Pfizer Limited — Q3 FY17 earnings call

Call held 1 Feb 2017

Management summary

Pfizer's Q3 FY17 was a transition quarter marked by significant structural headwinds, including the discontinuation of the core Corex formulation and the divestment of certain brands. While reported revenue and operating profits were hit by these changes and the external shock of demonetization, the 'Continuing Business' showed resilience with 4% growth. Management is pivoting towards new line extensions (Corex T) and integrating global acquisitions (Meronem) to rebase growth for FY18 and FY19.

Highlights

  • Reported Revenue of ₹503 crores, a decline of 3% YoY due to structural changes and demonetization.

  • Continuing Business (excluding Corex and divested brands) grew by 4% YoY to ₹433 crores.

  • Profit After Tax (PAT) grew by 4% YoY, supported by other income and exceptional items (sale of flats).

  • Profit from Operations declined by 30% due to the loss of high-margin Corex sales and pricing impacts.

  • Demonetization impact estimated at ₹15 crores in revenue for the month of November.

  • Non-price controlled brands showed robust growth of 13% during the quarter.

  • Gross Margin remained stable at approximately 60% despite pricing pressures.

  • Meronem acquisition from AstraZeneca expected to add ~₹100 crores in annual revenue upon transition.

Concerns

  • Drug Price Control Order (DPCO) Impact

  • Corex Discontinuation

Key financials

  1. Revenue ₹503 Cr -3%YoY
  2. Profit from Operations — -30%YoY
  3. PAT — +4%YoY
  4. Gross Margin 60%
  5. Employee Cost ₹87 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

SegmentRevenueGrowth
Continuing Business₹433 Cr4%
Corex (Discontinued Formulation)₹58 Cr—
Non-Price Controlled Brands—13%

Guidance & targets

Revenue

  • Market Growth Rate Revenue · FY18 | FY19 · Medium confidence Equal to or better than market
    Our objective is to do as good as the market if not better, but if you take FY ’18 and ’19, I am optimistic.

    — Ravi Prakash, CFO

  • Meronem Annual Revenue Revenue · Annual · Medium confidence ₹100 crores
    If you look at AstraZeneca Pharma India Limited’s annual report, the number seems to be around approximately Rs.100 crores in terms of the revenue.

    — Ravi Prakash, CFO

Margin

  • Margin Pressure Margin · FY18 · High confidence Under pressure
    In ’17-18 we will have to get ourselves prepared for a bit of pressure on the margins because the top line knock that we have taken on account of pricing and Corex is pretty significant.

    — Ravi Prakash, CFO

Risks & concerns

  • Drug Price Control Order (DPCO) Impact

    high

    Price cuts on controlled products ranged from 15% to 50%, significantly impacting revenue.

    Management acknowledged

  • Corex Discontinuation

    high

    Loss of ₹250 crores in annual high-margin revenue creates a significant gap that line extensions must fill.

    Both acknowledged

  • Demonetization Recovery

    medium

    Recovery is gradual; interior parts of North and East India still show an impact on regular run rates.

    Management acknowledged

Areas of evasion (3)

  • Profitability of the Meronem brand for the India entity.
  • Specific timelines for new product launches from the parent pipeline.
  • Future plans for the large cash balance.

Q&A highlights

0 direct, 1 evasive
Capital Allocation and Cash Pile Partial
We are aware of this and we are open to any opportunity that might arise in the market. I do not have anything firm to kind of share with you yet, but we are open.

Investors are concerned about the lack of a clear plan for the significant cash reserves on the balance sheet.

Asked by Ravi Purohit

Meronem Acquisition and Profitability Partial
At the moment we are not able to make an official comment as to what the profitability is and when we would be able to start recognizing revenue in Pfizer Limited.

Meronem is a key growth driver to replace lost Corex revenue, but the financial terms for the India entity remain unclear.

Asked by Nikhil Upadhyay

Prevenar Affordability and Pricing Strategy Evasive
Prevenar is priced at about Rs.3800 per course of vaccine. Yes, maybe it is not affordable by everybody. Having said that, for a large population it is also not out of reach... I think at the moment the strategy of Prevenar stays the same.

Analysts are questioning if lower pricing could significantly expand the market for this high-growth vaccine.

Asked by Ravi Purohit

2 min read 5 chapters

Detailed narrative

Demonetization and Market Slowdown

The Indian Pharma Market (IPM) growth slowed to 5.7% in the quarter, primarily due to demonetization. Pfizer estimated a direct revenue hit of ₹15 crores in November alone. While chronic therapy drugs saw a temporary 'phase bump' as patients stocked up, acute therapies were significantly impacted. Management noted that while cities have recovered, interior parts of North and East India still lag in returning to normal run rates.

Structural Portfolio Re-alignment

The quarter's results were heavily skewed by the discontinuation of the core Corex formulation and the divestment of brands to Piramal and Abbott. Corex revenue dropped to ₹58 crores from ₹77 crores YoY. Transition products, which contributed ~₹100 crores in FY16, are also phasing out. Management is now focusing on 'Continuing Business,' which stood at ₹433 crores for the quarter.

Pricing Pressure and Margin Resilience

Approximately 15-16% of the continuing business is under price control, where price drops ranged from 15% to 50%. Despite this, Pfizer maintained a 60% gross margin by managing the product mix. However, the loss of high-margin Corex sales led to a 30% drop in profit from operations, as fixed costs like employee expenses (which rose to ₹87 crores) could not be immediately rationalized.

Future Growth Drivers: Meronem and Corex T

To offset losses, Pfizer is integrating Meronem, an anti-infective brand acquired globally from AstraZeneca, which has an annual India revenue of ~₹100 crores. Additionally, the company has soft-launched 'Corex T' (a Codeine-based prescription drug) and is leveraging the Corex brand heritage for new line extensions. Corex DX is already showing high double-digit growth with an annual run rate of ~₹50 crores.

Capital Allocation and Parent Strategy

Management faced tough questions regarding the 'huge pile of cash' on the balance sheet. While they remain 'open to opportunities,' no firm acquisition plans were shared. They emphasized that Pfizer Inc. sees India as a critical market, especially after the Hospira acquisition, which made India one of Pfizer's largest manufacturing bases globally. The long-term goal remains growing at or above the market rate.

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