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Introduction
Business model
Business Segments
• Pharmaceutical
• Generics
• OTC
• Animal Health segment
Financial Analysis
Income Statement
Quarterly Results
• Balance Sheet
• Ratio Analysis
Novartis in India is a leading provider of innovative solutions to improve health and well-being
through products and services in the areas of pharmaceuticals, over-the-counter products,
nutrition, eye care and animal health.
The Group has a presence through three entities namely, Novartis India Limited, Novartis
Healthcare Private Limited and Sandoz Private Limited and employs more than 2000 people
across the country.
Sandoz Private Limited houses all the four manufacturing facilities which are located at Thane,
Kalwe, Turbhe and Mahad.
Business Model
The businesses comprise Pharmaceuticals, Generics, OTC and Animal Health. The
operational performance of the business is reviewed by the management based on such
segmentation.
(i) The Pharmaceuticals segment comprises a portfolio of prescription medicines which are
provided to patients through healthcare professionals. These are mainly products of original
research of the Novartis Group.
(ii) The Generics segment comprises Retail Generics products. The business unit primarily
focuses on the therapeutic segments such as Anti-TB, Anti-DUB (Gynaecology), Anti-
histamines, Antibiotics, Anti-ulcerants, Anti-diabetes and Cardiovascular.
(iii) The Animal Health segment has a presence primarily in the cattle, poultry and
aquaculture market segments.
(iv) The OTC segment is mainly in the VMS (vitamins, minerals and nutritional supplements)
and CoCoA (cough, cold and allergy) market segments.
1.Pharmaceutical
The Domestic pharmaceutical market is going through a transformation, led by strong underlying
growth drivers and has witnessed robust growth over the last couple of years. While this growth
was driven mainly by an increasing spend on healthcare, on account of rising disposable income,
increasing penetration of Health insurance and changing disease profile, regulatory reforms also
provided a significant boost.
Growth Drivers
The rise in disposable income has a positive impact on healthcare spend. In 2005, 6.2 percent of
disposable income was spent on healthcare as compared to 2.8 percent in 1995.
At present, organized players account for a meagre 2 percent share of the pharma retail market. It
is expected that with the advent of modern retailing in India, increasing investments in this space
will multiply the availability and accessibility of pharma products.
The existing therapy mix is tilted towards acute diseases. However, in the medium to long run the
domestic pharmaceutical market will be largely driven by the increasing prevalence of the chronic
segment. Increasing urbanization, changing lifestyles and ageing population will drive the growth
of this segment. In most cases, ailments in the chronic segment are recurring in nature, which
ensures regular consumption of medicines for the lifetime of the patient. Going forward, therapies
for treating cardiovascular diseases and diabetes are expected to have one of the highest growth
rates.
In terms of the geographical distribution of the Pharma market, 23 Metro cities account for
approximately a quarter of the market. Class I towns— comprising 300 towns altogether—
account for about one-third of the market. Rural markets which account for 21 percent of the total
market have been increasingly becoming an important market for big pharma companies.
• Government initiatives
The National Rural Health Mission (NRHM), introduced by the government to provide basic
healthcare amenities in the rural areas, is expected to increase the access to drugs in the rural
areas. In Budget 2007-08, the budgetary allocation to health was increased by 22 percent to INR 1,
52,910 million.
After the product patent regime was introduced in India in 2005, the domestic pharma industry has
witnessed the launch of around 11 patented products by multinational companies. This number is
expected to grow, as MNC pharma companies are already planning significant patented launches
over the next few years. Various industry estimates suggest that by 2015, patented drugs will
account for 10-15 percent of the domestic pharma market.
Key considerations
• PPP
70 percent people in this country do not have access to modern medicine. 700 million people in a
population of 1 billion. That is a problem that the government needs to solve. There has to be a
public private partnership to reach medicines to these 700 people
• Spurious drugs
According to the Mashelkar committee report, the industry faces a loss of around INR 40 billion
due to substandard drugs and a WHO report suggests that 35 percent of spurious drugs of the
world are being produced in India. Spurious and counterfeit drugs are a major public health
hazard.
• Price control
• High fragmentation
A report by the Institute for Studies in Industrial Development (ISID), a national level policy
research organization in the public domain, mentions that in 2000-01 there were approximately
2872 pharma units in India and out of these 91 percent were small manufacturing enterprises.
Challenges
• Changes in regulatory environment e.g. VAT,MRP based Excise, Service Tax etc.
Planned Actions
• In-licensing opportunities
2007 2006
• The Pharmaceuticals business registered a growth of 5% over the previous year with sales
of Rs 3835 million.
• Higher sales of the Voveran® range, the No. 1 Non-Steroidal Anti-Inflammatory drug in
India, due to the epidemics of chikungunya and dengue fever partially offset by a price
reduction in Tegrital™.
New products and line extensions introduced during the period under review were:
– Epilepsy ,Epitril MD
The business continues to hold leadership position in major therapeutic areas such as:
Indian companies are increasingly advancing beyond domestic boundaries and are aggressively
focusing on making their mark in the global generics space. In order to reduce their dependence
on the U.S. market, Indian pharma companies are now entering new and underserved generics
markets across different geographies such as Japan, South Africa, European and Commonwealth
of Independent States(CIS) countries and Latin America. While the global generics industry
continues to remain under severe pricing pressure, the Indian generic drug makers continue to
spread their wings across different international markets.
Growth Drivers
Globally, the generics industry is expected to grow at a Compound Annual Growth Rate
(CAGR) of 11 percent between 2006 and 2010 and touch USD 94 billion by 2010. At present,
India has only 10 percent market share in this industry.
• Regulated markets
U.S. - The world’s largest generics market, European Union (EU) – regulatory reforms to
drive growth and Japan – Low generics penetration and Government legislation to drive
growth
• Emerging markets
Emerging markets such as Russia and the CIS nations, Eastern Europe; Brazil and other Latin
American countries and South Africa are increasingly being viewed as highly remunerative
markets.
In order to remain competitive and maintain their dominance, Indian players have realigned
and restructured their operating paradigms reflected in lean cost structures, vertically
integrated models, geographically diversified presence, vast product baskets and increasing
presence in niche segments.
• Consolidations
Today, the top 10 global generics companies collectively have a market share of over 50
percent of the global generics market. This is likely to have a positive effect and reduce
pricing pressure in the global generics market, to some extent.
Key consideration
• Pricing pressure
• Multiple markets
The success of companies in these markets will depend on factors such as:
• Entry strategy
• Ability to comply with regulatory complexities
• Building product portfolio based on disease profile of each country.
• China competition
China is emerging as a strong competitor on the back of its cost competitiveness, strong
government support (in the form of incentives), implementation of GMP norms, aggressive
focus on exports and the soaring consolidation drive to build large Chinese pharma giants
• Integration problems
Some of the key concerns of the integration process involve people management, managing
cultural differences and aligning the goals and ambitions of the staff members with the vision
of the merged company.
Challenges
Planned Actions
2007 2006
Capital Expenditure 0 13
Top Products
• Foristal
• PZA CibaÒ
• Regestrone
Challenges
Planned Actions
2007 2006
• The OTC business registered sales of Rs 796 million with a growth of 10%.
• The Calcium Sandoz® range of products consolidated its position as the leading OTC
brand in Calcium with significant growth by
• The T-minic™ range of products in the CoCoA (Cough, Cold and Allergy) category
posted good growth albeit on a small base.
– higher sales
New products and line extensions introduced during the period under review were:
• Gastrointestinal
Animal Health
Challenges
– Bird flu
– Price sensitivity
Planned Actions
2007 2006
• Animal Health business achieved sales of Rs 359 million with a 4% growth over the
comparable previous period despite bird flu which impacted our key poultry brands.
• The growth in the cattle segment was primarily due to higher sales of the Calcium range
of products.
The scope of activities covers process development in Drugs and Pharmaceutical formulations.
4. Expenditure on R&D:
Novartis AG, Switzerland continues to provide basic technology and technical know-how for
introduction of new products and formulation development. These are adapted, wherever
necessary, to local conditions.
New product development, productivity and quality improvements, enhanced safety and
environmental protection measures and conservation of energy are the benefits derived.
3. Technology Imported:
Novartis AG, Switzerland has provided technical know-how and technology relevant to the areas
of business of the Company, as and when required, relating to products, quality, marketing and so
on. This on-going process involves visits by employees of both companies to each other’s office
sites for discussions and training. Novartis is considered to have one of the best pipelines in
Pharma sector.
Income Statement
Power & Fuel Cost 12.08 11.01 11.85 1.89 1.87 1.88
The overall sales figures areon a growing trend and shall grow at a fasterpace
in the coming years. with the reduction in excise duties , income should
sales have recovered after march last year and also other income has come
in.the quarter 3 showed lesser sales due to animal health segment being hit.
But considering the renewed focus on cattle, this segment will be able to
catch up and a profit will be observed.
Application Of Funds
Total CA, Loans & 240.89 237.76 339.67 459.67 474.56 577.41
Advances
Current Liabilities 95.28 66.11 74.67 69.28 68.2 68
Liquidity
The current ratio for top pharmaceutical companies is high due to high
current assets in the form of inventories and high loans and advances. The
sudden leap in Novartis India’s current ratio is due to reduction in current
liabilities by approximately 55% in ’07.
Leverage
Glenmark Sun
Dr Reddy`s Matrix Novartis
Pharmaceutic Pharmaceutic
Laboratories Laboratories India
al al
% ‘07 ‘06 ‘05 ‘07 ‘06 ‘05 ‘07 ‘06 05 ‘07 ‘06 ‘05 ‘07 ‘06 ‘05
27. 31. 23. 25. 10. 21. 20. 22. 32. 22. 25. 32. 28.
RONW 1 9.5 3.2 2 9 6 2 0 9 8 0 9 9 0 3
39. 16. 11. 28. 20. 25. 19. 34. 29. 17. 21. 16. 25. 26. 29.
Gross
Profit 9 1 7 0 1 2 5 0 1 9 0 4 8 5 2
31. 10. 17. 12. 13. 13. 27. 20. 16. 20. 13. 28. 28. 26.
Net
Profit 1 5 4.2 2 5 7 3 3 5 3 5 8 7 1 3
Profitability improved in ’06 but slumped in ’07 due to Animal Health division
affected by bird flu and change in employee benefits policy in ’07. the Tax
margin is affecting the bottom line. Lower R&D and depreciated assets have
resulted in higher tax.
High non operating income and low depreciation are the peculiarities seen in
Novartis India.
Activity
FG Inv 10 18 19 38 35 50 5 10 13 50 47 50 19 17 19
11 10
Creditor 88 92 80 62 58 97 73 42 41 47 15 23 36
s 2 7
The very low inventories of raw materials is due to actual production being
done in subsidiaries abroad, which also causes higher Finished goods
inventory considering longer lead times. Low receivables and creditors reflect
the efficiency of the staff.
The turnover ratios are low reflecting the efficiency but the per employee
ratios are reflecting low productivity. It seems that excess employees are
affecting the turnover ratios.
Valuation
Glenmark Sun
Dr Reddy`s Matrix
Pharmaceuti Novartis India Pharmaceutic
Laboratories Laboratories
cal al
% ‘07 ‘06 ‘05 ‘07 ‘06 ‘05 ‘07 ‘06 05 ‘07 ‘06 ‘05 ‘07 ‘06 ‘05
EPS 70 27 8 11 5 5 6 11 8 27 33 20 32 24 16
Book Value and EPS are at considerably good in contrast to others. the payout
ratio is high for Novartis and they had announced 200% dividend in the past 2
years.
This reflects the security of investing in the firm and the potential for P/E to
increase.
Considering that Novartis was unsuccessful in getting patent for Glivec , it was
a setback for them. They are now reconsidering their decision about setting
up research infrastructure in India. They may now concentrate on gurgoun
instead. The 500 Cr Hyderabad campus shows the importance Novartis is
giving India as an emerging country.
The pharmaceutical companies are expecting an excise duty cut from 16% to
8%. This will be beneficial to the consumer and organizations. Also the patent
regulations should be sorted in India soon for MNC companies to develop their
products in India.