Pfizer

If the last few quarters saw Pfizer's earnings under pressure as it grappled with the integration of Wyeth and the addition of field force, the coming quarters promise to turn that around significantly. Focus on branded generics, market expansion initiatives, strong product portfolio and expected increase in field force productivity promise a smoother sojourn for Pfizer.



This is corroborated by the company's performance in the just-announced November quarter, in which it delivered 21 per cent sales growth and 71 per cent growth in profits. Pfizer's access to its parent, Pfizer Inc.'s product portfolio too gives it a competitive edge, while strong balance-sheet, zero debt and significant cash surplus further add to its strength.

Investors with a long-term perspective, therefore, can consider accumulating the stock. At the current market price of Rs 1,239, the stock trades at about 18 times its estimated FY-12 per share earnings (the company is changing its accounting from the current Dec-Nov cycle to April-March next year onwards).

While valuation isn't inexpensive, it isn't unduly high, given the overall valuations for pharma stocks and Pfizer's own defensive tag.

Promising prospects

Pfizer derives a majority share (about 82 per cent) of its revenues from the pharmaceuticals business, boasting of some of the country's best-known brands. Six of its key brands (such as Gelusil) figure in the list of top 100 brands in the industry, with Becosules and Corex, ranked number one in their respective therapeutic segments. Its other well-known brands such as Magnex and Minipress XL too have consistently grown faster than the market.

In the recently ended quarter, these brands recorded a strong traction in growth, pushing up the revenues of the pharmaceutical division by 21 per cent over the year. Aside of these, the addition of Wyeth's products also opens up growth prospects. Wyeth's products would give it a presence in vaccines, certain key antibiotics and gynaecological drugs.

The main growth driver, however, would be the product launches by the company. Pfizer has already launched some of Pfizer Inc's products — such as Viagra, Lyrica, Caduet and Champix. It has also taken steps to reduce the time gap between global product launch and India launches.

The company's increasing focus on branded generics too opens up growth opportunities. While it has already launched some branded generics last year, a few are on the anvil in the coming year. However, given the competitive nature of the domestic generics market, Pfizer may see some moderation in margins for these products.

Pfizer India also has presence in animal health (12 per cent), which primarily involves large animal health and poultry market segments. The company plans to leverage its parent's global portfolio to make further inroads in this business. It also has a small presence in clinical development operations (5 per cent), in which it conducts clinical trials and new product development on behalf of its parent.

Market expansion

Pfizer has also improved its field force strength significantly over the year. It had added over 500 employees , of which 200 were from the erstwhile Wyeth India. The company plans to add another 300-400 employees in the current year as well. The coming years therefore promise to see improvement in field force productivity, given that it typically takes a year and a half for medical representatives to bring in sufficient revenues to break even.

The company plans to further expand its target market by adding new therapeutic areas and products to its existing therapeutic areas. To improve overall presence across therapy areas, it had rolled out the “Branded Value Offering” strategy focusing on launching products in fast growing therapy areas. It had also rolled out retail project (in mid 2008) with the aim of improving the coverage of retail pharmacies.

It now plans to establish stronger presence in the rural areas. While competition in the domestic market is certainly hotting up, Pfizer's access to its parent's product folio, its expanded field force, marketing initiatives and financial muscle lend it a position of strength. As of the 12-months ended November 2010, the company had cash and bank balances amounting to Rs 620 crore (or Rs 208 per share).

Earnings scorecard

The company's historical growth rates, however, aren't as impressive. Over the last three years, Pfizer grew its revenues and profits at a compounded rate of about 9 per cent and 4 per cent respectively.

This, however, is expected to change, given the now changed growth dynamics of the domestic market. In the 12-months ended November 2010, Pfizer reported a 13.5 per cent growth in sales and 15.6 per cent growth in profits. The company is now hopeful of stronger double-digit growth in revenues in the next fiscal (18-20 per cent). Operating profit margins for the period expanded by two percentage points to about 20 per cent.

Risks

Widening ambit of the Drug Price Control Order (DPCO) and possible routing of Pfizer Inc's drugs through its other Indian subsidiary may pose a risk to our recommendation. The company's increasing focus on branded generics and launch of some of the recent products through Pfizer India, however, are mitigating factors. Unfavourable share swap ratio in favour of Wyeth shareholders too could pose a risk.