JS Securities Limited – Morning Briefing

Karachi, March 13, 2019 (PPI-OT): Pharma: Price raise and health insurance could bode well for the sector

The Pharmaceutical sector has provided 9.7% return during YTD CY19, outperforming the KSE-100 index by 4.8%.

The decision to allow a 15% increase for all medicines (9% for life saving) on top of annual increase linked to CPI has rejuvenated the sector.

The negative impact of rupee devaluation will be partly cushioned, in our view, due to price renegotiations with supplier countries and decrease in API prices as the product matures.

International research (and common sense) suggests that health insurance (Sehat Insaf Cards in the local context) is a significant driver of pharmaceutical sector’s revenues.

Price increases rejuvenate pharmaceutical sector

The pharmaceutical sector has provided a return of 9.7% during YTD CY19, outperforming the KSE-100 index by 4.8%. One major reason for the outperformance of the sector is the announcement in Jan-2019 by the Drug and Regulatory Authority of Pakistan (DRAP) – after approval from the federal government – to allow a 15% price increase for all medicines (9% allowed for life saving medicines). This price increase, which recently came into effect, is a welcome relief for the local pharmaceutical sector. To provide some perspective, price controls on the pharmaceutical sector have been in place since as early in 2001 and has been a long standing Achilles’ heel for the sector.

Companies have thus been unable to increase prices, in response to rising costs, due to factors such as rupee devaluation, rising inflation, etc. This has resulted in companies such as Merck and Johnson and Johnson winding up operations in the country. On top of this price increase, it was also established previously that medicine prices would be linked to the Consumer Price Index (CPI). Non-essential medicines would be allowed an annual increase of 70% (max 7%) of the CPI, whereas all other medicine prices would be permitted 100% (max 10%) increase every year.

Moreover, the process has also been simplified as companies now have to merely notify DRAP of the price increase 30 days in advance in writing. Additionally, the negative impact of rupee devaluation has been overplayed in our view, since the companies renegotiate prices of Active Pharmaceutical Ingredients (APIs) following local currency weakness. Moreover, the natural price decline of APIs with time (as the product matures) and new raw material entering the market act as natural hedges against the impact of rupee devaluation. Finally, we also flag that the recent deterioration of relations with India will have a limited impact on cost of imports for the local industry as these products can be re-routed via UAE for instance, (with some additional costs) and it is possible that following elections in India, the situation could normalize in the midterm.

Sehat Insaf Cards could provide impetus to pharma demand

The pharmaceutical sector appears an attractive play in our view, particularly due to the current govt.’s focus on healthcare. Looking at international reports, healthcare is a significant driver of pharmaceutical sector revenues and the recent announcement to increase coverage of the Sehat Insaf Card could provide impetus to local demand of medicines.

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