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, 2023, OTSU has a total of 12.1 million shares outstanding which are held by 910 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 17.95 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 (2019-23)

OTSU’s topline has been posting growth since 2019; however, its bottomline ascended only in 2020 and 2021. In 2019 and 2023, the bottomline ended up in the negative zone. The margins of the company plunged in 2019 followed by an upward trajectory for the next two years only to lose their footing in 2022 and 2023. The detailed performance review of the period under consideration is given below.

In 2019, OTSU’s topline grew by 0.84 percent year-on-year. Adverse economic conditions, high discount rate and depreciation of local currency 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 superfluous supply in the market, the company only utilized 66 percent and 72 percent of IV solutions and plastic ampoules capacity respectively in 2019. 14.57 percent high cost of sales was mainly due to Pak Rupee depreciation. This squeezed OTSU’s gross profit by 30.47 percent year-on-year in 2019, culminating into GP margin of 21 percent versus GP margin of 30.5 percent recorded in 2018. Distribution expense grew by 9.6 percent year-on-year in 2019 due to higher payroll expense, increased advertisement as well as 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 5.27 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 23.23 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 net loss was 100 percent year-on-year rise in other expense on the back of massive exchange loss. This resulted in operating loss of Rs.127.74 million in 2019 versus operating profit of Rs.176.53 million in 2018. Finance cost further fueled the fire as it jumped up by 71.27 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 net loss of Rs.175.35 million in 2019 versus net profit of Rs.65.31 million in 2018. The company posted loss per share of Rs.14.49 in 2019 versus 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, many pharmaceutical companies made the most of this time to widen their sales and boost their profitability and margins. OTSU’s sales posted 18.16 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. Cost of sales grew by only 9.35 percent year-on-year in 2020 due to relatively better value of local currency. This translated into 51.24 percent year-on-year rise in OTSU’s gross profit with GP margin growing to 26.9 percent in 2020. Distribution expense and administrative expense grew by 3.76 percent and 7.41 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 mix to 3.23 percent of its sales mix which was also one of the reasons for 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 expense slid by 56 percent year-on-year in 2020 on account of considerably lower exchange loss incurred in 2020. OTSU was able to post operating profit of Rs.180.27 million in 2020 with OP margin of 8.1 percent. Finance cost grew by 10.20 percent in 2020 despite 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 net profit of Rs.91.07 million in 2020 with NP margin of 4.1 percent. EPS clocked in at Rs.7.53 in 2020.

OTSU’s topline multiplied by 14.34 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 only 4.51 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 4.26 percent and 9.1 percent respectively in 2021 due to higher payroll expense and elevated 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 133.57 percent in 2021 on the back of hefty exchange gain earned during the year due to favorable exchange rates. Other expense plummeted by 21.27 percent year-on-year in 2021 as there were no exchange losses and provision against doubtful debts. Operating profit grew by 170.93 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. This translated into 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 324.23 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.

In 2021, 12 percent year-on-year growth was recorded in OSTU’s topline as a result of streamlined sales mix. Clinical nutrition products drove up 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 13.17 percent in 2022. Gross profit inched up by 9.64 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 25.16 percent year-on-year hike in distribution expense in 2022. Administrative expense also rose by 31.86 percent year-on-year in 2022 despite downtick in the number of employees 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 43.52 percent year-on-year in 2022 due to no exchange gain made in 2022. Conversely, other expense grew by 60.81 percent year-on-year on account of exchange losses. Operating profit slumped by 23.98 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 were 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 NP margin of 8.1 percent. EPS slipped to Rs.19.16 in 2022.

In 2023, OTSU’s topline inched up by 6.43 percent. Medical devices segment was still struggling during the year, however, the new ORS sachet launched by the company during the year received positive response from the market. While DRAP approved price increase w.e.f August 2022, massive decline in the value of local currency, persistent hike in fuel, gas and power prices as well as implementation of final sales tax on both the purchase of pharmaceutical inputs and sale of finished goods drove up cost of sales by 24.21 percent in 2023. Gross profit slid by 30.51 percent in 2023 with GP margin diving down to 21.2 percent. Distribution expense inched up by 3.19 percent in 2023 due to inflationary pressure. Administrative expense went down by 10.31 percent in 2023 due to lower payroll expense as headcount was reduced to 362 in 2023. Other income registered a staggering rise of 68 percent in 2023 due to hefty gain recorded on the sale of fixed assets, reversal of impairment loss on Orthopedic knee implant kits as well as higher scrap sales and late charges received from Hospital Supply Corporation. The effect of robust other income was completely wiped off by 77.47 percent hike in other expense on account of exchange loss. Operating profit dwindled by 90.34 percent in 2023 with OP margin sliding down to 1.2 percent. Finance cost mounted by 863.59 percent in 2023 due to unprecedented level of discount rate and increase in the external borrowings particularly for the renovation of its Line-II facility. Gearing ratio climbed up to 57.7 percent in 2023. OTSU recorded net loss of Rs.7.207 million in 2023 with loss per share of Rs.0.60.

Recent Performance (9MFY24)

Until 2023, OTSU’s topline was able to sail through the economic headwinds and posted year-on-year growth. 2024, however, appears to be harsh as the company’s topline succumbed to external vulnerabilities and nosedived by 8.84 percent in 9MFY24. Cost of sales tapered off by 6.21 percent during the period, resulting in 17.7 percent lower gross profit recorded by OSTU during 9MFY24. GP margin fell from 22.9 percent in 9MFY23 to 20.7 percent in 9MFY24. The company made thorough efforts to keep a check on its operating expense during the period which inched up by a paltry 0.76 percent during 9MFY24. Other income grew by 76.89 percent during the period while other expense shrank by 83.87 percent due to exchange gain. Net exchange gain proved to be the savior for the company and enabled it to record operating profit of Rs.150.13 million in 9MFY24 as against operating loss of Rs.7.34 million registered during the same period last year. Elevated discount rate and increased borrowings for the renovation of production lines and also because of slow recovery of receivables from Hospital Supply Corporation drove up finance cost by 81.69 percent during 9MFY24. OTSU’s vigorous operating profit was able to absorb its escalated finance cost and translated into net profit of Rs.23.41 million in 9MFY24 versus net loss of Rs.68.14 million recorded during the same period last year. EPS clocked in at Rs.1.93 versus loss per share of Rs.5.63 posted in 9MFY23. NP margin stood at 1.1 percent in 9MFY24.

Future Outlook

The company is in the process of achieving economies of scale through line extensions. Significant efforts are also made to sustain its competitive position in the market by launching new value added products. The company has also taken over south supply from its distributor Hospital supply corporation and has appointed several other distributors. This will improve cash flow position of the company and probably reduce its borrowing requirements. Positive exchange parity will also serve as a boon for the company and boost its operating performance.