Prabhudas Lilladher - Pfizer

Prabhudas Lilladher report on Pfizer:

Sluggish sales growth

For Q2 FY07 (ending May '07), Pfizer has reported a 1% yoy dip in net sales -from Rs 1.67 billion to Rs 1.65 billion. The dip is attributed to supply-related issues regarding its major product, Corex. Moreover, the company is in the process of divesting its consumer healthcare (CHC) business in favor of Johnson & Johnson (J&J) in line with the global transfer of its CHC business to J&J, and hence the uncertainty about the divestment. The pharmaceutical business slipped 4% yoy whereas the animal healthcare (AHC) segment has reported a 21% sales growth. The clinical development services grew a marginal 1%.

Margins under pressure

During the quarter the operating margin slipped 60bp—from 22% to 21.4%—due to the rise in 'other expenses'. 'Other expenses' climbed 130bp—from 25% to 26.3% of net sales—due to lower sales growth. Material cost rose by 50bp—from 37.8% to 38.3% of net sales—with the change in product mix and higher sales of AHC products. Personnel expenses declined by 120bp—from 15.2% to 14%—due to the ongoing VRS.

Higher 'other income'

The company has reported a 60% rise in 'other income'—from Rs 109 million to Rs 174million—due to the rise in treasury income (Rs 90 million during the quarter). Pfizer has completed the sale of the Chandigarh property, and profited by Rs 2.74 billion. With this higher 'other income', the EBIDTA margin has improved, by 340bp—from 28.5% to 31.9%.

Capital gain

The company paid Rs 462 million as capital gains tax from the sale of the Chandigarh property and therefore the net inflow is Rs 2.28 billion. With this inflow, the company's treasury income is likely to rise by over Rs 50 million per quarter.

Net profit improved

Net profit before extraordinary items grew 10%—from Rs 298 million to Rs 329 million—due to higher 'other income'. Net profit after EO items also went up—from Rs 238 million to Rs 2,578 million—from the high inflow due to the sale of the Chandigarh property.

Investment positives

Pfizer has employed a contract field force of 100 people in three states to promote its mature products. It is widening its geographical reach to cover class II and class III cities. This is likely to generate additional sales and improve top-line growth.

To raise top line growth, it is focusing on the institution and hospital segments and the retail segment.

To improve sales and profitability as well to expand therapeutic coverage, the company is looking at domestic acquisitions.

Its new launch, Lyrica, is doing well in the domestic market. It is likely to be a future growth driver for the company.

Financials and Valuations

We expect Rs 3 billion from the sale of CHC business to J & J in FY07. Net inflow after capital gains tax is likely to be Rs 2.66 billion. With this, Pfizer can look at acquisitions aggressively. We expect a 13% reduction in net sales in FY07—from Rs 6.89 billion to Rs 6.04 billion, due to it's divesting its CHC business, which accounts for about 22% of the company's revenue. We expect an 11% rise in sales in FY08—from Rs 6.04 billion to Rs 6.73 billion. We expect the operating margin to inch up from 24% in FY06 to 24.4% in FY07 due to the reduced material cost as well as from operational efficiencies. We expect net profit (after EO items) to shoot up—from Rs 1.06 billion in FY06 to Rs 5.91 billion in FY07—and then slip to Rs 1.35 billion in FY08. Management has guided to double-digit sales growth and the maintaining of the EBIDTA margin after the transfer of the CHC business. The CMP of Rs 804 discounts the FY07E EPS of Rs 38.4 by 21x and the FY08E EPS of Rs 48.6 by 16.5x. We are positive on the long-term prospects of the company.