Ferozsons Laboratories Limited

Ferozsons Laboratories Limited (PSX: FEROZ) was established in 1956, being one of the first pharmaceutical manufacturing companies of Pakistan. Four years later in 1960, it converted into a public limited company and was listed on the stock exchange.

Some of the clients for the company are the United Nations, Federal Supply Services among other international relief agencies while it also exports to countries such as Australia, Hong Kong, Singapore, Turkey, etc.

Shareholding pattern

Ferozsons Laboratories is largely held by its associated companies, undertakings and related parties with a little over 27 percent shares held under this category that solely includes the KFW Factors (Private) Limited. Close to 11 percent shares are owned by the directors, CEO, their spouses and minor children; some 43 percent shares are amongst the local general public while the remaining 19 percent are distributed with the rest of the categories.

Historical operational performance

Although Ferozsons Laboratories topline for almost a decade has been rising except for in FY17, its profit margins have been sliding since FY16, reaching the lowest in FY18, before improving again for the next two years.

During FY16, the company’s topline more than doubled to cross Rs10 billion. This was due to a large contribution by “portfolio of imported products, particularly Hepatitis C franchise under license from Gilead Sciences”. However, this did not translate into a higher gross margin as cost of production stood at nearly 60 percent of the revenue, as compared to last year’s 54 percent. The increase was due to a 34 percent increase in salaries expense, whereas the imported products also had lower unit margins. Despite the fall in gross margins, net margin improved due to a collective decrease in operating expenses as a percentage of revenue. Thus, Ferozsons posted a net margin of close to 21 percent, up from previous year’s almost 17 percent.

In FY17, the company’s topline reduced to its historically normal level of near Rs4 billion. Due to previous year’s more than normal topline level, the rate of change was exorbitant at a negative 58 percent. The reason for this decline was the decline in imported products particularly Hepatitis C franchise. Apart from this, the sales of other products registered an 11 percent increase. Gross margin increased marginally due to a negligible decline in cost of production to 59 percent of the revenue. However, net margin reduced drastically to 9 percent due to a major increase in operating expenses as a share in revenue. Moreover, during the year, especially in the last quarter the company also had to make a provision for slow moving stock for around Rs140 million that also affected profitability. Furthermore, the introduction of cheaper brands of Sofosbuvir, whether they were licensed or not also impacted the sales of one of the company’s product.

Ferozsons Laboratories is also present in the international market. During FY18, it added more countries to its export destinations, such as Ghana and Uzbekistan. However, its sales revenue increased marginally by a little over 2 percent. Sales revenue was brought down due to decline in sales of imported line of products, mainly the drug used for the treatment of Hepatitis C. Apart from this portfolio, the company’s sales increased by 20 percent. However, net margin declined to its lowest level to 2 percent. This was due to a decrease in sales of imported products and an increase in cost of production to its highest level seen in almost a decade, at 66 percent. The increase was a result of increase in fuel expenses and currency devaluation.

Ferozsons Laboratories registered a little over 17 percent growth in its topline in FY19. Apart from the product portfolio that’s imported, the company’s sales of the rest of the products grew by 25 percent. However, the sales made to institutions declined due to a reduction in public sector health procurement. Most of these institutional orders are with regards to Hepatitis C product. Cost of production for the company reduced to 60 percent of the revenue allowing gross margin to grow to 39 percent.

Another reason for improvement in gross margin was also the “lesser diminution in net realizable value of stock” of one of its products as compared to previous year. Other expenses and distribution expenses saw a rise due to exchange loss and field force and branding expenses, respectively. However, net margin still grew as other income from commission income and gain on sale of property, plant and equipment also contributed to the bottomline. Thus, the net margin increased to almost 5 percent.

Recent results and future outlook

Topline growth in FY20 was a little subdued at 4 percent in comparison to the double-digit growth seen last year. Market sales grew by 11 percent while sales to institutions declined by a whopping 40 percent since the provincial governments’ have diverted their health budgets towards relief packages for Covid-19 affectees. While a lot of the companies saw the last quarter of FY20 being affected the most, operating in the pharmaceutical industry, Ferozsons sales for the last quarter of FY20 remained roughly the same. Rather the profit margins improved since due to the lockdown, field force activities and hence the expenses related to it reduced. Thus, net margin improved to a little over 7 percent.

The pharmaceutical industry, as a whole, was adversely impacted due to closure of out patient departments and private clinics in addition to reduced footfall in pharmacies. In anticipation of a possible second wave, the company is also diversifying its supply chain to cope with uncertainties.