Indian pharmaceutical sector appears to be well set to meet the future challenges in the post 2005 era. This is evident from the excellent performances by large and medium scale pharmaceutical companies in India during 2003-'04 and the first two quarters of current year. A study of financial highlights of 50 listed pharmaceutical companies, conducted by Pharmabiz, shows that higher exports, new product launches, mergers and acquisitions, increased focus on R&D and a constant search for new markets have contributed to exemplary performance of this sector.
Indian pharmaceutical industry will have a dozen corporates with an annual turnover exceeding Rs 1,000 crore by the end of 2005 at the current rate of their growth. Seven Indian pharma companies have been reporting more than Rs 1,000 crore sales for last two years now. These seven companies are Ranbaxy, Cipla, Dr Reddy's, Nicholas Piramal, Lupin, Cadila Healthcare and Aurobindo. The five companies expected to join the league of the Rs 1,000 crore group are Wockhardt, Sun Pharma, Orchid, Alkem Labs and Cadila Pharma. Among these, Alkem and Cadila Pharma are closely held companies and are not listed in stock exchanges.
To achieve faster growth the Indian pharma companies are now adopting the acquisition route. Recently Dr Reddy's acquired Trigenesis Therapeutics in US involving an amount of $11 million. Wockhardt also invested Rs 49 crore to acquire German pharma company 'esparma'. Earlier it has acquired Wallis Laboratories and CP Pharmaceuticals in UK. During the year 2003-04, Ranbaxy acquired RPG Aventis in Europe, Cadila acquired Alpharma France and now exploring possibilities of acquisition in Spain, Sun Pharma has already acquired Detroit-based Caraco Pharmaceutical in US and increased its stake to 63 per cent.
Further, companies also entered into marketing tie-ups with foreign companies or set up their subsidiaries. The acquisition is not only in the other parts, but these companies are spreading their business by acquiring domestic companies also. According to analysts the acquisition root is saving tremendous efforts and time of these companies and M&A activity will increase in the near future.
Pharma companies are also entering into marketing tie-ups with foreign companies or set up their subsidiaries abroad. Cadila Healthcare setup Zydus Pharmaceuticals USA Inc in US and entered into in-licensing agreement with global pharma majors such as Schering and Boeringer Ingelheim for marketing. Lupin recently entered marketing tie-up with Baxter Healthcare Corporation of US for exclusively distribute its generic version of ceftriaxone sterile vials for injection. It also has also signed marketing tie-up with Allergan Inc US. These marketing tie-ups and acquisition will help the Indian pharma companies to penetrate into more profitable markets.
Pharmabiz study of 50 drug companies, consisting of 39 Indian and 11 multinational companies, showed 18 per cent rise in net profit (after exceptional items and taxation) during the fiscal year 2003-'04. The net profit, after exceptional items and taxation, of these 50 companies touched to Rs 3600 crore from Rs 3052 crore in the year 2002-'03. The net sales of 50 companies increased by 16.9 per cent to Rs 26,173 crore from Rs 22,399 crore in the preceding year. Ranbaxy maintained its leadership position among the 50 companies with net sales of Rs 3,398 crore, followed by Cipla (Rs 2,060 crore), Dr Reddy's Laboratories (Rs 1,667 crore), Aurobindo Pharma (Rs 1,341 crore) and Nicholas Piramal (Rs 1,269 crore).
Lupin, Cadila Healthcare and GlaxoSmithKline also reported net sales of over Rs 1,000 crore during the fiscal year 2003-'04. Sun Pharmaceutical, Wockhardt and Orchid Chemical are likely to cross the Rs 1,000-crore mark during the course of the current year. The Indian pharma companies have entered very aggressively into international market giving tough competition to international giants. Major players are concentrating on advanced profitable markets like USA and Europe.
The other income of 50 pharma companies moved up by 38.6 per cent to Rs 1096.72 crore from Rs 791.17 crore in the previous year and helped to push overall profitability of the pharma sector.
The operating profit before interest, depreciation, exceptional items and taxation moved up by 16.9 per cent to Rs 5,948 crore during 2003-'04 from Rs 5,090 crore in the previous year. However, the operating profit margin i.e. operating profit as per cent of net sales, declined slightly to 22.35 per cent from 23.30 per cent on account of heavy operating losses incurred by Morepen Laboratories and Lyka Labs. Further, the operating profit of Alembic, Dr Reddy's Laboratories Strides Arcolab declined during the year 2003-'04. Morepen Laboratories incurred a heavy operating loss of Rs 165.47 crore during the 18 months period ended September 2003 as against a operating profit of Rs 178.12 crore. Lyka Labs also incurred an operating loss of Rs 9.32 crore as against an operating profit of Rs 33.73 crore. Dr Reddy's operating profit declined to Rs 376.54 crore from Rs 495.44 crore.
The reduction in interest rates and restructuring of high cost loans during 2003-04 by companies helped to reduced the interest burden by almost 5 per cent to Rs 552 crore from Rs 581 crore. The interest burden of 39 Indian companies worked out to Rs 546.56 crore as against Rs 574.38 crore in the year 2002-'03 and that of 11 MNCs declined to Rs 5.77 crore from Rs 6.21 crore.
Though the overall interest burden of 50 companies came down by 5 per cent, the provision for depreciation increased by 24.6 per cent to Rs 824 crore from Rs 661 crore in the previous year. The net profit before exceptional items and taxation saw a growth of 19.3 per cent, mainly due to reduction in interest cost, to Rs 4,594 crore from Rs 3,851 crore.
The pharmaceutical industry is known for rewarding its investors by declaring higher dividend or bonus shares. Almost all the companies declared higher equity dividend during the year 2003-04. Ranbaxy, Sun Pharma, Cadila Healthcare, FDC, IPCA Laboratories, Jubilant Organosys Abbott India, Aventis Pharma, Burroughs Wellcome, GlaxoSmithKline, Merck and Novartis declared equity dividend of 100 per cent or more. FDC's equity dividend worked out to 225 per cent for the year 2003-04. Further, Alembic issued bonus shares in the ratio of 2:1. Jubilant Organosys, Sun Pharma, Unichem Laboratories, FDC and Wockhardt also issued bonus shares in the ratio of 2:1, 3:5, 1:1, 1:1 and 1:2 respectively.
In the eighties MNCs were in limelight with higher dividends as the foreign managements were holding large stakes. The promoters of MNCs are now trying to increase the stake in Indian entities through buy-back scheme. AstraZeneca and Abbott India increased stake through buy-back of equity shares. All the MNCs are looking out for outsourcing their products and taking steps to close down manufacturing activities. Fulford (India), Merck, Pfizer and GSK have already sold their plants and giving manufacturing jobs to third party. This trend is likely to continue in current year as the companies are getting cost benefit without any worker related problem.
Relatively new companies like Matrix Laboratories, Divi's Laboratories, Biocon and Dishman Pharmaceutical achieved substantial growth in sales and profits. We have omitted Dabaur Pharma Ltd from our study as the company was incorporated during March 2003 and it provided figures only for one year. It has achieved sales of Rs 213.57 crore in its first year of operations and earned a net profit of Rs 13.99 crore.
Indian pharma companies, of late, are spending heavily on R&D to meet the new challenges and overcome competition. Ranbaxy is spending over $ 100 million for capacity expansion in the current year. Nicholas Piramal planning investment of Rs 200 crore on R&D and upgradation. Lupin is investing Rs 20 crore in Aurangabad for manufacturing anti-TB products. Ranbaxy is set to launch 20 new products and Lupin is launching herbal products. Dr Reddy launched Ibuprofen and Nefazodone in North America. Ranbaxy's US subsidiary received tentative approval from USFDA for manufacture of Auinapril Hydrochloride tablets for hypertension drugs.
The future of the pharma companies, however, to a great extend depend on the government policies such as DPCO, VAT and implementation of new patent law.
Top MNCs moving cautiously
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.
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.
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.
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.
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.
Thus, the Indian as well as MNC pharma companies in India are on right path and gearing their resources to grab future opportunities in the changing and challenging international environment. The big companies with strong cash reserves will be key player in long run.
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