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private Circula ation
Equit ty Research
8th May 2011
Square Pharmaceutical Limited
Current Ma C arket Pric Tk. 331 ce: 15.15
Tk. 3315.15 5 Tk. 2629 ‐ 43 362 0.91% 17.75% Tk. 176.44 4 Tk. 810.36 6
2006‐07 8,747.70 1,916.50 1,458.20 12,539.00 3232.3 2006‐07 38.27% 21.91% ! 16.67% 20.56% 7.65% 14.57% 2006‐07 28.08% 6.85 0.94 2006‐07 50, 50% B 2.04% 18.85% 12.42% 36.07% 2006‐07 10.01 1.76 2006‐07 2081.14 515.08 1566.06 714.71 1119.87 1090.00 770.32 ‐699.42
MS Value: T TK. 3855.0 00
Tk. 1962.0 m mn Tk. 8943.01 m mn Tk. 70,019.4 mn 19.62 mn 8.99 mn 54.17% Face Va alue Market t Lot Fiscal Y Year End Sector Category Listing Y Year T Tk. 100 1 March Pharmaceutical A 1995 CONSOLIDATED Q C QUARTERLY EPS (Resta ated) 2010‐11 2009‐10 Q1 Q 46.22 34.15 Q2 Q 92,28 70.9 Q3 Q 135.63 101.72 Q4 Q YTD 127.29
! Current P Price 52 Week Price Range Expected Dividend Yield Target Re eturn FY 2010E EPS FY 2010E NAV
Key Financ cials (in mn) Revenue Operating Profit Net Income Total Asset t Total Debt t Profitabilit ty & Growth Gross Prof fit Margin EBIT margi in ! ! ! Net Profit Margin Sales Grow wth (YoY) Net Profit Growth Total Asset t Growth Risk Indica ators Debt to Ca apital Interest Co overage Beta (5 Yea ars Average) Return Ind dicators DPS Dividend Y Yield ROE ROA 5 Years Av ! verage Return Price Multiples P/E ! P/B FCFF (in Mn) EBIT (‐)Taxes NOPAT (+)Depreciation e of Assets (‐)Purchase (‐)Investment in Associates s/Securities (Increase)/ /Decrease in NWC Free Cash Flow to Firm
COMPANY Y AND MARKET SNAPSHOT
Paid‐up Ca apital Reserve & & Surplus Market Ca apitalization Total No. o of Securities Free Float (estimated) Sponsors C Control
2008 8‐09 11,82 26.20 2,929.00 2,058.40 14,90 04.60 292 29.2 2008 8‐09 40.7 70% 24.7 77% 17.4 41% 12.0 06% 34.9 92% ‐1.0 02% 2008 8‐09 21.1 14% 7.3 34 0.9 92 2008 8‐09 40, 25% B 1.36% 20.1 15% 13.7 74% 38.2 23% 2008 8‐09 17. .22 3.2 24 2008 8‐09 3338 8.08 826 6.17 2511 1.90 827 7.40 1541 1.53 500 0.00 ‐586 6.64 1884 4.42 2009‐10 0 12970.92 2 3,325.90 0 2497.1 16,405.80 0 2735.4 2009‐10 0 43.32% 25.64% 19.25% 9.68% 21.31% 35.30% 2009‐10 0 16.32% 11.19 0.63 2009‐10 0 35, 30% B B 0.98% 20.93% 15.95% 32.90% 2009‐10 0 21.64 4.18 2009‐10 0 3583.63 886.95 2696.68 8 883.66 1535.05 40.00 395.06 1610.24 4
2007‐08 10,553.80 1 2,248.70 1,525.60 15,058.20 1 4398.1 2007‐08 37.98% 21.31% 14.46% 20.65% 4.62% 20.09% 2007‐08 31.63% 5.85 1.01 2007‐08 40, 35% B 4 0.97% 17.15% 11.06% 55.36% 2007‐08 24.09 3.87 2007‐08 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 duction of formulated drugs, ac ctive pharmaceu utical ingredients s (APIs), agro o vet product, fa abrics and textile e to hospital and d real estate. 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 and provide contrac ct‐manufacturin ng services for M MNCs. SPL has entered UK and has exclusive export posit tion in LDC countries. Other Eu uropean countries and USA i is not far away. 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 mains the most efficient player w with 20% of mark ket share. Stro ong financial performance: SP performed strongly for the last 5 PL s e year rs, as its CAGR o of revenue and net profit accru ued 15.63% and 16.52% resp pectively. 5 year r average ROE and ROA are end dowed with 19.4 47% and 13.3 35% respectively y.
Valu ue Drivers: We e expect company y’s future growth h will be driven by: 1. Upcoming ca 1 apacity expansions in production n facilities (3rd U Unit) by end of 2012 to meet the loc cal and export demand of the p products of company; Facilities to be build: (a) Solid Doses Form, (b Large b) Volume Par renteral (LVP) and (c) Special products s such as Anticancer Drugs; and 2. Producing a 2 and marketing of insulin, HFA MDIs, neb H bulizers, injectables an nd so on for bot th local and foreign market. 3. Amplification in bottom‐line will be credite by reduced f 3 n e ed financial expense and the immense growth in associa ates’ income (es specially Square Textil le and Square Ho ospital). • Low w Risk: It is a low w risk company with very little co‐movement w with the 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 Closing Price (LHS) )
300000.00 250000.00 200000.00 150000.00 100000.00 50000.00 0.00
Revenue (mn) Net Income (mn) Net P Profit Margin Net P Profit Growth (YoY) ) Beta P/E (a at Current Price) P/B ( (at Current Price)
Q3 2010‐11 1194 44.15 2660 0.74 22.2 28% 33.3 33% 0.5 54 19. .09 3.7 78
2010‐11E 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 ond‐line ARVs) from MNCs will increase price of drugs, may cause es som me reduced demand in the futur re. Reg gulatory Risk: Th he cost controlling will be emine ent from govern nment if the authority lists so ome of the drug gs as essential dr rugs.
Prob blem coordination and lack of strategic focus: The Company owns a huge portfolio of as sset. Coordinatio on and strategic c focus may prov ve to be a sig gnificant challen nge as the company adds more a assets.
01‐May‐10 01 May 10
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 MPANY DESCR 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 maceuticals fac ctories produce es and sells pha armaceuticals d drugs and m medicines in the local as well a as in the international market. 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 hospital sector. The organizational chronology is a as follows: The o organizational c chronology is as s follows:
1958 8 1964 4 1991 1 1994 4 1995 5 1997 7 2005 5 2007 7 2008 8 2010 0 Estab blishment of the C Company as a Partnership Form Incorporated as a private limited company Converted into a public limited c company IPO to public wit th the approval o of the SEC Stock E Exchange listings HRA standard soli id dosage formulations unit of Dhaka Site US FDA/UK MH of Pharmaceuticals goes into op peration operation, approv vable of State‐of‐the‐Art Cephalosporins unit goes into o US F FDA/UK MHRA Dhaka S Site’s solid dosage e unit gets the UK K MHRA approval Small Volume Par renteral & Ophth halmic) unit, built t as per Starts SVPO (S US FDA requireme ents and goes into o operation facturing goes into operation, app provable of US FD DA/UK Insulin manuf MHRA
API D Division Agro oVet & Pesti icide Division
Penicillins, an nalgesics, antipyretics, NSAIDs and pellets. AgroVet: Table et, powder, inject table, & liquid. Pestiside: Liqui id, powder, granu uler & aerosol.
• • Ten of th he local compan nies have gaine ed the largest m market share in the generic an popular cat nd tegory, which m makes up aroun nd 75% of the m 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 er etc.
GlaxoSm mithKline Drug Inter rnational opharma Aristo ACI Ltd Renata Eskayef Bangladesh Opsonin n Pharma oratories ACME Labo Beximco … Incepta Pharmaceuticals Square Pharmaceuticals 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 duct Information
• The company’s product line consist of 52 Pharmaceut e 28 ticals Products, 15 APIs, 32 Agro oVet Products and 19 Pest ticide Products. In 2009‐10, 97.25% of the company’s re evenue came from domestic sales, while the rem maining 2.75% came from expo ort to 35 countries in Asia, Africa, Europe and S South America. The . company exports its pharmac ceutical and Agr roVet products.
Gross Tur rnover (2009-10) Local Export
SPL’s cu urrent market share is 19.7%, based on net n turnover r, making it the decisive marke et leader. Further, it will gradually increase share with the capacity additions s.
The e Managemen 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 o‐based, health care, security management real estate, bank, h y t, information techno ology and insurance. As a rec cognized and le eading entr repreneur of the country, he has been an icon of the pharmaceutical industries in Ba angladesh for decades. He i the is Chairman of Central Depository B Bangladesh Ltd., Founder Trus stee & Form Chairman, Transparency International Bangladesh Chapter, mer B Vice e‐President 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 ional Board of Revenue (NBR) ) and awarded for being one o of the Nati High hest Tax‐Payers s in the year wh hen it was first introduced and also in 20 007‐08 & 2008‐ ‐2009.
Sponsor/Dire ector Foreign n Public
Owners ship Structu ure
Pharmaceutica al 97.12% 2.88%
ed of Having receive GMP certificate by UK MHRA for one o its formulation units, the com mpany is now entering into the regulated mark kets, UK and other EU countrie es. Operation nal Matrix
Pabna a Site
Solid oral dosage e forms like tablet, , capsules etc., liquid oral dosa age forms, inhaler, inject able, suppository, diff ferent topical prep parations like powder r, cream, ointment t etc. All dosage forms. A 1958
Dhaka a Site Cepha alosporin Unit
Antibiotics in t tablets, capsules, powder for suspension and injectable pre eparations.
The Management Committee is le ead by another r founder, 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 cutive committ tee of the Bang gladesh Employ yers Association n, and exec Bangladesh Textile e Mills Associati ion.
• A rise of 16.06% in the standalone net sales for the 3rd quarter ended December 2010 on a Year‐over‐Year basis. Net sales are increased to Tk. 9.97 billion from Tk. 8.59 billion in the same period of previous year. During the period, the company 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. In the same period, standalone total operating income of the company was at Tk. 2.59 billion, a rise of 15.94% over the prior year period. The stand alone 3rd quarter ending EPS, Tk. 111.26 compared to Tk. 89.19, were the better earning position on a Year‐over‐ Year basis (grew at 24.74%). The positive growth is attributed to the increased turnover, decreased cost of raw materials and boost from other income despite higher administrative and selling expenses. However, EPS growth on quarter‐over‐ quarter basis was sliding at 11.95% due to the leverage effect of slight decline in sales (‐2.99%). Moreover, the same pattern of negative growth rate in top line and bottom line was observed on Q‐o‐Q basis in previous year. The EPS is expected to be Tk. 136.57 for March 2011, resulting a growth rate of 28.32%. Though year‐end reported stand alone top line experienced a healthy growth of 16.72%, the net earnings growth declined in 2010, (10.47% compared to previous year’s 36.78%). Though the cost of raw materials reduced slightly, operating profit had increased only by 13.56% compared previous year’s 38.56%, reflection of significant increase in selling and distribution expenses. 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 goods sold of SPL. The consolidated scenario is quite remarkable according to the recent quarterly report. The top‐line achieved augmentation of 24.31% mainly attributed by the Cephalosporins unit and the new unit serving all dosages and 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 operating costs deteriorated some of the operating profit. On the other hand, amplification in bottom‐line is credited by reduced financial expense and the immense growth in associates’ income. The net profit margin reached to 22.28% at the end of the 3rd quarter, 2010. Though the Q‐o‐Q growth in consolidated EPS was slightly downward (‐5.87%), the Y‐o‐Y growth registered growth rate of 33.33%. The consolidated EPS is estimated to Tk. 176.44 (Y‐ o‐Y growth rate of 38.61%).
• Due to widespread vaccination schemes, successful eradication of leprosy and widespread use of oral rehydration for diarrhoea, many of the traditional health problems are minimized and life expectancy has risen to over 60 years – comparable to India and Pakistan rather than to African LDCs who mostly have life expectancies mostly well below 50. Cause of Death, 2006
Asthma, Respiratory Disease Blood pressure, Heart disease, Stroke Fever: Malaria, Typhoid, Influenza, Dengue, Other Fever Tumor, Cancer Jaundice, Liver disease Cholera, Diarrhea Malnutrition Rheumatism, Rheumatic fever Diabetes, Venereal diseases Total
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 important reason for disability. • 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 International etc., and MNCs like GlaxoSmithKline (GSK), Sanofi‐ Aventis, Sandoz, Pfizer, Novartis and Astra Zeneca, etc. capture the major market share. These top ten local companies enjoy a total market share of 75%. • In 2009, the Bangladeshi pharmaceutical market represented demand of around Tk. 79.74 Billion. However, the value of local sales (including the multinational companies) stood Tk. 57.81 Billion. Value of local sales (Tk. In million)
70,000 60,000 50,000 40,000
45,950 32,858 30,501 32,384
30,000 20,000 10,000 ‐ 2002 2003 2004 2005 2006 2007 2008 2009
INDUSTRY OVERVIEW Industry Trend
The following points highlight the health care position and industry 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 second lowest after Nepal (US$ 11) in the South Asia.
• The CAGR of last 8 years was 9.56%, which shows that the local production achieved a healthy amount of drug generation level during the period. • 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 prevalence of chronic disease is partly the result of a population that is ageing and increasingly obese. • Self‐medication is an important element of the total market for pharmaceutical products. The leading areas of the market include analgesics, cough and cold treatments and vitamins and minerals. • HIV/AIDS and Anti‐malarial drugs are untouched by the local producers because of low prevalence rate. • The producers focus on generics, mostly as tablets and capsules. Anti‐infective is the largest therapeutic class of locally produced medicinal products, distantly followed by antacids and anti‐ ulcerants. Other significant therapeutic classes include non‐ steroidal anti‐inflammatory drug (NSAID), vitamins, central nervous system (CNS) and respiratory products. However, inject able products, like vaccines, requiring high‐end 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, 2006 to November, 2010 stood US$ 147.28 mn (around Tk. 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 July‐November, 2010 it shows little growth; 3.41% against 117.10% for the same period of preceding year. • Import statistics of last 4 fiscal years indicate that finished pharmaceutical product import (opening of fresh LC during the period) rose by CAGR of 20.53%. FY10’s figures of fresh LC worth a total of US$ 83.34 mn against US$ 61.70 mn of previous year. However, the recent July‐October 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. • The opening of fresh LC for API import saw a boost; a growth of 21.09% over the last 4 years, reflecting the remarkable growth expectation among the drug producers and significant increase in price of the API imported. The FY10 end up with around US$ 324.16 mn versus US$ 270.07 mn of FY09. The latest quarter (July to October) statistics is also indicating the same drive as the cumulative fresh LC opening stood US$ 161.00 mn against US$ 120.89 mn of the same period of FY10, a Y‐o‐Y of 33.18%. • Over the last five years, the price of some basic API except paracetamol, like amoxicillin, tetracycline HCL, doxycycline, cefalexin rose by an averaged 10‐20%. These materials are essential to produce antibiotics and painkillers, first medicines manufactured in Bangladesh, i.e. 30% of the total production. Prices of Selected Imported Raw Materials for Essential Drugs Average Price (US $ per Kg.)
Raw Material Tetracycline HCL Amoxycillin Trihydrate 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, mainly from India and China. Few are imported from Europe and 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 anti‐cancer drugs. A list of the API manufacturing companies and the APIs already manufactured in Bangladesh are shown in the table below: API Portfolio Produced Locally
Beximco Pharmaceuticals Ltd. 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,
Square Pharmaceuticals Ltd. Drug International Ltd. Globe Pharmaceutical Ltd. Gonoshashtaya Pharmaceutical Ltd. Sunipun Pharmaceutical Ltd. Opsonin Chemicals Ltd.
• 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 increase a CAGR of 21% over the last five years. • As advertisement of drugs in television and newspapers is not allowed in Bangladesh, the pharmaceutical companies rely heavily on differentiated promotional campaigns. Aftermath of the financial crisis, the local producers have made a massive promotional and sales effort to boost sales figure. The resultant is aggregately publicly listed pharmaceutical companies realized increase of 93% in this expense account in 2009. .
Though the pharmaceutical plants are depends on imported API and heavily focus on generic drug products, several factors are expected to shape the outlook of the industry in future. • First, drug demand is likely to remain quite robust for the upcoming years mainly driven by increasing health consciousness among people and increasing health expenditure both on public and private level; i.e. Higher disposable income, rising population, changing demographics and lower price of locally produced generic drugs will aid demand. The development of new treatments becoming available and more patients availing of them. The acceleration of Government initiatives to improve public health. • Second, contract manufacturing is one of the major growth areas in drug industry, as the country’s top 10‐12 drug makers have state‐of‐the‐art drug plants. By upgrading their facilities to a level, the producers can do contract manufacturing for foreign pharmaceuticals and export drugs worth Tk200 billion a year. • Third, capacity building i.e. innovations, strengthening reverse engineering, training local people and upgrading technology is required to remain competitive in the post‐2016 period. API Park will help produce raw materials locally and innovate ingredients as well. • 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 manufacturing plant audit mechanism will have been created. Barriers to New Entry
+ High fixed costs + High requirement of quality control ‐ Marginal product differentiatio High Moderately High Moderate Moderately Low Low
Threat of Substitute Products
‐ Herbal and Homeopathi c
High Moderately High Moderate Moderately Low Low
Rivalry among Existing Competitors
‐ Large number of players ‐ Low switching cost ‐ high exit barrier ‐ High storage costs High
Bargaining Power of
High Moderately High Moderate Moderately Low Low
Moderatel y High Moderate
Bargaining High Power of Buyers Moderately
+ Many different buyers ‐ Low switching cost High Moderate
+ Import dependent + Controlled by foreign suppliers
makes the competitors more closely facing one another. The price differentiation is therefore minimum here. Moreover, the local companies now make the high‐tech, expensive drugs like anticancer drugs, insulin in Bangladesh. The prices of the locally produced anti‐cancer drugs and insulin would be 20 to 30% less than the imported ones. 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 market within couple of years. Square Pharmaceutical Ltd. has already set up plant to produce and market insulin locally with a brand name of “Ansulin”. The contribution of insulin market in the drug sector is about Tk. 1.10 billion of which around 80% demand is met by import. The most popular insulin brand, “Mixtard”, comes from Denmark, the base of Novo Nordisk, the global leader in diabetes care. The world’s 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‐ class insulin in the country within affordable price range.
Moderatel y Low Low
It is considerably expected that It will be able to maintain competitive edge in brand loyalty and transfer most of the increasing price of the raw materials to consumers. One of the major growth drives will come from the upcoming additional production placed by the new plant, as the company has the facility to produce Solid Doses Form, Large Volume Parenteral (LVP) and Special products such as Anticancer and Anti‐diabetes (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 breakeven point shortly. Gross profit margin will slightly be to 44% and Net profit margin at around 21‐27% with the wave of better effect of economic scale and increasing associates’ income over the volatile raw material prices and higher operating cost, indicating a positive outlook.
• 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 on‐patent 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 interest rate; the resultant may lead to devaluation of Taka. API, needed for the production of drugs, are imported and paid in USD, BDT’s devaluation became for some companies a real problem and a heavy expense The Competition Although the MNCs proclaim the exclusivity of their manufacturing process and brands and with that reason heightened most of their product prices, but still they have managed lower prices for some of their brands and been dominating in several therapeutic categories with competitive pricing. Even though the local pharmaceutical companies (LPCs) are generally known as offering low prices, they have increased their prices in some instances even more than MNCs. In case of these two therapeutic classes; antihistamines and analgesics, two drugs, that is, Aspirin and Chlorpromazine are very common OTC drugs. The higher price of LPCs here may be explained by the reasons that most OTC products are used in low doses and generally for short periods. The OTC products generally have lower prices. A higher price can ensure some degree of profitability here. On the other hand, 5 MNC and LPC essential drug products have similar rates, namely Atenolol 50 mg, Glibenclamide, Amitriptyline, Griseofulvin and Salbutamol. These five are all chronic care drug products; they are antidiabetic, psychotropic, antifungal, cardiovascular, and antiasthmatic drugs. Chronic care products for the aging population have been mentioned as the fastest‐growing market of the world. A narrow, but strong and deep focus for chronic care market
COMPETITIVE EDGE VS RISKS FOR THE FUTURE
Core Competencies • SPL is considered an excellent drug producer with nationwide 50 years of operational experience of producing drugs. • Competitive source of raw materials through the API division. • All formulation units are GMP certified approved by UK MHRA. Careful selection and scientific proportioning of raw materials with the use of latest technology enables manufacturing of high quality drugs. • Strong sales force and effective distribution system Risks • SPL still faces many issues regarding Anticancer and Anti‐ diabetes drugs to be produced by the year 2016. The demand for these special high‐tech drugs are currently met by the foreign companies or by import. There is much contest in ‘insulin’ as Eskayef will be able to provide lower priced top class 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 Ltd and will be served by the other local firms within couple of years. The real barrier, hindering access to treatments is in fact a lack of the basic healthcare infrastructure required to get existing medicines to people. Other factors such as a lack of access to basics like food, decent housing and clean water, armed conflict, corruption, bureaucracy and the lack of simple prevention measures like condoms and mosquito nets, unfortunately mean that poor health is endemic for the poorest people. Square is currently well positioned to counter any competitive threat, either from existing or new competitors. However, in the event that these competitors make serious inroads into SPL’s market, the result could severely limit the growth potential of the company in the future. As the company will not be able to sell on‐patent 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 second‐line ARVs) from MNCs will increase prices of drugs, may cause some reduced demand in the future. The cost controlling will be eminent from government if the authority lists some of the drugs as essential drugs.
approximately within the next three years even while maintaining its current reinvestment policy. Judicial
Liquidity and Solvency Analysis
• 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 candidate of taking debt should investment opportunity arise.
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 Total Debt/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 Ibne Sina
• Additionally, liquidity position pose unprecedented Cash ratio in 2009‐10. This may be explained by the increased investment in marketable securities and short‐term loans. This is backed by better cash collection from accounts receivables account, and the minimum level of short‐term debt and low level of creditors account in current liabilities. The changing financing strategy is shifting debt financing to internal financing which will reduce the cost of financing.
FINANCIAL ANALYSIS Earning Quality and Cash flow Analysis
• The latest years’ accrual amounts are much less than the early years’ of analysis. Moreover, the lower Accrual ratios indicate an encouraging tendency of improving earnings quality. In 2008‐09 and 2009‐10, they are significantly lower than in the earlier year, indicating a lower degree of accruals present in the company’s earnings. The cash flow and earnings relationship indicates that except the year 2006‐07 and 2007‐08 the operating cash flow before interest and taxes substantially exceeded the operating earnings. The discouraging fact is in 2006‐07 and 2007‐08 the cash flow was substantially low compared to reported earnings signaling red flag of earning quality. The 2008‐09 cash return on total assets is the highest of 18.41% in the five year span and the 2008 generates lowest of 10.14%; showing parallel relationship in cash generation.
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
Year DSO DOH Less: Number of days of payables Equals: Cash Conversion Cycle 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
Earning Quality Measures OCF before interest and Tax/ EBIT Accrual Ratio( Balance sheet based) Accrual Ratio (Cash flow Based) Revenue accruals to Total accruals OCF/Average Assets Cash flow to reinvestment Cash flow to total debt Years to repayment of debt after reinvestment
The decreasing DSO explains the lower amount of credit sales and high rate of collection from account receivables. However, this favorable situation is offset by the decreasing number of days payable implying tight credit terms granted by the suppliers. The higher number of DOH implies the regular demand of the drugs causing high stockpile for the companies. The SPL’s revenue growth at the industry’s growth and the lower DOH compared to similar companies implies the greater inventory management efficiency. Comparing cash conversion cycle among the listed producers from the following table, greater cash cycle indicate they require additional capital to fund working capital. Though Ibne Sina Pharmaceutical Ltd. shows better liquidity management among the companies, comparing with giants SPL’s cash cycle is much superior.
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 Ibne Sina
• The recent strong and improving OCF has enabled management to put more cash into investing for the company’s future growth. 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
• Over time, labor and capital productivity indicators are dropping off. SPL’s 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 expenses specially the personnel expense. SPL is outperforming every listed drug producers on labor metrics indicating efficient management and labor.
Productivity Ratios 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, SPL’s ROE placed 2nd lowest. However, with low financial risk and defensive depreciation principle SPL generate superior ROE.
Value Added/Salaries and Wages Value Added/machinery and Equipment Value Added/No of Employee* Sales/No of Employee*
After thorough analysis of industry cycle, stage of the company and future growth potential, we have adopted Discounted Free Cash Flow (DCF) method for valuing SPL stock. DCF is a widely accepted method for equity valuation. The following table illustrates the forecasted Free Cash Flow of SPL: (Figures in Millions except per share data)
*Taka (In Million); Note: Value Added includes Profit, labor cost, salary cost, and selling and administrative expenses.
The plant efficiency (capital productivity) of SPL has low figure than the listed companies’, mainly due to the induction of new plants and the higher asset base.
Labor 3.89 3.97 3.61 2.16 Capital 1.48 0.19 3.13 1.80 Sales to Employee* 1.46 1.94 4.93 0.56
4,595.4 1,137.4 3,458.0 1,049.1 1,944.3 15.3 2,547.6 2,547.6
5,253.6 1,300.3 3,953.3 1,194.7 1,711.0 469.4 2,967.7 2,603.2
6,118.6 1,514.4 4,604.3 1,311.2 1,368.8 484.6 4,062.1 3,125.7
7,340.0 1,816.7 5,523.4 1,404.4 1,095.0 557.3 5,275.5 3,560.8
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
Productivity Ratios Reneta Beximco GSK Ibne Sina
* Taka (In Millions)
(+)Depreciation (‐)CAPEX (Increase)/Decrease in NWC Free Cash Flow P.V of Free Cash flow
• The presence of associate investment provides significant share of income to the consolidated ROE. Impressive aggregate net profit margin came from the associates’ earnings, explaining the recent year’s up gradation in ROE. Decreasing financial leverage corresponding finer position, and parallel increasing asset turnover pose superior profitability and productivity of the business.
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%
Terminal Value Total P.V of FCF (A) P.V Terminal Value (B) Enterprise Value (A+B) Less: Net Debt Equity Value Outstanding Share
15,825.8 52,847.6 68,673.3 ‐216.2 68,457.2 19.62
Expanded DuPont Analysis Tax Burden (ex‐associates) Interest burden EBIT margin Net profit margin (ex‐ associates) Associates' effect on net profit margin Net Profit Margin Total asset turnover (ex‐ associates) Effect of associates investments on turnover Total Asset Turnover Return on assets Leverage Return on equity Square only ROE Asset's contribution to ROE
Per Share Price
The key assumptions for the DCF model are as follows: • Required Rate of Return (Discount Rate) is assumed at 14.00% is assumed. The discount rate is derived as follows:
5 year BG T‐Bond Rate (Risk Free) Assumed Risk Premium Required Rate of Return 8.26% 5.74% 14.00%
• • Revenue Growth is assumed to be at CAGR of 17.00% during the projected years. Constant Growth Rate is assumed at 6.0% considering the following factors: Long run economic nominal growth rate of 7% 1.3% population growth
SPL’s drug business is high margin and low turnover. This is expected of a company with brand equity.
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
Value of Associates
By virtue of the ownership in associate companies, contribution of these companies to the earnings of SPL as a whole is significant. Among these companies, Square Textile Ltd. is valued in the public market separately and its discrete valuation is adjusted to the pure SPL valuation. Additionally, value of other non‐listed associates are estimated by adjustment factor of 3.00% on total per share price of SPL (including all associates values). The adjustment factor is inferred on basis of the companies’ contribution to the net income to SPL and growth prospect of these businesses in future.
Reneta Beximco GSK Ibne Sina
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% ‐ ‐ Square Knit Fabrics Ltd. 48.84% 2.09% ‐ ‐ 3.00% 115.6 Square Fashions Ltd. 48.46% 2.68% ‐ ‐
• • • • SPL’s trailing P/E (based on June close price) ranged from 9.23x‐24.30x with an average of 19.47x over last 5 years. Forward P/E of 18.37 is lower than the historical average, but less than the industry. The forward P/E is expected to be close to higher end and to be higher than the average. Thus, P/E multiple is estimated within the range of 20x‐22x. With forward earning of TK 176.44 per share, we get a price range between TK 3528.81 and TK 3881.68.
2005 9.23 2006 21.61 2007 24.30 2009 19.32 2010 22.91 19.47 18.95
Proportion of Ownership Interest Contribution to the Net Income Equity Value (in Millions) Value to SPL (in Millions) Adjustment Factor Increase/(Decrease) in Price Per Share
Price Per Share without Associate Total Per Share Price
P/E (Trailing) Average Industry (Forward)
Simulation and Sensitivity Analysis
From simulation analysis, we have found that the firm value is most sensitive to the changes of cost of capital, cost of goods sold and terminal growth rate. The following table exhibits a sensitivity analysis based on two variables:
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
We are initiating coverage of Square Pharmaceuticals Ltd. with a Ms 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 economic slowdown due to power crisis. We feel this is a testament to the increasing industry demand and business model that SPL is executing, and certainly solidifies our confidence in the Company moving forward. Value is not timeless. However, we reasonably expect that the MS derived value will remain effective for the next three months.
• • • • • • • Mahmudul Bari Arif Khan Noman Ahmed Khan N. M. Al Hossain Md. Farjad Siddiqui Qazi Mussadeq Ahmad Syed Abu Redowan
Rahman’s Regnum Centre, 601/A (6th Floor), Plot No. 191/B, Tejgaon‐ Gulshan Link Road, Tejgaon C.A., Dhaka‐1208