Pharmaceutical Sector Thrives with 4x Earnings Growth and Expanding Margins

Staff Report:
Despite the fact that the sector’s production remained flat during the first two months of FY25 compared to last year (as reported in LSM figures by PBS), the pharmaceutical sector emerged as a unicorn in these testing times, thanks to a sharp recovery in gross margins. The industry posted net earnings of Rs7.5 billion in 1QFY25, compared to Rs1.8 billion in 1QFY24, an increase of 4x (see Table 1). Our Pharma sector sample includes ten companies that represent more than 94% of the sector’s market capitalization.

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Interestingly, pharma companies posted a cumulative gross profit of Rs26.8 billion versus Rs16.6 billion last year, resulting in gross margin expansion of 11 percentage points from 26% to 37% during 1QFY25 (see Table 1). We believe that the robust gross margin during 1QFY25 is due to a combination of higher product prices and lower raw material costs compared to last year. Notably, the government allowed a one-time price hike for essential medicines of up to 14% and for non-essential biologicals of up to 20%. On the flip side, the cost of raw materials sharply decreased, primarily due to: 1) a drop in chemical prices in USD terms amid declining oil prices, and 2) a 5% appreciation of the Pakistani rupee compared to last year.

Company-wise data shows that (see Table 2) GLAXO and HALEON posted the highest expansion in their gross margins, rising by 20 percentage points and 18 percentage points to 27% and 38%, respectively, during 1QFY25.

Revenue Growth: ABOT & HALEON Driving Sector Growth

Major players like ABOT and HALEON contributed significantly to sector revenue growth, with their topline growing by 24% and 21%, respectively. Meanwhile, smaller companies like MACTER and BFBIO reported the highest growth rates of 44% and 31%, respectively.