Investors are finding the stocks of drug makers in Africa’s most populous nation irresistible despite a myriad of challenges holding back the growth of operators in the sector.
The shares of the three largest listed pharmaceutical firms: Fidson Healthcare Plc, May and Baker Nigeria Plc and GlaxoSmithKline Consumer Nigeria Plc, have risen 199.20 per cent, 187.20 per cent and 44.84 per cent since the start of the year, outperforming the Nigerian Stock Exchange (NSE) All-Share Index (ASI) of 40.12 per cent.
Experts say the recent decision of the government to ban the importation of some drugs will result in increased capacity for local manufacturers that could result in increased revenue for these firms.
Ambrose Omorodion, Chief operating officer Investdata LTD, said the stock price appreciation that May & Baker is currently experiencing can be attributed to the memorandum of understanding (MUO) May & Baker signed with the federal government to produce some vaccines locally.
Omorodion said that the investors’ anticipation that the MOU would boost the company’s earning power and enhance dividend pay-out led to its price rally.
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In 2005, May & Baker entered into a joint venture with the Federal government to take over the facilities of the Federal Vaccine Production Laboratory (FVPL) in Yaba to resume vaccine production which had stopped due to the inability of the FVPL to cope with operational challenges. The project was however delayed due to the non-ratification of the agreement by successive governments.
For Fidson healthcare, analysts said the increase in its stock price was as a result of its new World Health Organisation (WHO) compliant ultra-modern manufacturing facility which is completed in the mid half of the year in Sango Ota Ogun state.
On the flip side, some drug makers have underperformed the NSE ALL Share Index.
Nigeria – German chemicals, Evans and Uniodac recorded zero growth in their year to date stock prices, while Neimeth International and Morrison industries lagged the pack after their stocks returned -28 per cent and -65.5 per cent respectively.
While some pharmaceutical firms have seen stock price appreciation due to an aggressive expansion plan, the sector is fraught with naira illiquidity as an increase in government borrowing is spurring banks to invest in the safety of sovereign debt rather than lending to businesses or consumers, a situation that is draining cash out of the system.
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This means lenders are not lending to the real sector of the economy as they prefer to buy government securities such as Treasury Bills (T-bills) because of its attractive returns.
“Some banks demand naira deposits of as much as 1.5 times the amount of dollars sought in the 60-day forwards market to guard against fluctuations in the currency,” said Ayodeji Aboderin, chief financial officer for May & Baker Nigeria Plc, a Lagos-based pharmaceutical and food processing company. That is pressuring the company’s own cash flow, he said.
The cumulative cost of sales of GlaxoSmithKline (GSK), Fidson, May and Baker and Evans, spiked by 22.55 per cent to N17.01 billion in September 2017 as against N13.88 billion the previous year, based on data gathered by BusinessDay.
The combined sales or revenue of the four firms increased by 18.15 per cent to N22.03 billion in the period under review from N18.65 billion as of September 2016.
“Banks would opt for government securities because of the risk associated with corporate bonds,” said Ayodeji Ebo, managing director and chief executive officer of Afrinvest Securities Limited.
“The fiscal authorities have to de-risk the real sector in terms of infrastructure and banks will complement and lend to these firms. They can’t lend to manufacturers when the risks are high. These lenders are liable to their shareholders. Banks are already complaining of rising Non-Performing Loans (NPLs),” said Ebo.
Ani Micheal
