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The largest drug makers in Africa’s most populous nation have used their fixed assets in generating higher profit even amid deteriorating profit margin as they struggle with rising input costs.
The average fixed asset turnover ratio (FAT) ratio of Fidson HealthCare Plc and May and Baker Plc rose to 3.14 in December 2023 from 2.65 as at December 2022.
This means for every Naira invested in fixed assets, a return of N3 is earned, but investors are more concerned about the bottom line (profit) where dividends are being distributed.
Fidson Healthcare’s FAT ratio increased to 2.51 in December 2023 from 2.07 the previous year. Peer rival May and Bakers’ ratio improved to 3.77 in the period under review from 3.23 the previous year.
Fixed Asset Turnover (FAT) is an efficiency ratio that indicates how well or efficiently a business uses fixed assets to generate sales. This ratio divides net sales by net fixed assets, calculated over an annual period.
The net fixed assets include the amount of property, plant, and equipment, less the accumulated depreciation. Generally, a higher fixed asset ratio implies more effective utilization of investments in fixed assets to generate revenue.
Of course, some sector players in the health care sector did deals that accelerated expansion plans and attracted investor participation in the sector.
For instance, Fidson collaborated with Asia’s Aidea Pharma in the second half of 2023 (H2:2023) to produce drugs for HIV treatment while Mecure Industries Plc listed on the Nigerian Exchange in 2023.
However, sector players succumbed to inflationary pressures, rising borrowing, and foreign exchange scarcity that undermined profit.
There was a surge in material costs as these firms import raw materials that are susceptible to imported inflation.
The average industry net profit margin of Fidson and May and Baker dipped to 5.59 percent in December 2023 from 10.35 percent the previous year. Operating profit margin reduced to 10.80 percent in the period under review from 16.76 percent the previous year.
Investors have not rewarded drug makers so far this year due to future uncertainty and a challenging business environment that forced some companies to leave the country.
GlaxoSmithKline Consumer Nigeria Plc, a major pharmaceutical giant, announced its exit from the Nigerian market due to difficulties accessing foreign exchange (FX), impacting product availability.
Sanofi-Aventis Nigeria Ltd, a major supplier of polio vaccines, also announced its exit from the Nigerian market and transition to a third-party distribution model.
Analysts at Meristem Securities suggest that these exits create an opportunity for existing companies to capture market share further and they anticipate an increase in pharmaceutical and consumer health product prices in 2024.
“We anticipate a strengthened financial performance at the industry level in 2024FY, propelled by anticipated growth in sales volumes and projected price adjustments to align with the prevailing macroeconomic conditions,” said analysts at Meristem Securities.
“However, we foresee a corresponding upswing in production costs and operational expenses, attributed mainly to expected increases in transportation and energy costs and sustained high inflation,” said analysts at Meristem Securities.
Fidson’s shares have a negative year to date (YTD) of -8.57 percent while May and Baker returned 7.25 percent, as both underperformed the NGXASI index’s 39.97 percent.
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