Pfizer Limited — Q1 FY17 earnings call

Call held 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

  • 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

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

  • Pricing Policy (NLEM/DPCO) Impact

Key financials

  1. Revenue Growth 3% +3%YoY
  2. PBT (before exceptional items) Growth -7% -7%YoY
  3. Effective Tax Rate 35%
  4. Amortization Benefit (Ind-AS) ₹16.4 Cr
  5. Exceptional Income ₹7.93 Cr

What they filed

Q1 FY27: revenue up 8.3%, net profit up 6.3% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue589 538 592 603 642 +9%645 +20%629 +6%653 +8%
EBITDA189 146 228 210 230 +22%228 +56%236 +4%248 +18%
Net profit158 128 331 192 189 +20%142 +11%200 −40%204 +6%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

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

Guidance & targets

Revenue

  • Full Year Pricing Impact Revenue · FY17 · High confidence ₹80-90 crores
    In terms of pricing or the impact on the quarter has been about Rs. 15 odd crores and on a full year basis, we expect it to grow 80-90 crores.

    — S. Sridhar, Managing Director

Margin

  • EBITDA Margin Margin · mid-term · Medium confidence 21-22%
    we are hopeful of about 21-22% EBITDA margin in the mid-term there.

    — S. Sridhar, Managing Director

Other

  • Annual Amortization of Intangibles Other · FY17 · High confidence ₹43 crores
    The number would be around Rs. 43 crores. annually for the amortization of intangibles and the balance would be the regular depreciation.

    — Ravi Prakash, CFO

  • Effective Tax Rate Other · FY17 · High confidence 35%

    Previously 44% → 35%

    whatever tax rate that you see will continue for the remaining quarters as well.

    — Ravi Prakash, CFO

Capacity

  • Warehouse Rationalization (CFA count) Capacity · post-GST · Medium confidence 22-26

    From 28-30 today

    Currently we are about 28 to 30 of them; maybe 4 or 6 will get rationalized.

    — S. Sridhar, Managing Director

Risks & concerns

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

    high

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

    Both acknowledged

  • Pricing Policy (NLEM/DPCO) Impact

    high

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

    Management acknowledged

  • Stock Returns from Market

    medium

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

    Management acknowledged

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

2 direct
Ind-AS Depreciation and Amortization Run Rate Direct
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

Corex Ban Contingency Plan Direct
Corex DX is already another alternative a non-codeine formulation which we are aggressively promoting... Corex Dx is already there in PAN India.

Investors were concerned about the total loss of the Corex brand; management highlighted a non-codeine alternative already in the market.

Asked by Dhaval Shah

Medium-term Margin Sustainability Partial
The first imperative for the company is we would like to build back the revenue, once the revenue gets built back chances are that we should be able to bring it at a competitive margin.

Management admits near-term margin pressure but sets a clear target to return to historical 22% levels in the medium term.

Asked by Mayank Hyanki

2 min read 5 chapters

Detailed narrative

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.

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.

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.

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.

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.

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