A Good Move

The parents renewed interest in Pfizer (India) means a fresh look at the stock. A report

The indecisiveness has gone at last. Pfizer, USA has at last decided to show greater interest in the operations of Pfizer (India) (PIL). The change in the parents stance, the thirteenth largest pharmaceutical company in the world with a turnover of $8 billion, has come at the right time as PIL had a pretty ordinary first half in 1997-98.

The parent which once held 80 per cent stake in the Indian arm slashed its stake to 40 per cent under the strict FERA regulations over the years. Now with the onset of liberalisation, it has indicated that it might hike its stake in PIL to a minimum of 51 per cent or a maximum of 80 per cent.

 

The World Trade Organi-sation agreement is all set to remove the boundary between the domestic pharmaceutical industry and the global market. This is one of the major reason behind the renewed interest of Pfizer, USA in the Indian operations.

Introduction of product patent which is on the cards after 2005 has offered the encouragement for the parent to rethink about consolidating its stake in PIL.

This is because intense competition from the cheaper re-engineered products has always remained a thorn in the flesh of PIL in the past.

The ten year period ended 1994 saw no new products launched through PIL from the parent. And out of the five new molecules introduced in the last three years, PIL has already withdrawn three due to the tough competition from the local brands.

This include Amlogard, priced at Rs 327 for a pack of ten tablets, fared poorly against Ciplas brand Amlopress priced at Rs 36 for a similar pack. The other product Zithromax, an oral antibiotic, priced at Rs 590 per strip of ten tablets also could not withstand the competition from Alembics Azithral priced at Rs 168.

While the parent has to include the cost of basic research while pricing its brand, PILs competitors has the advantage of pricing their brands at much lower levels as their expenses are limited to process development charges alone. In addition the domestic players enjoyed considerable cost advantage in terms of cheap labour against imports.

On this front, the other recent major development of the parents decision to adopt outsourcing strategy to take on competition from the re-engineered products gains prominence.

As per the revised plan, Pfizer, USA is planning to procure the bulk drug amlodipine used in the manufacture of its cardiovascular product Amlogard from Kopran. The domestic price of amlodipine at Rs 8,000-9,000 per kg is one fifth of the price of the imported drug. As such, the indigenous sourcing will enable PIL to price its brand at much lower levels to stay competitive against other brands in this segment.

In fact, in the domestic pharmaceutical industry most of the transnationals have started restricting themselves to manufacturing formulations. The MNCs predominantly outsource their active ingre- dient requirements to take advantage of the lower manufacturing cost of the local players. The parents current strategy shows that it is quite flexible to suit the demands of the changing environment.

If not for the revised plan that paved way for the relaunch and introduction of value added products of the parent, PIL would have been forced to wait till 2005 to receive the new molecules of its parent.

This is particularly so since Pfizer, USA unlike the parent of other MNC pharma companies like Glaxo Welcome Plc was quite unwilling to subsidise its import of bulk drug and active ingredients to the Indian arm.

As such it was not surprising to see that while the cardiovascular segment accounted for 30 per cent of Pfizer, USAs total sales, in case of PIL it stood below ten per cent. With the revised strategy having paved way for the relaunch of Amlogard it could strengthen PILs existing brand Minipress in this segment.

So far, infectious diseases like tuberculosis and malaria accounted for the major share, about 28 per cent of the total therapeutic segments in India. On the contrary, in developed markets, infectious diseases account for hardly 5 per cent of the total disease segment. Diseases like cardiovascular ailments and cancer account for 25 and 21 per cent of the total therapeutic segment respectively.

As the lifestyle of the urban and semi-urban Indian becomes as fast-paced and stressful as their Western counterparts, heart diseases and cancer are bound to rise. As such from the current strategy, PIL can derive maximum advantage.

In addition one could also expect the relaunch of products in other therapeutic segments like Zith-romax and the steroid Deltaurtin that were withdrawn due to competition from Wyeth.

The new product launches will provide major thrust to PILs sales growth that slumped by 26.4 per cent in the first half of 1997-98 against the corresponding previous period. Sales came down to Rs 106.17 crore from Rs 144.27 crore during this period.

However the sales decline is also due to PILs efforts to reduce the percentage of its products under the purview of price control. To keep its main brand Becosule the vitamin-B complex formulation, outside the purview of DPCO, PIL started outsourcing it from Omni Protech Drugs a small scale unit and transferred the dealership to, PILs hundred per cent subsidiary, Duchem Laboratories. This brand with sales value of Rs 59 crore accounted for approximately 24 per cent PILs total sales in 1995-96.

In addition, it also succeeded in bringing its other major brand Corex, a cough syrup, outside the purview of DPCO by changing its active ingredient, codeine phosphate, which is under price control. This brand accounted for around 30 per cent of PILs total sales in 1995-96.

With these measures, PILs turnover under DPCO has come down substantially from 55 per cent in 1994 to a meagre 10 per cent in 1997.

PIL which is already through with its first phase of its restructuring sold its loss making bulk drug Kalyani unit in West Bengal to Dabur for Rs 10 crore.

It has also implemented a voluntary retirement scheme of Rs 13 crore to cut down overheads and has currently initiated the second round of restructuring. Under this PIL, is planning to sell one more formulation unit at Ankleshwar and will retain the Thane unit that has better infrastructure to handle bigger capacity.

The last couple of years are witnessing major contribution from other income to the bottomline. This is due to reimbursements received for its marketing services for Becosules. PIL has also shifted its corporate office to leased premises at Jogeshwari, a Mumbai suburb, and this enables it to generate additional income by leasing out its commercial premises at Nariman Point in Mumbai.

The contribution from these recurring and non recurring income from non core activities resulted in other income making up for 115.9 per cent of PILs profit before tax.

This trend is likely to continue as the coming year will witness one time income from the sale proceeds of the Ankleshwar unit.

Though PILs operating profit margin remained lower at 1.29 per cent in the first half of 1997-98, its gross profit margin stood at 14.8 per cent. And due to this, PIL managed to escape with a decline in net profit of only 17 per cent in the first half of 1997-98. The half yearly net profit at Rs 9.12 crore yields annualised earnings per share of Rs 15.7.

The current market price at Rs 419 discounts the annualised EPS by around 27 times. With the renewed backup from the parent and positive impact of restructuring the stock holds potential for gains but only for the long term as the price has appreciated from Rs 200 in June 1997 to the current price of Rs 419.