We reinitiate coverage on Searle Company Limited (SEARL) with a ‘Buy’ rating and a June 2026 target price of Rs120/share, implying a potential total return of 25%. We believe the company’s challenges are largely behind it. The divestment of its subsidiary, Searle Pakistan (SPL), is expected to alleviate liquidity constraints, enabling debt repayment. Additionally, falling interest rates should further support profitability. The deregulation of non-essential drugs will also serve as a key catalyst in driving the margins upward as 80% of the company’s drug portfolio consists of non-essential medications.
§ Moreover, the company stands to benefit from (i) Favourable demographic trends, (ii) Rising disease prevalence, (iii) Low per capita healthcare spending and its growth potential, and (iv) Expanding healthcare infrastructure and accessibility.
§ Divestment of Searle Pakistan (SPL): SEARL has entered into a Share Purchase Agreement (SPA) with Ijara Capital Partners Limited and Noventa Pharma (Private) Limited to divest its entire 90.61% stake in Searle Pakistan (SPL) for a total consideration of Rs10.53bn. Under the agreement, Rs5.44bn will be received upon fulfilment of the Conditions Precedent outlined in the Sale Purchase Agreement (SPA), while the remaining Rs5.09bn will be paid over a 24-month period from the closing date.
§ As per our channel checks, the company has already received Rs6.3bn in 3QFY25 of the above amount, which has been utilized for debt repayment. This significant deleveraging, combined with a decline in interest rates from 22% to 12%, is expected to generate annualized after-tax savings of Rs2.6/share (39% of FY26 earnings).
§ Deregulation of non essential drugs to drive gross margins: The benefit of deregulating non-essential drug prices has now started to become visible in the financials of pharmaceutical companies like SEARL, as its gross margins improved from 45.4% in 1QFY25 to 50.6% in 2QFY25. Around 80% of SEARL’s portfolio comprises non-essential products, while only 20% consists of essential drugs. Based on this, we expect the company to post gross margins of 49.3% in FY25, 50.5% in FY26, and 52.4% in FY27. This will help company to regain its position of being amongst the top players in terms of gross profit margins.
§ Favourable Dynamics for Pharma Sector: Pakistan’s pharmaceutical industry holds significant growth potential, driven by multiple key factors. The country’s favorable demographics, with a population of 250mn growing annually over 2%, indicate a rising demand for medicines, particularly for chronic diseases linked to an aging population and increasing urbanization. The prevalence of both communicable diseases (such as tuberculosis and hepatitis) and non-communicable diseases (like cardiovascular ailments and diabetes) further sustains long-term pharmaceutical demand.
§ Additionally, Pakistan’s per capita healthcare expenditure remains low at US$43, significantly trailing regional peers, highlighting substantial growth potential. Expanding healthcare infrastructure, including the rapid growth of private healthcare services and government initiatives like the Sehat Sahulat Program, is improving accessibility and affordability. With health-related government spending rising at a 15% CAGR over the past five years, the demand for pharmaceuticals and healthcare services is expected to continue its upward trajectory.
§ Earnings Rebound; From Loss to Profit: With the deregulation of non-essential drugs and a decline in interest rates, SEARL is poised for a strong earnings recovery. The company is expected to return to profitability, posting a net profit of Rs0.8bn (EPS: Rs1.7/share) in FY25 and Rs3.4bn (EPS: Rs6.7/share) in FY26, compared to a loss of Rs2.4bn (LPS: Rs4.7/share) in FY24.
§ Attractive Valuation: SEARL is currently trading at a price of Rs95/share, offering a potential total upside of 25% to our Target Price of Rs120 per share. We have valued SEARL using a blend of the discounted cash flow (DCF) method and SEARL’s historical P/E multiple. We have used with a Risk-free rate of 12.3% and a Risk premium of 6% to arrive at Cost of Equity of 18.3%.
§ Key risk to our investment thesis includes (1) higher than expected rupee devaluation, (2) higher than expected inflation (for essential drugs), (3) lower than expected demand and (4) any regulatory change i.e. reversal of recently introduced deregulation of non essential drugs.
Courtesy – Topline Pakistan Research
