Rizwan Ahmad Sheikh is the CEO of Citi Pharma Ltd. He is one of the leading figures in the pharmaceutical sector of the country and is recognized among the top thought leaders, entrepreneurs. He is recognized as one of the most eminent pharmacists in Pakistan. Until recently he was a Member Board of Management, Pakistan Drugs Testing and Research Center. He was also a member of the Expert Panel (Ministry of Health, Pakistan) for inspection of bioequivalence centers.

BR Research recently sat down with Rizwan and discussed matters surrounding the API industry, and the expansion plans of Citi Pharma and the upcoming IPO. Following in an edited excerpt of the conversation:

BR Research:To start things off, could you please give a brief rundown on how Citi Pharma came into being and how has the journey been up to this point?

Rizwan Ahmed: Pharmaceutical industry is a stable and growing industry, with an average 15 percent annual growth in the past few years, for a variety of reasons. Citi Pharma ventured into the sector back in 2012, when the opportunity arose to acquire this plant. This plant was well laid out and ideal for expansion to achieve critical mass required to run an API production unit plus it had ample space available to set up formulation facilities. Over the course of time, we have expanded our operations to seven plants, which are producing various kinds of Active Pharmaceutical Ingredients (APIs), used by a number of leading drugmakers in Pakistan.

BRR:Does the Drug Pricing Policy also apply to the API industry in terms of the linkage with CPI?

RA: The API pricing is linked directly with the international market, and we are free to buy at any price to fulfil the country’s demand. Both are primary buying markets and the market that we sell to are both open. However, the Drug Pricing Policy restricts the Formulations sector and hence an indirect control is exercised. Usually, we fix the API prices for three months in order to mitigate the exchange rate riskif there is any excessive exchange rate volatility.Secondly, if the international prices move up, that also gets incorporated into our contracts with the buyers within a quarter. To sum it up, API prices are not directly controlled by the Drug Regulatory Authority of Pakistan (DRAP).

BRR: The pharmaceutical industry had been complaining about the price control, where drug prices stayed unchanged for a long stretch of time. Now that the pharma industry’s prices are linked with the changes in CPI, how does the mechanism work in cases where API prices, which are deregulated shoot higher than CPI?

RA:There is a phenomenon called “hardship cases” in the pharmaceutical industry;the drugs falling under that category do get price gain under a certain formula. The hardship cases are reviewed annually by the relevant committee. The input cost of API in almost 95 percent of locally manufactured drugs is less than 20 percent. At times there is a lot of hype created in the market despite APIs being no more than 20 percent of the overall cost.

At the end of day, all pharmaceutical companies operating in the country also have a duty to earn money. Like any other business, it is not possible for a drugmaker to manufacture a drug that does not make profits.

BRR: How price sensitive is the market. For instance, if the API prices go up considerably, and the pharma industry does not get the required increase, how much that effects the drug production?

RA:It is not that big an issue as the variation does not exceed 10-20 percent, with linkages to petroleum and freight rates. In my experience since 2012, things have by and large stayed under control, with Covid related disruptions skyrocketing the freight cost being an exception.

BRR: What percentage of the API requirements of Pakistan is Citi Pharma catering to?

RA: The total size of the API market in Pakistan is around Rs100 billion, of which our share is around 5-6 percent. Most of APIs are imported from China and other parts of the world.

BRR: How stiff is the competition in the API industry among local producers even if a large portion remains imported?

RA:There are a total of twelve API manufacturers operating in Pakistan, and only one other player matches our size, while all others are smaller.

BRR: Paracetamol is your leading product category, where your latest capacity utilization stood at 86 percent. Your IPO prospectus puts the reason down to increased demand due to the ongoing pandemic. You plan to expand your paracetamol unit by two-thirds of the current capacity. What are the factors behind your projection of Paracetamol demand going forward because the pandemic will be over in the longer run?

RA:Firstly, installed capacity should not be confused with optimal output, as it always remains 10-12 percent lower. So, at 86 percent, I can say that our plant is operating at near full utilization. The second part of your question that pertains to demand needs be viewed in the context that currently CPL is catering to 40-45 percent of the local Paracetamol API needs. The other half continues to get imported, which attracts import duty, thereby making our product more in demand.

Furthermore, in terms of volume, we are the biggest Paracetamol API producers in the country.With 3,600 metric tons per month, our tonnage is bigger than the combined production by all other players in Pakistan. In terms of value, Paracetamol is obviously a low-price product, which is where other product lines come into play with higher margins.

BRR: Your biggest buyer for Paracetamol is GSK. When your capacity expands as per plans listed in the IPO prospectus, will it all be catering to GSK’s needs,or will your reliance be lowered on GSK going forward?

RA:Paracetamol is a registered product with over 400 pharmaceutical companies in Pakistan and there are several whom we are not catering at the moment. Paracetamol is primarily used as Panadol in Pakistan, but gradually more and more new variants have made their way up around the world. In Pakistan alone, there are currently four combinations of Paracetamol, and others are in the plans.

In the next five years, we foresee more combinations of Paracetamol entering the Pakistan market, which partly explains our increased demand projection. Secondly, the existing demand is already there, as nearly half of the Paracetamol API gets imported, which justifies our decision to go for the aggressive expansion of the Paracetamol unit.

BRR: Given that nearly half of your topline is driven from one big pharmaceutical company, do you see it is a considerable risk, especially given the history of MNCs exiting from Pakistan?

RA:We actually see this is a positive for us, as partnering with a major MNC leads to continued improvement in the processes and quality controls. Secondly, even the MNCs that had exit had been bought by local players, which means their production is still there, and we continue to supply them.This is where our plan to achieve a critical mass in paracetamol before expanding to other APIs has played a key part in our growth.

BRR: Do you have export plans in the near future?

RA: We do get export orders, but due to capacity constraints, our focus has largely been on serving the local market. Once we have surplus capacity, we are very hopeful of exporting our products, because with economies of scale, it will also bring our costs down to competitive levels, which is a key factor in export market.

BRR: Given that nearly half of the IPO proceeds are aimed at hospital, what expertise does the company have in terms of hospital management? How did the idea come through? Will the hospital be a high-end first tier facility in terms of pricing and affordability?

RA:There are numerous examples around the world where companies started as API manufactures, and gradually transformed to intermediates, formulation, and then prescription. We have taken inspiration from success stories in China as we had our headquarters in Hong Kong and closely interacted with Chinese companies. One such company which is very popular here nowadays is Weiqeda Sinopharm – the makers of COVID vaccine.

We decided to enter the hospital business back in 2017 and bought a property for that purpose. It is not an afterthought that has come because of the IPO. There is huge demand in Lahore city as currently, there are not enough hospitals in the city that is growing rapidly. Furthermore, the last proper hospital established by the Government was established some 30 years back. Our hospital will be located in a posh area of Lahore, catering to the first tier.Citi’s will initially be a primary care hospital, where the revenue churner departments are being launched first.

BRR: In terms of revenue, will it be a bigger chunk of your revenue mix five years into operation?

RA: We foresee ourselves primarily as a leading API manufacturer of the country and that will remain our flagship. Our revenue projection for hospital by 2025 is around 10 percent.

BRR: Why should people subscribe to the IPO, if you could tell in brief terms, laying out your key positioning elements?

RA:We are going to be the first company since 2017 from the pharmaceutical sector that is going for listing, and only the second in 30 years. We are offering four things to our shareholders. Number one is a highly impressive sales growth that has been consistently over 20 percent for a number of years.

Secondly, we do not believe in using debt financing too much and Citi is currently not a highly leveraged company, with minimal portion of debt in our balance sheet and consistently positive cash flows. Current debt of the company stands at 17 percent only.

Third factor is the diversified portfolio, as we are venturing into API, formulation, and hospital segments.

Lastly, our projected Return on Equity is 20 percent in the next three years, which should excite investors.