The Hindu Business Line : Pfizer deal lends revenue visibility to Hikal

Hikal’s long-term agreement with Pfizer Inc for sourcing of Active Pharmaceutical Ingredients (APIs), announced on Monday, points to strong earnings prospects for the company. This deal suggests payoffs from the company’s strategy of re-aligning its focus to contract-manufacturing products for innovator companies in 2006, instead of relying on generic competitors.

The company has not disclosed financial details on the latest API deal, but the top management indicates that it expects revenue contributions from this deal to begin from the third quarter (September-December), with significant benefits flowing in from the fourth quarter. The stock price of Hikal that has gone up by 7.5 per cent, post-announcement, already appears to factor in this expectation.

Hikal’s USFDA plant at Jigani in Karnataka will be manufacturing the APIs. The agreement also represents a first-time association between Pfizer and the Indian company. The Jigani plant, which also supplies APIs to another US-based company Alpharma Inc, will start supplying to Pfizer with immediate effect. The management has also indicated that Hikal had already factored these contracted volumes into its expansion plans, which means there will be no additional capital expenditure for the Jigani plant related to the order. Long-term agreements such as these usually are multi-crore deals, but are prone to the volatile API pricing environment overseas, as the contract is spread over many years.

Hikal, which also has a significant crop protection business, has seen contribution from the pharmaceutical business increasing substantially in the recent quarters. The pharma business recorded net sales of Rs 61.2 crore in the six months to September, as against Rs 39.6 crore in the first half of 2007-08. While its other business, crop protection has shown steady growth, the pharma business has made a significant contribution to the overall turnover and is expected to ramp up further over the medium-term.

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