The battling pharmaceutical sector

Tough times call for resilient strategies! Who would agree to this better than the pharmaceutical manufacturers in Pakistan, who have been battling for years over irrational regulatory mechanisms. However, with little hopes for any transformation in industry’s dynamics, pharmaceutical companies have started unearthing alternative strategies to stay afloat.
In 1H FY14, aggregate profitability of the three leading companies in the pharmaceutical sector namely Glaxo, Abbott and Sanofi-–that represent nearly 80 percent of the total market capitalisation of this sector-–grew by a decent 10 percent year on year. Thanks to the sector’s strategy of diversifying into consumer health care and nutritional segments. However, at this stage, pharmaceutical business still continues to hold the largest share of the pie (70-80 percent share) in the portfolios of pharmaceutical manufacturers.
Sadly, pressures on input costs owing to rising fuelling inflation, rise in sales tax and levies, unfriendly currency movements have made the case difficult for pharmaceutical companies to sustain their gross margins. Hence, average gross margins of proxy pharmaceutical companies slipped downwards by 200 bps to 29 percent in 1H FY14.
Moreover, selling, distribution and marketing costs continue to inch upwards with the launch of new products and focus on alternative product lines, thus hampering the profitability further. This trend is likely to continue in coming years until alternative product lines attain a strong footprint in the market.
To put things in order, pharmaceutical industry has been going through a critical time. Absence of a rational pricing policy has not only hampered industry’s evolution, but also repressed existing players to invest further. Resultantly, Pakistan stands at an inferior position when compared to pharmaceutical industries in India and Bangladesh where regulations are less stringent giving players a level playing field to sustain and flourish. The solution to this, however, lies in implementing a coherent pricing policy in consultation with all the stakeholders.

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Pharma Sectors Combined P&L*

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Rs (mn)                    1HCY14     1HCY13      Chng

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Sales                      27,853     25,225       10%

Cost of Sales            (19,694)   (17,440)       13%

Gross Profit                8,159      7,785        5%

Selling, marketing and

distribution expenses     (4,062)    (3,875)        5%

Administrative expenses     (804)      (727)       11%

Other Income                  569        466       22%

Other Expenses              (307)      (371)      -17%

Operating Profit            3,555      3,278        8%

Finance cost                (146)      (123)       19%

Profit before taxation      3,409      3,155        8%

Taxation                  (1,257)    (1,206)        4%

Profit after taxation       2,152      1,949       10%

EPS (Rs.)                   19.08      23.84

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Source: Company Accounts