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    Pfizer Limited

    PFIZERNeutral
    Healthcare·8 Aug 2016
    Management Summary

    Pfizer India faced a challenging Q1 FY17 characterized by regulatory headwinds regarding its core brand 'Corex' and significant pricing pressure from the new NLEM policy. While the transition to Ind-AS accounting provided a book-keeping boost to margins via lower amortization and tax rates, operational growth remained sluggish at 3%. Management is prioritizing revenue recovery through volume growth and new launches, including potential sterile injectables from the global Hospira transaction.

    Highlights

    8

    • Revenue growth was soft at 3% YoY, significantly impacted by regulatory challenges and pricing policies.

    • Pricing impact for the quarter was approximately ₹15 crores; full-year impact expected at ₹80-90 crores.

    • Profit Before Tax (PBT) and exceptional items declined by 7% YoY due to higher expenses and soft revenue.

    • Ind-AS transition resulted in a ₹16.4 crore reduction in depreciation/amortization as goodwill is no longer amortized.

    • Effective tax rate dropped to 35% (from 44% previously) due to deferred tax liability reversals under Ind-AS.

    • Key brands like Prevenar, Magnex, and Oral Contraceptives maintained double-digit growth.

    • Exceptional income of ₹7.93 crores recorded from the sale of the Bharuch guest house.

    • Management targeting a mid-term EBITDA margin of 21-22% once revenue recovers.

    Concerns

    2

    • Regulatory uncertainty regarding Fixed Dose Combinations (FDC) / Corex

    • Pricing Policy (NLEM/DPCO) Impact

    What Changed1

    vs Q2 FY17

    Guidance items4 → 5 (+1)

    Key financials

    Single quarter

    05 metrics
    1. 01Revenue Growth3%+3%YoY
    2. 02PBT (before exceptional items) Growth-7%-7.0%YoY
    3. 03Effective Tax Rate35%
    4. 04Amortization Benefit (Ind-AS)₹16.4 Cr
    5. 05Exceptional Income₹7.93 Cr

    Segment breakdown

    Key Brands (Prevenar, Magnex, Oral Contraceptives)
    10% Growth
    Mid-tier Brands
    -7% Growth
    List

    Guidance & targets

    5
    CategoryTargetPriority
    Revenue
    Full Year Pricing Impact
    ₹80-90 crores
    		High
    Margin
    EBITDA Margin
    21-22%
    		Medium
    Other
    Annual Amortization of Intangibles
    ₹43 crores
    		High
    Other
    Effective Tax Rate
    35%
    		High
    Capacity
    Warehouse Rationalization (CFA count)
    22-26
    		Medium

    Risks & concerns

    5
    RiskSeverity

    Regulatory uncertainty regarding Fixed Dose Combinations (FDC) / Corex

    The ban on Corex was stayed by the court, but uncertainty has already pulled back sales and increased litigation costs. — Both acknowledged

    high

    Pricing Policy (NLEM/DPCO) Impact

    New pricing effective April 1st is a 'straight hit to margin' with an expected ₹80-90 crore annual impact. — Management acknowledged

    high

    Stock Returns from Market

    Stockists are returning old-priced goods despite policies allowing sales with new lower invoices, forcing re-stickering costs. — Management acknowledged

    medium

    Areas of Evasion(2)

    • Specific details on the '3-4 measures' being taken for revenue growth.
    • Exact breakdown of litigation vs. sales conference expenses.

    Q&A highlights

    3

    “The number would be around Rs. 43 crores. annually for the amortization of intangibles and the balance would be the regular depreciation.”

    Clarifies the significant accounting tailwind from the cessation of goodwill amortization under Ind-AS.

    asked by Ranjeet Kapadia

    2 min read5 chapters

    Detailed Narrative

    01

    Ind-AS Transition Reshapes Financial Profile

    The adoption of Ind-AS accounting standards has significantly altered Pfizer's reported financials. The most notable change is the cessation of goodwill amortization, which provided a ₹16.4 crore benefit to the expense line this quarter. Additionally, the effective tax rate has been reset to 35% from the historical 44% due to the reversal of deferred tax liabilities on intangible assets worth ₹427 crores. Management confirmed that these accounting benefits are structural and will continue in future quarters.

    02

    Corex Regulatory Headwinds and 'Plan B'

    The regulatory ban on Fixed Dose Combinations (FDC) significantly impacted Corex sales, which, along with pricing, dragged overall growth down by 4 percentage points. While a stay order from the Delhi High Court allows continued sales, uncertainty has led to stock returns and higher litigation expenses. Management is mitigating this risk by aggressively promoting 'Corex DX', a non-codeine alternative that is already marketed PAN India and gaining traction.

    03

    Pricing Policy Hits Top-Line and Margins

    The implementation of the new National List of Essential Medicines (NLEM) and a 2.7% WPI-linked price reduction effective April 1st resulted in a ₹15 crore hit to revenue in Q1. Management expects the full-year impact to escalate to ₹80-90 crores. Because pricing cuts flow directly to the bottom line, near-term margins are expected to be lower than the current quarter's reported figures until volume growth compensates for the value loss.

    04

    Strategic Focus on Revenue Recovery

    Management identified 'building back revenue' as their #1 priority. While key brands like Prevenar and Magnex grew double-digits, mid-tier brands saw a 7% decline due to pricing. To drive future growth, Pfizer is looking at its global portfolio, noting that it already markets most of Pfizer's top 20 global products in India. New opportunities include launching sterile injectables and branded generics from the global Hospira transaction.

    05

    Operational Efficiency and GST Readiness

    In anticipation of GST, Pfizer is evaluating its supply chain and warehousing strategy. The company currently operates 28-30 Carrying and Forwarding Agents (CFAs) and expects to rationalize this by dropping 4-6 locations. While geographical territories may shift, management does not expect GST to significantly alter sales force incentive structures, as these are based on territory achievement rather than shipping locations.

    This is an AI-generated summary of a publicly available earnings call transcript. It is for informational purposes only and does not constitute investment advice, a recommendation, or an endorsement. inve.money is not a SEBI-registered investment advisor. Please consult a qualified financial advisor before making any investment decisions.