The pharmaceutical sector in Pakistan has been facing an uphill battle for the past several years which is reflected in the financials of pharma companies operating in the country. Abbott Laboratories (Pakistan) Limited (PSX: ABOT) financial result for FY18 released yesterday shows that the struggle continues.

Abbott’s bottom line sank by 36 percent on a year-on-year basis despite a 14 percent increase in revenues in FY18. The company’s revenues rose on the back of an increase in volumetric growth in both pharmaceutical products as well as the nutritional segments. However, the 25 percent rise in cost of sales of the company confirms inflationary pressures that drug companies are facing in raw material and operational costs. This resulted in gross profit falling by 3 percent whereas gross margins fell by a whopping 600 bps in FY18 as compared to the same period last year.

Even though the new drug pricing policy has been welcomed as a good starting point by the pharmaceutical sector in addressing the concerns of stakeholders, there is an important element that is missing. Post the massive devaluation of the rupee, raw material costs have skyrocketed for pharmaceutical firms who mainly rely on imports.

But the new policy does not allow companies to raise prices to adjust for the depreciation which has resulted in falling profitability margins.

Therefore, even though the recent decision of the Drug Regulatory Authority of Pakistan (DRAP) to increase the maximum retail price of drugs under the hardship category by 9 percent and the prices of all other drugs by 15 percent is a life boat for pharmaceutical firms, it will not help relieve the pressure off their margins.

Abbott’s selling and distribution expenses for FY18 increased by 25 percent on account of higher advertisement and sales promotion expenditure.

This resulted in the company’s PAT dipping by 36 percent for FY18 on a yearly basis and net margins plunging by 700bps. To try to take some pressure off the company’s focus has been on cost savings by achieving a reduction in manufacturing and operating costs. Any further currency depreciation poses further challenges to the company’s dwindling margins.