pharmaceutical sector study-n1

PharmaceuticalSector Study

May 2021©The Pakistan Credit RatingAgency Limited

OMC | Global MarketTable of Contents

Contents

Global Overview 1

Global Overview|Growth Prospects 2

Sector Overview 3

Manufacturing Process 4

Large Scale Manufacturing‐ Overview 5

Industry Snapshot 6

Demand|Export 7

Demand|Local and Pricing 8

Supply 9

Business Risk 10

Page No.

Financial Risk‐Working Capital 11

Financial Risk‐Borrowings 12

Rating Curve 13

Duties and Taxes 14

Regulation 15

Porters 5 Forces Model 16

SWOT Analysis 17

Outlook 18

Bibliography 19

OMC | Global MarketPharmaceutical

Global Overview

Source: Statista, GNW 1

• The global pharmaceutical industry is expected to reach USD~1570 bln in CY23 at CAGR of ~7.5%. During the highlight of COVID‐19 in CY20, the focus of pharmaceutical industry was diverted towards viral vectors in the virotherapy and vaccine sectors in delivering effective vaccines and pharmaceutical treatments. After the vaccine, the pharmaceutical industry will return back to pre‐covid projects. Many of these projects will benefit from lessons learned by the sector during the COVID‐19 outbreak, helping to speed up their successful development.

• North America was the largest region in the global pharmaceuticals market, accounting for ~46% of the market in CY20. Asia Pacific was the second largest region accounting for ~26% of the global pharmaceuticals market. Africa was the smallest region in the global pharmaceuticals market.

• The manufacturing side of the pharmaceuticals is expected to receive an even greater boost. Amplified focus on elderly and pediatric patients, high incidence of cardiovascular disorders, growing demand for home‐based healthcare, and increased cancer and diabetes cases are further propelling the pharmaceutical manufacturing market expansion across the globe. The global pharmaceutical manufacturing market is expected to garner growth at a noteworthy CAGR of ~12.8% from CY21 to CY30.

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200

400

600

800

1,000

1,200

1,400

CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20

Revenue (USD billion)


Global Overview|Growth Prospects

Source: Statista 2

0 5 10 15 20 25

Xarelto (Bayer/J&J)

Biktravy (Gilead)

Imbruvica (Abbvie)

Stelara (Janssen Biotech)

Opdivo (BMS/Ono…

Eylea (Bayer/Regeneron)

Eliquis (BMS.Pfizer)

Revlimid (BMS)

Keytruda (Merck & Co.)

Humira (Abbvie)

Prod

uct n

ame (Com

pany

)

Leading Product Sales (USD billion)

0 1,000 2,000 3,000 4,000 5,000 6,000

CY11

CY12

CY13

CY14

CY15

CY16

CY17

CY18

CY19

CY20

Number of R&D Pipelines

0% 50% 100% 150% 200% 250%

PakistanRussia

AustraliaMexico

ArgentinaWorldBrazil

Saudia ArabiaIndonesia

ChinaIndia

Pharmaceutical Sector Growth (CY17‐CY30)

• The R&D (Research and Development) pipeline represents the aspirations and goals of the company. They are the sole source of future product development and potential innovation. The number of R&D Pipelines grew from ~2387 in CY11 to ~4816 in CY20. The World is expected to witness a growth of ~160% from CY17 to CY30 of in pharmaceuticals. China and India are two most promising in pharmaceutical growth.

• China is the largest producer of API in the world and is responsible for ~40% of the world’s supply. Since china was battling against COVID‐19 in CY20, the supply chain was disturb and sales target were not met. With opening of china exports once again, API supply chain is expected to pick the pace.


Sector Overview

Source: DRAP 3

• The pharmaceutical industry is responsible for the development, production, and marketing of branded and generic pharmaceuticals. Pharmaceutical companies mainly deal in generic, branded, branded generic and over the counter drugs. Firms may also engage in contract development or manufacturing, where a company provides comprehensive services from drug development through drug manufacturing to another firm.

Pharmaceutical Manufacturing

Primary ProcessProduction of Active

Pharmaceutical Ingredients (API)

Secondary ProcessConversion of API into

formulation and final product(Drugs)

Pharmaceutical Products

Drugs

Non‐Essential

Essential

Consumer Health

Over the Counter Drugs

Prescription Drugs

Tech and Devices


Manufacturing Process

Source: PPMA 4

Raw Chemicals such as Dicalcium phosphate, Tyrosine, valine etc. are processed and refined for further use.

Active Pharmaceutical Ingredients (API) are produced mainly in organic and inorganic synthetic drugs from refined chemicals.

Excipients most commonly produced are Disintegrants, Glidants and Lubricants from API

Finished product is mostly in Tablet or serum form and quality control is performed to authenticate drugs.

Packaging is done and properly labeled for usage. Ingredients and side affects are listed. The final product is than shipped to retail.

OMC | Global MarketPharmaceuticalLarge Scale Manufacturing‐ Overview

Econ

omy

Agriculture(19%)

Crops (35%)

Others(65%)

Manufacturing(13‐14%)

LSM(78%) Pharmaceutical (3.62%)

SSM (15.2%)

Slaughtering (6.8%)Services

(67‐68%)

• Large Scale Manufacturing (LSM) is essential for economic growth considering its linkages with other sectors. It contributes ~9.5% to Pakistan's GDP. During FY20, the country’s overall GDP contracted by ~0.4% on account of the Covid‐19 pandemic spread (FY19: Growth ~1.2%). Covid‐19 lockdown and overall economic slowdown had severe implication for LSM as well, as its registered negative growth of ~10.17% during FY20 (FY19: (negative ~3.38%)).

• The government of Pakistan and SBP announced series of incentives during 4QFY20 to support businesses and to stimulate business activity. The stimulus measures yields positive results for the economy, as the LSM posted a growth of ~8.99% during 3QFY21 (3QFY20: (negative ~5.4%)).

Source: Pakistan Economic Survey, SBP 5


Industry Snapshot

Source: IQVIA, PPMA,PBS,DRAP 6

FY19 FY20

Gross Revenue PKR 416 bln PKR 453 bln

Contribution to GDP 1.16% 1.17%

Registered Manufacturers 620 620

Structure Regulated & Oligopolistic

Imports (PKR) PKR 148 bln PKR 158 bln

Exports (PKR) PKR 29 bln PKR 33 bln

Regulator Drug Regulatory Authority of Pakistan

Association Pakistan Pharmaceutical Manufacturers Association

• Pharmaceutical sector recorded a revenue of PKR~453 bln during FY20 with YOY growth of ~9% (FY19: PKR~416 bln). The revenue was impacted by the closure of Outpatient Departments (OPDs) as the sector registered a growth of only ~4% in 4QFY20.

• Despite the large number of registered companies the sector is dominated by the top local and Multinational Companies (MNCs). Top 100 companies hold ~97% of the total market share whereas, remaining more than 500 companies hold only ~3% market share. Moreover, top ~50 companies hold ~80% of market share.

• The sector is highly dependent on imports to meet the demand of basic raw material – Active Pharmaceutical Ingredients (APIs). As per the estimates, ~95% of the API requirements are met through imports while the remaining 5% are met domestically. Heavy reliance on the imported raw material significantly increases the inherent risk of supply chain disruption.

• Pharmaceutical sector is critically important for the health and lifestyle of any country and its population. The average world health expenditure per capita stands at USD~1,100/capita while the average health expenditure per capita in Pakistan is significantly lower standing at USD~43/capita.


Demand|Consumption

Source: PBS 7

• With current population of more than ~220mln, the population growth rate of Pakistan is ~2% significantly higher than global growth rate of ~1%. Decrease in mortality rate from 84.3/1,000 births in 2000 to 55.6/1,000 births in 2019 and increasing average age from 62 in 1990 to 70 by 2020 will results in more people reaching older age and hence ever increasing demand of robust healthcare system.

• Aging population and rising health issues, especially during the pandemic, the demand for pharmaceutical product is a necessity. The pharmaceutical industry is unaffected by the harsh condition of economy for the most part.

• Health care expenditure was recorded at PKR~422bln in FY19 with CAGR of ~18% since FY12. Total expenditures showed subdued growth of ~1.28% during FY19 due to rising fiscal deficit. Going forward spending is expected to increase owing to COVID‐19 outbreak and substantial increase in number of families enrollment under Sehat Sahulat Program.

• The corona pandemic and global supply chain disruption gave rise to pharmaceutical exports. Exports during 9MFY21 was recorded at PKR~34bln (9MFY20: PKR~26bln) with YOY growth of ~31%.

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0.6%

0.8%

1.0%

1.2%

1.4%

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450

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

PKR bln

Health Care Expenditure (Both Federal and Provincial Governments)

Developement Exp Current Exp Total Exp Total Exp as % of GDP

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30

40

FY16 FY17 FY18 FY19 FY20 9MFT21

Exports (PKR bln)


Demand|Price Dynamics

Source: TSL Research, PBS,DRAP 8

• In Pakistan, prices of Pharmaceutical products are regulated by DRAP and cannot be changed unilaterally by the pharmaceuticalcompanies. Any new price or increase requires approval from the DRAP. Prices are increased with respect to Consumer Price Index (CPI).

• As a positive development for manufacturers, after the amendments in Drug Pricing Policy 2018, DRAP is mandated to respond tocompanies request for price revision within 30 days of submission otherwise the price increase as submitted by the companies will be made effective.

Pricing and Costing Under Drug Pricing Policy 2018Essential Drugs: MRP Increase by 70% of CPI (Cap of 7%)

Annual Price Increase

Non‐Essential Drugs:MRP Increase by 100% of CPI (Cap of 10%)

Low Priced Drugs Low priced Drugs are such that their MRPs are lower than the threshold prescribed by DRAP. MRPs of such

drugs are to be increased equivalent to CPI every year, subject to conditions.

First Generic:MRP of drugs to be set at 30% less than the cost of the Originator brand, subject to conditions

New Drugs

In other cases MRP fixed at prevailing highest MRP of Generic brand in the market

Locally Manufactured Drugs:MRP = Cost x Factor

Hardship Cases Imported Drugs: Trade Price= Landed Cost + mark up 45% (40% markup for anti‐cancer, biological etc)

Partially Imported Drugs: Trade Price = Landed Cost + packaging cost + markup


Supply

Source: PPMA,PBS 9

• Pakistan Pharmaceutical industry is only able to make up ~5% of its Active Pharmaceutical Ingredients (API) locally. The rest of the Ingredients are imported from all around the globe mainly from China, Germany, UK,USA and France.

• Negative ~2.69% in FY20 growth was witnessed in production due to corona pandemic and its affect on world supply chain. The decline in production of ~8.32% in FY19 was mainly due to harsh economic conditions and fluctuating exchange rate. For the 9MFY21, the sector witnessed a growth of 12.57% in production. The Imports stand at PKR~135,057mln for 9MFY21 (9MFY21, PKR~118,258mln). The Increase in imports is mainly due to depreciating exchange rate.

26%

28%18%

13%

15%

APIs Global Manufacturing

EU USA India China Others

‐ 20 40 60 80

100 120 140 160 180

FY16 FY17 FY18 FY19 FY20 9MFY21

Imports‐Raw material and Drugs (PKR bln)


Supply

Source: PPMA,PBS 9

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40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

FY16 FY17 FY18 FY19 FY20

Imports‐Raw material and Drugs (millions)

Product Category Unit FY16 FY17 FY18 FY19 FY20Tablets 000' Nos 27,238,358 29,014,742 27,842,998 27,802,433 27,557,865 Syrups 000' Liters 108,342 117,084 110,132 100,136 93,775 Capsules 000' Nos 3,398,609 3,497,716 5,168,041 3,585,562 3,814,808 Injections 000' Nos 999,207 1,212,658 1,608,332 1,337,891 1,277,320 Ointments 000' Kg 3,106 3,970 3,641 3,253 3,349 Galenical 000' Liters 46 343 259 39 68

• Pakistan Pharmaceutical industry is only able to make up ~5% of its Active Pharmaceutical Ingredients (API) locally. The rest of the Ingredients are imported from all around the globe mainly from China, Germany, UK,USA and France.

• Negative ~2.69% in FY20 growth was witnessed in production due to corona pandemic and its affect on world supply chain. The decline in production of ~8.32% in FY19 was mainly due to harsh economic conditions and fluctuating exchange rate. For the 9MFY21, the sector witnessed a growth of 12.57% in production. The Imports stand at PKR~135,057mln for 9MFY21 (9MFY21, PKR~118,258mln). The Increase in imports is mainly due to depreciating exchange rate.


Business Risk

Source: PACRA Internal Database 10

FY17 FY18 FY19 FY20

Revenue Growth 8.69% 9.42% 11.76% ‐0.27%

Cost of Sales 60.82% 64.88% 65.72% 62.58%

Gross Profit Margin 39.18% 35.12% 34.28% 37.42%

Net Profit Margin 13.94% 11.20% 9.19% 12.31%

67%

9%

3%

22%

Cost Break up

Raw Material Salaries Energy Others

• Rising cost of sales and declining gross margins were observed in FY18 and FY19. Negative growth can be seen in FY20 with declining cost of sales and improving profit margins. These margins were improved mainly due to pharmaceuticals products whose prices are unregulated by Drug regulatory Authority of Pakistan (DRAP). These mainly Include multivitamins, steroids and supplements.

• Pharmaceutical business model heavily relies on raw material making up ~67% of its cost of sales while energy cost being the lowest component accounting for ~3%. Salaries and other expenses account for 31% for cost of sales.

• With DRAP regulating the prices of drugs, the profits margins are highly sensitive to exchange rates and cost of raw material. ~95% of raw material (API) is imported and posses a major risk for the Industry.

• Pharmaceutical are shifting there focus towards non regulated drugs and products by DRAP to increase profitability and lower risk.


Financial Risk‐Working Capital

Source: PACRA Internal Database, SBP 11

0

20

40

60

80

100

120

140


Working Capital Days

Inventory days Receivable days Payable Days

0102030405060708090


Cash Conversion Cycle

Cash Conversion Cycle

• Cash Conversion Cycle stood at ~80 days in FY20 (~69 days in FY19) for the Pharmaceutical sector. The increase in inventory days from ~112 days in FY19 to ~127 days in FY20 were majorly responsible. Although pharmaceutical activity was not halted during the lock down for the pandemic, the disruption in supply chain and transport resulted in higher inventories. Receivable and Payable days also witnessed an increase of ~3 days and ~8 days in FY20, respectively.

• The Affect of third COVID‐19 wave and lockdown will further dampen the cash conversion cycle in FY21. Potential lockdown in the future if pandemic crisis persist is major threat to working capital management.


Financial Risk‐Borrowings

Source: PACRA Internal Database, SBP 12

9.5%3.1%

48.9%

38.0%

0.4%

Borrowing Mix (Mar‐21)

Export Import Short term Long term Other

14%

11%10%

13%11%

0%

2%

4%

6%

8%

10%

12%

14%

16%


Gearing ratio

• Total Sector borrowing clocked at ~81bln at the end of Mar‐FY21. Last year, total borrowing stood at ~55bln as of Mar‐FY20. The Industry is heavily reliant on import of raw material which constitutes a major portion of its cost. Short term borrowingmakes up ~48.9% of the total borrowings of the sector.

• The gearing ratio of industry is shallow and ranges between ~10%‐~15%. Given the nature of operations in the pharma industry, most debt is utilized in short term borrowing. A ~100 bps increase in interest rates is expected to shrink the profitability of the sector by approximately ~810mln.


Rating Curve


0

1

2

3

AA‐ A+ A A‐ BBB+ BBB BBB‐

Num

ber o

f Clients

Rating Curve

• PACRA rates 4 clients of the Pharmaceutical industry.

• Rating bandwidth of the sector is AA‐ to BBB‐

• No change in rating was observed for the clients


Duties and Taxes

Source: FBR 14

Custom duty Sales tax Income tax Additional Custom duty

API 11%‐20% 17% 11% 2%‐7%


Excipients 3%‐90% 17% 11% 2%‐7%


Drugs 0%‐20% 0%‐17% 0%‐11% 0%‐7%

• Duty structure is designed to keep the prices of drugs lower and to encourage healthcare in the country.

• Pakistan's SRO 567 (1) 2006 abolishes the import duty on all medicines for cancer, kidney dialysis, hepatitis and cardio vascular diseases.


Regulation

Source: DRAP 15

• The Pharmaceutical industry is high regulated by Drugs Regulatory Authority of Pakistan and it strictly monitors the prices of essential and biological drugs. Essential and biological drugs are included in the list published by World Health Organization (WHO) and notified by Ministry of National Health Services. The list is updated from time to time.

• According to the latest issue of DRAP July FY21, manufacturers and importers are allowed to increase the Maximum Retail Price(MRP) of essential drugs and biologicals up to 70% of Consumer Price Index (CPI) as reported by Pakistan Bureau of Statistics(BPS) at the end of Fiscal year. However the maximum increase is allowed up till 7%.

• Manufacturers and importers of all other biologicals and lower priced drugs are allowed to increase 100% of Consumer Price Index (CPI) as reported by Pakistan Bureau of Statistics at the end of Fiscal year. The maximum price increase limit is 10%.

• All other category of pharmaceutical products are not regulated by DRAP and their prices vary from manufacturer to manufacturer.

• All the pharmaceutical products have to approved by Drugs Regulatory Authority of Pakistan and a strict quality check is kept bythe regulatory department on the manufacturing process and ingredients to be used.

• Low threat to Entry• High Capital cost of Drug development

• Extensive regulatory requirement to approve new drugs.

• Lack of research in the pharmaceutical industry

POTENTIAL NEW ENTRY

• Low to High• Scarce supply of essential medicines coupled with highly regulated prices

BUYERS

• Low threat of substitutes

• Essential drugs are mostly imported

SUBSTITUTES

• High power• Only ~5% of supplies needs are met locally

• Heavy reliance on imported Active Pharmaceutical Ingredients with its set of challenges

SUPPLIERS

• Medium to High• ~95% of Active Pharmaceutical Ingredients are imported which gives incentive to rivalry and increase profit margins

COMPETITIVE RIVALRY

Pharmaceutical

Porters 5 Forces Model

16

PharmaceuticalSWOT Analysis

•Reliance on imported raw material• Exposure to exchange rate volatility• Extensive regulatory requirements• Shortage of locally available materials• Inability to pass on increased cost of production to end consumers for drugs regulated by DRAP.

•Highly research extensive industry

• Steadily increasing demand•High reliance of customer on the product•High profit margins in non essential drugs

Strengths

Threats Opportunities

Weaknesses

•Low per capita consumption•High profit margin opportunities in non essential drugs and products

•Room of research and drug development.

•High level of competition• Increasing cost of energy• Threat of increasing Active Pharmaceutical Ingredients

• Third wave of covid‐19 lockdown and possible lock down will disrupt the supply chain

•Rising Interest rates

17


Outlook: Stable


• Number of multinational companies have reduced over the reduced in the sector. The major reason are the regulation which prohibits passing of research and development cost of new drugs to consumers. Continuing of this trend will result in importing key essential drugs in the future.

• The sector margins remain largely unaffected from corona pandemic due its needfulness of its products. The pharmaceutical was exempted from lockdown however its supply chain was mostly disturb.

• The sector is highly sensitive to exchange rates and price of its raw material ingredients. Adverse movement in these element will further dampen the profitability due to inability of passing down the cost to consumer.

• Exports are expected to increase as the corona pandemic situation persists.

• The sector has small gearing ratio and the demand for pharmaceutical products is a necessity. With exchange and interest rate expected to remain unchanged according to the State Bank of Pakistan., the outlook for sector is stable.

Research Analyst

Muhammad Nadeem SheikhACCA, CFASupervising Senior

Zohaib KhalidResearch Analyst

Contact Number: [email protected]‐mail: +92 42 35869504

DISCLAIMERPACRA has used due care in preparation of this document. Our information has been obtained from sources we consider to be reliable but its accuracy or completeness is notguaranteed. The information in this document may be copied or otherwise reproduced, in whole or in part, provided the source is duly acknowledged. The presentation should not berelied upon as professional advice.

• PACRA Internal Database• Drug Regulatory Authority of Pakistan• Statista.com• The Business Research Company• Pakistan Bureau of Statistics• State Bank of Pakistan• The Economic Survey of Pakistan• Pakistan Pharmaceutical Manufacturer’s Association• Federal Board of Revenue• Global News Wire

Pharmaceutical

Bibliography

19

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