Are Pharma Stocks in Pakistan Poised for a Rerating?

After years of navigating tight price controls, rising costs, and volatile exchange rates, Pakistan’s pharmaceutical sector appears to be at a critical inflection point. Thanks to deregulation, cost normalization, and improving earnings power, the industry is shedding its reputation for sluggish margins and is now emerging as a surprising source of stability and growth. Here’s why this turnaround matters, and where the smart money may be heading next.

Deregulation is reshaping the revenue model

One of the most transformative shifts in recent years has been the government’s decision to deregulate non-essential drug pricing. With over 60% of pharmaceutical products falling under this category, many companies now have the freedom to set prices in line with market dynamics rather than waiting for regulatory approvals. This has enabled a wave of price increases, averaging 30–35%, without sacrificing demand.

The move not only boosts topline growth but also restores investor confidence, particularly in firms with large non-essential product portfolios like AGP, Searle, and Haleon.

API prices and currency risks are cooling off

Historically, Active Pharmaceutical Ingredient (API) prices and a volatile PKR/USD exchange rate have squeezed margins across the sector. But there’s good news on both fronts.

API prices have now declined materially, in some cases by more than 40%, as global commodity prices normalize post-pandemic. Meanwhile, the rupee has remained relatively stable in recent quarters, easing import cost pressures and supporting margin recovery.

📢 Announcement: We're on WhatsApp – Join Us There! 

Margin recovery is already underway

The combined impact of deregulation and lower input costs is evident in sector-level financials:

Don't miss:

• Which cars are driving the rally in auto stocks?
• 5 High ROE stocks according to Topline Securities
• Why TPLP could go higher.

• Gross margins improved from an average of 31% in 3QFY24 to 39% in 3QFY25
  
• Earnings surged by 83% YoY in the same period
  
• Top-performing companies like AGP reported gross margins of 58%, among the highest in the sector
  

While seasonality may cause short-term fluctuations, these trends signal a sustained recovery in profitability.

Valuations are still attractive

Despite improved earnings, the pharma sector has underperformed the KSE-100 Index by 6% YTD, making it a compelling entry point for value investors. Many top-tier companies are still trading at P/E multiples between 12x and 14x, well below historical averages of 18x–20x.

This mismatch between fundamentals and market price offers a significant re-rating potential for long-term investors.

The demand story remains intact

With Pakistan’s growing population and increased healthcare awareness post-COVID, demand for essential and lifestyle drugs continues to rise. Companies are investing in capacity, launching new products, and entering high-growth categories like dermatology, nutrition, and OTC.

Export recovery, particularly with easing of branding and regulatory hurdles, also adds a promising layer to the growth outlook.

Final word

After a challenging few years, Pakistan’s pharmaceutical sector is finally showing signs of sustainable recovery. Deregulation, lower input costs, and robust earnings growth are combining to create a far more resilient and investor-friendly environment. For those willing to look past the headlines, the industry may offer some of the most compelling risk-adjusted returns on the PSX today.

Source: Optimus Capital Management Research Report 

⚠️ This post reflects the author’s personal opinion and is for informational purposes only. It does not constitute financial advice. Investing involves risk and should be done independently. Read full disclaimer →