High borrowing costs push drugmakers to restructure

Nigeria’s pharmaceutical companies relied heavily on short-term bank loans to fund operations, expansion, and working capital.

That model is now under strain as rising interest rates and currency pressures make debt increasingly difficult to sustain. By the second quarter of 2026, a structural shift is taking hold, with firms beginning to restructure their balance sheets to reduce exposure to expensive borrowing.

At the centre of this shift is the cost of capital. Despite recent adjustments, the Central Bank of Nigeria’s Monetary Policy Rate remains at 26.5 percent, while commercial lending rates for manufacturers often exceed 30 percent. For pharmaceutical firms, where production cycles are long and input costs are largely import-driven, these rates are widely seen as unsustainable.

“Loans with interest rates as high as 33 percent make it nearly impossible for manufacturers to break even, especially in a capital-intensive industry like API production,” said Patrick Ajah, managing director of May & Baker Nigeria Plc.

At such levels, debt stops being a tool for growth and becomes a drag on operations. Companies are forced to commit a growing share of their cash flow to servicing loans, leaving less available for production, procurement, and expansion.

Rising input costs are amplifying this pressure. Industry estimates suggest that more than 70 percent of pharmaceutical raw materials are imported, exposing manufacturers to foreign exchange volatility. As the naira weakens, the cost of active pharmaceutical ingredients and other inputs rises, increasing the amount of working capital required to sustain production.

Recent global disruptions have added to the strain. Industry operators say the cost of key inputs such as paracetamol has surged sharply within short periods, reflecting supply shocks and geopolitical tensions. For local manufacturers, this translates into higher operating costs at a time when financing those costs is becoming more expensive.

The result is a tightening squeeze on cash flow. Companies are paying more to procure inputs and more to service debt, creating a mismatch between operating needs and available liquidity.

It is within this context that restructuring is gaining traction. Restructuring involves changing how a company finances its operations to reduce pressure on cash flow. This can include extending the term of existing loans, renegotiating interest rates, converting short-term obligations into longer-term debt, or raising funds from shareholders to replace expensive borrowing.

Some firms have already begun to take these steps. Fidson Healthcare Plc raised about N21 billion through a rights issue in early 2026, strengthening its capital base and reducing reliance on short-term bank loans. The company said the funds would support expansion, technology upgrades, and operational efficiency.

“The successful formalisation of this N21 billion rights issue marks a critical milestone for Fidson,” said Biola Adebayo, the company’s managing director. “This capital will support our growth and strengthen our position in the market.”

Neimeth International Pharmaceuticals Plc has taken a slightly different approach, combining capital raising with debt restructuring. After returning to profitability in 2025, the company is seeking to extend the tenor of its loans and reduce financing costs as it scales operations.

“We were able to restructure the loans over a longer period, which gives the business more room to operate,” said Valentine Okelu, Neimeth’s managing director. The company is also planning a capital raise to fund expansion, strengthen working capital, and reduce its debt burden.

These moves highlight a broader shift in strategy. For years, pharmaceutical companies relied on short-term borrowing to manage working capital. But in a high-interest-rate environment, that model is becoming less viable, particularly for firms operating on tight margins.

Other listed players, including Mecure Industries Plc and May & Baker, have not announced formal restructuring programmes but face similar pressures. Rising input costs, foreign exchange volatility, and tighter liquidity are narrowing their financing options and increasing the risk of balance sheet stress.

The restructuring trend is also being shaped by changes in the competitive landscape. The exit of multinational companies such as GlaxoSmithKline and Sanofi has created supply gaps in the Nigerian market, increasing pressure on local manufacturers to expand production.

Filling that gap requires significant investment in manufacturing capacity, regulatory compliance, and distribution. However, such investments are typically long-term and cannot be easily financed with short-term, high-interest loans. This mismatch between funding structure and operational needs is pushing companies toward more stable sources of capital.

Equity financing, while potentially dilutive, offers that stability. Unlike debt, it does not carry immediate repayment obligations, allowing firms to invest in capacity and absorb short-term shocks.

Policy direction is also reinforcing this shift. Despite a tax waiver that exempts some 875 pharmaceutical raw materials from value-added tax (VAT), efforts to boost local pharmaceutical production and reduce import dependence are encouraging firms to invest in domestic capacity, including the potential development of active pharmaceutical ingredient manufacturing. These projects require significant capital and long gestation periods, further reducing the appeal of short-term borrowing.

Market response to early movers has been positive. Shares of Neimeth have recorded strong gains in early 2026, reflecting investor confidence in its turnaround strategy, while Fidson continues to attract institutional interest following its capital raise.

The restructuring wave is just beginning, and companies are responding at different speeds. Firms that replace expensive short-term debt with equity or extend loan repayment are creating space to fund production, manage working capital, and respond to supply gaps left by multinational exits. Fidson and Neimeth have moved early, strengthening their balance sheets and attracting investor attention, while other companies are still adjusting to rising input costs and currency volatility. High borrowing costs, import dependence, and naira fluctuations make restructuring increasingly necessary for firms that want to operate without constant financial strain.