Pakistan listed pharmaceuticals sector’s earnings were down 42 percent YoY to Rs. 7.9 billion in the calendar year 2023.
According to Topline Securities, this decline is primarily attributed to a decrease in gross margins and an increase in finance costs.
Revenue increased by 17 [percent YoY to Rs. 274.5 billion in 2023 mainly driven by an increase in drug prices.
To recall, in May 2023, the Government allowed one-time dispensation, enabling pharmaceutical companies to increase their existing Maximum Retail Price (MRPs) of essential drugs equal to a 70 percent increase in CPI (with a cap of 14 percent) and MRP of all other nonessential up-to increase in CPI (with a cap of 20 percent) to mitigate the impact of rupee devaluation.
Despite the rise in prices, companies were unable to sustain gross margins, with the gross profit margin falling to 26 percent in 2023 from 30 percent in 2022.
The decline in gross margins is primarily attributed to a 20% devaluation of the rupee against the US dollar and an average inflation of 31% in 2023.
Another factor contributing to the decline in profitability is the significant increase in finance costs, rising by 55 percent to Rs. 7.7 billion in 2023 from Rs. 5.0 billion in 2022. This increase in finance cost is attributed to the rise in the policy rate from 16 percent to 22 percent and the increase in borrowings.
Selling and administrative expenses increased by 20 percent and 17 percent respectively in 2023, which is in line with the inflation trend.
Recently in February 2024, the government approved the deregulation of non-essential drug prices which we believe will improve the margins of pharmaceutical companies especially companies with a high mix of non-essential categories, as they will be able to increase their prices in line with the increase in costs, rather than being subject to any cap on pricing. Furthermore, an expected decline in interest rates in the coming months will further support profitability in 2024.
Topline prefers high-quality stocks with a higher non-essential product mix, leverage, and better gross margins, which include Searle Company (SEARL), Haleon Pakistan formerly Glaxo Consumer Health (HALEON), Abbott Laboratories (ABOT), and Highnoon Laboratories (HINOON).
