Abbott Laboratories Pakistan Limited’s (PSX: ABOT) history in the country dates back to Pakistan’s inception. It was established in 1948, initially as a private marketing company. Over the years it has grown, and expanded operations, with two manufacturing facilities in Karachi. Currently, it stands as a public limited company, with almost 78 percent of its shares held by Abbott Asia Investments Limited, UK. The ultimate holding company, however, is Abbott Laboratories, USA which has its headquarters in Abbott Park, Chicago, Illinois.
The company operates within four business divisions; diabetes care under which it develops devices for easy glucose monitoring; diagnostics under which it has range of tests for various health conditions; Nutrition under which it produces science-based nutrition products for infants and adults, alike. Lastly it has an established pharmaceuticals division under which it offers more than 150 products ranging from pediatrics to respiratory to nervous system and pain and fever relief among many others.
Associated companies, undertakings and related parties hold most of the shares of the company at close to 79 percent. Of this majority is with Abbott Asia Investments Limited, an investment management company in the UK. The local general public has a little over 9 percent while the directors, CEO, their spouses and minor children hold less than 1 percent shares of the company.
Historical operational performance
The company’s earnings have remained more or less stable since CY12, before declining after CY17. Its topline growth has also largely remained in double digit except for CY15 and CY19.
In CY14, the company experienced 14 percent growth in its topline year on year. Pharmaceuticals division has almost always had the highest contribution to the topline. In CY14, pharmaceuticals division saw a 15 percent incline in its sales based on higher volumes. Raw materials and packaging along with salaries and wages are the main cost drivers of the company, together making up 88 percent of the total cost. With costs increasing corresponding to sales, margins remained more or less similar for the year.
Topline growth was a little subdued in CY15 at 7.5 percent due to the domination of local companies in the industry; the latter made up a larger share of the market compared to the MNCs in the sector, which made 34 percent of the market. According to the company’s report “MNCs have been forced to scale back their operations due to continued financial viability of their products”. The pharmaceutical industry of the country is highly regulated in terms of pricing. Cost of manufacturing again made up 61 percent of the revenue keeping gross margins flat, while a slight reduction in distribution expenses allowed operating margin to increase somewhat.
In CY16, Abbott Laboratories regained some growth momentum with topline growing by over 10 percent. This could perhaps be a result of new product launches made during the year. In addition, the company undertook cost curtailment which allowed gross margins to incline marginally. Capital investment made towards enhancing capacity allowed Abbott to improve efficiency and productivity. With the remaining elements remaining unchanged, the higher sales and cost controls allowed it to be reflected in the bottomline. A net profit margin of 17 percent was the highest seen since CY13.
Topline registered a growth of 11 percent in CY17, with majority of the growth coming from sales in the Nutrition segment; it saw a growth of 10 percent apart from the pharmaceutical sales which saw a 13 percent increase. As costs reached its level of taking up 61 percent of the net revenue again, gross margins reduced slightly and its effect trickled down to the bottomline as well, since no major changes were seen in operating expenses.
In CY18 the company grew its topline by 14 percent, mostly driven by higher volumes. Pharmaceutical division saw an increase of 12 percent in its sales while Nutrition sales grew by almost 24 percent, primarily through volume growth in PediaSure and Ensure. Given the inflation seen in the economy during CY18, the cost of manufacturing was adversely affected with the biggest increase salaries, wages, allowances and staff welfare. Cost of manufacturing made up 67 percent of the revenue as opposed to the usual 61 percent. Thus profit margins dipped with net margin being nearly halved.
Recent result and future outlook
Revenue could only increase marginally in CY19 at less than 2 percent. Pharmaceutical sales which have been the biggest contributor thus far in topline, saw a decline of 3 percent in its sales. Costs on the other hand, as a percentage of revenue, increased to nearly 72 percent- up from 67 percent in CY18 and the historical 61 percent. This was largely due to inflation and currency devaluation; the company procures more than 70 percent of its materials from imports, thus the devaluation had a significant impact on its books.
In addition, the high interest rates also had an impact on its finance costs as in CY18 it paid 0.16 percent on its lease liability while in CY19 it paid 0.63 percent. Thus, with higher promotion expenditure, higher costs and a marginal incline in revenue, net margin was less than halved.
Aside from the inflation and currency devaluation which has impacted the overall business activity, the company operating in the pharmaceutical industry faces the challenge of price adjustments and the strict regulations. Cut throat competition also makes it difficult to pass the higher cost to the consumer, as it is MNCs share in the sector is gradually declining. Even though the company has fared well financially, it continues to face challenges associated with the local environment.