Pharma sector earnings rise, valuations fall: is it a buying opportunity?

Key takeaways:

• Net revenue rose 12% YoY to Rs80bn in 1QCY25
• Earnings grew 78% YoY; gross margins climbed to 39%
• The sector underperformed KSE-100 by 6% CYTD—presents a buying opportunity

The pharmaceutical sector in Pakistan delivered a strong performance in 1QCY25, with listed companies showing robust profitability driven by favorable macro and regulatory developments. Using a sample of ten listed players, industry revenue rose by 12% year-on-year to Rs80 billion, primarily due to price hikes following the deregulation of non-essential drugs in early 2024. The deregulated regime enabled pharmaceutical firms to better navigate cost pressures and protect margins.

Strong earnings momentum

The sample recorded an earnings growth of 78% YoY, supported by improved pricing, declining active pharmaceutical ingredient (API) costs, and a stable currency. Gross margins improved by 8 percentage points YoY to 39%, while operating margins also trended upward. Companies such as BFBIO, FEROZ, HALEON, and AGP were standout performers, with BFBIO leading the growth chart at 41% YoY.

QoQ decline due to seasonality

On a sequential basis, sector revenues declined 2% QoQ due to seasonal factors, with GLAXO showing the sharpest drop at 11% QoQ. SEARL, ABOT, HINOON, and AGP also posted marginally negative sequential growth. Despite these dips, gross margins remained flat QoQ as cost-side benefits offset lower sales volumes.

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Sector outlook remains bright

Looking forward, the outlook remains upbeat. The expected CPI-linked price increase for essential drugs in 2HCY25 should support further earnings growth. Moreover, the deregulation of non-essential products, enhanced drug availability, and declining API prices all point to expanding margins and top-line resilience.

From a valuation perspective, the pharmaceutical sector has underperformed the KSE-100 index by 6% so far in 2025, creating a compelling entry point for long-term investors. Despite recent price corrections, fundamentals remain strong, and the earnings outlook is supportive.

Key growth contributors

• AGP maintained industry leadership in operating margins
• SEARL posted the highest selling expense ratio, limiting margin expansion
• FEROZ and HALEON were notable in both revenue growth and cost management
• GLAXO underperformed both YoY and QoQ, due to product mix pressures

Industry snapshot
The total size of the pharmaceutical market in Pakistan reached Rs1.04 trillion as of Feb-2025, with volumes holding steady at 3.8 billion units—a 4% YoY increase. With a four-year CAGR of 19%, the sector is steadily growing in value terms, with key structural reforms now unlocking more predictable profitability.

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The pharma sector’s 1QCY25 performance underscores its ability to deliver earnings even in a challenging macro backdrop. With pricing freedom, lower API costs, and improving operating metrics, JS Global maintains an overweight stance on the sector. Select names with superior margins and efficient cost structures, like AGP and SEARL, remain their preferred picks.

Source: JS Research

⚠️ 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 →