Healthcare

OVERVIEW

Our largest business to date, healthcare is the centerpiece of our portfolio and is perhaps the best-known aspect of our corporate identity, accounting for 50% of the Group’s revenue.

Sunshine Healthcare Lanka Ltd functions as five distinct business units that operate under an overarching enterprise, delivering cutting edge curative (pharmaceutical), corrective (surgical), and preventative (diagnostic) healthcare solutions to a highly regulated market, increasingly conscious of the quality, efficacy, and safety of their medical and surgical needs. The healthcare segment of the group serves private and public sectors, along with individual consumers, through five business units that collectively span across the entire healthcare supply chain.

Healthcare recorded Rs. 28 Bn. in FY24, with earnings before interest and tax (EBIT) of Rs. 4.3 Bn. at a margin of 15.5%, and profit after tax (PAT) of Rs. 2.5 Bn. at a margin of 9.1%.

Mere months after the devastation of the COVID-19 pandemic,
Sri Lanka’s healthcare sector had to brace itself for the worst financial crisis the country had faced in decades, which nearly left the industry in tatters. Owing to over 57 years of experience and business acumen in the sector, Sunshine was able to withstand the brunt of these catastrophes, and emerged stronger than most, ready to reap the benefits of a rapidly recovering economy.

Though there is certainly a long way to go, Sri Lanka’s ongoing reform agenda along with increased dollar inflows has led to increased economic activity and low inflation and the country is on the verge of positive growth for the first time in years. In this context, Sunshine Healthcare, already an industry leader, is poised to grow beyond expectation and secure its position as a veritable giant.

During the reporting period, each business unit was faced with its own unique set of challenges that it had to meet head-on, particularly in terms of price restrictions, healthcare being a tightly price-regulated sector. The sudden imposition of value added tax (VAT) also posted challenges, compounded by fluctuations in the exchange rate. The pharmaceuticals, medical devices, pharma manufacturing and retail operations, all import-dependent businesses, were heavily impacted by the rise in the US dollar, though the economy’s improved liquidity situation was a welcome change and pricing strategies helped all business record remarkable growth against heavy odds. Attrition also proved a major obstacle for all SBUs, though intelligent employment engagement initiatives have helped us contain the issue to a large degree.

In terms of performance, Healthcare recorded Rs. 28 Bn. in FY24, with earnings before interest and taxes (EBIT) of Rs. 4.3 Bn. at a margin of 15.5%, and profit after tax (PAT) of Rs. 2.5 Bn. at a margin of 9.1%.

Margins for the segment overall improved over the reporting period due to Maximum Retail Price (MRP) adjustments on all stock-keeping units (SKUs) due to the devaluation of the rupee against the US dollar. The improvement in the EBIT margin can be attributed to improved gross profit margin and overhead cost controls during the year.

Pharmaceuticals

Sunshine’s Rs. 16 Bn. pharmaceutical business is at the core of the Group’s deeply entrenched image as a leading player in the healthcare industry. As the country’s third largest pharmaceuticals importer, we enjoy a market share of 13.1% in a space occupied by a handful of major players who together hold 75% of the market. Over the years, Sunshine Healthcare has secured leading sales positions in a number of fast-moving therapies. Segments such as diabetes, cardiology, and gastroenterology. Today, the Company dominates the diabetes segment, being the largest provider of insulin in Sri Lanka, with a significant 64% share of the private market.

Primarily, Sunshine’s pharmaceutical arm serves as master importer of high quality, regulator-approved drugs from India, Denmark, Indonesia, Bangladesh, Australia, Germany and other markets. As the Group’s legacy business going back to the founding of the Company over 50 years ago, our agency house operation is perhaps the biggest contributor to Sunshine’s accelerated growth over the decades.

In Sri Lanka, the pharmaceutical landscape is predominantly import-driven, with about 85% of the supply sourced internationally and the remaining 15% locally manufactured. Sunshine Healthcare primarily focuses on serving the private market, which imports pharmaceuticals alongside the state sector. The pharmaceutical industry operates under strict government regulation and exists in a rigorous regulatory environment that demands 100% statutory compliance. Nearly all products distributed by Sunshine Healthcare are sensitive to exchange rate fluctuations and most are subject to price controls. All imported drugs are registered with the National Medicines Regulatory Authority (NMRA), the industry regulator, and our processes also meet the even stricter compliance requirements of our principals abroad. While audits are regularly conducted across all business units of the Group, nowhere is this more thorough than in the pharma division.

Quality Management System has earned ISO 9001:2015 (UKAS) and Good Distribution Practices (Bureau Veritas) marks the ongoing journey towards establishing a Total Quality Culture within the organisation and fostering a culture of excellence at every level.

The pharmaceutical operation’s business model includes regulatory services, import and clearing services, inventory planning, sales booking, physical distribution, finance and HR, which invariably results in the Company routinely acquiring talent on behalf of our principals. We leverage Group synergies by relying on the state-of-the-art, end-to-end cold chain capabilities and real-time monitoring systems made possible by Healthguard Distribution, our distribution arm, that ensure our products meet stringent temperature requirements as specified by the principals and by the NMRA. The business model is also designed around our supporting services to drive growth for our principal brands.

Within our healthcare vertical, the pharmaceuticals business contributes some 40% of our overall revenue, with the vertical as a whole contributing around 44%. The pharma business represents around 37 principals as at March 2024.

Year under review

In the wake of the financial crisis of 2022, which deeply hurt our pharmaceutical business, the operation recorded a growth of approximately 11% in the 2023-2024 financial year that ended 31 March due in large part to price increases. This occurred in a challenging market environment that, despite some recovery, saw a 9% shrinkage in volume. The reporting period was marked by price increases across the board, driven by currency depreciation against the US dollar earlier in the year, which directly impacted the pricing of imported drugs.

As macroeconomic conditions improved along with the country’s dollar liquidity situation, the debilitating challenge of the previous financial year of not being able to issue letters of credit had been overcome by the beginning of the reporting period, but the depreciation of the rupee meant that prices had to be raised for most of our products. As a business that is both hypersensitive to exchange rate fluctuations and must, at the same time remain compliant with the strictly enforced Maximum Retail Price (MRP) regime, it was a challenge to strike a balance between these two imperatives, but we were able to grow regardless, with due consideration paid to the potential consequences of increasing the price of medicine, which we at Sunshine have always believed must remain affordable, while also keeping the business afloat.

As was the case the previous year, we were conscious of the reality that availability of a vital medicine even at a higher price point was a markedly less undesirable outcome than not being able to find it at all. With this in mind, we continued our lobbying efforts with the authorities during the reporting period to introduce an equitable pricing mechanism for pharmaceuticals, with direct engagement with the Ministry of Health and other agencies still ongoing.

A major challenge during the year under review was a rise in fuel costs, which affected the operations of our 450-strong field force responsible for promoting pharmaceuticals to doctors, supplying products to hospitals, and interacting with pharmacies.

On the human resources front, attrition proved a severe obstacle as some of our most qualified personnel opted to migrate in the wake of the economic crisis. Meanwhile, operational expenses also rose due to salary and perk adjustments for staff to reflect the increase in living costs.

Our partners in the SME sector also grappled with numerous challenges during the reporting period, which invariably had an impact on our own performance. The retail sector faced similar difficulties in sustaining businesses. The Company supported pharmacies by settling expired products and adjusting prices to help them maintain operations, which was vital for the health of the industry overall.

The pharmaceutical division was able to sustain its gross profit margins in 2023-24 up to a point, some losses notwithstanding. The significant rupee depreciation against the dollar (around 330 to 295 rupee) squeezed margins since pharmaceutical pricing was determined based on a lower exchange rate a year prior. Though the Company had initially observed a period of adjustment to the “new normal” with increased operational costs (30-35% in the past two years), the recent rupee appreciation has offered temporary relief on margins.

DISTRIBUTION

Our pharmaceuticals distribution arm, Healthguard Distribution, operates largely in the private retail pharmacy channel, modern trade (supermarkets) and hospitals distributing pharmaceutical and wellness products – imported either by Sunshine or other players – to over 4,500 touchpoints island wide.

Healthguard Distribution, which was formerly a division of the agency business, now operates as its own independent entity serving all of the healthcare segment’s internal distribution requirements while also building its roster of external clients. The talent and knowhow that Healthguard Distribution inherited from its previous incarnation, being part of the country’s only major pharmaceutical importer with its own distribution channel, helped the business become the Group’s fastest-growing business over the last few years.

With its uniquely advanced capabilities and sophistications, the Company provides a comprehensive delivery solution for importers and local manufacturers alike to distribute their own pharmaceuticals and wellness products to any customer point in the island. Our services include a 24-hour distribution promise and strict adherence to end-to-end cold chain delivery standards, with high-tech temperature monitoring and online tracking features enabled for our fleet of 38 vehicles which guarantee sustained product quality throughout the delivery journey.

Achievement of ISO 9001:2015 (UKAS) and Good Distribution Practices (Bureau Veritas) reaffirms dedication to deliver the best healthcare solutions that meet customer and regulatory requirements.

We boast a dedicated team of 180 employees who are highly trained in managing and overseeing the distribution process and are experts in collection and are also adept at maintaining professional relationships with chemists, all of which are important attributes that our clients can use to maximise value.

Although Sunshine’s agency business predominantly comprises Healthguard Distribution’s operations at present, the Company has, over the years, diversified its portfolio by signing up with a number of players who operate in consumer health and wellness, cosmetics and ayurveda segments. This expansion aims to extend their distribution reach beyond pharmaceuticals to include a wide range of products suitable for pharmacy shelves. Healthguard Distribution has also expanded its distribution services beyond retail outlets to include institutions and modern trade spaces across the island, broadening the company’s market presence and offerings.

As of March 2024, Healthguard Distribution has 6 regional centres that distribute to 14 sales areas covering the entire island since the establishment of the business.

Year under review

A major challenge faced by the distribution business during the year under review was the unprecedented rise in energy costs, as utility tariffs and fuel prices increased substantially during the early part of the year. Having just recovered from a crippling fuel crisis the previous year that threatened to grind the operation to a halt, this new status quo was far from ideal, as it had a direct impact on our distribution activities.

We took great pains to mitigate the impact through rationalisation, with significant time spent on amending our route plans and optimising our itineraries. We could only do this up to a point, however, as further reductions would have affected the quality of our service offered to our clients.

There was also the question of keeping our distribution centers always running, to ensure an uninterrupted cold chain. Our refrigerators had to be kept on at all times, which proved costly, and the matter remains a concern despite recent reductions in electricity and fuel prices.

Attrition was a challenge for the distribution business too, while rising costs including meal allowances to account for increased food costs also proved difficult.

Healthguard Distribution Centres

Medical devices

Sunshine Healthcare’s Rs. 5 Bn. medical devices arm increased its revenue five-fold and is now one of the Group’s fastest-growing businesses. Today, it is the healthcare segment’s third largest business unit in terms of revenue, and has a strong presence in the surgical, diagnostic, and other medical devices markets.

In 2017, the devices operation split from the pharmaceuticals business becoming its own SBU, looking to tap into the devices segment’s immense untapped potential. Sunshine Medical Devices’ market share has since increased to 11% from the 4% it held at the time.

Sunshine’s medical devices business operates across three segments: surgical, diagnostic and equipment, showing steady growth in the first two segments in particular. The business represents some of the world’s leading surgical and diagnostic device manufacturers, including such renowned names as Johnson & Johnson, 3M (Solventum), Siemens Healthineers, GE Healthcare, ICU Medical, Cordis and Randox to name a few.

Year under review

The medical devices business began the 2023-2024 financial year on a high note, having crossed the Rs. 5 Bn. mark early on. A major contributing factor to this growth was our strategic move to play a bigger role in the Government sector. In 2023 we took a decisive call to enter the public healthcare sector in a bigger way, taking a calculated risk with respect to the Government’s credit situation and the possibility of cumbersome tender procedures. Our presence in the public sector has increased dramatically. An avenue that had hitherto not been open to us, particularly as a result of the pandemic followed by economic downturn, was now within our grasp, and our medical devices business did not hesitate to grab the opportunity.

A number of government projects also proved beneficial during the year under review, one of which was a fund facility extended by the Asian Development Bank (ADB) to the State Pharmaceuticals Corporation (SPC) for the purchase of medical devices and equipment, which opened yet another avenue for growth.

The end result of this foray into the government sector was that the medical devices arm became a star entity of the Group. Not only did the business unit’s revenue shoot up to Rs 5 Bn., but we also delivered high margins which helped us significantly boost profitability during the reporting period.

During the last quarter of the year under review, device prices had to be increased following the increase of VAT, which affected our entire line of products. Procedure prices also went up earlier on in the year and during most of the previous fiscal year due to inflation, which resulted in volumes coming down. This was seen across the industry, and recapturing some of those areas helped the medical devices business perform. Though there were some unit drops when it came to some products, such as surgical consumables, these were not significant enough to have a notable impact. Given the constraints faced during the pandemic followed by the financial crisis, the year under review saw us grow in spite of macroeconomic conditions not being the most favourable. We are happy to note that we are now coming out of the uncertainties caused by the crises that engulfed the industry and are on our way to increased growth and profitability. The recent appreciation of the rupee also allowed us to decrease prices on devices, passing the benefit on to customers.

Attrition was a fairly significant obstacle for the devices business during the year under review, which we were able to keep low through rigorous employment engagement initiatives. The business also scored the highest for the Great Place to Work (GPTW) accreditation at 84%, an increase from the previous year’s 69%, which helped ease the attrition issue.

Medical devices will continue to grow in the new financial year with the forex advantage coming despite the continued imposition of VAT. We will, however, continue to lobby the Ministry of Finance and the Ministry of Health for some relief in this area. Regardless, we are confident that volumes will increase with the growth of the economy.

As the economy continues to improve, the Government’s purchasing capacity will also improve, which we expect will have a positive impact on the business, particularly in the in vitro diagnostics line. We also anticipate the issue of delayed payments will not worsen in the coming months. Overall, the medical devices business is quite optimistic for the future for the 2024-2025 financial year as economic conditions improve further and the purchasing power of the public increases over time, leading to more volumes and growth for the business.

Pharma Manufacturing

Our manufacturing business consists of two entities operating as a singular unit: Lina Manufacturing and Lina Spiro, both subsidiaries of the Group. Established in 2011, Lina, primarily focuses on the respiratory segment. The business specialises in patented Dry-powder Inhalers (DPIs) and currently stands as the only manufacturer of Metered Dose Inhalers (MDIs) in the local market, giving Sunshine Healthcare a monopoly in this area. The company also benefited from being awarded the government’s order for this specific products.

Over the span of its 12-year existence, Lina Manufacturing has emerged as a key supplier of respiratory products to both government and private sectors. Having pioneered the development of local respiratory products, the company continues to invest in research and development initiatives aimed at introducing more cutting-edge products to the local market. At present, Lina manufactures six product lines, with an emphasis on asthma therapy. All lines have demonstrated operational success: the dry powder capsules line, the tablet line, the nasal spray line, device line, the metered dose inhaler line and cream line.

Sunshine Healthcare acquired the Lina manufacturing following a merger with Akbar Pharmaceuticals in December 2020, which elevated Sunshine Healthcare to being Sri Lanka’s first fully integrated healthcare company that operates in all five segments of the healthcare supply chain: R&D, manufacturing, importation, distribution, and retail.

Year under review

Driven largely by our Government contract with the Department of Health Services for our inhaled products, the manufacturing business crossed the Rs. 2 Bn. milestone, having doubled our revenue from the previous financial year.

Efficiencies in our factory were increased during the reporting period and the factory now operates 24 hours a day.

Lina Manufacturing play’s large role in the Government sector, private sector and also contribute to local manufacturing by contract manufacturing products for other companies. In the new financial year, we have identified a growth opportunity in the private sector and plans are in place to increase our presence by aggressively marketing our products. A marketing team has already been appointed and further investments into promoting our products.

Another major initiative that we have launched is a partnership with overseas suppliers to manufacture their products in Sri Lanka under their own brands. This presents a significant growth opportunity for Sunshine’s manufacturing business, and we are optimistic that we will start to see results this year itself.

While some pharmaceuticals were exempted from VAT, the tax still applies to primary and secondary materials. Since we cater to over 15% of the demand, this proved challenging during the financial year. This drives up costs, but to address this, we capitalized on the increased capacities and our increased quantities which brought production costs down due to economies of scale. We significantly increased our production, resulting in revenue and profits growth.

We play largely in the Government sector, which presents some difficulties in terms of price controls and delayed payments which have an impact on working capital, despite there not being any bonds that needed to be settled during the year. The government did show a preference to settle payments early for manufacturing, assuring payments in 120 days, but invariably payments would take 150 or 180 days which eroded our Return on Invested Capital (ROIC) for the long term. For devices, some payments, amounting to billions of rupees, were delayed by as much as a year. This was a major challenge that we needed to manage within our operating profit margins, but we were able to overcome it due to the sheer financial capacity of the Group and through continuous lobbying.

The country’s foreign exchange situation was largely beneficial to the manufacturing segment during the reporting period. As the US dollar appreciating, costs for our raw materials came down, which helped offset the impact of the VAT increase and also helped our profit margins.

Attrition was a major issue for the manufacturing business as well. Though we survived the pandemic, many of our most senior employees left the country in the wake of the economic crisis, a problem that continued into the year under review. This was further compounded by senior personnel leaving other companies, resulting in their poaching our top talent who have had the best training from our principals. We, however, able to contain the issue through various interventions. Though attrition was still notably high at 26%, we performed reasonably well in this count compared to the industry through various initiatives by our human resources department and salary increases reflecting market rates as well as timely bonus payments by developing and retaining talent.

The business scored 65% in the Great Place to Work (GPTW), this was an improvement from the previous year’s score of 52%. Training initiatives, town halls and engagement initiatives proved successful in improving employee retention as well.

Moving forward, the Government is making a concerted effort to support local manufacturing of pharmaceuticals and medical devices. We are also looking at enhancing our own brands and venturing deeper into the territory of contract manufacturing, which we anticipate will help Lina Manufacturing make a significant leap forward. The future looks optimistic for the manufacturing business on the whole, as we anticipate increased production and more volume growth and margin improvements as the economy recovers further.

Retail

Healthguard, our flagship retail brand was founded on a single central premise: to deliver high-quality pharmaceuticals and wellness products to an increasingly discerning consumer base that values quality above all else.

Healthguard stands out by pursuing a level of differentiation and sophistication across three fundamental pillars: ambiance, product offering, and service driven on expertise and technology. Over the past decade, this has elevated the business to an enviable position of unrivalled leadership.

Healthguard’s product portfolio predominantly features pharmaceuticals and wellness products categorised as upmarket, which necessarily aligns with our brand identity as a high-street pharmacy serving the urban, middle-upper-income individuals. Our clientele, often prescribed medications of a higher price range by their physicians, gravitate towards our curated selection which tend to be of a higher price point. While we do maintain stock of lower-tier alternatives for many products, our fast-moving range predominantly consists of higher-end offerings, a trend that has persisted despite an unprecedented economic downturn.

Healthguard is staffed by qualified, well-trained pharmacists, and our service stands out as being customer-centric and offering data-driven solutions that rely on analytics to understand customer preferences.

Ambience is a key highlight of the Healthguard customer experience. We consider it essential to create an atmosphere that’s conducive to a pleasant shopping experience, which comes through in the physical layout and overall look and feel of our outlets. Adherence to strict storage standards is also considered of the utmost importance at Healthguard. It is no exaggeration to say that we have set the standard for modern pharmacy retailing in Sri Lanka that conveys quality and trust in the design of its store format and customer service. Our commitment to exceptional service is reinforced through the care we put into displaying and merchandising our products assortment as well.

Though it is a fully-owned subsidiary of the group, Healthguard is not limited to pharmaceutical products imported by Sunshine Healthcare. Our 15 retail outlets across the Western Province representing all major pharmaceutical and wellness importers including the group’s competitors so as to offer our customers as diverse a range of products as possible.

WESTERN PROVINCE OUTLETS

At Healthguard, we transcend the traditional concept of a pharmacy. Our retail outlets are vibrant spaces that go beyond pharmaceutical and wellness products and offer impulse-driven categories that seamlessly complement routine purchases, enhancing the overall shopping experience for our valued customers, many of whom appreciate the convenience and familiarity of the pharmacy-cum-lifestyle-store model, akin to those found in more developed markets across Europe and elsewhere.

The pharmacy retail chain also leverages the group’s robust ICT capabilities to enhance its product and service offerings. A prime example is its automated ordering engine, which enables seamless weekly orders across its supplier network; typically, the system processes beyond 300 orders to its 160 existing suppliers every week. This sophisticated software solution predicts stock availability and autonomously places orders as required, minimising manual intervention. The system cross-references available alternatives, allowing pharmacists to offer informed choices to customers, enhancing the overall customer experience.

Year under review

Our retail pharmacy operation grew 19% year-on-year during the reporting period, also recording a healthy same-store growth of 14%, with both pharmaceutical and wellness product categories contributing to an increase in topline and bottomline revenue. Satisfactory growth was recorded in profits as well during the year owing to a number of factors.

Consequent to the 2022 financial crisis, consumption of wellness products by our mid-tier clients reduced during the year under review, while our higher-income clients continued to purchase our products.

Price increases in both pharmaceutical and wellness categories, which also had an impact on volumes during the year under review, even as the wider market saw a parallel drop in volumes and is facing a decline that continues to this day. In this context, however, we are happy to note that we have performed reasonably well, given the constraints at play.

Many of our pharmaceutical products went up in price during the reporting period and subsequently came back down, while wellness products were impacted by a significant increase in VAT. However, as mentioned previously, considering that a sizable percentage of our customers have higher disposable income, wellness product volumes remained largely unchanged. Consumer sentiment surveys carried out during the year showed that most customers had prioritised health expenditure in the wake of the crisis, which meant that many were prepared to accept the price increase. Pharmaceuticals sales grew by 23% during the reporting period, and wellness by as much as 30%, helped in large part by our more affluent customers. Consumption at the upper and higher-middle income levels remain more or less the same during the year at a quantity level, despite the price increases. The inelasticity of medicine also contributed to this growth.

A notable challenge during the reporting period was the necessity to negotiate better terms with our suppliers on the possibility of exploring higher growth ambitions for improved margin support to Healthguard retail chain. This paid dividends by the end of the year, with several suppliers signaling their agreeability to continue the renewed joint business plan for the next year too.

Measures are also being taken, at present, to improve our existing loyalty programme, in an effort to broaden our base of regular customers. Online delivery, which had taken a backseat with the end of the pandemic largely due to resource constraints, is also poised to make a comeback and we are actively looking into enhancing this aspect of our service offering.

An ambitious growth strategy is also on the cards, despite the ongoing decline of the market and no anticipated price increases on the horizon. We have set ourselves the task in the near future to formulate a formidable growth strategy, envisioning higher revenues and profits. This will not, however, be through geographical expansion, although one outlet may be added to our chain in the coming months, but through a revision of our business model and enhancement of our service offering, which we are currently working on.

Enriching the partnerships we have built with our suppliers over the past 10 years and enhancing the performance capabilities of our employees is another facet of this growth strategy. We are also looking to minimise the unavailability of certain medicines and are currently engaged in discussions with suppliers to improve this situation without overburdening the working capital. The wellness portfolio will also be expanded going forward as economic activity surges.

Our retail pharmacy operation grew 19% year-on-year during the reporting period, also recording a healthy same-store growth of 14%, with both pharmaceutical and wellness product categories contributing to an increase in topline and bottomline revenue.