H1 REVIEW: NIGERIAN PHARMACEUTICAL INDUSTRY, HIGH ON DEBTS LOW ON MARGINS

As an Investor looking to diversify portfolio in the vastly shallow Nigerian Stock Exchange, the pharmaceutical industry is one that an outsider will look to investing in. After all a diversified portfolio like they say helps reduce risk. But how good are the Pharmaceutical companies currently quoted on the stock exchange? Well, the answer emphatically is a resounding bad. The industry as it stands is currently suffering from low margins due to high operating costs, high debt and intense competition from small time importers and counterfeiters. This is no small diagnosis and one which urgently requires a medicine.

A look at the half year unaudited accounts that has recently been released by GSK, Fidson, May and Baker, Pharma-Deko present a sorry state of affairs in the sector. All the companies made a combined turnover of N19b a 26% from the N15.5b posted within the same period last year. Whilst this is a significantly marked improvement it is not pleasant to note that GSK, contributed over 63% of the revenue posted in the first half of 2012 alone. The industry is also bugged down by huge operational cost with margin ranging from 8.6% to just under 15%. It does seem the industry is used to margins under 15% an indication of a highly competitive industry and one in need of massive help from the government in terms of tighter border controls and product standardization. Today drugs and pharmaceutical products of all shapes and sizes find their way into the Nigerian market despite the lofty efforts of regulators like Nafdac.

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The sector is also riddled with debts as it struggles to fund new investments and marketing cost necessary to wade of competition. Without GSK (which presently has no debt), the companies all have a combined debt to equity of nearly 1.1:1 with debt taking up 51% of capital structure. This anomaly in capital structure ensures the little operational profits made are utilized to pay for cost of debt leaving little or nothing for equity holders. No wonder profit margins are dismal and return on equity anything but impressive for a sector badly in need of a show off. GSK ,the spark in a pitch of darkness, probably will continue to attract investors money in the years to come despite their modest returns. ROE may have increased year on year from 18% to 21% but operational profit margin dropped from 16% to 14% a sign that efficiency is on a slide.

But GSK can’t be the benchmark for the survival of the sector. The company is tightly run under the influence of its parent company abroad and can leverage on the economies of scale that provides to belly up on revenue and profits. For the others though, a total restructuring is badly needed. Pharmadeko needs new equity and possibly a better business model to be able to survive the next 12 months. May & Baker and Fidson need major cost cutting initiatives to improve its efficiency. Debt may not be an immediate problem for the pair but efficiency if not improved upon drastically will surely drag them into fault lines. The ink may be black for the quartet but as a force the sector is mostly in red.