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Ferozsons Analysis

Ferozsons Analysis

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ANALYSIS OF PHARMACEUTICAL INDUSTRY

Ferozsons Laboratories Limited

Submitted by: Aali Muazzam (2008-3-39-8410) Dated: January 1, 2010

Analysis of Pharmaceutical Industry

TABLE OF CONTENTS
PHARMACEUTICAL SECTOR IN PAKISTAN Main Market Segment -------------------------------------------------------------------------------05 Basic Manufacture------------------------------------------------------------------------------------06 Multi National Manufacturers-----------------------------------------------------------------------06 Local Manufacturers----------------------------------------------------------------------------------06 Drug Act -------------------------------------------------------------------------------------------------06 Drug Registration Status Report-------------------------------------------------------------------06 Pharma Industry--------------------------------------------------------------------------------------07 Pharmaceutical Sector Investment Policy ------------------------------------------------------08 Future Outlook-----------------------------------------------------------------------------------------10 Industry Summary ------------------------------------------------------------------------------------11 Outlook Measures ------------------------------------------------------------------------------------11 Industry at a Glance ---------------------------------------------------------------------------------12 Swot Analysis -----------------------------------------------------------------------------------------12 FEROZSONS LABORATORIES LIMITED Company History -------------------------------------------------------------------------------------13 Company Introduction -------------------------------------------------------------------------------14 Business Highlights ----------------------------------------------------------------------------------14 Balance Sheet -----------------------------------------------------------------------------------------16 Profit and Loss Account -----------------------------------------------------------------------------17 Cash Flow Statement --------------------------------------------------------------------------------18 Ratio Analysis------------------------------------------------------------------------------------------19 Future Industry Scenario----------------------------------------------------------------------------27

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Analysis of Pharmaceutical Industry

January 1, 2010 Reader College of Business Management Karachi Subject: Letter of Authorization

Dear Reader, As a student of MBA (EX), College of Business Management for Analysis of Financial Statements course, I have been authorized to present a report on Analysis of Pharmaceutical Industry “Ferozsons Laboratories Limited” The report covers the Analysis of Pharmaceutical Industry in Pakistan and ratio analysis of last 10 years of Ferozsons Laboratories financial statements. The report is due on the January 2nd 2010. If there be any query regarding the report please feel free to contact.

Sincerely

Aali Muazzam Student of MBA – Executive College of Business Management

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Analysis of Pharmaceutical Industry

January 1’ 2010 Mr Maqbool ur Rehman College of Business Management

Subject:

Letter of Transmittal

Dear Mr Maqbool ur Rehman, I am presenting the report on Analysis of Pharmaceutical Industry “Ferozsons Laboratories Limited” assigned to me at the end of the term for Analysis of Financial Statements. The report discusses Analysis of Pharmaceutical Industry in Pakistan and ratio analysis of last 10 years of Ferozsons Laboratories financial statements. Hopefully if you demand clarification, feel free to contact me.

Sincerely

Aali Muazzam Student of MBA – Executive College of Business Management

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Analysis of Pharmaceutical Industry

PHARMACEUTICAL SECTOR IN PAKISTAN
Pakistan meets 80% of its domestic demand of medicines from local production and 20% through imports. The pharmaceuticals market size is Rs. 127 Billion (US $ 2 Billion), approximately. The market for pharmaceuticals in Pakistan has been expanding at a rate of around 10 to15% since last few years. Pakistan is also exporting its surplus drugs to a large number of countries particularly to the Asian and African regions with an expanding trade in the newly emerged Central Asian States. About a hundred million strong populations of the Central Asian States, with almost no local manufacture of medicines, offers an attractive market for industries located in Pakistan. Pakistan's large population of more than 140 million people, expanding economy including health services, individual rise in purchasing power, general awareness regarding use of new molecules of drugs, etc. provides an ideal environment for investment in this field. Presently the pharmaceutical industry in Pakistan is producing all the major pharmaceutical dosage forms. Similarly, there are some special products e.g. immunological, anti-cancer drugs, certain anti-diabetics, antidotes and products manufactured from biotechnology, which are still being imported, in the finished form. These specific areas provide excellent opportunities for investment. Only few bulk pharmaceutical raw materials are being manufactured locally and most of the pharmaceutical raw materials are being imported in large quantities from different countries of the world. This sector also gives challenge to explore and avail the opportunities.

Main Market Segments
The prominent segments of the Pharma Sector & their respective shares (Percentage); Segment Antibiotics GIT CNS Respiratory Vaccines 2001 25 20 5 5 2 2002 22 15 8 3 5 2003 20 15 10 4 7 2004 20 14 13 3 9 2005 19 11 14 3 9 2006 18 10 15 5 10 2007 18 8 18 5 12 2008 15 8 19 5 12

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Analysis of Pharmaceutical Industry

Vitamins Narcoleptic Nutritional Anti metabolics Anticancer

8 3 5 5 2

10 5 7 8 2

10 4 8 10 3

8 3 5 10 5

8 2 3 12 5

10 2 3 12 5

10 2 3 15 7

10 2 3 15 10

Basic Manufacture
There are five units operating in Pakistan for the Semi Basic Manufacturing of pharmaceutical raw material and still Pakistan has the capacity to absorb the significant investment in this field.

Multi National Manufacturers
At present 30 multinational pharmaceutical organizations are producing their products in Pakistan.

Local Manufacturers
411 units are involved in local pharmaceutical manufacturing.

Drug Act
The Pharmaceutical manufacture and trade in Pakistan is regulated through the Drug Act 1976, and the rules framed there under. This is a fairly comprehensive law. Pakistan was the first amongst the developing countries in the world to have introduced Good Manufacturing Practices as a mandatory requirement. Registrations are granted by the Central Licensing and Registration Boards. The Quality Control system at the federal and provincial levels is supported by the professionally competent drug inspectorates and laboratory services.

Drug Registration Status Report As on June 30, 2008
Sr. No 1. 2. 3. 4. Type of Drugs Locally manufactured drugs of human use Imported drugs for human use Locally manufactured drugs for veterinary use Imported drugs for veterinary use Total 27,055 5,388 2,742 1,188

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Analysis of Pharmaceutical Industry

Total Registered Drugs

36,373

Source: Ministry of Health, Pakistan

Pharma Industry
The 600 firms (over 400 domestic manufacturers and approximately 200 major importers) together produce 40,000-odd formulations in the country. Despite high competition and price wars, drug prices are controlled by a strict regulatory policy. The pharmaceutical market comprises of large Multinational Companies which are producing and marketing research based products and also other big and small National companies which pre-dominantly produce and market generic products. Out of total market of US$ 2 billion, 53.3% is captured by Multinationals and 46.7% is taken up by National companies. The top 50 companies enjoy more than 80% market share. There are 20 multinationals in the top 50 companies, while the top 100 companies have 94.0% market share.

Having no recourse to a single price increase since December 2001, the pharmaceutical sector will be under pressure to maintain its profitability in the face of inflationary pressures and currency devaluation the total outlay on the health sector is budgeted at Rs.38.0 billion, which has increased by 15.8 percent over last year. The existing network of medical services consists of 12,260 hospitals, 113,000 doctors practicing, 4582 dispensaries, 5301 Basic Health Units (BHU), 552 Rural

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Analysis of Pharmaceutical Industry

Health Centers (RHC), 906 Maternity and Child Health Centers (MCH) and 289 Tuberculosis Centers (TBC). total expenditure on health has increased from PKR 4.37 billion to PKR 6.04 billion, which is 31.86% higher than the last year.( as of 2007)
PHARMACEUTICALS EXPORT/IMPORT STATISTICS Year 2005 2006 2007 2008

Export

US$(Millions)

82.9

101.6

110.5

116.3

Import

US$(Millions)

335.6

429.3

539.3

Source: www.epb.gov.pk (As of 31-12-2009)

Pharmaceutical Sector Investment Policy, Tax and Other Incentive

POLICY PARAMETERS Govt. Permission Remittance of capital, profits, dividends, etc. Upper Limit of foreign equity allowed Minimum Investment Amount Customs duty on import of PME** Customs duty on import of Raw Materials & Chemicals Sales Tax on import of PME Withholding Tax on import of PME*** Rate of Tax on Payment on Royalty & Technical Fee

CONDITIONS Not Required except specific licenses from Ministry of Health Allowed

100% No Restriction 5% * 5% 0% 0% 15% of the gross amount. (In case of non-residents is such as

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Analysis of Pharmaceutical Industry

contained in the overriding provision of bilateral agreements on avoidance of double taxation.) Corporate Tax Rate: Public companies Private companies Withholding Tax on Dividends: Public & Insurances Cos. Other Companies Withholding Tax on Capital Goods****  35% 35%

5% (if received by Public & Insurances Cos.) 10% (if received by other companies) 1%****

For Formulation of dosage forms the pharmaceutical raw materials, both the active and the inactive, are exempted from custom duty in excess of 10% ad valorem and sales tax. ***

Withholding tax under section 148 on Capital Goods is charged at reduced rate of 1% under clause (13G) of Part-II of Second Schedule to the Income Ordinance, 2001.****

The packing materials also enjoy the benefit of exemption from custom duty in excess of 10% ad valorem. However, sales tax is levy-able ton the packing material.

For bulk manufacturing of pharmaceutical raw materials, the chemical raw materials are exempted from custom duty in excess of 5% ad valorem and sales tax. ***

Once a local manufacturer of bulk pharmaceutical raw material is capable of meeting the required standards of quality and the domestic requirements, he may be granted a tariff protection on the recommendations of the National Tarrif Commission.

In order to promote pharmaceutical exports, 50% subsidy restored to facilitate pharmaceutical companies for registration of their products in foreign countries.

Source: Income Tax Ordinance 2001, CBR, and Investment Guide of Pakistan, BOI, Ministry of Health, Drugs Control Organization.

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Analysis of Pharmaceutical Industry

Future Outlook
BMI forecasts that the market should grow at a nominal CAGR of 12.7% in local currency to reach PKR230bn (US$3bn) in 2013, with population growth being a major driver. However, with inflation expected to average 9.9% over the forecast period, drug market growth is likely to be negative in real terms. We expect both prescription and OTC markets to be hit in Pakistan, since the majority of health expenditure continues to be financed out of pocket, leaving market growth vulnerable to deteriorating economic conditions. BMI’s updated Business Environment Ratings for Q309 highlights the challenges faced by pharmaceutical companies operating in Pakistan. The country is ranked 14th out of 15 markets assessed in the Asia Pacific region, with only Vietnam considered less attractive. The country’s unstable political and economic situation pose significant risks to the operating environment, while the pharmaceutical regulatory situation, most notably patents, remain substandard. Despite the challenges, Pakistan has a substantial pharmaceutical manufacturing industry, which is largely geared towards supplying the domestic market. According to the Pakistan Pharmaceutical Manufacturers Association (PPMA), domestic manufacturing supplies 70% of the country’s demand for finished products, a figure that is supported by trade data from the UN Commodity Trade Statistics Database (Comtrade), which showed that imports only accounted for 20% of Pakistan’s pharmaceutical consumption by value in 2007. The PPMA claimed that the local pharmaceutical industry spent PKR107bn (US$1.3bn) on manufacturing facilities, which he equated to a saving of about US$3bn in foreign exchange on the import of medicines. The government is largely supportive of pharmaceutical manufacturing; however, it has recently reduced protectionist import tariffs in a number of therapeutic areas – recognition that domestic manufacturing is restricted to low-tech, high-volume production. Pakistan’s health indicators are generally poor, particularly in rural areas, indicating that one of the major challenges for the government is to improve access to healthcare. Pharmaceutical expenditure remains largely funded out of pocket, meaning generics are popular and expensive treatments are unaffordable for many on low incomes. Infectious disease remains a problem, as does malnutrition. However, non-communicable chronic diseases such as diabetes and cancer are on the rise, especially in cities. The pharmaceutical sector has been permitted spur on import of raw materials and active ingredients on compromising rates of duty in the budget to strike the export potential existing in the world markets. The pharmaceutical industry has strongly represented it in the pre-budget consultation process and has gained much-needed incentives for developing exports from the country. Moreover, that high cost of doing business including costly land, utilities and high interest rates were seriously hampering the growth of pharma-industry. Some key incentives are also expected in the forthcoming Trade Policy 2009 that will be announced in the 3rd week of July. In the budget customs duties have been trimmed down from 25% and 10% to just 5%

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Analysis of Pharmaceutical Industry

on import of 19 types of raw materials and active ingredients as well as chemicals. Customs duty on import of packing materials has been reduced from 25% or 20% to just 5% on import. Pharmaceutical products exports have been increasing from the last four years and it is expected that the industry would gear up its efforts for tapping export potential in regional as well as exports markets in African countries. Pharmaceutical industry has not been allowed increase in the price of medicines since 2001 when the government had permitted 3 percent increase in controlled medicines and 4 percent increase in de-controlled medicines.

Industry Summary
The Pakistani pharmaceutical industry has an estimated worth of $1.9 billion and existing exports have reached $125 million. The industry has set an export target of $1 billion to be achieved by 2010. Pakistan to enlarge production base and saving at least $ 3 billion worth of foreign exchange which would have otherwise spent on the import of medicines. This seems like a highly challenging task since recently the manufacturers have been facing problems from all directions. Rising cost of energy, raw materials and a weak rupee have all contributed to high production costs and squeezed the industries profit margins further. Pakistan was among those 35 countries which are self sufficient in medicines production. The pharma-industry indirectly employs about 1 billion people while its direct employees have touched 162,000 persons. The recent electricity crises has also harmfully affected the production of life saving medicine. However, the pharmaceutical manufacturers can take solace in the fact that patents worth billions of dollars are nearing expiration and will fuel growth in global generic market. The fast-deteriorating business environment especially for the pharmaceutical companies in the wake of high cost of production has been burdening the local pharma sector.

Outlook Measures
The government can play its role by ensuring uninterrupted electricity to the manufacturers, and taking steps to prevent such shortages in the future. Also, carve in duty is beneficial for industry growth which might sufficient effect on exports growth. Being one of the major indicators of economy, pharma industry has contributed positively so far and has somehow managed to increase production by a meager 1%. Additionally, in order to improve the growth rate of pharmaceutical exports government authorities should provide financial incentives and support schemes. These could range from local subsidies to cost sharing of foreign registrations. Authorities can also enter into MOUs with other countries in order to provide bilateral support to boost Pakistani exports. The health ministry can also play a vital role by helping emerging exporters to achieve world class Good Manufacturing Practices (GMP) standards and earn certifications by foreign regulatory agencies. With a low cost-base, world class manufacturing facilities and a duly placed intellectual property legislature the local manufacturers have all the right ingredients to become regional export leaders. The cut of import duty may reveal further recovery in industry and would help to increase rising opportunities for investment.

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Analysis of Pharmaceutical Industry

Industry at a Glance
Share in GDP: 0.8% Imports: US $ 388.6 Mn Exports: US$ 125.4 Mn Total No of Units 431 Multinational companies: 30 Local companies: 411 Total investment: US$ 1.9 Billion Share of MNC`s 48% Share of local Co.s 52%

SWOT ANALYSIS
STRENGTHS  Established pharmaceutical industry.  Exposure to export of medicines in central Asia, South Asia & Africa.  Availability of Skilled Manpower  Low Labor cost.  Increase local demand due to population growth & poor health conditions in Pakistan. WEAKNESSES  Research & Development facilities.  No infrastructure to produce medicines from Biotechnology.  Manufacturing of Basic raw material.  Old manufacturing facilities with in-efficient process.  No World Class manufacturing practices & certification by reputable foreign regulatory agencies.  Poor Policy framework. OPPORTUNITIES  Good export market.  Increase domestic demand.  Availability of infrastructure  New medicines from biotechnology.  Develop world class manufacturing facilities to boom exports.  Improve & upgrade manufacturing processes. THREATS  Regulated Price mechanism for local sale.  Dumping of low cost medicines from china & India.  High manufacturing cost mainly due to electricity tariffs.  Un-availability of power due to frequent power outages & load shedding.  High import duty on raw materials.  High interest rates

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Analysis of Pharmaceutical Industry

FEROZSONS LABORATORIES LIMITED
Company History
In 1894, Maulvi Ferozuddin Khan established the business House of Ferozsons through the creation of a publishing House - Ferozsons Limited. From the beginning, Ferozuddin Khan's vision of business extended beyond wealth creation, and firmly incorporated the enrichment of human life in the under-developed South Asian region. Thus the publishing house was created not only as a means of creating wealth, but as one of spreading literacy and education among the masses of the sub-continent. In the same spirit, Ferozsons Laboratories Limited was created in 1956 as one of the first pharmaceutical manufacturing facilities in the fledgling state of Pakistan, to ensure a constant and reliable source of quality medicines for the people of the nation as experienced its birth pangs. Incorporated as a Private Limited Company in 1954, Ferozsons Laboratories Limited became Pakistan's first local pharmaceutical company to be listed on the country's stock exchanges (1960). Commencing production in 1956, we made our beginnings primarily as manufacturers of fine chemicals and galenicals, and as toll-manufacturers for multinational pharmaceutical corporations like Boots (now a part of Knoll), Lakeside Laboratories Inc. of the USA (now a division of HMR/Aventis), Chemie Grunenthal of Germany, and more recently, Procter & Gamble of the United States, Curatis Pharma GmbH, Germany, and the Bago Group, the largest pharmaceutical group in Latin America with sales of over US $ 500 million. Though now an independent entity and a public limited company listed on the country's three stock exchanges, the founder's spirit still courses through the company's veins. In our quest for maximizing returns to our shareholders and increasing market share, we have not lost sight of the fact that we exist first and foremost to improve the quality of life in the markets we serve. While maintaining the highest standards of Quality and ensuring adequate financial returns to our investors, we seek also to ensure that our products are made available at prices that are relevant to the local population in our chosen markets. Today, our core strength lies in our own range of branded generics, which cover products in the following segments: Anti-infectives Gastrointestinal Cardiovascular Dermatology

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Analysis of Pharmaceutical Industry

Company Introduction
Plant has recently undergone a major renovation to keep our production processes and facilities in line with the latest GMP requirements. Ferozsons production capabilities include the manufacture of tablets, capsules, syrups, suspensions, creams and ointment. The company is also in the process of setting up independent units for the manufacture of Sterile liquids and solid products., including a separate dedicated facility for the production of injactable cephalosporins Existing Manufacturing Facility: Nowshera, NWFP. New Facility: Raiwind Road Lahore (Under Construction) Company Head Office: Mall Road Rawalpindi Total No of Employees: 450

Business Highlights
The company has achieved sales growth of over 16%, with Net Sales of Rs. 1.085 Billion in year ended June’2009. The Company achieved a Net Sales figure of Rs. 1.189 Billion against the figure of Rs 1.029 Billion achieved last year. In contrast, depreciation in the Rupee and a rise in the cost of inputs significantly eroded the Gross Profit of the company, which grew by 8%, for the Year. Operating and Net Margins were further reduced due to increased marketing spend. This spend was necessitated by the launch of four new products: • Aurora (Rosuvastatin), in cardiology, for elevated cholesterol. • Orion (Olmesartan), also in cardiology for primary hypertension. • Centaurus (Entecavir) for Hepatitis B, in the company’s Biotech division. • Dynetic (Itopride) in gastroenterology, for the treatment of Functional Dyspepsia. While the marketing activities associated with these launches significantly increased the selling expense during the fiscal year, the benefit they are expected to add to the top line and profitability will begin to accrue in Fiscal year 2009-10. Net Profit decreased by 16% to close at Rs. 182.757 Million for the Year (2008: Rs. 217.024 Million). This decrease was mainly influenced by some aggressive marketing activities. In an industry that has been stifled under the weight of a price freeze for nearly a decade, new launches are the life-blood for any company. Correspondingly, as mentioned above, company undertook 4 major product launches in the second half of the year. These launches will add much-needed depth to Ferozsons Cardiology, Gastroenterology and Hepatology portfolios. It was expected that these products to contribute handsomely to the company’s sales growth and profitability in the quarters and years to come. In preparation for the launch of Ferozsons’s subsidiary, BF Biosciences Limited, the company also increased their participation in international conferences including the American Society of Clinical Oncology (ASCO) meeting held in the United States, and the Digestive Diseases Week, also held in the United States. The management is confident that they have provided a solid footing for the Company’s biotech portfolio, which will expand further under the BF Biosciences umbrella starting July,

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Analysis of Pharmaceutical Industry

2009, and will increase profitability as its major brands shift to local manufacturing. The Company’s entry into medical devices through its partnership with the Boston Scientific Corporation has also made an encouraging start during the fiscal year, and with the start-up phase now nearing completion. In coming year, this business will grow to its potential and add significantly to the company’s depth particularly in the Cardiology, Gastroenterology and Oncology segments of the market.

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Analysis of Pharmaceutical Industry

BALANCE SHEET AS AT 30TH JUNE
SHARE CAPITAL AND RESERVES
Issue , subscribed & paid up capital Capital reserve Reserve for issue of Bonus shares Unappropriated profit MINORITY INTEREST Total SHE

2009 (RUPEES) 173,607,322 321,843 795,036,930 38,990,296 1,007,956,391 247,474,526 174,062,500 53,960,116 475,003

2008 (RUPEES) 144,672,768 321,843 681,242,280 826,236,891 252,011,413 156,062,500 49,691,426 1,456,643

2007 (RUPEES) 120,560,640 321,843 561,722,124 682,604,607 256,984,285 75,187,500 48,302,487 1,024,253

2006 (RUPEES) 100,467,200 321,843 416,294,570 517,083,613 262,437,999

2005 (RUPEES) 77,282,460 321,843 6 305,866,486 383,470,795 54,537,651

2004 (RUPEES) 55,201,760 321,843 22,080,706 164,874,732 242,479,041 61,284,221

2003 (RUPEES) 44,161,410 321,843 11,040,356 124,381,575 179,905,184 61,543,907

2002 (RUPEES) 35,329,130 321,843 8,832,283 90,261,594 134,744,850 76,157,950

2001 (RUPEES) 35,329,130 321,843 69,864,368 105,515,341 45,725,290

2000 (RUPEES) 35,329,130 321,843 54,548,073 90,199,046 45,725,290

SURPLUS ON REVALUATION OF FIXED ASSETS
Non-Current Liabilities Long Term Financing Secured DEFERRED LIABILITY FOR TAXATION OBLIGATIONS UNDER FINANCE LEASES

46,910,274 5,321,499

16,512,079 11,873,821

17,214,210 2,341,580

11,769,751 6,733,166

5,546,478 5,879,561

5,046,478 --

4,887,985 723,500

CURRENT LIABILITIES
Bank borrowings/Short term borrowings secured Current maturity of long term liabilities Current portion of obligations under finance leases Creditors, accrued and other liabilities Revolving advances Accrued markup on long term financing Provision for taxation Unclaimed dividend Proposed dividend Total Current Liabilities Total Liabilities & SHE 548,554 94,125,000 983,653 166,505,160 6,983,134 0 -56,750,000 2,399,815 116,423,214 5,588,157 15,008,477 17,312,500 4,310,822 131,024,480 1,610,432 13,017,721 23,927,980 12,832,490 22,080,704 86,465,125 409,784,177 226,954,299 14,304,739 32,000,000 4,043,765 19,872,635 110,086,574 370,038,582 178,468,756 16,523 6,029,485 27,875,835 16,207,221 8,832,283 89,440,441 311,769,280 159,202,571 6,031,885 22,728,243 1,840,365 24,730,391 76,148,670 232,435,779 110,244,807 3,458 33,085 10,570,686 1,651,186 8,832,283 69,721,007 211,256,828 103,135,645 5,388 33,085 723,500 10,835,452 86,794,523 65,000 11,456,235 66,697,360 122,456 5,141,337 46,288,138 122,456 6,407,314 47,640,404 122,456 3,816,660 32,585,986 122,456 26,058,715 67,456 12,782,463 1,487,400 33,967,533 429,456

269,145,501 1,753,074,037 1,273,098,467 33,085 31,143 5,061,570 1,278,224,265

196,169,663 1,481,628,536 610,987,413 203,425,956 156,062,500 822,691 790,870 972,089,430

154,258,234 1,218,361,366 539,455,959 149,606,959 75,187,500 600,447 764,850,865

110,712,696 942,466,081 486,662,333 138,318,587

102,204,031 568,598,377 265,711,067 19,138,244

FIXED ASSETS
CAPITAL WORK IN PROGRESS LONG TERM INVESTMENTS Long Term Loan Derivative Asset-interest rate swap LONG TERM Deposits Total Fixed Assets

436,447 625,417,367

526,947 285,376,258

481,047 241,740,085

184,514,764

165,234,456

110,281,350

103,174,118

CURRENT ASSETS
Stores, spares and loose tools Stock in trade Trade debts-unsecured (considered good) Advances, deposits, prepayments and other receivables Loans & Advances Current Portion of Long term Loan Trade deposits & short term prepayments other receivables Interest accrued Advance income tax-net Short Term Investments Cash and bank balances Total Current Assets Total Assets 3,628,845 280,924,884 57,955,059 7,964,738 4,091,300 180,787,784 24,454,201 4,560,060 56,750,000 5,809,956 1,530,284 1,273,496 194,474,564 35,807,461 -----------------509,539,106 1,481,628,536 4,280,632 133,816,190 31,937,773 3,015,174 14,546,615 17,312,500 14,103,388 2,485,196 3,362,895 186,969,198 41,680,940 -----------------453,510,501 1,218,361,366 3,719,036 145,341,209 12,611,931 2,563,919 46,907,762 3,802,163 97,077,143 5,763,040 44,357,908 6,192,514 2,500,000 3,408,688 84,605,100 6,370,838 4,197,556 3,387,606 338,195 3,537,866 101,722,444 7,390,611 33,991,241 2,402,757 77,057,413 6,182,384 23,412,411 2,218,485 87,150,800 6,419,389 1,933,404 79,057,782 8,001,468

7,293,812 1,768,991 996,428 4,598,809 63,974,446 45,743,760 -----------------474,849,772 1,753,074,037

6,954,243

12,031,726

16,238,543

86,648,750 12,301,864 -----------------317,048,714 942,466,081

57,071,000 66,458,351 -----------------283,222,119 568,598,377

24,763,787 40,972,322 -----------------168,044,092 409,784,177

1,843,000 37,038,656 -----------------185,523,818 370,038,582

4,897,550 32,582,309 -----------------146,534,824 311,769,280

14,334,029 -----------------122,154,429 232,435,779

2,851,513 -----------------108,082,710 211,256,828

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Analysis of Pharmaceutical Industry

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30TH JUNE
NET SALES LESS: COST OF SALES GROSS PROFIT LESS: OPERATING EXPENSES Administrative expenses Selling expenses Other charges Financial expenses Total Operating Expenses

2009 1,189,256,968 (584,146,610) 605,110,358

2008 932,297,994 (391,559,432) 540,738,562

2007 922,368,542 (415,507,467) 506,861,075

2006 752,221,631 (322,838,328) 429,383,303

2005 655,761,685 (279,508,957) 376,252,728

2004 500,930,930 (195,893,031) 305,037,899

2003 492,846,868 (250,188,539) 242,658,329

2002 404,635,697 (218,952,624) 185,683,073

2001 (RUPEES) 351,148,935 (199,969,968) 151,178,967

2000 (RUPEES) 297,618,660 (191,065,649) 106,553,011

OPERATING PROFIT OTHER INCOME
Loss/Gain on remeasurement of investments held for trading Share in profit/loss of Farmacia-98% owned partnership

82,717,534 271,025,184 27,964,315 3,778,988 385,486,021 219,624,337 29,516,774

60,719,276 199,424,660 21,073,792 1,487,228 282,704,956 258,033,606 20,809,630 13,818,997 292,662,233

51,568,412 214,439,862 17,629,100 4,148,403 287,785,777 219,075,298 28,149,442 11,288,372 258,513,112

51,000,143 163,052,856 2,268,560 216,321,559 213,061,744 15,350,477 (4,798,077) 7,180,383 230,794,527 10,653,087 2,004,046 12,657,133 218,137,394

33,753,707 137,686,959 1,797,616 173,238,282 203,014,446 25,800,546 (6,086,758) 4,833,505 227,561,739 10,150,722 1,957,558 12,108,280 215,453,459

27,040,360 122,146,359 1,363,047 150,549,766 154,488,133 6,923,722 (435,778) (3,129,441) 157,846,636 7,724,407 1,453,106 9,177,513 148,669,123

30,132,959 110,618,385 1,044,415 141,795,759 100,862,570 3,995,490 145,236 105,003,296 5,043,129 948,707 5,991,836 99,011,460

22,296,722 81,518,389 1,553,835 105,368,946 80,314,127 3,020,074 630,379 83,964,580 4,015,706 755,430 4,771,136 79,193,444

17,708,748 65,714,540 2,366,541 85,789,829 65,389,138 700,545

16,739,459 54,970,318 4,379,781 76,089,558 30,463,453 508,515

PROFIT FOR THE YEAR LESS: WORKERS' (PROFIT) PARTICIPATION FUND CENTRAL RESEARCH FUND
PROFIT BEFORE TAXATION

249,141,111

66,089,683 3,269,457 615,047 3,884,504 62,205,179

30,971,968 1,523,173 286,538 1,809,711 29,162,257

0 249,141,111

0 292,662,233

0 258,513,112

PROVISION FOR TAXATION
Taxation PROFIT AFTER TAXATION/Net Income 66,331,849 182,809,262 75,638,404 217,023,829 58,258,952 200,254,160 42,268,679 175,868,715 61,887,660 153,565,799 47,713,720 100,955,403 30,928,694 68,082,766 90,261,594 9,934,644 263,982 100,460,220 168,542,986 27,000,000 52,193,444 69,864,368 22,158,493 40,046,686 54,548,073 10,609,492 18,552,765 44,827,591

ACCUMULATED PROFIT BROUGHT FORWARD
Transfer of surplus on revaluation of fixed assets Prior Years Current Year-net of tax 0 0 217,023,829 0 200,254,160 0 175,868,715 0 153,565,799 0 100,955,403

69,864,368 122,057,812 94,594,759 63,380,356

PROFIT AVAILABLE FOR APPROPRIATION
APPROPRIATIONS: Interm Dividend Proposed Dividend @ 70% (2000: 25%) Transfer to Reserve for issue of Bonus shares

182,809,262

UNAPPROPRIATED PROFIT CARROED FORWARD
No of shares

0 182,809,262 17,360,733 10.53

0 217,023,829 14,467,277 15.00

0 200,254,160 12,056,064 16.61

0 175,868,715 10,046,720 17.51

0 153,565,799 7,728,246 19.87

0 100,955,403 5,520,176 18.29

(13,248,423) (19,872,635) (11,040,353) (44,161,411) 124,381,575 4,416,141 15.42

(14,131,652) (8,832,283) (8,832,283) (31,796,218) 90,261,594 4,416,141 11.82

(24,730,391) (24,730,391) 69,864,368 3,532,913 11.34

(8,832,283) (8,832,283) 54,548,073 3,532,913 5.25

EARNINGS PER SHARE-BASIC

Page 17 of 27

Analysis of Pharmaceutical Industry

CASH FLOW STATEMENT FOR THE YEAR ENDED 30TH JUNE
2009 Profit before taxation Cash flow from operating activities Adjustment for: Depreciation Profit on sale of fixed assets Financial Charges Profit/interest from investments/deposits/capital gains/dividend income Loss/Gain on remeasurement of investments held for trading Share in Profit/loss of Farmacia-98% owned partnership Loss/Gain on fair value adjustment of interest rate swap Operating profit before working capital changes (Increase)/decrease in: Stocks and stores Trade debtors Advances, deposits, prepayments and other receivables 249,141,111 2008 292,662,232 2007 258,513,112 2006 218,137,394 2005 215,453,459 2004 148,669,123 2003 99,011,460 2002 79,193,444 2001 (RUPEES) 62,205,179 2000 (RUPEES) 29,162,257

45,402,712 (3,014,100) 2,591,349 (26,441,366) 5,251,345 1,187,639 24,977,579 274,118,690 (88,765,980) (21,199,391) (9,407,536) (119,372,907) 35,727,920 190,473,703 (2,146,965) (81,231,407) 107,095,331

33,244,566 (687,675) 1,487,228 (15,229,954) -3,704,361 (13,818,997) (1,187,639) 103,168 292,765,400 (46,782,262) 7,483,572 6,833,437 (32,465,253) (17,426,686) 242,873,461 (3,097,660) (55,878,093) 183,897,708

42,105,532 (1,592,218) 4,148,403 (26,557,224) (11,288,372) 6,816,121 265,329,233 10,963,423 (19,325,842) (11,753,493) (20,115,912) 42,856,164 288,069,485 (2,537,971) (73,247,355) 212,284,159

45,170,037 (5,025,921) 2,268,560 (10,324,556) 4,798,077 (7,180,383) 29,705,814 247,843,208 (48,180,939) (6,848,891) (3,285,002) (58,314,832) 18,305,902 207,834,278 (2,268,560) (55,223,829) 150,341,889

23,829,142 (14,986,494) 1,797,616 (10,814,052) 6,086,758 (4,833,505) 1,079,465 216,532,924 (12,865,518) 607,798 (45,172,965) (57,430,685) 19,417,548 178,519,787 (1,797,616) (51,494,301) 125,227,870

16,570,745 (378,803) 1,363,047 (6,544,919) 435,778 3,129,441 14,575,289 163,244,412 2,131,237 (1,816,383) 3,832,930 4,147,784 3,171,992 170,564,188 (1,363,047) (45,898,276) 123,302,865

14,854,314 (377,584) 1,044,415 (3,593,966) -145,236

11,824,345 (482,230) 1,553,835 (2,470,611) -630,379

9,422,727 (576,897)

8,300,141 (346,822)

11,781,943 110,793,403 (25,800,140) (1,208,227) (8,613,507) (35,621,874) 14,518,796 89,690,325 (1,044,414) (27,027,763) (34,244,162) 27,373,986

9,794,960 88,988,404 9,909,115 237,005 (11,116,938) (970,818) 6,582,271 94,599,857 (1,553,835) (21,352,408) (24,495,187) 47,198,427

8,845,830 71,051,009 (8,378,099) 1,582,079 4,206,817 (2,589,203) (21,053,281) 47,408,525 (2,366,541) (9,842,443) (8,643,104) 28,922,978

7,953,319 37,115,576 (9,566,289) (1,797,813) (1,825,922) (13,190,024) 2,396,735 26,322,287 (4,379,781) (5,907,352) (6,008,818) 14,406,117

(Decrease)/increase in other payables/current liabilities

Financial charges paid Payment of tax Payment of dividend Net cash from operating activities Cash flow from investing activities Long term investments Capital expenditure Short term investments Sale proceeds from short term investment Long term loan disbursed Long term loan recovered Compensation receivable from Government written off Profit/interest from investments/deposits/capital gains/dividend income Cash transferred to Farmacia Sale proceeds of fixed assets Net cash used in investing activities Cash flow from financing activities Payments-finance lease Proceeds from short term financing Proceeds from long term financing Repayment of long term financing Proceeds from minority share capital contribution Payment of dividend Net cash from/(used in) financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year

(275,959,826) (96,412,228) 248,371,272

(40,000,000) (86,770,250) (240,974,845) 237,173,839 (134,500,000) 14,187,500 18,414,107 2,369,375 (230,100,274)

(58,087,290) (100,320,448) (92,500,000)

(111,999,960) (30,665,371) (34,375,827)

4,995,996 (43,312,167) (42,954,189)

1,000,404 (66,973,876) (18,360,569)

2,400 (25,127,490) 2,569,407

(5,998,800) (19,707,551) (4,267,171)

(16,968,759)

(13,712,506)

-25,694,600 7,314,722 (90,991,460) 22,922,268 2,280,350 (225,705,120) 10,324,556 10,163,018 (156,553,584) 10,378,274 26,490,250 (44,401,836) 6,460,299 (455,390) 770,251 (77,558,881) 3,659,733 1,702,052 (17,193,898) 2,206,864 1,293,790 (26,472,868) 1,015,697 (15,953,062)

738,076

1,212,842 (11,761,588)

(2,397,802) (867,745) 87,926,150 (94,125,000) 10,000,000 (41,938,309) (41,402,706) (25,298,835) 71,042,595 45,743,760

(4,444,417) 134,500,000 (14,187,500) (75,538,996) 40,329,087 (5,873,479) 41,680,940 35,807,461

(10,821,877) 92,500,000

(7,173,105)

(14,930,361)

(6,703,563)

(5,723,741)

(2,477,279)

(1,487,400)

(1,640,032)

(38,878,086) 42,800,037 29,379,076 12,301,864 41,680,940

(40,771,687) (47,944,792) (54,156,487) 66,458,351 12,301,864

(40,409,644) (55,340,005) 25,486,029 40,972,322 66,458,351

(35,106,755) (41,810,318) 3,933,666 37,038,656 40,972,322

(5,723,741) 4,456,347 32,582,309 37,038,656

(2,477,279) 18,248,280 14,334,029 32,582,309

(1,487,400) 11,482,516 2,851,513 14,334,029

(1,640,032) 1,004,497 1,847,016 2,851,513

Page 18 of 27

Analysis of Pharmaceutical Industry

Ratio Analysis
Company's profitability has been an improvement on a year-on-year basis, as the company is able to minimize its cost structure and hence, post a profitable return. The gross profit margin for FY08 was 30%. Approximately 10% increase compared to the previous year FY07 (41.20%). Several factors contributed to this decline, as there was rupee devaluation, increase in international prices and inflationary pressures. Furthermore, the concern then lies with net profit margin, which has declined to 16.1% in FY08 as compare to FY07. The basic reason for decline is an increase in cost of goods sold mainly sales promotion for the new launches during the period of FY08.
Liqudity Ratios Current ratio Quick ratio Cash flow liquidity Inv days Receivable days Payable days Leverage Ratios Debt ratio Long term debt to total captalization Debt to equity Solvency Ratio Time interest earned Cash coverage ratio Fixed charged coverage ratio Cash Flow Adequacy ratio Profitability ratio Cash flow margin Net profit margin Optn profit margin Gross profit margin ROI /ROA ROE Cash return on assets Market Ratio EPS DPS Dividend Pay out ratio P.E Ratio Dividend Yield Degree of fin leverage DuPont Analysis Profitability Activity Solvency Efficiency Ratios Receivable TO Inv. TO Payable TO Fixed Assets TO Total Asst TO
2009 1.76 0.69 0.81 175.53 17.79 104.04 0.43 0.32 0.74 59.12 88.72 59.12 0.33 0.09 0.15 0.19 0.51 0.10 0.18 0.06 10.53 2.42 0.23 14.72 1.56 1.22 0.15 0.68 1.74 20.52 2.08 3.51 0.93 0.68 2008 2.60 1.65 2.11 168.52 9.57 108.53 0.44 0.36 0.79 174.50 78.41 174.50 1.11 0.20 0.23 0.28 0.58 0.15 0.26 0.12 15.00 5.22 0.35 20.60 1.69 1.20 0.23 0.63 1.79 38.12 2.17 3.36 0.96 0.63 2007 2.94 2.07 2.86 117.55 12.64 115.10 0.44 0.36 0.78 53.81 113.50 53.81 2.13 0.23 0.22 0.24 0.55 0.16 0.29 0.17 16.61 3.22 0.19 14.93 1.30 1.11 0.22 0.76 1.78 28.88 3.11 3.17 1.21 0.76 2006 2.86 1.55 2.25 164.32 6.12 98.13 0.45 0.38 0.82 94.92 91.62 94.92 2.04 0.20 0.23 0.29 0.57 0.19 0.34 0.16 17.51 4.06 0.23 11.71 1.98 1.22 0.23 0.80 1.82 59.64 2.22 3.72 1.20 0.80 2005 2.77 1.76 2.43 126.77 3.21 87.10 0.33 0.18 0.48 113.94 99.31 113.94 1.46 0.19 0.23 0.31 0.57 0.27 0.40 0.22 19.87 5.23 0.26 9.81 2.68 1.33 0.23 1.15 1.48 113.79 2.88 4.19 2.30 1.15 2004 1.94 0.93 2.19 157.64 4.64 86.25 0.41 0.25 0.69 114.34 125.13 114.34 1.19 0.25 0.20 0.31 0.61 0.25 0.42 0.30 18.29 6.36 0.35 8.20 4.24 1.54 0.20 1.22 1.69 78.63 2.32 4.23 2.07 1.22 2003 1.69 0.76 0.60 148.40 5.47 69.50 0.51 0.31 1.06 97.57 53.09 97.57 1.05 0.06 0.14 0.21 0.49 0.18 0.38 0.07 15.42 7.75 0.50 6.10 8.25 1.50 0.14 1.33 2.06 66.69 2.46 5.25 2.67 1.33 2002 1.64 0.78 0.95 128.46 5.58 54.32 0.57 0.39 1.31 52.69 45.12 52.69 2.22 0.12 0.13 0.20 0.46 0.17 0.39 0.15 11.82 5.55 0.47 4.48 10.47 1.57 0.13 1.30 2.31 65.45 2.84 6.72 2.45 1.30 2001 1.60 0.46 0.57 159.07 6.67 47.56 0.55 0.32 1.20 28.63 17.38 28.63 1.50 0.08 0.11 0.19 0.43 0.17 0.38 0.12 11.34 2.45 0.22 2.43 8.90 1.69 0.11 1.51 2.20 54.70 2.29 7.67 3.18 1.51 2000 1.55 0.42 0.25 151.03 9.81 64.89 0.57 0.36 1.34 7.96 5.64 7.96 0.80 0.05 0.06 0.12 0.36 0.09 0.21 0.07 5.25 1.70 0.32 2.86 11.34 1.88 0.06 1.41 2.34 37.20 2.42 5.62 2.88 1.41

Return on Assets (ROA) has shown a marginal decrease in FY08. It has reduced from 15% in FY07 to 10% in FY08. This decline has mainly resulted in an increase in
Page 19 of 27

Analysis of Pharmaceutical Industry

the cost of goods sold mentioned above. It has resulted in a low net income, which in turn, led to low ROA. Ferozsons had been performing well from the past few years with an increment of the ROA on year-on-year basis, however FY08 decline has dented the growth of the profits of Ferozsons. The net income of FY08 was 16.1% less compared to the net income in FY07. This shows the main reason of low ROA

Compared to other companies, Ferozsons has not performed well in terms of profitability, as it was in previous years. ROE (Return on Equity) has followed a similar trend as ROA has. This is because again the lower net income earned in the period, along with a very high investment in Bio sciences business. Similar is the case with ROE, there has been an increase in the net equity, however, not a proportionate increase in the net income observed. In fact, in FY08, there has been a fall in net income. ROE has been on an increasing trend for the past half decade, with earnings on the rise plus stable increase in the equity. However, FY08 has made ratios growth under stress, because of rupee devaluation, inflationary pressures, which have affected the cost structures of the company, especially the cost of goods sold & entering in biosciences business. Augmenting to this, are high selling and distributive expenses, which has resulted in further decline of net income.

Page 20 of 27

Analysis of Pharmaceutical Industry

Compared to the previous years, the current ratio has further deteriorated. In FY06, it was 2.94x, then declined to 2.60x in FY07 and further to 1.76 in FY08. The company has not been able to increase its current assets in line with the current liabilities. However, it remained in a strong competitive position in the market. Current Liabilities have again shown increasing trend. FY08 showed a substantial increase of 37.2%. This was mainly due to an increase in trade payables that was experienced by the company and current maturity of long term liabilities. Ferozsons has not been able to actively manage its current ratio structure, hence faced a declining trend for the two consecutive years - FY07 and FY08.

Page 21 of 27

Analysis of Pharmaceutical Industry

Quick ratio has also shown a declining movement because an increase in stock-intrade figures. The quick ratio declined to 0.69x in FY08 from 1.65x in FY07. This year, the reduction is basically attributed to an increase in the stock-in-trade values, which has increased by 55.4% in FY08. Hence, the liquidity condition for the company has been under stress as there has been decline of both current and quick ratios emanating because of increase in current liabilities and disproportionate increase in current assets. Keeping its previous years performance, the company has been a good performer in terms of fulfillment of debt obligations and still stands to be considering the current economy and market condition for the local firms to operate. Receivable days show how quickly the company is able to collect the dues from its debtors. It should be high enough for the company to avoid risks of bad debts. Ferozsons has increased its receivable days from 9.57days in FY07 compared to 17.79 days in FY08. This shows that the company has not able to collect their debts from the customers and made sure that their customers do not take long enough to repay the debts of the company. This is mainly due to increase in inventory & marketing strategy to boost sale on credit to minimize inventory levels.

Inventory Turnover (ITO) ratio depicts how quickly the company is able to sell-off its inventory. Ferozsons has been able to perform better in this area. ITO has slightly deteriorated in FY08 from 168 days in FY07 to 175 days in FY08. This shows that the company has taken 7 days extra to sell-off its inventory, as a result reduced in their efficiency process. This could have been because there is an increase in sales, however the average inventory has been more than the last year's figures. This has resulted in the decline in the ITO. It is not been a significant increase however, compared to the industry, it has slightly deteriorated.

Page 22 of 27

Analysis of Pharmaceutical Industry

Page 23 of 27

Analysis of Pharmaceutical Industry

Considering the debt management ratio, the company has not performed well in this area. The ratios were slightly detoriated from previous years. The first would be Debt to Asset ratio. There has been a slight deterioration in this ratio as it has declined from 0.44x in FY07 to 0.43x in FY08. The ratio basically tells us that the company has been able to finance their assets through their debt (long-term plus short-term). A slight reduction could be because of the accrued liabilities that have increased in FY08.

The second ratio is Debt to Equity. This shows us that the financing of its assets are done through either certain percentage of debt and equity. There has been a decline in the ratio, 0.74x in FY08 from 0.79x in FY07. This tells us that the company has been relying more on debt to finance its assets than equity. The main reason of increase in this ratio from FY06 was due to company investments in new manufacturing facility & Farmacia business. Long-term Debt to Equity has been on a declining trend over the past 4 years. However, the ratio has been a significant concern for the company. This is because of a increase in the Long term financing in the past two years. The company had been performing well in FY04 and FY05. Though it shows that the company has generated enough income to fulfill their financial cost obligations. However there was a decline because of a low EBIT compared to previous years. There has been a significant decline in EBIT in FY08 compared to FY07. The sharp increase in selling expense is the main reason for the decline. This is mainly due to launching of new medicines in local market. The (P/E) ratio shows how much investors are willing to pay per rupee of the reported profits, depends on the company's price per share and its the earnings per share (EPS).
Page 24 of 27

Analysis of Pharmaceutical Industry

There is a decline in the EPS observed in FY08. It has fallen from 15 in FY07 to 10.53 in FY08. This main reason for this decline is credited to decrease in the net income & increase in the outstanding shares. However, P/E has shown an increase in the value because the investors are still ready to pay a higher price for the shares of the company. This shows that the reliability of the company's performance with respect to local investors. Market price at the year-end showed a decline from Rs 309 in FY07 to Rs 155 in FY08. This could be because of the current stock market condition & volatility of the company's financial performance, which led to a lower demand for the market investment. The dividend per share showed a sharp decrease in FY08, because of the decrease in the dividend paid out for the year. This could be because the company was reinvesting its profits for the expansionary purpose for the past 2-3 years. However it has paid out dividends to their shareholders in order to promote as a profit sharing company and attracted other investors to keep investing in the company. One reason for doing this is that the company faced a competitive financial year hence to keep trustworthy position of the company; this move can be beneficial to keep their healthy investors in tact rather than losing out on investments. Secondly, the company can argue that the investments made in previous year have paid off and that has resulted in dividend payout for the shareholders.

Page 25 of 27

Analysis of Pharmaceutical Industry

Page 26 of 27

Analysis of Pharmaceutical Industry

Future Industry Scenario
The pharmaceutical industry is subject to structural weaknesses brought about by a challenging and in many cases irrational regulatory environment. The Government’s drug pricing policy refuses to address the legitimate and substantial increase in manufacturing costs. Pharmaceutical manufacturers in Pakistan today suffer on many fronts. First, the industry is constrained by a pricing freeze from adjusting its prices in response to cost increases. Second, it also suffers, like other manufacturing sector, from shortages in the supply of utilities, particularly electricity and gas, but is again unable to pass on the cost of its utilities when it is forced by the outages to rely on expensive alternate sources of power. Finally, whereas in other countries, investment in the manufacturing sector is encouraged through tax holidays and duty waivers on import of plant, equipment and raw material, in Pakistan, particularly in the Pharma Sector, it is the commercial importers who derive the benefits of duty free imports and a low withholding tax regime as final liability at the import stage. By constrast, the manufacturing sector, which generates much-needed investment and employment, by comparison, faces a tax burden greater in several orders of magnitude compared to the importer. This kind of ‘reverse-subsidy’ in taxation against local manufacturing is counter-productive and a strong disincentive against investment in the sector. Until this disconnect in tax policy is rectified, the manufacturing sector will continue to struggle in Pakistan. Ferozsons Laboratories have invested in Hepatitis and Cancer medicine. There is a strong local market of above mentioned medicines. This will increase future sales and profit of the company.

Page 27 of 27

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