Pfizer Limited — Q2 FY17 earnings call

Call held 7 Nov 2016

Management summary

Pfizer India delivered a resilient quarter despite significant regulatory headwinds, including unanticipated price controls under Para 18 which impacted margins. The company is actively rationalizing its portfolio, evidenced by the ₹110 crore divestment of tail brands to Piramal. Management is transitioning to a new customer-centric 'route-to-market' structure and preparing for a major SAP rollout in 2017.

Highlights

  • Revenue of ₹552 crores, representing a 5% YoY growth

  • Regulatory pricing impacts (NLEM, WPI, Para 18) reduced revenue by ₹22 crores (4% impact)

  • Exceptional gain of ₹103 crores recorded from the sale of four brands to Piramal Enterprises

  • Profit from operations stood at ₹75 crores, down from ₹102 crores in Q1 FY17

  • Top 11 brands, contributing 69% of total revenue, grew by 8% YoY

  • Cash balance reached approximately ₹1400 crores, representing ~20% of market cap

  • Gross margin declined by ~500 bps YoY, primarily due to pricing impacts (2%) and inventory write-offs

  • Launched global patented product XELJANZ, clocking ₹1 crore in its debut quarter

Concerns

  • Regulatory Pricing Pressure (NLEM, WPI, Para 18)

Key financials

  1. Revenue ₹552 Cr +5%YoY
  2. Profit from Operations ₹75 Cr -26.5%QoQ
  3. Exceptional Item Gain ₹103 Cr
  4. Cash Balance ₹1,400 Cr
  5. Inventory Write-off ₹5 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

  • Top 11 Brands
    69% Revenue Contribution8% Revenue Growth
  • Hospital Segment
    15.5% Revenue Growth

Guidance & targets

Margin

  • EBITDA Margin Margin · FY17 · Medium confidence 22-23%
    if you add back the pricing, the EBITDA goes exactly to that point, 21 or 22%

    — Ravi Prakash, CFO

Revenue

  • Corex Dx Annual Revenue Revenue · FY17 · High confidence ₹45-50 crores
    Yes, Corex Dx will close roughly about 45-50 crores in the year annual basis.

    — S. Sridhar, Managing Director

Other

  • Divestment Revenue Adjustment Other · per quarter · High confidence -₹6 crores
    With respect to the third question was on Piramal, you should adjust going forward from August, for about Rs.6 crores per quarter.

    — Ravi Prakash, CFO

  • SAP Go-live Timeline Other · FY18 · High confidence July 2017
    we plan to go live with the SAP somewhere around July 2017 just in time with the GST.

    — S. Sridhar, Managing Director

Risks & concerns

  • Regulatory Pricing Pressure (NLEM, WPI, Para 18)

    high

    Impacted revenue by 4% (₹22 Cr) and is expected to persist as a quarterly headwind.

    Both acknowledged

  • Fixed Dose Combination (FDC) Litigation

    medium

    Corex sales remain uncertain pending a Supreme Court hearing; growth is currently flat.

    Both acknowledged

  • Inventory Write-offs

    low

    A one-time ₹5 crore write-off impacted gross margins this quarter.

    Management acknowledged

Areas of evasion (1)

  • Specifics on the acquisition pipeline despite high cash balances.

Q&A highlights

2 direct
Volume vs Price Growth Breakdown Direct
In terms of volume and price, if I take the 5% growth this quarter, 4% is volume-driven and 1% is price-driven.

Confirms that core demand remains healthy (4% volume growth) despite heavy regulatory pricing pressure.

Asked by Cindrella Carvalho, Dolat Capital

Capital Allocation and Cash Surpluses Partial
Like I said we always believe in a conservative associated dividend policy, we stay with that.

Management signaled they will maintain high cash balances (₹1400 Cr) for potential M&A rather than increasing shareholder payouts.

Asked by Ravi Purohit, Securities Investment Management

EBITDA Margin Guidance Miss Direct
Price control is something you and I cannot help... If I knock off those pricing impacts, I think we were home and right.

Management attributes the margin slide entirely to unanticipated regulatory changes (Para 18) rather than operational inefficiency.

Asked by Ranjit Kapadia, Centrum Broking

2 min read 5 chapters

Detailed narrative

Regulatory Pricing Headwinds

Pfizer faced a significant ₹22 crore revenue hit this quarter due to a combination of NLEM, WPI, and Para 18 pricing mandates. This regulatory pressure accounted for a 4% drag on total revenue growth, which would have otherwise been 9%. Management expects this 4% impact to continue quarterly assuming the current portfolio mix remains stable.

Strategic Portfolio Rationalization

The company concluded the sale of four legacy brands (Neko, Ferradol, Sloan’s, and Waterbury) to Piramal Enterprises for ₹110 crores. This divestment resulted in a ₹103 crore exceptional gain. Management noted that these brands were better suited for a pure OTC route, which Pfizer does not focus on, and investors should adjust for a ₹6 crore quarterly revenue reduction going forward.

Corex and FDC Litigation Uncertainty

Corex performance was flat YoY as the company awaits a Supreme Court hearing regarding Fixed Dose Combination (FDC) petitions. While sales have improved slightly compared to the immediate aftermath of the ban, they remain below historical levels. To mitigate this, Pfizer is scaling Corex Dx, which is expected to reach ₹45-50 crores in annual revenue.

Operational Restructuring and SAP Rollout

Pfizer is restructuring its commercial teams into three specialized units: Critical Care (hospitals), Specialty Care (niche specialists), and Primary Care (mass brands). Simultaneously, the company has kicked off an SAP rollout planned for July 2017 to align with GST implementation. This project involves a ₹5 crore CAPEX and an ongoing ₹2.5 crore annual depreciation charge.

New Product Traction

The launch of XELJANZ, a global patented Rheumatoid Arthritis product, is a key highlight of Pfizer's specialty strategy. The product generated ₹1 crore in its first quarter. Management emphasized that while global products take time to clear local regulatory hurdles (typically ~1 year), they are committed to fast-tracking launches where a strong portfolio fit exists.

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