Project Topic and Materials on DETERMINANTS OF PROFITABILITY OF LISTED PHARMACEUTICAL FIRMS IN NIGERIA 

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Every business organization is primarily focused on extracting the highest amount of profit from their business activities. When investments are made in a business venture, whether by owners or shareholders, it is because they expect profit out of their investments. The measure of a successful enterprise is frequently based on how much and how consistently it can turn a profit. However, profit and profitability are two different concepts, albeit related. Raval (2006) reduced profitability to its simplest terms by defining it as the ability of a given instrument to earn a profit. Whether the firm is generating enough profit from its resources, whether it is utilizing resources properly, whether it is performing better or worse than its competitors in terms of making profit etc. cannot be adequately judged simply by looking at the firm's net profit. Instead, profitability has to be taken into account considering both the internal and external factors that can affect it either positively or negatively. In technical terms, profitability is the ratio of profit to revenue, which gives a clearer picture of the performance of a company rather than just the

profit.

In the same vein, profit is the main motive of every business organization which pharmaceutical companies are not exempted. Shareholder desire for wealth maximization cannot be achieved without profit. Profit ensures that the business continues as a going concern. The existence and survival of any business is dependent on the level of profit.Thus, it is the driving force for the business enterprises. The perpetual existence of the firms depends on the profit earning capacity of the firm, which is considered to be the foremost factor in influencing the reputation of the firm.

Profit is an absolute term, whereas, the profitability is a relative concept. Profit refers to the total income earned by the enterprise during the specified period of time, while profitability refers to the operating efficiency of the enterprise and delivers the evidence about the company‘s ability to spawn earnings. An enhancement in profitability sparks to an increase in stock price, thereby registering capital gains.

Profitability of firms is of vital importance to investors, stakeholders and economy at large. For investors, the return on their investments is highly valuable, and a well performing business can bring high and long-term returns for their investors. Furthermore, profitability of firm will boost the income of an organization, bring better quality products for its customers, and have better environment friendly production units. Also, more profits will mean more future investments, which will generate employment opportunities and enhance the income of people. Many studies have been conducted to determine various financial and non-financial factors that can boost or have an adverse effect on the performance of firm. 

The performance of any enterprise is influenced by the environment in which it is located. The last two decades has witnessed the pre and post democratic governance in Nigeria as well as a number of government initiatives aimed at addressing some challenges facing the health delivery system of the country. The pharmaceutical sector is a complex one, involving many different stakeholders such as the manufacturers themselves, national regulators, government ministries, wholesalers and others. Developing the industry requires concerted action across these stakeholders to create the environment in which that industry can flourish and realize its full potential as an asset to economic and social development. Since 2006, United Nation Development Organisation(UNIDO), with funding from the Government of Germany, has been conducting a project on strengthening the local production of essential generic drugs in developing and Least Developed Countries. The objective is to help the pharmaceutical sectors in developing countries such as Nigeria realize their potential role of acting as a pillar of public health and contributing to economic and social development. The key challenges confronting Nigeria‘s pharmaceutical market include counterfeit medicines, poor healthcare infrastructure and the limited spending power of citizens. These challenges is as a result of high cost of production by pharmaceutical companies.According to the survey conducted by UNIDO in 2011, there are about 120 local drug manufacturers in Nigeria. Capacity utilization within the sector is about 40 per cent, meaning that there is a large volume of under-utilized manufacturing capacity which could be applied to produce new products upon demand. According to the Pharmaceutical Manufacturers Group of the Manufacturers Association of Nigeria (PMG-MAN), about 60 per cent of pharmaceutical production in ECOWAS countries is located in Nigeria. 

The survey further indicated that poor infrastructure (power, water, and transportation) increases the cost of medicine manufacture and distribution whilst also hampering growth. Currently, no Nigerian pharmaceutical manufacturer has attained WHO cGMP (current Good Manufacturing Practice) requirements and WHO pre-qualification although some companies are inter alia upgrading their facilities and hope to attain this status in the near future. However, for the time being, they cannot participate in international tenders for pharmaceutical supplies and their scope for exporting is also limited. Attainment of WHO GMP and prequalification status will enable local pharmaceutical producers to participate in international tenders for supplies of antiretrovirals, anti-malarials and anti-TB medicines. A further obstacle faced by local manufacturers is access to finance for working capital and upgrading facilities, which is constrained by high bank interest rates.