The Searle Company Limited

The Searle Company Limited (PSX: SEARL) was incorporated in Pakistan as a private limited company in 1965 and was later converted into a public limited company. The principal activity of the company is the manufacturing and sale of pharmaceutical, consumer health, and nutritional products. SEARLE is a subsidiary of International Brands (Private) Limited.

Pattern of Shareholding

As of June 30, 2023, SEARL has a total of 390.066 million shares outstanding which are held by 17,470 shareholders. International Brands (Private) Limited is the parent company of SEARL and holds 52.89 percent of its total outstanding shares. It is followed by the local general public having a stake of 22.02 percent in the company. Joint stock companies account for 6.74 percent shares of SEARL while Banks, DFIs, and NBFIs hold 4.87 percent shares. Around 3.34 percent of the company’s shares are held by Modarabas & Mutual funds and 3 percent by Trusts & Funds. The foreign general public and foreign companies hold 2.17 percent and 2.09 percent shares of SEARLE respectively. Insurance companies also have a 2.09 percent stake in SEARLE. The remaining around 1 percent shares are held by Directors, CEOs, their spouses, and minor children as well as associated companies.

Historical Performance (2019-23)

SEARL’s topline has been inching up in all the years under consideration, yet its bottom line has been shrinking since 2018. The margins assumed their peak in 2020 and 2021 during the outbreak of COVID-19 and then subsided in the subsequent years. The detailed performance review of the period under consideration is given below.

In 2019, SEARL’s topline touted 14.69 percent year-on-year growth which came on the back of strengthened demand, rich product mix, and stringent branding efforts. As the local pharmaceutical industry heavily relied on the imports of active pharmaceutical ingredients (API), local currency depreciation resulted in a 16.74 percent year-on-year surge in the cost of sales. This pushed the GP margin down from 35 percent in 2018 to 33.85 percent in 2019. Distribution expenses went up by 17.43 percent year-on-year in 2019 on the back of a rise in salaries and wages coupled with extensive advertising and promotion, sample expenses, etc. Administrative expenses largely remained in check during 2019. SEARL booked lesser provisioning for WWF and WPPF which pushed other expenses down by 13.36 percent year-on-year in 2019. Other income slightly dwindled due to lesser dividend income from subsidiary companies. All these factors contributed to a 5.23 percent year-on-year slide in operating profit during 2019 which culminated in an OP margin of 22.41 percent as against 27.13 percent in the previous year. To further weaken the bottom line, finance costs amplified by a massive 108.89 percent year-on-year in 2019 which was the result of a rate hike coupled with increased short-term borrowings during the year. Exchange loss also contributed a great deal to driving the finance cost up in 2019. Consequently, the bottom line slumped by 13.36 percent year-on-year to clock in at Rs.2641.95 million in 2019 with an NP margin of 18.17 percent as against 24 percent in 2018. EPS also dropped from Rs.14.35 in 2018 to Rs.12.44 in 2019.

In 2020, SEARL’s revenue grew by 13.96 percent year-on-year. While many other businesses suffered due to COVID-19 and the associated measures and restrictions imposed by the government to contain the disease, the novel virus proved to be a boon for the pharmaceutical sector and harnessed its integration among the masses. Pakistan’s pharmaceutical sector’s sales grew by 13.23 percent during the year. Besides, volumetric growth, the Drug Regulatory Authority of Pakistan (DRAP) pricing policy which was linked to CPI also produced a positive impact on the revenue of SEARL and its counterparts. SEARL enjoyed a market share of 6.5 percent in 2020 as against 5.3 percent during the last year. Cost of sales went down by 13.74 percent year-on-year as the company discontinued toll manufacturing services from its subsidiary Searle Pharmaceuticals (Private) Limited. This reduced its processing charges by a manifold. The result was a 68.12 percent year-on-year surge in gross profit, driving the GP margin up to 49.93 percent in 2020. Distribution expenses grew by a marginal 1.72 percent year-on-year in 2020 as SEARL considerably trimmed its advertising and promotion budget, sample expenses as well as traveling expenses due to restrictions on the movement of people and goods on account of COVID-19. Administrative expenses ticked up by 18.97 percent year-on-year during 2020 owing to a hike in salaries and wages, corporate services charged by the holding company as well as generous donations and charities given during the year. Other expenses posted a humungous 70.17 percent year-on-year rise on the back of higher provisioning for WPPF, WWF, and the Central Research Fund (CRF). Other income shrank by 74.83 percent year-on-year as SEARL received lesser dividends from subsidiary companies. The major impact was created by Searle Pharmaceutical (Private) Limited which had a lion’s share in last year’s other income pie, however, it didn’t pay any dividends in 2020. Operating profit magnified by 21.11 percent year-on-year in 2020 with OP margin clocking in at 23.82 percent. Finance cost grew by 49.87 percent year-on-year as the discount rate was higher during the first three quarters of FY20 coupled with increased borrowings during the year. Higher taxation due to the imposition of super tax as well as elevated finance costs barred the growth in operating profit from cascading down and pushed net profit down by 7 percent year-on-year in 2020. Net profit clocked in at Rs.2455.08 million in 2020 with EPS of Rs.11.56. SEARL’s GP, OP, and PBT margins were the highest during 2020, however, higher taxation trimmed down the NP margin to 14.8 percent.

In 2021, SEARL’s topline almost stayed at the same level as of 2020 with a negligible year-on-year growth of 0.01 percent. Cost of sales slid by 3.31 percent year-on-year due to lesser raw and packing materials as well as processing charges. GP margin touched 51.59 percent in 2021. Distribution and administrative expenses posted a year-on-year rise of 9.14 percent and 9.39 percent respectively in 2021. The main growth drivers were high salaries and wages, carriage and duties, sample expenses, and travel expenses. Other expenses took a 21 percent nosedive due to lesser provisioning for WWF, WPPF, and CRF. Other income ascended by 28.84 percent year-on-year on the back of handsome dividends from OBS Pakistan (Private) Limited, a subsidiary of SEARL. Operating profit inched up by 2.81 percent year-on-year with OP margin reaching 24.5 percent in 2021. A steep 106.14 percent rise in finance cost despite monetary easing was the result of a sizeable Rs.9.5 billion worth of Musharaka facility (long-term) obtained by the company coupled with a higher running finance facility availed during the year. This translated into a 13.53 percent year-on-year drop in the net profit of SEARL which stood at Rs.2122.92 million in 2021 with an NP margin of 12.8 percent. High finance costs diluted the NP margin of SEARL in 2021 while its GP and OP margins during the year were visibly greater than last year’s margins. The issue of 27.6 million right shares during the year resulted in a 39.36 percent year-on-year decline in EPS which stood at Rs.7.01 in 2021.

In 2022, SEARL’s topline grew by 7 percent year-on-year. High cost of sales on the back of unprecedented level of inflation and the rapidly depreciating value of local currency resulted in a 13.32 percent rise in cost of sales which eclipsed the growth of gross profit. GP margin went down to 48.76 percent in 2022. Distribution expense multiplied by 19 percent year-on-year in 2022 due to higher advertising budget, traveling charges, carriage and duties, and salaries including bonuses to salesmen. Administrative expenses grew by a mere 3.19 percent during 2022 which was the result of higher depreciation as well as repair and maintenance. Other expenses and other income showed favorable movements during the year whereby the former slid by 27.92 percent while the latter rose by 85.54 percent. The staggering growth in other income came on the back of handsome dividends from subsidiary companies, particularly Searle Pakistan Limited. Operating profit registered a 4.86 percent year-on-year rise while OP margin slightly lowered to clock in at 23.98 percent during 2022. Finance costs surged by 45.56 percent year-on-year due to excessive monetary tightening which drastically increased the cost of borrowing during the year. Higher short-term borrowings also contributed to an increase in finance costs during 2022. SEARL’s bottom line slipped by 1.52 percent year-on-year in 2022 to clock in at Rs.2090.72 million with an NP margin of 11.8 percent – the lowest among all the years under consideration. EPS slid to Rs.5.36 in 2022.

During 2023, SEARL’s topline boasted a staggering 22 percent year-on-year rise, yet, it couldn’t trickle down to produce a robust bottomline. Significant Pak Rupee depreciation, increase in global commodity prices as well as increased energy cost resulted in a 33.10 percent increase in cost of sales in 2023. This pushed the GP margin down to 44.10 percent in 2023. High operating expenses due to unsurpassed inflation levels coupled with deteriorating other income on the back of low dividend income have shoved operating profit down by 11.67 percent year-on-year in 2023. OP margin also slumped to 17.36 percent in 2023. 73.95 percent higher finance cost due to multiple rounds of monetary tightening resulted in 85.55 percent year-on-year shrinkage in net profit which clocked in at Rs.302.137 million in 2023. This translated into a thin NP margin of 1.4 percent in 2023. EPS was recorded at Rs.0.77 in 2023.

Recent Performance (9MFY24)

During 9MFY24, SEARL’s topline strengthened by 12.48 percent year-on-year. This was mainly driven by price increases due to the deregulation of prices of non-essential medicines by DRAP. Cost of sales grew by 7.96 percent in 9MFY24, translating into 17.86 percent higher gross profit with a GP margin of 47.87 percent versus a GP margin of 45.69 percent recorded during the same period last year. Distribution expenses grew by 18.58 percent during 9MFY24 due to increased salaries and bonuses to salesmen as well as elevated advertising and traveling expenses incurred during the period. Administrative expenses also escalated by 9.14 percent during 9MFY24 owing to inflationary pressure. The company curtailed provisioning for WWF, WPPF, and CRF, resulting in 51.27 percent lower other expenses for the period. SEARL didn’t receive any dividend income during 9MFY24, resulting in an 80.17 percent year-on-year decline in other income. Operating profit slumped by 2.62 percent year-on-year during 9MFY24 with OP margin moving down to 15.89 percent from 18.36 percent in 9MFY23. A 14 percent spike in finance cost during the period signified a higher discount rate although the company streamlined its debt profile during 9MFY24. Net profit dwindled by 82.6 percent year-on-year to clock in at Rs.111.276 million in 9MFY24 with EPS of Rs.0.22 versus EPS of Rs.1.25 posted by the company in 9MFY23. NP margin which stood at 3.76 percent in 9MFY23 marched down to 0.58 percent in 9MFY24.

Future Outlook

While the company has been able to muster healthier gross profit due to an end to restrictive drug pricing mechanism, elevated operating expenses, thinner dividends from related parties and high finance costs are trimming down the company’s profitability. Recently, the company announced that it would divest its entire shareholding and control of Searle Pakistan Limited. This may provide the company with enough funds to pay off its liabilities and cut down its finance costs. The company can also invest idle funds in other profitable avenues to boost its income.