EQUITY VALUATION REPORT

Transcription

1 A fully owned subsidiary of EQUITY VALUATION REPORT Square Pharmaceuticals Limited is the largest pharmaceuticals company in Bangladesh securing 17.73% market shares. The company manufactures and distributes pharmaceuticals drugs, medicine, basic chemicals, animal health product, agrovet and pesticide products. (Initiation Coverage) We initiated a valuation based on Discounted Cash Flow method and Relative Valuation method while assuming next 5Years CAGR of revenue will be 15.02%. Historical 5Years CAGR of revenue was 15.25%. Currently, SQURPHARMA is traded at BDT In our valuation, the target price based on DCF and Relative Valuation is determined at BDT per share which represents 16.71% upside from current market price.

2 Market Leader 17.7% 27 Blockbuster Drugs Market Share Current Price Target Price % Expected Return from the Blue Chip Stock Consistent Cash Dividend: Mix of Cash and Stock Stock 15.25% Historical 5 Years Revenue CAGR 15.02% Projected 5 Years Revenue CAGR 25.00% Historical 5 Years NPAT CAGR 15.67% Projected 5 Years NPAT CAGR

3 Square Pharmaceuticals Limited DSE: SQURPHARMA, BLOOMBERG: SQUARE:BD Target Price: BDT 346.8, Current Price: BDT Rating: Overweight Valuation date: 16th November, 2017 Analyst: MD. Mosavvir Al Ashick Company Fundamentals Sector Pharmaceuticals & Chemicals Potential Upside 16.7% Market Cap (BDT mn) 201,462.0 Market weight 1.1% Paidup Capital (BDT mn) 6, Months Return 5.43% Freefloat Shares (in mn) Months Avg. Daily Turnover (BDT mn) Current P/E 19.2 Current P/NAV week price range (BDT) Restated Restated Financial Information (BDT mn) Net Sales Gross Profit EBITDA Operating Profit Profit After Tax Total Assets Total Debt Total Equity Retained Earnings Cash Dividend (C/B)% Margin Expected 27,532 12,272 9,616 7,617 5,583 36, ,914 24,960 4,524 30/ ,073 15,991 11,277 10,796 8,288 44, ,557 31,612 8,523 40/10* 38,455 18,593 14,251 12,318 9,398 53,481 49,280 39,841 14,203 35/7.5 45,377 22,235 16,866 14,830 11,383 61, ,655 46,821 16, % 34.9% 27.7% 28.5% 20.3% 48.4% 34.1% 32.6% 34.6% 25.1% 48.4% 37.1% 32.0% 34.0% 24.4% 49.0% 37.2% 32.7% 34.9% 25.1% 13.9% 15.7% 21.2% 29.7% 20.1% 30.3% 41.7% 48.5% 16.3% 16.3% 14.1% 13.4% 18.0% 19.6% 20.4% 21.1% 17.3% 22.0% 32.1% 1.1% 20.5% 24.2% 30.8% 2.5% 19.2% 23.7% 22.6% 0.7% 19.7% 21.5% 36.2% 1.2% Debt Ratio 0.9% 0.0% 0.0% 0.8% DebtEquity 0.9% 0.0% 0.0% 0.8% Altman ZScore Gross Profit EBITDA Operating Profit Pretax Profit Net Profit Growth Sales Gross Profit Operating Profit Net Profit Profitability ROA ROE Payout Ratio PEG ratio Leverage Valuation EPS (BDT) NAVPS (BDT) P/E P/NAV (x) EV/EBITDA EV/Sales Square Pharmaceuticals Limited is the largest pharmaceuticals company in Bangladesh securing 17.73% market shares. The company manufactures and distributes pharmaceuticals drugs, medicine, basic chemicals, animal health product, agrovet and pesticide products. The Pharmaceuticals industry of Bangladesh is expected to grow at a CAGR of 15% over the next five years due to steady economic growth, population growth, growth of income level of people and increased health awareness. Being the leader in the growing Pharmaceuticals industry; Square Pharmaceuticals Limited is expected to grow at the same pace with the industry. Square Pharma holds 27 blockbuster drugs among top 100 drugs sold in Bangladesh. These 27 drugs constitutes 7.11% of total market share. It is expected that these blockbuster drugs will continue to possess a large market share in the future. Square Pharma holds 58.78% market share in the top two therapeutic segments of Pharma Market that accounts for 52.77% of total Pharma Market in Bangladesh. The company also maintains top position in other therapeutic segments. Dominance on the market share of top therapeutic segment will help the company to stay as market leader for a long time in the future. Square Pharma maintains huge capital expenditure in every year which ensures continuous growth for the company. Currently, two manufacturing units are under construction in Dhaka site. The units are expected to be completed by the end of In addition, the company has announced that they will spend additional BDT 2,002 million for purchasing land and machinery. It is anticipated that new units and machineries will help to generate more revenue in the future. Expected 5 years revenue and NPAT CAGR are 15.02% and 15.67% respectively. The company achieved a 5 years revenue CAGR of 15.25% and NPAT CAGR of 25%. Square Pharmaceuticals Limited announced that they will set up a subsidiary in Kenya with an investment of USD 20 million. With the establishment of that subsidiary, revenue of the company is likely to increase by BDT 1,920 million in the first year of operations. Square Pharma has the highest Operating Profit margin (32.7%), Net profit margin (21.1%) in the Pharma Industry of Bangladesh. It s ROA and ROE also exceeds its close competitors. ROA and ROE of SQURPHARMA are 19.7% and 21.45% respectively where the average ROA and ROE of its close competitors are 8.2% and 12.6% respectively. We initiated a valuation based on Discounted Cash Flow method and Relative Valuation method while assuming next 5Years CAGR of revenue will be 15.02%. Historical 5Years CAGR of revenue was 15.25%. Currently, SQURPHARMA is traded at BDT In our valuation, the target price based on DCF and Relative Valuation is determined at BDT per share which represents 16.71% upside from current market price. Price Volume Movement of SQURPHARMA 330 1,600,000 1,400, ,200,000 1,000, , , , , Jan15 0 1Jul15 1Jan16 1Jul16 1Jan17 1Jul & information has been restated because of the change in accounting period *For 18 month Period April 2015 March 2016

4 Bangladesh Pharmaceutical Industry Overview Pharmaceuticals industry of Bangladesh has experienced a CAGR of 15% from 2012 to 2017, five years period; According to Bangladesh Market Size of Pharmaceuticals Product of Bangladesh and Association of Pharmaceutical Growth (amount in BDT million) Industries (BAPI), approximately 207 licensed pharmaceutical CAGR 15% manufacturers are operating in Bangladesh and about 150 are functional. These manufacturing companies meet around 98% of local demand. Specialized products like vaccines, anti187, , , ,864 97,589 93,904 cancer products and hormone drugs are imported to meet the remaining 2% of the demand. 80% of the drugs produced in Bangladesh are generic drugs, rest 20% are patented drugs. Source: IMS Health Report Q2 According to Director General of Drug Administration (DGDA), the industry has 3,526 generics of allopathic medicine, 2,313 registered Homeopathic drugs, 5,703 registered Unani Drugs and 3,877 Ayurvedic registered drugs. Domestic market of Pharmaceutical products in Bangladesh has shown an increasing trend over the past few years and the market size is BDT 187,566 million as on 2017 Q2 (Source: IMS Health Report Q2). According to Bangladesh Bureau of Statistics, the industry has contributed 0.90% to the GDP. Pharmaceutical industry of Bangladesh is largely protected from external competition, as there is a restriction regarding import of similar drugs that is manufactured locally. 200, , , , ,000 Expected five years CAGR is 15% 100,000 80, , , ,0 00 Exports of Pharmaceuticals products of Bangladesh experienced a CAGR of 13% from to , five years period Population growth, increase in income level of people, increase in medical facilities and health awareness are the key growth drivers of Pharmaceuticals industry of Bangladesh Exports of Pharmaceuticals Product According to Bangladesh Export Revenue of Pharmaceuticals Product of Bangladesh Association of Pharmaceutical and Growth (amount in US dollar million) Industries (BAPI), approximately Export Growth 1,200 pharmaceutical products received registration for export 23.98% over the last two years and are being exported to 113 countries including USA, UK, Australia and 15.75% 13.04% Africa. According to Export 4.91% Promotion Bureau (EPB), in the 9.39% 8.92% fiscal year , Bangladesh 7.55% has exported pharmaceutical products worth USD million $48.25 $59.82 $69.24 $72.64 $82.11 $89.82 $96.60 as against USD million in * From July to October , Bangladesh exported Source: Bangladesh Export Promotion Bureau USD 32.1 million worth of *201718, 4 month data annualized Pharmaceuticals Product. The Government of Bangladesh has set up an export target of USD 100 million of Pharmaceuticals products for (Source: Financial Express). Over the last 7 years, export revenue CAGR was 15%. However, export sales only contributed 5.97% of pharmaceuticals market in Hence, the contribution of export sales in pharmaceuticals industry is low. Pharmaceuticals Company of Bangladesh can only sell different medicine to other country when they get approval of the particular medicine from the drug authority of that particular country. Approval from developed countries signifies that the local medicine has international standard which helps them to build a strong position in local market. $ % $ % $ % $ % $ % $ % $ % Opportunities in Global Generic Drugs Market for Bangladesh Pharmaceuticals industry of Bangladesh has tremendous opportunity to grow in the future. Bangladesh offers significant manufacturing cost advantages due to the lower cost of labor. Major generic hubs India and China are losing cost advantages. Cost of labor in Bangladesh is 3 to 4 times lower than that of China and India. Medicine price in Bangladesh is currently among the lowest in the world. As a result, Bangladesh has opportunity to export pharmaceuticals products more than India and China. (Source: Bangladesh Association of Pharmaceuticals Industry). At the same time, major producer of pharmaceuticals raw materials India and China won t be able to produce the patented raw material due to the restrictions from World Health Organization (WTO). Thus, Bangladesh can export to foreign countries easily. 2

5 Key drivers for growth of Pharmaceuticals company in Bangladesh: 1. Economic Growth of the country: In the year , Bangladesh has achieved GDP growth rate of 7.24% (Source: Bangladesh Bank). World Bank predicts that Bangladesh will earn GDP growth rate of 6.4% to 6.8% for the year 2017 and Bangladesh has entered the socioeconomic classification of Lower Middle Income Group. It is targeted that Bangladesh will become higher Middle Income Group and Higher Income Group by 2021 and 2041 respectively. With the GDP growth, per capita income is likely to rise which will lead to higher health care expenditure by both individual and government. 2. Population growth rate: Bangladesh is one of the highly populated country in the world with 168 million people. According to World Bank report 2016, population growth rate of Bangladesh is 1.1% annually. This contributes to the growth of Pharmaceuticals sector of Bangladesh. 2. Growing Income level of people: Average income level of people of Bangladesh has increased. According to BBS provisional estimation, the per capita income rose to $1,602 in the fiscal year which was $1,465 in the financial year. Average income grew by 9.4% from to Thus, people have more money to allocate for medical expenditure. 3. Increase in modern healthcare facilities: Medical and Pharmaceutical facilities in Bangladesh is adopting Market Share of Top 20 Companies modern technology. This will largely contribute to the growth of Pharmaceuticals industry of Bangladesh. 4. Health awareness of mass people: People of Bangladesh is becoming aware of health day by day. Increased awareness of health and high life expectancy will lead to the growth of pharmaceutical sector of Bangladesh. Top 20 Companies dominate the pharmaceuticals market; holds about 86.33% of pharma market share An API Park is going to established in establish in Munshigonj Munshigonj to reduce theto reduce the dependency of dependency of imported raw imported materials raw materials Square Incepta pharma Beximco Opsonin pharma Renata Healthcare pharma A.C.I. Aristopharma Eskayef Acme General Radiant pharma Drug international Sanofi bangladesh Popular pharma Unimed &unihealth Novo nordisk Sun pharma Novartis Ibn sina 2017 Q Q2 Change (YoY) 17.73% 10.21% 8.39% 5.54% 4.97% 4.57% 4.43% 4.38% 4.36% 3.91% 2.42% 2.26% 2.06% 2.04% 1.90% 1.82% 1.77% 1.22% 1.22% 1.13% 18.83% 10.18% 8.52% 5.55% 5.03% 3.78% 4.31% 4.41% 4.50% 3.90% 2.22% 2.02% 2.21% 1.98% 1.88% 1.61% 1.76% 0.96% 1.26% 1.06% Market Position of Different Companies Pharmaceutical companies in Bangladesh usually provide brandedgeneric products as a result of which established brands are able to charge premium price for its products. According to IMS Health Care Report Q2, 2017 top 10 companies hold 68.49% of Pharma market share. Companies that secured position ranging from 11th to 20th on the basis of their relative market shares hold Source: IMS Health Report 2017 Q2 and 2016 Q2 only 17.84% market share. Summing up, top 20 companies hold 86.33% market share, leaving 13.67% market share to other existing companies. It is to be noted that top 20 companies held 85.97% market share in 2016 Q2. Aggregate market share of top 20 companies has increased (Source: IMS Health Report 2017 Q2). The Pharmaceuticals market is concentrated among few local companies only and entry barrier is higher due to large capital investment and legislative bindings. Square Pharmaceutical is the market leader having 17.73% market share followed by Incepta, Beximco, Opsonin and Renata. The table above shows the current market share hold by leading pharmaceutical companies as per IMS health report Q2, 2017 and comparison against 2016 Q2. API Park: Pharmaceuticals industry of Bangladesh is dependent on imported raw materials for manufacturing drugs. According to International Trade Administration, about 80% of raw material is imported. Main suppliers of raw materials are India and China. Bangladesh also imports API from Germany, France & USA. Bangladesh Small and Cottage Industries Corporation (BSCIC) has begun the work of setting up Active Pharmaceuticals Ingredients (API) Park on 200 acres of land at Baushia, Gazaria, Munshigonj in The park is being built under the publicprivate initiative with the Bangladesh Association of Pharmaceutical Industries (BAPI). After revising two times, the estimated cost of the project was BDT 3, million. According to the director of the project, the cost of the project is likely to increase above 9% of original estimation. There will be about 42 number of plots in the API Park. The cost of each acre of land is estimated at BDT 31 million. The Companies will get 10 years time to pay for the plot. There are 30 plots in A category (3.27 acre each), 5 plots in B category (2.35 acre each), and 7 plots in S category 3

6 (different size). 32 member companies of BAPI has applied for 57 plots. All infrastructural facilities including Common Effluent Treatment Plant (CETP) and Waste Dumping Yard will be available in this project. The cost of the Common Effluent Treatment Plant (CETP) is estimated at BDT 800 million, to be established by the companies. With the completion of API Park, Bangladesh will be able to decrease the cost of locally manufactured drugs. API can also be exported to other countries. Currently, Global API market stands at USD 135 billion. It is to be noted that major raw materials supplying countries such as India and China are not legally able to produce the patented raw materials due to the WTO restriction. At the same time, The Government of Bangladesh has declared Pharmaceuticals sector as thrust sectors. This gives immense opportunity for Bangladesh to export API to these countries. It has been announced that Square Pharmaceuticals Limited and Beximco Pharmaceuticals Limited have been approved three plots in the API Park. As a least developed country, Bangladesh is enjoying TRIPS waiver up to 2033 Trade Related Aspect of Intellectual Property Rights (TRIPS): Being a leastdeveloped country, Bangladesh has been exempted from the obligations to implement patents and data protection for pharmaceutical products until January 2033 by the World Trade Organization. As a result, Bangladesh is allowed to produce any patented medicines without taking prior permission from innovator. Also, Bangladesh has the opportunity to export to any country if the medicine is not under patent. Competitive Structure of the Pharmaceuticals Industry Threat of new entrants of the industry: Low A company that wishes to enter into a pharmaceuticals industry requires huge capital expenditures and regulatory permission from the drug authority; which creates a significant barrier to enter in the industry. Furthermore, customer s loyalty to the drugs of established brands, access to distribution channel creates further barrier. These cause low threat of new entrants in the industry. Threat of substitute product: High The retail consumers of pharmaceutical products often switch from one brand to another. There are many substitute brands of single medicine. If consumer does not find one brand, he will switch to another brand very quickly. Thus, the threat of substitute product is very high. The bargaining power of buyers: Low The government strictly maintains the retail price of lifesaving drugs. Pharma companies are free to set up the price of other drugs. Furthermore, the buyers are not concentrated and thus possess low bargaining power. The bargaining power of the supplier: High Currently, Bangladesh imports 98% of raw materials of pharmaceuticals industry; mainly from China and India. Bangladesh can also import API from European supplier. But, it will incur more cost if Bangladesh imports raw material from European supplier. Concentration of the supplier and high switching cost create high bargaining power of the supplier. Rivalry among the exiting competitors: High The pharmaceuticals market is highly concentrated. Top 20 players dominate the major portion of the market. Every company has the same medicine in different brands. The companies are competing with each other fiercely in order to grab market share. Square Pharmaceuticals Limited Square Pharmaceuticals Limited is the Number of Product in each product catagory of manufacturer, marketer and distributor of SQURPHAMA pharmaceuticals drugs, medicines, basic chemicals, Pharmaceuticals 655 animal health products, agro vet and pesticide products. The products of Square Pharmaceuticals Agrovet 63 Limited are available in different forms like tablet, capsule, injection, infusion, dry powder, ENT preparation (Ear, Nose and Throat medicine), Pesticides 25 Opthal preparation, suppository, insulin, pellet etc. Square Pharmaceuticals Limited is renowned for its Pellet 14 world class pharmaceuticals products. The company was founded in Late Samson H Basic Chemicals 8 Chowdhury and his three friends Dr. Kazi Harunur Rashid, Dr. PK Shaha and Radha Binod Roy started the company with the name Square Pharmaceuticals Works with an investment of Rs. 17,000. The company secured permission to manufacture products on behalf of Johnson & Johnson, Belgium in 1972 with their prescribed formula. After securing a contact with Johnson & Johnson, Square Pharma produced only Johnson and Johnson brand products. However, the contract became void in 1982 when the government 4

7 imposed Pharmaceuticals Policy for the country. After the announcement of drug policy 1986, which banned the foreign pharmaceuticals company to operate in Bangladesh without partners from Bangladesh, foreign Pharmaceuticals companies lost their market shares. Capitalizing this favorable government policy, Square Pharmaceuticals Limited became market leader in 1987 among all the national and multinational companies. Since then Square Pharmaceuticals Limited stayed as the market leader for the last 30 years. Square Pharmaceuticals Limited was the first ever company of Bangladesh to get UK MHRA (United Kingdom Medicines and Healthcare products Regulatory Agency) approval in Currently, the company has an agreement with M/S NAAFCO Pharma Limited and M/S Sharif Pharmaceuticals Limited for contract manufacturing of some products of Square Pharmaceuticals Limited to meet increased demand of existing products as well as to introduce new products. Founder: Late Samson H Chowdhury Establishment: In 1958 as a Partnership Enterprise with the name Square Pharmaceuticals Works Commencement of Manufacturing Operations: In 1959 Incorporation: In November 10, 1964 as a Private Limited Company Conversion into Public Limited Company: In 1991 Listing: Dhaka Stock Exchange & Chittagong Stock Exchange: In December, 1995 Credit Rating: Long Term: AAA, Short Term: ST1, Outlook: Stable (By CRISL) Key personnel: Chairman Vicechairman Managing Director Director Director Independent Director Independent Director Company secretary Mr. Samuel S Chowdhury Mr. Ratna Patra Mr. Tapan Chowdhury Mr. Anjan Chowdhury Mr. Kaji Iqbal Harun Mr. M Sekandar Ali Mrs. Nihad Kabir Mr. Khandaker Habibuzzaman Shareholding Structure (Sept 2017) Sponsors Institution Foreign Public Shareholding Pattern 36.11% 34.43% 10.13% 19.33% Sponsors Institution Foreign Public Sept % 27.18% 9.65% 8.96% Sept % 10.34% 15.05% 20.40% Sept % 10.85% 15.85% 19.78% Sept % 11.88% 15.71% 36.07% Sept % 10.13% 19.33% 36.11% Composition of Shareholding Structure among major stakeholders Name Designation Mr. Samel S Chowdhury Mr. Tapan Chowdhury Mr. Kazi Iqbal Harun Mr. Ratna Patra Mr Anjan Chowdhury Chairman Managing Director Director Vice Chairman Director Total Number of Shareholding (in Million) % Holdings 7.06% 7.22% 4.16% 6.77% 7.31% 32.52% Positions of Chowdhury Family members in Square Pharmaceuticals Limited Late Mr. Samson H Chowdhury Founder of Square Pharmaceuticals Limited Samuel S Chowdhury Chairman, Square Pharmaceuticals Limited Ratna Patra Vice Chairman, Square Pharmaceuticals Limited Tapan Chowdhury Managing Director, Square Pharmaceuticals Limited Anjan Chowdhury Director, Square Pharmaceuticals Limited Chowdhury Family members hold 28.36% shares of Square Pharmaceuticals Limited as on June 30,

8 Blockbuster drugs: Top 20 brands of Square Pharma contribute 46.38% of total revenue where top 10 brands contribute 32.19% of total sales. Square Pharmaceuticals Limited possesses 27 blockbuster drugs among the top 100 brands sold in Bangladesh which constitutes 9.41% market share. In Bangladesh top 20 brand constitutes 14.07% of total market among which more than half of this portion belongs to Square Pharmaceuticals Limited. Below table gives the list of 15 blockbuster drugs among the top 50 brands sold in Bangladesh that constitutes 7.11% of total market. Drugs Brand Value (BDT million) Market Share Seclo 3, % CEF3 1, % Zimax % Neotack % Neurob % Comet % Calbod % Ciprocin % Nexum % Angilock % Alatrol % Entacyd plus % Ceevit % Ace % Ceftron % Total 13, % Source: IMS Health Report 2017 Q2 Product Quality: Square Pharmaceuticals Limited produces product by following GMP (Good manufacturing practice) standards of World Health Organization. The company also maintains strict surveillance to withdraw expired product from the market. Foreign Accreditation: UKMHRA (United Kingdom Medicines and Healthcare products Regulatory Agency), TGA (Therapeutic Goods Administration)Australia, EMEA (European Medicines Evaluation Agency), USFDA (US Food and Drug Administration) Therapeutic Group Wise market Share A drug class is a set of medications that has similar chemical structures, the same mechanism of action, a related mode of action, and/or are used to treat the same disease. Market Share, value, growth and ranks of Square Pharmaceuticals Limited according to therapeutic class is given in the following chart. Theraputic Class Alimentary t. & metabolism Systemic antiinfectives Nervous system Cardiovascular system Respiratory system Musculoskeletal system G.u.system & sex hormones Dermatologicals Blood & blood forming organs Sensory organs Systemic hormones Hospital solutions Parasitology Antineoplast & immunomodul Various** Diagnostic agents Rank* 1st 1st 2nd 3rd 1st 1st 3rd 1st 2nd 6th 4th 1st 6th 5th Value (BDT million) 68, , , , , , , Share (%) Source: IMS 2017, Q2 * The ranking is based on top seller in that particular therapeutic class **In various therapeutic class, Square Herbal & Nutraceuticals holds 5th position 6

9 In the Pharmaceuticals Pharma Market Growth vs Square Pharma Growth industry of Bangladesh, Alimentary T. & Metabolism 30% Pharma Market Growth Rate Square Pharma Growth Rate and Systemic AntiInfectives 25% have grabbed almost 58.87% of total market. Of these two 20% therapeutic group Square Pharmaceuticals Limited 15% grabbed 52.77% of market 10% shares. Possessing a large market share in the top two 5% therapeutic group makes Square Pharmaceuticals 0% Limited market leader in the Pharmaceuticals Industry of Source: Annual Report of Square Pharmaceuticals Limited Bangladesh. Apart from those Therapeutic group, Square Pharmaceuticals Limited holds strong market share in other therapeutic group too. Only in parasitology and diagnostic agents Square Pharmaceuticals Limited could not secure top six position. Production Units: Square Pharmaceuticals Limited has 13 manufacturing unit. 1. a) b) c) d) e) 2. a) b) c) d) e) Dhaka Unit: This unit is located at Kaliakoir in Dhaka, about 50 kilometre in the north of capital city.. All the facilities in this unit have been developed by meeting the requirement of cgmp CFR 21 (current Good manufacturing Practice). This plant got approval from UNICEF and MHRAUK. In the year 2012, Dhaka unit and Square Cephalosporin Limited got Therapeutic Goods Administration (TGA) of Australia approval (Cephalosporin unit was a subsidiary company of Square Pharmaceuticals Limited in 2012). This plant has started operation from Currently, Square Pharmaceuticals Limited is constructing two units in Dhaka plant which is expected to be operational by There are six manufacturing units in this location which is engaged in producing formulation product. Those units are as follows. General Production Unit: General Production Unit is used for bulk production of tablet & capsule and their packaging. This unit started operation in Cephalosporin Unit: Cephalosporin Unit is used for producing cephalosporin antibiotics. This unit started operation in November, Cephalosporin Unit complies with the requirement of international GMP standards like EMEA (European Medicines Evaluation Agency), UK MHRA (UK Medical and Healthcare products Regulatory Agency), TGA (Therapeutic Goods Administration, Australia) and US FDA (US Food and Drug Administration). Small Volume Parenteral & Ophthalmic Unit: Small volume parenteral & ophthalmic unit was built in accordance with US FDA and UK MHRA cgmp specifications. This facility is built by Telstar S.A. of Spain a world renowned pharmaceutical manufacturing facility expert and the machineries are designed and manufactured by Weiler Engineering, USA. Insulin Unit: Insulin unit is used for producing insulin solution and suspension. The infrastructure and major production machineries was provided by Tpro, a wellknown Spanish company. For filling insulin product, IMAMAC vial washing, filling machine was brought from Italy. Metered Dose Inhaler Unit: Meter dose Inhaler unit is engaged in producing a specific types of device that delivers specified amount of drugs to lungs. This unit was started in September Pabna Unit: Pabna Plant is the first manufacturing facility of Square Pharmaceuticals Limited and started operation in This plant complies with WHO cgmp (current Good manufacturing Practice) requirement. The production facilities in this units are: Hormone & Steroid Unit: Manufacturing procedures including Tablet Compression, Tablet Coating, Tablet Blistering, Personal Cleaning, and Dispensing Booth & Automatic Granulation for producing hormones & steroids products are completed in Hormone & Steroid unit. Liquid Unit: This unit produces syrup, suspension, drypowder, cream gel. This unit started its operation from Penicillin Unit: According to cgmp requirement, Pharmaceuticals companies need to set up penicillin unit separately to avoid cross contamination of other drugs with penicillin. To meet up the requirement with cgmp, Square Pharmaceuticals Limited has set up penicillin unit separately. Agro Vet Division: Agro vet Division produces 73 types of poultry and livestock products. This division has started operation in The company produces different therapeutic classes comprising antibacterial agents, anthelmintics, NSAIDs, antihistamine, antidiarrhoea, vitamins, digestive stimulants etc. in this unit. Pesticide Unit: The main operations include repacking, selling and marketing of insecticides, fungicides, and herbicides of ChimacAgriphar s.a., Belgium and FMC Corporation, USA. This unit also produces formulation of mosquito control aerosol. 7

10 f) Pharmaceutical Bulk Manufacturing Plant (API Unit): Pharmaceutical bulk manufacturing unit is one of the largest pharmaceuticals bulk producing units of the country. This unit was established in 1992 and started operation in The company used the product of this unit for own consumption until From 1997, the company marketed API products to many pharmaceutical companies including (but not limited to) Aventis Pharma, Novartis Bangladesh Ltd., ACI Ltd., Beximco Pharmaceuticals Ltd., The Acme Laboratories Ltd, Eskayef Bangladesh Ltd., Opsonin Chemicals, Renata Ltd., Essential Drugs Co. Ltd. Square Formulations Limited: The factory of Square Formulation Unit is located at Momin Nagar, Gorai, Mirzapur, Tangail. This unit started operations in The company has the capacity to produce 8,000 million tablet and 2,000 million capsule annually. Pet bottle unit: PET bottle unit has the production capacity to produce 5,000 piece per hour. It can run 24 hours continuously in a day. This unit started its operation from The whole process of producing pet bottle is completed in this division Production Capacity Square Pharmaceuticals Limited produces medicine in different forms. Those forms include tablet, capsule, liquid etc. In the year , production capacity of tablet was 11,279 million pieces where actual production was 6,647 million pieces. Capacity utilization rate was 59%. The production capacity of tablet has increased 1.54 times from to , 5 years period. Capacity utilization rate has increased by 5.38% over the five years period. Average capacity utilization rate was 58.2% over the last five years. Square Pharmaceuticals Limited always maintains buffer production capacity. Competitive structure of the industry forces the company to maintain buffer capacity so that they can meet up any unforeseen demand promptly which will help them to remain market leader. Tablet (in million unit) Production Capacity 12, 000 Actual Production Capacity Utilization 70% 66% 10, % 58% 8, % 60% 56% 6, % 55% 4,0 00 4,090 4,862 5,446 6,087 6,647 2,0 00 7,345 7,348 10,495 10,546 50% 11,279 45% From to period, the company had the highest capacity utilization in the year Higher demand for capsule forces the company to increase the capacity. Current capacity of capsule stands at 2,211 million piece where capacity utilization rate is 55%. Capsule (in million unit) Production Capacity Actual Production Capacity Utilization 125% 2, % 102% 120 % 2, % 63% 54% 1, % 80% 60% 1,0 00 1,177 1, ,151 1,194 2,220 1,213 1,403 2,228 2, % 20% 0% It is important for the Pharmaceuticals Company of Bangladesh to ensure uninterrupted production and supply of the pharmaceutical products. Failure to meet the demand may result in switch to substitute products by the customer, thus will result in the reduction of market share of the company. The production capacity utilization of capsule unit has decreased over the time as company increased its capacity to maintain a buffer capacity of production. These steps ensure that the company can quickly response to any 8

11 unforeseen demand. Improved production capacity and a slight increased demand caused decrease of capacity utilization. Distribution network: Square Pharmaceuticals Limited has a large distribution network to ensure uninterrupted supply of pharmaceutical products. The company has 22 depot in 22 different districts of the country. Export: Square Pharmaceuticals Limited pioneered the export of medicine from Bangladesh in The company exports pharmaceuticals finished products since The company currently exports antibiotics and other pharmaceuticals product to 39 countries including 3 countries in Europe, 19 countries in Asia, 11 countries in Africa, 3 countries in Central and South America. Square Pharmaceuticals Limited offers more than 300 off patent and on patent molecules in different dosage forms. The company exports pharmaceuticals product in the market of Europe, Australia and USA and finished formulations to ASEAN, SAARC region. Export Sales of Square Pharmaceuticals Limited (Solo)(Amonunt in BDT million) 1, % Export Growth 1, % 48.34% 1, % % 1, % 5.92% % 21.75% % % ,138 1, (15 Month) 0.0 0% Subsidiary & Associate Companies of Square Pharmaceuticals Limited Square Pharmaceuticals Limited 1 Subsidiay & 3 Associates Square Formulations Limited Square Textile Limited Square Fashions Limited 49.94% ownership to SQURPHARMA 48.63% ownership to SQURPHARMA 46.36% ownership to SQURPHARMA 99.5% ownership to SQURPHARMA Square Hospital Limited Square Texcom Limited Square Yarns Limited 99.48% ownership to 95% ownership to SQUARETEX SQUARETEX Subsidiary Company Square Formulations Limited: Square Formulations Limited was incorporated in 21st November, The company started its commercial operation in 1st April, Square Formulations Limited is involved in producing formulation products. Square Pharmaceuticals Limited has announced on 22nd October 2017 that Square Formulations Limited will merge with Square Pharmaceuticals Limited. Authorized Capital of the company is BDT 500 million and Paid up capital is BDT 100 million. Currently, Square Pharmaceuticals Limited holds 99.5% share of Square Formulations Limited. ROA of the company stands at 7.5% in 2016 Associates: 1. Square Textile Limited: Square group enters into the textile business with the establishment of Square Textile Limited in The company involves in the business of manufacturing cotton ring spun yarn for hosiery. Square Textile supplies its product to the export oriented readymade garments industry. The company started with a single unit in 1997 with an establishment cost of BDT 1,600 million. Square Textile Limited Revenue, NPAT and NPAT margin of Square Textile Limited (Amount in BDT million) 10, % 9, % 8, % % 8.77% 7,00 0 6,00 0 5, % 10.25% 6,096 9, % 8,164 8, % 8,109 8, % 6.0 0% 4,00 0 3, % 2, , % 0.0 0% * month data has been annualized 9

12 subsequently established its second unit and third unit with an establishment cost of BDT 1,080 million and BDT 960 million in the year 1998 and 2000 respectively. Production Capacity Unit Machinery Production capacity per day Unit 1 36,288 Spindles 20,000 kilograms Unit 2 23,184 Spindles & 768 Rotors 20,000 kilograms Unit 3 3,192 open end heads 8,000 kilograms With its sophisticated vertically integrated technology, Square Textile is producing 48,000 kilograms of yarns every day. Authorized Capital of the company is BDT 3,000 million and Paid Up capital is BDT 1, million. Square Pharmaceuticals Limited holds 46.36% share of Square Textile Limited. Square Textile Limited has two subsidiary companies. They are a) Square Yarns Limited: Square Yarns Limited was established in 2006 with an establishment cost of BDT 1,600 million. Square Yarns Limited has 31,248 spindles with daily production capacity of 18,500 kilograms. Square Textile Limited holds 99.48% shares of Square Yarns Limited. b) Square Texcom Limited: Square Texcom Limited belongs to the textile industry. Square Textile Limited holds 95% shares of Square Texcom Limited. 2. Square Hospitals Limited: Revenue, NPAT and NPAT margin of Square Hospitals Limited Square Hospitals Limited is a (Amount in BDT million) 400bed tertiary care hospital Revenue (Net) Profit After Tax NPAT margin located at Panthapath, 13.5% 13.5% Dhaka. Square Hospitals Limited started its operation in the year Major 8.1% 8.3% healthcare services provided 2,249 2,507 2,349 2,679 2,019 2,937 1,780 by Square Hospitals Limited 4.3% are radiology and imaging, 0.9% 0.5% chemotherapy, fine needle aspiration cytology, bone Marrow therapy, intensive care unit, coronary care unit, cardiac care, neonatal incentive care, physiotherapy, telemetry service and cardiac surgical intensive care. Square hospitals Limited has appointed highly qualified physician from Bangladesh as well as from foreign countries. The main building of the hospital is 18 storeyed and the second building is 16 storeyed with an area of 450,000 square feet and 136,000 square feet respectively. The second building started its commercial operation in The outpatient department of the company has the capacity to serve 1,200 patient daily. The hospital is an affiliate partner of Methodist Healthcare, Memphis, Tennessee, USA, SingHealth, Singapore, Bangkok Hospital Medical Centre, Thailand and Christian Medical College, Vellore, India. Square Pharmaceuticals Limited holds 49.94% share of Square Hospitals Limited % 14. 0% % % % % % % % Square Fashions Limited: Revenue, OP, NPAT, NPAT margin of Square Fashions Square Fashions Limited was Limited (Amount in BDT million) established in 2001 with an Revenue (Net) Profit from Operations establishment cost of BDT 1,200 million. The company started its operation in June It involves in Readymade Knit Apparel business with the 9,229 9,003 13,884 14,513 target market in USA and Europe. Square fashion limited 974 produces Tshirt, Polo shirt, 2,044 1, , tank tops, pajamas, sport wear, sport ware, under garments, (18 Month) (18 Month) mens and ladies fashion wear, kids wear etc. Square Pharmaceuticals Limited holds 48.63% share of Square Fashions Limited. Production Capacity per day TShirt Polo Shirt 1,400 dozen 1,200 dozen Women & Kids 1,400 dozen Undergarments 1,000 dozen Prospects of Textile Industry in which Square Textile Limited & Square Fashion Belong: According to Mckinsey & Company report titled The appeal sourcing caravan s next stop: digitalization, Bangladesh is the top choice of foreign importers of apparel product. Foreign importers of apparel product chose their target country based on cost of raw material, exchange rate, labor cost, trade agreement, compliance cost, transportation cost etc. Bangladesh is currently in favorable position in considering these aspects. Foreign 10

13 buyers demand huge quantity of product with a low cost. Bangladesh is ahead of other apparel exporting countries like Ethopia, Mayanmar, Vietnam and India. Considering this demand Bangladesh is likely to remain the number one choice for foreign importer of apparel product. Minority Investments: Name of the company Square Informatix Limited United Hospital Limited Central Depository Bangladesh Limited LankaBangla Finance Limited IDLC Finance Limited Bangladesh Steels Rerolling mills Share Number 1,000,000 ordinary shares 120,000 shares 5,711,804 shares 100,000 zero coupon bond 250,000 zero coupon bond 200,000 zero coupon bond Amount n.a. n.a. n.a. BDT 87, 125, 691 BDT 177,827,691 BDT 177,827,691 Source: Annual Report Investment in marketable securities: Square Pharmaceuticals limited has an investment of BDT 2,695 million (market value) in marketable securities according to the Financial Statement Q1. Dissolved subsidiaries and associates of Square Pharmaceuticals Limited 1. Square Cephalosporin Limited 2. Square Biotechs Limited 3. Square Multi Fabrics Limited 4. Square Knit Fabrics Limited Approved merger: Square Formulations Limited (a subsidiary of Square Pharmaceuticals Limited) and Square Herbal & Nutraceuticals (a concern of Square Group) will be merged with Square Pharmaceuticals Limited. At the same time, Square Yarns Limited (a subsidiary of Square Textile Limited) will be merged with Square Textile Limited. Contribution of companies to Square Pharma's NPAT (15 Month) (15 Month) ( (15 Month) Month) 93.18% 83.21% Square Pharmacueitcals Limited (Solo) 82.32% 83.06% 81.45% 81.48% Square Formulations Limited 0.00% 0.00% 0.00% 0.00% 6.25% 6.55% Square Textile Limited 6.59% 5.73% 4.97% 3.84% 3.59% 3.00% Square Fashions Limited 2.76% 3.25% 3.32% 5.86% 5.47% 6.18% Square Hospitals Limited 0.20% 1.04% 2.91% 2.61% 2.44% 1.07% Square Knit Fabrics Ltd 1.45% 1.79% 2.03% 1.36% 1.56% 0.00% Square Cephalosporin Limited 6.68% 5.13% 5.31% 4.86% 0.00% 0.00% Regulatory law that affect the business operation of Square Pharmaceuticals Limited VAT exemption to 93 items of life saving drugs and Duty exemption facility to various raw materials used in pharmaceutical industry will facilitate the business operation of Square Pharmaceuticals Limited. Duty exemption facility to various raw materials used in this industry such as API will help the company to maintain the cost of raw materials at current level 20% cash incentive on the amount of exported Active Pharmaceuticals Ingredient 11

14 Competitor Analysis (Based on the 2017 Q3 Financial Statements) ACI (Solo) ACMELAB BXPHARMA RENETA (Solo) SQURPHARMA IBN Sina Revenue (in BDT mn) Gross Profit (in BDT mn) Operating Profit(in BDT mn) Net Profit (in BDT mn) 13,677 6,001 1, ,057 3,588 2,362 1,146 11,445 5,340 2,585 1,634 11,221 5,918 2,925 1,802 26,642 13,571 9,189 7,252 2,964 1, Total Asset Total Equity Total Liability 26,502 12,677 13,825 29,034 16,773 12,261 33,041 24,479 8,562 17,368 11,656 5,712 51,557 46,306 5,252 2,080 1, % 9.91% 6.38% 3.3% 6.9% 39.62% 26.08% 12.65% 3.9% 6.8% 46.66% 22.58% 14.28% 4.9% 6.7% 52.74% 26.07% 16.06% 10.3% 15.5% 50.94% 34.49% 27.22% 14.07% 14.01% 41.33% 8.76% 6.21% 8.8% 16.1% NAV EPS Margin Gross Profit Operating Profit Net Profit ROA ROE Financial Performance In order to analyze financial performance of Square Pharmaceuticals Limited, annual information from to and (9 month annualized) information is considered. Liquidity Position: STRONG From the period Current Ratio to , Current ratio, quick ratio and cash ratio have increased. This improvements are attributed by the increase in current asset, specially increase of cash in large A amount. From to period the companies cash and cash equivalent has been doubled. In the period , the current ratio stands at 5.6. Quick ratio stands at BDT 4.8. Finally cash ratio shows that the company has BDT 4.1 cash and cash equivalent to pay off its short term liability. During the period , those ratios has slightly decreased. Nevertheless, the company maintains strong liquidity position in all the metrics of liquidity analysis. Quick Ratio A Cash Ratio Operating Efficiency: IMPROVED From to period, company s average collection period on its payable was almost static over the five years period. Average Collection Period (Days) A A Inventory Conversion Period(Days) A 12

15 Square Pharma has Payables Payment Period (Days) Cash Conversion Cycle (Days) significantly decreased its time on inventory conversion period over the last five years, 18.9 meaning that the company is turning its inventory into cash in a 2.5 shorter period of time A A During the period, , the inventory conversion period was 53 days while it was 33 Total Asset Turnover days in the period The company decreased its inventory conversion period about 20 days. At the same time the company has increased its payable payment period, meaning that the company is getting more time to pay its debt. During the period , payable payment period was 2.5 days while in (9 month annualized), payable payment period was 18.9 days. The company is now A deferring its payment by almost 16 days. Together with static average collection period, shorter inventory turnover period and payable payment period, the cash conversion cycle of the company has decreased, meaning that the company requires less working capital for running its operation than it required earlier. However, the company s asset turnover ratio remained almost static over the five years period. During the period , the total asset turnover was 0.8 times. The asset turnover increased in the following two years. In the last two period, and , the asset turnover ratio stayed at 0.8 times. Profitability: INCREASED Square Pharma retains a Gross Profit Margin (GPM) healthy amount of its revenue. The gross profit of the company stands at 48.4% in the year (9 month annualized). The gross profit margin tends 44.2% 43.9% 44.6% 48.4% 48.4% to increase over the period and currently A highest among the last five years. Operating profit margin also shows an increasing trends over the five years period. Currently. Operating profit margin is 32%. Net profit margin of the company also shows increasing trend over the five years period. Current net profit margin is 24.4% in It is to be noted that gross profit margin, operating profit margin and net profit margin of Square Pharmaceuticals Limited is the highest in the Pharmaceuticals Industry of Bangladesh. Highest margin of the company are one of the main reasons of Square Pharma s being the market leader in the industry. Operating Profit Margin (OPM) 26.1% 26.0% 27.7% 32.6% 32.0% A Net Profit Margin (NPM) 18.3% 17.8% 20.0% 25.1% 24.4% A 13

16 Other profitability margin also ROE ROA shows increasing trend over the five years period. In the period , ROA and ROE was 17.2% and 12.4% while in (9 month annualized), ROE and ROA was 23.2% and 19.6%. 19.6% 20.5% 17.3% 15.2% 14.7% 12.4% Although the profitability is 17.2% 21.6% 20.4% 22.0% 24.2% 23.2% slightly decreased in period compared with , A degrowth is not quite significant. It is to be noted that ROA and ROE of Square Pharmaceuticals Limited is the highest in the Pharmaceuticals industry of Bangladesh. Leverage ratio: LOW Coverage ratio: HIGH Square Pharmaceuticals Limited depends less on debt. Currently, the company has a small amount of short term debt. As the company has low debt, it has strong capacity to pay off its debt. During the period , the company did not incur any financial expense. Leverage Ratios Total Debt to Equity Debt to Total Assets Coverage Ratios Times Interest Earned (TIE) A 14.6% 12.2% 1.4% 1.3% 0.9% 0.9% 0.0% 0.0% 0.0% 0.0% ,159.2 Investment Insights Investment Positive The Pharmaceuticals industry of Bangladesh is expected to grow at a CAGR of 15% over the next five years due to economic growth as well as population growth, growth of income level of people and increased health awareness. Being the leader in the growing Pharmaceuticals industry; Square Pharmaceuticals Limited is expected to grow at the same pace with the industry. Square Pharmaceuticals Limited is the market leader of pharmaceutical industry in Bangladesh and possess 17.73% market share as per IMS Health Report for Q2, The Company has strong fundamentals compared to other pharmaceutical companies. It possess 27 blockbuster drugs among the top 100 medicines sold in Bangladesh according to IMS Health Care Report 2017 Q2. The company achieved 5 years revenue CAGR of 15.25% and NPAT CAGR of 25% respectively. It is expected that the revenue and NPAT of the company will grow at this level in the future. Current NPAT margin stands at 24.4% which is the highest in the industry. Square Pharmaceuticals Limited maintains huge capital expenditure. Average capital expenditure of the company from to is more than BDT 3,500 million. Recently, Square Pharmaceuticals Limited has decided to invest BDT 2.02 billion in order to import machinery and purchase land to upgrade their facility. It is expected that new machinery and capital expenditure will help the company to generate more turnover in the future. The company is setting up a subsidiary manufacturing plant in Nairobi, Kenya. It s investment on this plant will be USD 20 million (BDT 1,670 million). It is expected to complete the plant by June It is expected that the revenue of the company will boost up with the commercial operation of the subsidiary. Square Formulations Limited and Square Herbal & Nutraceuticals Limited will merge with Square Pharmaceuticals Limited. It is expected that Square Pharmaceuticals Limited will achieve economy of scale after the merger. Square Pharma remained market leader of the Pharma industry since It is expected that the company will continue to dominate the Pharma market. According to Q1 financials for , Square Pharmaceuticals Limited has only BDT 218 million short term debt. Lower debt creates lower financial expense for the company. 14