Pakistan Pharma Sector: Rupee Devaluation & High Interest Rates Dent Profits

Staff Report

Pakistan Pharma Sector’s earnings were down 42% YoY to Rs7.9bn in calendar year 2023. This decline is primarily attributed to a decrease in gross margins and an increase in finance costs.

Revenue increased by 17% YoY to Rs274.5bn 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% increase in CPI (with a cap of 14%) and MRP of all other nonessential up-to increase in CPI (with a cap of 20%) 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% in 2023 from 30% 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% to Rs7.7bn in 2023 from Rs5.0bn in 2022. This increase in finance cost is attributed to the rise in the policy rate from 16% to 22% and the increase in borrowings.

Selling and administrative expenses increased by 20% and 17% respectively in 2023, which is in line with the inflation trend.

Recently in Feb-2024 government approved the deregulation of nonessential 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, the expected decline in interest rates in the coming months will further support profitability in 2024.EU May Allow Pharmaceutical Imports from Pakistan

We prefer 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).