NOVO_First Brief by TazeenIslam


									                                     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
    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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