Searle and Citi Pharma Project Growth

Staff Report: Topline Securities hosted Pakistan Pharma Invest 2024, where the first session featured Searle Pakistan (SEARL) Limited. The speakers included Mr. Mobeen Alam, Group CFO of SEARL, along with his team.

The company is targeting the closure of the OBS (or SPL) deal before December 2024, which includes signing the Share Purchase Agreement (SPA) with the buyer.Pharmaceutical industry growing due to SIFC’s efforts

Management expects gross margins to recover to 46-48%, with a target of reaching 50% in the last quarter of FY25. This improvement is primarily driven by the deregulation of non-essential drugs in February 2024.

The company anticipates a revenue growth of over 30% for FY25, with the larger proportion expected from deregulation of drugs, followed by the launch of new products that were previously unviable due to low prices. Volumetric growth will also contribute. The company aims to maintain a growth rate of 30% for the subsequent year.

Currently, 60% of SEARL’s volumes and 80% of its value come from the non-essential segment. With the exit of OBS, this contribution is projected to rise to 80-85%.

Regarding non-essential drugs, the industry has proposed to the government an increase in the annual price hike cap from 7% to 10%. Many medicines are subject to debate between the industry and government over whether they should be classified as essential or non-essential, so discussions will take place to align with WHO guidelines.

Since inception, pharma companies have proposed that the power to set price increases be transferred from DRAP to the Chamber of Commerce or a similarly competent body to handle pricing strategies.

Starting in April 2024, a price increase was observed in some essential drugs. It took about three months for old inventory to be cleared, so the full impact of this price increase will be reflected from July to December 2024, with a seasonal effect also anticipated.

SEARL is the second-largest pharmaceutical exporter in Pakistan, exporting to 12 countries. This export activity contributes approximately 11% to the company’s total revenue.

SEARL ranks first in cardiovascular, pain management, gynecology, and cough supplements, and second in pulmonology, neurology, and pediatrics. The company is the second-largest pharmaceutical company in terms of units sold, with a revenue growth rate reflecting a 5-year CAGR of 17%.

Citi Pharma Limited (CPHL) – Key Takeaways

The second session focused on Citi Pharma Limited (CPHL), with Mr. Rizwan Ahmed, CEO of CPHL, as the key speaker.

The total market size of APIs in Pakistan is around US$1.3 billion, with the local share being US$200 million and the rest imported.

CPHL entered into an exclusive partnership with Murli Krishna Pharma of India to provide high-quality APIs. According to management, 15 APIs will be supplied by Murli Krishna. Out of these, 3 APIs, including omeprazole, have been registered with DRAP (Drug Regulatory Authority of Pakistan), and the registration of the remaining 12 APIs is in progress.

The company expects to finalize this Murli Krishna Pharma partnership within the next 6-8 months. The company expects a 20%-30% revenue impact by FY25, with a major impact expected from FY26 onwards. Post-FY26, the company is targeting 50% revenue growth.

The success rate of these APIs in terms of registration with DRAP is 100%, as these products have been supplied in the country for decades. The total CAPEX of this project is estimated at US$1 million, mainly for importing complex equipment. The installation period is expected to be less than 6 months after the registration of all APIs.

Gross margins of the company are expected to improve in the coming quarters, as CPHL has entered the formulations business, which generally has higher gross margins compared to the API segment.

The company also has a joint venture with Saudi Arabia to develop an API manufacturing facility. This venture will benefit the company in two ways: CPHL will produce APIs there, enabling the export of formulations to the Saudi market, and the venture will allow CPHL to supply products to other countries where direct export from Pakistan is not feasible.

The company expects to finalize a joint venture with one of the biggest Chinese pharma companies, Sinopharm, to manufacture vaccines by the start of next year.

Paracetamol prices have significantly decreased over the past year. Currently, prices hover around Rs1,100/kg, compared to Rs3,000/kg in the past.

Management stated that the Citi Hospital project has been delayed; however, they are optimistic about the expansion of the APIs and formulation businesses.

Management expects revenue growth of 20-25% in FY25 and over 50% by FY26, as the new developments are likely to materialize.