The Contribution of Multinational Pharmaceutical Companies In
the Development of Pakistan Economy Chapter 4 Presentation Analysis
and Interpretation of Data
PRESENTATION ANALYSIS AND INTERPRETATION OF DATAMajor
Therapeutic CategoriesAntibiotics, vitamins and analgesics are the
top three therapeutic classes in terms of sales by value.
Anti-biotic dominate the market with approximately 24% of the
market value. Vitamins and analgesics account for 6.6% and 6% of
the market respectively. The vitamins and antibiotics sectors are
vital not only because of their large size but also because of
their astronomical growth. Sales of antibiotics are growing at 30%
per year, while the growth rate in the vitamins segment is 20%. The
importance of vitamins in the domestic market is compounded by the
fact that being nonessential drugs, their prices are now
deregulated. This price deregulation, which occurred in 1993 has
enhanced the competition within this therapeutic strata of the
market and has placed companies like Abbot, Cyanamid, Pfizer,
Sandoz, Squibb and Roche in a privileged position. Wellpositioned
competitors in the antibiotic arena include Smith Kline, Wyeth
Squibb, Sandoz, Pfizer and Wellcome. Seprtan, Amoxil and Ampiclox
are three largest selling products in Pakistan. Wellcome produces
Septran, whereas the other two are Beechams products. The sales of
each of these three products are approximately $6 million to $9
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million, larger than the total sales of many medium sized
companies in the pharmaceutical industry in Pakistan. The following
table shows the value sales of the top 10 products: Table 2: THE
VALUE SALES OF THE TOP 10 PRODUCTS PRODUCT Septran (Wellcome)
Amoxil (Beecham) Ampiclox (Beecham) Velosef (Squibb) Neurobion
(Merck) Brufen (Boots) Tarivid (Hoechst) Erythrocin (Abbot)
Augmenting (Beecham) Postan (P. Davis) Demand The market size of
the pharmaceutical industry is estimated to be around $550 million.
The total installed capacity in the private sector is estimated to
be 12 billion tablets, 1.2 million capsules, 312 million ampoules,
173 million vials, 32000 tons of liquid preparations and 2000 tons
of semi solid (ointments) preparations. In rupee terms the total
pharmaceutical market in 1992-93 worked out to be Rs 20 million.
The annual average growth was estimated to be 16.1%. This growth
has been achieved despite the strict price controls. However due to
the recent devaluation of the Pak rupee against US dollar, the
pharmaceutical industry may find it difficult to maintain their
growth rate.Newport University (USA) ISMS Karachi Campus Page
29
ESTIMATED SALES 1993 (RS. MN) 272 - 290 250 - 270 160 - 170 155
- 165 155 - 165 155 - 165 140 - 145 130 - 140 110 110
The Contribution of Multinational Pharmaceutical Companies In
the Development of Pakistan Economy Chapter 4 Presentation Analysis
and Interpretation of Data
Since approximately 95% of the raw material requirements of the
industry are met through imports, the recent devaluation will
increase the cost of production and may thus have a contractionary
impact on the supply of essential drugs. Moreover, the overall
effect might be more acute due to the fact that the government
heavily regulates the retail prices of medicines. The following
table shows the historical and current consumption of drugs and
medicines during 1981 to 1993:
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Table 3: DEMAND FOR DRUGSYEAR PRODUCTION (MN) IMPORTS (MN)
EXPORTS (MN) TOTAL DEMAND (MN) GROWTH (%)
1980-81 1981-82 1983-84 1984-85 1985-86 1987-88 1988-89 1989-90
1990-91 1991-92 1992-93
2528 3033 3500 4000 4762 6283 7834 9329 10605 12089 13781
936 1222 1800 1974 2252 2852 3318 3723 4408 5184 5980
44 1814237 43 52 44 73 110 382 260 470 515
3420 23.8 5257 5921 6970 10135 11042 12052 14753 16803 19246
4237 4.5 12.6 17.7 22 8.9 15.6 22.4 13.8 14.5
On the basis of the figures provided by the economic survey of
Pakistan of 1993-94 for Gross National Product (GNP), population
and per capita income, the total expenditure on health stood at Rs
20 million.
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Table 4: TOTAL EXPENDITURE ON HEALTH YEAR POPULATION (MN) GNP
(RS MN) PER CAPITA INCOME 1987-88 1988-89 1989-90 1990-91 1991-92
1992-93 1993-94 103.82 107.04 110.36 113.78 117.31 120.83 124.45
402,516 418,881 439,647 455,462 485,362 496,946 515,959 (RS) 3,877
3,913 3,984 4,003 4,137 4,113 4,146 PER CAPITA EXP. ON HEALTH 85.07
92.23 98.29 115.45 128.75 141.84 156.64 TOTAL EXP. ON HEALTH (RS.
MN) 8,831.97 987.2830 10,847.28 13,135.90 15,103.66 17,138.53
19,493.85
For the past decade the GNP (at constant factor cost of 1980-81)
has been growing at an average rate of 4.66% per annum. In addition
to this, the level of population is rising at an average rate of 3%
per annum, which is said to be the highest among the most populous
countries. Keeping these factors in mind it would be safe to
predict that total expenditure on pharmaceutical would more than
double in five to six years. This assumption can be made on the
1993-94 figures of Rs 20 billion. On the basis of the average
historical growth rates of the figures presented in the previous
table, it is possible to project the figures for the next five
years upto 1999. These figures will give an idea of demand will be
in the next few years and the potential market size available to
the pharmaceutical companies.Newport University (USA) ISMS Karachi
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Table 5: PROJECTED DEMAND YEAR POPULAT ION (MN) GNP (RS. MN) PER
CAPITA INCOME 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99
124.45 128.18 132.03 135.99 140.07 144.27 515,959 537,405 560,137
583,831 608,527 634,248 (RS.) 4,145.91 4,192.58 4,242.50 4,293.19
4,344.45 4,396.40 PER CAPITA EXP. ON HEALTH 156.64 174.23 193.80
215.56 239.77 266.70 TOTAL EXP. ON HEALTH (RS. MN) 19,49 3.85
22,332.80 25,587.40 29,314.00 33,584.58 38,476.81
Pakistan with a population of 124 million people is the ninth
most populous country in the world. The average growth rate of
population is 3.1 %. It has a low per capita income of
approximately $400 per annum. Seventy percent of the population
resides in rural areas. The health sector in Pakistan is not very
well developed. As a percentage of GNP, Pakistan spends
approximately 1% on health (world development report). This is far
less than what other South Asia countries spend.
Table 6: EXPENDITURE ON HEALTH BY SOUTH ASIAN COUNTRIES
Bangladesh Philippines Sri Lanka 4.8% 4.2% 2.0%Page 33
Newport University (USA) ISMS Karachi Campus
The Contribution of Multinational Pharmaceutical Companies In
the Development of Pakistan Economy Chapter 4 Presentation Analysis
and Interpretation of Data
India Pakistan
1.6% 1.0%
In addition to this, Pakistan has one doctor for a population of
2000 people and one hospital bed for 1600 people. Population per
nursing facility stands at 6700. There fore on an average, per
capita spending on pharmaceutical product is between $4 and $5 per
annum. Per capita consumption of drugs and medicines is increasing
in the country. It was Rs.95 per capita in 1987-88. Per capita
consumption in 1992-93 increased to Rs.159. However it is still low
compared to western standards. The following
Newport University (USA) ISMS Karachi Campus
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Table 7: PER CAPITA CONSUMPTION OF DRUGS AND MEDICINES FROM 1987
TO 1993 YEAR 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93
POPULATION (MN.) 104 107 110 114 117 121 CONSUMPTION (RS. MN) 10135
11042 12052 14753 16803 19246 PER CAPITA CONSUMPTION 95 103 110 129
144 159
expansion in demand can be fuelled by discovering and exploiting
new export markets. Reasons for excessive market growth 1. An
excessive inflow of rural population to the cities is responsible
for
the increased demand for pharmaceuticals. The present rate of
urbanization in the country is 5% per annum. 2. Pakistans
population is increasing at a rate of 3% per annum and during
the last five years per capita income has registered an average
annual growth rate of 3% at constant factor costs and about 17% at
current factor costs. Hence the expenditure on drugs and medicines
have gone up accordingly.
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3.
The money remitted from abroad has also led to a rise in the
expenditure
on drugs and medicines. Home remittances increased to the extent
of $3000 million per annum. However, in 1992-93 remittances had
been reduced to $1562 million. 4. The unethical practice of
retailers to sell drugs without prescription is
another factor responsible for the growth in the medicine
market. Moreover, the sales of spurious drugs at low prices are
also adding to drug sales. IMPORTS AND EXPORTS IMPORTS: In the
1950s over 75% of the countrys requirement of medicines was
fulfilled by imported medicines in finished form. This has now been
reduced to approximately 20%. Presently though, almost 95% of
pharmaceutical raw material and almost one third of the formulated
drugs are imported. By value, approximately 40% of pharmaceutical
sales are imported. There is an import duty of 60% on raw
materials. Imports of medical and pharmaceutical products increased
from Rs 936 million in 1980-81 to 5980.1 million in 1992-93,
showing an average annual increase of 17.2%. Import and export of
medical and pharmaceutical products for twelve years are given
below: Table 8: IMPORT AND EXPORT OF MEDICAL &
PHARMACEUTICAL
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PRODUCTS YEAR c1980-81 1981-82 1982-83 1983-84 1984-85 1985-86
1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 IMPORT
936.1 1222.4 1390.3 1799.8 1973.9 2252.4 2638.2 2852.0 3318.3
3723.4 4407.5 5183.8 5980.1 EXPORT 44.8 18.3 27.7 43.2 51.8 44.3
47.8 73.4 110.4 382.0 260.3 470.3 514.5 PERCENTAGE INCREASE 30.5
13.7 29.4 15.2 13.8 17.1 8.1 16.3 12.2 18.3 17.6 15.3
Among the different therapeutic classes of medicines imported in
the country, antibiotic imports registered a tremendous growth.
Import of analgesics is quite insignificant and there has been no
import of cough syrups since 1979-80 because domestic production
has increased to quite an appreciable extent during the past few
years. Antacids are at present not imported in the country.
Table 9: PERCENTAGE SHARE IN TOTAL IMPORTS OF DEFFERENT
MEDICINES Medicines Pro vitamins & Vitamins AntibioticsNewport
University (USA) ISMS Karachi Campus
(Rs. Millions) 965 957
(% Share in Total) 19 19Page 37
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Medicaments NS Medicine containing antibiotic Derives Hormones
and Derives Other Total
2650 70 123 421 5184
51 2 9 100
The cheap unrecorded sources of imports are from Singapore,
HongKong, South Korea etc. The recognized sources are the United
Kingdom, United States, China, Switzerland, France and Irish
Republic. Major suppliers of pharmaceutical are United Kingdom and
Germany. They are mainly supplying medications and their market
share is around 62.4%. Suppliers of paracetamol are American
companies. Total imports of paracetamol from USA in 1991-92 stood
at Rs. 289 million In terms of money Germany supplied Rs. 1448
worth of medicines while UKs share was Rs. 915 million worth of
medicines. Other important sources are Yugoslavia and China, which
supply medicines at very low cost.
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EXPORTS: Exports of pharmaceutical are picking up at a very
rapid rate. In 1988-89 exports stood at Rs.110.4 million that
increased to Rs. 514.5 million in 1992-93 showing a cumulative rise
of 336% in four years. In the last five years average annual
increase of exports was 67%. Thirty percent of the total exports
went to SriLanka, Djibouti and Nigeria. Other important buyers of
Pakistani pharmaceutical were Argentina (6.7%), U.A.E (5.86%),
Belgium (4.09%), Bangladesh (3.80%) and USA (3.52%). Pakistan can
substantially increase the exports of pharmaceutical industry is
being threatened in several countries. According to reports in
financial Times, UK is becoming an increasing unattractive country
for drug manufacturing units. Investments in the UK pharmaceutical
industry could be threatened by increasing government controls on
prices and demand for drugs. Moreover, increasing animal rights
protection is also a cause of major concern for the industry. For
regulatory reasons medicines have to be tested for toxicity on two
species, only one of which can be a rodent. Some drugs are poorly
tolerated by dogs and so have to be tested on primates. Most
cardiovascular research is based on dogs, because their internal
system is similar to that of human beings. It may be mentioned that
six of the worlds top selling drugs was discovered in United
Kingdom. At present, Britain has won the highest number of Nobel
prizes in the world. However, due to the increase in the protection
of animal rights in the recent years, Britain is becoming an
unattractive site for future pharmaceutical research. Moreover,
cost cutting reforms introduced by the German health care system
have focused on heavy controls over drug prescribing. As a result,
more than 20% was saved on medicines between January and June 1993,
with a significant switch to cheaper off-patent, generic
medicines.Newport University (USA) ISMS Karachi Campus Page 39
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TAX STRUCTURE In a recent package of incentives offered by the
government. The industry will be exempt from duty and sales tax on
the import of raw materials for the manufacture of pharmaceuticals.
The import duty on the import of plant and equipment will also be
cut down to only 10%. The raw materials that are used in other
industries are also subject to duties, which range from 15 to 65%.
However this duty can be reclaimed within 15 months of the
production of manufactured drugs. The income tax payable is 37% for
public limited companies and 47% for private limited companies. In
addition to this the companies also have to pay other taxes such
as: Worker profit participation fund Worker welfare fund EBOI Rs
Education 5% on PAT 2% on PAT Rs. 150 per head per month Rs. 100
per head per month
The companies also have to pay octroi, Property tax, vehicle
tax, professional tax and research levy etc.
COMPETITIVE STRUCTURE
Newport University (USA) ISMS Karachi Campus
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The major proportions of the pharmaceutical industry are
composed of 20 wellentrenched competitors, with no player
controlling more than 6% of the market. Absence of monopolistic
distortions and intense rivalry result in competitive products and
superior quality of long term earnings. The major competitors in
the pharmaceutical industry can be generally classified under the
following headings: Multinational pharmaceutical companies National
pharmaceutical companies (under public sector control) Local
pharmaceutical companies Importers The multinational companies are
responsible 70% of the total manufactured products. Imports
contribute around 10% and national and local companies manufacture
20%. The multinational and local companies are diagrammatically
opposed not only in their marketing strategies, but also in their
sourcing methods and in their dependent on their parent companies.
These major multinational companies produce their basic raw
materials from parent companies, which also help them with
formulation and research and development efforts. As far as
marketing is concerned, these giants depend on internationally
branded product, which are supported by high budget advertising. On
the other hand the local companies basically rely on licensing for
their core business. As they are unable to match the advertising
budget and expertise of their multinational competitors, these
local companies have positionedNewport University (USA) ISMS
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the Development of Pakistan Economy Chapter 4 Presentation Analysis
and Interpretation of Data
themselves as pushers of their products by offering higher trade
margins. In general MNCs offer their retailers 15% margins whereas
the margins that are offered by the local competitors are
approximately 20%. Specifically as far as the foreign competition
is concerned, almost all of the worlds largest European and US
pharmaceutical companies are present in Pakistan, with most of
their product range. Thus the worlds most prominent and prestigious
brands compete with each other a very small market share in terms
of value. The top 20 firms in Pakistan are all affiliates or
subsidiaries of multinational companies. Together they capture over
60% of the Market. The top 5 companies include Wellcome, Abbott,
Glaxo, SmithKline Beecham and Hoechst. Together they account for
nearly 23% of the total market. Following are the tables gives the
specific details of the top 10 companies that are operating in
Pakistan. (The top 10 companies have been selected on the basis of
their rupee sales).
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Table 10: TABLE SHOWING SALES, MARKET, GROWTH OF THE TOP 10
COMPANIES COMPANY 1 2 3 4 5 6 7 8 9 10 ABBOT WELLCOME GLAXO BECHAM
SANDOZ HOECHST PFIZER MERCK AG ROCHE SQUIBB TOTAL SALES (Rs.. MN)
913 833 757 708 603 597 508 484 452 438 6,293 MARKET SHARE (%) 5.51
5.02 4.57 4.25 3.64 3.6 3.06 2.92 2.73 2.64 37.94 GROWTH RATE 26.8
20.2 10.0 20.3 16.5 24.4 26.3 15.3 26.6 18.9
ECONOMIC SIGNIFICANCE The industry is generally profitable and
has a pretax profit for MNCs ranging between 12% and 18%. Raw
material costs constitute about 60% of all costs. For most MNCs, a
significance part of costs are in imported raw material (up to 50%
of sales). The stock market recognizes the potential of the
pharmaceutical sector and has accordingly, priced it at a sector
Price-Earnings ratio of 32.5 compared to the Pakistani Stock Market
P/E of 21.
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In order to get a better picture of the economic significance,
we have complied the financial and strategic aspect of some of the
important companies of the industry, which are: ABBOTT LABORATORIES
(PAKISTAN) LIMITED Abbott Laboratories (Pakistan) Limited is one of
the largest pharmaceutical companies in Pakistan with sales
revenues of over Rs. 1.0 billion. In 1993, it commanded a market
share of approximately 5.5% and maintained the position in 1994.
The company was established in 1948 and converted to a public
limited company in 1992 with Abbott USA retaining 70% equity. It
has factories in Karachi, Multan & Rawalpindi while head office
in Karachi. The company is also engaged in the manufacture of
general health care products that are well known brands like Mospel
(mosquito repellant), Selsun Shampoo and Fiberand-Digestive. Abbott
is the second largest pharmaceutical company in terms of products
offered (61). It has a strong presence in the vitamins and
antibiotics market, Erythrocin of Abbott is currently ranked as one
of the top ten selling national brands in Pakistan, accounting for
about 16% of the companies sales. With the Pak Consulting &
Engineering (Pvt) Limited of deregulation expected together speed,
there will be positive effect of the sales of the company as the
antibiotics market holds 20.6% share in the total market for
pharmaceutical products. The company has a tradition for launching
new products and new products are expected especially in the
general health care sector that is in the slow price regulation
category. The one negative side is that the company has not made
provisions for a contingent tax liability of Rs. 76 million, while
actually not expected to be fully levied the possibility cannot be
discounted. AsNewport University (USA) ISMS Karachi Campus Page
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a result the share price of Abbott is below its peer group
despite otherwise strong fundamentals. The companys average
compounded growth rate turnover is 20.5%. It has more than doubled
in the last five years, which has made Abbott the market leader in
the last three years. Abbott has no long-term debt and it has
strong relationship with the major local and foreign banks.
Interest cover is currently estimated at 16X as the company is able
to negotiate very low short term borrowing rates (11.7-13.2%) from
banks, due to its strong credit rating in the local market. Gross
profit margin has increased from 19.2% in 1989 to 29.6% in 1993
indicating better pricing policy and impact of price deregulation
in the non-essential drugs segment. In 1993, profit after taxes
increased by 111.8%. The underlying factors were increased volume,
a better product mix and government relaxation of price controls.
The companys dividend policy has become very liberal dividends have
increased from nil to 1989 to 35% in 1993. KNOLL PHARMACEUTICAL
LIMITED Incorporated in 1948 in Pakistan, Knoll pharmaceutical
limited is engaged in the production and marketing of ethical drugs
and health care products. The company is a subsidiary of Boots
company PLC, UK that holds 56% equity. Four investment companies
hold another 22% shares, while the remaining shareholding is shared
between foreign investors, individuals and financial institutions.
The company is a major player in the anti-rheumatics segment with
Brufen and in the throat lozenges segment with Strepsils. Knoll has
a strong hold over the anti-rheumatics segment with brufen as the
market leader having a share of more than 20%. Brufen accounts for
over 40%Newport University (USA) ISMS Karachi Campus Page 45
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and Interpretation of Data
of Boots total sales. Boots is well placed in the throat
lozenges segment with Strepsils as a major seller. The company is
streamlining its operations as evidenced from dis-investment in
fixed assets especially the recent divestiture of its food division
(sold to Heinz). This points towards a much more focused and
dedicated strategy. The company is expected to net about Rs. 160
million from the dale of the food division which it intends to
combine with its huge cash reserves to become one of the top
players in the pharmaceutical market. Our researched has revealed
that Boots is looking for acquisitions in the pharmaceutical and
health care sector. Preliminary discussions with a couple of
companies are reportedly underway. CIBA-GEIGY (PAKISTAN) LIMITED
Ciba-Giegy enters in Pakistan 1951 as one of the earliest in to the
pharmaceutical industry. Ciba-Giegy of Switzerland hold 60% equity
stake with the balance of large stocks being held by long term
institutional investors. Ciba-Geigy manufactures and markets drugs
and medicines. It is ranked as the 15th largest company in
pharmaceutical in Pakistan, based on the sales of its
pharmaceutical products only. 20% of the companys revenue comes
from pharmaceutical products, whereas remaining 80% is derived from
agriculture and other products. In 1988 the commercial trading
division was closed down due to poor performance. Ciba-Giegy has
been struggling in the face of sales an eroding margin due to stiff
competition in the agro-chemical/pesticide segment that accounts
for 7580% of its business. Despite a world class percent,
Ciba-Giegy has not been able to recover from the shock of 1992 when
its profit s were reduced to mere 38% of the previous years figure.
The company showed a pre-tax loss of Rs.Newport University (USA)
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and Interpretation of Data
1.0 Million in 1993 after being hit by crash in gross margins
due to intense competition by unbranded pesticides and rapidly
rising financial charges. CibaGiegy has however taken steps to stem
its slide and is in the process of a major reorganization both at
managements levels as well as marketing. An expected injection of
equity should also allow it to improve its leverage and reduce the
menace of high financial charges. With EPS growth emerging from
negative in 1994 and EPS expected to reach Rs. 3 in 1995 the market
appears to have put the past behind in terms of valuation. However
we feel that for now Ciba is HOLD candidate. After a pre-tax loss
of Rs. 1.0 million in 1993, Ciba-Giegy is taking the necessary
steps to put it on of course of slow but steady recovery. The
massive jump in inventories due to inability to sell in the face of
stiff competition from unbranded pesticides led to very high cost
inventory financing in 1992 and 1993. With better sales in 1994
this is expected to be reduced. The margins, both gross and net,
have continued to remain under tremendous pressure due to the above
factors, but are expected to improve over the next two years. The
current ratio has dropped from 0.99 to 0.93 in 1993 while interest
cover remains precarious at around IX. CYANAMID (PAKISTAN) LTD
Incorporated in 1949, Cyanamid (Pakistan) LTD, is engaged in the
sales and manufacture of pharmaceutical with major emphasis on
antibiotics, antituberculosis and nutritional drugs. The company is
a subsidiary of American Cyanamid Company, USA, which has a 75%
stake in the local market. It was converted into a public limited
company in 1982. The companys major
Newport University (USA) ISMS Karachi Campus
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products include Myambutol & Myrin (anti-tuberculosis),
ledermycin (antibiotic), lederplex & incremin (vitamins).
Cyanamid is the undisputed leader in the tuberculosis segment of
the pharmaceutical industry in Pakistan. With tuberculosis still a
menace in this part of world, Cyanamids strong positioning hopes
well for continued further growth. Additionally, a fairly large
proportion of its sales are accounted for by nutritional which
underwent complete price deregulation late last year. This will
feed through in 1994 accounts leading to massive jump in
profitability. Cyanamid recently acquired the agri-business of
Shell Pakistan in line with its strategy to diversify into related
new fields. The timing is fortuitous as the agriculture sector
(mainly cotton) is just coming out of a deep recession of last
three-year and is bound to grow very rapidly in the coming
two-three years. With growth of 23% in 1993 expected to be repeated
in 1994 and gross profit margins remaining over 25% Cyanamid should
turn in increased profits in next two years. Financial results of
1993 showed a turnaround after dismissal performance in 1992 mainly
due to increase in sales and retail price deregulation by the
government. The highlight of the year was the increase in the after
tax earnings which grew by 533% (Rs. 19 million as against Rs. 3
million in 1992) after showing negative growth in 1991 and 1992.
The 1994 half-year sales were Rs. 285 million versus 1993 half-year
sales of Rs. 231 million. With a full year to half-year ratio of
2.3 the 1993 sales are expected to set a new record. Pre-tax profit
margins are rising sharply and this trend is forecasted to continue
in the near term. Specifically, turnover grew by 22.53% as compared
to 16.3%
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in 1992 and operating income more than doubled to Rs. 59 million
(Rs. 27.3 million in 1992). ROTA and ROCE recovered to 5% and 18%
respectively and are expected to jump sharply in 1994 due to much
higher net margins which are forecasted at 10% versus 3.5% in 1992.
FEROZSONS LABORATORIES LTD One of the smaller players in the
domestic pharmaceutical industry, Ferozsons is still in
consolidation phase after a rough patch in the last two years. The
company is diversifying into cosmetics and toiletries while
actively seeking partners of this party manufacturing in this
segment. Contract manufacture of Vicks Vapor-rub of Procter &
Gamble, is said to have shown substantial growth. Civil works at
the companys cosmetics factory at the tax free Gadoon industrial
estate is almost complete and machinery is reported to have reached
the site. Ferozsons appears to have turned the comer and is on a
growth pats. It is a candidate for selected buying on weakness, for
the long-term pretax profits have shown tremendous improvement of
400% through the absolute quantum is still small. Margins have also
edged up with gross margin rising 4% to 32% and net reaching 7.1%
from 0.8% in the previous period. Interest cover has improved
markedly and the current ration has shown improvement rising to
1.32 versus 1.16 last year indicating the liquidity is not
deteriorating in the short term. The return on capital has jumped
to 24% due to sharp rise in net profit. SEARLE PAKISTAN LIMITED
Newport University (USA) ISMS Karachi Campus
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Searle Pakistan Ltd was established in 1965, incorporated USA
owned 60% shares in the company till year 1992. The UDL group which
itself has an annual turnover of more than 6.0 billion acquired the
controlling shares from G.D. Searle in 1993. The board of directors
comprises of 7 directors, out of which 6 belong to UDL group.
Searle Pakistan Ltd has its plant in Karachi. Its product canderel
and hydrallin enjoy market leadership in their respective market
segment. The acquisition of Searle by UDL has placed the company in
the hands of the largest local distribution company in Pakistan.
The company has disproportional benefit from price deregulation, as
almost 50% of its sales are free from price controls. The
combination of distribution syringes with UDL and potential of
significance rise in margins due to continuing deregulation, Searle
is expected to begin a solid and sustained growth in market share
and profitability. The company has a license to use the name and
style of Searle on its products for five years additionally, it
will have technical and quality control support from the Searle. It
is also engaged in contract manufacturing for ICI, Procter &
Gamble and Woodwards. With this business expected to rise economics
of scale will positively impact gross margins. SPL has set a robust
growth path for the next few years with sales rising at ground 25%
p.a. gross and net margins jumped in 1993 due to price deregulation
allowing the company to attain gross margins of 73%. Continuing
price increases should allow gross margins of 40% to be achieved in
94/95. The companys ROCE has shot up since its acquisition by UDL
in 1993 to 28% from 20% in 1992. With UDLs marketing prowess and
price deregulation ROCE will continue to rise to 35% range in 94
and 95. The company remains in a comfortable position in terms of
debt servicing with an interest cover ofNewport University (USA)
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between 4.8-4.9, despite a rise in long term debt linked to the
take over. SPL is a cash generating company keeping a significance
amount of cash in hand. This bodes well for shareholders whether in
terms of dividend payout or reinvestment in expansion of business
and diversification. PARKE-DAVIS & COMPANY LIMITED Parke-Davis
& Company Ltd is a subsidiary of Parke Davis USA, which has a
75% stake in the local company. The company is involved in the
manufacture and marketing of pharmaceutical and to likely
preparations. Major brands of Parke-Davis are Ponstan,
Chloromycetin and Amodiaquin. The company is major player in the
analgesic & antibiotic segment and ranks amongst the top 15
companies in the pharmaceutical industry. The stellar performance
of Parke-Davis in 1993-94 has set the stage for taking it into big
league for top 10 pharmaceutical, in the next years or so. Already
one of the marketing leaders in the analgesic segment through its
top selling ponstan, Parke-Davis has embarked on a two pronged
growth strategy for the future, the results of which are already
manifest in past two years results. The company is investing
heavily in marketing its globally successful brands in key segments
such as cold & cough medication, anti-inflammatory medicines
etc. At the same time, it is going all out to promote its
non-regulated (in price terms) product ranges. The prices of
Parke-Davis non- regulated products are still comparatively lower
than the prices of some products in neighboring countries. This
will allow the company to increase it margins in every segment
where it is also increasing volume. The double impact will boost
already accelerating profitability further over the next two year.
With a prospective P/E of 9 in 1995 at current share prices (and
forecasted EPS or Rs 38), the companyNewport University (USA) ISMS
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is extremely attractive as growth stock. Since 1993 Parke-Davis
has emerged from a period of consolidation and entered into massive
new growth phase with record sales and high profitability. Sales
growth has consistently risen over the last 5 years from 16% to a
handsome 30%. The company achieved excellent results in 1993 with
pre-tax profits jumping to Rs 84.8 million from Rs 21.9 million in
1992 as evidence of this new chapter in this dynamic evolution.
Gross margin for 1993 was 35.5% (one of the highest in the
industry) as against 21% in 1992. Apart from the sharp rise in
sales strict cost management as evident helped it from an increase
of only 5.64% in cost of sales. Net profits registered a four-fold
increase from Rs. 12.5 million in 1992 to Rs 49.5 million in 1993.
The company transferred 86% of 1993 earnings to general reserves
(Rs 87.5 million in 1993 Vs Rs 45 million in 1992). As a result
shareholders equity increased from Rs 64.8 million to 107.5 million
from 1992-93, hence it can finance future expansion through debt.
EPS in 1993 was a magnificent Rs 25.3 as against Rs 6.5 in 1992.
Net asset value per share also increased to Rs 54 in 1993 from Rs
32.5 in 1992. WYETH LABORATORIES (PAKISTAN) LIMITED Wyeth
laboratories was incorporated in 1961 and started commercial
production in 1963. It is involved in the manufacturer and
marketing of pharmaceutical products. American house products are
the holding company of Wyeth with 70% share holds. Another 26%
shares are held by financial institutions. The company is a major
player in ant-acids (Simeco and Mucaine), anti-biotics and
tranquilizers. Wyeth is the major player in the ant-acids segment,
with a segment market share or 60% its major products being simeco
and mucaine.Newport University (USA) ISMS Karachi Campus Page
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GLAXO-WELLCOME (PAKISTAN) LTD Glaxo Laboratories (Pakistan) Ltd
is a subsidiary of Glaxo group U.K, which has a 70% stake. The
company has facilities in Karachi and Lahore for the manufacture of
pharmaceuticals and food products. Its head office is located in
Karachi. The ranked third in the pharmaceutical industry in terms
of share volume and first in terms of market capitalization as per
1993 figures. The major brand of Glaxo is Zantac (anti-ulcer)
Caponex (anti-biotic) and Betnovate (dermatological). DRUGS
DISTRIBUTION The distribution of drugs and medicines in the country
may be undertaken in any of the following ways: Through
stockiest/wholesalers Through national distributors Through company
owed depots Under the first system, the stockiest are appointed in
smaller areas like Nawabshah and Mirpurkhas etc, so that each
covers a limited region. Stockiest perform simple functions and
usually do not undertake sales promotion activities (these are
handled by the manufactures staff). Stockiest employ salesdelivery
men to cover upcountry regions. Large stockiest who handles a
number of accounts may indulge in direct delivery system where spot
order/delivery can be made immediately. The terms between stockiest
and the retailer as well as between the stockiest and the
manufacture varies dependingNewport University (USA) ISMS Karachi
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upon the type of product, terms of contact, and the goodwill
that each party enjoys. Pfizer and Wellcome use the stockiest
system for the distribution of their output. The distribution
through company owned depots is normally used by the large
manufactures with high turnovers and long product lines. The depots
are scattered all over the country and allow the manufacture
greater control, as well as direct feedback from the market. The
bigger cities have more than one depot. This method is based on the
mechanism of the optimum cost of distribution. Direct distribution
results in cost savings as the purchase complaints can be
efficiently handled. Under the national distribution system, a
national distributor acquires the stock from the manufacture
warehouse. The distributor works through salesmen who deal with
orders and use various incentive schemes and productivity plans to
motivate the field staff. GOVERNMENT REGULATIONS In 1972, the Drug
Generic Act was introduced. After this the Drug Act was introduced
in 1976. It gave the government to control the prices of drugs.
Under this act, the manufacture, sale, distribution and the profits
of the pharma industry were totally regulated by the government. A
drug-manufacturing license was granted for a limited period of two
years. All selling prices of the drugs were to be fixed by the
Ministry of Health. The formula for calculating the price of
finished imported medicines, as mentioned before, was cost plus 40%
mark-up. In addition tom the formula, the prices fixed for imported
medicines were automatically revised on July 5th of each year to
allow for theNewport University (USA) ISMS Karachi Campus Page
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exchange rate fluctuations. Prices of local drugs were
determined on a prime cost plus mark-up basis. All manufactures had
to comply with the Good Manufacturing practices and other
requirements of the Drug Rules of 1976. In 1977 the import of
unregistered drugs was banned. This law was followed by the Drugs
Rule of 1979. In 1989, the Drugs Labeling and Packing Rules were
reinforced. This made it compulsory for the Pharma companies to
print the date of manufacture and the date of expiry of all
medicines. In 1993, the Economic Co-ordination Committee divided
drugs into two categories. The prices of drugs under controlled
category were not allowed to be changed at the discretion of
manufacturer. Exemption on the import of raw materials, for the
manufacture of pharma products had been extended to all drugs
registered under the Drugs Act. Protection had been extended to the
local infusion solution and in fusion administering sets
manufacturing industry through levy of regulatory duty on the
imported substitutes. Exemption from customs duty and sales tax had
been granted on plant and machinery, which were imported for the
establishment of the approved projects for manufacture of Pharma
raw materials. This excluded locally manufactured machinery. The
Pharma industry was included in the list of key industries under
the industrial policy. No new Pharma unit could be set up and
license to manufacture drugs without the approval of the EEC/CIPS
depending on theNewport University (USA) ISMS Karachi Campus Page
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cost the project. The standard rate of royalty was kept at 2%
for a period of three to five years. In March 1995, the Senate
Standing committee on health made some important recommendations to
the government with reference to the Pharma industry. The important
recommendations are as follows: The government should not allow the
Pharma companies the annual increase in the prices of essential
drugs keeping in mind the recent price hikes. Effective deterrent
legislation should be introduced to check the prices of drugs
especially in the controlled category. Protection given through
patents should be limited to those products that do not affect the
public interest and the import of non-patented/generic drug should
be promoted. Tax and tariff reforms suggested encouraging local
production of basic raw material. Local prices should be set in
comparison with those reigning with in neighboring countries. In
May 1995, the Board of Investment announced a package of incentives
for the Pharma industry. It is expected that as a direct result of
this package the local production costs will fall by about 50%. The
main features of the package are:Newport University (USA) ISMS
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Duty free imports of raw materials to boost the local drugs
manufacturing industry. Reduction of imports duty on plant and
equipment to 10%. Tariff protection to local manufacturers against
the import of raw materials being produced locally. Exemption of
the Pharma industry from sales tax. Revision of the debt to equity
ratio from 60:40 to 70:30.
In addition to the above mentioned regulations, the Pharma
industry operates under the following rules: All Pharma products
must be registered with the ministry of health. Manufacturers and
retail pharmacies must be licensed and doctors must be registered
with the Pakistan Medical Council. Pharmacists are not allowed to
sell products from unlicensed manufacturers. In addition a special
license is required to sell narcotics and controlled drugs.
Prescriptions for narcotics must include the prescribing doctors
registration number.Newport University (USA) ISMS Karachi Campus
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Only products listed in the National Formulary (list of drugs,
which may be manufactured, imported or sold in Pakistan) may be
imported. Some locally manufactured drugs included in the formulary
may not be imported. At least 5% of profits of Pharma companies
must be invested in R & D. Prices have to be set in accordance
with the guidelines provided by the government. The following
informations must be included on the package and insertion:
Manufacturers name and address, generic name, ingredients, dosage,
warnings, indications, contraindications, side effects and
precautions. No more than 5% of a companys turnover may be spent on
advertising, sampling and other promotional activities.
Prescription Pharmaceuticals may be advertised in medical journals
only. Advertising to non-prescription drugs is allowed if necessary
information, precautions and prohibited use for certain diseases is
made. If a product is found to be defective the manufacturer is
bound to recall it.
PROS AND CONS OF THE INDUSTRY The Pakistani Pharma industry has
been undergoing a great deal of criticism and is probably a victim
of misinformation. The defamatory remarks, accusing the
manufacturers of marketing and selling the medicines at very high
pricesNewport University (USA) ISMS Karachi Campus Page 58
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were made in certain sections of the press. Though this
allegation has no concrete basis, as the Pharma Industry is highly
regulated, suspicious do come to mind. Moreover, much has been said
accusing the industry of producing low quality drugs and catering
to a monopoly. These remarks can do a lot of harm to the industry
and measures should be taken to keep the industry from earning a
bad name. The salient features of the industry are as follows: 1.
It is imperative for the government and the concerned authorities
to realize that there should be no discrimination between national
multinational companies, and there should be an immediate
withdrawal of the decisions of the registration board on this
subject. 2. The matter of transfer pricing has been grossly over-
emphasized and over criticized for years. A recent study was done
by the ministry of health to investigate the so-called transfer
pricing by determining the differences in prices of the imported
raw materials and the average international prices. A detailed
research showed that the much trumpeted transfer pricing was only
about 0.0038% of the total sales volume. Hence the concept of
transfer pricing in the Pakistani Pharma industry is virtually
non-existent and grossly exaggerated. 3. Prices in new products
should be similar to those of existing products. The registration
board comprises of many medical and technical experts, who after
careful scrutiny and analysis price the product. The analysis of
each case is on merit and takes into account several factors before
pricing the new product. This process has been effective but the
multinationals can quote a lot of cases when the board has
initially
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granted the retail price and then has offered a lower price for
the new product. 4. Today it takes about $359 million and about 12
years of research for a research based multinational company to
develop a new drug. The notion is that large MNCs capture markets
by virtue of patents. Any leading position is obtained on the basis
of research and development efforts or medical information. The
allegation pertaining to the use of patents as a tool of market
supremacy is usually made in developing countries, and a suggested
remedy is to abolish these patents. But this allegation is entirely
baseless. As mentioned above R & D helps the company achieves a
leading role, as these companies are responsible for Pharma
innovation. They are known worldwide for their high quality
products which results in their high market share. The patents are
used only to protect their research work; otherwise the companies
would not be able to finance its R & D due to fear of piracy.
Hence such notions against the patent systems prevalent in some
segments of our industry are baseless. 5. Since the partial
deregulation of the Pharma industry in 1993, the greatest
beneficiaries have been the national companies. It can be certified
for all 32 MNCs that the prices of controlled products increased by
only 5%, where those of decontrolled products increased by 24%. In
June 1993 all the companies had the opportunity to increase their
retail prices to whatever level they desired. The national
companies had the unique opportunity of increasing their prices up
to the level of the prices of MNCs products. Hence there does not
exist any disparity.
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6. The open tender method is probably the most efficient,
economical and fair bulk purchasing policy used worldwide. In this
system all the companies compete for the business. The Federal
government and the Provincial government buying agencies follow the
open tender method and are able to purchase quality medicines at
low prices. In fact, the government agencies often indulge in
intensive price negotiations and orders are finally placed upon the
component ones. 7. It is wrong and improper to say that
multinationals should be allowed to produce only a few products, as
is often proposed by local manufactures. This practice is against
international laws equitable business practices. 8. Some of the
drugs have to be imported and are not manufacture locally. There
are basically two reasons for this fact. One is that some of these
drugs are highly specialized and cannot manufactured locally.
Secondly, the demand for such drugs is so small that local
manufacturing will not be feasible. 9. Despite the hurdles in the
manufacturing of chemicals, Pharma MNCs are moving into basic and
semi-basic manufacturing. Glaxo is producing most of its major
active chemicals locally. Wellcome has set up a huge trimethoprim
facility. Hoechst, Cyanamid and Sandoz are also in the field.
Beecham is also manufacturing some of its basic chemicals. One
local company - Pharmagen Beximco has recently entered into basic
manufacturing.
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10.To save foreign currency and promote the transfer of
technology, the government has provided for total basic manufacture
of products. These include imported plant and machinery exempted
from customs duty and the refund of duty paid on imported process
chemicals. 11.The decontrols of nonessential drugs is a potential
boom to the industry and could prove to be a gold mine for those
companies heavily engaged in the manufacture of such products. The
authorities had hinted that the price of the so called decontrolled
drugs would be re-decontrolled after 30 June 1995, and that
controlled drugs will be allowed another price rise of 7.5% to 10%
towards the end of this year based on a new pricing formula which
adjusted for devaluation and inflation.
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