Morning Briefing for December 10, 2013 – Standard Capital

Karachi, December 10, 2013 (PPI-OT): Pharmaceutical industry – in search of amicable Solution

Pharmaceutical industry is one of the key industries in the country – Standard Capital is laying focus on GLAXO, ABOT, SEARL, FEROZ and ICI.

According to KASB Securities Limited, the industry is trying to dictate terms wherein it is locked horns with the government to increase prices of medicines. The Prime Minister has asked the authorities to withdraw the notification of 10% – 12% price increase.

Standard Capital expects some amicable solution wherein MNCs dominated industry may play tactics of withdrawing key medicines from the market – thriving case for counterfeit or black market. Standard Capital also expects government to present a long term solution which is also being presented in other sectors. (see Standard Capital’s table of valuations on companies)

Caveats:

Meeting between government and industry participants;

MNCs to outwit government, since medicine quality is an important issue and price increase has already been done;

Product withdrawal threat;

The MNCs are claiming that drug prices in Pakistan are lower than the other counties.

Multinational companies withdrew key drugs:
Standard Capital has come to know that local managements of MNCs have been asked by the parent companies to withdraw key products if required price increase is not allowed by the authorities and government. The companies are vying for pre-2001 formula where they are undertaking to expand.

Vanishing key products in peak winter season
The demand of Anti- infectives , Anti-Viral and analgesic drugs usually increase in winter season, but Standard Capital’s pharmaceutical market is facing acute shortage of these drugs like Panadol CF, Panadol Extra, Actifid P , Cofcol, Calpol , Panadol syrup, Xanax, Laxotanil, Sancos, Migril tablets, Ativan, Phenabarbiton, Arinac Forte, Decadron Inj., Marax Dihydan and Neuberol etc (as per Standard Capital’s market survey.

This situation creates a wide gap for the local un- registered products to fill this gap and making profit. Some of these brands belong to listed companies such as GLAXO, ABOT, SEARL etc.

Pharmaceutical industry increases drugs’ prices unilaterally:
Beside rejection of demand of price revision by federal government the pharmaceutical industry players have increased the drug prices by more than 20%. The price of Panadol syrup is increased to Rs 51 which was previously selling at Rs 35. Likewise prices of Calpol syrup is expected to increase because supplier and wholesaler had vanished the product from market and expected to resume its supply with new price (Calpol and Pandol both are GLAXO products).

Putting consumer’s life on duplicate local drugs:
Standard Capital’s observation is that in order to put pressure on the government for increase in drugs prices, MNCs and national registered companies have stopped supplying key drugs to market. This created a gap for un- registered and duplicate drug manufacturer to enter in the market and supply their products. These duplicate products have many side effects which may lead to death of the patients.

Standard Capital has already observed these type cases in Punjab due to use of these types of low quality drugs. The crisis could balloon and snowball to other province.

Valuations deciphers that ABOT, SEARL and FEROZ still attractive – don’t forget ICI

Table given below illustrates valuations of pharmaceutical industry;

GLAXO yields highest PE of 27x with mere 3% dividend yield;

SEARL and FEROZ yield lower PE of 8.6x and 8.3x (as per industry benchmarks; please also refer to Standard Capital’s web portal www.scstrade.com pharma sector multiples in advance search).

Wherein ABOT stands out as the strong company which is reporting highest cash per share of Rs 31.10 based on 9MCY13 results and yielding a PE of 16x which is attractive than GLAXO.

ABOT is having a roaring success in nutritional segment which brackets it with companies such as NESTLE (PE 70x)

Another company which comes to light is ICI for life sciences (report already released deciphering PE of 16x).

Pharmaceutical sector- snapshot Based on latest result
Script      9MCY13   Exp PE*   Dividend Yield   GP margin   EBIT margin   NPAT margin   Cash per share (Rs)   Book Value   PBV
GLAXO         2.95    26.7          3.0%           26%         10%            6%              5.50               38.2      3.5
ABOT         17.92    16.1          1.7%           37%         21%           14%             31.10               76.3      5.5
SAPL         13.77    22.9          3.0%           30%         10%            6%              2.44              213.0      2.0
SEARL     2.41(1Q)     8.6          1.9%           46%         20%           10%              0.21               43.3      2.4
FEROZ     3.22(1Q)     8.3          3.3%           51%         19%           23%              0.92               78.1      1.7

Source: www.scstrade.com

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