Drug makers stocks plummet as headwinds mount

Stocks of drug makers in Africa’s largest economy, Nigeria, have plummeted, as macroeconomic headwinds continue to drag earnings prospects.

BusinessDay analysis shows that from the announcement of first naira devaluation decision (25th November 2014) to date, there has been significant pressure on the pharma stocks.

“This became worse by the second devaluation decision. All pharma stocks except M&B are in red from November 2014 till date with Fidson at11.76%; Glaxosmith-22.22%; Evansmed-0.22%; May & Baker-23.57% and Neimeth-17.78%, as most stocks trade at their year lows.This loss maybe also be blamed on the general apathy in the equities marketplace,” said Saheed Bashir ,an analyst at Meristem Securities Ltd, in a response to questions.

“We do not expect to see significant impact of devaluation in companies full year 2014 results, albeit we anticipate much impact in subsequent quarterly earnings releases in 2015,” said Bashir.

The naira which  was  N155/US$1 before the devaluation now trades at N226.50 at the parallel market and N202.72/US$1 at the interbank market (on Friday Feb 27).

The cumulative pretax profit of the four pharmaceutical companies which have released third quarter 2014 results remained flattish at N2.30 billion, as economic headwinds continue to drive cost.

The four companies are Fidson Healthcare Nigeria plc, GlaxoSmithKline Consumer (GSK) Nigeria plc, Neimeth International Pharmaceutical plc and Pharma Deko Nigeria plc.

Their cumulative operating expenses rose by 16.03  percent to N11.94 billion in 2014, from N10.29 billion as at the end of 2013, while cost of sales which measure the relationship between sales and production costs surged by 17.5 percent to N20.08 billion.

“Exchange rate volatility is an issue,” said T.S Dayanand, managing director of GSK Nigeria in an earlier interview with BusinessDay.

“We will continue to manage that risk and have factored some of it in our budget,” said Dayanand.

Pharmaceutical imports have been forecast to reach $789 million by 2018, thereby widening the country’s pharmaceutical trade deficit from the $475 million it posted in 2013, according to a September 8 report by PWC.

Other challenges hampering or stunting growth of the industry are counterfeiting of drugs, lack of meaningful patent legislation on pricing, high registration fees for imports and a chronically underfunded healthcare sector.

Finance costs are expected to remain a drag to companies’ earnings, especially as a number of drug makers (e.g. Fidson, May and Baker etc) take out extra loans in a bid to expand their capacities, and align their operations to attain the GMP status.

The Pharmaceutical industry in Nigeria spent over $600 million (N120 billion) to attain the pre-qualification of about four local firms in the country by the World Health Organisation.

“The tight monetary policy, with its attendant impact on interest rate environment, is taking a toll on the pharmaceutical firms, which pay a notable percentage of operating profits in servicing debt burdens,” said Abiola Rasaq of the Research and Strategy Unit of Associated Discount House Limited.

There are however upside potentials in the sector, as the rise in non communicable diseases (NLS) such as diabetes, hypertension and cancer is expected to drive growth of the local pharmaceutical industry.

The industry is also becoming more attractive to foreign investors who are willing to partner with local manufacturers.

“Due to the foregoing, our outlook for the sector in the short term is neutral, because we still expect several levels of restructuring across the industry, as most companies seek for loans to shore up working capital,” said Bashir.

BALA AUGIE