Pharmaceutical Sector Earnings Up 3.1x in 2024 Due to Deregulation of Medicine Prices

Pakistan’s listed pharmaceutical sector’s earnings were up 3.1x to Rs. 24.8 billion in the calendar year 2024. This jump in profitability is primarily attributed to higher net sales and improved gross margins. Net sales increased by 15 percent YoY to Rs. 318 billion in 2024, primarily driven by an increase in drug prices, according to Topline Securities. To recall, in February 2024, the government approved the deregulation of non-essential drug prices, which allowed companies to increase prices without any cap as it was under the previous drug policy to increase the prices of all other non-essential drugs by up to the full increase in CPI (with a cap of 10 percent). While prices of essential drugs are still capped with a formula of up to 70 percent of the increase in CPI (with a cap of 7 percent). Additionally, on February 6, 2024, the Ministry of National Health Services, Regulations, and Coordination (NHSR&C) also approved an increase in the prices of 146 essential drugs. These developments and price increases led to an improvement in gross margins, which rose from 26 percent in 2023 to 36 percent in 2024. Additionally, the recent decline in raw material prices for many drugs and PKR appreciation further contributed to the increase in gross margins. Selling and administrative expenses increased by 14 percent and 15 percent, respectively, in 2024, which is in line with the inflation trend. The finance cost of the sector also increased by 1 percent YoY to Rs. 8.0 billion in 2024 from Rs. 7.9 billion in 2023. This rise in finance cost, despite a decline in the average KIBOR (benchmark lending rate) from 21.6 percent in 2023 to 18.5 percent in 2024, is due to higher borrowings. The deregulation of non-essential drugs will further enhance the margins of pharmaceutical companies, particularly those with a high proportion of non-essential products, as the full impact is yet to materialize in the coming quarters. Additionally, the recent decline in interest rates, along with the expected reduction in borrowings by a few companies, is likely to further support profitability in 2025. The report is in favor of high-quality stocks with a higher non-essential product mix, leverage, strong gross margins, and attractive valuations. AGP Limited (AGP) and Searle Company (SEARL) are the firm’s preferred picks in the pharmaceutical sector.