Pharma industry: Tomorrow it will be a different medicine, folks

Bringing in new drugs and tossing out some of the older ones is something pharma companies do on a regular basis. But what has got them paying even closer attention to the routine exercise are two things: One, the coming of product patent regime starting next year and, two, a marked shift in the nature of ailments even in a developing country like India. Growing awareness of vaccination and hygiene has meant that there are fewer incidents of infectious diseases each year. On the other hand, the fast-paced urban lifestyle, change in food habits for the worse (there's more of fat and sugar), and hypertension have more people falling victim to heart-, diabetes-, or nervous-related problems.

Not surprisingly, then, over the last three years most pharma players-be it Glaxo, Wockhardt, Ranbaxy or Dr Reddy's-have all gone in for a change in product mix. GlaxoSmithKline Pharma, for instance, started rationalising its portfolio towards the end of year 2000, coupled with a detailed portfolio analysis in mid-2001, which led to a reduction in product count from 250 to 200. It also identified 30-odd products as focus brands that would get the promotional resources. "Product portfolio rationalisation sharpens sales focus and, naturally, leads to better margins and profitability," says G.V. Prasad, Executive Vice Chairman and CEO, Dr Reddy's Labs.

His company did a major exercise last financial year, when it dropped 38 brands and identified seven focus areas: Gastro intestinal, cardiovascular, pain management, diabetes, dental, urology, and dermatology. While initially it is expected to result in about 5 per cent drop in sales, over the long-term profitability should improve. Starting next year, companies will need newer versions of popular drugs to compete profitably in the market. So they must be desperately hoping that the churn works.

UP AND AWAY
Inflation Watch: What Could Soon Be Dearer?

LPG and Kerosene
With global energy prices climbing, there's pressure to increase domestic prices of LPG and kerosene.

Sugar
Currently, there's a supply shortage, besides which there's a government restriction on opening new mills.

Housing and Construction
Because steel has already become dearer and cement seems set to rise.

Fruits and Vegetables
Not that your vendor needs any excuse, but this is the summer season when production is thinner.

-compiled by Ashish Gupta

Q&A
"The Backlash is Temporary"

He claims to have handled the world's first business process outsourcing deal way back in 1989 for British Petroleum. Just the same, David Andrews, CEO of UK-based Xchanging, is a latecomer to India. On his first trip to the country, Andrews, who's even got an Olympic Silver medallist to work for him, told BT's Sudarshana Banerjee why outsourcing is a bit like aeroplanes. Excerpts:

What's your India plan?

Next few years we want to develop a significant presence in India-fly in a core management team from London, and step up the headcount by several thousand from the hundred that is today. RebusIS, a company that we just acquired, has a footprint here, and deals in insurance outsourcing.

What's your business model?

We take the debt cost base of our clients, put in our operational expertise, create a business out of it, and share the spoils equally. By improving productivity, we create spare capacity and then get third-party revenues exploiting this.

Are you looking at any other BPO destinations?

We are looking towards the Malaysia-Thailand band.

What about the backlash?

Do you have your own fleet of aeroplanes? You hire a cab to go from place A to B. Isn't that outsourcing? The US backlash is a temporary political phenomenon. In continental Europe, there is some uncertainty because of the language gulf.

What's the road ahead?

Looks like business process improvement (bpi) with enterprise partners. A company can outsource everything other than its policy or strategy. But what happens if a particular process intrinsically needs improvement?

The Dividend Machine
There's good reason for Hero Honda's blockbuster payout.

Hero's B.M. Munjal: Plenty to dip into

Except for its huge numerical roundness, hero Honda's 1,000 per cent dividend shouldn't surprise its shareholders. For at least four years now, the motorcycle major has been rewarding its investors with staggering payouts: 850 per cent each in 2001 and 2002, and 900 per cent in 2003. While the percentage in itself is huge, compared to the face value of Hero Honda shares-a mere Rs 2-it doesn't seem much in absolute terms. For example, the 1,000 per cent dividend translates into Rs 20 on each share. Yet, the fact remains that it is a fabulous return to investors, and the overall payout tots up to Rs 180 crore.

But guess who the biggest beneficiaries of this generosity are? Not surprisingly, the two promoters, Hero Group and Honda, which together own 55 per cent of the joint venture and, therefore, stand to make Rs 99 crore by way of dividends. Dalal Street was abuzz with rumours that Honda may have actually demanded a big payout to fund its wholly-owned subsidiary, which currently makes scooters but plans to launch motorbikes starting later this year. Then, Hero and Honda will take each other head on in the marketplace. Brijmohan Lall Munjal, Chairman of Hero Honda, however, has a straightforward explanation for the record dividend. "There is no point in maintaining huge reserves, the company belongs to the shareholders and if it has money, it should return it to them," he says. And Hero Honda has lots of money. Even after the Rs 180 crore hand-out, it will have Rs 900 crore in reserves. Enough to fund the third manufacturing facility that it wants to build.

-Kushan Mitra

IT's a Bonus, Alright
Issuing bonus shares may help the IT companies in the long run.

Wipro's Premji: Give and take

It's been raining bonus shares in the IT industry. MphasiS kicked off the trend by announcing a 1:1 bonus, followed by Infosys' generous 3:1, and then Wipro's 2:1. A number of other tier-two it companies are expected to follow suit. While a bonus issue does not change the ownership pattern, it does lower the earning per share, since it increases the capital base. So why do companies do it? "To make their shares affordable and to signal a long-term management confidence in growth," says T.R. Venkatesh, Dean, ICFAI Business School. Depending on the bonus ratio, share price falls. For example, a 1:1 issue, like Mphasis', should halve the stock price. But here's the interesting bit: In the case of the three it companies, the fall in stock price hasn't been proportionate. In fact, by increasing their float, the companies are allowing a larger number of investors to participate and, thereby, potentially increase the market cap in the long run. In companies such as Wipro, where Azim Premji holds an overwhelming 84 per cent, the promoter will take home greater dividend income (in Premji's case, Rs 566 crore). But the bonus strategy works only if the company can maintain its expected rate of growth and profitability.

-Venkatesha Babu