Fresh investments by multinational drug companies in India happen only in government securities, private sector bonds and debentures and not in creating new manufacturing facilities or for R&D activities. This is what is evident from a Pharmabiz study of financial highlights of eight top MNCs during 2003-04.
Take the cases of GSK and Merck, two leading MNCs in India. GSK investments in such financial instruments during 2003-04 have gone up by 253 per cent to Rs.409.12 crores from Rs.162 crores in the previous year. Almost all these investments are in government securities, private sector bonds and mutual fund units. In the case of Merck, such investments in financial markets increased by 173 per cent to Rs.72.48 crores in 2003-04 from Rs.26.55 crores in the previous year.
Click here to view Table of the Investments of 7 MNCs
At the same time, investments by seven out of eight MNCs in creating new fixed assets increased only by 0.6 per cent to Rs 922.58 crores during 2003-04 from Rs 916.68 crores in the previous year. The seven companies are GSK, Pfizer, Abbott India, AstraZeneca, Aventis, Fulford India and Merck. Investment made by Novartis is not available for the year 2003-04. Investment figures of the other 7 companies show that there has been hardly any addition of new manufacturing facilities or expansion of capacities during the year.
In fact, the gross fixed assets of GSK declined to Rs 256.69 crores from Rs 270.09 crores during the year. However, investments in gross fixed assets of Aventis showed a 6.1 per cent rise during the year. GSK had sold its plant in Mumbai and ceased manufacturing operations at Bangalore in November 2003. Pfizer sold its Ankleshwar plant last year. It is now in process of selling its Chandigarh plant. Merck has closed down its Taloja plant and outsourcing the requirements through third parties. Abbott amalgamated its wholly-owned subsidiary Lenbrook Pharmaceuticals during 2003. Wyeth Ltd, another MNC not included in the study, will be selling its Nashik and Mumbai plants this year.
Click here to view Table of the Gross Fixed Assets of 7 MNCs
One important factor that contributed to the huge increase in net profits of MNCs during the 2003-'04 is the other income from these investments. Strong support from the parent company, limited spending on R&D, negligible interest burden and cost cutting moves also helped MNCs to make hefty growth in profits. The net profit of these eight companies has taken a quantum jump at 39 per cent to Rs 550.14 crore during 2003-'04 from Rs 395.51 crore in the previous fiscal. The net profit margins of these companies also have improved to 14.6 per cent from 10.9 per cent.
At the same time, the overall growth in their sales was very poor as compared to growth in profits. The eight pharma MNCs viz., Abbott India, AstraZeneca, Aventis Pharma, Fulford (India), GSK, Merck, Novartis India, and Pfizer achieved a total net sales of Rs 3773.49 crore during the year 2003-'04 as compared to Rs 3618.72 crore, representing a very meager growth of 4.3 per cent.
Among the eight MNCs, relatively small companies like Fulford (India) and AstraZeneca achieved a better sales growth during 2003-'04. Fulford has reported a sales growth of 39.6 per cent at Rs 127.29 crore from Rs 91.20 crore in the previous year. The net sales of AstraZeneca improved by 29.3 per cent to Rs 176.11 crore from Rs 136.17 crore.
GSK, Aventis Pharma, Abbott India, Merck and Novartis could not achieve even double-digit growth in sales. Pfizer received a major setback as its net sales declined sharply by 12.5 per cent to Rs 474.63 crore from Rs 542.43 crore. The company has decided to amalgamate Pharmacia Healthcare Ltd during the year ended November 2003. Reduction in price of Becosules, inventory rationalization, confusion regarding VAT and transporters' strike put pressure on Pfizer's sales.
GSK could achieve a net sales growth of 3.9 per cent to Rs 1102 crore from Rs 1060 crore in the previous year. Its pharmaceuticals sales increased by 5.8 per cent to Rs 971 crore during the year ended December 2003. Similarly, sales of Novartis India increased by 7 per cent to Rs 504.94 crore from Rs 471.70 crore in the previous year and its pharmaceutical sales increased by 6.2 per cent to Rs 310 crore. Merck has achieved net sales of Rs 364.17 crore as against Rs 346.69 crore. Its pharma business showed a growth of 6.3 per cent during the year ended December 2003.
Click here to view Table of the Financial Highlights of 8 MNCs
The other income of eight MNCs moved up by 8 per cent to Rs 200.16 crore from Rs 185.35 crore. These companies have successfully managed to reduce expenses during the year 2003-'04.
There raw material cost reduced by 5.6 per cent to Rs 1770 crore, staff cost by 2.2 per cent to Rs 412 crore and advertising expenses by 6.5 per cent to Rs 110 crore. Thus the reduction in these expenses pushed the operating profit before interest, depreciation, tax and exceptional items by 26.6 per cent to Rs 920.09 crore from Rs 726.69 crore. The cost of raw material of GSK, Novartis and Pfizer came down by 1.7 per cent, 10 per cent and 12.7 per cent respectively. Merck and Pfizer reduced staff cost by 25 per cent and 10 per cent respectively.
The slow growth in sales and speedy growth in operating profits give positive push to the operating profit margins. The operating profit margins of eight MNCs thus moved up to 24.38 per cent during the year 2003-'04 from 20.08 per cent in the previous year.
Over the years, these MNCs have created strong reserves position and reduced the dependence on external borrowings. The total borrowings of the seven companies, excluding Novartis, declined by nearly 40 per cent to Rs 12.13 crore from Rs 20.04 crore. Due to this, interest burden came down by 14.8 per cent to only Rs 4.84 crore from Rs 5.68 crore. MNCs are getting full technical and R&D support from there holding companies. The R&D expenses of seven companies (excluding Novertis) amounted to Rs 28.93 crore.
The export earnings of seven MNCs declined slightly to Rs 206.36 crore from Rs 206.65 crore. Export earnings of Aventis improved during the 2003-'04 to Rs 143.01 crore from Rs 127.96 crore but that of GSK declined to Rs 33.98 core from Rs 58.01 crore. Merck and Pfizer recorded modest rise at Rs 15.82 crore and Rs 11.48 core respectively. Fulford and AstraZeneca have not engaged in export activity. As against these export earnings their imports on CIF basis also declined marginally to Rs 402.57 crore from Rs 416.66 crore.
The study finds MNCs have the practice of giving out hefty rise in dividend amount paid to its shareholders. The total dividend payout of eight MNCs worked out to Rs 237.86 crore as against Rs 168.99 crore. Abbott declared equity dividend of 350 per cent (120 per cent in the previous year) followed by Novartis 200 per cent (150 per cent), Aventis 160 per cent (160 per cent), Merck 100 per cent (78 per cent), GSK 100 per cent (70 per cent) and Pfizer maintained its equity dividend at 75 per cent despite heavy setback. Fulford turned the corner and announced equity dividend of 20 per cent as against nil in the previous year.
Click here to view Table of the Dividend paid by 8 MNCs
The foreign holding in these MNCs worked out between 40 per cent and 91.61 per cent. In the case of AstraZenca, the foreign holding company has increased its equity stake to 91.6 per cent by implementing buy-back programme. The foreign holding at Abott India has increased to 61.7 per cent after completing buyback of equity shares.
Novartis has also buy-back equity shares of over Rs 60 core at a price of Rs 250 per share. Thus on one-hand MNC managements are increasing stake in Indian firms and stepping up equity dividend. During the year 2003-'04 the dividend remitted in foreign currency by eight pharma multinational companies reached at Rs 89.14 crore, which worked out to more than 37 per cent of total dividend paid by these eight companies during 2003-'04.
Meanwhile, pharma majors are all set to achieve better performance during the current year. Aventis, GSK, Merck and Pfizer announced impressive financial results for the first quarter of 2004-05. The net profit (before exceptional items) of Merck has taken a quantum jump of 93.3 per cent and touched to Rs 14.34 crore. Similarly net profit of GSK went up by 59.8 per cent to Rs 56.08 crore and that of Pfizer moved up smartly by 47.7 per cent to Rs 16.44 crore.
Aventis also pushed its profit by 22.9 per cent to Rs 25.20 during the first quarter. Pfizer's net sales increased during the first quarter of current year increased by 27.8 per cent to Rs 129.14 crore and that of GSK grew by 17.5 per cent to Rs 332.31 crore. Net sales of Aventis and Merck increased by 16 per cent and 7.8 per cent to Rs 167.80 crore and Rs 82.80 crore respectively. Large investments in various securities and all-round reduction in costs may help pharma MNCs to push profits in the current year.
The total equity capital of eight pharma MNCs reached at Rs 182.63 crore and their total market capitalization on June1, 2004 worked out to Rs 10,261 crore when the BSE Sensex was closed at 4835.