Why does the Pharma sector continue to rally?

Today, the pharmaceutical sector saw a rise in its stocks, and here’s why:

On February 6th, 2024, the Interim Government initially approved the deregulation of non-essential drugs, which meant these drugs would no longer be subject to strict regulations outlined in the Drug Act of 1976. However, this decision faced a setback when a petition filed in the Lahore High Court led to a temporary halt, or stay order, against the deregulation.

Under the Drug Policy of 2018, medicines are categorized into two types: essential and non-essential. Prices for these drugs are set by the government and are linked to the Consumer Price Index (CPI). Essential drugs can see a price increase of up to 7%, while non-essential drugs can increase by up to 10%. Last year, there was a one-time increase of 14% for essential drugs and 20% for non-essential drugs for a period of one year.

The current pricing formula involves a calculation based on various factors such as the cost of active pharmaceutical ingredients (API), excipients, packaging materials, and mark-ups for both locally manufactured and imported drugs.

However, as of April 2nd, 2024, the Lahore High Court lifted the stay order against deregulation, citing discussions with the elected Government. Yet, a final decision from the Government is still pending.

If this deregulation is approved, it could greatly benefit the pharmaceutical sector. Companies would be able to increase prices of non-essential drugs and introduce new products, potentially leading to higher profits.

In particular, companies like AGP and SEARL (TSL Pharma Universe) stand to gain from this decision. AGP, with its mix of essential and non-essential drugs at 40% and 60% respectively, could be the primary beneficiary.

This development brings hope to the pharmaceutical industry, signalling potential growth and increased profitability in the future.