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Weak Sales, high cost margins undermine Evans Medical’s bottom line

Evans-Medical

tough and unpredictable macroeconomic environment has taken a toll on Evans Medical plc’s financial performance as weak sales, high production cost margins undermined bottom lines and lead to a loss position.

For the year ended December 2014, the company recorded a loss after tax of N972.90 million as against a loss after tax of N816.76 million the same period of the corresponding year (FY) 2013. Sales were down by 9.48 percent to N3.34 billion as the firm continues to grapple with weak consumer demand.

A cursory examination of the 2014 financial statement of Evans show production costs (cost of sales plus operating expenses) of N4.13 billion swallowing or wiping out all of revenue, resulting in operating loss of N700.38 million.

Total production cost margins increased to 123.80 percent in 2014 from 112.12 percent in 2013. This means the company is spending more on cost of producing each unit of products. Simply put, the company spent N123 in producing every N100 generated in sales.

Analysts attribute the suppressed margins to high costs of doing business in Africa’s largest economy as most firms accumulate huge overhead cost on the back of epileptic power supply.

The unstable power from the grid forces most firms to rely on diesel oil (an expensive source of energy) to run plants at the factories. Evans Medical will under perform in 2015 as foreign exchange restrictions imposed by the Central Bank of Nigeria (CBN) aimed at curbing inflation and stopping the continued bleeding of external reserves as a result of significant drop in oil price hard hit the pharmaceutical firms.

This is because as they were unable to access dollars for the purpose of paying suppliers and importing drugs.

Only 30 percent of the drug sold in Nigeria is manufactured locally. 70 percent is imported, according to PMG-MAN, Frost & Sullivan.

Analysts also said the weak consumer discretionary spending stoked by rising inflation and slow manufacturing activities from mid 2015 and 2016 will impact on the performance of drug makers.

In Nigeria, Inflation rate has risen to 15.60 percent for the month of June, the highest in six years, caused by increased price of gasoline and rising price of foodstuff, according to the NBS.

The economy has contracted by 0.4 percent in the first quarter of the year, the worse since 2004 while a recession is imminent.

With pervasive poverty and extreme inequality, only a small percentage of the population can afford quality health care and quality drugs.

With an estimated size of $1-1.6billion (PMG-MAN, Frost & Sullivan), the Nigerian pharmaceutical industry is less than 0.3% of the national GDP and is practically non-existent in the world pharmaceutical map.

Experts attribute other causes of   high cost of operation to high interest rate, multiple taxation, lack of power which makes the locally manufactured product less competitive compared to the imported ones.

There is light at the end of the tunnel for the pharmaceutical sector as the adoption of a flexible exchange rate policy by the apex bank means a lot of firms will have access to dollars that give them the leeway to finance capital projects or expansion plans

“We believe manufacturers, which had hitherto experienced difficulty in sourcing FX for imports, should now have seamless access to FX for their businesses,” said Tajudeen Ibrahim, team head Chapel Hill Denham Limited, a Lagos based investment house, in an emailed statement.

There is light at the end of the tunnel for Evans Medicals and its peers as 4 companies have prequalified by the World Health Organization (WHO), a feat that makes their drugs competitive at the international level.

Analysts say such significant improvement in the global rating and have the potential of improved productivity and patronage by international. Evans Medical’s share price has been fixated at N0.50 since November last year while market capitalization was N366.17 million.

BALA AUGIE