Karachi: VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of OBS Pakistan (Private) Limited (‘OBS Pakistan’ or the ‘Company’) at ‘A/A2’ (‘Single A/A Two’). The medium to long-term rating of ‘A’ indicates good credit quality with adequate protection factors, although risk factors may vary with potential economic fluctuations. The short-term rating of ‘A2’ signifies a good likelihood of timely repayment of short-term obligations, supported by sound short-term liquidity factors. The outlook on the assigned ratings remains ‘Stable.’ The previous rating action was announced on September 25, 2023.
According to VIS Credit Rating Company Limited, OBS Pakistan was incorporated on December 07, 2021, as a private limited company and is a subsidiary of AGP Limited, which holds a 91.82% ownership stake. The Company’s primary activities include the import, marketing, export, dealership, distribution, and wholesale of pharmaceutical products. The operations commenced in 2023 after acquiring 17 pharmaceutical brands from Viatris Inc. and Pfizer Pakistan, with 10 brands actively marketed. Out of these, 3 are locally manufactured and 7 are imported. The acquisition was financed through 73% debt and 27% equity, with the debt portion raised through two sukuks of Rs. 3.6 billion and Rs. 2.9 billion, respectively.
The rating highlights the low business risk profile of Pakistan’s pharmaceutical sector, characterized by stable demand and low economic sensitivity, which supports consistent revenue and profitability. Key factors such as population growth, disease prevalence, emerging illnesses, and hygiene conditions sustain the demand for pharmaceutical products. However, profitability is under pressure due to price caps on essential drugs, enforced by the Drug Regulatory Authority of Pakistan (DRAP). Additionally, 70-80% of raw materials are imported, exposing companies to exchange rate risks. The recent deregulation of drug prices for Non-Essential Medicines, allowing companies to independently raise prices, further enhances the sector’s business risk profile.
The rating also considers the sponsor’s support from AGP Limited, which holds a strong market position and provides guarantees for the debts of OBS Pakistan. The Company’s shift in distribution is anticipated to expand market reach and enhance operational efficiency through connections with a wider network of pharmacies, including retail chemists, institutional sales, and e-commerce channels. However, portfolio concentration risk remains, and addressing this over time will be crucial from a ratings perspective.
The assigned rating also evaluates the Company’s financial risk profile. OBS Pakistan reported favorable topline performance in the current year, driven by a significant increase in sales volumes and a one-off price adjustment approved by the government. With secured product supply from Pfizer Pakistan during the transition period, the risk of cost variability has been mitigated through pre-negotiated product costs. Consequently, the Company reported stable gross margins during the review period. Looking ahead, the rating is supported by expected supply chain efficiencies and improvement in the Company’s profitability profile in the medium term, aided by plans to manufacture the majority of imported active brands at AGP’s facilities. However, cash flow coverages were under stress due to constrained profitability in the ongoing year, and management expects the liquidity profile to remain under strain due to increased current liabilities from the debt-financed acquisition. Nevertheless, comfort is drawn from wo
rking capital support pledged by the parent company. The capitalization profile was affected due to acquisition financing, with both gearing and leverage ratios increasing over the rating horizon. The rating remains sensitive to the gradual strengthening of the equity base, reduction in debt levels, and the maintenance of effective liquidity management.