Top Pharmaceutical Companies

Transcription

1 Parvez M Chowdhury (880) ; parvez@bracepl.com Top Pharmaceutical Companies Sector Rating: Outperform March 1, 2010 Square Pharma 2009A 2010E 2011E Revenue (MM BDT) 11, , ,098.9 Operating Income (MM BDT) 2, , ,537.1 Operating Margin 25% 24% 23% Net Income (MM BDT) 2, , ,456.9 Net Margin 18% 17% 16% 5-Year Revenue Growth (CAGR) 13% Capex (MM BDT) 2, , ,398.1 Debt/Equity 23% 20% 18% No. of Shares (MM) EPS (BDT) Dividend (BDT) Current Price (BDT) 3,554 Target Price (BDT) 4,000 Return (incl. Div yield) 14% Beximco Pharma 2008A 2009E 2010E Revenue (MM BDT) 4, , ,015.3 Operating Income (MM BDT) , ,635.3 Operating Margin 25% 26% 27% Net Income (MM BDT) Net Margin 14% 15% 16% 5-Year Revenue Growth (CAGR) 13% Capex (MM BDT) 1, Debt/Equity 34% 32% 29% No. of Shares (MM) EPS (BDT) Dividend (BDT) Current Price (BDT) 166 Target Price (BDT) 230 Return (incl. Div yield) 39% Renata Limited 2008A 2009E 2010E Revenue (MM BDT) 3, , ,005.0 Operating Income (MM BDT) ,151.2 Operating Margin 23% 23% 23% Net Income (MM BDT) Net Margin 14% 15% 15% 5-Year Revenue Growth (CAGR) 21% Capex (MM BDT) Debt/Equity 1% 0% 0% No. of Shares (MM) EPS (BDT) Dividend (BDT) Current Price (BDT) 11,310 Target Price (BDT) 13,000 Return (incl. Div yield) 15% ACI Limited 2008A 2009E 2010E Revenue (MM BDT) 10, , ,632.4 Operating Income (MM BDT) , ,239.2 Operating Margin 9% 9% 9% Net Income (MM BDT) Net Margin 9% 7% 3% 5-Year Revenue Growth (CAGR) 46% Capex (MM BDT) 1, , Debt/Equity 176% 155% 156% No. of Shares (MM) EPS (BDT) Dividend (BDT) Current Price (BDT) 509 Target Price (BDT) 675 Return (incl. Div yield) 35% Source BRAC EPL Research The pharmaceutical industry is one of the most developed among manufacturing industries in Bangladesh. Around 250 companies are operating in the market. The market size is estimated to be BDT billion, which grew by 16.83% in The market size in 2008 was BDT billion with a growth of 6.68%. One of the fastest growing sectors with an annual average growth rate of 14-16%, Bangladesh s pharmaceutical industry contributes to almost 1% of GDP. Local companies and MNCs together meet 95% of the country s drug demand but the local manufacturers dominate the industry; they enjoy approximately 87% of market share, while multinationals hold a 13% share. Another notable feature of this sector is the concentration of sales among a very small number of top companies. The top 15 players control around 73% of the market share. Given the country's lack of spending power, the pharmaceutical market remains tiny in comparison with the population size. Pharmaceutical spending is amongst the lowest in the world in per capita terms. Healthcare expenditures consist of only 3.4% of GDP. However, the increased awareness of healthcare and the government s increased expenditure in this sector is causing the demand to increase in this sector. In addition to the demand of therapeutic drugs, the demand for wellness drugs such as vitamins and minerals are increasing gradually and the future growth of the sector lies in it. In a recent market research by IMS, a US-based market research organization, Square Pharmaceuticals, Beximco Pharmaceuticals, Renata and ACI Limited secured top positions in the turnover leaders list. The estimates from IMS are not completely accurate and there is a margin of error of 10% in either direction. However, this is the only estimate with any accuracy for this sector. Square Pharma retained the top position with a local sales of BDT 10.70bn in Square s market share was a solid 19.48%. Beximco Pharma improved their sales from 2008 and 2007 with sales figure of BDT 4.2bn in 2009 (sales growth 27.15%). Beximco was at the No. 3 spot with a 7.72% market share. Renata had a sales growth of 25.63% in 2009 taking the seventh position. With a turnover of BDT 2.50bn, the company holds a market share of 4.54%. ACI Limited took the eighth place with 4.48% of market share. ACI s turnover stood at BDT 2.46bn. Table 1: Top Pharma Companies and Peers Company Current No. of Shares Price (BDT) (MM) Source BRAC EPL estimates for 2009 earnings Mcap (MM BDT) Free Float Avg Daily Trade (Last 30 Days) P/E P/B Square Pharmaceuticals 3, , % 52, x 4.4x Beximco Pharmaceuticals , % 1,032, x 2.6x Renata Limited 11, , % x 7.1x ACI Limited , % 216, x 2.9x GlaxoSmithKline , % 28, x 10.2x Reckitt Benckiser 1, , % 1, x 15.4x Average 37.2x 7.1x

2 Square Pharmaceuticals (Target price: BDT 4,000) Square Pharmaceuticals is the largest pharmaceuticals manufacturing company in the country. The company has consistently created value for its shareholders, with average Return on Equity (ROE) of over 20% in the last 7 years. While maintaining the profitability in its core pharma business, the company has created a number of other businesses in house in the past, and after profitable commercial operation of the businesses commenced, spun off such subsidiary businesses to monetize the investment. Square Pharmaceuticals has undertaken an expansion program to be completed in two phases. The first Phase will be completed in 2012 at a total cost of BDT 3.6b (we anticipate a 25% cost overrun for a final cost of 4.5b). This first phase is expected to almost double the current production capacity. The second phase starts in 2014, completing in 2017 for a total cost of 2.0b (including an estimated cost overrun of 25%). We expect the expansion programs contributing to revenue growth after Capital expenditure will be financed by internally generated cash as the company generates a handsome amount of cash each year Current debt to equity ratio is quite low at 23%; in the absence of any other major expansion plan, we do not anticipate assumption of any more debt. Some of the business units (e.g., Square Knit Farbics Ltd. and Square Cephalosporins Ltd.) are just starting to become profitable and more are on the right path (e.g., Square Hospitals Ltd.). Square will definitely benefit from this. We believe the company is still undervalued. We need to look a for the value of the company beyond 2013 as the major value addition to the company is going to take place after We believe the market has not yet identified the real value of the company. Based on 2013 estimated EPS of BDT 231, a price multiple of 22x (currently at 25.5x) and a discount rate of 13%, we arrive at a NPV of BDT 3,986. Target price BDT 4,000. Dividend yield 1.2%. Total return of 14%. Valuation Discounted FCF Operating cash 2,707 2,880 3,284 3,479 4,407 5,300 5,545 6,500 7,626 9,474 9,746 Capital expenditure -1,386-1,398-1,426-1, Increase/(reduction) in debt Free cashflow 1,321 1,482 1,858 2,028 3,558 4,431 4,689 5,654 7,226 9,074 9,346 Terminal value 153,264 NPV 55,914 Marketable Securities 3,628 NPV/Share 3,946 Discount rate 13% Perpetual growth 7% Square Pharma 2013 EPS 231 P/E 20.0x 22.0x 24.0x Price 4,627 5,090 5,552 P/B 2.0x 3.0x 4.0x Price

3 Square Pharma: Income Statement MM BDT E 2011E 2012E Net Turnover 8, , , , , ,287.3 Cost of Good sold 4, , , , , ,674.2 Gross profit 3, , , , , ,613.1 Selling & Distribution Expense , , , , ,208.6 Administrative Expense Depreciation Operating Profit 1, , , , , ,945.2 Other Income EBIT 2, , , , , ,315.7 Interest Expense Profit before WPPF 1, , , , , ,007.3 Provision for WPPF EBT 1, , , , , ,807.0 Tax ,046.9 PAT 1, , , , , ,760.0 Square Pharma: Balance Sheet MM BDT E 2011E 2012E Cash & Cash Equivalent , ,019.6 Short Term Loan to Associates 1, , Marketable Securities Adv, Deposit & Pre-Payment Accounts Receivable Inventories 2, , , , , ,645.4 Total Current Assets 4, , , , , ,452.9 Total Long Term Investment 2, , , , , ,110.9 Fixed Assets: PPE-Net of Depreciation 4, , , , , ,970.5 Capital Work In Progress , , , , ,200.8 Total Fixed Assets 5, , , , , ,171.3 Total Assets 12, , , , , ,735.1 Liabilities & Shareholders' Equity: Current Liabilities: Accounts Payable Liabilities for Expense Liabilities for Other Finance Short Term Bank Loan 2, , , , , ,712.2 Current Portion of LTD Total Current Liabilities: 3, , , , , ,376.6 Non Current Liabilities: Long Term Loan -Secured Deffered Tax Liability Minority Interest Total Non Current Liabilities , Total Liabilities 4, , , , , ,376.4 Shareholder's Equity: Share Capital , , , ,509.0 Share Premium 2, , , , , ,035.5 General Reserve Tax Holiday Reserve/Other 1, , , , , ,248.0 Retained Earnings 4, , , , , ,460.3 Total Shareholder's Equity 8, , , , , ,358.7 Total Liabilities & Equity 12, , , , , ,735.1

4 Beximco Pharmaceuticals Beximco Pharmaceuticals is one of the largest pharmaceutical companies in Bangladesh. The company has featured consistently in the top five manufacturers for the last decade. Beximco is widely regarded as one of the technological leaders among the local pharmaceutical companies in the country. The company utilizes state of the art technology. All new plants are equipped with cutting edge machineries. New facilities are coming online in 5 new plants. Two of them are already operational. The company maintains many good partnerships with established players such as Bayer AG of Germany and Upjohn Inc. of USA. The company has outperformed the industry in terms of sales during The pharmaceutical industry has grown around 15% on average annually and Beximco Pharma has matched that growth before We believe they will continue to emulate the performance of 2009 for the foreseeable future. Generally the company doubles their turnover in every three years. The company expects to generate BDT 700 million per month in Despite troubled political environment during 2007 and 2008, the company has successfully weathered the conditions and bounced back strongly under more favorable condition in New production lines become operational this year which will effectively double the capacity. The company has undertaken a hugely ambitious plan for foreign market. The management has targeted to have equal revenue from domestic sales and exports. That means they would have to achieve exponential growth in exports. Although this seems quite ambitious, there are signs that the management is on the right track to delivering what they promised. Target price BDT 230. Dividend yield 0.66%. Total return of 35%. Valuation Discounted FCF Operating Cash 915,856 1,133,017 1,523,378 1,914,524 2,344,024 2,693,460 3,017,023 Capital Expendture -333, , , , , , ,802 Change in Debt , ,554 1,265,977 1,741,722 2,171,222 2,520,658 2,844,221 Net Terminal Value 76,792,805 Terminal Value 80,349,238 Terminal Debt 3,556,433 Net Free Cash Flow 582, ,554 1,265,977 1,741,722 2,171,222 2,520,658 79,637,026 Discount Rate 13.0% NPV 39,322,708 Terminal Growth Rate 9% NPV/Share BEXIMCO Pharma Valuation EPS BVPS 2010 estimates Multiple 20.0x 2.5x Target price

5 Beximco Pharma: Income Statement Net Sales 3,702,317 3,597,025 4,010,167 5,012,709 6,015,251 7,218,301 Cost of goods Sold 1,809,860 1,813,233 1,855,687 2,406,100 2,887,320 3,248,235 Gross Profit 1,892,457 1,783,792 2,154,480 2,606,609 3,127,930 3,970,065 Administrative Expenses 150, , , , , ,549 Selling & Distribution Expenses 834, , , ,415 1,142,898 1,371,477 Depreciation Expense 161, , , , , ,601 Profit from Operation 746, , ,795 1,311,854 1,635,344 2,210,438 Other Income 56,201 19, ,532 15,038 18,046 Contribution to WPPF 26,162 19,984 35,706 37,595 45,114 54,137 Earning before Interest and Taxes (EBIT) 776, , ,775 1,286,791 1,605,267 2,174,347 Interest Expense 253, , , , , ,515 Earning Before Taxes (EBT) 523, , ,121 1,002,276 1,320,753 1,889,832 Income Tax (Current & Deffered) 52,585 46, , , , ,255 Profit After Tax (PAT) 470, , , , ,150 1,379,578 Beximco Pharma: Balance Sheet Assets: Current Assets: Cash & Cash Equivalent 581,099 85,699 73, ,450 1,639,117 2,657,386 Accounts Receivable 430, , , , , ,916 Spares and Supplies 182, , , , ,530 Loan, Advance & Deposit 591, , , , , ,509 Inventories 1,754,440 1,470,152 1,505,288 1,590,305 1,680,123 1,775,014 Total Current Assets 3,357,393 2,923,775 2,861,892 3,362,710 4,602,196 5,715,355 Fixed Assets: Property, Plant & Equipment 8,513,136 8,992,942 11,921,073 12,087,968 12,257,199 12,343,000 Investment in Shares 41,983 36,701 36,701 36,701 36,701 36,701 Total Fixed Assets 8,555,119 9,029,643 11,957,774 12,124,669 12,293,900 12,379,701 Total Assets: 11,912,512 11,953,419 14,819,665 15,487,379 16,896,096 18,095,056 Liabilities & Equities: Current Liabilities: Short Term Borrowing from Bank 1,302, ,582 1,461,666 1,461,666 1,461,666 1,461,666 CMLTD 712, , , , , ,166 Creditors & Other Payables 365, , , , , ,670 Accrued Expenses 117,937 60,053 81, , , ,143 Dividend payable 13,012 3,285 3,170 3,170 3,170 3,170 Income Tax Payable 16,276 41, , , , ,077 Total Current Liabilities 2,527,421 1,627,973 2,602,032 2,704,348 2,793,802 2,860,893 Non Current Liabilities: Long Term Borrowing-Secured 1,159,410 1,776,450 1,446,601 1,446,601 1,446,601 1,446,601 Deffered Liability-provision for gratuity 213, , , , , ,419 Deffered Tax Liability 62,403 51,352 46,411 46,411 46,411 46,411 Total Non-Current Liabilities 1,435,171 2,074,506 1,767,431 1,767,431 1,767,431 1,767,431 Shareholder's Equity: Share Cpaital 1,040,973 1,145,070 1,259,577 1,259,577 1,834,877 1,834,877 Share Premium 1,489,750 1,489,750 1,489,750 1,489,750 1,489,750 1,489,750 Issue price over face Value of GDR 1,689,637 1,689,637 1,689,637 1,689,637 1,689,637 1,689,637 Capital reserve 294, , , , , ,951 Tax-Holiday Reserve 394, ,355 1,711,175 1,711,175 1,711,175 1,711,175 Retained Earnings (including Tax holiday reserve from 2006E) 3,039,775 3,189,176 4,005,112 4,570,509 5,314,474 6,446,343 Total Equities 7,949,920 8,250,940 10,450,202 11,015,599 12,334,863 13,466,732 Total Liabilities & Equities 11,912,512 11,953,419 14,819,665 15,487,379 16,896,096 18,095,056

6 Renata Top Pharmaceutical Companies Renata is one of fastest growing pharmaceutical companies in Bangladesh. It is the seventh largest company in terms of local pharmaceutical sales. Successor of the business of Pfizer Bangladesh still enjoys distribution relationship with Pfizer. Renata is the market leader in agrochemical business. Strong growth history; in the last five years, revenue grew by a 23% CAGR whereas net profit grew by 31%. Even if gross profit margin remained the same, the company has consistently reduced its operating costs, thus improving the bottom line. The company achieved a return on equity of over 25% on average in the past five years seems to be on the same track. Renata boasts of the highest gross profit margin (almost 50%) among the local manufacturers. In 3Q09, Renata declared EPS of BDT posting a 43.55% bottom line growth QoQ; reduction of operating expenses improved bottom line. Renata has a Modest dividend payment; dividend yield in 2008 was about 1%. A high retention rate is justified as the company consistently makes huge capital expenditures, financed by internal cash. This state is supposed to continue in the near future. Manageable leverage; D/E is about 50%. The entire debt is short-term. Renata has good management, disciplined growth and low leverage, and appears to be an attractive company. Target price BDT 13,000. Dividend yield 0.55%. Total return 15%. Valuation Discounted FCF Operating Cash 490, , , , ,068, ,220, ,411,073.1 Capital Expendture -103, , , , , , ,426.7 Change in Debt -10, , , , , , ,078, ,259,646.4 Net Terminal Value 15,560,337.9 Terminal Value 15,560,337.9 Terminal Debt 0.0 Net Free Cash Flow 376, , , , , ,078, ,819,984.3 Discount Rate 13.5% NPV 9,438,570.8 Terminal Growth Rate 5.00% NPV/Share 6, Renata Valuation EPS BVPS 2011 estimates Multiple 20.0x 5.0x Target price

7 Renata: Income Statement Turnover 2, , , , , ,006.1 Cost of sales -1, , , , , ,003.0 Gross profit 1, , , , , ,003.0 Administrative, selling and distribution expenses , , ,621.6 Operating profit , ,381.4 Other income Gain on disposal of property, plant and equipment Other expenses , ,397.7 Interest on overdraft , ,307.1 Contribution to WPPF Profit before tax , ,246.5 Current tax Deferred tax Total tax Net profit after tax for the year Renata: Balance Sheet Current assets Inventories , , , ,801.8 Trade and other receivables Advance, deposits and prepayments Cash and cash equivalent ,195.8 Total current assets 1, , , , , ,628.3 Non-current assets Property, plant and equipment , , , ,165.9 Capital work-in-progress Investment Total non-current assets , , , , ,790.5 Total Assets 1, , , , , ,418.7 Current liabilities Bank overdraft Short term bank loans Dividend distribution tax Creditors for goods Accrued expenses Other payables Unclaimed dividend Provision for taxation Total current liabilities , , , ,481.1 Non-current liabilities Loans and borrowings Deferred liability-staff gratuity Deferred tax liability Total non-current liabilities Total liabilities , , , ,667.9 Equity attributable to equity holders of the group company Share capital Revaluation surplus Capital reserve Tax holiday reserve Proposed stock dividend Proposed cash dividend Retained earnings , , , , ,342.1 Total equity attributable to equity holders of the group company 1, , , , , ,750.8 Minority interest Total equity 1, , , , , ,750.8 Total equity and liabilities 1, , , , , ,418.7

8 ACI Limited Advanced Chemical Industries (ACI) Limited is one of the most recognized pharmaceutical companies in Bangladesh. ACI currently lies at eighth spot in the local market. The company has expanded its business beyond pharmaceuticals encompassing agrochemical, animal health, agro-machinery, consumer brands and retail chains. Since the company has been expanding its business horizon rather aggressively for the last few years, ACI has found itself in a cash crunch, which ultimately led the company to resort to a fair bit of leverage. However, ACI has recently issued a zero-coupon bond to improve their cash position. Despite cash constraint, ACI is one of the more consistent dividend paying companies in the local market. Although the core pharma segment and agribusiness segment are making respectable profits, consumer brands and other segments are not yet fully profitable. If and when these segments become profitable, the bottom line will see significant improvement. Despite its cash crunch, ACI remains one of the more attractive companies among the pharmaceutical companies. Target price BDT 675. Dividend yield 1.96%. Total return 35%. Valuation Discounted FCF Operating Cash 578,368,698 1,114,949,068 1,231,726,511 1,410,844,831 1,690,114,889 1,788,059,630 1,967,010,983 Capital Expendture -1,500,000, ,457, ,678, ,178, ,931, ,216, ,126,271 Change in Debt 315,090, ,599, ,000,000-1,070,816,761-1,200,000, ,000, ,000, ,540, ,091,401 64,048,280-60,150,210 65,183,313 1,136,843,627 1,287,884,712 Net Terminal Value 21,037,902,697 Terminal Value 23,396,572,260 Terminal Debt 2,358,669,563 Net freecashflow -606,540, ,091,401 64,048,280-60,150,210 65,183,313 1,136,843,627 22,325,787,409 Discount Rate 15.0% NPV 11,050,450,933 Terminal Growth Rate 9.00% NPV/Share ACI valuation EPS BVPS 2011 estimates Multiple 18.0x 3.0x Target price

9 ACI: Income Statement Revenue 4, , , , , ,139.4 Cost of sales 2, , , , , ,433.8 Gross profit 1, , , , , ,705.6 Admisnistrative expenses Distribution expenses Selling expenses , , , ,098.1 Operating profit , , ,639.1 Other income Result From opeating activities , , , ,709.7 Profit from sale of shares Share of Profit equity accounted investees EBIT , , , ,709.7 Financing cost , ,125.0 Provision for contribution to WPPF Profit before tax , ,068.8 Income tax expenses: Current tax expense Deferred tax income Profit after tax ACI: Balance Sheet Inventory 1, , , , , ,277.4 Trade debtors , , , ,294.8 Other debtors Advances, deposits and prepayments Advance income tax Inter-company receivable Cash and bank balances Total current assets 2, , , , , ,390.9 PPE at cost/revaluation 1, , , , , ,469.5 Accumulated depreciation , , ,835.1 PPE Net 1, , , , , ,634.4 Capital work-in-progress Intangible assets Investment Total non-current assets 1, , , , , ,142.1 Total assets 3, , , , , ,533.0 Bank overdraft , , , Short term bank loan 1, , , , , ,870.8 Long term bank loan- Current portion Trade creditors Other creditors , ,224.4 Inter company liability Current portion of lease obligation Provision for taxation Total current liabilities 2, , , , , ,799.1 Zero coupon bond 1, Long term bank loan Other liabilities Long term liabilities , ,425.7 Total liabilities 2, , , , , ,224.8 Share capital Share premium Capital reserve Special Reserve 0.1 Revaluation surplus Tax Holiday Reserve 34.5 Retained earnings , , , ,903.7 Total equity 1, , , , , ,000.2 Minority interest Total equity and liabilities 3, , , , , ,533.0

10 IMPORTANT DISCLOSURES Analyst Certification: Each research analyst and research associate who authored this document and whose name appears herein certifies that the recommendations and opinions expressed in the research report accurately reflect their personal views about any and all of the securities or issuers discussed therein that are within the coverage universe. Disclaimer: Estimates and projections herein are our own and are based on assumptions that we believe to be reasonable. Information presented herein, while obtained from sources we believe to be reliable, is not guaranteed either as to accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any security. As it acts for public companies from time to time, BRAC-EPL may have a relationship with the above mentioned company(s). This report is intended for distribution in only those jurisdictions in which BRAC-EPL is registered and any distribution outside those jurisdictions is strictly prohibited. Compensation of Analysts: The compensation of research analysts is intended to reflect the value of the services they provide to the clients of BRAC-EPL. As with most other employees, the compensation of research analysts is impacted by the overall profitability of the firm, which may include revenues from corporate finance activities of the firm's Corporate Finance department. However, Research analysts' compensation is not directly related to specific corporate finance transaction. General Risk Factors: BRAC-EPL will conduct a comprehensive risk assessment for each company under coverage at the time of initiating research coverage and also revisit this assessment when subsequent update reports are published or material company events occur. Following are some general risks that can impact future operational and financial performance: (1) Industry fundamentals with respect to customer demand or product / service pricing could change expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes; (3) Unforeseen developments with respect to the management, financial condition or accounting policies alter the prospective valuation; or (4) Interest rates, currency or major segments of the economy could alter investor confidence and investment prospects.