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Sanjiv Shankaran

PHARMACEUTICAL companies differ greatly in their capital requirement, R&D skills and outlook. The most obvious categorisation is between Indian companies and multinational corporations.

Supported by powerful parents, MNCs conduct operations with relatively limited capital. An MNCs business is built on a limited capital base because of the opportunity to use the global affiliate's assets. Indian companies, on the other hand, need to start from scratch. The imminent tightening of the patent law has also meant that Indian companies' business structure is different to MNCs'. What follows is the latest financial highlights of Glenmark Pharma — a medium-sized Indian company that largely relies on the domestic market — and Pfizer — the quintessential MNC that dips into its global parent's product basket and operates on a low capital base.

Pfizer

Pfizer's financial year is unusual — December to November. For the financial year ended November 2001, its operating income was Rs 410 crore, up 11 per cent over the previous December-November year.

Despite long years in the Indian market, Pfizer's sales are lower than that of quite a few Indian companies. The latter are constantly adding to their product basket in working towards a critical mass. Pfizer and other MNCs usually rely on their parent's product basket to build a portfolio in India. Therefore, they seem to launch new products at a slower rate in relation to Indian companies.

In fiscal 2001, Pfizer's largest expense was the consumption of raw materials. At Rs 113 crore, raw materials accounted for 31 per cent of sales. Two important aspects to the statistic are that raw materials form a low proportion of sales and Pfizer's emphasis on cost control has lowered this proportion over time. In fiscal 2000, the cost of raw materials came to 33 per cent of sales.

These factors explain the healthy profitability of Pfizer's operations. Its operating profit as a proportion of income was about 20 per cent in fiscal 2001 — a fairly high level.

Interest costs are almost negligible in the case of MNCs, and Pfizer's financial statements reflect this. It was a mere Rs 26 lakh out of the Rs 352-crore pre-tax expenditure.

The incidence of tax on Pfizer was about 38.34 per cent of the pre-tax profit of Rs 77 crore. The incidence of tax is generally higher for MNCs as their overseas sales (tax-benefits available on overseas profit) are limited. In the absence of significant investments in fixed assets, MNCs appear unable to reduce the incidence of tax.

Pfizer's net profit as a proportion of income was 11.19 per cent, once again a fairly high level. Equity shareholders' return is best measured by the proportion of net profit to equity shareholders' capital in the company's business — or the return on net worth (RONW). Pfizer's RONW is an impressive 31.23 per cent.

The striking feature of the Pfizer balance-sheet is the low level of capital deployed in business — Rs 170 crore as on November 30, 2001. It thus managed a level of operating income about 2.12 times its capital invested, suggesting efficient use of capital. Another interesting feature is that most of the capital is company's own funds. Simply put, the company does not rely on long-term borrowing to finance its business.

Pfizer's operations can be termed as a low-capital-high-profit margin business — the kind that will hardly ever require shareholders to invest more to fund its business.

Glenmark Pharmaceuticals

Glenmark's sales in 2001-02 was Rs 265.25 crore, higher by Rs 74.47 crore (39 per cent) over the previous financial year.

The growth in sales is far higher than Pfizer's because Glenmark has made a concerted effort to expand its product basket through a number of new launches and added to its field force strength.

Growth and critical mass are likely to be the dominant themes in the strategy of a mid-sized Indian company such as Glenmark.

Another notable feature of Glenmark's sales pattern is the growing importance of the new endeavour — drugs to combat diabetes. The division has registered fast growth, and is an example of an Indian company's attempt to rapidly expand in areas that promise fast growth.

Glenmark's operating expenditure reveals a sharp rise in selling expenses. Selling expenses rose Rs 18.06 crore (29.30 per cent) over the previous fiscal to register Rs 79.69 crore. Selling expenses are about 30 per cent of sales, reflecting an overwhelming desire to grow.

The sharp growth in sales helped the company raise its profitability, and this showed up through an increase in the proportion of operating profit to sales. In fiscal 2002, it was 18.33 per cent against 14.87 per cent the previous year.

The net profit for 2001-02 was Rs 22.77 crore, higher by 33.31 per cent compared to the previous year. The diluted earnings per share (EPS) in fiscal 2002 was Rs 21.18, up by 27 per cent.

The capital deployed in Glenmark's business for fiscal 2002 is not available. Therefore, fiscal 2001 data has been used to get an idea of the capital structure.

The company deployed Rs 202 crore in its business in fiscal 2001, of which about 36 per cent came through borrowings. The capital deployed was a shade more than the company's fiscal 2001 sales of Rs 192 crore.

Glenmark is at a stage where growth and infrastructure creation are its priorities. The company's opportunities will dry up once the new patent regime is in in 2005. Therefore, the efficiency with which capital is deployed in the business is likely to be lower than MNCs'.

Glenmark's financial statements reflect a company that places more emphasis on preparing itself for the future than on improving financial ratios.

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