The often neglected pharmaceutical sector of Pakistan has faced the brunt of massive rupee devaluation and high inflation in the past six months. But even in such cruel times - Sanofi-Aventis, the country's fourth largest pharmaceutical company stands aloft being the only firm posting an increase in profits and in net margins.
Sanofi's stock price has shot up following its result announcement and the scrip currently trades at an attractive P/E multiple of 7x. The company saw a massive 89 percent growth in sales in the first half ended June, mainly driven by its decision to sell vaccines to the government for its health spending programme, in a time when the industry grew at an average 58 percent. This was sheer volumetric growth as the sector still faces strict pricing policy framed by the government.
However, the firm's gross margins declined by a considerable 20 percent mainly due to increased cost of raw material and packaging, higher inflation and 23 percent depreciation is rupee's value during the period. But when compared to the huge fall in margins all across the industry, this drop starts looking like quite an achievement.
In order to mitigate the impact of falling margins, Sanofi strove to minimise the external factors affecting its top line by cost cutting and achieving plant and personnel efficiency.
This, coupled with effective management of marketing and selling expenses, which as percentage of sales went down by 29 percent, pushed net earnings higher by over 300 percent.
Cost cutting is one way out, but it cannot be done beyond a certain extent and there are reasons to believe that the threshold point has been reached as further cost cutting may not be possible or would instead be counter productive.
Sanofi's financial performance so far has been impressive and given its fiscal health it is still quite far from the red zone and can afford a drop in earnings in the future without any real threat of closure like many others in the industry. But in the bigger picture things do not seem bright.
The demand of pharma products is growing at a reasonable pace and so is the cost of production - but without any corresponding increase in prices. Hence, it would not be easy for drug makers to continue their operations and Sanofi being no exception to the rule might witness a larger drop in margins if the status-quo is maintained.
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Rs (mn) 1HFY09 1HFY08 % chg
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Sales 3,863 2,044 89%
Cost of sales 3,001 1,471 104%
Gross profit 863 572 51%
Gross margin 22% 28% -20%
Marketing expenses 594 441 35%
Finance cost 74 33 121%
PBT 156 61 154%
PAT 125 31 304%
EPS (Rs) 12.94 3.20 304%
Net Margins 3% 2% 114%
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Source: Company financials
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