NOVO Pharma and Healthcare Ltd Background: United Group and NOVO Pharma United Group, a well established and reputable business house of the country, started operations as a trading company in 1978, and has since expanded into various sectors. The group is pioneer in several private sector initiatives particularly related to maritime and power generation. Since the late ‘90s, the Group has participated and taken up investment opportunities in selected key infrastructure sectors. The group has been the pioneers in several private sector initiatives particularly related to maritime and power generation. The key sectors in which the Group is currently engaged includes: Civil and Hydro Engineering Broadcasting & Communications Real Estate Developers Passenger Lifts & Escalators Heavy Construction Equipments Polymer Industries Land Port Services on BOO basis Textile Mill International University Shared Banking ATM Network Turnkey Solutions Power Generation as Independent Power Plants Pharmaceuticals Multispecialty hospital The group’s current turnover is over USD 20 mil, and employs more than 1000 people in its various enterprises throughout the country. The pharmaceutical manufacturing company, established in 2004 by the United Group, produces high quality pharmaceutical products. The company produces bulk drugs, especially pellets, and covers major therapeutic areas of pharmaceutical finished goods. In Bangladesh, pellet is a comparatively new dosage form with good potentials. This dosage form has become popular and acceptable because of its efficacy and compliance compared to the conventional dosage forms. With pellets it is possible to supply drug substances for specific purposes, e.g., sustained release, delayed release, time release or in gastro resistant form. These are special technologies and not commonly manufactured in the industry here. Along with Pellets, NOVO plans to expand into other specialized pharmaceutical technology, like biotechnology, effervescent, etc. The company currently manufactures under the following categories: 1. Antibacterial 9. Cough Expectorant 2. Antidepressant & Anxiolytic 10. Electrolyte Replenisher 3. Antifungal 11. Gastro prokinetic 4. Antihistamine and anti-asthmatic 12. Haematinic combinations 5. Antiprotozoal 13. Lipid Lowering Agent 6. Antispasmodic 14. NSAIDs 7. Antiulcerants 15. Parenteral Products 8. Cardiovascular Drugs 16. Platelet Aggregation Inhibitors 17. Topical preparations 18. Vitamins & Minerals The main NOVO factory is located in Mirpur, on rented premises. However, another unit has been set up in Savar, on an area of 8.5 bighas (approx. 2.5 acres), as part of the Master Plan for the company. The company is also doing toll manufacturing from other factories. The company has obtained the GMP certificate from GoB. It has plans to export to Sri Lanka, Yemen and Philippines to begin with, from where it already has orders for the next 3 years. The necessary permission required for export to Philippines is almost complete. Bangladesh Pharmaceutical Industry Pharmaceutical sector is the second largest contributor to the country’s national revenue. With a market size of USD 700 million, it is the largest white-collar labour employer of the country, employing around 75,000 skilled and unskilled labour. The sector is growing rapidly at an average rate of 12.5%. The industry, however, has been largely focused on the domestic market until recently. The local pharmaceutical industry produces, and is able to meet about 95-97% of the local demand. The global pharmaceutical industry is expected to reach a size of US$ 1.3 trillion by 2020. The Bangladeshi market currently has the largest and most advanced pharmaceutical industry among the LDCs. The competitive advantage for essential drugs manufacturing in Bangladesh as a LDC results from the Doha Declaration on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and public health, which states that LDCs are exempted from the obligation to implement patent protection for product patents until 2016, and possibly beyond. The TRIPS agreement has given Bangladesh a privilege as an LDC to legally reverse engineer patented products and sell in the local market. The market in India has been subjected to patent protection since 2005. This places Bangladesh in an advantageous position in the generics market. Investments in areas, e.g., adequate reverse engineering facilities and API (Active Pharmaceutical Ingredients) plants will help the industry to optimize its advantage and compete in the global standard. Bangladesh exported pharmaceuticals worth US$42.86 million to 72 countries of the world last year, registering a 53 per cent growth, while the country’s pharmaceuticals sector has a domestic market of about US$700 million, 97 per cent of which is met by local industries. The cost of medicines has increased in China and India since they entered the WTO. Bangladesh has a unique opportunity to pare the costs of manufacturing medicines due to the low-cost high-qualified manpower and its LDC status. Global medicine giant Novartis uses its Bangladeshi facility to do toll manufacturing. Last year Novartis’ Bangladesh facility exported medicines worth about 15 million dollars. The largest drug manufacturing company now is Square Pharmaceuticals, with annual revenues of around US$ 100 million, followed by Beximco Pharma. These two companies alone have a market share of about 27%, with a combined sale of USD 160 million. In terms of sales turnover in recent years, some other companies that follow the big 2 are Acme, Incepta, Eskayef, Sonafi-Aventise, Renata, Novartis, Drug International, ACI and Aristopharma. In the animal health business segment, Renata continues to hold on to market leadership registering 23.3% sales growth. As far as export regulations are concerned, at present, there are no restriction on exports. In the new 3- year Export Policy for FY07 to FY09, Pharmaceuticals products were listed under the thrust sector. The government plans to introduce a conducive policy to boost exports in the near future. Bangladesh exported pharmaceuticals worth USD 42.86 million to 72 countries including some developed countries like the UK, USA, Germany, in 2008, registering a 53% growth. Financial Highlights: The Revenue for 2008 was USD 3.3 million, and the company has sustained losses of USD 2 million for the year. The cumulative loss till date is USD 5.2 million. The revenue projection for 2009 and 2010 is USD 7.5 million and USD 9.7 million respectively, and it aims to break even in 2010. In 2015, the revenue will stand at USD 24 million with net profit of USD 3.6 million. USD mil 2008 2009 2010 2011 2012 2013 2014 2015 Revenue 3.33 6.90 9.10 11.85 14.57 17.29 20.01 22.73 Gross Profit 1.41 3.37 4.74 6.52 8.30 9.95 11.67 13.39 GP margin 42% 49% 52% 55% 57% 58% 58% 59% Net Profit (2.09) (0.70) 0.05 0.74 1.57 2.26 2.95 3.62 NP margin -63% -10% 1% 6% 11% 13% 15% 16% The paid up capital of the company in 2008 was USD 1.24 mil (BDT 86.8 mil). The bank loan is negligible, around USD 0.6 million. Most of the funding has come as inter-company loan from United Enterprises & Co. Ltd (UECL), the parent company, which now amounts to USD 4.7 mil. NOVO is continuing to invest through 2009 and 2010. An additional investment from UECL in 2009 will bring the total inter-company loan amount to around 6.5 mil (BDT 454 mil). These funds are used both for capital expenditure, as well as high marketing cost, which is the characteristic of the pharma industry. The company has plans to go for IPO in 2012, and with that in view, the sponsors are making a few changes to the capital structure. The loan from UECL will be converted to equity to raise the paid up capital to USD 1.4 mil (BDT 100 mil), and the remaining USD 5.7 million (BDT 400 mil) will be kept as share premium. With the current financial statistics, NOVO forecasts to yield a gross profit margin of 52% in 2010, which is consistent with the average GP% of Square Pharmaceuticals Ltd. over the last three years. Moreover, NOVO also expects to be at par with Square’s average net profit margin by 2014, at 15%. The sponsors have an immediate plan for expansion which would require fresh funding of USD 2.4 mil. This proposed investment will generate an additional revenue of USD 1.7 mil in the 1st year, reaching USD 14 mil in year 5 of its operation. If this plan is implemented immediately, and we assume revenue generation from 2011, then the combined revenue for NOVO stands at USD 14 mil in 2011 and USD 35 mil in 2015. In Million US$ Particulars 2010 2011 2012 2013 2014 2015 Revenue NOVO 9.10 11.85 14.57 17.29 20.01 22.73 Consolidated 9.10 13.56 18.00 23.00 30.01 34.87 % Increase after expansion 0% 14% 24% 33% 50% 53% Gross Profit NOVO 4.74 6.52 8.30 9.95 11.67 13.39 Consolidated 4.74 7.12 9.67 12.35 15.97 18.73 % Increase after expansion 0% 9% 17% 24% 37% 40% Net Profit NOVO 0.05 0.74 1.57 2.26 2.95 3.62 Consolidated 0.05 0.14 0.98 1.83 2.99 4.46 % Increase after expansion 0% -81% -38% -19% 2% 23% Funding Structure The company offers a share price of BDT 800, based on an IRR of 18%, which values the company at USD 11.43 mil. They are considering selling 25% stake, which is an investment of USD 2.85 mil. The fund will be used to reduce the outstanding loan from UECL. The fund for expansion, the sponsors have suggested, will be contributed by all the shareholders in proportion to their stake in the company. Key Issues The expansion plan and the implementation timeframe; Accounting treatment of various items in preparation for IPO.
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