The pharmaceutical segment experienced uncertainties during the last quarter of fiscal year 2004-05 on account of new patent regime, implementation of MRP based excise duty and value added tax (VAT) scheme. Similarly, stiff competition in the global market from cash rich international players, limited list of product approvals and launches put pressure on international business of top pharmaceutical companies. Almost stagnant growth in sales and significant rise in manufacturing cost, including research and development activity, restricted the growth in topline, exports earnings and bottomline.
The PHARMABIZ study of Top Ten Indian pharmaceutical companies viz., Ranbaxy Laboratories, Cipla, Dr Reddy's Laboratories, GlaxoSmithKline Pharmaceuticals, Sun Pharmaceutical Industries, Nicholas Piramal India, Lupin, Aurobindo Pharma, Cadila Healthcare and Wockhardt, for the year 2004-05 revealed that these companies received setback and their unaudited or audited standalone net profit after tax and exceptional items declined by 8.3 per cent to Rs 2,307crore from Rs 2,516 crore in the previous year. The standalone net sales, however, improved marginally by 5.6 per cent to Rs 15,396 crore from Rs 14,583 crore in the previous year. The quarter ended January-March 2005 was very disappointing for almost all players.
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The last quarter of 2004-05 was a much difficult one than the previous three quarters in respect of profitability. The net sales of the quarter ended March 2005 improved by 20.4 per cent to Rs 4205 crore from Rs 3492 crore in the corresponding period of last year. However, the net profit during the quarter ended March 2005 declined sharply by 30.4 per cent to Rs 381 crore from Rs 547 crore, mainly due to loss incurred by major companies like Dr Reddy's Lab and Nicholas Piramal India.
Further, Ranbaxy, Cadila and Lupin received setback and their net profit declined sharply. The problem of MRP based excise duty and uncertainty regarding the VAT implementation put pressure on operations in the domestic market. The analyst pointed out that the setback is temporary and once the things settle for the better, the pharma companies will be able to present stronger performance with top companies focusing more on export front.
The lower than expected growth in sales and shortfall in other income on one hand, and rising R&D, staff and marketing cost on the other hand, put significant pressure on operating level. The operating profit before interest, depreciation and taxation declined by 10.9 per cent to Rs 3,244 during 2004-05 from Rs 3,643 in the previous year. The operating profit as per cent of net sales worked out to 21.1 per cent as against 25 per cent in the last year. The net profit declined by 8.3 per cent to Rs 2307 crore from Rs 2,526 crore.
Out of top 10 companies, Cipla, GlaxoSmithKline (GSK), Sun Pharmaceuticals and Wockhardt Ltd managed to achieve a double-digit growth in net sales and net profit during 2004-05. Ranbaxy Laboratories, Lupin and Cadila Helathcare managed to improve their net sales marginally in the range of 2.2 per cent and 3.7 per cent only, but the net profit came down heavily in the range of 8 per cent to 31 per cent.
The major companies like Dr Reddy's Laboratories, Nicholas Piramal and Aurobindo suffered heavily and their net sales as well as net profit declined sharply during 2004-05. The poor performance on profitability front of these six companies gave strong blow to entire working of the pharmaceutical segment during 2004-05.
Will there be any turnaround possible for these companies in near future? The pharma analyst pointed out that unless early positive results from investment in R&D, these companies will not be able to sustain growth. If the companies will launch generic for off-patented blockbusters with own R&D efforts, then they can overcome stiff competition in the more lucrative international market. Indian pharma industry is enjoying the highest FDA approval facilities in the world. Further, low manufacturing cost, easy availability of high-skilled labour and aggressive marketing in regulated market will give necessary boost for business, the analyst added.
Ranbaxy Laboratories has maintained its leadership in the Indian pharmaceutical segment during 2004-05 with standalone net sales of Rs 3,474 crore as against Rs 3,398 crore in the previous year, registering a very small rise of 2.2 per cent. Cipla and Dr Reddy's Lab maintained their second and third positions with sales of Rs 2,242 crore and Rs 1,559 crore respectively. GlaxoSmithKline, the only MNC in the first ten companies, was successful in capturing fourth place with net sales of Rs 1,376 crore as against seventh place in the last year. It pushed down Aurobindo Pharma, which slipped from fourth place to eighth in 2004-05. Sun Pharmaceutical achieved net sales of Rs 1,282 crore and climbed to fifth position in 2004-05 from ninth position in the last year.
The standalone net sales of Nicholas Piramal declined by 2.9 per cent to Rs 1,232 crore and it lost its fifth place during 2004-05 and now remained at sixth position. Lupin Ltd and Cadila Healthcare lost sixth and eighth position and slipped to seventh and ninth position with net sales of Rs 1,161 crore and Rs 1,063 crore respectively. Despite 16.1 per cent growth in net sales during 2004-05, Wockhardt could not move up and remained at tenth position during 2004-05.However, the company notched up smart gain in profitability.
The standalone operating profit before interest, depreciation, taxation and exceptional items of all the major companies like Ranbaxy, Dr Reddy, Nicholas Piramal, Lupin Ltd, Aurobindo and Cadila Healthcare suffered heavy setback. The operating profit of Ranbaxy declined sharply by 23.9 per cent to Rs 764 crore from Rs 1,004 crore in the previous year, basically due to drastic fall in other income to Rs 258 crore from Rs 384 crore in the previous year. Dr. Reddy's operating profit declined significantly by 61 per cent to Rs 147 crore from Rs 377 crore and that of Nicholas Piramal and Lupin came down heavily by 32.5 per cent and 48 per cent respectively. Aurobindo is loosing its grip and its operating profit declined by 48.4 per cent during 2004-05.
Wockhardt's operating profit has taken a quantum jump of 64.5 per cent and touched to Rs 271.16 crore from Rs 164.88 crore in the previous year. Similarly, GSK and Cipla notched up smart growth in operating profit of 44 per cent and 25.8 per cent respectively during 2004-05. Cipla's growth in other income aided to push its operating profit to Rs 572 crore from Rs 455 crore. The operating profit of Sun Pharma also moved up by 17.1 per cent to Rs 372.57 crore from Rs 318.16 crore.
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The aggregate other income of top ten pharmaceutical companies declined by 12.9 per cent to Rs 647.83 crore from Rs 744.14 crore basically due to fall in other income of Ranbaxy, Dr Reddy's Lab, Lupin, Cadila, GSK and Aurobindo. Ranbaxy's other income, which includes other operating income in respect of export benefits, forex gains and share of revenue from Bayer on Ciprofloxacin OD declined sharply to Rs 257.99 crore from Rs 384.20 crore in 2003-04. Similarly, the other income of Lupin declined to Rs 18.77 crore from Rs 45.55 crore. However, Cipla's other income went up sharply by 113 per cent to Rs 75.94 crore from Rs 35.57 crore.
The increase or decrease in stock of top ten companies worked out to negative Rs 272.92 crore as compared to negative Rs 114.84 crore in the previous year. The raw material cost increased by 5.9 per cent to Rs 7,035 crore from Rs 6646 crore. The staff cost of ten companies increased by 15.5 per cent to Rs 1,362 crore from Rs 1179 crore. Cipla's cost of employees increased by 22.8 per cent to Rs 116.93 crore and that of Ranbaxy moved up by 21.7 per cent to Rs 301.60 crore. The spending on personal cost as per cent of net sales of Cadila remained highest at 13.2 per cent followed by Dr Reddy at 12 per cent, Nicholas Piralma 11.5 per cent and Lupin at 10.8 per cent.
Focus on R& D
The expenditure on R&D by Ranbaxy reached at Rs 326.76 crore during 2004-05 from Rs 238.05 crore in the previous year, registering a smart rise of 37.3 per cent. This worked out at 8.8 per cent of total income. Dr Reddy's Laboratories is spending highest on R&D in terms of total income, which worked out to 14.9 per cent. The company's R&D expenditure increased by 26.8 per cent to Rs 242.19 crore from Rs 191.05 crore. Wockhardt is also spending 8.2 per cent of its total income on R&D and it is planning to invest Rs 125 crore in the current year. Lupin and Sun Pharmaceutical expenditure on R&D increased by 59.1 per cent and 73.1 per cent to Rs 76.14 crore and Rs 79.77 crore respectively. Though Aurobindo has not published its R&D expenditure for the 2004-05, it incurred expenditure of Rs 49 crore in last year. According to analysts, the large spending on R&D will give better strength for the future product pipeline, but this spending is currently putting burden on working, as the companies are not able to generate higher profits from investments.
Major Approvals
Aurobindo received approvals for its six facilities from major agencies like WHO, US FDA, UK MHRA, MCC South Africa, Anvisa Brazil and others during 2004-05. Similarly, Cadila's formulation facility at Moraiya and API plant at Baroda also received US FDA approvals. Sun Pharmaceutical received approval for its Panoli bulk active factor and Halol tablet factory without a single remark or observation. Wockhardt has built up its Biotech Park as per US FDA and European Medicines Agency standards. These companies are investing in expansion programme also and moving largely to Baddi in Himachal Pradesh. Cipla's new plant at Baddi commenced operations from April 2005.
Export earnings
With the stiff competition in the international market, exports from top ten pharma companies were not up to the mark. Ranbaxy's exports remained almost stagnant at Rs 2436 crore as against Rs 2429 crore in the 2003-04. Lupin's exports declined to Rs 662 crore from Rs 671 crore as its exports from advanced markets of North America and Europe declined to Rs 202 crore from Rs 229 crore. However, its API exports to advanced market increased by 18 per cent to Rs 183 crore from Rs 156 crore. Dr Reddy's forex loss touched to Rs 48.9 crore compared to a forex gain of Rs 28.3 crore. The company experienced setback in North America as its generics business declined to Rs 2.2 billion from Rs 3.4 billion in the previous year. The sharp declined in sales from fluoxetine and tizanidine due to lower prices put pressure on overall business activity in America.
However, despite competition, Cipla, Sun Pharmaceutical and Wockhardt improved their international operations during 2004-05. Cipla's exports contributed 45 per cent to its sales and touched Rs 1052 crore as against Rs 812 crore. Sun Pharmaceutical’s exports on standalone basis improved sharply by 32.1 per cent to Rs 287.41 crore from Rs 217.65 crore. Wockhardt notched up exports of Rs 308 crore as against Rs 280 crore, a rise of 10 per cent. However, Aurobindo's exports on FOB basis, declined by 13.6 per cent to Rs 554.62 crore from Rs 642.04 crore.
M &A and Joint Ventures
These companies are spreading their operations to new markets by setting up new subsidiaries or by acquisitions. Dr Reddy's Lab acquired Trigenesis Therapeutics Inc., a US-based privately owned Dermatology company for a consideration of US$ 11 million Rs 50 crore. Cadila merged German Remedies, Recon healthcare, Zydus Pathline soom Properties and Banyan Chemicals with the company during 2004-05. GSK merged Burroughs Wellcome (India) with effect from January 2004 and sold out its Worli plot as well as closed down operations in Mysore and Bangalore. Wockhardt acquired esparma GmbH, without manufacturing facility, in Germany during May 2004 and also set up a subsidiary in USA and Brazil. Wockhardt also set up joint venture in Mexico and South Africa. Sun Pharmaceutical merged M J Pharma. Nicholas acquired the global Inhalation Anesthetics business of Rhodia Organique Fine Ltd, UK for a consideration of US$ 14 million. Further it has acquired the ophthalmic business of Alpex International Pvt ltd for a consideration of Rs 13.44 crore.
Consolidated performance
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The consolidated working including subsidiaries operations improved the standalone performance of top ten companies. The pharmaceutical segment is spreading its marketing operations through setting up of subsidiaries in the other parts of world. This is giving them substantial mileage and assistance to established their brand image abroad. Almost all the top companies of PHARMABIZ study have set up subsidiaries in other markets and their consolidated financial performance shows that the net sales increased by 9.9 per cent to Rs 18,475 crore from Rs 16,818 crore in the previous year. The net profit also moved up marginally by 1.3 per cent to Rs 2,533 crore from Rs 2,500 crore.
The pharma analyst from FIIs pointed out that the investment in subsidiaries abroad would give necessary cost advantage to Indian firms in future. It will be easy to establish brand image and capture market share in the regulated markets. Due to cost advantage and aggressive marketing, the Indian majors will be in a position to give tough time to international majors. It is easy to keep watch on market conditions and filed DMFs and ANDAs with wholly owned subsidiary.
Dividend Payout
Despite lower than expected profits levels, pharmaceutical companies declared handsome equity dividend during 2004-05. Dr Reddy's Lab declared equity dividend of Rs 5 per share for share face value of Rs 5 each. GSK, Wockhardt and Ranbaxy recommended equity dividend of 240 per cent, 100 per cent and 170 per cent respectively. Cadila and Nicholas announced equity dividend of 120 per cent and 150 per cent respectively during 2004-05. Lupin also announced equity dividend of 65 per cent, Nicholas has split its equity shares of Rs 10 each to Rs 2 per share and Ranbaxy is planning to split from Rs 10 to Rs 5 each from August 2005. Ranbaxy has also decided to split its shares which will increase liquidity in the market. However, Aurobindo cut its dividend rate from 45 per cent to 10 per cent for the year 2004-05.
Market Capitalisation
Though the overall performance of these ten pharma companies was not upto the mark, the share price movements and market capitalization of these companies improved during last six months. The BSE Healthcare index of 23 pharmaceutical companies touched to 2722.57 on June 20, 2005 as against 2080.46 on June 21, 2004, registering a growth of 32.2 per cent. The Healthcare index reached at its 52-weeks peak level at 3094.79 on January 2005. However, profit taking at higher level and setback in financial performance put pressure on market price movements. The market capitalization of Pharmabiz Top Ten pharma companies worked out to Rs 68,133 crore as against market capitalization of Rs 93227 crore for BSE Healthcare index 23 scrips. Ranbaxy remained at highest level of market capitalization at Rs 20138 crore followed by Sun Pharma Rs 10,404 and Cipla at Rs 9139 crore.
The consolidation of business through mergers and acquisition will be the key word for the Indian pharma majors. To fight competition under the new patent regime and grab the existing opportunities, the companies will have to spread market operations through new tie-ups and mergers. This will give some relief on cost front. The implementation of Schedule M in respect of Good Manufacturing Practices from July 1, 2005 will help major companies to secure more business in the domestic market, as the number of SSI units are likely to come down in future.
The contract manufacturing and contract research will be another area where Indian pharma majors can play a crucial role in near future. The international companies are looking out for partners to boost margins. Indian players have already established brand image in the international market by offering low cost generics.
To meet the patent challenge, the top ten pharma companies are taking necessary steps and investing large funds in Research & Development activity, entering aggressively into the regulated markets, filing up more and more DMFs and ANDAs in the largest markets. Further, to strengthen the bottomline, top pharma companies are entering the new marketing tie-ups and adopting merger and acquisition policy. These efforts may assist them to strengthen future business operations and create strong brand image in the international market.