Otsuka Pakistan Limited

Otsuka Pakistan Limited (PSX: OTSU) was incorporated in Pakistan as a public limited company in 1988. The principal activity of the company is the manufacturing, marketing and distribution of intravenous infusions besides trading in pharmaceutical products, medical equipment and nutritional foods. OTSU is an indirect subsidiary of Otsuka Pharmaceutical Company Limited, Japan.

Pattern of Shareholding

As of June 30, 2022, OTSU has a total of 12.1 million shares outstanding which are held by 824 shareholders. Associated companies, undertakings and related parties are the largest shareholders of OTSU holding 67.89 percent of its outstanding shares. This category is followed by local general public having a stake of 17.24 percent in the company. Directors, CEO, their spouse and minor children account for around 3.3 percent of OTSU’s shares. The remaining shares are held by other categories of shareholders.

Historical Performance (2018-22)

OTSU’s topline has been posting growth since 2018; however, its bottomline dipped twice i.e. in 2019 and 2022 during the five year span. In 2019, the bottomline ended up in the red zone and posted a net loss. Conversely, in 2022, the bottomline managed to post net profits despite considerable decline. The margins of the company plunged in 2019 and then rode an upward trajectory in the next two years but lost their footing in 2022. The detailed performance review of each of the years under consideration is given below.

In 2019, OTSU’s topline grew by 1 percent year-on-year as the year was difficult due to adverse economic conditions, high discount rate and depreciation of local currency. This also put OTSU under extreme pressure as it depends on imported raw materials. The IV infusion market saw demand- supply disparity due to lackluster demand. The company had an installed capacity of 30.8 million bottles of IV solutions and 14.5 million bottles of plastic ampoules in 2019. However, due to oversupply condition in the market, the company only utilized 66 percent and 72 percent of IV solutions and plastic ampoules capacity respectively in 2019. 15 percent high cost of production due to Pak Rupee depreciation squeezed the gross profit by 30 percent year-on-year in 2019, culminating into a GP margin of 21 percent versus 30.5 percent in 2018. Distribution expense grew by 10 percent year-on-year in 2019 due to higher payroll expense on account of high inflation coupled with increased advertisement, samples and promotion expense as the company launched two new products in the IV segment namely Otsuzol (Metronidazole) and Otsumol (Paracetamol) and one new product in the medical equipment segment i.e. Otsuka Urea Breath Test System (UBIT) in 2019. Administrative expense inched up by 5 percent year-on-year in 2019 despite the fact that employee headcount shrank from 395 in 2018 to 388 in 2019 due to lower capacity utilization of its plants. Other income provided much needed support to the bottomline as it rose by 23 percent year-on-year in 2019 due to reversal of provisions against doubtful trade debts, late payment surcharge from Hospital Supply Corporation and higher scrap sales made during the year. What proved to be of utmost concern for Otsuka in 2019 and pushed the company in losses was a 100 percent year-on-year rise in other expense on the back of massive exchange loss. This resulted in an operating loss of Rs.127.74 million in 2019 versus an operating profit of Rs.176.53 million in 2018. Finance cost further fueled the fire as it jumped up by 71 percent year-on-year in 2019 on account of higher discount rate coupled with increased short-term borrowings. While the borrowings from related parties increased in value due to Pak Rupee depreciation, the contraction in OTSU’s equity due to accumulated losses further did the trick and drove its gearing ratio up from 81.57 percent in 2018 to 97.97 percent in 2019. OSTU posted a net loss of Rs.175.35 million in 2019 versus a net profit of Rs.65.31 million in 2018. The company posted a loss per share of Rs.14.49 in 2019 versus an EPS of Rs.5.40 in 2018.

While the outbreak of COVID-19 in 2020 proved to be a bane for the economy in general, pharmaceutical companies made the most of this time to widen their sales and boost their profitability and margins. OTSU’s sales posted an 18 percent year-on-year rise in 2020 which came on the back of higher demand of clinical nutrient products. OTSU’s capacity utilization increased to 72.4 percent and 83.4 percent in the IV solutions and Plastic Ampoules segment respectively in 2020. The cost of sales grew by 9 percent year-on-year in 2020 due to relatively better value of local currency. This translated into a 51 percent year-on-year rise in OTSU’s gross profit with GP margin growing to 27 percent in 2020. Distribution expense and administrative expense grew by 4 percent and 7 percent respectively on account of higher payroll expense as well as higher outward freight and handling expense. During 2019, company’s net sales to Afghanistan grew from 0.4 percent of its sales to 3.23 percent of its sales which resulted in higher freight charges. Moreover, the number of employees grew to 393 in 2020 to meet additional demand. These two factors were the major contributors of an increase in operating expense in 2020. Other income grew on the back of late payment surcharge from Hospital Supply Corporation. Other expense also slid by 56 percent year-on-year in 2020 on account of considerably lower exchange loss incurred in 2020. OTSU was able to post an operating profit of Rs.180.27 million in 2020 with an OP margin of 8 percent. Finance cost grew by 10 percent in 2020 despite a plunge in short-term borrowings as discount rate was higher for the first three quarters of 2020. Due to lesser accumulated losses, OTSU’s gearing ratio also ticked down to 89.57 percent in 2020. OTSU posted a net profit of Rs.91.07 million in 2020 with an NP margin of 4.1 percent. EPS clocked in at Rs.7.53 in 2020.

OTSU’s topline multiplied by 14 percent year-on-year in 2021 primarily on the back of sales of clinical nutritional products. With the eruption of COVID-19, the medical devices business came under pressure but the company adeptly altered its sales mix to include clinical nutritional products to optimize its sales volume and earn better margins. During 2021, the company produced 20.3 million bottles of IV solution and 14.6 million bottles of Plastic ampoules, resulting in the capacity utilization of 64.6 percent and 69.5 percent respectively. During the year, the company also increased its production capacity to 31.4 million bottles of IV solutions and 21 million bottles of plastic ampoules as against 20.3 million bottles and 14.6 million bottles respectively in 2020. Cost of sales grew by 5 percent year-on-year in 2021 as the year ended with stronger Pak Rupee coupled with cost optimization measures put in place by the company. Gross profit surged by 41 percent year-on-year in 2021 with GP margin climbing up to 33.2 percent – the highest among all the years under consideration. Distribution and administrative expense rose by 4 percent and 9 percent respectively in 2021 due to higher payroll expense and outward freight and handling charges. During the year, the company also introduced a new product OTSUFLOX (Ciprofloxacin) in 2021. Other income grew by a massive 134 percent in 2021 on the back of hefty exchange gain earned during the year due to favorable exchange rates. Other expense plummeted by 21 percent year-on-year in 2021 as there were no exchange losses and provision against doubtful debts. Operating profit grew by 171 percent in 2021 with OP margin climbing up to 19.2 percent. Finance cost slid by 74 percent year-on-year in 2021 due to lower discount rate coupled with lesser outstanding borrowings as the company settled its short-term running finance during the year. Due to tremendous profits earned, the company’s equity grew up translating into a gearing ratio of 41.85 percent, less than half of the gearing ratio reported by the company in the previous year. Net profit grew by 324 percent year-on-year in 2021 with NP margin of 15.2 percent. EPS also staggeringly increased to clock in at Rs.31.93 in 2021.

2021 brought another 12 percent growth in OSTU’s topline as a result of streamlined sales mix. Clinical nutrition products drove sales in 2022 while medical equipment segment continued to stay under pressure. The capacity utilization of IV solutions grew to 70 percent in 2022 while plastic ampoules segment posted a reduced capacity utilization of 47 percent. Double digit inflation, depreciation of Pak Rupee and high energy charges pushed the cost of sales up by 13 percent in 2022. Gross profit inched up by 10 percent year-on-year in 2022 with GP margin marginally dipping to 32.5 percent. Higher freight charges, advertisement and promotional expense coupled with increased payroll expense resulted in a 25 percent year-on-year hike in distribution expense in 2022. Administrative expense also rose by 32 percent year-on-year in 2022 despite a downtick in the number of employees from 375 in 2021 to 373 in 2022. This was the effect of unprecedented level of inflation and the related rise in salaries and wages. Other income tumbled by 44 percent year-on-year in 2022 due to no exchange gain made in 2022. Conversely, other expense grew by 61 percent year-on-year on account of exchange losses. Operating profit slumped by 24 percent year-on-year in 2022 with OP margin slipping to 13 percent. Finance cost continued its downward journey despite high discount rate as the company paid off its long-term loans. Short-term loans slightly increased in 2022 but most of them are obtained from related parties at subsidized rates. The gearing ratio further tapered off to 38.36 percent in 2022 as equity grew due to profits earned over the years. Net profit shrank by 40 percent in 2022 to clock in at Rs.231.80 million with an NP margin of 8.1 percent. EPS slipped to Rs.19.16 in 2022.

Recent Performance (9MFY23)

OTSU’s topline posted a decent 12 percent year-on-year growth in 9MFY23. However, cost of sales posted a severe 32 percent rise on account of unfavorable exchange rate, high indigenous inflation and rise in energy prices. Gross profit dampened by 26 percent year-on-year in 9MFY23 with GP margin sliding down to 23 percent from 34.4 percent during the same period last year. Distribution and administrative expense magnified by 7 percent and 5 percent respectively in 9MFY23. Other income surged by 160 percent year-on-year in 9MFY23 due to gain on disposal of fixed assets and increase in scrap sales during the period. Other expense, however, nullified the impact of growth in other income. Other expense rose by 202 percent in 9MFY23 due to heavy exchange losses on account of weaker Pak Rupee. OTSU made an operating loss of Rs.7.34 million in 9MFY23 versus an operating profit of Rs.324.19 million in 9MFY22. Finance cost posted a steep rise of 948 percent in 9MFY23.due to an upsurge in discount rate coupled with increased borrowings for the renovation of its operational facility. The company also made its nutraceutical unit operational during 9MFY23 with the first product ORTIE (ORS) expected to be launched in the 4QFY23. OTSU posted a net loss of Rs.68.14 million in 9MFY23 versus a net profit of Rs.204.01 million during the same period last year. The company posted a loss per share of Rs.5.63 in 9MFY23 versus an EPS of Rs.16.86 in 9MFY22.

Future Outlook

While the company is expected to make reasonable revenue growth on the back of relentless demand of pharmaceutical products, high cost of sales, weaker local currency and high finance cost might put a dent on its profitability and margins.

With the easing of import restrictions and a short-term positive movement seen in the value of local currency, the company can stock up on its inventory to protect its bottomline against massive exchange losses. However, even if the company manages to do so, the margins may remain stressed as discount rate, energy prices and inflation are giving no respite.