Good growth prospects, high current prices, lack of support from financial institutions will translate to lukewarm response to the open offers.
In line with their emerging markets focus, pharma multinationals Novartis AG and Pfizer Inc are seeking to consolidate their presence in India by increasing their respective stake in their listed subsidiaries. The two companies have come out with open offers, which if successful will help Novartis increase its stake to nearly 90 per cent, while Pfizer’s stake will move up to 75 per cent. While financial institutions have been reported to have shown their unwillingness to tender their shares what should individual shareholders do? Read on to know more about current valuations, the recent performance and growth prospects for the two companies.
| PFIZER HEALTHY GROWTH | |||
| In Rs crore | FY08 | FY09E | FY10E |
| Sales | 704 | 796 | 895 |
| OPM (%) | 21.6 | 25.0 | 27.3 |
| Net profit* | 15.0 | 187 | 213 |
| EPS* | 50.5 | 62.6 | 71.4 |
| P/E | 14.0 | 11.3 | 9.9 |
| Year ending November * Adjusted for extraordinary items | |||
Delisting plans?
Multinational pharma companies including Novartis and Pfizer typically operate through a 100 per cent subsidiary across the globe. But, they have been operating as a listed subsidiary in India as a result of regulations imposed in the past. Both companies also have 100 per cent subsidiaries in the country. While Pfizer Inc’s subsidiaries include those that it got through M&As (Pharmacia India and Pfizer Pharmaceuticals India or the former Warner Lambert India), Novartis AG’s 100 per cent subsidiaries in India include Novartis Healthcare India and Sandoz. While both companies have indicated that the open offer is aimed at “consolidation and creating more flexibility” for their operations (integration/merger of Wyeth India, acquired recently by Pfizer Inc with Pfizer India) and are using the current attractive valuations to increase their stake, analysts believe that the move could be the first step to delist from the bourses.
| NOVARTIS GOOD PROSPECTS | |||
| In Rs crore | FY08 | FY09E | FY10E |
| Sales | 553 | 615 | 683 |
| OPM (%) | 17.8 | 18.7 | 19 |
| Net profit | 97 | 107 | 122 |
| EPS | 30.4 | 34.0 | 39 |
| P/E | 12.9 | 11.6 | 10.1 |
In addition, a higher stake (three quarters or more in these two cases) will help the companies get complete control of operations. Currently, non-promoter shareholders can block special resolutions if their voting strength is 26 per cent or more. Even if the two companies continue to operate with increased stakes, the issue that rankles minority shareholders most is the launch of new products.
New products and growth
While Pfizer India has indicated in the past that it will launch patented products through its subsidiaries based on “value creation” (niche products requiring a new set up may be routed through fully owned arms, while those that require manufacturing base will be routed through Pfizer India), Novartis AG has been launching new products such as Lucentis (Eye disease), Elidel (skin care) and Galvus (anti-diabetic) through its 100 per cent subsidiary. The Swiss giant has run into problems as patent applications for both the alpha and the crystal forms of anti-cancer medication, Glivec have been rejected. While Novartis India’s new product portfolio is limited to line extensions, Pfizer India over the last one and a half years has launched seven new products among which are Champix (anti-smoking drug) Cyclokapron (preventing blood loss) Acupil (controlling blood pressure) Trulimax (respiratory tract infections) through its listed arm.
| THE PRICE FACTOR | ||
| Pfizer | Novartis | |
| Current P/E | 14.0 | 12.0 |
| 52 week high/low (Rs) | 725/436 | 409/221 |
| Offer price (Rs) | 675.00 | 351.00 |
| Current Price (Rs) | 717.00 | 393.00 |
| Difference (%) | 6.2 | 12.0 |
| Current shareholding (%) | 41.00 | 50.93 |
| If offer successful (%) | 75.00 | 89.93 |
Performance
Novartis India sells its products through four business segments of pharmaceuticals, generics, OTC and animal health. While sales growth for Novartis over the last couple of fiscals has not been too impressive due to the lack of new products, the company is expected to turn out better numbers in FY09. For the nine months ended December FY09, the company’s pharma business (67 per cent of sales, 80 per cent EBIT) grew 7 per cent on the back of contributions from brands such as Voveran (anti-inflammatory), Methergin (gynae) and Sandimmune Neural (immunosuppressant) as well as new launches (line extensions).
Going ahead, although there are issues pertaining to patent-registration and pricing, if the company does manage to sort out these and use the listed arm for new launches, sales could witness a jump considering its presence in high growth areas of anti-diabetic, cardiovascular, gynaecology and anti-ulcerants.
Pfizer has been more aggressive in launching its innovative product basket with seven new launches in 2008 in pharmaceutical (accounts for over 80 per cent of sale) and animal health segments (through the listed company). In licensing deals and two new products in CVS and anti-infective segments in 2009 are expected to drive growth going ahead.
For the three months ended February 2009, while sales was up 22 per cent, operating margins fell 220 basis points due to higher raw material cost. The concern for Pfizer would be on account of Corex, a cough syrup and India’s largest pharma brand, where sales may be hampered due to supply issues of its ingredient codeine phosphate.
Valuations
The stock prices of Pfizer India and Novartis India have been moving up and have gained 6 per cent and 12 per cent over the respective open offer prices. Both companies are trading at 10-11 times their FY10 estimated earnings per share of Rs 71 and Rs 39, respectively. With strong brands, robust pipeline of products, distribution reach and domestic market that is expected to grow between 10-15 per cent, growth is more or less certain. Launch of new products through the 100 per cent subsidiaries seems to be the only irritant. If you can stomach the uncertainty you could stay invested, but if you are worried on the delisting count as well a new product launches an exit with prices trading at close to their 52-week highs isn’t a bad option.
