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Merck Limited: The Most Undervalued MNC [email protected] High Growth

(adityanahata) #1

The strategy now would be to address inefficiencies, free up resources and invest in promising growth markets. Now obviously the reference was to Asia and China and India in particular. Reading between the lines, I believe that this subsidiary of Merck Germany, which has been ignored and not sort of seriously looked at by the parent for so many years now, would see increased attention and renewed investor interest in the coming months and years. So far the financials have not been too good; this company has started growing at a very fast pace recently. The net profit is at Rs 1000 crore on basis of the recent results declared, so we literally are getting a top notch MNC pharmaceutical major at 20 PE. But looking at what the parent has said in the board meeting, three months back, I believe that there should be a renewed interest in this counter in the coming months and years. Financially, this year the company would report about Rs 50 kind of earnings, the stock is at about Rs 780 so it is trading at about 20 times that is reasonable. But if you look this stock from a marketcap to sales perspective, the stock is looking very cheap. If you compare it with Novartis, the turnover is about Rs 873 crore, marketcap is Rs 2,500 crore that is again three times the sales. And if you look at the Pfizer turnover is about Rs 1,900 crore or so and the marketcap is Rs 12,000 crore six times the sales. So Novartis, and Pfizer all these three companies are trading at an average of three to six times the sale. The market cap of Merck should atleast be Rs 1,800 crore whereas the current marketcap is about Rs 1300 crore. So reasonable P/E, decent valuations based on marketcap to sales and renewed interest by the parent company should rerate the stock in the coming years. It is a good long-term stock wherein the risk is very low and the reward could be reasonably good.

The key negative has been low growth since the past many years but I believe the company is breaking out from that ballon and market may take some time to factor that in .

Disclosure: Started buying today in smaller quantities and look to build up on it. Welcome all feedback and views

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(Nikhil) #2

Sharing recent article on OTC brands have discussed few Merck brands

If You’ve Got It, Flaunt It
Pharma companies are giving OTC brands a strong makeover by splurging on advertising
Himanshu KakkarSEP 29 , 2015

Illustration by Kishore Das
With actresses invading our collective bathrooms to check our toothpastes for salt and TV presenters making their way to the loo to sell floor cleaners, perhaps the day was not far when our national cricket team began peddling medical formulations. But even by those consumeristic standards, the ad featuring cricketer Rohit Sharma endorsing Nasivion nasal drops comes as a surprise. While you might have thought prescribing nasal decongestants was your ENT specialist’s job, we live in a world where do-it-yourself (DIY) is fast becoming the dictum, and pharma companies seem to be on board with that philosophy. In the pharma world, DIY can be conveniently packaged as ‘self-care’, implying the companies’ arsenal of over-the-counter (OTC) drugs.
Brijesh Kapil, Merck IndiaCelebrities mostly helpthe brand break through the clutter and establish its dominance in the market — Brijesh Kapil, general manager - head of consumer health, Merck India When Rohit Sharma is shown huffing Nasivion before a cricket match in the TV commercial, Merck, the maker of the drug, has a large number of potential consumers on its mind.
“Celebrities help the brand break through the clutter and establish its dominance in the market. Rohit Sharma as a celebrity brand ambassador did positively impact the brand” says Brijesh Kapil, head of consumer health, Merck India. It is not surprising that the brand turnover of Nasivion improved by 33% over the past three years. And it’s not just Merck.
For years, constipated masses across the country would see doctors prescribing the Dulcolax tablet – the No.1 laxative brand in the world – to them. But late last year, maker Boehringer Ingelheim, which used to market the tablet through Zydus Cadilla in India, decided to advertise its magic motion pill on TV under a new brand name – Dulcoflex.
Susan Josi, managing partner, Sorento Healthcare Communications, says that the company is the first to take this step in the laxative pills category. “Boehringer Ingelheim was No.1 in the prescription space. Then the company realised it could just launch its own brand instead. It ended the agreement with Zydus Cadilla and launched an OTC division in India last year,” says Josi.
The company’s move is hardly surprising, given that the size of the OTC pharma market in India is pegged at ₹5,300 crore. The overall OTC category is estimated to be worth $3 billion-$4 billion and has grown at the rate of over 20% in the past three years. There are three types of OTC players in India. First, companies like Dabur, which sell ayurvedic or herbal products. Second, companies like Paras Pharma, which, being an exception, directly launched OTC products, completely bypassing the prescription route; the company sells Moov, Krack and Itch Guard creams. Third, pharma companies that strategically switch from prescription (Rx) drugs to OTC. It is this third type of pharma companies that are now going out of their comfort zones to turn into consumer brands.
Hot counters
OTC brands advertised by pharma companies
*Dulcoflex was being sold by Zydus as Dulcolax before 2013, and its size is estimated to be under Rs.12 crore. Source: IMS Health
“Typically, companies have to apply to the regulator for permission to launch an OTC drug. The regulator then decides whether the drug is fit to be launched under the OTC segment. In doing so, it takes into consideration questions like if the molecule has been in use for several years, if it treats a condition that has widespread prevalence and whether patients would face discomfort if it was consumed by mistake,” says Hemant Bakhru, pharma analyst at CLSA.
“The OTC switch is possibly to create bigger, self-sustaining brands without investing on the medical representative side and without the need for doctors’ prescriptions,” adds Bakhru. There is a science behind the idea, insists Josi of Sorento. “After some time, doctor’s prescriptions don’t go up but sales keep increasing. This happens because the consumers buy your product on their own.” Once you have been prescribed an Otrivin or Nasivion for a blocked nose, you are not going to return to the doctor. This often is an opportunity for pharma companies to try and figure out how they can increase sales. “While the doctor may have reduced the prescription, the consumer goes back and buys the brand on his or her own. Why not go to the consumer directly,” asks Josi.
Star power
Celebrities who endorsed OTC brands

Pharma companies are confident that building brands is a more sustainable way to grow the business in the long term. “It is an attractive business from a long-term perspective,” says Kedar Rajadnye, president and COO, consumer products, Piramal Enterprises. On the surface, the value proposition is not that apparent – high margins and brand premiums are only forthcoming in the herbal category. Then again, drugs that fall under price control in the Rx category cannot be sold at higher prices as OTC drugs. So, the only plays the pharma companies experimenting in the OTC category have are the volumes game and brand creation.
And Sun Pharma (formerly, Ranbaxy) has one of the best success stories. Its pain-relieving cream Volini and health supplement Revital currently rule the roost. The former was introduced in the 1990s and remained a prescription topical analgesic till 2007, when its first few TVCs were launched. With actresses such as Sonali Bendre and Trisha Krishnan promoting the brand, Volini went on to become a ₹250 crore brand from a measly ₹50 crore at the time of switch in 2007.
Similarly, Revital, first promoted by cricketer Yuvraj Singh and then actor Salman Khan, went from being a ₹27-crore brand at the time of the switch in 2002 to being over ₹200 crore by July 2014. Subodh Marwah, vice-president, global consumer healthcare, Sun Pharma, says, “The basic philosophy behind the switch was that consumers find the brand relevant even without the doctor’s recommendation, and if you continue to build that relevance, then the brand will find resonance with the consumers.”
But that is not a hard-and-fast rule –Piramal didn’t let doctors prescribe i-pill – it jumped into the market right away, which had its own costs. “The product exploded in the media. It was a good, unmet need. But the amount of money the company spent to get return was almost 100% (against a typical 20% in case of a switch),” says Josi. This was also because the company didn’t have a choice – most doctors are unlikely to prescribe a morning-after pill.
Making a name
The OTC market in India is nascent and is not very clearly defined. “But the industry is thriving and is growing better than pharma,” says Kapil of Merck. The OTC business contributes close to 35% to the all-India pharma business at Merck. The business has been growing at a healthy 16% over the past three years against the market growth rate of 9%. In fact, OTC contributed 20% to Ranbaxy India’s sales before it was bought over by Sun Pharma. The company has around 10 OTC brands, including the best-selling Revital, Volini, Pepfiz, Chericof and Garlic Pearl.
Over the past three to four years, these companies have created good traction through some strategic brand switches and placements. “Merck has almost quadrupled sales over the past three years on account of the Neurobion brand shift. Neurobion has grown a healthy 18% over the past two years in a phased switch progression,” says Kapil.
As a global strategic move, Merck shifted the Neurobion vitamin supplement from the Rx category to the consumer portfolio in 2013. The move right away added a billion dollars to Merck’s global consumer health division’s revenue that year. Merck’s OTC business is currently projected at over ₹200 crore. Neurobion and Nasivion are its top brands and their respective sizes are ₹125 crore and ₹40 crore. Seven Seas is its third key brand in India.
Starting from the 40th spot in 2007, Piramal Consumer Health has advanced into the top 10, riding on brands like Lacto Calamine lotion (the company’s first ₹100-crore brand), Saridon (reaching ₹37 crore), i-pill, i-sure, i-can and Polycrol antacid. “Our ambition is to be in the top three by 2018,” says Rajadnye of Piramal. What is the source of his confidence? “Most of our brands are either No.1 or No.2 in their categories and we have one of the largest field force of 1,000 people,” he adds.
Piramal’s strategy is four-fold. “We are launching new products and categories, looking for acquisitions, increasing coverage and making the best use of the self-care market, which is growing faster than prescription.” Sun Pharma, on the other hand, still has its eye on the unmet needs of consumers and is leveraging its existing brands even more. “Our strategic focus has always been to provide value to our consumers by identifying insights and uncovering needs that we can meet,” says Marwah.
Sun Pharma’s OTC poster boy Volini was introduced in this business in 2006. “Since then, it has grown almost five times in size. Over the years, we have introduced relevant and significant extensions such as Revital Woman or Volini Spray, which have resonated with consumers due to the need gaps they addressed. These gaps were unmet in the market by any brand,” Marwah adds. Merck’s OTC strategy in India – which is the 3X3 strategy – is driven by the global Merck Consumer Health (CH) division strategy.
“This means that we aim for a 3% market share, with three strategic brands in the top strategic markets identified by Merck CH,” reveals Kapil. And India is one of the key strategic markets for Merck. Existing market share for Merck CH India hovers at 1.2% despite growth rates of 50-100%. “This should give us a market share of 1.5% by 2021. We are working on brands to cover the strategic planning gap of the 1.5% share by acquiring brands or through M&A,” he adds.
India is amongst the top five markets for Neurobion and Nasivion globally. No wonder, then, that the company’s three strategic brands for India at the moment are Neurobion, Nasivion and Seven Seas. The first two are the top prescribed brands in their respective categories and Seven Seas leads in the cod liver oil segment.
But not every company is successful with OTC ventures. “Success here depends on two things. One, your product profile and the depth of your pocket to sustain it,” says Kewal Handa, former MD, Pfizer India. “Successful are those who manage consumer businesses with a different mindset. If you have a prescription mindset and you are managing a consumer business, then it will be a challenge,” says Handa.
Before 2006, Pfizer had OTC brands such as Benadryl and Listerine in its stable, but it sold these off to Johnson & Johnson, which, according to Handa, has done a better job with these brands. But when a drug is switched to OTC, the company moves out of a comfortable controlled zone into the wild world. In the prescription space, the marketing heads have a fair idea of the number of doctors and chemists, where they are, how to crack the market, how much to sell, how much will be the cost. But outside this zone, the journey can throw up surprises.
“So, the benchmark for most companies that have moved into the OTC space is that they need high gross revenue because that gives them a lot to play with, both in the media and with selling and distribution,” says Josi. In the case of Merck, with India being its strategic market, the company makes considerable investments to realise 1.5-2X of the growth in the market. “The marketing and sales expenditure hovers around 15-40%, based on the marketing or communication objective,” says Kapil.
Making connections
One has to get the right partners involved for both creative and advertising campaigns. “We have been paying a premium by having the best agencies on our rolls, but value will help us in the long run,” says Rajadnye. He feels that keeping a tab on costs and right targeting are very important for pharma companies, given that they are not peddling soft drinks. “All the elements of P&L play a role. It is very important that every rupee helps promote the brand,” says Rajadnye.
Piramal roped in boxer Mary Kom five years ago to promote Polycrol antacid, which is No.1 in east India. Its Jungle Magic range of children’s products are promoted by Juhi Chawla. With lack of FMCG-like budgets, innovation is what pharma companies resort to. “To help Saridon have top-of-the-mind recall, we associated it with anything to do with headaches. We involved movie critics Anupama Chopra and Rajiv Masand to do Saridon reviews of movies so that they could point out those that would give viewers headaches,” says Rajadnye.
Merck, on its part, has done Seven Seas tie-ups with Spelling Bee competitions and the Spider-Man franchisee to promote it with the children segment and through school activations. But is it mandatory to have celebrity endorsements? “You are replacing doctors with someone who is more popular with the consumer. It also gives you an immediate headstart – you are not seen as a fuddy-duddy, Rx kind of product, you get a little bit more consumerised in the eyes of the audience, and depending on what category you are present in, your visibility goes up. If you have the money, why not use it to break through the clutter,” asks Josi.
Subodh MarwahThe product and the brand should always remain at the core. The celebrity should add value and never overpower the brand — Subodh Marwah, vice-president, Global Consumer Healthcare, Sun Pharma Sun (as Ranbaxy) had a dream run with Salman Khan as the poster boy for Revital. But, Marwah adds, “We believe that the product and the brand should always remain at the core. The celebrity should add value and never overpower the brand.” With Revital, the company created the need for health supplements – you were advised to take it if you returned tired from work. “Then, when the company achieved economies of scale and had cash, it opted for a celebrity,” says Josi.
To win more and more consumers, it is an imperative for companies to keep looking for unmet needs. Piramal decided to offer a solution for one such need. When at home, kids are protected from mosquitoes. But what about when they go out? So, three years ago, the Jungle Magic mosquito band was launched. “It has been a runaway success. Nothing like it existed in the market. Many players have copied us,” says Rajadnye.
The company’s recent innovation has been a tiffin box with a locked-in hand sanitiser – to open the box, kids have to use the sanitiser first. Merck has been playing around with its nasal brand to attract consumers as well. The company introduced the innovative Nasivion No Drip (which does not leave a bad aftertaste), Nasivion Moist (which moistens nasal mucosa), Nasivion Advanced (with herbal ingredients) and Nasivion Saline (for daily nasal health and hygiene) and the Nasivion Paed and Mini ranges to cater to the kid segment.
“Many companies are interested in the OTC space but the moment they spend some time here, they realise that you need to be in this space for a long time and need to keep investing in marketing. So, many opt out,” says Rajadnye about the challenging economics of the space. “Typically, ad spends for a new brand are 4-5X sales for the first three to four years,” he adds.
Kedar RajadnyeHaving one or two OTC brands will not make sense, as you require large distribution, infrastructure and marketing capabilities — Kedar Rajadnye, president and COO, consumer products, Piramal Enterprises The sustained ad spends, low margins and initial low volumes don’t make the OTC look pretty. But the key factor driving the industry is the creation of brands that have got years of legacy of usage with consumers and doctor prescriptions. “Hence, you would need minimal expenditure to create a brand and later evolve strategies to unlock value through innovative product and marketing strategies,” says Kapil. Sun (post Ranbaxy buyout) and Zydus Cadilla are looking at increasing contribution from their OTC businesses.
But just having a long-term perspective isn’t good enough. Another piece of the puzzle is having a strong portfolio. “Having one or two OTC brands will not make sense, as you require large distribution, infrastructure and marketing capabilities,” says Rajadnye. “You also have to compete with multimedia competition and the likes of Amway, which are on a similar platform but have a different distribution channel. So, competition comes from companies that are not pharma companies,” says Handa.
Clearly, there is a long transformational path for Indian pharma companies. But, they are walking fast and have no qualms in admitting who they are learning from. “Given that we are a kind of a crossover business between pharmaceuticals and FMCG, we actually learn from both sides,” says Marwah of Sun pharma. For now, this strategy is like having the best of both worlds.

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(Yash Pal) #3

“The net profit is at Rs 1000 crore on basis of the recent results declared.”

What is the turnover (ie annual sales) of Merck?

(Kushal Dakalia) #5

Just 1052 crore for entire portfolio of drugs like Concor (Yearly sales : 88 cr), Entire chemical business (Yearly sales: 350 cr), plus various other products, is way too less. During FY17-18 there has been fabulous growth in Bio-Pharma, Performance Chemicals and Life Science business. The same has not been properly highlighted in 2017-18 annual report. Request to all the minority shareholders - Do not vote in favor of the resolution for sale of BPL business at this rate.

(Niraj) #6

Anyone tracking the global merger of Merck’s Consumer Business with Procter and Gamble. Came across this article. Not sure how it affects the India business of Merck. Seems like an exit in the India business completely.

(deepmindnc) #7

It is a very good price. A bad price would’ve been 1x sales. Concor is a second line beta blocker with no scope of growing revs, the rest of the portfolio is sub scale.
The chemicals business is again niche but sub scale
The bulk of the new products Merck has brought into India has been unfortunately through unlisted entities

(deepmindnc) #8

I purchased Merck at 1200 because it was cheap and I had found somewhere that Merck Germany had put up its consumer healthcare business for sale. These usually go in an M&A for 4-5x revs so I bought this knowing most of revs/profits come from consumer healthcare

I think the way to think about Merck now is that post transaction and taxes payable, there is ~700-750/sh of cash which post DDT is 600-650/sh

The vitamins business by itself can do an EPS of 75-80Rs in CY18 and closer to 90-95Rs in CY19 (1QCY18 was very weak). So this company, ex-cash is trading at low 20s P/E. It is probably the cheapest FMCG stock in India with crazy scope for growth esp. under P&G. You’ll probably start seeing Seven Seas kiosks in all pharmacies in India soon (Seven Seas which we all used to use 20 years ago now does sales of 10-15cr in India which is a joke, it should be a 500cr brand at least). We might even see higher end Neurobion/Polybion variants. Vitamins and other health supplements usually see a crazy S curve as a country’s GDP goes up. This should be a core holding in everyone’s portfolio.

Price caps are a risk but their tablets on avg. cost below 1Rs per capsule - it’s not a large part of a customers medical bill. This is compared to the foreign brand vitamins capsules that sell on Amazon at 10-20Rs per capsule on avg.

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(Raj) #9

Hi, anyone following this stock after renamed as P&G Health? Of course price has run up nearly Rs. 3700
.

(yourraj) #11

dIsc : not invested it is in my watch list