Press Release

VIS Reaffirms Entity Ratings of OBS Pakistan (Private) Limited

Karachi, November 05, 2024: 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’). Medium to long term rating of ‘A’ indicates good credit quality; protection factors are adequate. Risk factors may vary with possible changes in the economy. Short term rating of ‘A2’ indicates good likelihood of timely repayment of short-term obligations with sound short-term liquidity factors. Outlook on the assigned ratings remains ‘Stable.’ Previous rating action was announced on September 25, 2023.

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 encompass the import, marketing, export, dealership, distribution, and wholesale of pharmaceutical products. The operations commenced in 2023 following the acquisition of 17 pharmaceutical brands from Viatris Inc. and Pfizer Pakistan, with 10 brands actively marketed—3 of which are locally manufactured and 7 imported. The acquisition was financed through 73% debt and 27% equity, with the debt portion raised through two sukuks of Rs. 3.6 bn and Rs. 2.9 bn respectively.

The assigned rating reflects the low business risk profile of Pakistan's pharmaceutical sector, marked by stable demand and low economic sensitivity, which supports steady revenue and profitability. Key factors such as population growth, disease prevalence, emerging illnesses, and hygiene conditions sustain the demand for pharmaceutical products. Profitability, however, remains 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. Nevertheless, the recent deregulation of drug prices for Non-Essential Medicines allows companies to independently raise prices, further supporting the sector's business risk profile.

The rating incorporates the sponsor's support, provided by AGP Limited, which holds a well-established market position, along with AGP Limited's support in guaranteeing the debts of OBS Pakistan. Additionally, the Company’s shift in distribution is expected to enable wider market reach and enhance operational efficiency through connections with a broader network of pharmacies, including retail chemists, institutional sales, and e-commerce channels. However, portfolio concentration risk persists, and mitigating this overtime will remain important from ratings perspective.

The assigned rating also takes into account the Company’s financial risk profile. OBS Pakistan reported favorable topline performance in the current year, driven by a significant uptick in sales volumes and a one-off price adjustment approved by the government. With product supply secured from Pfizer Pakistan during the ongoing transition period, the risk of cost variability has been addressed through pre-negotiated product costs. Subsequently, the Company reported stable gross margins during the review period. Going forward, the rating is underpinned by expected supply chain efficiencies and improvement in the Company’s profitability profile in the medium term, supported 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 anticipates the liquidity profile to remain under strain on account of increased current liabilities arising from the debt-financed acquisition. Nevertheless, comfort is drawn from working capital support pledged by the parent company. The capitalization profile was impacted 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.

For further information on this ratings announcement, please contact at 021-35311861-64 or email at info@vis.com.pk.
Applicable Rating Criteria: Corporates:
https://docs.vis.com.pk/docs/CorporateMethodology.pdf
VIS Issue/Issuer Rating Scale
https://docs.vis.com.pk/docs/VISRatingScales.pdf

Information herein was obtained from sources believed to be accurate and reliable; however, VIS Credit Rating Company Limited (VIS) does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.VIS , the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the rating(s)/ranking(s) mentioned in this report.VIS is paid a fee for most rating assignments. This rating/ranking is an opinion and is not a recommendation to buy or sell any securities. Copyright 2024 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .