private Circula ation

Equit tyResearch
8thMay2011

SquarePharmaceutical Limited
CurrentMa C arketPric Tk.331 ce: 15.15

Tk.3315.15 5 Tk.262943 362 0.91% 17.75% Tk.176.44 4 Tk.810.36 6
200607 8,747.70 1,916.50 1,458.20 12,539.00 3232.3 200607 38.27% 21.91% ! 16.67% 20.56% 7.65% 14.57% 200607 28.08% 6.85 0.94 200607 50,50%B 2.04% 18.85% 12.42% 36.07% 200607 10.01 1.76 200607 2081.14 515.08 1566.06 714.71 1119.87 1090.00 770.32 699.42

MS Value:T TK.3855.0 00
Tk.1962.0m mn Tk.8943.01m mn Tk.70,019.4mn 19.62mn 8.99mn 54.17% FaceVa alue Market tLot FiscalY YearEnd Sector Category ListingY Year T Tk.100 1 March Pharmaceutical A 1995 CONSOLIDATEDQ C QUARTERLY EPS(Resta ated) 201011 200910 Q1 Q 46.22 34.15 Q2 Q 92,28 70.9 Q3 Q 135.63 101.72 Q4 Q YTD 127.29

! CurrentP Price 52WeekPriceRange ExpectedDividendYield TargetRe eturn FY2010EEPS FY2010ENAV

KeyFinanc cials(inmn) Revenue OperatingProfit NetIncome TotalAsset t TotalDebt t Profitabilit ty&Growth GrossProf fitMargin EBITmargi in ! ! ! NetProfitMargin SalesGrow wth(YoY) NetProfitGrowth TotalAsset tGrowth RiskIndica ators DebttoCa apital InterestCo overage Beta(5Yea arsAverage) ReturnInd dicators DPS DividendY Yield ROE ROA 5YearsAv ! verageReturn PriceMultiples P/E ! P/B FCFF(inMn) EBIT ()Taxes NOPAT (+)Depreciation eofAssets ()Purchase ()Investmentin Associates s/Securities (Increase)/ /DecreaseinNWC FreeCashFlowtoFirm

COMPANY YANDMARKETSNAPSHOT
PaidupCa apital Reserve& &Surplus MarketCa apitalization TotalNo.o ofSecurities FreeFloat(estimated) SponsorsC Control
2008 809 11,82 26.20 2,929.00 2,058.40 14,90 04.60 292 29.2 2008 809 40.7 70% 24.7 77% 17.4 41% 12.0 06% 34.9 92% 1.0 02% 2008 809 21.1 14% 7.3 34 0.9 92 2008 809 40,25%B 1.36% 20.1 15% 13.7 74% 38.2 23% 2008 809 17. .22 3.2 24 2008 809 3338 8.08 826 6.17 2511 1.90 827 7.40 1541 1.53 500 0.00 586 6.64 1884 4.42 200910 0 12970.92 2 3,325.90 0 2497.1 16,405.80 0 2735.4 200910 0 43.32% 25.64% 19.25% 9.68% 21.31% 35.30% 200910 0 16.32% 11.19 0.63 200910 0 35,30%B B 0.98% 20.93% 15.95% 32.90% 200910 0 21.64 4.18 200910 0 3583.63 886.95 2696.68 8 883.66 1535.05 40.00 395.06 1610.24 4

200708 10,553.80 1 2,248.70 1,525.60 15,058.20 1 4398.1 200708 37.98% 21.31% 14.46% 20.65% 4.62% 20.09% 200708 31.63% 5.85 1.01 200708 40,35%B 4 0.97% 17.15% 11.06% 55.36% 200708 24.09 3.87 200708 2594.19 642.06 1952.13 738.96 1765.94 503.16 666.88 244.89

We are covering Sq quare Pharmace eutical Ltd. (DSE: SQURPHARM CSE: MA, SQP PH), the large conglomerate, which has bu usinesses range from es prod ductionofformulateddrugs,ac ctivepharmaceu uticalingredients s(APIs), agro ovetproduct,fa abricsandtextile etohospitaland drealestate. Hug Market: The Bangladesh p ge pharmaceutical market is expe ected to reac TK 100 bn b 2013. The ex ch by xpiration of pate of expensiv drugs ent ve with 2012 and th cost cutting health policy in regulated mar hin he n rket like US, UK and other E European count tries will create opportunity to export o andprovidecontrac ctmanufacturin ngservicesforM MNCs.SPL has entered UK and has exclusive export posit tion in LDC countries. Other Eu uropean countriesandUSAi isnotfaraway. Esta ablished Industr Position: Wit significant pr ry th resence in key m markets coupled with synergic gains, espe ecially in raw material, the co m ompany rem mainsthemostefficientplayerw with20%ofmark ketshare. Stro ong financial performance: SP performed strongly for the last 5 PL s e year rs,asitsCAGRo ofrevenueand netprofitaccru ued15.63%and 16.52% resp pectively.5year raverageROEandROAareend dowedwith19.4 47%and 13.3 35%respectively y.

Valu ueDrivers:Wee expectcompany ysfuturegrowth hwillbedrivenby: 1. Upcomingca 1 apacityexpansionsinproduction nfacilities(3rdU Unit)by endof2012 tomeettheloc calandexportdemandofthep products of company; Facilities to bebuild: (a) Solid DosesForm, (b Large b) Volume Par renteral (LVP) and (c) Special products s such as AnticancerDrugs;and 2. Producing a 2 and marketing of insulin, HFA MDIs, neb H bulizers, injectablesan ndsoonforbot thlocalandforeignmarket. 3. Amplification in bottomline will be credite by reduced f 3 n e ed financial expenseandtheimmensegrowthinassocia atesincome(es specially SquareTextil leandSquareHo ospital). Low wRisk:Itisalow wriskcompany withverylittle comovementw withthe mar rket.

Vo olume(RHS) 5000.00 0 4500.00 0 4000.00 0 3500.00 0 3000.00 0 2500.00 0 2000.00 0 1500.00 0 1000.00 0 500.00 0 0.00 0 ClosingPrice(LHS) )

4335.75

300000.00 250000.00 200000.00 150000.00 100000.00 50000.00 0.00

Revenue(mn) NetIncome(mn) NetP ProfitMargin NetP ProfitGrowth(YoY) ) Beta P/E(a atCurrentPrice) P/B( (atCurrentPrice)

Q3201011 1194 44.15 2660 0.74 22.2 28% 33.3 33% 0.5 54 19. .09 3.7 78

201011E 2 14786.85 1 2862.30 21.87% 38.61% 18.37 4.00

RISKS Post TRIPS Market Share: As the company will not be able to sell on t t n pate molecules, it may stand to lose the so ent ome of the ma arket to multinational comp panies by 2016. In addition, technology transfer for prod duction of APIs and selected finished drugs (like newly patented s s seco ondline ARVs) from MNCs will increase price of drugs, may cause es som mereduceddemandinthefutur re. Reg gulatoryRisk:Th hecostcontrollingwillbeemine entfromgovern nmentif theauthoritylistsso omeofthedrug gsasessentialdr rugs.
Prob blemcoordinationandlackof strategicfocus:TheCompany ownsa hugeportfolioofas sset.Coordinatio onandstrategic cfocusmayprov vetobe asig gnificantchallen ngeasthecompanyaddsmorea assets.

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Disclaimer
This material is produced by Mind s dspring Research ( Mindspring), an in ndependent researc firm registered with Registrar of Joi Stock Companie and Firms, Bang ch w int es gladesh. This docum ment is not to be used or consid dered as an offer to sell or a solicitatio of an offer to bu any securities, o to enter into any other agreement. Projections of pote o on uy or y ential risk or return are illustrative, an should not be nd taken as limitat tions of the maximum possible loss o gain. Past performance is not indica or ative of future results. The information and any views ex n xpressed in this document are given a at the date of as writing and sub bject to change. Wh the information has been obtained from sources believed to be reliable Mindspring do no represent that it i accurate or complete and it should not be relied on hile n d e, ot is as such. Minds spring and its empl loyees accept no li iability for any direc or consequential loss arising from the use of this doc ct l t cument or its contents or otherwise ar rising in connection therewith. This n document is no to be relied upon or used in substitu ot n ution for the exercis of independent j se judgment. It is bein furnished to you solely for your info ng ormation, and by ac ccepting this report you agree to be bound by the fo oregoing limitations s.

COM MPANYDESCR RIPTION

Square Pharmaceut tical Ltd., flags ship of the Square Group, is the s large conglomerate comprising business of operating mo e e odern pharm maceuticalsfac ctoriesproduce esandsellspha armaceuticalsd drugs andm medicinesinthelocalaswella asintheinternationalmarket.The comp pany has a separate divisio to operate a modern Basic on e Chem mical Factory, a produces a sells Basic Chemical Prod and and ducts. The company has also an AgroV Division p Vet producing and sells AgroV products. The company has also inves Vet sted to diversif its fy busin ness and has m made it foot p prints in the t textile, fashion and hospitalsector.Theorganizationalchronologyisa asfollows: Theo organizationalc chronologyisas sfollows:
1958 8 1964 4 1991 1 1994 4 1995 5 1997 7 2005 5 2007 7 2008 8 2010 0 Estab blishmentoftheC CompanyasaPartnershipForm Incorporatedasaprivatelimitedcompany Convertedintoapubliclimitedc company IPOtopublicwit ththeapprovalo oftheSEC StockE Exchangelistings HRAstandardsoli iddosageformulationsunitofDhakaSite USFDA/UKMH ofPharmaceuticalsgoesintoop peration operation,approv vableof StateoftheArtCephalosporinsunitgoesintoo USF FDA/UKMHRA DhakaS Sitessoliddosage eunitgetstheUK KMHRAapproval SmallVolumePar renteral&Ophth halmic)unit,built tasper StartsSVPO(S USFDArequireme entsandgoesinto ooperation facturinggoesintooperation,app provableofUSFD DA/UK Insulinmanuf MHRA

APID Division Agro oVet & Pesti icideDivision

Penicillins,an nalgesics,antipyretics,NSAIDs andpellets. AgroVet:Table et,powder,inject table,&liquid. Pestiside:Liqui id,powder,granu uler&aerosol.

1998 N/A

MarketShare
Tenofth helocalcompan nieshavegaine edthelargestm market share in the generic an popular cat nd tegory, which m makes uparoun nd75%ofthem market. reign companie are focusing only On the o other hand, for es g on the patent and premium catego ories, like vac ccines, anticance eretc.

GlaxoSm mithKline DrugInter rnational opharma Aristo ACILtd Renata EskayefBangladesh Opsonin nPharma oratories ACMELabo Beximco InceptaPharmaceuticals SquarePharmaceuticals Others 0% 5.2% 5.1% 4.4% 4.6% 5.6% 5.5% 6.0% 4.9% 8.9% 10.2 2% 19.7 7% 19.84% 5% 10% 15% 20% 25%

Prod ductInformation
The companys product line consist of 52 Pharmaceut e 28 ticals Products, 15 APIs, 32 Agro oVet Products and 19 Pest ticide Products. In 200910, 97.25% of the companys re evenue came from domesticsales,whiletherem maining2.75%camefromexpo ortto 35 countries in Asia, Africa, Europe and S South America. The . companyexportsitspharmac ceuticalandAgr roVetproducts.
Gross Tur rnover (2009-10) Local Export

SPLs cu urrent market share is 19.7%, based on net n turnover r,makingitthedecisivemarke etleader. Further, it will gradually increase share with the capacity additions s.

The eManagemen nt
Samson H. Chowdhury, the Chairman of up, is Square Grou 40% the leading The company. 54% % group has its into operation 6% pharmaceutical, extile, toiletries, te agro obased, health care, security management real estate, bank, h y t, informationtechno ologyandinsurance.Asarec cognizedandle eading entr repreneur of the country, he has been an icon of the pharmaceutical industries in Ba angladesh for decades. He i the is ChairmanofCentralDepositoryB BangladeshLtd.,FounderTrus stee& Form Chairman, Transparency International Bangladesh Chapter, mer B Vice ePresident of the Interna f ational Chamb ber of Comm merce, Bangladesh, and a advisor of Bang gladesh Aushad Shilpa Samit He ty. has been recogniz Commercia Important Person (CIP) b the zed ally by ionalBoardof Revenue(NBR) )andawarded forbeingoneo ofthe Nati High hestTaxPayers sintheyearwh henitwasfirstintroducedandalso in20 00708&2008 2009.
Sponsor/Dire ector Foreign n Public

Owners shipStructu ure

Pharmaceutica al 97.12% 2.88%

0.00% 1.47%

0.00% 0

100.00% 98.53%

00.00% 10

APIs

AgroVet

Pe esticide

ed of Having receive GMP certificate by UK MHRA for one o its formulation units, the com mpany is now entering into the regulatedmark kets,UKandotherEUcountrie es. Operation nalMatrix

Location/Unit
Pabna aSite

Product
Solidoraldosage eformsliketablet, ,capsulesetc., liquidoraldosa ageforms,inhaler,injectable, suppository,diff ferenttopicalprep parationslike powder r,cream,ointment tetc. Alldosageforms. A 1958

Dhaka aSite Cepha alosporinUnit

2001 1995

Antibioticsint tablets,capsules,powderfor suspensionandinjectablepre eparations.

TheManagement Committeeisle eadbyanother rfounder,Mr.T Tapan Chowdhury, form mer Advisor of Caretake governmen of er nt Bangladesh. Mr. Chowdhury w was a President of Metrop politan merce and Ind dustry (MCCI) and member o the a of Chamber of Comm cutivecommitt teeoftheBang gladeshEmploy yersAssociation n,and exec BangladeshTextile eMillsAssociati ion.

 RecentPerformance
Ariseof16.06%inthestandalonenetsalesforthe3rdquarter ended December 2010 on a YearoverYear basis. Net sales are increased to Tk. 9.97 billion from Tk. 8.59 billion in the sameperiodofpreviousyear.Duringtheperiod,thecompany disclosed a standalone profit of Tk. 2.18 billion as against rd profit of Tk. 1.75 billion for the 3 quarter ended December 31.Inthesameperiod,standalonetotaloperatingincomeof thecompanywasatTk.2.59billion,ariseof15.94%overthe prioryearperiod. Thestandalone3rdquarterendingEPS,Tk.111.26compared toTk.89.19,werethebetterearningpositiononaYearover Yearbasis(grewat24.74%).Thepositivegrowthisattributed to the increased turnover, decreased cost of raw materials and boost from other income despite higher administrative and selling expenses. However, EPS growth on quarterover quarterbasiswasslidingat11.95%duetotheleverageeffect ofslightdeclineinsales(2.99%).Moreover,thesamepattern of negative growth rate in top line and bottom line was observedonQoQbasisinpreviousyear.TheEPSisexpected to be Tk. 136.57 for March 2011, resulting a growth rate of 28.32%. Thoughyearendreportedstandalonetoplineexperienceda healthy growth of 16.72%, the net earnings growth declined in 2010, (10.47% compared to previous years 36.78%). Though the cost of raw materials reduced slightly, operating profithadincreasedonlyby13.56%comparedpreviousyears 38.56%, reflection of significant increase in selling and distributionexpenses. Square Cephalosporins Ltd., subsidiary of the company making its way to fully operational. Recently, coupled with revenue growth and decreasing cost of materials (6.30%) it has added significant cost reduction to consolidated cost of goodssoldofSPL. The consolidated scenario is quite remarkable according to the recent quarterly report. The topline achieved augmentation of 24.31% mainly attributed by the Cephalosporinsunitandthenewunitservingalldosagesand the new insulin drug. However, the higher COGS resulting from higher exchange rate and new product development costs reduced the gross margin. Moreover, the higher operatingcostsdeterioratedsomeoftheoperatingprofit.On the other hand, amplification in bottomline is credited by reduced financial expense and the immense growth in associatesincome.Thenetprofitmarginreachedto22.28% attheendofthe3rdquarter,2010. Though the QoQ growth in consolidated EPS was slightly downward(5.87%),theYoYgrowthregisteredgrowthrate of33.33%.TheconsolidatedEPSisestimatedtoTk.176.44(Y oYgrowthrateof38.61%).

Due to widespread vaccination schemes, successful eradication ofleprosyandwidespreaduseoforalrehydrationfordiarrhoea, manyofthetraditionalhealth problemsareminimizedandlife expectancyhasrisentoover60yearscomparabletoIndiaand Pakistan rather than to African LDCs who mostly have life expectanciesmostlywellbelow50. CauseofDeath,2006
Asthma,RespiratoryDisease Bloodpressure,Heartdisease,Stroke Fever:Malaria,Typhoid,Influenza,Dengue,OtherFever Tumor,Cancer Jaundice,Liverdisease Cholera,Diarrhea Malnutrition Rheumatism,Rheumaticfever Diabetes,Venerealdiseases Total

Percentage
16.10 13.53 7.76 6.08 3.09 1.94 1.84 1.36 1.27 52.97

The most important health issues in Bangladesh today are related to maternal health and malnutrition, vitamin and iron deficiency. AIDS, Malaria and Tuberculosis are potential health threats. Other more important causes of death are Jaundice, liver diseases, asthma, respiratory diseases cardiovascular diseases, diabetes, and cancer. Mental disorders are an importantreasonfordisability. The pharmaceutical industry in Bangladesh includes more than 230 small, medium, large and multinational companies operating in the country producing around 97% of the total demand. Local large incumbents like Square, Incepta, Beximco, Acme Laboratories, Opsonin, Eskayef, Reneta, ACI, Aristophrma, Drug Internationaletc.,andMNCslikeGlaxoSmithKline(GSK),Sanofi Aventis,Sandoz,Pfizer,NovartisandAstraZeneca,etc.capture themajormarketshare.Thesetoptenlocalcompaniesenjoya totalmarketshareof75%. In 2009, the Bangladeshi pharmaceutical market represented demandofaroundTk.79.74Billion.However,thevalueoflocal sales (including the multinational companies) stood Tk. 57.81 Billion. Valueoflocalsales(Tk.Inmillion)
70,000 60,000 50,000 40,000
Tk

45,950 32,858 30,501 32,384

50,300 51,493

54,940

57,810

30,000 20,000 10,000 2002 2003 2004 2005 2006 2007 2008 2009
Year

INDUSTRYOVERVIEW IndustryTrend
Thefollowingpointshighlightthehealthcarepositionandindustry performance: Healthcare expenditure in Bangladesh, relative to other South Asian countries, is coming from a low base. Until 2005, per capita health expenditure of Bangladesh (US$ 12) was the secondlowestafterNepal(US$11)intheSouthAsia.

TheCAGRoflast8yearswas9.56%,whichshowsthatthelocal productionachievedahealthyamountofdruggenerationlevel duringtheperiod. The most important therapeutic Group in the Bangladeshi market is antibiotics. They account for almost 30% of the market. Chronic diseases such as diabetes, hypertension, heart disease and stroke are a large and growing burden on the health of

Bangladeshi people and healthcare system. The rising prevalenceofchronicdiseaseispartlytheresultofapopulation thatisageingandincreasinglyobese. Selfmedicationisanimportantelementofthetotalmarketfor pharmaceutical products. The leading areas of the market includeanalgesics,coughandcoldtreatmentsandvitaminsand minerals. HIV/AIDS and Antimalarial drugs are untouched by the local producersbecauseoflowprevalencerate. Theproducersfocusongenerics,mostlyastabletsandcapsules. Antiinfectiveisthelargesttherapeuticclassoflocallyproduced medicinal products, distantly followed by antacids and anti ulcerants. Other significant therapeutic classes include non steroidal antiinflammatory drug (NSAID), vitamins, central nervoussystem(CNS)andrespiratoryproducts.However,inject able products, like vaccines, requiring highend equipment, superior environment and quality control, is still untouched segment for local producers, hence such demand is met by import. Driven by high growth and the consequent cash generation, drug manufacturers have gone into aggressive capacity expansion mode. The cumulative settled LC amount from July, 2006toNovember,2010stoodUS$147.28mn(aroundTk.9.58 bn). Import of capital machinery statistics indicates significant increase of US$ 27.97 mn in opening of import LCs for capital machinery during FY10, compared to the same period of the preceding year. This represents a growth of 129.43% in FY09 compared to 29.59% in FY09. However, up to JulyNovember, 2010itshowslittlegrowth;3.41%against117.10%forthesame periodofprecedingyear. Import statistics of last 4 fiscal years indicate that finished pharmaceutical product import (opening of fresh LC during the period)rosebyCAGRof20.53%.FY10sfiguresoffreshLCworth atotalofUS$83.34mnagainstUS$61.70mnofpreviousyear. However, the recent JulyOctober numbers of FY11 reflects a little attempt in the import; a growth of 5.48%, whereas, the same period of preceding year saw a dramatically upsurge in growth rate; 108.60%. The imported drugs mainly comprise of the cancer drugs, vaccines for viral diseases, hormones, etc. TheopeningoffreshLCforAPIimportsawaboost;agrowthof 21.09% over the last 4 years, reflecting the remarkable growth expectation among the drug producers and significant increase inpriceoftheAPIimported.TheFY10endupwitharoundUS$ 324.16 mn versus US$ 270.07 mn of FY09. The latest quarter (JulytoOctober)statisticsisalsoindicatingthesamedriveasthe cumulative fresh LC opening stood US$ 161.00 mn against US$ 120.89mnofthesameperiodofFY10,aYoYof33.18%. Over the last five years, the price of some basic API except paracetamol, like amoxicillin, tetracycline HCL, doxycycline, cefalexin rose by an averaged 1020%. These materials are essential to produce antibiotics and painkillers, first medicines manufacturedinBangladesh,i.e.30%ofthetotalproduction. PricesofSelectedImportedRawMaterialsforEssentialDrugs AveragePrice(US$perKg.)
RawMaterial TetracyclineHCL AmoxycillinTrihydrate Trimethoprin Leavamisole Doxycycline Metronidazole Paracetamol 2002 9.85 9.22 13.75 36.48 5.35 2003 12.21 11.27 11.48 29.50 5.22 2004 12.03 23.05 11.48 15.00 30.06 7.12 3.27 2005 25.24 16.07 46.50 3.00 2006 26.05 18.45 7.53 2.95 2007 11.99 32.00 17.00 47.50 8.15 2008 19.65 48.50 52.64 2.65

Bangladeshi companies have little pricing power regarding raw materials, as they import 80% of the required raw material, mainlyfromIndiaandChina.FewareimportedfromEuropeand USA. China is the biggest producer of antibiotics API in the world. The leading manufacturers are therefore going into API manufacturing, focusing mainly on Antibiotics, but also other drugs, as for example anticancer drugs. A list of the API manufacturingcompaniesandtheAPIsalreadymanufacturedin Bangladeshareshowninthetablebelow: APIPortfolioProducedLocally
BeximcoPharmaceuticalsLtd. Amlodipine,Amoxycillin,Ampicillin,Celecocib, Rofecoxib,Paracetamol,Diclofenac,Cloxazillin, Flucloxacillin,Cetirizine,Fluconazole, Ciprofloxazin,Ranitidine,Cephalexin Amoxycillin,Paracetamol,Diclofenac,Cloxazillin, Flucloxacillin,Cephalexin Amoxycillin,Diclofenac,Cloxazillin,Flucloxacillin, Cephalexin Amoxycillin,Paracetamol,Diclofenac,Cloxazillin, Flucloxacillin,Cephalexin Amoxycillin,Paracetamol,Diclofenac,Cloxazillin, Flucloxacillin,Cephalexin Paracetamol Amoxycillin,Paracetamol,Diclofenac,

SquarePharmaceuticalsLtd. DrugInternationalLtd. GlobePharmaceuticalLtd. Gonoshashtaya PharmaceuticalLtd. SunipunPharmaceuticalLtd. OpsoninChemicalsLtd.

Salaries represent also an important operating expense for the pharmaceutical industry, where the sales department counts lots of employees to reach as many clients as possible. The account of total personnel expense costs the companies to increaseaCAGRof21%overthelastfiveyears. Asadvertisementofdrugsintelevisionandnewspapersisnot allowed in Bangladesh, the pharmaceutical companies rely heavilyondifferentiatedpromotionalcampaigns.Aftermathof the financial crisis, the local producers have made a massive promotionalandsalesefforttoboostsalesfigure.Theresultant isaggregatelypubliclylistedpharmaceuticalcompaniesrealized increaseof93%inthisexpenseaccountin2009. .

IndustryProfitability
ThoughthepharmaceuticalplantsaredependsonimportedAPIand heavilyfocusongenericdrugproducts,severalfactorsareexpected toshapetheoutlookoftheindustryinfuture. First, drug demand is likely to remain quite robust for the upcoming years mainly driven by increasing health consciousnessamongpeopleandincreasinghealthexpenditure bothonpublicandprivatelevel;i.e. Higher disposable income, rising population, changing demographics and lower price of locally produced genericdrugswillaiddemand. The development of new treatments becoming availableandmorepatientsavailingofthem. The acceleration of Government initiatives to improve publichealth. Second, contract manufacturing is one of the major growth areas in drug industry, as the countrys top 1012 drug makers havestateoftheartdrugplants.Byupgradingtheirfacilitiesto alevel,theproducerscandocontractmanufacturingforforeign pharmaceuticalsandexportdrugsworthTk200billionayear. Third, capacity building i.e. innovations, strengthening reverse engineering, training local people and upgrading technology is required to remain competitive in the post2016 period. API Park will help produce raw materials locally and innovate ingredientsaswell. Fourth, the establishment of API Park in Munshigonj will determine the capacity of producing raw materials locally and innovating ingredients as well, as opportunities of

bioequivalence study, validation report, clinical trials and manufacturingplantauditmechanismwillhavebeencreated. BarrierstoNew Entry
+ High fixed costs +High requirement of quality control Marginal product differentiatio High Moderately High Moderate Moderately Low Low

Threatof Substitute Products

Herbal and Homeopathi c

High Moderately High Moderate Moderately Low Low

Rivalryamong Existing Competitors

Large number of players Low switching cost high exit barrier High storage costs High

Bargaining Powerof
Suppliers

High Moderately High Moderate Moderately Low Low

Moderatel yHigh Moderate

Bargaining High Powerof Buyers Moderately

+ Many different buyers Low switching cost High Moderate
Moderately

+ Import dependent + Controlled by foreign suppliers

makes the competitors more closely facing one another. Thepricedifferentiationisthereforeminimumhere. Moreover, the local companies now make the hightech, expensive drugs like anticancer drugs, insulin in Bangladesh. Thepricesofthelocallyproducedanticancerdrugsandinsulin wouldbe20to30%lessthantheimportedones. Beacon pharmaceutical Ltd., a subsidiary company of Orion Group is the pioneer of producing anticancer drugs locally. Other leading producers are also on the queue to serve the marketwithincoupleofyears. SquarePharmaceuticalLtd.hasalreadysetupplanttoproduce andmarketinsulinlocallywithabrandnameofAnsulin.The contribution of insulin market in the drug sector is about Tk. 1.10billionofwhicharound80%demandismetbyimport.The most popular insulin brand, Mixtard, comes from Denmark, the base of Novo Nordisk, the global leader in diabetes care. The worlds biggest insulin maker Novo Nordisk and Eskayef Bangladesh Ltd, a concern of Transcom Group are going to produce this drug jointly within a year, providing the world classinsulininthecountrywithinaffordablepricerange.

Moderatel yLow Low

FUTUREOUTLOOK
Itisconsiderablyexpectedthat It will be able to maintain competitive edge in brand loyalty andtransfermostoftheincreasingpriceoftherawmaterials toconsumers. Oneofthemajorgrowthdriveswillcomefromtheupcoming additionalproductionplacedbythenewplant,asthecompany has the facility to produce Solid Doses Form, Large Volume Parenteral (LVP) and Special products such as Anticancer and Antidiabetes(insulin)Drugs. The contribution of the investment associates will accrue a significant bottom line effect in the income statement, as earning from Square Hospital will converge to eventual breakevenpointshortly. Gross profit margin will slightly be to 44% and Net profit margin at around 2127% with the wave of better effect of economic scale and increasing associates income over the volatile raw material prices and higher operating cost, indicatingapositiveoutlook.

Low Low

Fifth, though Bangladesh can continue with the patented products up to 2015 as per trade, related intellectual property rights (TRIPS), abuse of available antibiotics can cause nationwide bacterial resistance and people will have to pay a premium price for new onpatent antibiotics after 2016. However, the essential drugs may have concession of such scenario. Finally, another effect, expected this year, on the expenses of companies is the exchange rate. The expected contraction monetary policy taken by Bangladesh Bank will increase the interestrate;theresultantmayleadtodevaluationofTaka.API, needed for the production of drugs, are imported and paid in USD, BDTs devaluation became for some companies a real problemandaheavyexpense TheCompetition Although the MNCs proclaim the exclusivity of their manufacturing process and brands and with that reason heightenedmostoftheirproductprices,butstilltheyhave managed lower prices for some of their brands and been dominatinginseveraltherapeuticcategorieswithcompetitive pricing. Even though the local pharmaceutical companies (LPCs) are generallyknownasofferinglowprices,theyhaveincreased theirpricesinsomeinstancesevenmorethanMNCs.Incase of these two therapeutic classes; antihistamines and analgesics, two drugs, that is, Aspirin and Chlorpromazine areverycommonOTCdrugs.ThehigherpriceofLPCshere maybeexplainedbythereasonsthatmostOTCproducts areusedinlowdosesandgenerallyforshortperiods.TheOTC products generally have lower prices. A higher price can ensuresomedegreeofprofitabilityhere. Ontheotherhand,5MNCandLPCessentialdrugproducts have similar rates, namely Atenolol 50 mg, Glibenclamide, Amitriptyline,GriseofulvinandSalbutamol.Thesefiveareall chroniccaredrugproducts;theyareantidiabetic,psychotropic, antifungal, cardiovascular, and antiasthmatic drugs. Chronic care products for the aging population have been mentioned as the fastestgrowing market of the world. A narrow,butstronganddeepfocusforchroniccaremarket

COMPETITIVEEDGEVSRISKSFORTHEFUTURE
CoreCompetencies SPLisconsideredanexcellentdrugproducerwithnationwide50 yearsofoperationalexperienceofproducingdrugs. CompetitivesourceofrawmaterialsthroughtheAPIdivision. AllformulationunitsareGMPcertifiedapprovedbyUKMHRA. Careful selection and scientific proportioning of raw materials withtheuseoflatesttechnologyenablesmanufacturingofhigh qualitydrugs. Strongsalesforceandeffectivedistributionsystem Risks SPL still faces many issues regarding Anticancer and Anti diabetes drugs to be produced by the year 2016. The demand for these special hightech drugs are currently met by the foreign companies or by import. There is much contest in insulinasEskayefwillbeabletoprovidelowerpricedtopclass popular Mixtard to the market from next year. There is conjecture as to whether SPL will capture the planned 10% market share with its sales force. Moreover, the anticancer

drugs are already produced locally by Beacon Pharmaceutical Ltdandwillbeservedbytheotherlocalfirmswithincoupleof years. Therealbarrier,hinderingaccesstotreatmentsisinfactalack of the basic healthcare infrastructure required to get existing medicines to people. Other factors such as a lack of access to basicslikefood,decenthousingandcleanwater,armedconflict, corruption, bureaucracy and the lack of simple prevention measureslikecondomsandmosquitonets,unfortunatelymean thatpoorhealthisendemicforthepoorestpeople. Square is currently well positioned to counter any competitive threat,eitherfromexistingornewcompetitors.However,inthe event that these competitors make serious inroads into SPLs market, the result could severely limit the growth potential of thecompanyinthefuture. As the company will not be able to sell onpatent molecules, it may stand to lose the some of the market to multinational companies by 2016. In addition, technology transfer for production of APIs and selected finished drugs (like newly patented secondline ARVs) from MNCs will increase prices of drugs,maycausesomereduceddemandinthefuture. The cost controlling will be eminent from government if the authoritylistssomeofthedrugsasessentialdrugs.

approximately within the next three years even while maintainingitscurrentreinvestmentpolicy.Judicial

LiquidityandSolvencyAnalysis
Liquidity position of SPL is better than that of all listed drug producers but Beximco Pharmaceutical Ltd. However, the liquidity and solvency position of GSK is the finest, consequential of very low fixed asset base, SPL pose fair candidateoftakingdebtshouldinvestmentopportunityarise.
Current 2.39 1.17 2.98 3.11 0.73 Quick 0.98 0.35 1.83 1.69 0.25 Cash 0.74 0.10 1.53 0.73 0.25 TotalDebt/Total Capital 16.32% 26.47% 25.29% 5.91% 53.35% Interest Coverage 11.19 9.13 4.15 529.06 13.59

Ratio Square Reneta Beximco GSK IbneSina

Additionally, liquidity position pose unprecedented Cash ratio in200910.Thismaybeexplainedbytheincreasedinvestment inmarketablesecuritiesandshorttermloans.Thisisbackedby better cash collection from accounts receivables account, and the minimum level of shortterm debt and low level of creditorsaccountincurrentliabilities. The changing financing strategy is shifting debt financing to internalfinancingwhichwillreducethecostoffinancing.

FINANCIALANALYSIS EarningQualityandCashflowAnalysis
Thelatestyearsaccrualamountsaremuchlessthantheearly years of analysis. Moreover, the lower Accrual ratios indicate an encouraging tendency of improving earnings quality. In 200809 and 200910, they are significantly lower than in the earlier year, indicating a lower degree of accruals present in thecompanysearnings. The cash flow and earnings relationship indicates that except the year 200607 and 200708 the operating cash flow before interest and taxes substantially exceeded the operating earnings. The discouraging fact is in 200607 and 200708 the cashflowwassubstantiallylowcomparedtoreportedearnings signalingredflagofearningquality. The 200809 cash return on total assets is the highest of 18.41%inthefiveyearspanandthe2008generateslowestof 10.14%;showingparallelrelationshipincashgeneration.
2005 1.04 2006 0.89 17.87% 21.91% 15.01% 0.79 0.93 5.33 5.69% 10.14% 0.54 0.71 2.58 2007 0.97 18.58% 16.48% 4.85% 11.54% 0.70 0.77 4.78 2008 1.11 1.11% 8.42% 97.9% 18.41% 1.35 0.85 6.14 2009 1.11 11.52% 8.40% 3.86% 17.78% 1.77 1.36 2.42

EfficiencyRatio
Year DSO DOH Less: Number of daysofpayables Equals: Cash ConversionCycle 2005 33.61 120.56 37.02 117.15 2006 30.60 126.55 32.21 124.94 2007 28.79 132.03 18.19 142.63 2008 21.12 131.0 12.15 140.0 2009 13.92 123.62 7.49 130.05

EarningQualityMeasures OCFbeforeinterestandTax/ EBIT AccrualRatio(Balancesheet based) AccrualRatio(CashflowBased) RevenueaccrualstoTotal accruals OCF/AverageAssets Cashflowtoreinvestment Cashflowtototaldebt Yearstorepaymentofdebt afterreinvestment

ThedecreasingDSOexplainstheloweramountofcreditsales andhighrateofcollectionfromaccountreceivables.However, this favorable situation is offset by the decreasing number of days payable implying tight credit terms granted by the suppliers. ThehighernumberofDOHimpliestheregulardemandofthe drugs causing high stockpile for the companies. The SPLs revenue growth at the industrys growth and the lower DOH compared to similar companies implies the greater inventory managementefficiency. Comparing cash conversion cycle among the listed producers from the following table, greater cash cycle indicate they requireadditionalcapitaltofundworkingcapital.ThoughIbne Sina Pharmaceutical Ltd. shows better liquidity management among the companies, comparing with giants SPLs cash cycle ismuchsuperior.
2005 197.55 265.44 141.81 35.56 2006 211.55 157.98 145.38 33.62 2007 194.19 136.21 142.05 28.07 2008 204.07 237.53 146.42 23.93 2009 218.14 221.40 115.21 19.69

Year Reneta Beximco GSK IbneSina

The recent strong and improving OCF has enabled managementtoputmorecashintoinvestingforthecompanys futuregrowth. The increasing cash to debt ratio indicates strong cash generations to total debt outstanding, explaining borrowing capacity of the company should an investment opportunity arise. Moreover, the capacity to pay off its debt is

ProductivityRatio
Over time, labor and capital productivity indicators are dropping off. SPLs per employee marks are climbing over the years. However, the combining effect of the undersized new workforce with higher cost of materials dictates the climbing per employee marks. The opposite scenario of productivity

metrics are implied by the fact of huge growth of operating expensesspeciallythepersonnelexpense. SPL is outperforming every listed drug producers on labor metricsindicatingefficientmanagementandlabor.
ProductivityRatios 2005 11.37 1.04 1.14 2.36 2006 11.05 0.76 1.23 2.42 2007 8.77 0.86 1.27 2.45 2008 8.98 0.98 1.41 2.77 2009 8.61 0.96 1.52 2.82

Comparing with the listed firms, SPLs ROE placed 2nd lowest. However, with low financial risk and defensive depreciation principleSPLgeneratesuperiorROE.

VALUATION
ValueAdded/SalariesandWages ValueAdded/machineryand Equipment ValueAdded/NoofEmployee* Sales/NoofEmployee*

IntrinsicValue
Afterthoroughanalysisofindustrycycle,stageofthecompanyand future growth potential, we have adopted Discounted Free Cash Flow (DCF) method for valuingSPL stock. DCF is a widely accepted method for equity valuation. The following table illustrates the forecastedFreeCashFlowofSPL: (Figures in Millions except per share data)

*Taka (In Million); Note: Value Added includes Profit, labor cost, salary cost, and sellingandadministrativeexpenses.

Theplantefficiency(capitalproductivity)ofSPLhaslowfigure thanthelistedcompanies,mainlyduetotheinductionofnew plantsandthehigherassetbase.

Labor 3.89 3.97 3.61 2.16 Capital 1.48 0.19 3.13 1.80 SalestoEmployee* 1.46 1.94 4.93 0.56

2010
4,595.4 1,137.4 3,458.0 1,049.1 1,944.3 15.3 2,547.6 2,547.6

2011
5,253.6 1,300.3 3,953.3 1,194.7 1,711.0 469.4 2,967.7 2,603.2

2012
6,118.6 1,514.4 4,604.3 1,311.2 1,368.8 484.6 4,062.1 3,125.7

2013
7,340.0 1,816.7 5,523.4 1,404.4 1,095.0 557.3 5,275.5 3,560.8

2014
9,116.0 2,256.2 6,859.8 1,479.0 876.0 726.4 6,736.4 3,988.5

EBIT ()Taxes NOPAT

ProductivityRatios Reneta Beximco GSK IbneSina

*Taka(InMillions)

(+)Depreciation ()CAPEX (Increase)/Decrease in NWC FreeCashFlow P.VofFreeCashflow

EarningDecomposition
Thepresenceofassociateinvestmentprovidessignificantshare of income to the consolidated ROE. Impressive aggregate net profit margin came from the associates earnings, explaining therecentyearsupgradationinROE. Decreasingfinancialleveragecorrespondingfinerposition,and parallel increasing asset turnover pose superior profitability andproductivityofthebusiness.
2005 70.82% 90.86% 25.79% 16.59% 112.50% 18.67% 0.85 0.12 0.73 13.61% 1.49 20.27% 18.02% 2.25% 2006 70.24% 85.40% 23.79% 14.27% 116.80% 16.67% 0.89 0.15 0.75 12.42% 1.52 18.85% 16.14% 2.71% 2007 71.62% 82.92% 24.58% 14.60% 99.03% 14.46% 0.96 0.20 0.76 11.06% 1.55 17.15% 17.32% 0.17% 2008 73.37% 86.38% 28.23% 17.89% 97.30% 17.41% 1.03 0.24 0.79 13.74% 1.47 20.15% 20.71% 0.56% 2009 72.58% 91.06% 27.63% 18.26% 105.44% 19.25% 1.11 0.28 0.83 15.95% 1.31 20.93% 19.85% 1.08%

TerminalValue TotalP.VofFCF(A) P.VTerminalValue(B) EnterpriseValue(A+B) Less:NetDebt EquityValue OutstandingShare

89,257.4

15,825.8 52,847.6 68,673.3 216.2 68,457.2 19.62

ExpandedDuPontAnalysis TaxBurden(exassociates) Interestburden EBITmargin Netprofitmargin(ex associates) Associates'effectonnet profitmargin NetProfitMargin Totalassetturnover(ex associates) Effectofassociates investmentsonturnover TotalAssetTurnover Returnonassets Leverage Returnonequity SquareonlyROE Asset'scontributiontoROE

PerSharePrice

3490

KeyAssumptions
ThekeyassumptionsfortheDCFmodelareasfollows: Required Rate of Return (Discount Rate) is assumed at 14.00% is assumed. The discount rate is derived as follows:
5 yearBGTBondRate(RiskFree) AssumedRiskPremium RequiredRateofReturn 8.26% 5.74% 14.00%

Revenue Growth is assumed to be at CAGR of 17.00% duringtheprojectedyears. Constant Growth Rate is assumed at 6.0% considering thefollowingfactors: Longruneconomicnominalgrowthrateof7% 1.3%populationgrowth

SPLs drug business is high margin and low turnover. This is expectedofacompanywithbrandequity.
Tax Burden 73.33% 72.02% 73.79% 80.55% Interest burden 84.81% 72.27% 99.81% 88.23% EBIT Margin 24.88% 24.66% 14.54% 5.42% Total Asset Turnover 1.11 0.28 1.97 2.29 Financial Leverage 1.81 1.63 1.48 2.77 ROE

ValueofAssociates
By virtue of the ownership in associate companies, contribution of these companies to the earnings of SPL as a whole is significant. Amongthesecompanies,SquareTextileLtd.isvaluedinthepublic marketseparatelyanditsdiscretevaluationisadjustedtothepure SPLvaluation.Additionally,valueofothernonlistedassociatesare estimatedbyadjustmentfactorof3.00%ontotalpersharepriceof SPL (including all associates values). The adjustment factor is inferredonbasisofthecompaniescontributiontothenetincome toSPLandgrowthprospectofthesebusinessesinfuture.

Reneta Beximco GSK IbneSina

31.20% 5.86% 31.19% 24.37%


Square Textile Ltd. 46.45% 4.85% 10,529.8 4,891.1 7.14% 249.3 Square Hospital .49.56% 4.39% SquareKnit FabricsLtd. 48.84% 2.09% 3.00% 115.6 Square Fashions Ltd. 48.46% 2.68%

P/EMethod
SPLstrailingP/E(basedonJunecloseprice)rangedfrom 9.23x24.30xwithanaverageof19.47xoverlast5years. ForwardP/Eof18.37islowerthanthehistoricalaverage, butlessthantheindustry. TheforwardP/Eisexpectedtobeclosetohigherendand to be higher than the average. Thus, P/E multiple is estimatedwithintherangeof20x22x. With forward earning of TK 176.44 per share, we get a pricerangebetweenTK3528.81andTK3881.68.
2005 9.23 2006 21.61 2007 24.30 2009 19.32 2010 22.91 19.47 18.95

ProportionofOwnershipInterest ContributiontotheNetIncome EquityValue(inMillions) ValuetoSPL(inMillions) AdjustmentFactor Increase/(Decrease)inPricePer Share

PricePerSharewithoutAssociate TotalPerSharePrice

3490 3855

P/E (Trailing) Average Industry (Forward)

SimulationandSensitivityAnalysis
Fromsimulationanalysis,wehavefoundthatthefirmvalueismost sensitive to the changes of cost of capital, cost of goods sold and terminal growth rate. The following table exhibits a sensitivity analysisbasedontwovariables:
TerminalGrowth
12.00% 12.50% 13.00% 13.50% 14.00% 14.50% 15.00% 5.00% 4,486 4,197 3,944 3,721 3,523 3,346 3,187 5.50% 4,763 4,433 4,148 3,899 3,679 3,484 3,309 6.00% 5,086 4,707 4,382 4,101 3,855 3,638 3,445 6.50% 5,468 5,025 4,651 4,331 4,054 3,811 3,597 7.00% 5,926 5,402 4,966 4,597 4,281 4,008 3,768

MsValue

WeareinitiatingcoverageofSquarePharmaceuticalsLtd.withaMs Value of Tk. 3855 a share. Certainly, from a fundamental standpoint, the Company is exhibiting phenomenal growth and financial strength in the midst of a global recession and recent economicslowdownduetopowercrisis.Wefeelthisisatestament to the increasing industry demand and business model that SPL is executing, and certainly solidifies our confidence in the Company movingforward. Value is not timeless. However, we reasonably expect that the MS derivedvaluewillremaineffectiveforthenextthreemonths.

Discountrate

AnalystTeam
MahmudulBari ArifKhan NomanAhmedKhan N.M.AlHossain Md.FarjadSiddiqui QaziMussadeqAhmad SyedAbuRedowan

MINDSPRINGRESEARCH
RahmansRegnumCentre,601/A(6thFloor),PlotNo.191/B,Tejgaon GulshanLinkRoad,TejgaonC.A.,Dhaka1208