Ferozsons Analysis

ANALYSIS OF PHARMACEUTICAL INDUSTRY Ferozsons Laboratories Limited Submitted by: Aali Muazzam (2008-3-39-8410) Dated: January 1, 2010

Analysis of Pharmaceutical Industry

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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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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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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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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 2001 2002 2003 2004 2005 2006 2007 2008

Antibiotics 25 22 20 20 19 18 18 15

GIT 20 15 15 14 11 10 8 8

CNS 5 8 10 13 14 15 18 19

Respiratory 5 3 4 3 3 5 5 5

Vaccines 2 5 7 9 9 10 12 12


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Vitamins 8 10 10 8 8 10 10 10

Narcoleptic 3 5 4 3 2 2 2 2

Nutritional 5 7 8 5 3 3 3 3

Anti

metabolics 5 8 10 10 12 12 15 15

Anticancer 2 2 3 5 5 5 7 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 Type of Drugs Total

1. Locally manufactured drugs of human use 27,055

2. Imported drugs for human use 5,388

3. Locally manufactured drugs for veterinary use

2,742

4. Imported drugs for veterinary use 1,188


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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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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

CONDITIONS

Govt. Permission Not Required except specific licenses from

Ministry of Health

Remittance of capital, profits,

dividends, etc. Allowed

Upper Limit of foreign equity

allowed 100%

Minimum Investment Amount No Restriction

Customs duty on import of PME** 5% *

Customs duty on import of Raw

Materials & Chemicals 5%

Sales Tax on import of PME 0%

Withholding Tax on import of

PME*** 0%

Rate of Tax on Payment on

Royalty & Technical Fee

15% of the gross amount.

(In case of non-residents is such as


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contained in the overriding provision of

bilateral agreements on avoidance of

double taxation.)

Corporate Tax Rate:

Public companies

Private companies

35%

35%

Withholding Tax on Dividends:

Public & Insurances Cos.

Other Companies

5% (if received by Public & Insurances

Cos.)

10% (if received by other companies)

Withholding Tax on Capital

Goods**** 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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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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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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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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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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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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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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BALANCE SHEET AS AT 30TH JUNE 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000

(RUPEES) (RUPEES) (RUPEES) (RUPEES) (RUPEES) (RUPEES) (RUPEES) (RUPEES) (RUPEES) (RUPEES)

SHARE CAPITAL AND RESERVESIssue , subscribed & paid up capital 173,607,322 144,672,768 120,560,640 100,467,200 77,282,460 55,201,760 44,161,410 35,329,130 35,329,130 35,329,130Capital reserve 321,843 321,843 321,843 321,843 321,843 321,843 321,843 321,843 321,843 321,843Reserve for issue of Bonus shares 6 22,080,706 11,040,356 8,832,283Unappropriated profit 795,036,930 681,242,280 561,722,124 416,294,570 305,866,486 164,874,732 124,381,575 90,261,594 69,864,368 54,548,073MINORITY INTEREST 38,990,296Total SHE 1,007,956,391 826,236,891 682,604,607 517,083,613 383,470,795 242,479,041 179,905,184 134,744,850 105,515,341 90,199,046

SURPLUS ON REVALUATION OF FIXED ASSETS 247,474,526 252,011,413 256,984,285 262,437,999 54,537,651 61,284,221 61,543,907 76,157,950 45,725,290 45,725,290Non-Current LiabilitiesLong Term Financing Secured 174,062,500 156,062,500 75,187,500DEFERRED LIABILITY FOR TAXATION 53,960,116 49,691,426 48,302,487 46,910,274 16,512,079 17,214,210 11,769,751 5,546,478 5,046,478 4,887,985OBLIGATIONS UNDER FINANCE LEASES 475,003 1,456,643 1,024,253 5,321,499 11,873,821 2,341,580 6,733,166 5,879,561 -- 723,500

CURRENT LIABILITIESBank borrowings/Short term borrowings secured 548,554 -- 12,782,463Current maturity of long term liabilities 94,125,000 56,750,000 17,312,500 723,500 1,487,400Current portion of obligations under finance leases 983,653 2,399,815 4,310,822 10,835,452 11,456,235 5,141,337 6,407,314 3,816,660Creditors, accrued and other liabilities 166,505,160 116,423,214 131,024,480 86,794,523 66,697,360 46,288,138 47,640,404 32,585,986 26,058,715 33,967,533Revolving advances 65,000 122,456 122,456 122,456 122,456 67,456 429,456Accrued markup on long term financing 6,983,134 5,588,157 1,610,432Provision for taxation 0 15,008,477 13,017,721 23,927,980 12,832,490 32,000,000 27,875,835 22,728,243 10,570,686Unclaimed dividend 4,043,765 16,207,221 1,840,365 1,651,186Proposed dividend 22,080,704 19,872,635 8,832,283 24,730,391 8,832,283Total Current Liabilities 269,145,501 196,169,663 154,258,234 110,712,696 102,204,031 86,465,125 110,086,574 89,440,441 76,148,670 69,721,007Total Liabilities & SHE 1,753,074,037 1,481,628,536 1,218,361,366 942,466,081 568,598,377 409,784,177 370,038,582 311,769,280 232,435,779 211,256,828

FIXED ASSETS 1,273,098,467 610,987,413 539,455,959 486,662,333 265,711,067 226,954,299 178,468,756 159,202,571 110,244,807 103,135,645CAPITAL WORK IN PROGRESS 16,523 3,458 5,388LONG TERM INVESTMENTS 33,085 203,425,956 149,606,959 138,318,587 19,138,244 14,304,739 6,029,485 6,031,885 33,085 33,085Long Term Loan 156,062,500 75,187,500Derivative Asset-interest rate swap 31,143 822,691LONG TERM Deposits 5,061,570 790,870 600,447 436,447 526,947 481,047Total Fixed Assets 1,278,224,265 972,089,430 764,850,865 625,417,367 285,376,258 241,740,085 184,514,764 165,234,456 110,281,350 103,174,118

CURRENT ASSETSStores, spares and loose tools 3,628,845 4,091,300 4,280,632 3,719,036 3,802,163 3,408,688 3,537,866 2,402,757 2,218,485 1,933,404Stock in trade 280,924,884 180,787,784 133,816,190 145,341,209 97,077,143 84,605,100 101,722,444 77,057,413 87,150,800 79,057,782Trade debts-unsecured (considered good) 57,955,059 24,454,201 31,937,773 12,611,931 5,763,040 6,370,838 7,390,611 6,182,384 6,419,389 8,001,468Advances, deposits, prepayments and other receivables 7,964,738 4,560,060 3,015,174 2,563,919 33,991,241 23,412,411Loans & Advances 14,546,615 46,907,762 44,357,908 4,197,556Current Portion of Long term Loan 56,750,000 17,312,500Trade deposits & short term prepayments 7,293,812 5,809,956 6,192,514 3,387,606other receivables 1,768,991 1,530,284 14,103,388 6,954,243 2,500,000 338,195 12,031,726 16,238,543Interest accrued 996,428 1,273,496 2,485,196Advance income tax-net 4,598,809 3,362,895Short Term Investments 63,974,446 194,474,564 186,969,198 86,648,750 57,071,000 24,763,787 1,843,000 4,897,550Cash and bank balances 45,743,760 35,807,461 41,680,940 12,301,864 66,458,351 40,972,322 37,038,656 32,582,309 14,334,029 2,851,513

------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------Total Current Assets 474,849,772 509,539,106 453,510,501 317,048,714 283,222,119 168,044,092 185,523,818 146,534,824 122,154,429 108,082,710Total Assets 1,753,074,037 1,481,628,536 1,218,361,366 942,466,081 568,598,377 409,784,177 370,038,582 311,769,280 232,435,779 211,256,828


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PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30TH JUNE 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000

(RUPEES) (RUPEES)NET SALES 1,189,256,968 932,297,994 922,368,542 752,221,631 655,761,685 500,930,930 492,846,868 404,635,697 351,148,935 297,618,660LESS: COST OF SALES (584,146,610) (391,559,432) (415,507,467) (322,838,328) (279,508,957) (195,893,031) (250,188,539) (218,952,624) (199,969,968) (191,065,649)GROSS PROFIT 605,110,358 540,738,562 506,861,075 429,383,303 376,252,728 305,037,899 242,658,329 185,683,073 151,178,967 106,553,011

LESS: OPERATING EXPENSESAdministrative expenses 82,717,534 60,719,276 51,568,412 51,000,143 33,753,707 27,040,360 30,132,959 22,296,722 17,708,748 16,739,459Selling expenses 271,025,184 199,424,660 214,439,862 163,052,856 137,686,959 122,146,359 110,618,385 81,518,389 65,714,540 54,970,318Other charges 27,964,315 21,073,792 17,629,100Financial expenses 3,778,988 1,487,228 4,148,403 2,268,560 1,797,616 1,363,047 1,044,415 1,553,835 2,366,541 4,379,781Total Operating Expenses 385,486,021 282,704,956 287,785,777 216,321,559 173,238,282 150,549,766 141,795,759 105,368,946 85,789,829 76,089,558

OPERATING PROFIT 219,624,337 258,033,606 219,075,298 213,061,744 203,014,446 154,488,133 100,862,570 80,314,127 65,389,138 30,463,453

OTHER INCOME 29,516,774 20,809,630 28,149,442 15,350,477 25,800,546 6,923,722 3,995,490 3,020,074 700,545 508,515Loss/Gain on remeasurement of investments held for trading (4,798,077) (6,086,758) (435,778) 145,236 630,379Share in profit/loss of Farmacia-98% owned partnership 13,818,997 11,288,372 7,180,383 4,833,505 (3,129,441)

PROFIT FOR THE YEAR 249,141,111 292,662,233 258,513,112 230,794,527 227,561,739 157,846,636 105,003,296 83,964,580 66,089,683 30,971,968

LESS: WORKERS' (PROFIT) PARTICIPATION FUND 10,653,087 10,150,722 7,724,407 5,043,129 4,015,706 3,269,457 1,523,173

CENTRAL RESEARCH FUND 2,004,046 1,957,558 1,453,106 948,707 755,430 615,047 286,5380 0 0 12,657,133 12,108,280 9,177,513 5,991,836 4,771,136 3,884,504 1,809,711

PROFIT BEFORE TAXATION 249,141,111 292,662,233 258,513,112 218,137,394 215,453,459 148,669,123 99,011,460 79,193,444 62,205,179 29,162,257

PROVISION FOR TAXATIONTaxation 66,331,849 75,638,404 58,258,952 42,268,679 61,887,660 47,713,720 30,928,694 27,000,000 22,158,493 10,609,492PROFIT AFTER TAXATION/Net Income 182,809,262 217,023,829 200,254,160 175,868,715 153,565,799 100,955,403 68,082,766 52,193,444 40,046,686 18,552,765

ACCUMULATED PROFIT BROUGHT FORWARD 90,261,594 69,864,368 54,548,073 44,827,591Transfer of surplus on revaluation of fixed assetsPrior Years 9,934,644Current Year-net of tax 263,982

0 0 0 0 0 0 100,460,220 69,864,368

PROFIT AVAILABLE FOR APPROPRIATION 182,809,262 217,023,829 200,254,160 175,868,715 153,565,799 100,955,403 168,542,986 122,057,812 94,594,759 63,380,356

APPROPRIATIONS:Interm Dividend (13,248,423) (14,131,652)Proposed Dividend @ 70% (2000: 25%) (19,872,635) (8,832,283) (24,730,391) (8,832,283)Transfer to Reserve for issue of Bonus shares (11,040,353) (8,832,283)

0 0 0 0 0 0 (44,161,411) (31,796,218) (24,730,391) (8,832,283)

UNAPPROPRIATED PROFIT CARROED FORWARD 182,809,262 217,023,829 200,254,160 175,868,715 153,565,799 100,955,403 124,381,575 90,261,594 69,864,368 54,548,073

No of shares 17,360,733 14,467,277 12,056,064 10,046,720 7,728,246 5,520,176 4,416,141 4,416,141 3,532,913 3,532,913

EARNINGS PER SHARE-BASIC 10.53 15.00 16.61 17.51 19.87 18.29 15.42 11.82 11.34 5.25


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CASH FLOW STATEMENTFOR THE YEAR ENDED 30TH JUNE

2009 2008 2007 2006 2005 2004 2003 2002 2001 2000

(RUPEES) (RUPEES)

Profit before taxation 249,141,111 292,662,232 258,513,112 218,137,394 215,453,459 148,669,123 99,011,460 79,193,444 62,205,179 29,162,257

Cash flow from operating activities

Adjustment for:

Depreciation 45,402,712 33,244,566 42,105,532 45,170,037 23,829,142 16,570,745 14,854,314 11,824,345 9,422,727 8,300,141

Profit on sale of fixed assets (3,014,100) (687,675) (1,592,218) (5,025,921) (14,986,494) (378,803) (377,584) (482,230) (576,897) (346,822)

Financial Charges 2,591,349 1,487,228 4,148,403 2,268,560 1,797,616 1,363,047 1,044,415 1,553,835

Profit/interest from investments/deposits/capital gains/dividend income (26,441,366) (15,229,954) (26,557,224) (10,324,556) (10,814,052) (6,544,919) (3,593,966) (2,470,611)

Loss/Gain on remeasurement of investments held for trading 5,251,345 -3,704,361 4,798,077 6,086,758 435,778 -145,236 -630,379

Share in Profit/loss of Farmacia-98% owned partnership (13,818,997) (11,288,372) (7,180,383) (4,833,505) 3,129,441

Loss/Gain on fair value adjustment of interest rate swap 1,187,639 (1,187,639)

24,977,579 103,168 6,816,121 29,705,814 1,079,465 14,575,289 11,781,943 9,794,960 8,845,830 7,953,319

Operating profit before working capital changes 274,118,690 292,765,400 265,329,233 247,843,208 216,532,924 163,244,412 110,793,403 88,988,404 71,051,009 37,115,576

(Increase)/decrease in:

Stocks and stores (88,765,980) (46,782,262) 10,963,423 (48,180,939) (12,865,518) 2,131,237 (25,800,140) 9,909,115 (8,378,099) (9,566,289)

Trade debtors (21,199,391) 7,483,572 (19,325,842) (6,848,891) 607,798 (1,816,383) (1,208,227) 237,005 1,582,079 (1,797,813)

Advances, deposits, prepayments and other receivables (9,407,536) 6,833,437 (11,753,493) (3,285,002) (45,172,965) 3,832,930 (8,613,507) (11,116,938) 4,206,817 (1,825,922)

(119,372,907) (32,465,253) (20,115,912) (58,314,832) (57,430,685) 4,147,784 (35,621,874) (970,818) (2,589,203) (13,190,024)

(Decrease)/increase in other payables/current liabilities 35,727,920 (17,426,686) 42,856,164 18,305,902 19,417,548 3,171,992 14,518,796 6,582,271 (21,053,281) 2,396,735

190,473,703 242,873,461 288,069,485 207,834,278 178,519,787 170,564,188 89,690,325 94,599,857 47,408,525 26,322,287

Financial charges paid (2,146,965) (3,097,660) (2,537,971) (2,268,560) (1,797,616) (1,363,047) (1,044,414) (1,553,835) (2,366,541) (4,379,781)

Payment of tax (81,231,407) (55,878,093) (73,247,355) (55,223,829) (51,494,301) (45,898,276) (27,027,763) (21,352,408) (9,842,443) (5,907,352)

Payment of dividend (34,244,162) (24,495,187) (8,643,104) (6,008,818)

Net cash from operating activities 107,095,331 183,897,708 212,284,159 150,341,889 125,227,870 123,302,865 27,373,986 47,198,427 28,922,978 14,406,117

Cash flow from investing activities

Long term investments (40,000,000) (111,999,960) 4,995,996 1,000,404 2,400 (5,998,800)

Capital expenditure (275,959,826) (86,770,250) (58,087,290) (30,665,371) (43,312,167) (66,973,876) (25,127,490) (19,707,551) (16,968,759) (13,712,506)

Short term investments (96,412,228) (240,974,845) (100,320,448) (34,375,827) (42,954,189) (18,360,569) 2,569,407 (4,267,171)

Sale proceeds from short term investment 248,371,272 237,173,839

Long term loan disbursed (134,500,000) (92,500,000)

Long term loan recovered 14,187,500

Compensation receivable from Government written off -- 738,076

Profit/interest from investments/deposits/capital gains/dividend income 25,694,600 18,414,107 22,922,268 10,324,556 10,378,274 6,460,299 3,659,733 2,206,864

Cash transferred to Farmacia (455,390)

Sale proceeds of fixed assets 7,314,722 2,369,375 2,280,350 10,163,018 26,490,250 770,251 1,702,052 1,293,790 1,015,697 1,212,842

Net cash used in investing activities (90,991,460) (230,100,274) (225,705,120) (156,553,584) (44,401,836) (77,558,881) (17,193,898) (26,472,868) (15,953,062) (11,761,588)

Cash flow from financing activities

Payments-finance lease (2,397,802) (4,444,417) (10,821,877) (7,173,105) (14,930,361) (6,703,563) (5,723,741) (2,477,279) (1,487,400) (1,640,032)

Proceeds from short term financing (867,745) 92,500,000

Proceeds from long term financing 87,926,150 134,500,000

Repayment of long term financing (94,125,000) (14,187,500)

Proceeds from minority share capital contribution 10,000,000

Payment of dividend (41,938,309) (75,538,996) (38,878,086) (40,771,687) (40,409,644) (35,106,755)

Net cash from/(used in) financing activities (41,402,706) 40,329,087 42,800,037 (47,944,792) (55,340,005) (41,810,318) (5,723,741) (2,477,279) (1,487,400) (1,640,032)

Net increase/(decrease) in cash and cash equivalents (25,298,835) (5,873,479) 29,379,076 (54,156,487) 25,486,029 3,933,666 4,456,347 18,248,280 11,482,516 1,004,497

Cash and cash equivalents at the beginning of the year 71,042,595 41,680,940 12,301,864 66,458,351 40,972,322 37,038,656 32,582,309 14,334,029 2,851,513 1,847,016

Cash and cash equivalents at the end of the year 45,743,760 35,807,461 41,680,940 12,301,864 66,458,351 40,972,322 37,038,656 32,582,309 14,334,029 2,851,513


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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

2009 2008 2007 2006 2005 2004 2003 2002 2001 2000Current ratio 1.76 2.60 2.94 2.86 2.77 1.94 1.69 1.64 1.60 1.55Quick ratio 0.69 1.65 2.07 1.55 1.76 0.93 0.76 0.78 0.46 0.42Cash flow liquidity 0.81 2.11 2.86 2.25 2.43 2.19 0.60 0.95 0.57 0.25Inv days 175.53 168.52 117.55 164.32 126.77 157.64 148.40 128.46 159.07 151.03Receivable days 17.79 9.57 12.64 6.12 3.21 4.64 5.47 5.58 6.67 9.81Payable days 104.04 108.53 115.10 98.13 87.10 86.25 69.50 54.32 47.56 64.89Leverage RatiosDebt ratio 0.43 0.44 0.44 0.45 0.33 0.41 0.51 0.57 0.55 0.57Long term debt to total captalization 0.32 0.36 0.36 0.38 0.18 0.25 0.31 0.39 0.32 0.36Debt to equity 0.74 0.79 0.78 0.82 0.48 0.69 1.06 1.31 1.20 1.34Solvency RatioTime interest earned 59.12 174.50 53.81 94.92 113.94 114.34 97.57 52.69 28.63 7.96Cash coverage ratio 88.72 78.41 113.50 91.62 99.31 125.13 53.09 45.12 17.38 5.64Fixed charged coverage ratio 59.12 174.50 53.81 94.92 113.94 114.34 97.57 52.69 28.63 7.96Cash Flow Adequacy ratio 0.33 1.11 2.13 2.04 1.46 1.19 1.05 2.22 1.50 0.80Profitability ratio

Cash flow margin 0.09 0.20 0.23 0.20 0.19 0.25 0.06 0.12 0.08 0.05Net profit margin 0.15 0.23 0.22 0.23 0.23 0.20 0.14 0.13 0.11 0.06Optn profit margin 0.19 0.28 0.24 0.29 0.31 0.31 0.21 0.20 0.19 0.12Gross profit margin 0.51 0.58 0.55 0.57 0.57 0.61 0.49 0.46 0.43 0.36ROI /ROA 0.10 0.15 0.16 0.19 0.27 0.25 0.18 0.17 0.17 0.09ROE 0.18 0.26 0.29 0.34 0.40 0.42 0.38 0.39 0.38 0.21Cash return on assets 0.06 0.12 0.17 0.16 0.22 0.30 0.07 0.15 0.12 0.07

Market RatioEPS 10.53 15.00 16.61 17.51 19.87 18.29 15.42 11.82 11.34 5.25DPS 2.42 5.22 3.22 4.06 5.23 6.36 7.75 5.55 2.45 1.70Dividend Pay out ratio 0.23 0.35 0.19 0.23 0.26 0.35 0.50 0.47 0.22 0.32P.E Ratio 14.72 20.60 14.93 11.71 9.81 8.20 6.10 4.48 2.43 2.86Dividend Yield 1.56 1.69 1.30 1.98 2.68 4.24 8.25 10.47 8.90 11.34Degree of fin leverage 1.22 1.20 1.11 1.22 1.33 1.54 1.50 1.57 1.69 1.88DuPont AnalysisProfitability 0.15 0.23 0.22 0.23 0.23 0.20 0.14 0.13 0.11 0.06Activity 0.68 0.63 0.76 0.80 1.15 1.22 1.33 1.30 1.51 1.41Solvency 1.74 1.79 1.78 1.82 1.48 1.69 2.06 2.31 2.20 2.34Efficiency RatiosReceivable TO 20.52 38.12 28.88 59.64 113.79 78.63 66.69 65.45 54.70 37.20Inv. TO 2.08 2.17 3.11 2.22 2.88 2.32 2.46 2.84 2.29 2.42Payable TO 3.51 3.36 3.17 3.72 4.19 4.23 5.25 6.72 7.67 5.62Fixed Assets TO 0.93 0.96 1.21 1.20 2.30 2.07 2.67 2.45 3.18 2.88Total Asst TO 0.68 0.63 0.76 0.80 1.15 1.22 1.33 1.30 1.51 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


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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.


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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.


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Quick ratio has also shown a declining movement because an increase in stock-in-trade 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.


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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).


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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 re-investing 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.


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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.

Date post:	09-Apr-2015
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Ferozsons Analysis

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