KARACHI: Pakistan’s listed pharmaceutical sector recorded a 28 per cent year-on-year increase in profitability to Rs42.2 billion during FY26, while annual gross margins climbed to an all-time high of 42.8 per cent, according to an analysis by Topline Securities.
The brokerage attributed the improvement in earnings primarily to price-led revenue growth and a substantial decline in finance costs, although sector earnings weakened during the final quarter of the fiscal year because of losses reported by The Searle Company Limited (SEARL).
According to Topline Securities’ latest pharmaceutical sector review, 4QFY26 profitability declined 2 per cent year-on-year and 26 per cent quarter-on-quarter. Excluding SEARL, however, listed pharma companies recorded profit growth of 6 per cent year-on-year, with quarterly earnings reaching Rs9.3 billion, although this represented a 4 per cent decline from the preceding quarter.
The performance highlights a widening gap between the sector’s underlying earnings growth and investor returns. Despite a 22 per cent year-on-year increase in profitability excluding SEARL during FY26, the combined market capitalisation of listed pharmaceutical companies, excluding SEARL and Liven Pharma, increased by only 0.4 per cent over the year.
On a broader basis, the sector’s market capitalisation excluding Liven Pharma rose 2.3 per cent year-on-year as of June 30, 2026 — significantly below the 28 per cent growth in reported profitability.
Topline Securities said the disconnect suggests that strong earnings growth has not yet translated into a proportionate re-rating of pharmaceutical stocks.
The sector’s net sales increased 10 per cent year-on-year to Rs377.9 billion in FY26, compared with Rs342.6 billion in FY25. Topline Securities attributed the increase largely to higher prices.
During 4QFY26, sector sales stood at Rs88.9 billion, up 3 per cent year-on-year but down 3 per cent quarter-on-quarter.
Abbott Laboratories Pakistan (ABOT) remained the largest contributor to sector sales, accounting for approximately 20 per cent, followed by GlaxoSmithKline Pakistan (GLAXO) at 18 per cent, Haleon Pakistan (HALEON) at 11 per cent and SEARL at 10 per cent.
One of the most significant developments was the improvement in gross margins. The sector’s annual gross margin increased to 42.8 per cent in FY26 from 38.9 per cent in FY25, marking an all-time high.
Quarterly gross margin also remained elevated at 42.8 per cent in 4QFY26, compared with 40.4 per cent in the corresponding quarter of the previous year and 42.7 per cent in 3QFY26.
Topline Securities said the improvement was primarily driven by higher selling prices. The sector continued to maintain average inventory levels of around 60 days.
Among individual companies, AGP Limited recorded the highest gross margin during FY26 at 60.4 per cent, followed by Highnoon Laboratories at 56.1 per cent and The Searle Company at 52 per cent.
However, higher profitability came alongside increased selling and distribution expenses.
Sector-wide selling and distribution expenses rose 21 per cent year-on-year to Rs69.5 billion in FY26. During 4QFY26, these expenses stood at Rs17.6 billion, up 11 per cent year-on-year but down 2 per cent quarter-on-quarter.
At the same time, the sector benefited significantly from lower borrowing costs. Finance costs fell 42 per cent year-on-year to Rs3.6 billion in FY26, reflecting a combination of relatively stable interest rates and lower debt levels across companies.
In the fourth quarter, finance costs declined to Rs822 million, down 29 per cent year-on-year and 13 per cent quarter-on-quarter.
Other income also provided support to the sector’s bottom line, increasing 2 per cent year-on-year to Rs6.5 billion during FY26.
The increase became considerably more pronounced during 4QFY26, when other income reached Rs2.5 billion, representing an 85 per cent year-on-year increase and approximately 2.7 times the preceding quarter. Topline Securities attributed the sharp quarterly increase primarily to a higher contribution from Hoechst Pakistan Limited.
The sector nevertheless faced a higher effective tax burden. The effective tax rate increased to 42.5 per cent in FY26 from 39.8 per cent in FY25.
In 4QFY26, the effective tax rate rose to 50.4 per cent compared with 42.2 per cent in 4QFY25 and 40.6 per cent in 3QFY26.
Muhammad Abdur Rafay, Senior Research Analyst at Topline Securities, said the sector’s FY26 performance reflected the continuing impact of price-led growth and improving financial efficiency.
“Despite strong profitability growth during FY26, the listed pharmaceutical sector’s market capitalisation has shown only a modest increase. This indicates that the improvement in earnings has not yet been fully reflected in valuations,” Rafay told The Scoop.
He said the outlook for pharmaceutical companies could improve as volumes recover from the low base witnessed during 2026.
“We expect pharma sector volumes to bounce back from the first half of 2027, supported by the low base effect of 2026 and the expanding product portfolios of companies,” Rafay said.
Topline Securities’ assessment also points towards a potentially important shift in the sector’s earnings profile. While recent growth has been largely price-driven, a recovery in volumes would provide a second leg of growth for pharmaceutical companies and could make earnings expansion less dependent on price increases.
The sector’s FY26 numbers also underline the importance of cost management. Lower finance costs provided meaningful support to profitability, while higher selling and distribution expenses continued to absorb part of the gains generated through pricing.
For investors, the relatively limited movement in pharmaceutical market capitalisation despite a substantial increase in profitability remains a key feature of the sector’s FY26 performance.
The brokerage expects the combination of a low volume base, broader product portfolios and an eventual recovery in demand to support the next phase of growth from 1HFY27.
The pharmaceutical sector therefore enters FY27 with a stronger earnings base, historically high gross margins and significantly lower finance costs, but the sustainability of its performance will increasingly depend on whether price-led growth can be complemented by an actual recovery in volumes.