Analyst:

Khandakar Safwan Saad

safwan@bracepl.com (880) 173 035 7779

An Overview of the Pharmaceutical Sector in Bangladesh

May 2012
Introduction The pharmaceutical market in Bangladesh is pretty small compared to the population size of the country, mainly because of the lack of spending power of the population. Pharmaceutical spending is also amongst the lowest in the world in per capita terms. Healthcare expenditures consist of only 3.35% of GDP. However, increased awareness of healthcare, increase in per capita income, emergence of private healthcare services and the governments increased expenditure in this sector, together with other factors, have caused the demand to rise in recent years. The sector is also protected from external competition as imports are completely restricted for similar drugs that are manufactured locally. This sector reports provides an overview of the pharmaceutical sector in Bangladesh and highlights the top performers that are listed in the Dhaka Stock Exchange (DSE). Pharmaceutical Sector in Bangladesh Pharmaceutical sector is technologically the most developed manufacturing industries in Bangladesh and the third largest industry in terms of contribution to governments revenue. The industry contributes about 1% of the total GDP. There are about 250 licensed pharmaceutical manufacturers in the country; however, currently a little over 100 companies are in operation. It is highly concentrated as top 20 companies produce 85% of the revenue. According to IMS, a US-based market research firm, the retail market size is estimated to be around BDT 84 billion as on 2011. Bangladesh pharmaceutical companied focus primarily on branded generic final formulations, mostly using imported APIs (Active Pharmaceuticals Ingredient). Branded generics are a category of drugs, including prescription products, that are either novel dosage forms of off-patent products produced by a manufacturer that is not the originator of the molecule, or a molecule copy of an off-patent product with a trade name. About 85% of the drugs sold in Bangladesh are generics and 15% are patented drugs - the structure differs significantly from the international market. Branded generic drugs represent about 25% on average of worldwide pharmaceuticals sales; however, given the popularity in emerging markets like China, India and Latin America, branded generic drugs may well dominate the total sales within a decade. Bangladesh manufactures about 450 generic drugs for 5,300 registered brands which have 8,300 different forms of dosages and strengths. These include a wide range of products from anti-ulcerants, flouroquinolones, antirheumatic non-steroid drugs, non-narcotic analgesics, antihistamines, and oral anti-diabetic drugs. Some larger firms have also started producing anticancer and anti-retroviral drugs. Domestic manufacturers account for 97% of the drug sales in the local market while the remaining 3% are imported. This is a complete turnaround over from two/three decades back when imports

There are about 250 licensed pharmaceutical companies in Bangladesh. The industry contributes 1% to the country's GDP and is the third largest industry in terms of contribution to government revenue

The market is dominated by branded generics, accounting for 85% of the total sales in the country

The market is almost self-sufficient in meeting local demand as 97% of the drugs are manufactured locally

Pharmaceutical Sector in Bangladesh

May 2012
used to dominate the market. The imported drugs include essential live saving drugs and other high quality drugs. The ratio will further increase in favor of the local production as some of the big players are poised to manufacture these high quality drugs in-house in the future. Market Size and Growth As stated earlier, the size of the retail market reached BDT 84.0 billion as on 2011 based on IMS report. The report further stated that, retail sales in the domestic market achieved 23.6% growth in 2011 following 23.8% and 16.8% growth in 2010 and 2009 respectively. High growth in the last three years (78.8% cumulative and 21.4% CAGR) meant that the Bangladesh Pharmaceutical market doubled in just over four years. The retail market also crossed USD 1.0 billion in size in 2011. It is one of the fastest growing sectors in the country with an annual average growth rate of 17.2% over the last five years and 13.1% over the last decade. However, considering that IMS does not include rural market in their survey, the actual size of the market will vary slightly (5%-10%). It is estimated that the retail market represent 90% of the total market; in that respect the total market size (including the rural market) is expected to be over BDT 90.0 billion at present.
Table 1: Retail Market Size & Growth Year 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 Size (BDT b) 84.0 68.0 54.9 47.0 44.0 38.0 36.5 31.1 28.6 27.0 24.5 Growth 23.6% 23.8% 16.8% 6.9% 15.8% 4.1% 17.5% 8.6% 5.9% 10.2% Table 2: Selected Health Indicators for Bangladesh Health Indicators Life Expectancy Government % in total health exp. Health exp. as % of GDP GDP per Capita (Current US$) Health exp. per capital (Current US$) Median Age (2011 estimate) Poverty Level
Source: World Bank

Retail market registered 21.4% CAGR over the last three years, 17.2% over the last five years and 13.1% over the last decade

2009 68.3

2008 68

2005 66.9

2000 64.7

31.7% 31.4% 34.9% 39.0% 3.35% 3.32% 3.21% 2.82% 607.8 18.4 23.3 31.5% 546.9 16.5 428.8 12.1 363.6 9.1

NA 40.0% 48.9%

Drivers behind Market Growth The table above shows some selected health indicators for Bangladesh. Most of the indicators improved over the last decade which are among some of the factors that contributed to the growth of the sector.

Source: Square Pharmaceuticals Annual Reports & IMS Report

There has been a gradual demographic shift - life expectancy improved from 64.7 in 2000 to 68.3 in 2009 which highlights the increased health consciousness among the people. Also the income level of the population increased over the last decade which allowed them to spend more for healthcare. The base was also low as healthcare expenditure was less than 3% of GDP in 2000 with total pharmaceutical sector size of BDT 24.5 billion only in that year. Increased medical coverage of population with new hospitals. Emergence of private healthcare service - a number of top class hospitals started operating which includes Apollo Hospitals, Square Hospitals, United Hospitals and others. These hospitals became very

Increased life expectancy, increased medical coverage of population, emergence of private healthcare services, growing income base of population and popularization of wellness drug are some of the factors contributing to high industry growth in recent times

Pharmaceutical Sector in Bangladesh

May 2012
popular with the mass population due to their quality service; they have been a major factor contributing to increased healthcare expenditure.

Although government expenditure as a % of total healthcare expenditure did not improve in the last decade, there has been increased expenditure in in absolute terms. Growth in private expenditure was the primary reason behind fall in public % of expenditure. Income base of the population has been growing over the last decade. Health expenditure per capita doubled in the last decade, indicating peoples willingness to spend more to remain healthy.

Drivers for Future Growth Table 4 compares the indicators with other regions of the world and shows that Bangladesh is way behind other countries. Government spending proportion is much lower than that in other regions - it is one possible area where future growth may come from. Moreover, the total health expenditure to GDP ratio and health expenditure per capita of Bangladesh (both of which gradually increased from 2000) is very low in comparison to developed and developing countries. Since the base is still very low, we expect the recent growth in the local retail market to continue in the current decade. Some other factors that will also boost the industry growth includes:

Increase in government spending, increase in number of modern hospitals and increase in health consciousness of the people are some of the drivers for future growth

Table 3: Healthcare exp as % of GDP Region USA World UK Japan Afghanistan Nigeria Nepal Thailand India Sri Lanka Bangladesh Pakistan
Source: World Bank

Increase in number of modern hospitals Increase in level of service/treatment provided in the hospitals with improved/more modern diagnostic equipments General people are getting more health conscious Growing income level of the people Export of pharmaceutical products

2009 10.03% 9.34% 8.35% 7.36% 5.82% 5.81% 4.31% 4.17% 3.96% 3.35% 2.62%

2005 9.73% 8.25% 8.16% 8.76% 6.60% 5.91% 3.55% 4.03% 4.04% 3.21% 2.78%

2000 9.23% 7.04% 7.69% 8.29% 4.56% 5.06% 3.40% 4.61% 3.72% 2.82% 3.02%

16.21% 14.72% 13.41%

Table 4: Comparison of health indicators (2009) with other regions South Bangladesh World Health Indicators Asia Life Expectancy Government % in total health exp. Health exp. as % of GDP Health exp. per capital (Current US$)
Source: World Bank

EU 79.4 76.1%

USA 78.1 48.6%

68.3 31.7%

69.4 60.8%

65 32.9%

3.35% 10.03% 18.4 863.6

3.99% 10.31% 16.21% 40.2 3,370.7 7,410.2

Growth Projections Table 3 shows the healthcare expenditure as % of GDP for neighboring countries to Bangladesh as well as some other developed countries as well. Bangladesh is way below in the list of countries with only Pakistan below in terms of healthcare expenditure percentage. If we assume that Bangladesh is going to achieve 6.5% real GDP growth rate over the next five years and healthcare expenditure to reach 5% of GDP by that time, then healthcare expenditure in nominal value will grow at 15.4% annually over the next five years.

Pharmaceutical Sector in Bangladesh

May 2012
With 6.5% forecasted GDP growth in the next five years and healthcare expenditure estimated to reach 5% of GDP in that time, domestic market is poised to grow over 15% annually in the next five years

Bangladesh has been achieving around 6% GDP growth rate over the last decade. The current government has set target to achieve even higher growth rate in this decade, with a vision to achieve double-digit growth within 2018. As such, it is likely that the actual growth in GDP in the next five years will be greater than the projected 6.5% - in that case the growth in healthcare expenditure is likely to be more than our simple estimated value of ~15%. At present, the retail pharmaceutical market size is about 1% of GDP and health expenditure is about 3.35% of GDP. Therefore, the pharmaceutical sector revenue accounts for ~30% of the healthcare expenditure. If we assume that the ratio will remain constant over the years, pharmaceutical revenue will also grow at par - at 15.4% annually over the next five years. Major Players Based on the IMS report for the fourth quarter 2011, Square Pharmaceuticals (DSE: SQURPHARMA) holds the top market share in the retail market 18.7%, followed by Incepta Pharmaceuticals (INCEPTA) - 9.3%, Beximco Pharmaceuticals (DSE: BXPHARMA) - 8.8%, Opsonin Pharma (OPSONIN) 5.1% and Renata (DSE: RENATA) - 4.9%. The top five companies held 46.8% market share in 2011, slightly more than their 46.2% market holding in 2010 - indicating cumulative revenue growth in excess of the sector growth. Among the top five, three are listed in DSE Square, Beximco and Renata. Top 10 companies held 67.7% of the market in 2011 as shown in chart 1. Growth at par with the entire market meant that there cumulative holding did not change from 2010 level. However, the market share shifted among the top players. SQURPHARMA lost 0.5% market share in the last year (from 19.2% in 2010) while the next four companies gained 1.1% market share in the same period. Growth in local sales of these four companies INCEPTA, BXPHARMA, OPSONIN and RENATA was 28.5% in 2011, increasing their market share from 27.0% in 2010 to 28.1% in 2011. Chart 2 in the next page compares the growth rate for the top companies.
Table 5: Major players in the retail market Company Square Pharmaceuticals Market Size (BDT m) 15,725.8 7,851.5 7,415.0 4,275.4 4,076.8 3,980.3 3,578.2 3,500.7 3,412.8 3,070.2 56,886.5 71,382.5 12,661.6 84,044.1 Growth in 2011 20.5% 28.6% 30.5% 27.2% 26.1% 18.9% 24.9% 13.7% 26.3% 18.9% 23.6% 24.1% 20.7% 23.6% Market Share 2011 2010 18.7% 9.3% 8.8% 5.1% 4.9% 4.7% 4.3% 4.2% 4.1% 3.7% 67.7% 84.9% 15.1% 19.2% 9.0% 8.4% 4.9% 4.8% 4.9% 4.2% 4.5% 4.0% 3.8% 67.7% 84.6% 15.4%

Square Pharmaceuticals holds the top market share, followed by Incepta Pharmaceuticals and Beximco Pharmaceuticals

Top 10 companies hold 67.7% market share while top 15 companies hold 77.7% market share

Chart 1: Market Share

32.3%

Incepta Pharmaceuticals Beximco Pharmaceuticals

67.7%

Opsonin Pharma Renata Eskayef Bangladesh ACI Acme Pharmaceutical Aristopharma Drug International Top 10 Companies Top 20 Companies Others Companies Total Sector
Source: World Bank

Top 10
Source: IMS Report

Others

Pharmaceutical Sector in Bangladesh

May 2012
Chart 2: Growth of top ten companies in 2011
Acme Pharmaceutical Eskayef Bangladesh Drug International 14% 19% 19% 21% 24% 25% 26% 26%

Square Pharmaceuticals
Sector ACI Renata Aristopharma Opsonin Pharma Incepta Pharmaceuticals Beximco Pharmaceuticals

27% 29%
31%

Source: IMS Report

Square Pharma (1st), Beximco Pharma (3rd), Renata (5th), ACI (7th), GlaxoSmithKline (15th) and The IBN SINA (20th) are the top pharmaceutical companies that are listed in DSE

If we go further down the list of top pharmaceutical companies, the top 15 companies held 77.7% market share in 2011 (which remained unchanged from 2010 level) and top 20 companies held 84.9% market share in 2011 (slightly higher than 84.6% in 2010). It can be easily seen from the numbers that the concentration of sales is centered among the top players, in particular, the local manufacturers. Local manufacturers dominate the industry, enjoying about 90% market share while multinationals hold little over 10% market share. Apart from SQURPHARMA, BXPHARMA and RENATA, three other companies among the top 20 companies are listed in the DSE - ACI (ranked 7th), GlaxoSmithKline Bangladesh (ranked 15th) and The IBN SINA (ranked 20th). API About 80% of the active pharmaceutical ingredients (APIs) are imported as there are only a few local companies (usually the leading ones) that are engaged in manufacturing APIs. However, the number is really small (below 50) compared to the total requirement. These local companies usually run the relatively easier final chemical synthesis stage with API intermediaries, instead of the complete chemical synthesis. For many APIs, the domestic market is too small to justify an API manufacturing plant - the initial investment and the production scale required are high. However, the government has planned to set up an API park to facilitate the production of several APIs for the local manufacturers. The value addition for the backward linkage will not be much as the country will again need to import the basic chemicals for manufacturing APIs. It is estimated that cost of APIs will decrease by about 20% if the API park is established. The government initially set a target to complete the project by 2012 but realistically, it is unlikely that the manufacturing park will be completed within the stipulated time. Since the APIs are imported, the companies are exposed to exchange rate risk. The local currency depreciated significantly against USD over the last decade as shown in chart 3 in next page. However, the local companies were able to contain the manufacturing cost by shifting the import source of APIs to low cost manufacturers. As per discussion with the management of Beximco

80% of the APIs are imported. Government has planned to build a API park to facilitate local production of the raw material which will lower the cost by ~20%

Companies were able to contain raw material cost despite depreciating local currency as they have been importing more raw materials from India and China (low cost producers), shifting from Europe.

Pharmaceutical Sector in Bangladesh

May 2012
Chart 3: USD-BDT exchange rate from 2000 onwards
90 80 70

60 50 40
Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

Source: www.oanda.com

Pharmaceuticals, China and India currently accounts for more than two-thirds of the imported raw materials while the remaining materials are imported from Europe; back in 2000, 80% of the APIs were imported from Europe. The decrease in API cost from changing the source off-set most of the adverse movement in the exchange rate. Pricing of Drug The Directorate of Drug Administration (DDA), the national drug regulatory authority, regulates drug manufacturing, import and quality control of drugs in Bangladesh as well as fixing the price. It belongs to the Ministry of Health and Family Welfare.
DDA fixes the price of essential drugs with companies having no power in this regard. Companies do get to set the price of other drugs, however, DDA gives the final approval for raising price

The DDA regulates the pricing of all the drugs in the country. In particular, the local companies have no say in setting the price for essential drugs (a list of lifesaving drugs decided by the government). Revision of price of these drugs takes place few and far between and as such the margin is usually lower for these drugs. Local manufactures usually do not focus much on these items for generating business growth. The companies do get to set the price of other drugs; however the final price is approved by the DDA. The companies submit new price to the DDA based on (increased) cost of production which the regulatory body scrutinizes. They cannot set too high a price as the DDA takes into account the purchasing power of the population as well as the price proposed by other manufacturers (for the same generic of drug). Nevertheless the companies do make the bulk of the margin from these non-essential drugs. Recent Trend in Pricing The price of most of the drugs increased in recent times owing to higher manufacturing cost. Since the companies have already shifted the import source of the raw materials to low cost producers (China and India), further relocation is not feasible. As such, adverse movement in exchange rate is likely to increase the raw material cost for most of the manufacturers. Moreover, there has been multiple hikes in electricity and fuel prices in the last one year which has also pushed the cost of operating business in the country. As a result the price increased for most of the non-essential drugs in the last one/two quarters. It is likely that the price increase will impact the financial statements in this year and drive the growth of the industry (in nominal terms).

Price of most of the drugs increased in recent times following steep depreciation of BDT again USD in 2011; it is likely that such increase in price will drive the growth of the industry (in nominal terms)

Pharmaceutical Sector in Bangladesh

May 2012
TRIPS The World Trade Organization's (WTO) Trade-Related Aspects of Intellectual Property Rights (TRIPs) agreement permits Bangladesh to reverse-engineer patented generic pharmaceutical products to sell locally and export to markets around the world. The 1994 WTO agreement TRIPS requires signatories to implement patent protection for almost all products, including pharmaceuticals. However, article 66 provides Least Developed Countries (LDCs) with a breathing space before introducing full product patent protection. Bangladesh is therefore exempt until 2016 from the requirement to observe patent protection on reverse-engineered generic products destined for the local market. Bangladesh imports approximately 80% of its APIs for domestic production, ~20% of which are patented. Bangladesh also enjoys some export advantages from TRIPS with regards to exporting pharmaceutical goods:

Bangladesh is exempted till December 31, 2015 to implement patent protection for pharmaceuticals and other products

Bangladesh can export generic drugs to markets where the patent owner has not filed for protection. Most drugs on WHOs Model List of Essential Drugs are not patented, as affordability is one of the criteria used in designating medicines as essential. Bangladesh can export to other LDCs or non-WTO members which have not implemented product patent protection, for example Myanmar. Bangladesh can also export to a country which has issued a compulsory drug license and awarded the production contract to Bangladesh. TRIPS grants governments the right to issue a compulsory license for public health purposes, which occurs when a government overrides a patent and grants another entity the right to produce the patented product. It may do all of this without paying royalties to the patent owner.

The cost of importing APIs will most likely rise as TRIPS phases in. However, it is likely that WTO would extend the facility for another 10 years on ground of public health situation and technology transfer issue for producing patent drugs in the LDCs. WTO will review extension of TRIPS agreement waivers by the end of 2013. In case the TRIPS agreement is not extended beyond 2015, the local manufacturer will face a number of constraints including:
In case the TRIPS agreement is not extended beyond 2015, Bangladeshi companies will face cost pressure in importing patented APIs and producing patent drugs. However, the impact may not be devastating as proportion of patent drugs is very small in our market

Import cost of patented APIs are likely to increase. The cost of manufacturing patented drugs will also increase as the companies are likely to pay royalty to the original manufacturer. Export of patented products will become costly.

However, the cost pressure is likely to be associated with a lower proportion of drugs as less than 20% drugs are patented in the current market. Moreover, a number of blockbuster drugs have already lost patent or are about to lose patent in the international market within this year, including Plavix, Lipitor, Seroquel, Actos, Enbrel, Singulair, Levaquin, Zyprexa and Concerta. With passage of time, more drugs are set to lose patent rights, as such the post TRIPS era (if it happens in 2016), is not likely to have a devastating impact in the pharmaceutical market in Bangladesh.

Pharmaceutical Sector in Bangladesh

May 2012
Underlying Threat The advantages that TRIPS provide for Bangladesh are somewhat offset by the pace and competitiveness of the Indian and Chinese generic markets. In both the countries, companies can produce drugs at highly competitive pricing, even with higher costs associated with buying patented APIs or paying royalties. Bangladesh will have to rely on the standard business practices of producing the highest quality product at the lowest price to compete on the international market which may be difficult to achieve in the near term. Bangladesh has a competitive disadvantage (when compared to India and China), since the local pharmaceutical industry is not backward-integrated. Most of the APIs have to be imported, and even if the APIs are manufactured in the country, the basic raw materials still have to be imported. As such construction of API Park is not likely to add too high a value in the pharmaceutical manufacturing value chain. This results into higher factor costs, especially in cases where the provider of the API is a competitor in selling the finished product. Building up backward-integration for all relevant APIs is also not a realistic option because of scale disadvantages and infrastructure constraints. The reliance on importing API remains to be the only significant threat for the pharmaceutical industry in Bangladesh. Cost structure and Margins for Pharma Industry Production cost is about 50%-55% for the pharmaceutical companies in Bangladesh, which results into 45%-50% gross margin for most of the companies. Raw materials, including API, excipients, packaging materials and others, account for 75% of the production cost while the remaining 25% is the conversion cost. Operating cost is about 25% of sales for an average pharmaceutical company, most of which is dominated by selling and marketing expenses (more than three-fourth of the operating cost). Operating margin is about 20%-25% and net profit margin (NPM) varies around 15% for the industry. The NPM is usually better for the listed companies as they enjoy significant tax rebate for listing. 37.5% corporate tax is applicable for non-listed companies in Bangladesh while it goes down to 27.5% for listing in the stock exchange. Listed companies further enjoy 10% rebate for paying out more than 20% of paid-up capital as cash dividend corporate tax rate is only 24.75% for them. Table 6 shows the cost structure & margin for the top three listed companies (pharmaceutical business only).
Chart 4: Tax Rates for Companies
37.50%

The reliance on imported APIs remain as the major threat to the industry

Table 6: Cost Structure of Top 3 listed companies Square Beximco Renata Gross Margin 42.8% 20.4% 15.7% 22.4% 25.3% 6.5% 18.8% 25.8% 48.9% 23.7% 20.1% 25.2% 21.0% 4.8% 16.2% 22.8% 52.7% 27.1% NA 25.7% 22.2% 5.5% 16.7% 24.6% Operating Exp to sales Marketing Exp to sales Operatinf Margin PBT Margin Tax expense to sales Net Margin Effective tax rate
Source: BRAC EPL Research

27.50%
24.75%

Non-Listed

Listed

Listed with 20% cash dividend

Source: BRAC EPL Research

Pharmaceutical Sector in Bangladesh

May 2012
Chart 5: Pharmaceutical Export and Growth (BDT m)
2,800.0 2,400.0 2,000.0 120% 100% 80%

Chart 6: Pharmaceutical and Organic Chemical Import (USD m)

600.0 500.0 400.0

1,600.0 1,200.0 800.0

400.0 0.0 2004 2005 2006 2007 2008 2009 2010 2011

60%

300.0
40% 20%
0% -20%

200.0 100.0

0.0
2003 2004 2005 2006 2007 2008 2009 2010 2011

Pharmaceuticals (LHS)

Growth (RHS)
Source: Bangladesh Bank

Pharmaceuticals

Organic Chemical

Source: Bangladesh Bank and Export Promotion Bureau

Table 7: Pharma Export (USD m) Q1 Q2 Q3 Q4 Total 2011 10.4 12.4 12.3 10.9 46.0 2010 9.4 8.7 10.1 11.4 39.6 2009 8.8 8.5 10.2 12.7 40.1

Export and Import Bangladeshs overall export earnings from pharmaceuticals reached USD 46.0 billion for the calendar year 2011, recording a growth of 16.1% over USD 39.6 billion in calendar year 2010. Exports earnings in Q12012 was USD 10.9 billion, 5.7% up from the same period previous year. Table 6 shows the quarter wise export earnings for the last three years while Chart 5 shows the total export over the last eight fiscal years*. Pharmaceutical export from Bangladesh recorded 25.5% growth annually over the last seven years. However, the growth was not steady across all the years - in fact in FY2009 pharmaceutical export dropped 1.8% following the global financial crisis. In FY2011 also, the growth was only 1.0% because of sovereign debt crisis in Europe. Apart from these two years where trade slowed down significantly worldwide, pharmaceutical export was robust in all other years. We expect the export growth to pick up from 2012 onwards given that the world trade is likely to recover from the sovereign debt crisis. However, the growth rate is likely to peak four/five years from now. Most of the top pharmaceutical companies are gearing up for the export market as most of them have been establishing GMP (Good Manufacturing Practice) compliance plants. Some of the top companies have already received UKMHRA Certificate (Square Pharmaceuticals being the first company to do so in 2007) while most of them are awaiting for US FDA approval. Apart from these two major GMP certificate, most of the top companies have already received GMP clearance from a number of countries, including Turkey, Yemen, Kenya, Congo, Uganda, Sudan, Ethiopia, etc. Once the growth in the domestic market becomes steady, companies are likely to focus heavily in the export market. Earlier, we forecasted domestic market to grow at around 15% annually over the next five years. Top companies can easily achieve more than 15% growth by attaining higher export sales. Going beyond 2016, export is likely to be the major driver behind companys top line growth.
* Fiscal Year (FY) is from July to June; FY 2012 means July 2011 to June 2012

Source: Export Promotion Bureau

Some of the top companies already received the UK-MHRA Certificate while the US FDA approval is waiting in the pipeline for many companies

Export Sales is likely to drive companies revenue once domestic market reaches steady growth

Pharmaceutical Sector in Bangladesh

May 2012
Chart 6 in the previous page shows the import data for pharmaceutical products and organic chemicals. Over the last eight years, import of pharmaceutical products grew at 12.9% annually while organic chemical grew at 15.8%. Unlike export data, pharmaceutical and chemical imports have been steady over the last four years as the domestic market has been bullish is the same period. Budget Directives for FY2012 The government lowered import duties for the FY2012 to provide support to the pharmaceutical companies. They proposed the following changes to promote further growth of the sector:

Lower import duty for certain raw materials, from 12% to 5%. Lower duty for importing certain capital machineries used in the pharmaceutical industry - for instance a sandwich panel that had a duty of 12% applied on it would now have a 3% duty. Withdrawal of existing 5% import duty and 15% VAT on leucocytes filter used in purification of blood of thalasamia patients Withdrawal of 20% supplementary duty and reduction of import duty from 25% to 12% on cartridge/membrane filter used for pharmaceuticals industry. Extended eligibility for tax holiday for both pharmaceutical and API firms.

Table 8: Tax Holiday Structure Year Year 1 Year 2 Year 3 Year 4 Year 5 Rebate 100% 100% 50% 50% 25%

Source: Budget Speech for FY12

Regulatory Assistance The government has given support to the manufacturing industry for decades. It adopted The Drug Act 1940 in 1974, originally adopted by the Indian government in 1940, and later by the Pakistani Government in 1957. The Drug Act gave protection to the local manufacturers by restricting import of pharmaceutical products that are manufactured in the country. It successfully prevented the Indian manufacturers, who could serve the market at competitive price, from entering the country. Going forward there is no regulatory risk that import restriction will be removed and local companies are likely to continue on dominating the pharmaceutical market. The government has planned to set up the API park by 2012 to facilitate API production and lower reliance on API import. In the last budget also, government provided various incentives to lower the import cost of the pharmaceutical manufacturers. In this coming budget for FY 2013, it is expected that the government is going to provide incentive to export - in particular easing up the documentation procedures and removing bottleneck for exporting goods. Performance of Listed Companies Of the six listed companies, only BXPHARMA and IBNSINA reports standalone statements while the other four reports consolidated numbers. For SQURPHARMA and RENATA, the pharmaceutical business generates bulk of the consolidated revenue (90% and 94% respectively for the two companies) while for ACI and GLAXOSMITH the proportion is much lower

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Pharmaceutical Sector in Bangladesh

May 2012
Table 9: Comparison of listed pharmaceuticals companies Market Price Market Cap Profit in 2011 DSE Ticker (BDT) (BDT m) (BDT m) SQURPHARMA BXPHARMA RENATA ACI GLAXOSMITH IBNSINA 268.7 93.9 981.2 247.8 605.2 135.5 71,161.1 3,565.4 23,641.0 1,198.4 27,710.9 1,066.7 4,885.3 238.1 7,290.5 282.1 1,756.1 70.8 MCAP Weighted P/E

P/E 20.0x 19.7x 26.0x 20.5x 25.8x 24.8x 21.2x

* Market price and market capitalization given as on May 10, 2012 Source: DSE Website and BRAC EPL Research

(about 50%). Among the six companies, SQURPHARMA, BXPHARMA and RENATA present investors with prospective investment opportunities. For IBNSINA the market capitalization is very small for investment. The sector P/E ratio (comprising of these six companies only) stands at 21.2x. Because of the market weight of the top two, the P/E ratio is heavily tilted towards Square Pharmaceuticals (20.0x) and Beximco Pharmaceuticals (19.7x). Renata has the highest P/E ratio of 26.0x. We will focus on the top two companies for investment analysis, (shown in the following pages).

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Pharmaceutical Sector in Bangladesh

May 2012
Square Pharmaceuticals
Square Pharmaceuticals is the largest pharmaceuticals manufacturing company in the country with a total gross revenue of Tk. 17.0 billion in 2010-11. Square Pharmaceuticals is the stand out market leader with a market share of 18.7%. The company also has three subsidiaries and several associate companies. While maintaining the profitability in its core pharmaceutical business, the company has sprouted a number of other businesses in-house in the past, and after profitable commercial operation of the businesses commenced, spun off such subsidiary businesses to monetize the investment. Square Pharmaceuticals currently has a number of such businesses in the pipelines.

Share Data
52-week Price Range (BDT) Current Price BDT (May 10, 2012) Fair Value BDT (Dec 2012) Price Return Dividend Yield Total Return Number of Shares MM Market Cap BDT MM Free Float Average Turnover Value BDT MM (LTM) 178.10 278.00 268.70 275.0 2.3% 2.0% 4.3% 264.8 71,161.1 44% 76.4

Investment Positives

Income Statement
MM BDT 2010A 2011A Sales 12,971 16,975 Cost of goods sold -7,352 -10,284 Gross Profit 5,618 6,691 Operating Expenses -2,293 -2,874 Operating Profit 3,326 3,817 Non-operating Income 258 454 Allocation for WPPF -158 -191 Financial Expenses -320 -310 EBT 3,106 3,770 Tax -737 -939 Minority Interest -2 -2 PAT 2,497 3,257 Number of shares MM 265 265 EPS (BDT) 9 12 DPS (BDT) 26 22 Pay-out Ratio 275% 181% 2012E 20,975 -12,650 8,325 -3,499 4,825 1,169 -264 -516 5,214 -1,272 0 4,280 265 16 3 21% 2013E 2014E 25,937 31,604 -15,621 -19,004 10,316 12,599 -4,331 -5,211 5,984 7,388 1,463 1,821 -329 -406 -425 -361 6,693 8,441 -1,635 -2,063 0 -1 5,516 6,962 265 265 21 26 4 6 21% 21%

Square is the market leader by far in local pharma-market with greater bargaining
power with both suppliers and customers. Such strong competitive position will help the company to maintain margin and growth in prevailing macro environment.

Their plants are equipped with state-of-the-art manufacturing facilities and adhere
to GMP and other international standards sufficiently. These are the pre-requisite to make strong foothold in export markets. They are the first company to receive the UK-MHRA certificate in 2007 and also expected to receive the US FDA certificate soon. So the company is ready to unlock the export potential.

They have the largest portfolio of over 650 products in the domestic market. Their
top branded product, Seclo (Omeprazole), is the top selling brand in the country in terms of value. There are four more square products among the top ten.

Square

invested in a number of subsidiaries and associate companies (e.g.

Square Hospitals, United Hospital) that are about to become profitable. These companies earnings will drive consolidated earnings growth in next 3-5 years.

Balance Sheet
MM BDT PPE Intangible Asset Inventories Trade Debtors Advances & Deposits Cash & Equivalent Total Asset Long Term Loans Deferred Liabilities Short Term Laibilities Trade Creditors Other Current Liabilities Total Liabilities Equity Minority Interest Total Equity BVPS (BDT) 2010A 2011A 2012E 2013E 2014E 6,681 8,059 8,986 10,523 12,469 4,306 4,825 5,164 5,622 6,207 2,575 3,179 3,886 4,764 5,772 512 1,422 1,472 1,791 2,157 371 598 751 897 1,097 270 429 875 2,042 4,727 16,406 22,226 25,542 30,239 37,270 1,143 726 194 57 17 226 303 303 303 303 1,382 3,432 3,063 2,478 2,147 103 1,208 918 549 675 608 882 1,109 1,381 1,693 3,462 6,551 5,587 4,767 4,835 12,940 15,670 19,950 25,466 32,428 4 6 6 7 7 12,944 15,675 19,956 25,472 32,435 49 59 75 96 122

The

pharmaceutical unit has been going through expansion program which is

expected to enhance their sales volume beyond 2013. So free cash flow is set to improve with growing operating cash flow and falling capex requirement.

Square is widely regarded as the best managed conglomerate in the country

with good governance practice that ensure protection of minority shareholders rights.

Risks & Challenges

Squares

revenue growth has not been the most exciting among the top

pharmaceutical companies, especially in the last couple of years. They are still in a comfortable position at the top, but in the last few years they have lost market share to Incepta Pharmaceuticals and Beximco Pharmaceuticals.

Squares

plans to tap the export market may require a lengthy compliance

process and may increase maintenance capex.

Square invested in a number of un-related companies whose performance details

are not available. Overall profitability may be impaired if these investments underperform.

Cash Flow Statement

MM BDT Operating Investing Financing Net Cash Flow 2010A 2011A 2012E 2013E 2014E 2,783 3,008 9,192 4,961 9,139 -1,493 -3,954 -1,960 -2,186 -2,772 -1,335 1,105 -6,786 -1,607 -3,682 -45 159 445 1,168 2,685

Stock Chart
300 275 250
Price, BDT

525.0 450.0 375.0 300.0

Valuation and Key Ratios

P/E P/B Return on Equity Return on Total Assets Sales growth Gross Profit Growth Op. Profit Growth PAT growth Effective Tax Rate 2010A 2011A 2012E 2013E 2014E 28.5x 21.8x 16.6x 12.9x 10.2x 4.1x 3.4x 2.6x 2.1x 1.6x 19% 21% 21% 22% 21% 15% 15% 17% 18% 19% 10% 31% 24% 24% 22% 17% 19% 24% 24% 22% 14% 15% 26% 24% 23% 21% 30% 31% 29% 26% 24% 25% 24% 24% 24%
Turnover, BDT MM

225 225.0 200 175 150 150.0 75.0 .0

Turnover

Price

12

Pharmaceutical Sector in Bangladesh

May 2012
Beximco Pharmaceuticals
Beximco Pharmaceuticals Limited (BPL) is one of the leading pharmaceutical manufacturing companies in Bangladesh. A part of Beximco Group, the largest private sector industrial conglomerate in Bangladesh, BPL develops, manufactures and markets both finished dosage form branded generic pharmaceutical products and active pharmaceutical ingredients (APIs). Considered as a technological leader among the local manufacturers, BPL currently holds the third position in local sales among all pharmaceutical companies in Bangladesh. The company has established an extensive distribution network that supports some of the best selling products in the local market.

Share Data
52-week Price Range (BDT) Current Price BDT (May 10, 2012) Fair Value BDT (Dec 2012) Price Return Dividend Yield Total Return Number of Shares MM Market Cap BDT MM Free Float Average Turnover Value BDT MM (LTM) 56.30 - 114.60 93.90 130.0 38.4% 38.4% 251.8 23,641.0 87% 74.6

Investment Positives

Income Statement
MM BDT 2009A 2010A 2011E 2012E 2013E Sales 4,868 6,491 8,127 10,273 12,633 Cost of goods sold 2,566 3,318 4,176 5,265 6,443 Gross Profit 2,302 3,173 3,951 5,008 6,190 Operating Expenses 1,301 1,537 1,533 1,933 2,382 Operating Profit 1,001 1,636 2,185 2,817 3,499 Non-operating Income 199 456 328 423 525 Allocation for WPPF 43 68 92 125 160 Financial Expenses 289 662 564 617 669 EBT 867 1,362 1,856 2,497 3,196 Tax 243 310 423 568 727 PAT 625 1,052 1,434 1,929 2,468 Number of shares MM 252 252 252 252 252 EPS (BDT) 2 4 6 8 10 DPS (BDT) 0 0 2 2 3 Pay-out Ratio 0% 0% 26% 26% 26%

Besides They

being the third largest manufacturer in the local market, Beximco

Pharma is also one of the largest pharma-exporters of Bangladesh. have been increasing their market share in the local market - in the last

three years the company achieved 28.1% revenue growth compared to 21.4% industry growth. In 2011, they had 30.5% growth in the retail market compared to 23.6% growth for the sector.

With

its state of the art manufacturing plant and certification from advanced

market regulators, BPL is already in an advanced stage of becoming one of the first truly export-oriented pharmaceutical companies in the country. They have received GMP Clearance from a number of countries (including GCC) and clearance from US FDA and UK-MHRA are also expected to be received soon.

They have acquired rights for a number of niche products from US manufacturers
which they intend to leverage in expediting the USFDA certification process.

Balance Sheet
MM BDT PPE Intangible Asset Inventories Accounts Receivable Advances & Deposits Cash & Equivalent Total Asset Long Term Loans Deferred Liabilities Short Term Laibilities Trade Creditors Other Current Liabilities Total Liabilities Share Capital Share Premium Revaluation Surplus Other Reserve Total Equity BVPS (BDT) 2009A 2010A 2011E 2012E 2013E 12,967 15,123 16,002 16,611 17,078 9 57 135 135 135 1,723 1,984 2,198 2,632 3,068 694 821 1,028 1,300 1,599 699 779 981 1,236 1,513 1,058 1,471 1,454 1,794 2,199 19,892 21,372 23,005 25,006 26,987 1,925 1,902 2,129 2,307 2,232 352 647 647 647 647 1,760 1,989 2,129 2,307 2,232 410 432 544 686 840 151 92 115 145 177 9,006 5,398 5,974 6,551 6,692 1,511 2,098 2,518 2,518 2,518 3,179 6,959 6,959 6,959 6,959 1,617 1,535 1,535 1,535 1,535 295 295 295 295 295 10,886 15,974 17,030 18,456 20,295 43 63 68 73 81

They

have successful business partnerships in contract manufacturing with

MNCs such as Bayer AG, Upjohn Inc. of USA as well as GlaxoSmithKline, Novartis, Sanofi Aventis, etc.

Their top branded product, NAPA (Paracetamol), is

Risks & Challenges

the largest selling brand in

the country in terms of volume, and fourth largest in terms of value.

Although

BPLs has been steadily increasing their market share, competition

among the top players in the domestic market is as strong as ever.

Export business appears to be the future growth driver, which certainly would be
challenging. Entering the international market, especially the developed markets, requires a lengthy compliance process. Moreover, the maintenance capex may increase once they get US FDA and Uk-MHRA certification in order to comply with the standards.

The ROE is very low for BPL as the company had significant dilution of share due
to conversion of preference shares in 2010. BPL is also holding its equity as they have been giving out only stock dividend over the last three years (2009-2011); no cash dividend was paid out during this period.

Cash Flow Statement

MM BDT Operating Investing Financing Net Cash Flow 2009A 2010A 2011E 2012E 2013E 521 1,352 1,432 1,607 2,180 -3,453 -991 -1,438 -1,120 -997 3,917 52 -11 -147 -779 985 413 -17 340 405

Stock Chart
140 450.0 120 360.0

Valuation and Key Ratios

P/E P/B Return on Equity Return on Assets Sales growth Gross Profit Growth Op. Profit Growth PAT growth Effective Tax Rate 2009A 2010A 2011E 2012E 2013E 37.8x 22.5x 16.5x 12.3x 9.6x 2.2x 1.5x 1.4x 1.3x 1.2x 6% 8% 9% 11% 13% 4% 5% 6% 8% 9% 21% 33% 25% 26% 23% 15% 38% 25% 27% 24% 0% 63% 34% 29% 24% 21% 57% 36% 35% 28% 28% 23% 23% 23% 23%
Turnover, BDT MM

Price, BDT

100

270.0

80

180.0

60

90.0

40

.0

Turnover

Price

13

Pharmaceutical Sector in Bangladesh

May 2012

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

BRAC EPL Stock Brokerage Capital Markets Group

Ali Imam Khandakar Safwan Saad Farjad Siddiqui Kallol Biswas Nafees Mohammed Badruddin Head of Research Research Associate Research Associate Research Associate Research Associate imam@bracepl.com safwan@bracepl.com farjad.siddiqui@bracepl.com kallol.biswas@bracepl.com 01730 357 153 01730 357 779 01730 727 924 01730 727 930

nafees.badruddin@bracepl.com 01730 727 931

Strategic Sales
Sajid Huq Amit Head of Strategic Sales sajid.huq@bracepl.com 01755 541 254

Institutional Sales and Trading

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