Equity Analysis /

Bangladesh Pharma: Poised for recovery, and well-positioned to tap macro growth prospects

    Tanay Kumar Roy
    Tanay Kumar Roy

    Research Analyst

    IDLC Securities
    13 March 2019
    Published by

    We remain positive on the pharma sector. The Bangladesh pharma industry demonstrates strong economic and demographic fundamentals, despite the recent slowdown of the industry growth rate to 6.3%. We expect 14% sales CAGR for the industry in the next five years, driven by double-digit growth in per capita income, increasing access to healthcare services, and rising numbers of diabetic and hypertension patients. In the immediate period, the post-election price hike of drugs in Q1 19 is likely to aid growth recovery.

    Our top picks: SQUARE and BXPHAR. Within our Bangladesh pharma coverage, our top picks are Square (Buy, TP BDT321, ETR 21%) and Beximco Pharma (Buy, TP BDT109, ETR 26%). With its investment in Square Kenya (subsidiary), SQUARE bundles together the growth stories of two evolving markets. The temporary hiccups in sales growth keep the share price suppressed as it trades at 17.5x trailing PE vs 21.3x historical median PE (c17% discount). We expect that the acquisition of Nuvista, the launch of its human insulin production unit and the Unit 3 facility (100% capacity expansion) will help Beximco generate c17% sales CAGR and c18% earnings CAGR during the next five years. With such growth expectations, a stock that trades at 12.3x 2019f PE is too cheap to ignore, in our view.

    The next growth drivers: Cardiovascular and diabetic drugs, steroid-insulin-hormone products. Because of the changing nature of disease profile, the sale of cardiovascular drugs and hormones are on the rise, outperforming 3-year industry sales CAGR by 232bps and 372bps respectively. This trend is likely to benefit BXPHAR and RENATA, which are more focused on these therapeutic classes (c20% of sales) compared to the industry (15% of sales). However, the growth of antibiotic products has slowed because of increasing awareness against indiscriminate use of antibiotic drugs to control drug resistance among patients.

    Top 20 players fight for market share. These firms hold 87.6% market share now, having gained c2% over the past five years. While most of the names in the top 20 list remain the same, we observe a significant shuffle in rankings among the mid-ranked companies. Non-listed companies such as Incepta, Healthcare and Radiant, as well as listed companies such as Ibn Sina and Beacon, have been very aggressive with the incentives they offer doctors to prescribe their medicine. Market participants have tended to prioritise acquiring market share over profitability, although SQUARE has consciously deviated from this trend and tolerated a decline in market share. Such a competitive scenario is likely to prevail and opex/sales ratios may increase, thus offsetting much of the margin improvement from scale benefits.

    International sales flourish with limited access to developed markets. Pharma exports (in taka) grew c35% in 2018 but remain concentrated in Asia and Africa. Tough competition from India and China gives limited access to the US and UK market. Beximco leads in exports with c19% share and launched four products in the US. Square got its first ANDA for Valsartan (a hypertension drug) in the US market and has made a proactive move with Square Kenya to access the Africa region.

    Dependency on imported API poses risks: While dependency on imported API hinders export growth due to price competitiveness, API price volatility in 2018 was a concern for pharma manufacturers. The shutdown of Chinese factories in 2017 also made some APIs scarce. Local companies increased inventory levels to ensure continuous supply, but the additional working capital requirement increased leverage.

    This Bangladesh pharmaceuticals update is a joint report from Exotix Capital and its research partner in Bangladesh, IDLC Securities, as we bring together our coverage. This report discontinues Exotix’s independent coverage of SQUARE and BXPHAR. The changes in forecasts and ratings cited are changes from IDLC Securities’ previous forecasts and ratings