Founded in 1965 as a subsidiary of G.D. Searle & Co (USA), The Searle Company Ltd (PSX: SEARL) started its journey as a private limited company called Searle Pakistan Limited. Today, it stands as one Pakistan's leading pharmaceuticals; it is ranked fourth in terms of volume, sixth by value, and holds a whopping market capitalisation of over Rs 63 billion.

In 1993, G.D. Searle & Co divested its shares in Pakistan and was acquired by IBL Group. Searle Pakistan was thence converted into a public limited company and came to be known as The Searle Company Limited. Today, that company has six state-of-the art manufacturing facilities in Lahore and Karachi. It is a leader in many therapeutic areas such as cardiovascular, allergy and cough preparations, and pain management. The company's diverse portfolio spans antibiotics, nutritional/ food supplements, infant milk formulation, and many biotechnology products.

Prior performance

Searle has been the picture of growth; the company has witnessed increases in its sales and profits year after year. Despite a tough environment (pricing regulation by the government of Pakistan), Searle has maintained strong margins. Meanwhile, other big-name multinationals like GSK or Abbott lag far behind. Over the years, it has come to rely not only on its most popular brands such as Hydrillin and Nuberol Forte, but new product launches as well; in 2012, new product launches (those products launched within the past three years) made up 25 percent of the top line.

The last year (2015) was particularly outstanding - the company's top line grew by 19 percent year-on-year while net profit shot up by over 65 percent. This was due to domestic volume growth thanks to expanding doctor coverage and a price increase made in the latter part of FY14; the Drug Regulatory Authority of Pakistan (DRAP) approved an across-the-board increase in the prices of drugs by 15 percent, but immediately rescinded the order two days later. Some companies obtained a stay order on this price increase, including Searle. This has helped prop up its margins rather nicely.

Searle primarily operates in two segments - pharmaceuticals and consumer healthcare. The former accounts for around 90 percent of total sales. However, both segments have been growing astoundingly; as of FY15, the consumer healthcare segment grew by 23 percent year-on-year, bolstered by old brands and new such as Canderel and Vitamin Water.

As for exports, the company does not have many; as of FY15, exports accounted for less than seven percent of total revenues. Nevertheless, the company has been increasing its exports, and this is an area that is apparently on the agenda as well - as per the company's latest Director's Report, "Searle will aggressively focus on the global market and will primarily focus to expand the business operation in existing export countries while looking to penetrate into new countries as well."

Recent performance

For the nine months ended FY16, Searle has reported some interesting results; sales growth was a whopping 25 percent over the comparable period last year, while the bottom line blossomed by 53 percent year-on-year. Net margins were up by 440 basis points to 24 percent, putting it ahead of even Ferozsons' magnificent 23 percent in the comparable period. All seems well, but there's more to the story.

The firm's cost of sales more than increased by 41 percent year-on-year, weighing down on gross margins. There is no concrete reason given in the recent Director's Report for the increase in cost of sales, but based on the previous reports, it can be concluded that the increase took place in the third quarter.

The higher costs are most reflected in the segment results; despite a 21 percent increase in pharma segment revenues year-on-year in 9MFY16, the net income was down by 32 percent. Fortunately, the company was saved by healthier margins from the consumer segment, not to mention other operating income, which skyrocketed 150 percent and accounts for 80 percent of the bottom line!

Outlook

As mentioned earlier, Searle is looking to expand its exports, a key area where it is lagging and can drive further growth. The recent numbers indicate some trouble for the company in controlling its costs, though one can't say why as yet.

As for the pharma industry on the whole, some price revisions have been granted, while the Drug Pricing Policy is expected to take effect starting July 2016. This should bode well for the industry in the coming year.