Rundown of pharma sector

A quick look at the pharmaceutical sectors financial performance during 1H FY14 suggests a bumpy ride for the sector. And it is not surprising at all!
Whimsical pricing mechanism and stringent regulatory framework, coupled with tough economic scenario, left no stone unturned in dampening the pharmaceutical sectors profitability during the period. However, the only strategy that granted manufacturers some respite was to diversify the product mix, especially in consumer healthcare business where pricing mechanism is adjustable, allowing pharmaceutical manufacturers to pass on price hikes to their consumers.
Also, the price performance of these companies on local bourse (see graph) has moved in anticipation of rise in drug prices which has not yet materialized.
Companies that were able to strengthen their profitability amid unfavourable external environment were IBL HealthCare, Searle, Highnoon, Abbott Laboratories and Ferozsons Laboratories. On the other hand, Otsuka, Wyeth, Sanofi-Aventis and GlaxoSmithKline were on a downward spiral.
On the whole, top line of the sector increased by 11 percent to Rs34 billion. Sadly, increase in costs swallowed whatever gains the sector achieved from increase in sales revenue. In terms of top line, during this period, highest revenue growth was achieved by Highnoon Laboratories and Ferozsons Labs, 27 percent each. Searle followed with an impressive top line growth of 21 percent year on year.
In terms of gross margin, average gross margin of the sector slid to 31 percent vis-à-vis 35 percent in the corresponding period of last year. Shrinking sectoral gross margin is attributable to slender growth in top line (owing to fixed pricing mechanism on bulk of life-saving drugs), which compels pharmaceutical companies to bear any rise in cost of production.
But, even in such a tight condition, Abbott Pakistan, Sanofi Aventis and IBL HealthCare were the ones that managed to perk up their gross margins through implementing diversification strategies and limiting their operating costs.
By and large, selling and distribution costs remained another concern that marred the bottom line of the sector by framing nearly 16 percent of sectors sales revenue. In this regard, Searle and Highnoon Laboratories witnessed the highest rise in their selling and distribution costs of 42 percent and 37 percent, respectively.
Owing to aforementioned detrimental reasons sectoral profitability dwindled to Rs2.5billion vis-à-vis Rs2.7billion in 1H FY13 depicting a fall of 7 percent year on year. Abbott Laboratories contributed the highest to the sectors bottom line, followed by Searle and GlaxoSmithKline.
To conclude, 1H FY14 wasn an easy year for pharmaceutical companies. And with government and the regulator brushing off the concerns of pharmaceutical manufacturers, especially with regards to the pricing of essential drugs, one can expect the sectors profitability to continue moving towards the downward trajectory.

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PHARMACEUTICAL SECTOR (CONSOLIDATED PNL)

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                                       Half year ended

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Rs (mn)                              Dec-12      Dec-13         chg

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Sales - net                          30,906      34,237         11%

Cost of sales                       (20,950)    (23,605)        13%

Gross profit                          9,956      10,632          7%

Selling and distribution expenses    (4,797)     (5,520)        15%

Administrative expenses                (973)     (1,183)        22%

Other income                            679         668         -2%

Other operating expenses               (533)       (562)         5%

Finance cost                           (300)       (407)        36%

Profit before taxation                4,032       3,627        -10%

Taxation                             (1,316)     (1,090)       -17%

Profit for the year                   2,716       2,537         -7%

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Source: Company accounts.

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INDUSTRY WIDE GROSS MARGINS

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                1HFY14   1HFY13

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Abbott             38%      37%

GlaxoSmithKline    22%      25%

Highnoon Lab.      43%      43%

Sanofi-Aventis     35%      33%

Ferozsons Labs.    52%      55%

Otsuka              4%      28%

The Searle         42%      48%

IBL HealthCare     35%      24%

Wyeth Pak.         12%      22%

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Average            31%      35%

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