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Pharma Industry of Pakistan is not among the largest industries of Pakistan, but it a reasonably big sized industry. It is also a popular industry because news, mostly negative, keep appearing about it on various media. I would like to take up some of the commonly held perceptions and examine these to separate myths from facts. Being a Pharma Veteran of 45 years, I do understand the industry mechanics well to comment.
Pharma Industry is Highly Profitable – When we talk about profit, there are three stages of profit. There is a gross profit which is calculated by simply subtracting the Cost Of Goods Sold (COGS) from the revenue that is received through sales. Let us say that a pack of 100 Paracetamol tablets has a retail price (patient price) of 200 rupees. The pharmacy earns 15% or 30 rupees on each pack. The distributor gets 10% on pharmacy price, or 17 rupees, and the manufacturer gets 153 rupees. The COGS is 90 rupees. These are not real figures, but just an example to understand the profitability mechanism. In this example, the manufacturer or Pharma company has a Gross Profit of 63 rupees (153-90). This is the first stage of profit. Then come the costs of sales team, administration, management and the office. Let us say these come to 40 rupees. The Net Profit or stage 2 profit is 23 rupees. The net profit is liable to income tax and other taxes if any. The final or stage 3 profit may be 13 rupees.
Whatever the product or whatever is the price, the calculation shall remain the same. Internationally, if the final profit is around 10-15% it is considered very good. Pharmaceutical is generally in the same range. The survival is in volumes. If a company has large business, its earning in real money will be large, no matter what the percentage.
Research products get a premium price world over which is meant to cover the cost of research which has gone into that product and which will go into future research. Presently, a new research-based Pharma product may cost about one billion US dollars from identification to bringing it to market. It is a huge expense which must be recovered. At the same time, research keeps going on to find more new products. The financing of new projects has to continue.
Generic manufacturers do not spend such huge amount on research and are therefore able to sell products at a much lower price.
When Sundar Industrial Estate, Raiwind Road, Lahore was established several years ago, over 100 plots were earmarked for Pharmaceutical Manufacturing Units. The plots were purchased by existing Pharma companies and by those who were not in Pharma business till then. Someone I knew had family business of exporting rice from Pakistan. The gentleman called me one day and said he had purchased a plot for Pharma. I asked him what would he do with it? He said Pharma was lucrative business, so why not get into it. I wished him well. Later he realized, it was not his cup of tea and did not venture into it.
Out of the hundred or so plots, pharmaceutical manufacturing plants of various sizes have been constructed on many and have gone into operation. Barring few, most others are seriously struggling to survive. Some never went beyond the construction, some stopped after some time, and many are up for sale. So much for the highly profitable industry. As mentioned earlier, unless a Pharma company builds sizable business, it is in crisis.
Another accounting term is achieving ‘break even’. It means when a business reaches a point where its income and expenses become equal. By any estimate, it takes about three to five years for a pharma business to reach break-even. During this time, millions have already been invested. First, these will be recovered and then the real profit will start.
No business is easy. Regulated businesses are more costly and difficult. Pharmaceutical business is highly regulated and quite complex. The overall profitability is limited. However, the companies who have built big businesses over the years are earning better, but for smaller companies it is a constant struggle.
To be Continued……