The Hindu Business Line : Pfizer: Hold

Though Pfizer's performance has shown a consistent improvement over the last few quarters, our current view is driven largely by the uncertainty over the impact of the sale of the consumer business at the global level.

MR KEWAL HANDA, MD.

Investors can retain their holdings of the Pfizer stock, which trades at about Rs 890, at about 22 times its expected sustainable per share earnings for the fiscal year ended November 2006.

It has been a story of steady improvement in operational metrics at Pfizer. After being a laggard on the margin front compared to other frontline peers such as Glaxo and Aventis, Pfizer has covered substantial ground on this score; its performance in the latest quarter is evidence of this. Though there is still scope for a further improvement in margins, we believe that the street is pricing in such a development. Our current view is also underpinned by the uncertainty over the sell-off of the consumer business division and its impact on minority shareholders.

The numbers

Pfizer's topline has registered a growth of 9 per cent at Rs 185.6 crore compared to the year-ago period. This has been driven by a 10 per cent growth in the core pharmaceuticals business (that accounts for close to 90 per cent of sales) for the quarter; the division has registered a strong 15 per cent growth in the first three quarters of this fiscal.

Operating margins continue to be on the rise; for the latest quarter, that figure, at close to 26 per cent, was higher by about 200 basis points compared to the year-ago period.

Adjusted for the exceptional item, earnings for the quarter at Rs 33.8 crore grew 23 per cent compared to the corresponding previous quarter.

Investment rationale

Pfizer's efforts at rationalising costs and restructuring its field force have translated into better operating performance. With change in the product mix and tightening of costs, there is scope for further improvement. We believe that this will only be incremental; thereafter, topline growth will drive earnings.

To this end, Pfizer has tapped the portfolio of its global parent to launch products in the domestic market; Lyrica, Caduet and Viagra have been introduced locally. While we believe that Pfizer has one of the better field forces in the business, it would take time for such products to contribute significantly to earnings. In this context, the pricing of such products will also turn out to be crucial. With competition from low-priced generics, establishing critical mass for these products may be a key challenge, in our opinion.

The second issue pertains to the status of the consumer products division, which has been sold by the global parent to J&J. The effects of that transaction on the Indian business are not yet known. Two scenarios unfold: One, post-sell-off, the licences for these brands will rest with J&J; and Pfizer in India could continue to sell them as part of its portfolio and pay a royalty on sales to J&J, in which case we do not expect any material impact on the former's numbers.

In the other scenario, these brands could move out of Pfizer in return for a compensation to shareholders.

The extent of such a compensation would then assume critical importance. As there is no clarity at this juncture on how the arrangement will pan out, we prefer to adopt a cautious view.

A key concern, which was highlighted in the past, is to do with the presence of a fully-owned subsidiary of the parent that handles products in the ophthalmology and oncology therapy areas. It appears that mass-based products from the parent's pipeline will be launched through the listed entity — enabling shareholders to participate in gains — while niche products may find their way into the subsidiary. Any news of the launch of a key molecule through the subsidiary may impact stock sentiment.

The shape that the new pharma policy will take may also have an important bearing on stock movement.

The industry has been pressing for an arrangement of price monitoring as opposed to price control; if the latter comes into effect, it would be a negative not only for Pfizer but for other pharma stocks as well.

Valuation and view

At 22 times the expected per share earnings for FY-06, Pfizer's valuation levels cannot be termed undemanding. We note that earnings includes an exceptional item that pertains to amortisation of VRS payments and the five-year period over which they have been reckoned with should end this year.

That should not impact our estimates, as only the sustainable earnings, after excluding the effect of exceptionals, have been factored in.

Though there is lack of clarity on the consumer business, the premium valuation level that stocks from the MNC pharma space command should cushion the downside risk. Remain invested.

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