Otsuka Pakistan Limited (PSX: OTSU) was incorporated in Pakistan as a public limited company in 1988. The principal activity of the company is the manufacturing, marketing and distribution of intravenous infusions besides trading in pharmaceutical products, medical equipment and nutritional foods. OTSU is an indirect subsidiary of Otsuka Pharmaceutical Company Limited, Japan.
Pattern of Shareholding
As of June 30, 2024, OTSU has a total of 12.1 million shares outstanding which are held by 1291 shareholders. Associated companies, undertakings and related parties are the largest shareholders of OTSU, holding 67.89 percent of its outstanding shares.
The remaining shares are held by other categories of shareholders.
Historical Performance (2019-24)
OTSU’s topline has been posted year-on-year growth since 2019; however, its bottomline ascended only in 2020 and 2021. In 2019, 2023 and 2024, the bottomline ended up in the negative zone.
The margins of the company plunged in 2019 followed by an upward trajectory for the next two years only to lose their footing in 2022 and 2023. In 2024, gross margin continued to fall while operating margin picked up. The detailed performance review of the period under consideration is given below.
In 2019, OTSU’s topline grew by 0.84 percent year-on-year to clock in at Rs.1884.75 million. Adverse economic conditions, high discount rate and depreciation of local currency put OTSU under extreme pressure as it depends on imported raw materials. The IV infusion market saw demand- supply disparity due to lackluster demand.
The company had an installed capacity of 30.8 million bottles of IV solutions and 14.5 million bottles of plastic ampoules in 2019.
However, due to superfluous supply in the market, the company only utilized 66 percent and 72 percent of IV solutions and plastic ampoules capacity respectively in 2019. 14.57percent higher cost of sales was mainly due to Pak Rupee depreciation. This squeezed OTSU’s gross profit by 30.47 percent year-on-year in 2019, culminating in a GP margin of 21 percent versus GP margin of 30.50 percent recorded in 2018.
Distribution expense grew by 9.60 percent year-on-year in 2019 due to higher payroll expense, increased advertisement as well as samples and promotion expense as the company launched two new products in the IV segment namely Otsuzol (Metronidazole) and Otsumol (Paracetamol) and one new product in the medical equipment segment i.e. Otsuka Urea Breath Test System (UBIT) in 2019.
Administrative expense inched up by 5.27 percent year-on-year in 2019 despite the fact that employee headcount shrank from 395 in 2018 to 388 in 2019 due to lower capacity utilization of its plants.
Other income provided much needed support to the bottomline as it rose by 23.23 percent year-on-year in 2019 due to reversal of provisions against doubtful trade debts, late payment surcharge from Hospital Supply Corporation and higher scrap sales made during the year.
What proved to be of utmost concern for Otsuka in 2019 and pushed the company to a net loss was over 100 percent year-on-year spike in other expense on the back of massive exchange loss. This resulted in operating loss of Rs.127.74 million in 2019 versus operating profit of Rs.176.53 million recorded in 2018.
Finance cost further fueled the fire as it jumped up by 71.27 percent year-on-year in 2019 on account of higher discount rate coupled with increased short-term borrowings. While borrowings from related parties increased in value due to Pak Rupee depreciation, the contraction in OTSU’s equity due to accumulated losses further did the trick and drove its gearing ratio up from 81.57 percent in 2018 to 97.97 percent in 2019.
OSTU posted net loss of Rs.175.35 million in 2019 versus net profit of Rs.65.31 million posted in 2018. The company registered loss per share of Rs.14.49 in 2019 versus EPS of Rs.5.40 in 2018.
While the outbreak of COVID-19 in 2020 proved to be a bane for the economy in general, many pharmaceutical companies made the most of this time to widen their sales and boost their profitability and margins.
OTSU’s net sales posted 18.16percent rise year-on-year in 2020 to clock in at Rs.2226.99 million. This came on the back of higher demand of clinical nutrient products.
OTSU’s capacity utilization increased to 72.4 percent and 83.4 percent in the IV solutions and Plastic Ampoules segments respectively in 2020. Cost of sales grew by only 9.35 percent year-on-year in 2020 due to relatively better value of local currency. This translated into 51.24 percent year-on-year rise in OTSU’s gross profit with GP margin growing to 26.90 percent in 2020.
Distribution expense and administrative expense grew by 3.76 percent and 7.41 percent respectively on account of higher payroll expense as well as higher outward freight and handling expense. During 2019, company’s net sales to Afghanistan grew from 0.4 percent of its sales mix to 3.23 percent of its sales mix which was also one of the reasons for higher freight charges.
Moreover, the number of employees grew to 393 in 2020 to meet additional demand. These two factors were the major contributors to the increaserecorded in operating expense in 2020. Other expense slid by 56 percent year-on-year in 2020 on account of considerably lower exchange loss incurred in 2020.
OTSU was able to post operating profit of Rs.180.27 million in 2020 with OP margin of 8.1 percent. Finance cost grew by 10.20 percent in 2020 despite plunge in short-term borrowings as discount rate was higher for the first three quarters of 2020.
Due to lesser accumulated losses, OTSU’s gearing ratio also ticked down to 89.57 percent in 2020. OTSU posted net profit of Rs.91.07 million in 2020 with NP margin of 4.1 percent. EPS clocked in at Rs.7.53 in 2020.
OTSU’s topline multiplied by 14.34 percent year-on-year to clock in at Rs.2546.28 million in 2021. This was primarily on the back of sales of clinical nutritional products. With the eruption of COVID-19, the medical devices business came under pressure, but the company adeptly altered its sales mix to include clinical nutritional products to optimize its sales volume and earn better margins.
During 2021, the company produced 20.3 million bottles of IV solution and 14.6 million bottles of Plastic ampoules, resulting in the capacity utilization of 64.6 percent and 69.5 percent respectively.
During the year, the company also increased its production capacity to 31.4 million bottles of IV solutions and 21 million bottles of plastic ampoules as against the rated capacity of 20.3 million bottles and 14.6 million bottles respectively until 2020.
Cost of sales grew by only 4.51 percent year-on-year in 2021 as the year ended with stronger Pak Rupee coupled with cost optimization measures put in place by the company. Gross profit strengthened by 41 percent year-on-year in 2021 with GP margin climbing up to 33.20 percent – the highest among all the years under consideration. Distribution and administrative expense rose by 4.26 percent and 9.1 percent respectively in 2021 due to higher payroll expense and elevated outward freight and handling charges.
During the year, the company also introduced a new product OTSUFLOX (Ciprofloxacin). Other income grew by a massive 133.57 percent in 2021 on the back of hefty exchange gain recognized during the year due to favorable exchange rates. Other expense plummeted by 21.27 percent year-on-year in 2021 as there were no exchange losses and provision against doubtful debts.
Operating profit grew by 170.93 percent in 2021 with OP margin climbing up to 19.18 percent. Finance cost slid by 74 percent year-on-year in 2021 due to lower discount rate coupled with a decrease in outstanding borrowings as the company settled its short-term running finance during the year.
Due to tremendous profit, the company’s equity grew. This translated into gearing ratio of 41.85 percent - less than half of the gearing ratio reported by the company in the previous year. Net profit grew by 324.23 percent year-on-year in 2021 with NP margin of 15.17 percent. EPS also staggeringly increased to Rs.31.93 in 2021.
In 2022, 12 percent year-on-year growth was recorded in OSTU’s topline which clocked in at Rs.2851.73 million. This was the result of streamlined sales mix. Clinical nutrition products drove up sales in 2022 while medical equipment segment continued to stay under pressure.
The capacity utilization of IV solutions grew to 70 percent in 2022 while plastic ampoules segment posted a reduced capacity utilization of 47 percent. Double digit inflation, depreciation of Pak Rupee and high energy charges pushed the cost of sales up by 13.17 percent in 2022.
Gross profit inched up by 9.64 percent year-on-year in 2022 with GP margin dipping slightly to 32.49 percent. Higher freight charges, advertisement and promotional expense coupled with increased payroll expense resulted in 25.16 percent year-on-year hike in distribution expense in 2022.
Administrative expense also rose by 31.86 percent year-on-year in 2022 despite downtick in the number of employees to 373 in 2022. This was the effect of unprecedented level of inflation and the related rise in salaries and wages. Other income tumbled by 43.52 percent year-on-year in 2022 due to no exchange gain recorded in 2022.
Conversely, other expense grew by 60.81 percent year-on-year on account of exchange losses. Operating profit slumped by 23.98 percent year-on-year in 2022 with OP margin slipping to 13 percent. Finance cost continued its downward journey despite higher discount rate as the company paid off its long-term loans.
Short-term loans slightly increased in 2022 but most of them were obtained from related parties at subsidized rates. The gearing ratio further tapered off to 38.36 percent in 2022 as equity grew due to profit recorded over the years. Net profit shrank by 40 percent in 2022 to clock in at Rs.231.80 million with NP margin of 8.1 percent. EPS slipped to Rs.19.16 in 2022.
In 2023, OTSU’s topline inched up by 6.43 percent to clock in at Rs.3035.09 million. Medical devices segment was still struggling during the year, however, the new ORS sachet launched by the company during the year received positive response from the market.
While DRAP approved price increase w.e.f August 2022, massive decline in the value of local currency, persistent hike in fuel, gas and power prices as well as implementation of final sales tax on both the purchase of pharmaceutical inputs and sale of finished goods drove up cost of sales by 24.21 percent in 2023. Gross profit slid by 30.51 percent in 2023 with GP margin, diving down to 21.22 percent.
Distribution expense inched up by 3.19 percent in 2023 due to inflationary pressure. Administrative expense went down by 10.31 percent in 2023 due to lower payroll expense as headcount was reduced to 362 in 2023.
Other income registered a staggering rise of 68 percent in 2023 due to hefty gain recorded on the sale of fixed assets, reversal of impairment loss on Orthopedic knee implant kits as well as higher scrap sales and late charges received from Hospital Supply Corporation.
The effect of robust other income was completely wiped off by 77.47 percent hike in other expense on account of exchange loss. Operating profit dwindled by 90.34 percent in 2023 with OP margin sliding down to 1.18 percent.
Finance cost mounted by a massive 863.59 percent in 2023 due to unprecedented discount rate and increase in the external borrowings particularly for the renovation of its Line-II facility. Gearing ratio climbed up to 57.7 percent in 2023. OTSU recorded net loss of Rs.7.207 million in 2023 with loss per share of Rs.0.60.
In 2024, OTSU’s net sales ticked up by 4.24 percent to clock in at Rs.3163.87 million. During the year, the company faced production challenges due to ageing of its machinery. This also resulted in a decline in rated capacity of I.V solutions and plastic ampoules to 28.6 million bottles and 14.1 million bottles respectively in 2024.
During the year, the company produced 18.7 million bottles of I.V solutions, down 13.02 percent year-on-year and 11.8 million bottles of plastic ampoules, down 3.28 percent year-on-year. One significant development during the year was the introduction of “Alpha berry plus” sachet in 2024 in its nutraceutical segment.
The company also replaced its previous major distributor by appointing “M/s. UDL Distribution (Pvt.) Limited” for Karachi and various other distributors for southern areas. This greatly helped the company with the payment terms, cash flow and liquidity.
Cost of sales increasedto 8.18 percent in 2024 due to unprecedented level of inflation, Pak Rupee depreciation as well as high electricity and gas prices. GP margin fell to its lowest level of 18.24 percent in 2024.Distribution expense ticked up by a paltry 2.98 percent in 2024 due to lower advertising & promotion charges.
Administrative expense escalated by 16.39 percent in 2024 due to higher payroll expense. This was despite the fact that the company streamlined its workforce from 362 employees in 2023 to 345 employees in 2024.
Other income grew by 83.89 percent while other expense shrank by 44.29 percent in 2024 due to hefty exchange gain recorded during the year on account of mark-to-market valuation of JPY currency loan obtained M/s. Otsuka Pharmaceutical Factory, Inc., Japan (OPF). OTSU’s operating profit improved by 239.49 percent in 2024 with OP margin climbing up to 3.85 percent.
Finance cost mounted by 60 percent in 2024 due to monetary tightening as well as new loan of JPY 300 million obtained from OPF.
While the company’s equity shrank due to higher accumulated losses, robust bank balances resulted in a reduced gearing ratio of 53.87 percent in 2024. OTSU’s net loss tapered off by 33.91 percent to clock in at Rs.4.76 million in 2024. This translated into loss per share of Rs.0.39 in 2024.
Recent Performance (9MFY25)
OTSU had been struggling with insignificant sales growth and negative bottomline for the past two years, however, 2025 appears to be a turning point for the company as its net sales posted a staggering year-on-year growth of 24.69 percent in 9MFY25 to clock in at Rs.2668.46 million. This was due to better sales volume on the back of strategic price adjustment implemented during the period.
OSTU also launched a new product “Falitop” which received great market traction and reinforced its clinical nutrition segment. Cost of sales grew by 23.36 percent in 9MFY25, resulting in a minor uptick in GP margin from 20.65 percent in 9MFY24 to 21.50 percent in 9MFY25. This was due to annual maintenance of the plant conducted during the period which drove up fixed cost per unit.
Distribution expense escalated by 26.98 percent in 9MFY25 due to development of sales force, higher salaries of sales personnel and increased promotional activities undertaken during the period. 37.52 percent spike in administrative expense in 9MFY25 was due to higher payroll expense, renovation and legal charges. 13.49 percent plunge in other income and 34.35 percent hike in other expense during the period under review was the result of mark-to-market valuation of foreign currency denominated loans.
OTSU recorded 3.63 percent downtick in its operating profit in 9MFY25 with OP margin falling down to 5.42 percent, down from OP margin of 7 percent recorded in 9MFY24.
The hiring of new distributors resulted in better cash flows from the company as its payment terms changed from credit policy to advance payment. This enabled OTSU to pay off a substantial portion of its outstanding loans, resulting in 95.79 percent reduction recorded in finance cost in 9MFY25. This culminatedin 153.90 percent enhancement in the company’s net profit, which clocked in at Rs.59.44 million in 9MFY25. OTSU recorded EPS of Rs.4.91 in 9MFY25 versus EPS of Rs.1.93 posted in 9MFY24. NP margin also strengthened from 1.1 percent in 9MFY24 to 2.23 percent in 9MFY25.
Future Outlook
The company is in the process of achieving economies of scale through line extensions. Significant efforts are being made to sustain its competitive position in the market by launching new value-added products particularly in the clinical nutrition and nutraceutical segments which offer greater margins.
The company has also taken over its south supply from its distributor “Hospital supply corporation” and has appointed several other distributors. This has greatly improved the cash flow position of the company and reduced its borrowing requirements. Furthermore, positive exchange parity, lower inflation and downward trending discount rate will also serve as a boon for the company and boost its operating performance.