Drug makers succumb to economic uncertainties as growth slows

Nigerian drug makers have succumbed to economic uncertainties culminating in rising cost which has stunted growth, analysis by BusinessDay shows.

Data compiled by BusinessDay show that four quoted drug makers in the third quarter of 2014 recorded a single digit 7 percent rise in sales to N33.52 billion, compared to the 15 percent growth recorded in the corresponding 2013 period.

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

A cross section of analysts interviewed by BusinessDay say the slow growth of firms operating in the sector stems from a squeeze in consumer spending, exchange rate volatility and influx of foreign manufactured products into the country.

“Given the pressure on the disposable income, consumers are choosing to buy the most important stuff,” said T.S Dayanand, managing director of GSK Nigeria, in a recent interview with BusinessDay.

“Consumers are making the hard choice of what not to buy. We are also seeing a reduction in consumption or drop in the frequency of consumption,” said Dayanand.

It will be recalled that manufacturers of drugs in Africa largest economy Nigeria,have been grappling with fluctuations in exchange rate which means imported raw materials will be expensive.

Exacerbating the already anemic position of these firms is the recent decision of the Central Bank of Nigeria (CBN) to devalue the country’s currency by 8 percent to N168 from N155 which policy analysts say would further spiral the material costs for companies.

The currency of Africa’s largest crude producer fell 4 percent, the most since January 2009 on a closing basis, to 187.05 per dollar as of 4:48 p.m. in Lagos, the commercial capital, on Monday.

Some analysts have also attributed the contraction in drug makers’ revenues to costs incurred on research into new innovative products with a view to increasing their share of the market, as well as energy costs.

As a result, the cumulative pretax profit of the four pharmaceutical companies that have released results remained flattish at N2.30 billion, as costs incurred on World Health Organisation prequalification continues to pressure earnings.

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

The cumulative operating expenses rose by 16.03 percent to N11.94 billion in 2014, from N10.29 billion as at the end of 2012, while cost of sales which measure the relationship between sales and production costs surged by 17.5 percent to N20.08 billion.

“Exchange rate volatility is an issue,” said Dayanand “We will continue to manage that risk and have factored some of it in our budget. We intend to localise more of our manufacturing as much as possible, even as we currently produce 75 percent of our products locally,” said Dayanand.

Drugmakers have taken a beating this year as investors sell on negative sentiment towards the sector and frontier markets like Nigeria in general.

GSK Nigeria is down -26.47 percent, Niemeth is down – 38.1 percent, Evans Medical -43.38 percent, and May and Baker -35.51 percent.

This compares with a -16.70 percent fall in the benchmark NSE –ASI for the period.