December 15, 2016

Pakistan Pharmaceutical Sector

MORNING BRIEFING

Pharmas set for another year of outperformance

Syed Atif Zafar, CFA

as profits continue to trend upwards

atif.zafar@js.com

KSE100 Index: Closing 46,185.27 (327.38)

Pak Pharmas are set to outperform the benchmark KSE-100 index for the
sixth straight year in 2016, as the sector has clocked in an YTD 2016
return of 41.8% (adjusted return of 48%) vs. KSE-100 YTD 2016 return of
40.7%.

We attribute sectors outperformance in the last six years to impressive

growth in its profitability, which has increased by a 5-year CAGR of 27%.

We attribute strong returns in YTD 2016 to growth of 10% YoY (20% YoY
ex. GLAXO) in sectors profitability during 9M2016, with sales growth of
12% YoY and improvement in Gross Margins by 160bps YoY to 36.3%.

Based on our back of the envelope working, we estimate the sector is

trading at a forward P/E of 24.4x, where in spite of an already impressive
return in YTD 2016, SAPL continues to remain the cheapest at 15.8x.

We believe premium of Pak Pharmaceuticals remains justified given

Pakistans (1) higher annual population growth of ~2% against global
population growth of 0.22% and (2) low double-digit per capita
consumption of medicine.

We also believe (1) progress on Drug Pricing Policy, challenged by

Pharmaceutical companies and (2) launch of new products like the
Dengue Vaccine (by SAPL) can further fuel growth in the sector.

+ 9221 111-574-111
Ext: 3118

Sixth straight year of outperformance

Pakistan Pharmaceuticals are set to outperform the benchmark KSE-100 index for
the sixth straight year in 2016 (with just 11 trading days left), as the sector has
clocked in an YTD 2016 return of 41.8% (adjusted return of 48%) vs. KSE-100 YTD
2016 return of 40.7%.
Pharma sector performance vs. KSE-100

120%

Pharma Sector

100%
KSE-100

80%
60%
40%
20%
0%
-20%

2010

2011

2012

2013

2014

2015

2016 YTD

Source: PSX

We attribute sectors outperformance during the last six years to impressive growth
in its profitability, which has increased by a 5-year CAGR of 27%. Key YTD 2016
JS Research is available on Bloomberg, Thomson Reuters, CapitalIQ and www.jsgcl.com
Please refer to the important disclosures and disclaimer on the last page

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December 15, 2016

MORNING BRIEFING

outperformers (based on adjusted returns) from the sector have been Sanofi
Aventis (SAPL, +214%), Wyeth Pakistan (WYETH, +106%), Searle Pakistan
(SEARL, +96%) and Abbott Pakistan (ABOT, +56%), whereas notable
underperformers have been Ferozsons Laboratories (FEROZ, -28%), Highnoon
Laboratories (HINOON, +23%) and GlaxoSmithKline Pakistan (GLAXO, +26%).

2016 YTD: Pharma stocks performance*

250%

Profits soar with 3Q most impressive in 9M2016

150%

100%
50%

SAPL

OTSU

WYETH

SEARL

IBLHL

ABOT

GLAXO

-50%

HINOON

0%

FEROZ

We attribute strong returns in YTD 2016 to growth of 10% YoY (20% YoY ex.
GLAXO) in sectors profitability during 9M2016, with sales growth of 12% YoY and
improvement in Gross Margins by 160bps YoY to 36.3%. It is worth highlighting
that GLAXO had booked abnormally higher Other Income in 9M2015 because of a
gain on sale of its land. In 3Q2016, sectors (ex. GLAXO) earnings growth clocked
in at 18% YoY largely led by price hikes, as net revenues clocked in 8% YoY higher
with Gross Margins improving by 170bps. It is worth mentioning that sectors gross
margins in 3Q2016 are close to/above record levels at 37.5%, which is 232bps
higher compared to preceding five-quarter average of 35.2%. Most notably, SAPL
turnaround its profitability during the last two quarters on the back of (1) price hike
taken during 1Q2016, (2) closing down of loss-making counters and (3) substantial
decline in raw material costs because of EURO depreciation.

200%

Source: Bloomberg, *adjusted returns

Sales Growth in 3Q2016 vs 3Q2015

FEROZ

IBLHL

ABOT HINOON GLAXO SEARL

OTSU

SAPL

WYETH

40%

Sectors Gross Margin trend

30%

38%

20%

-50%

34%
33%
32%

-70%

31%

Source: Company Accounts

High growth driving premium valuations

Based on our back of the envelope working, we estimate the sector is trading at a
forward P/E of 24.4x, where in spite of an already impressive return in YTD 2016,
SAPL continues to remain the cheapest at 15.8x. Similarly, sector trades at a
forward P/S of 3.4x where SAPL and GLAXO appear the most attractive. We
highlight that Pak Pharmaceutical stocks have a premium attached vis--vis Global
Pharmaceutical companies. We believe premium remains justified given Pakistans
(1) higher population growth of ~2% per annum against global population growth of
0.22% per annum and (2) low double-digit per capita consumption of medicine
against US$33/capita in India and ~US$300/capita in other developed countries.
We also believe (1) progress on Drug Pricing Policy, challenged by Pharmaceutical
companies and (2) launch of new products like the Dengue Vaccine (by SAPL) can
further fuel growth in the sector.

1Q2015

-60%

3Q2016

-40%

2Q2016

-30%

35%

1Q2016

-20%

36%

4Q2015

-10%

3Q2015

0%

37%

2Q2015

10%

Source: Company Accounts

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MORNING BRIEFING

Pakistan m arket statistics (Dec 14, 16)

Pharm a cpm panies key statistics

2016E/FY16A 2017F/FY17F 2016E/FY16A 2017F/FY17F 2016E/FY16A 2017F/FY17F
EPS
EPS
P/E
P/E
P/S
P/S

KSE-100 Index

46,185.27

Previous KSE-100 Index

45,857.89

Change from last closing

327.38

ABOT

32.8

36.1

28.9

26.3

4.6

4.0

Change from last closing (%)

0.71%

FEROZ

28.8

31.7

26.8

24.4

4.4

3.8

PSX Market Cap. (Rs. bn)

GLAXO

8.9

9.8

27.0

24.5

3.3

2.9

PSX Market Cap. (US$ bn)

88.40

Total Volume (Shares mn)

360.78

HINOON

9,269.16

17.5

19.2

35.9

32.6

3.3

2.9

IBLHL

3.9

4.3

42.7

38.9

6.8

5.9

SAPL

120.7

132.8

17.4

15.8

1.8

1.6

KSE-30 Index

SEARL

22.0

24.2

27.9

25.4

6.4

5.5

Change from last closing

246.34

Sector

N/A

N/A

26.7

24.4

4.0

3.4

Change from last closing (%)

0.99%

Futures Volume (Shares mn)

56.01
4,195.94

Source: Company accounts, JS Research, *Back of the envelope working

Traded Value (Rs. bn)

18.97

Traded Value (US$ mn)

180.96
25,027.58

Futures Value (Rs. mn)

Also in Focus

6.90%

Futures Spread
Source: PSX

US provides US$81mn for North Waziristan dam

The US has agreed to provide the Water and Power Development Authority
(WAPDA) with a grant of US$81mn for the construction of initial stage of Kurram
Tangi Dam in the North Waziristan region of FATA. The project is expected to be
completed in two phases, with total gross water storage capacity of 1.2mn acre-feet
and electricity generation capacity of 83.4MW. It is expected that construction
activity for the second phase would also commence soon.

PSX valuations
2014A 2015A 2016A/E
P/E (x)

10.5

10.2

10.3

P/BV (x)

2.0

1.8

1.7

Div. Yield (%)

5%

5%

5%

Earnings grow th

9%

3%

-1%

Source: JS Research

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December 15, 2016

MORNING BRIEFING

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