October 12, 2020 (MLN): Unlike other sectors of the economy that faced unprecedented challenges on economic or financial front due to the worst pandemic of recent times, Pharmaceutical sector witnessed significant improvement, with earnings growing by a 71% YoY during 2HFY20.

The growth in earnings was mainly on the back of stable sales performance, higher gross margins and lower effective tax. In addition to this, the decline in selling and marketing expenses provided another major stimulus to earnings.  Finally, lower financial charges due to reduction in policy rate by the State bank of Pakistan during 4QFY20 also provided support to the sector’s bottom-line.

Amidst a volatile and challenging economic environment, the sector maintained its revenue stream with the improved sales of nutrition supplements, while sales of other pharma medicines took a hit as hospitals and OPDs were largely closed for non-COVID related illnesses and patient visits to doctors were also fell amid social distancing and other safety measures.

As the Pharmaceuticals are known for spending a large amount on promotions and marketing but  as a result of the lockdown in the second quarter of 2020  amid pandemic, major promotional activities were not carried out, this coupled with the companies’ initiatives to control expenses, the sector’s marketing and selling expenses nosedived notably during Jan-June FY20.

Taking into account the financial performances of 6 major listed companies, namely; Abbot, GSKCH, GSK, AGP, SAPL and HINOON, that provide the fair representation of the sector’s performance, it can easily be deduced that despite COVID impact on business related operations, the sector managed to record improvement in net profits as well as in sales.

As can be seen in the table above, the sector as a whole encountered a significant 71% YoY growth in net profits, the gross profits went up by 8%YoY. With regards to turnover, as mentioned above, the sector maintained a stable revenue stream at Rs 56.3 billion (up by 1% YoY) despite supply chain issues. Based on individual evaluation, ABOT outperformed the remaining 5 companies from the lot with considerable expansion in net profits, in both absolute terms as well as percentage wise. In respect of sales, all the companies in our sample observed upturn in sales except for GLAXO and SAPL, as their turnover plummeted by 11% YoY and 9% YoY respectively, on account of COVID-19 which caused disruption in business activity amid lockdown and dropped patients’ visits to healthcare professionals.  GLAXO’s sales were also impacted due to discontinuation of Ranitidine (Zantac), as mentioned in the annual report of the company.

Since the Pharmaceutical sector is sensitive to exchange rate movement, inflationary pressures and changes in DRAP’s pricing policy, the sector witnessed steadiness in profit margins as it improved by 1 ppts from 30% to 31 amid CPI related price hike, positive sales mix, favorable exchange rate. company-wise, AGP, GSKCH and SAPL witnessed a plunge in profit margins. The decline could be attributable to devaluation of PKR against USD during the period, leading to a rise in their cost of production, shrinking the margins of the producers.

In order to evaluate the sector’s performance more deeply, it is imperative to see how the sector’s index performed against KSE-100 index during the period under review. The graph below shows identical nature movement for both the indices. Since the sector holds around 4% weightage in KSE-100 index, therefore it is equally important to highlight that the sector contributed around 197.61 points to the KSE-100 index during 2HFY20, with ABOT providing the highest gains at 104.6 points, followed by companies like AGP, GLAXO, SEARL, HINOON and GSKCH, which contributed 23.37, 22.19, 22.10, 18.30, and 7.08 points, respectively.

Outlook:

Although the lock down has been eased off, the threat of pandemic remains high and the government continues to emphasize the importance of strictly adhering to prescribed safety measures to avoid a second wave. To accelerate business growth and ensure liquidity in the economy, the Government and State Bank of Pakistan have introduced a set of measures such as refinancing policies, reduction of policy rate, short-term tax reliefs and subsidies. These measures are helping to stimulate sector’s business. Moreover, to achieve Sustainable Development Goals and other international benchmarks, Current Government has been making efforts to support the health sector through various programs which may help in pushing the demand upwards for producers. However, disruptions in logistics amid pandemic may continue to impact the industry for the remainder of this year.

Furthermore, owing to health awareness and consumers eagerness for a healthier lifestyle, the consumption of dietary supplements is observed to be rising. Secondly,40%of children in Pakistan have a stunted growth (Pakistan’s National Nutrition Survey for 2018-2019) and there is an increasing rate of deficiencies which may also add to demand for nutraceuticals giving a chance to the pharmaceuticals to tap the market further, a report by Fortune Securities cited.

As per the report, strict regulations and changes in policy by DRAP creates uncertainty in the sector and may adversely affect the future plans. DRAP has been making efforts since inception however, the problems of counterfeit products, smuggling and firms exiting the market prevails which hampers the growth of the sector. Therefore, a more systematic approach and human resource management plans will aid in improving the functions of DRAP and solve these issues, it added.

However, the inability to pass on USD/PKR devaluation, unexpected changes in DRAP’s policy, new entrants and competition from multinationals and trade restrictions causing shortage in Active Pharma Ingredient (a major raw material for pharma products in Pakistan which is the mostly imported), remain the downside risk to industry’s outlook.

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