Hoechst Marion Roussel: Hold

Recommendation: Hold

Sanjiv Shankaran

HOECHST Marion Roussel (HMR) trades around Rs. 465, at a price-earnings multiple (PEM) of 27 times the annualised earnings per share (EPS) of the financial year 2001.

The company has changed its strategy over the last couple of years, a move that has brightened the outlook. At the current price, the stock looks attractive, but a couple of factors have the potential to upset the calculations. A look at the factors.

HMR's business profile and strategy have undergone a significant change in the recent past. The company has reduced the manpower and manufacturing centres.

The company's restructuring was aimed at moving out of the highly competitive therapeutic segments, comprising old molecules, cutting down manufacturing costs and moving towards becoming an efficient marketing unit, and trying to improve the profitability by introducing new molecules from the parent, Aventis AG's product basket.

The new areas of focus in medicine categories are anti-diabetics, cardiovasculars, vaccines and select sub-segments in anti-infectives. The common thread running through the aforementioned therapeutic segments is that they are relatively high-margin segments and the new drugs introduced are out of the purview of price control.

The price control has hurt HMR's profitability in the past. As in the case of most multinational corporations (MNCs) in the pharmaceutical sector, HMR's relatively stagnant product portfolio had a significant number of products with a price ceiling imposed. The new line of products is expected to shake off the constraint of government-imposed price control.

In the new avatar, HMR has attracted considerable investor attention and the stock seems heading upwards after a steep fall in the post-Budget crash in pharmaceutical stocks. But a few concerns remain. Certain factors suggest that investors should hold on rather than take fresh exposure right now. They are as follows.

What could trigger HMR's share price is a dilution in the price control regime. This trigger has been making rounds for a long time. If and when it finally comes, it may not result in a straight addition to the bottomline. A lot will depend on the extent of competition in individual therapeutic segments where intense competition has, at times, led to market prices being lower than the government-mandated price.

In getting new products from the parent, a lot would depend on the price level at which the parent transfers the product to HMR (transfer pricing). The pharma market is expected to remain sensitive to price for a long time. Transfer pricing will be critical and it may be prudent to wait-and-watch a few more product launches before deciding how flexible the parent is.

As in the case with most MNCs, HMR is vulnerable to the fall in the value of the rupee vis-a-vis the dollar. The company imported about 38 per cent of its raw material in the financial year 2000. In the current environment, a weakening rupee may adversely impact profitability.

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Globally, Hoechst and Rhone-Poulenc merged to form Aventis. In India, HMR has announced its intention to `integrate' operations. A move towards a legal merger may not materialise soon because of the bad experience that MNC pharma companies have had with earlier mergers.

The stock may be in for an uptrend in the near term, but given a few concerns, investors may be better off waiting for a while before taking a fresh exposure or increasing their exposure to HMR.