Net margins to reach 10% in next three years: CEO Citi Pharma

It took a pandemic and lockdowns for capital markets to rally, and rally they did. Not only did the KSE-100 index surged ahead, becoming one of the best performing bourses in the region, there was finally a revival in new listings after a fairly long dry spell.

In FY21, five companies have conducted their initial public offerings, raising over Rs10 billion in the process. The latest entrant to this list is Citi Pharma, which closed its book building process a day earlier and secured funds of Rs2.32bn through institutional investors and will soon hit the retail segment with 18.1m shares on offer.

This makes it only the second pharmaceutical company to have gone to the public markets in the last 23 years. As a leading local API, Citi boasts some of the major pharma brands among its customers and with the new funds, plans to enter the formulation business as well. Its topline has been scaling rapidly as the revenues have grown from Rs1.02 billion in FY16 to Rs2.63bn in only the first half of FY21.

With the new proceeds, including the roughly Rs500 million in debt, the company is all set to not only expand its existing API capacity but also try to make a name in formulation as well. To know more about Citi Pharma’s plans and its outlook in the coming years, Mettis Global interviewed its CEO Rizwan Ahmed.

The transcripts below have been edited for brevity.

What trends did you witness during the book building process and is the appetite going to continue among retail investors?

The IPO was oversubscribed by two times of which 50%+ was from corporates, including all sorts of investors from commercial banks to mutual funds to insurance companies. So there was good healthy participation from all sorts of institutional investors. We expect that the book-building will be heavily oversubscribed and even more aggressive because only 18 million shares are being offered. Demand at Rs32 a share was in excess of 89% so all those guys who bid at the price only got 11% of their bid.

CPL has net margins around 5%. What measures are being taken to increase that and where do you expect them in the near future?

API is generally a volume-based business with low margins so the profits go up as you scale. In comparison, input costs account for a lower percentage in formulation but you have higher marketing and prescription expenses there for example. To improve these margins, we are introducing new products in API, such as Vitamin or azithromycin, which will hopefully improve the profits. Then in the formulation side as well, the company has selected new lines where competition is lower so that will help too.

Overall, our leadership hierarchy remains the same so adding new products will help spread out the costs incurred on top management. Therefore, we expect good margins as our hierarchy and fixed costs are not going to increase, only volumes will go up. Currently we are standing at 5% but in the next three years we should be able to raise that by 1-2 percentage points every year to get around 10% by the next three years.

In the latest budget, the government took a number of measures related to the pharma sector such as exemption of CD and ACD or the proposed concessionary rate of 5% on imports of plant and machinery. How will these developments impact CPL?

The exemption of CD and ACD on the import of more than 350 APIs is an encouraging step from the government and it is in line with the proposals our industry associations had recommended. The move will not only help stabilise the price but also ensure the products are available in the market. Interestingly, the exemption on those 350 APIs which are not manufactured in Pakistan. Ones which are going to be manufactured here will ultimately face the CD and ACD.

As for the proposed concessionary rate of 5% on import of plant and machinery for pharma, I believe it will encourage companies to import modern machinery which will certainly enhance the capacity and improve the quality of the medicines/products and increase the export potential.

To what extent does Citi Pharma depend on imports for its raw materials?

Citi Pharma has to rely on imports to a certain extent as the intermediates are mostly manufactured in China and the supply chains are clustered around there. In fact, the whole world is dependent on China for those as it has the biggest market for the API intermediates and side chains as they have big volumes. Their local policies are very supportive which allowed them to basically grab the entire market share. However, we intend to work on this and in the long run, Citi Pharma will manufacture the intermediates for API in Pakistan, hopefully beginning from 2025. Currently, our objective is to achieve a certain level of API volumes that will make intermediate manufacturing feasible for us.

Pharma sector, especially the multinationals, has long complained about the regulated pricing regime and have attributed a number of exits to the same. As a B2B entity, do you feel the supposedly declining interest from international players in the Pakistani market poses a major risk to your customer base?

Anything linked with the government sector, be it pharma, sugar or anything, is bound to have some bottlenecks. As essential items, they obviously have to regulate drugs and their pricing, but they can’t just stop it. There is a mechanism to pass on costs based on a certain percentage of inflation and then reviews take place too.

Multinational players don’t like it as their profit margins in Pakistan are often lower than that enjoyed in other markets. But they have this expectation somewhere that once the regulatory regime streamlines, their margins will improve. This is why you have most major players operating here. But these goods are essential so we see steady growth in volumes at around 10% as our population continues to increase. However, going forward, we believe the business of generics will be increasingly captured by the domestic players as multinationals are moving more and more towards the biotech and research-heavy drugs.

Despite having many of the major global pharma players operating in Pakistan, we haven’t seen any meaningful progress towards becoming an export destination for this industry? Will this change any time soon?

As mentioned earlier, many of the big pharma companies are moving towards biotech, which will create an opportunity for Pakistani and other regional players to grab a larger share of the generics drug market. Local companies have already started entering some countries, for example in Central Asia. Consequently, exports will increase to the countries where regulation is more open. However, to places like the US where the Food and Drug Regulatory Authority or the UK with Medicines and Healthcare Products Regulatory Authority, exporting won’t be possible as the cost of getting approval for even a single product can be more than setting up a plant there.

Copyright Mettis Link News

Posted on: 2021-06-18T13:28:00+05:00