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Current Price as of March 29th, 2017 www.jamapunji.pk
March 30, 2017
SEARL: The Preferred Medicine
Pharmaceuticals
Hubco Company to Outperform Due to Analyst
The Searle Company Ltd. REP 300
Initiating Coverage on SEARL – BUY!
We initiate coverage of The Searle Company Ltd. (SEARL) with our Dec’17 Target Price
of PKR 816.60/share; at current price levels the scrip offers a 33% upside potential.
Our investment thesis is premised on i) significant growth expected in the topline on
the back of anticipated expansion, macroeconomic triggers, industry dynamics, and
improving outreach, ii) unsurpassed margins, and iii) expected rise in foreign interest
in the scrip amidst inclusion in MSCI EM and FTSE GEIS. Further to it, SEARL is by far
one of the safest scrips in the sector given it is relatively immune to the uncertainty
of pricing mechanism and respective regulatory outcomes.
Double Digit Growth in Topline Expected to Lead to Greener Pastures
Premised on the back of the anticipated expansion together with (i) Pakistan’s improving
macroeconomic levels, (ii) growing awareness of advantages of nutrition based
biopharmaceutical products, and (iii) country’s overall demographics with SEARL’s
growing distribution network; we expect the company’s leading chronic, analgesic, and
nutrition product mix to lift the topline north of 20% YoY in FY17E (PKR 11,435mn). Based
on our estimates, top 30 products that make up over 50% of the total revenue, are
expected to post over 13% of jump in sales during FY18 (in excess of PKR 7,000mn), while
the biopharmaceutical products that are already in production, estimated to have broken-
even, should start churning high margin sales with an anticipated growth of over 1.5x in
FY18. Incorporating this exceptional growth, our estimates point to a 5Y CAGR of 22%
(FY16-21F) translating into FY21F net revenue of PKR 26,149mn.
Concurrently, with improved margins in FY17 along with the anticipated generous
dividends from its subsidiaries, we expect SEARL to post a growth of 48% YoY in its
bottom-line in FY17E (EPS: PKR 20.04) with a 5Y CAGR of 20% (FY16-21F) taking the FY21F
net profit to PKR 5,171mn (EPS: PKR 33.59).
Industry Leader in Margins with a Promising Business Model for the LT
Recently, while stay order on hardship cases facilitated some of its competitors translating
into improved margins, SEARL made significant advances of its own. In the 2QFY17, while
SEARL successfully managed its Gross Margins at 41%, its Net Margins surged up to 29%
from an earlier 20% in FY16, providing a momentous headway compared to industry’s
average NM of 13%. Going forward, we believe, with the high-margin Bioscience’s sales
expected to post double digit growth coupled with possible enhancement of its existing
pharma facilities, SEARL may further increase its GMs up to ~43% while maintaining its
NMs at higher 20s (given the expected increase in its marketing efforts).
Preferred Pick with Largest Free Float / Foreign Inflows / Competitive Adv.
Tied to its long term growth prospects, superseding margins, and a solid business plan in
place, SEARL gets our preference in the sector based on its i) largest free float in the
industry of 62.97mn, ii) inclusion in MSCI EM and FTSE Global Equity Index Series Asia
Pacific (ex-Japan), and iii) competitive advantage over various MNCs.
Exhibit. 1 Key Financial Highlights
Year End (PKR mn) FY15 FY16 FY17E FY18F FY19F
Net Revenue 7,582 9,525 11,435 14,641 17,861
Growth (%) 25 26 20 28 22
EPS diluted (PKR) 9.32 13.57 20.04 22.83 25.49
PE (x) 34.4 39.5 30.7 27.0 24.2
DPS (PKR) 2.0 5.0 7.0 9.0 10.0
Source: Company Financials, AHL Research
BUY
816.6
615.7
32.6
Shares (mn) 154
904
3M 6M 12M
1.7 36.2 87.2
334.7 335.5 511.5
670.1 670.1 670.1
584.9 444.8 328.9
Source: Bloomberg
Analyst:
Shiraz Zaidi
F:+92 21 3242 0742
D:+92 21 3246 2589
SEARL PA
Upside (% )
Current Price
Target Price (Dec'17)
Recommendation
Market Cap. (USD mn)
www.arifhabibltd.com
UAN: +92 21 111 245 111, Ext: 248
94,771
– International Brands Ltd.
Price Performance
Major Shareholders
Price Performance
Avg. Volume (000)
High Price - PKR
Low Price - PKR
Return (% )
Market Cap. (PKR mn)
Best Domestic Equity House – 2016
Top 25 Companies
(2015, 2014 & 2012)
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SEARL KSE100
The Searle Company Limited (SEARL) Page 2
March 30, 2017
SEARL - Pharmaceuticals
INVESTMENT THESIS
I. Double Digit Growth in Topline Expected to Lead to Greener Pastures
Keeping pace with pharmaceuticals globally, we expect Searle Company Ltd. (SEARL) to
proceed with a series of capital expenditure focused primarily on expansion of its high-
tech Biosciences (Biopharmaceutical) facility, along with enhancement of its existing
Pharmaceutical and Consumer Goods’ segments. With a CapEx of PKR 400mn already
incurred by the management during the 1HFY17, we expect another PKR 600mn in the
2HFY17, followed by PKR 550mn in the following year, taking the total expenditure in
excess of PKR ~1,500mn by end of FY18.
The anticipated phased expansion could not have been better timed, we believe, with
various drivers in place for the sector to outperform going forward. A few key factors
worth discussing in more detail are i) improving macroeconomic indicators (affordability),
ii) growing awareness of advantages of good health and healthy lifestyle (awareness), and
iii) country’s overall demographics (accessibility).
a) Key Drivers for Pharmaceuticals (to Support SEARL’s Topline) i. Rise in Income = Rise in Affordability
Pakistan has been all over the international media for its turn-around story given the
substantial improvement in its economy and law and order situation. To reiterate, we
expect the GDP to grow at 5.2% in FY17 and in excess of 7.0% from FY19 onwards which
will in turn increase not just the disposable income but is expected to also widen the
middle class, raising nation’s overall affordability. We expect this economic activity to
possibly provide some ease on pricing regulation of scheduled drugs, especially Essential
Drugs, which has remained one of the primary hurdles for the industry to operate at a
higher profitability margin, as discussed earlier. In addition, an enhanced affordability
should help create a larger market for a diverse product portfolio, especially for nutrition
based Biopharmaceuticals and Consumer Good items, which may fall under non-Essential
and Over-The-Counter drugs.
ii. Rise in Affordability Supports Awareness of Benefits of a Healthier Lifestyle
Secondly, the increase in affordability is expected to be tailed by an increased awareness
of advantages of good health and healthier lifestyles. The trend is substantiated by various
research and surveys conducted by renowned consultancies such as McKinsey (‘Unlocking
Pharma Growth’, 2012) and Streategy& (‘Pharma Emerging Markets 2.0’, 2013) in similar
emerging markets. Especially in the case of large middle-income markets such as Brazil,
India, China, Mexico, Turkey, and Russia all exhibited similar trends in their pharma
industries; that of a rise in overall spending (mainly marketing) to increase patient
awareness followed by an expanding insurance coverage, emergence of new hospital
formats, and introduction of innovative therapies and biotech solutions to lingering
epidemics.
We expect a similar trend to emerge in Pakistan that has a growing population along with
recently found triggers to economic growth. The only precaution that will need to be
considered is the lack of tailored approach to an individual market (instead of a generic
growth model) and the lack of outreach within. We believe, while various MNCs may
struggle to find efficiencies in-between their internal (foreign parent) company policies
and stringent local regulation terrain of the pharma landscape, SEARL will be well
positioned as one of the largest local manufacturers to capture and increase its existing
market share going forward. SEARL currently stands as the 5th largest pharmaceutical in
Biopharmaceuticals vs Pharmaceuticals
The primary difference between
biopharmaceuticals and traditional
pharmaceuticals is the method by which
the drugs are produced.
Contrary to pharmaceuticals, that
manufacture drugs through a series of
chemical synthesis, Biopharmaceuticals
manufacture drugs via living organisms
such as bacteria, yeast, and mammalian
cells.
Affordability: Premised primarily on the
back of anticipated pickup in GDP,
translating into higher disposable income
and growing middle and upper middle
classes.
Awareness & Acceptability: Based on
various research and surveys conducted in
other emerging markets, especially with a
similar growing middle income population,
a rise in an overall affordability of the
population paved way for a better
awareness of advantages of good health
and nutrition based treatments along with
a more holistic approach towards a
healthier lifestyle. On the ground level we
see a similar change here in Pakistan,
though at an initial stage in the upper-
middle class but expected to gradually
move down the social classes pyramid.
Accessibility: SEARL has incurred double
digit growth in selling and marketing
expenses in the last three years with a
similar growth expected going forward. The
rise in expenses, except salaries, is primarily
driven by increasing efforts in marketing
the products via both (i) obtaining new and
maintaining old contracts with hospitals,
which remain influential due to the large
proportion of prescriptions for chronic
ailments, (ii) reaching out to more remote
pharmacies and clinics; including moving
down the physician pyramid that may drive
some of SEARLs’ best sellers (Nuberol Forte,
Hydrallin, Peditral, Extor, Metrozine,
Spiromide, Sustac, Rotec, Tramal, etc) in
chronic heart diseases, common cold, and
analgesics product lines.
The Searle Company Limited (SEARL) Page 3
March 30, 2017
SEARL - Pharmaceuticals
Pakistan with 3.63% of market share, based on Q3 2016 data obtained from Information
Medical Statistics (IMS).
iii. Demographics, demographics, demographics (Accessibility)
The third significant growth driver remains the very demographics of Pakistan’s
population. Being the sixth largest nation in the world with over 203mn natives growing
at ~2.0% annually, according to the World Population Data Sheet 2016 – issued by
Population Reference Bureau, it offers a massive potential for growth in its pharma
industry. Pakistan has a striking ~60% of total population living in rural areas, with bare
minimum facilities and drug unavailability (lack of outreach) whereas, an enormous ~60%
of total population is projected to be under 30 years of age.
To address the lack of outreach, SEARL has been determined to increase its salesforce to
over 1,750 (inclusive of factory workers) end of FY16 from an earlier 1,468 in FY15, not
only by moving down the ‘physician pyramid’ to drive growth in its chronic segments but
also to penetrate into the rural areas (lower strata) which remains a massive market still
untapped, even for the drugs treating mild illnesses. Staff salaries of PKR 602mn (FY16)
remain the largest header under the company’s marketing and distribution expenses of
PKR 2,420mn (FY16).
b) Product Portfolio Tailored to the Needs of the Local Market
Pertaining to the tailoring of product mix, SEARL has a wide range of popular brands
under its banner that provide treatment for lingering epidemics in the country. To better
analyze the effectiveness of available product portfolio, we break down the population
and leading causes into three groups; i) ‘1-14 Yrs’, ii) ’15-39 Yrs’, and ii) ‘40+ Yrs’.
Based on the data obtained from the highly renowned Institute of Health Metrics and
Evaluation (IHME), an independent population health research center – part of University
of Washington US, leading causes for deaths in Pakistan amongst ages ‘1-14’ were i) liver
diseases, ii) cardiovascular diseases, iii) malaria, and iv) respiratory diseases. For ’15-39’
group more common causes were i) HIV/TB, ii) Liver diseases, iii) Birth related diseases
and disorders (maternal), and iv) nutritional deficiencies, whereas for our last group of
‘40+’ primary causes noted were i) HIV/TB, ii) Birth related (maternal), iii) Liver diseases,
iv) digestive infections, and v) diabetes. The results indicate that some of the deadliest
diseases in Pakistan have been similar to those common in most of the markets SEARL
already operates (see graph in the following page).
Figure. 1 Leading Cause of Death (5-14 Years Age Group) Figure. 2 Leading Cause of Death (All Age Groups)
Source: Institute for Health Metrics and Evaluation (IHME), AHL Research Source: Institute for Health Metrics and Evaluation (IHME), AHL Research
4% 9%
15%
5%
12%
54%
Brain Infection Diarrheal disease Heart Disease
Malaria Respiratory infection Others
13%3%
4%
36%8%
35%
Birth infections Diabetes Diarrheal disease
Heart Disease Respiratory infection Others
The Searle Company Limited (SEARL) Page 4
March 30, 2017
SEARL - Pharmaceuticals
Figure. 3 Massive Markets For Leading SEARL Product Mix in Both Emerging and Developed Economies (All Ages)
Source: Institute for Health Metrics and Evaluation (IHME), AHL Research
Exhibit. 2 Massive Markets For Leading SEARL Product Mix in Both Emerging and Developed Economies (All Ages)
AFG IND MYN PAK PHL SRL USA VNM
Cardiovascular 28.0% 27.0% 24.7% 32.8% 33.3% 36.7% 32.0% 35.5%
Digestive/Infection 12.9% 13.3% 8.1% 11.9% 12.3% 5.4% 3.8% 5.0%
Cancer 5.5% 6.6% 17.4% 9.0% 12.3% 11.5% 24.5% 18.1%
Diabetes 4.4% 7.4% 7.4% 5.5% 9.2% 13.1% 7.1% 8.3%
Respiratory 3.5% 11.8% 8.2% 5.2% 5.4% 9.0% 6.7% 0.0%
HIV/AIDS/TB 1.3% 5.8% 7.1% 3.4% 4.8% 0.7% 0.3% 4.1%
Liver 1.8% 2.3% 6.1% 1.5% 2.0% 3.4% 2.1% 2.9%
Birth Related 2.3% 0.6% 0.9% 1.3% 0.3% 0.1% 0.0% 0.0%
Malaria 0.0% 0.0% 0.0% 0.8% 0.0% 0.0% 0.0% 0.0%
Nutritional def. 0.3% 0.6% 0.4% 0.6% 0.6% 0.1% 0.2% 0.0%
Other 0.1% 0.3% 0.6% 0.2% 0.3% 0.3% 1.6% 0.3%
Source: IHME , AHL Research
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
AFG IND MYN PAK PHL SRL USA VNM
Cardiovascular Digestive/Infection Cancer Diabetes Respiratory HIV/AIDS/TB
Liver Birth Related Malaria Nutritional def Other
The Searle Company Limited (SEARL) Page 5
March 30, 2017
SEARL - Pharmaceuticals
Figure. 4 Leading Cause of Deaths in PAK (Groups Defined) Figure. 5 Leading Cause of Death (All Ages Groups)
Source: IHME, AHL Research Source: IHME, AHL Research
Exhibit. 3 Leading Cause of Deaths in Pakistan (1990 - 2015)
Pakistan 1990 1995 2000 2005 2010 2015
Cardiovascular 21% 25% 28% 28% 31% 33%
Other 19% 20% 25% 26% 27% 22%
Birth Related 19% 17% 16% 14% 15% 14%
Digestive/Infection 27% 22% 19% 15% 14% 12%
Cancer 5% 6% 7% 7% 8% 9%
Diabetes 0% 0% 0% 4% 0% 6%
Respiratory 4% 5% 5% 5% 5% 5%
HIV/AIDS/TB 4% 4% 0% 0% 0% 0%
Source: IMHE, AHL Research
As shown in Exhibit 2-3 and Figure 3-5, SEARL’s broad range of product mix facilitates
treatment for leading causes of deaths in all its operational markets. Products range from
chronic heart diseases/cardiovascular; hypertension (BYSCARD | EXTOR), angina
(TENORMIN) and angina pectoris (SUSTAC | RANCARD XR | INDERAL), congestive heart
failure (SPIROMIDE), chest pain, pain palliative for chronic conditions such as joint aches
(TRAMAL | NUBEROL FORTE), arthritis, osteo and rheumatoid arthritis (ROTEC), diabetes
(JENTIN MET | HYLIXIA | CANDERAL), various respiratory, liver (METROZINE | METODINE),
and birth infections; amoebiasis, osteopenia, osteoporosis (OSTEGEM), neural tube
defects (M-FOLATE), chronic asthma, spastic form of chronic obstructive pulmonary
disease, anti-malarial, along with more common infections and diseases such as common
cold (HYDRYLLIN), allergies (XADINE), fever, and muscle ache.
0%
20%
40%
60%
80%
100%
1-14 years 15-39 years 40+ years
Birth related Cancer CardiovascularDiabetes Digestive/Infection HIV/AIDS/TBLiver Malaria Nutritional def
0%
20%
40%
60%
80%
100%
1990 1995 2000 2005 2010 2015
Birth Related Cancer CardiovascularDiabetes Digestive/Infection HIV/AIDS/TBOther Respiratory
The Searle Company Limited (SEARL) Page 6
March 30, 2017
SEARL - Pharmaceuticals
A Few of the Leading Brands - To Provide for Growth in its Topline
c) Exports and Toll Manufacturing to Pick Up
Both exports and contracted toll manufacturing have facilitated support to the company
consistently over the years with over 10% of contribution to total sales, on average. Given
the expansion of Biopharma facility along with anticipated introduction of various new
drugs in the registration pipeline, we expect the exports and toll manufacturing to pick
up YoY in excess of historical quantum. Further, SEARL is in process of obtaining US FDA
approval which will not only help in registration of drugs going forward but will also help
in improving its exports and toll manufacturing.
On the back of all the factors discussed above, our conservative estimates signal a growth
of 20% YoY in net revenues for FY17 (PKR 11,435mn) followed by a 28% YoY growth in
FY18 (PKR 14,641mn) with a 5 Yr CAGR of 22% (FY16-21F).
Figure. 6 Category Leadership Brands
Source: Company Financials, AHL Research
Exhibit. 4 Exports & Toll Manufacture Supporting Sales
Year End FY12 FY13 FY14 FY15 FY16
Exports 309 241 366 524 851
Toll Sales 245 237 311 271 291
% of Net Sales 11 9 11 10 12
Total Net Sales 4,936 5,150 6,072 7,582 9,525
Source: Company Financials, AHL Research
Pakistan South AsiaEast Africa South-East AsiaMiddle East
Nuberol (Forte)
(Paracetamol + Orphenadrine Citrate)
• Treats painful muscle spasm associated with chronic low back pain, sprains, strains, prolapsed intervertebral disc, muscle injury, nonarticular rheumatism, tension headache, dysmenorrhea, and other Acute & Chronic painful muscular conditions.
Hydryllin (Syrup & Drops)
(Aminophylline + Diphenhydramine + Ammonium Chloride + Menthol)
• Treats Productive cough, Smokers cough, cough associated with Asthma, cough due to Bronchitis and other respiratory disease and infections.
Peditral (Sachet & Liquid)
(Sodium Chloride + Potassium Chloride + Sodium Citrate + Dextrose Anhydrous)
• Treats Productive cough, Smokers cough, cough associated with Asthma, cough due to Bronchitis and other respiratory disease and infections.
Extor
(Amlodipine + Valsartan)
• Treats Essential Hypertension
The Searle Company Limited (SEARL) Page 7
March 30, 2017
SEARL - Pharmaceuticals
II. Industry Leader in Margins with a Promising Business Model for the LT
Recently, while stay order on hardship cases facilitated some of its competitors translating
into improved margins, Searle made significant advances of its own. In the 2QFY17, while
SEARL successfully managed its GM at 41%, its NM surged up to 29% from an earlier 20%
in FY16, providing a momentous headway compared to industry’s average of 13%.
With a focus on Biosciences and Consumer Goods in a growing economy (projected to
grow in excess of 8% from FY18 onwards), SEARL has over a hundred New Chemical Entities
(NCEs) in process of registration which, we expect, should provide stronger tailwinds to its
bottomline from FY18 onwards once they come in production (our estimates indicate NMs
in excess of 20% despite anticipated rise in overheads).
To add to it, while SEARL already has an extensive network of international operations
(Afghanistan, Sri Lanka, Myanmar, Vietnam, Cambodia, Philippines, etc.), the company is in
an early stage of exploring markets and registering products in some of the region’s fastest
growing economies with industries in excess of USD 1,000mn. Given the Drug Policy
exempts locally manufactured exporting medicine from price cap, an expansion in SEARL’s
Global Business Division should supplement future margins.
Going forward, we believe, with the higher-margin Bioscience’s sales expected to post
double digit growth coupled with possible enhancement of its existing pharma facilities,
SEARL may further increase its GMs up to ~42% while maintaining its NMs at current levels
(given the expected increase in its marketing efforts).
Figure. 7 Industry Margins Comparison - SEARL Leading the Pack in Net Margins
Source: Company Financials, AHL Research
0.0
10.0
20.0
30.0
40.0
50.0
GM NM GM NM
2015 LQ
ABOT GSK SEARL FEROZ SAPL WYETH(%)
The Searle Company Limited (SEARL) Page 8
March 30, 2017
SEARL - Pharmaceuticals
III. Preferred Pick with Largest Free Float and Anticipated Foreign Inflows
Coupled with the long term growth prospects, superseding margins, and a solid business
plan in place, SEARL gets our preference in the sector due to i) largest free float of
62.97mn in the sector, ii) inclusion in MSCI EM and FTSE Global Equity Index Series Asia
Pacific (ex-Japan), and iii) competitive advantage over various MNCs.
Having the largest free float in the pharmaceutical sector facilitates ample liquidity to the
scrip in turn enabling higher volumes and ease of trading. In fact, higher free float enabled
the stock to be included in MSCI EM and FTSE GEIS-AP due to its largest free float based
market capitalization. The inclusion is expected to bring further liquidity to the scrip via
increasing foreign interest.
In the local pharmaceutical industry a few key factors provide a competitive edge to local
manufacturers in the market. The most important factor remains the possibility of a
tailored internal policy that is in line with the regulations yet may provide endless
possibilities to the company in driving its margins. For example, while a MNC might only
run contracts via approved vendors or run lengthy QA checks through its parent to obtain
its approval, a local manufacturer can hunt cheapest available vendors meeting its quality
parameters both local and foreign.
The Searle Company Limited (SEARL) Page 9
March 30, 2017
SEARL - Pharmaceuticals
Recommendation and Valuation
(Dec’17 TP at PKR 816.6 / share)
We value SEARL using a multiple stage DCF model with our valuation criteria as follows:
risk-free rate 8.0%, equity risk premium 6.0%, and beta factor 0.9x and a 5.2% terminal
growth (our FY17 GDP projection).
Based on our calculation, the sum of PV from discounted cash flows stands at PKR
60,216mn, along with PV from Terminal cash flow that comes at PKR 65,826mn. Our
Target Price for Dec’17 stands at PKR 816.6 /share.
Exhibit: 6 Valuation Snapshot
(PKR mn)
Sum of PV 60,216
PV Terminal CF 65,826
Net Debt (341)
Equity Value 125,701
No. of Shares (mn) 154
Total Value (Per Share) 816.6
Source: AHL Research
Exhibit. 7 Industry Snapshot
LQTD SEARL FEROZ GLAXO ABOT SAPL
GM (%) 41.00 43.40 27.50 41.20 33.70
NM (%) 28.93 13.60 10.20 19.70 7.60
ROE (%) * 31.80 20.00 19.70 31.40 18.20
ROA (%) * 22.70 17.00 12.90 23.80 7.20
Source: Company Financials, AHL Research, (*) Based on L12M Equity and PAT
Exhibit: 5 Valuation Criteria
Terminal Growth 5.2%
RfR 8.0%
Beta (Adj) 0.9
Risk Premium 6.0%
CoE 13.5%
Source: AHL Research
The Searle Company Limited (SEARL) Page 10
March 30, 2017
SEARL - Pharmaceuticals
Risks to Estimates
Downside Risks & Mitigating Factors
The largest risk exposure to the sector comes from the lack of certainty on drug pricing
mechanism, especially in light of recent regulatory developments, as discussed earlier
under ‘Key Sector Considerations’.
With that said, unlike some of its biggest competitors in the local market, SEARL has a
much lower revenue dependency on products that may be classified as hardship cases.
It is also substantiated by documents released by DRAP from its Drug Pricing
Committee meeting held on 4th and 5th March, 2016 where no item produced by SEARL
was contested for a price hike. Secondly, another factor mitigating a possible hardship
case would be SEARL’s strong Global Business Division that could help company utilize
exemption from any local pricing cap as established under Drug Policy 2015 – discussed
earlier, and possibly export medicine at a profitable price.
Upside Risks
On the other hand, a possible upside risk to our estimates remains an exponential
growth in sales due to faster registration of pending Biopharmaceutical products, than
we anticipate.
Marketing and Selling & Distribution expenses are expected to mount going forward
while the company strives to create a sizeable market for its existing and upcoming
products. We have incorporated a double digit growth in our assumptions, while a well-
managed expenditure could pose a substantial upside risk to our estimates.
The Searle Company Limited (SEARL) Page 11
March 30, 2017
SEARL - Pharmaceuticals
The Ever changing Pharma Landscape - Key Sector Considerations
ʘ Ministry of Health (MoH) controlled, assigned, and decided drug prices under the Drug Act of 1976. Price
Regulation Committee (PRC) worked under MoH and regularly monitored drug prices and decided ceiling
prices referred by MoH.
ʘ Drug Policy was adopted in 1992 (based on leader prices and CPI) but was deemed ineffective later due
to invalid classification of controlled and uncontrolled drugs. MoH dissolved and Drug Regulatory
Association of Pakistan (DRAP) came into existence under the DRAP Act 2012.
ʘ There were continued disagreements between Pakistan Pharmaceutical Manufacturers Association
(PPMA) and DRAP over its ineffective new drug registration and pricing mechanism that still stands in
place. PPMA’s discontent with DRAP stood on the premises that the regulatory authority made it too
difficult for the pharmaceuticals, both local and MNCs, to function with its micro monitoring of processes
while itself ignoring structural hurdles such as years long process of registration of NCEs and patenting.
ʘ From DRAPs perspective, according to various surveys conducted by private third parties, variety of
pharma products were being sold in the local market that were not only unregistered with DRAP but were
also made available at different prices. Hence, calling for stricter measures to keep the sector in check.
ʘ In 2013 DRAP decided to allow pharmaceuticals to raise prices on selected drugs up to 15% but then later
the decision was overturned. In response to which, pharmaceuticals sorted to approach the Supreme
Court and successfully obtained stay order to keep prices raised.
ʘ In 2016, DRAP’s Drug Pricing Committee (DPC) decided to increase prices by another 8% for different
drugs based on the increase in their raw materials.
ʘ In CY17TD, majority of the stay orders obtained from the Supreme Court against DRAPs decision to cap
the prices at prior levels are intact. All pharmaceuticals that have products eligible to be classified under
‘Hardship cases’ (loss making), as well as ‘Lower priced drugs’, as elaborated in 2015 Policy, are assumed
to maintain the stay orders in place.
While there remains uncertainty surrounding the outcome of the stay orders on hardship cases and
pricing of scheduled drugs, we expect the matter to either linger on until a decisive agreement is reached
between pharmaceuticals and DRAP or some concession/relief provided to both MNCs and local
manufacturers as the sector remains an essential part of the economy.
The Searle Company Limited (SEARL) Page 12
March 30, 2017
SEARL - Pharmaceuticals
International Brands Limited – The Group
A distribution business under the banner of International Brands Limited (IBL) remains one
of the primary distributors for major FMCG labels such as Unilever Pakistan, British
American Tobacco, Bristol Myers Squibb, GlaxoSmithKline, Novartis, RJR Nabisco, Dow
Chemicals, and New Zealand Dairy Board. IBL embarked on joint ventures with Gillette,
P&G, Unisys, Dow, FMC, Pioneer, and RJ Reynolds. It acquired Gideon Daniel Searle
(originally founded in Nebraska, US in 1888) in 1993.
IBL’s core expertise lies in its ability of marketing and distribution across Pakistan which
only serves a competitive advantage to its group companies such as SEARL. With diverse
product mix and one of the largest distribution networks across the country (67 branches),
IBL's scope reaches out to all major business sections. Further, IBL functions more like a
business partner rather than the stereotypical distributor where its sub-distributors
(business partners) facilitate coverage even in the more remote areas where running
branches becomes infeasible for IBL.
Figure. 8 Strategic Organogram
Source: Company Financials, Company Profile, AHL Research
The Searle Company (SEARL) - Management
The company has been successfully steered for the past 9 years by Mr. Nadeem Ahmed –
Chief Executive Officer, a pharmaceutical and healthcare veteran with an extensive
experience of 26 years. Apart from SEARL, Mr. Ahmed is on the Board of IBL Healthcare
(IBLHC), United Distributors Ltd. (UDL), United Brands Ltd. (UBL), International Franchise
Ltd. (local partners of Dunkin Donuts), Habitt Home Store, IBL Operations, and Unisys Pvt.
Ltd. and heads the Pricing Committee of Pakistan Pharmaceutical Manufacturers
Association (PPMA) forum as its Chairman.
Working besides the CEO is Mr. Mobeen Alam serving the chair of Chief Financial Officer
and Director Finance at The Searle Company. Spanning over a decade, Mr. Alam’s
experience has been tied mostly to IBL and the company, working in various functions from
internal audit to strategic initiatives. Prior to SEARL, Mr. Alam was associated with
PricewaterhouseCoopers Pakistan. Along with the CEO and CFO, SEARL has a team of
experienced Directors, all veterans of pharmaceutical and healthcare industries.
International Brands Ltd(IBL)
IBLHC (74.19%)
Nextar Pharma(70.34%)
Searle Pharma Ltd100%
Searle Labs Pvt Ltd100%
Searle Biosciences100%
IBL Identity Pvt Ltd(Al Abid Exports)
100%
The Searle Company(55.36%)
IBL Operations(FMCG/Pharma/Dist.)
United Brands(FMCG/Dist./Mkt.)
Habitt(Home Accessories)
IFL (Dunkin Donuts)
The Searle Company Limited (SEARL) Page 13
March 30, 2017
SEARL - Pharmaceuticals
Shareholders’ Pattern (SEARL)
Exhibit. 8 Aggregate Shares Held Figure. 9 Aggregate Shares Held
No of Shares % of Shares
IBL LTD 83,397,698 54.18%
General Public 26,706,152 17.35%
Foreign Companies 42,154,752 27.39%
Banks & Institutions 10,439,687 6.78%
Others 23,341,430 15.16%
Total 153,931,293 100.00%
Source: Company Financials, AHL Research Source: Company Financials, AHL Research
54.18%
17.35%27.39%
6.78%
15.16%
IBL LTD General Public Foreign Companies
Banks & Institutions Others
The Searle Company Limited (SEARL) Page 14
March 30, 2017
SEARL - Pharmaceuticals
SWOT Analysis
Manufacturing Facilities
1. Pharmaceutical Plant (Karachi – S.I.T.E) – Total plant area of 5.2 acres (138,000 sqft covered area). It is
the production site for Hydryllin and Nuberol (Forte), two of Searle’s flagship brands.
2. Pharmaceutical Plant (Lahore – Block I & II) – Total plant area of 119,136 sqft (55,000 sqft covered area).
The facility has an overall capacity of 5 million bottles per month of oral liquid and ~3 million packs of
tablets. Both blocks are integrated in a manner to achieve maximum flexibility and independence of
manufacturing dedicated products.
3. IV Infusion Plant (Lahore) – State of the art plant dedicated for making, filling and sealing infusion bottles.
Management is expected to expand their line of IV Solutions going forward. Currently, the plant produces
eleven (11) different products of different sizes.
4. Biotechnology Plant (Karachi – Port Qasim) – Biosciences is what is to become the fastest growing
revenue generator for SEARL in the coming years as the management is focused on expanding the high
margin business line.
5. Consumer Plant (Karachi – Korangi) – Total plant area 3,000 sq. yards (18,000 sqft covered area). The
plant is engaged in the manufacturing of consumer brands such as Canderel, Kaplan, and Metacil.
STRENGTH
Largest distribution network of parent company
Growing global presence
Profitable multinational partners (including toll manufacturing)
One of very few technologically advanced and purpose built biosciences manufacturing plant
In process of acquiring US FDA approval for its Bio-sciences plant (to help expedite drug registration)
Larger anticipated cash generation would enable either a higher payout or further expansion
Competitive advantage over various MNCs in availing cheaper raw materials, quicker registration process, and ease in switching between suppliers
WEAKNESSES
Higher than industry-average marketing costs (negatively
impacting SEARL’s net margins)
Higher marketing/branding costs for Consumer goods and
Bioscience products due to less awareness in public
(market creation)
Rapid continuous growth required in Biosciences (high
margin products) to improve margins and counter possible
rise in overheads (industry-wide)
Costs in penetrating into potentially high growth rural
areas
OPPORTUNITIES
Expected growth in middle class and its disposable
income to lead to disproportionate growth in
nutrition based (biopharmaceutical) products and
consumer goods
Export to other rapidly growing economies besides
Pakistan (Argentina & Romania)
Mark additional affiliations with corporates, hospitals,
and health insurance companies to market both its
prescription and OTC drugs
With various MNCs struggling to cope with the
changing regulations’ landscape, SEARL has the
potential to capture the opening gap in supply and
demand for pharmaceuticals.
THREATS
Biosciences market penetration from other local and
international pharmaceuticals
Unfavorable Drug Policy implementation
Continued rise in overheads (cost of manpower and
energy)
Possible competition from market penetration from
Chinese imports
Political and law and order instability to pose challenges
The Searle Company Limited (SEARL) Page 15
March 30, 2017
SEARL - Pharmaceuticals
Financial Highlights
Exhibit. 9 Income Statement
(PKR mn) FY15A FY16A FY17E FY18F FY19F
Net Sales 7,582 9,525 11,435 14,641 17,861
Gross Profit 3,332 3,714 4,722 6,285 7,680
Other Income 806 1,806 2,471 2,563 2,663
Financial Charges (190) (110) (108) (59) (60)
PAT 1,435 2,089 3,085 3,514 3,924
EPS PKR 9.32 13.57 20.04 22.83 25.49
DPS PKR 2.00 5.00 7.00 9.00 10.00
Source: Company Financials, AHL Research
Exhibit. 10 Balance Sheet
(PKR mn) FY15A FY16A FY17E FY18F FY19F
Shareholders' Equity #REF! 4,548 8,180 10,495 12,932 15,471
Non-Current Liabilities #REF! 713 508 866 723 580
Current Liabilities
Trade and Other Payables #REF! 1,617 1,819 1,958 2,785 3,394
Other Current Liabilities #REF! 804 702 605 155 280
Total Liabilities and Equity #REF! 7,979 11,506 14,220 16,891 20,021
Assets
Non-Current Assets #REF! 3,730 6,001 7,022 7,485 7,698
Current Assets #REF! 4,248 5,506 7,198 9,407 12,323
Total Assets #REF! 7,979 11,506 14,220 16,891 20,021
Source: Company Financials, AHL Research
Exhibit. 11 Ratio Analysis
FY15A FY16A FY17E FY18F FY19F
Gross Margins % 43.9 39.0 41.3 42.9 43.0
Net Margins % 18.9 21.9 27.0 24.0 22.0
ROE % 37.3 32.8 33.0 30.0 27.6
ROA % 20.1 21.4 24.0 22.6 21.3
Dividend Yield % 0.3 0.9 1.1 1.5 1.6
P/E x 73.6 42.0 30.7 27.0 24.2
P/B x 12.2 8.3 8.8 7.2 6.0
Source: Company Financials, AHL Research
The Searle Company Limited (SEARL) Page 16
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SEARL - Pharmaceuticals
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Arif Habib Limited (AHL) uses three rating categories, depending upon return form current market price, with Target period as December 2015
for Target Price. In addition, return excludes all type of taxes. For more details kindly refer the following table;
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the purchase or sale of any security. This publication is intended only for distribution to the clients of the Company who are assumed to be reasonably sophisticated
investors that understand the risks involved in investing in equity securities. The information contained herein is based upon publicly available data and sources
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stored or disseminated in any form or by any means without the prior written consent of Arif Habib Limited.
The Searle Company Limited (SEARL) Page 17
March 30, 2017
SEARL - Pharmaceuticals
Contact Information
Shahid Ali Habib Chief Executive Officer [email protected] +92 -21-3240-1930
Research Team
Shahbaz Ashraf, CFA Head of Research [email protected] +92-21-3246-2589
Tahir Abbas VP- Senior Investment Analyst [email protected] +92-21-3246-2589
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Rao Aamir Ali AVP- Investment Analyst [email protected] +92-21-3246-2589
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