Ferozsons Laboratories Limited

About the company: One of the first locally established pharmaceutical companies of Pakistan, Ferozsons Laboratories Limited (PSX: FEROZ) was incorporated as a private limited company in 1954, and earned the distinction of being the first national company to be listed on the Karachi Stock Exchange in 1960. Undoubtedly the largest local name in pharma, its market capitalisation is currently more than Rs 15.7 billion.
Ferozsons' niche is maintaining exclusive agreements with international partners for selling, distribution, and co-manufacturing of products. Some of its popular affiliates include General Electric, Boston Scientific Corporation, and Gilead Sciences, Inc. The company also established a subsidiary company, BF Biosciences Limited - Pakistan's first biotech manufacturing company - as a joint venture with the Bagó Group in Argentina. The company has been making waves over the past couple of years since it partnered with Gilead to bring Sovaldi (Sofosbvir) into Pakistan.
Stock & pattern of shareholding FEROZ stock has not been having the best year. After a meteoric rise in the prior year, the stock has crashed and burned and has been finding new lows as of late, staying well below the KSE100 index. One reason for this has been the company's underwhelming financial performance in the ongoing fiscal year, which fails to live up to the heights achieved in the previous year.
Ostensibly, less than 10 percent of FEROZ shares are in the hands of the owners. However, KFW Factors - an associated company that holds more than 27 percent of the stock - is a private limited company about which little information can be found, with online sources listing the company's address as Ferozsons' address. The general public holds exactly one-third of the stock.
Prior performance Ferozsons' growth story is almost unbelievable; the company's sale CAGR is an unbelievable 42 percent. Fiscal '16 was the year that brought this growth, when the top line more than doubled year-on-year, while the bottom-line almost tripled. This phenomenal growth can be attributed to Ferozsons' international agreement with Gilead to bring Sovaldi into Pakistan.
During FY14, Ferozsons entered into a landmark agreement with American biopharma giant Gilead Sciences, Inc, to be its exclusive branded medicines business partner for Pakistan. It obtained rights for, inter alia, the sale and marketing of Gilead's breakthrough Hepatitis C (HCV) drug, Sovaldi. The drug was introduced under Gilead's Special Access Program to patients in Pakistan at a fraction of the international price. This proved to be a watershed for Ferozsons, and the balance sheet tells the story.
However, Sovaldi has brought with it lower margins, so Ferozsons' gross margins have taken a hit, touching a low of 40 percent in FY16. Moreover, sales of Ferozsons' subsidiary BF Biosciences declined in FY16 due to Sovaldi, which significantly affected the sales of its portfolio of inject able products being used for treatment of HCV.
As far as exports are concerned, there isn't much to say; Ferozsons' exports have never come close to even Rs 300 million, amounting to less than two percent of the total revenues as of FY16.
Recent performance It seems Ferozsons has fallen victim to its own success; for the nine months ended FY17, the company's top line is down by 63 percent year-on-year, while the bottom-line is now one-fourth of what it was in 9MFY16. As per the Director's Report, the rapid drop in Ferzosons' top line has been due to a substantial decline in sales of Sovaldi. This is attributable to several unlicensed generics flooding the market in Pakistan. On the plus side, however, gross margins have improved by 540 basis points, reflecting the reduction in the sales mix of the low-margin imported products. Amid the plummeting sales, however, administrative expenses registered an increase of 14 percent year-on-year, while the sales & distribution expenses declined by just nine percent. This resulted in the net margins taking a significant hit.
Outlook Keeping aside Sovaldi, Ferozsons still has a lot to offer going forward. The company's Gilead-licensed generic brand of Sofosbvir, 'Savera,' showed healthy sales growth in second quarter. It also filed an application for another HCV treatment called 'Epclusa,' the import of which is expected to start in 4QFY17. Moreover, Ferozsons entered into an agreement with GE Health Care FZE regarding diagnostic equipment at the start of the fiscal year.
Yet, another hitch that the company has run into is medical device imports coming to a standstill in Pakistan, following the recent controversy regarding unregistered devices. As per the Director's Report, the supply shocks have been a detriment to the industry and the company's growth. The Medical Device Registration Rules are currently under review.

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Ferozsons Laboratories

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Rs (Million)                       9MFY17    9MFY16            YoY

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Net Sales                          3,175      8,471           -63%

Cost of Sales                      1,722      5,048           -66%

Gross Profit                       1,453      3,423           -58%

GP Margin                             46%        40%    up 540 bps

Administrative expenses              207        182            14%

Selling & distribution expenses      638        702            -9%

Other expenses                        46        239           -81%

Other income                          37         96           -61%

Finance cost                          14          8            75%

Taxation                             120        482           -75%

Net Profit                           467      1,906           -75%

NP Margin                             15%        23%  down 780 bps

EPS                                15.46      63.14           -76%

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Source: company accounts

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Pattern of Shareholding

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Shareholders Category                          Percentage of holding

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Directors, CEO, their spouses and minor children               9.76%

Associated Companies, Undertakings & Related Parties          32.99%

KFW Factors (Pvt) Limited                                     27.45%

CDC - Trustee National Investment (Unit) Trust                 5.54%

Banks, NBFCs, DFIs, Takaful, Pension Funds                     3.30%

Mutual Funds                                                   3.92%

Insurance Companies                                           12.20%

Modarabas                                                      0.03%

Other Companies, Corporate Bodies, Trust etc.                  3.65%

General Public                                                34.16%

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