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Global Research - U.A.E Abu Dhabi Stock Exchange
Gulf Pharmaceutical Industries (Julphar), established in 1980, is the second largest
public shareholding company in the pharmaceutical sector within the GCC region.
The Julphar group had sales of AED443mn (US$120mn) in ’03 and net profit of
AED56.5mn (US$15.3mn), which were 18.8% and 31.3% respectively higher than theprevious year.
Most of Julphar’s revenues come from selling of ‘out of patent’ pharmaceutical
formulations in different parts of the world. The parent company, Julphar UAE had80% of its sales in GCC countries, with more than half of it in Saudi Arabia.
A few government bodies hold stakes in Julphar, giving it an advantage in the markets
Julphar group owns seven pharmaceutical manufacturing facilities, including one each
in Germany and Ecuador and a biotechnology plant in the UAE. The company sells adiversified portfolio of products, covering most of the therapeutic segments.
The company also does under-license manufacturing for foreign companies and plans
During the three year period ’01-’03, Julphar witnessed a CAGR of 16% in revenues.
It is expected to continue its high growth, owing to the nature of its markets and globalgrowth trends for the sector.
The company had an operating profit margin of 13.4% in ’03, much lower than the
industry norm. This was mainly due to the high cost imports of bulk drugs fromEurope. Return on invested capital (ROIC) stood at 8.1%, lower than the estimatedcost of capital of 9.47%.
An increase in the share of revenues from under license manufacturing, and shifting
the source of bulk drug imports to cost-effective sources are expected to improve thecompany’s profitability. However, this could be offset to some extent by potentialprice decline due to intensifying competition.
Global Research - U.A.E
Gross profit margin increased to 50.7% in the first half of ’04 from 47.8% in the
similar period previous year. However, an increase in distribution expenses kept theprofit growth down to 8.4%, in line with the sales growth in this period.
Julphar stock currently trades at a P/E of 17.4x the ’04 EPS. It is low on liquidity with
We initiate our coverage of Julphar with a ‘Buy’ recommendation. Based on the
discounted cash flow valuation method, we have valued the company’s shares at anintrinsic value of AED4.03/share, which is 15.1% higher than the market price ofAED3.50 as on 17th Oct. Investment indicators Price on 17th October Shares in issue Market Cap 52-week price range 2004 (AED) (‘000) (AED ‘000) as on 17th Oct 2004 Net profit Book value/ ROAE share (AED) *Historical P/E and P/BV pertain to respective year-end prices, while those for future years are based on marketprice as on October 17th, 2004. Source: Global researchShare price performance chart Source: Global Research Global Research - U.A.E Company Background Julphar was established in 1980, in the emirate of Ras Al Khaimah, United Arab Julphar group hadsales of AED443mn
Emirates, and it officially started commercial production in 1984. Since then the
company has grown fast to become the second largest public shareholding company in
the pharmaceutical sector within the GCC region. The Julphar group had sales ofAED443mn (US$120mn) in ’03 and net profit of AED56.5mn (US$15.3mn), which
were 18.8% and 31.3% respectively higher than the previous year. The company wentpublic in ’02, listing its shares in the Abu Dhabi Securities Market. It currently has a
market capitalisation of AED1.26bn (US$341mn).
Most of Julphar’s revenues come from selling of ‘out of patent’ pharmaceutical formulations
The company is intoselling of out of
in different parts of the world, with GCC markets accounting for the lion’s share of it. It also
has exposure to retail pharmacy chains in UAE and Oman. Lately, the company has venturedinto manufacturing and selling of biotech products. Revenues in the first half of ’04 grew by
8.3% to AED242mn, while net profit grew by 8.4% to AED32.5mn.
Management The incorporation of Julphar as a public shareholding company was the vision and
commitment of H H Sheikh Saqr Bin Mohammed Al Qasimi, the ruler of Ras AlKhaimah. The company also has the support of Arab Company for Drug Industries and
Medical Appliances (ACDIMA), which is also the second largest shareholder. Thelatter, owned by the various governments in the Arab world, is the guiding force of the
drugs and medical appliances industry in the region.
The management of Julphar showed commendable vision in usurping on the opportunity
to be a successful export-oriented company based in the UAE. UAE per se is a very
small market for pharmaceuticals, dominated by the multinational companies (MNCs),
export-orientedbusiness to prosper
which would have been next to impossible for a domestic company to profitably break
into. However, the regulations in the economy were supportive to trade, which made it anideal location for Julphar’s business model to blossom. The success achieved by Julphar
in export markets further shows the ability of the management to wade through hurdles inquick time. It also signifies the aggressive marketing intent of the management.
While marketing is the strong point of the company, it also has competence in
manufacturing quality products, though confined to conversion of bulk drugs toformulations. Facilities compliant with the quality mandated by internationally
recognised authorities like US FDA corroborate the future focus of the management. However, it should be noted that Julphar has so far been supported by a protective
environment in the form of price regulations, and restrictions on competition fromimports. A change in this scenario would necessitate the management to look at new
innovative options to keep the nose in front of the competition. Either, ways to cutcosts have to be unearthed, or newer markets which would allow selling at higher
Global Research - U.A.E
prices have to be explored. This would pose a test on the ability of the management tomeet challenges and to exhibit flexibility in their approach.
Shareholding and Liquidity
As already stated, ACDIMA, which was established by a resolution from the ArabEconomic Unity Council, holds a considerable stake in Julphar. This body is headquartered
in Jordan, and has affiliates in countries like Saudi Arabia, UAE, Iraq, Tunisia, Syria andAlgeria. In collaboration with some of these companies, ACDIMA performs scientific
research, which would be helpful in the long term, for companies in the region. Apart from ACDIMA, there are few other shareholders having substantial stakes in the
Table 1: Major shareholders As in Jun ‘04
As can be seen from the table, Julphar has government bodies holding substantialstakes in it. This augurs well for the company, considering that a significant share of
the pharmaceutical purchases in the region is done by the government.
Liquidity: The company has 360mn shares outstanding, each having a par value of
AED1. This is post 20% increase in share capital through a rights issue at 1:5 ratio at
an offer price of AED1.5, in the second quarter of ‘04. Post the announcement of the
rights issue, the share price has come down by 29% from an all time high of AED4.92
in Feb ’04 to the current level of AED3.50. The current price is slightly lower than thelevel, at which it was an year back. However, the average daily traded volume more
than doubled in ’04, compared to that in the previous year as shown below. Table 2: Liquidity of the Julphar stock Source: ADSM*for the first nine months**at the end of the period
In spite of the increase in volumes, Julphar’s share, at a turnover ratio of 16.8%, hasrelatively low liquidity, which is a matter of concern for the shareholders.
Global Research - U.A.E
Julphar group has five companies, the parent company-Julphar UAE, and four
subsidiaries-Julphar Ecuador, Julphar Germany, Julphar Drug Store and the Scientific
Pharmacy, Oman. Subsidiaries facilitate the business of manufacturing and selling
pharmaceutical formulations by giving access to newer markets and reaching
customers better. Together, they own seven manufacturing plants, five located in the
UAE, one in Ecuador and the other in Germany.
Table 3: Julphar’s manufacturing facilities Location Products manufactured
1.8 bn tablets, 250mn hard gelatin capsules,20mn bottles of powder pro suspension
Antibiotics and Sterile products Cephalosporins, oral penicillins,
Julphar 5 Germany Non-sterile dosage forms
Conventional drugs, food supplements, cosmetics
Syrup, suspension, oral drops, ointments and
Erythropoietin, interferon, GCSF, interlukin
About 90% of the products manufactured are sold as branded formulations in different
markets. Generic formulations account for 5% of the total sales, while contract
manufacturing for international companies account for 5-6%. As at the end of 03,
Julphar Group had 2,683 product registrations in different markets of the world. Chart 1: Proportion of registered products in various markets Global Research - U.A.E
Number of product registrations increased by 15% in ’03. Getting the products
registered is the only major entry barrier apart from distribution in most of the
unregulated markets. The group markets 176 brands across the markets. Break-up of
the brand strength based on the therapeutic categories is shown below,
Chart 2: Brands by therapeutic categories
The proportion of brands in different categories more or less mimics the pattern of
diseases in the Middle East markets. Anti-infective and respiratory are two of the
largest categories in this market. However, the company has been gradually trying to
increase the exposure to the chronic segments, which are growing at a higher rate in
most of the markets. Middle East markets account for 90% of the total sales of the
Julphar UAE, the parent company, as shown below,
Chart 3: Area-wise sales of Julphar-UAE Global Research - U.A.E
‘Others’ include markets like Far East Asia and Russia. Apart from this the company
has exposure in America and Europe through its subsidiaries at Ecuador and Germany.
The plant owned by the German subsidiary is fully certified according to the EU
guidelines and was acquired by Julphar as a step towards breaking through the
European market. Besides supplying their own products, both these subsidiaries open
the doors for Julphar’s products in those markets.
The other subsidiaries of the company, Julphar Drug Store (JDS) and Scientific
Two of Julphar’ssubsidiaries are
Pharmacy, Oman (SPO) play major roles in the marketing of products manufactured by
Julphar. JDS, though originally formed to market Julphar’s products in the UAE,
currently also acts as a distributing agent for various world-renowned brands of health
and cosmetic products in the region. It has an established network of 21 pharmacies in
the UAE and has more than 15% share of the total retail business in the country. JDS
engages in aggressive marketing and tries to retain customers by providing incentives,
for which it has a tie-up with MashreqBank, the leading private bank in the country.
Similar to JDS, SPO is the sole agent in Oman, and it also acts as the distribution agent
for other international companies. SPO has 17 pharmacy outlets and several clinics in
various cities of Oman. Besides these subsidiaries, the company has marketing offices
in more than 40 countries in the world. These sponsor public awareness campaigns,
seminars, public leaflets and posters as part their marketing activities. However, it
should be noted that the major portion of Julphar’s sales comes through tenders, since
government purchases are very common in the Middle East markets.
Biotech venture: Of late, the company has set up the biotechnology plant and has
started marketing biotech products like erythropoietin, interferon, GCSF and interlukin.
Julphar’s biotech plant fully meets the biological manufacturing requirements of the
US FDA. It has a capacity to produce 1.4mn injections of biotech products annually,
estimated to be more than the requirement of all the GCC countries put together. This
assumes significance in the overall business, as biotech is an area with higher entry
barriers than conventional pharmaceutical business. Further, this could also provide a
window of opportunity in regulated markets, once Julphar gets its plant approved by
the US FDA or UK MCA. Generic biotech products could have an easier route in these
markets than other pharmaceutical products, as the rules on patent challenges of
Regulatory compliance: Talking about regulations, most of the products that Julphar
markets are those which are out of patent in regulated markets like the US and Europe.
Exception to this rule are a very few products, most of which are under licensing. Global Research - U.A.E
Further, the company complies with the rules on quality of imports. It is much easier to
get the imports from regulated markets, approved by the local authorities, compared to
those from unregulated markets like India and China. However, it should be noted that
imports from regulated markets are about 30-40% costlier.
Contract manufacturing: As a company compliant with regulations, Julphar
becomes a good candidate to do under-license and contract manufacturing for
multi-national companies. It already does under-license manufacturing for foreign
companies. It is yet to enter into contract manufacturing in a big way, though the
company has plans on this front. However, in general, under-license manufacturing is
Table 4: Difference between contract manufacturing and under-license manufacturing
Does only manufacturing, akin Manufactures and markets the product
From sales of the product, booked in own books
Manufacturing cost, marketing cost and royalty
Julphar expects to enhance its business in order to align itself to the changing market
conditions and regulations. In a scenario of most markets complying with the WTO
rules and regulations, the management feels that the company would have new business
opportunities, generating lot of value. An example is under-license manufacturing,
which the company plans to make its second line of business. Once the market
recognises product patents, MNCs would have more confidence to enter into
under-licence agreements with companies like Julphar. Consequently, the management
expects the business mix to change dramatically in favour of this line of business. In
addition to this, expansion of business in newer markets would also have an effect on
the geographical business mix, as shown below.
Global Research - U.A.E Chart 4: Planned business mix of Julphar 3-4 years down the line
The most notable change from the current business mix is an increase in exposure to
Iraq and the rest of Middle East. The management sees Iraq as a big opportunity, and
sees Iraq market asa big opportunity
would be aggressively bidding for the open tenders to sell pharmaceutical products in
the country. In case of the other relatively newer markets, subsidiaries in Germany and
Ecuador would increasingly play a part in routing the sales in those areas. The
management makes it clear that, these subsidiaries would play the role of asserting the
presence of the company in corresponding areas, rather than being profit earners for the
group. Julphar also has plans of entering the US, and expects their plants to be visited
by the US FDA authorities in 3-4 months. The procedure has been on for some time,
and the management expects US FDA approval in about six months from now.
Along with exploring newer markets for its products, the company is also looking to
The company looksto reduce costs, by
alter its sources of API imports, in order to become cost effective. Future compliance
with WTO by countries like India and China (though the latter is still not a WTO
member), would increase the confidence in their products and in turn would lead to a
relaxation of restrictions on import from these countries. Substitution of European
imports by that from India and China could bring Julphar’s costs down by up to 30%.
Lastly, the company also intends to improve its overall profitability by launching more
specialty products. Products like Augmentin (amoxicillin+clavulanic acid), Epotin
specialty arena isexpected to improve
(erythropoietin) and Sigmasporin (cyclosporine) are already doing well, and an
increase in their sales would boost the overall profit margins. Further, the company also
plans to reduce exposure to lower margin categories like painkillers and antacids, in
which competition has heightened considerably.
Global Research - U.A.E Global Scenario: Healthcare is one of the largest industries worldwide, and is expected
to reach US$4tn in size by ’05. Out of this, audited sales of pharmaceuticals alone
account for $466.3bn in ‘03, according to IMS Health. Global pharmaceutical market has
been growing at a CAGR of 10% in the last five years, while it grew by 9% in ’03. North
America alone accounts for almost half of the global sales, as shown below.
Chart 5: Area wise share of pharmaceutical sales
Apart from being the largest market, North America is also the major growth driver,
growing at a CAGR of 14.2% in the last five years. USA accounts for around 95% of
the sales in this region. The growth trend was similar in Europe too, though milder at a
CAGR of 8.5%. However, another large market, Japan showed signs of saturation
growing at just 2.7%, in turn pulling down the overall growth rate. The relatively
smaller and low value markets in Asia, Africa and Australia had a CAGR of 10%, the
growth mainly driven by the increasing penetration in comparatively nascent markets.
In terms of the various therapeutic categories, there has been a distinct shift to chronic
segments from acute segments, as dictated by the changing lifestyles and the improving
sanitary conditions around the world. Five of the 10 categories fall in those for the
treatment of chronic disorders like cardiovascular (CV) and central nervous system
Global Research - U.A.E Table 5: Top ten categories, sales and growth in ‘03
In terms of the long-term growth rates too, chronic segments have outperformed the
Chronic segmentshave outperformed,
acute ones comfortably. Cholesterol & triglyceride reducers and antipsychotics had
4-year CAGRs of 17% and 23% respectively, while the most popular anti-infective
category of cephalosporins had a negative CAGR of 1.3%. Growth of chronic segments
was led by large brands like Pfizer’s Lipitor (statin) Eli Lilly’s Zyprexa (antipsychotic)
and Sanofi Synthelabo’s Plavix (anti-clotting agent), while the erstwhile top brand,
Astra Zeneca’s Prilosec’s (anti-ulcerant) sales declined considerably owing to the
launch of the corresponding generic variant. Pfizer, with revenues of $45bn in ’03 is the
largest pharmaceutical company in the world, followed by GlaxoSmithKline, Merck &
Co., AstraZeneca and Bristol-Myers Squibb. Growth of Generics: Lately, the growth of these large companies, which sell Lately, low costgenerics have been
patented products, was thwarted by generic companies, based in low cost
manufacturing locations like Israel, India, China and Jordan. The latter have been
helped by a few regulatory changes, which were prompted by a drive to reduce cost
of social support in developed countries, especially the US. Most significant among
the regulations that supported generics was the 180-day exclusivity awarded to any
generic product launched consequent to a successful patent challenge rendering the
latter invalid. Companies were also allowed to start work on generic products, way
before the patent expiry, so that they can be launched as soon as the patent expires.
Supported by the helpful regulations, generic sales in regulated markets have
outwitted the growth of patented product sales in the last few years, in turn gaining
Global Research - U.A.E Chart 6: Generic sales and penetration in regulated markets as in ‘03
Major companies operating in the generic space include Teva, Ivax, Mylan, Watson
and Ranbaxy. These companies concentrate on generic sales in both regulated markets
and the relatively lower margin unregulated markets. The unregulated markets, where
copied versions of patented drugs are allowed, provides opportunities to smaller
generic companies too, as the entry barriers are much lower. However, these
opportunities would dry out, as and when these countries comply with the WTO
regulations, expected in ’05 for most.
Different business models: In a scenario of varying adoption of the WTO standards by
different countries, companies world over follow various business models ranging from
research-oriented innovation to contract manufacturing of active pharmaceutical
ingredients. Shown below, is the value chain of different pharmaceutical business models.
Global Research - U.A.E Chart 7: value chain of pharmaceutical business models Higher risk, higher reward
Cipla, Julphar *New chemical entity, **New drug delivery system#Active pharmaceutical ingredients##North China Pharmaceutical CompanyGlobal Research - U.A.E
Big companies follow the model of selling patented products, which needs huge
investment in new molecule research. Scale becomes imperative to withstand failures
which are very common in research. The average cost of taking a molecule from the
discovery stage to the market is estimated at $800mn, incorporating the abysmally low
probability of success. This takes around 10 years, which makes the revenue flow
management extremely difficult. As a result smaller companies with research skills
concentrate on contract research or outlicensing of molecules at different stages of
clinical trials, so that their costs are restricted.
Compared to this, generic companies are at a much less risky end, piggybacking on the
research of innovator companies. However, returns are restricted too, as they face
unbridled competition from open markets. Notwithstanding this, some generic
companies generate higher value by concentrating on ‘difficult to copy’ specialty
products and gaining exclusivities through patent challenges. With the regulations
increasingly supporting generics, as already stated, more companies are finding it an
attractive area to enter into. In spite of very little innovative research being involved in
the business, generic companies selling in regulated markets still have to put up with
the entry barrier of having to comply with the stringent quality parameters laid down
Entry barriers are even lower for selling formulations in unregulated and
semi-regulated markets, which Julphar is into. Formulations sold in these markets are
effectively generics, as product patents do not hold any value. Companies are allowed
to copy patented products, and sell them in the market as branded products. As a result,
large number of companies and a lot of substitutable products co-exist in the market. If
not for the price controls in some of the markets, it is perfect competition, which in turn
makes it a customer’s market, with prices ruling low. Distributors too are at an
advantageous position, possessing substantial bargaining power in this scenario.
Major unregulated markets: Majority of the markets in the world are unregulated.
The table below shows the larger unregulated/semi-regulated regions, which are
potential markets for Julphar, considering the model that it follows.
Global Research - U.A.E Table 6: Unregulated markets, size and major characteristics
Complex regulations and distribution networks, low on IPR**
Low on IPR, highly developed domestic industry
Increased government role, popularity of OTC products
Relatively stringent on IPR, import dependent, higher price levels
Government support for generics, erratic growth patterns, imports
Highly import dependent though from selective countries,
Source: Industry sources, EIU estimates, Global Research*Approximate market size in ’02**Intellectual property rights
Julphar, which currently has most of its business in unregulated markets, has
substantial exposures in Saudi Arabia, UAE, Iraq and other markets in the MENA
Pharmaceutical markets in the MENA region: Pharmaceutical market in the
MENA region, which has an estimated size of more than $7bn, grew at a CAGR of
10.6% in the period ’98-’02. Within the region, Jordan and Egypt are over 90%
self-sufficient, while the rest of the countries produce less than 20% of their
high cost importsfrom the developed
requirements. The latter rely on imports, predominantly from Europe and the US. Also
for the manufacture of formulations in the region, 85% of the bulk drugs are imported
from countries like France, Switzerland, Belgium, Germany and the United Kingdom,
which renders these manufacturers cost inefficient to some extent.
Coming on to the GCC, the market size is estimated to be more than $2bn for the
region. Per capita health spending for the GCC countries is substantially higher than
that of the other MENA countries. However, the figures pale in comparison with
Global Research - U.A.E Chart 8: Per capita health expenditure*
Germany UK Australia Qatar UAE Kuwait Bahrain Lebanon Saudi Oman Jordan Libya Tunisia Syria Morocco Egypt
Source: WHO World Health Report 2004*figures pertain to 2001
The average per capita annual spending on pharmaceuticals in GCC countries is $60
($550 in the US), according to the official estimates. Markets in GCC are clearly
demarcated into government and private business. Healthcare provided by the
government is almost free, while private markets cater to the expatriates and those
citizens who do not wish to avail of government facilities. Procurement of medicines is
done through joint tenders floated by the GCC states or by the individual ministries of
health. For emergency requirements, local pharmaceutical distributors directly supply
to government hospitals too. All the states pursue a uniform strategy on drug price
control, in view of joint tenders issued. Price is an important criterion for the tender
purchase, though other factors like quality of the product and service and support also
hold significance in evaluation of bids. Some countries give preference to those
products that have already been registered in other GCC markets or in European
countries, which makes it difficult for imports from third world countries. Even the
exporters from developed countries have to enter into tie-ups with local distributors or
agents, who are instrumental in selling the products.
Non-patented products dominate the GCC markets, despite four of them, Kuwait,
Bahrain, Qatar and UAE being WTO members. These markets are expected to
recognize product patents from ’05. However, there is a lot of uncertainty on the future
changes on this front. Currently, non-patented drugs from an MNC get preference in
registration over patented ones, because of the royalty to be paid on the latter. The
chain from supply to the end consumer is more or less similar for all the markets in
Global Research - U.A.E Chart 9: Pharmaceutical market mechanics in GCC markets *Generics denote out of patent products, could be sold as branded ones
A look at the market mechanics of individual markets, which Julphar has exposure to,
would give a better idea about the potential opportunities of the company.
Saudi Arabian market: One of the largest markets in the MENA region, Saudi
Arabia, had a size of around $1.5bn in ’02, and was expected to grow at more than 10%
in the years to come. The public sector hospitals, clinics and primary health centres
account for 42% of the market. Major diseases in Saudi Arabia include gastro-intestinal
disorders, tuberculosis and other respiratory diseases, malaria, diabetes,
ophthalmological diseases and cardiovascular diseases. Around 80% of the market
depends on imports. Category-wise breakup and major sources of imports are shown
Global Research - U.A.E Chart 10: Category-wise pharmaceutical imports and sources of imports of Saudi Arabia Source: WHO World Health Report 2004
Since it is primarily a tender market, the ability to supply large quantities with
confirmed supply schedule and flexible pricing ability are important for the companies
operating in this market. It is a protected market and both importers and direct investors
face bureaucratic hurdles. Because of the complicated, costly and time-consuming
import documentation requirements, Saudi Arabia is known to be the most costly
market within GCC to enter. Although all the imported products are free of duty, local
manufacturers are given preferential treatment, in terms of facilitating approvals.
Banaja, the leading domestic pharmaceutical company, imports and distributes
products, and has established partnerships with 12 leading international companies.
Saudi Pharmaceutical Industries and Medical Appliances Corporation (SPIMACO) and
Saudi Arabian Japanese Pharmaceutical Company are the other major domestic
UAE market: The UAE market, which had a size of around $400mn in ‘02, is mostly
served by imports, while the domestic production, which is not enough to cater to the
market demand is export oriented. As in the case of Saudi Arabia, the UAE market also
has seen double-digit growth rates in the past. Per-capita pharmaceutical expenditure in
the country is one of the highest in the MENA region at $105. Also the prices of
medicines are relatively higher in the country, owing to the price being regulated by the
government with a cap as well as a floor. For example, the price of an anti-hypertensive
here is 9 times that in the Indian sub-continent. Prescription products account for 85%
of the UAE market, while OTC products account for 10% and lower priced generics
account for 5%. Antibiotics dominate the prescription segment as shown in the chart
Global Research - U.A.E Chart 11: Category-wise pharmaceutical imports in Dubai
Government purchases in the UAE form 45% of the total, which is the lowest among GCC
Private sector has amajor role to play in
markets. A marked increase was seen in the private sector business, as the country has
recently decided not to provide free medical assistance to the expatriates. Unlike the case in
Saudi Arabia and the other markets in GCC, UAE is not dominated by tender purchases. It
has a more organised distribution system, which markets the imported products.
Ten countries account for 80% of the pharmaceutical imports to the UAE, eight of
Registration ofproducts from third
them being developed countries. Registration of products with the MoH in the UAE is
world countries isdifficult in the UAE
extremely difficult for the companies from third world countries. Around 7% of the
imports are re-exported from the UAE, with the major destinations being Iran, Pakistan
and Lebanon. The pharmaceutical import figure for the UAE also includes imports of
bulk drugs by domestic companies, majority of which goes into production of
formulations for exports. Julphar is the largest domestic company, while the other
major ones are Gulf Inject Company, Global Pharma, Medpharma, Pharmacare and
Neo Pharma. The margins of these companies are constrained by the high cost imports,
mostly from Europe, as mentioned before.
Other markets in GCC: Table 7: Salient features of markets in the GCC Size ($mn) Government Features of the market
High demand for cardiovascular drugs, restricts generics,compulsory medical insurance
Focus on quality, sell only through Qatari agents
80-90% tender purchases, generic imports have made animpact
Large market for cardiovascular products, large share ofEuropean imports
Source: Oman Economic Review, Ficci report, Global EstimatesGlobal Research - U.A.E Iraq market: It had a size of $400mn in ’02, though the organised demand was severely
affected in the last two years due to the problems in the country. In light of the heavy
expected demand for pharmaceutical products, Iraq represents an important market for
pharmaceutical companies. More than 42% of Iraq’s population is under 15. High level
of child malnutrition and infectious diseases constitute major problems, in turn signifying
the importance of vaccination programmes and other prevention policies.
The market was highly centralized, controlled by the overbearing state machinery in
the past, and was predominantly tender-based. It is also highly import-dependent as in
the case of other countries in the region. It is different from markets like Saudi Arabia,
in that there is no local production to be protected, and is much lower on bureaucratic
hurdles or rigid regulations. However, the lenient registration regulations have led to
stiff competition. Jordan’s pharmaceutical companies dominated the market in the past,
though their share has come down to around 20% in ’02 from 50% in early ‘90s. The
high import dependence was in consequence to the country’s manufacturing facilities
severely hampered by the restrictions on import technology, thanks to the UN
sanctions. Going forward, the import dependence is expected to continue, though there
would be a change in market mechanics. With the likelihood emergence of federalism
as the most favored political system in the country, a decentralized healthcare system
would transpire, pointing towards an abundance of tenders and supply contracts for
However, the susceptibility of US-linked foreign investment laws to annulment, under
a future sovereign government suggests that leading multinationals are unlikely to
commit heavily to the sector over the next two years. This would mean a substantial
opportunity for the players in the region, especially Jordan-based ones, due to their
logistical advantages and their experience in Iraq and other high-risk markets like
Algeria, Lebanon and Sudan. Recently, Iraqi Ministry of Health expressed their desire
to apply the European and American standards of importing drugs, meaning that
quality players would be at an advantage to win contracts.
IPR laws in unregulated markets: The implementation of the highest quality
standards is a part of the endeavor to comply with the WTO regulations. However,
product patent infringement is allowed though at varying degrees currently, in all the
unregulated markets. In Latin America patent infringement is allowed on a case-by-case
basis on the government’s assessment of the essentiality of the treatment and the
consumer. For example in Brazil, doctors at public hospitals are allowed to prescribe only
generics and in Argentina, government purchases only generics for public health
facilities. While the limited generic substitution in these countries are government
Global Research - U.A.E
motivated, in some other markets like India and China, IPR laws are extremely lax,
allowing all and sundry to infringe on patents, and come up with their own brands.
Changes in regulations would have a major impact on the pharmaceutical growth.
Branded products are expected to grow at around 10% in the next five years, while
generics are expected to grow at 20%, according to IMS Health. Share of generics in
the overall market is expected to increase from 8% in ’03 to around 12% in ’08. This
would be a direct effect of the change in regulations and government support,
facilitating generic switchover in developed countries. Category-wise growth is
expected to continue the trend of higher growth in the chronic segments.
Growth in the unregulated markets is expected to be at a slightly higher rate than the overall
Product patentregime not to have a
growth rate, owing to the low penetration in many developing countries. Regulatory
changes, especially compliance with the TRIPS, would bring about a paradigm shift in the
dynamics of the industry in these markets. With the introduction of the product patent
regime from ‘05, local companies will not be allowed to market products which were
patented after ‘95. This would have a major bearing on the markets, especially those having
large number of under patent products, marketed by local companies, rather than the
innovators. However, this is not the case in the GCC markets, where local companies
predominantly sell out-of-patent products. Patented products are either sold by innovators
or by the local companies which do under-license manufacturing.
Growth in GCC markets would be helped by the following factors;
Large spending on health. Saudi Arabian government on an average spends around
Expected implementation of the new co-operative medical insurance scheme in
countries like Saudi Arabia and UAE.
The plans to restrict expatriates from bringing medicines from their home country to
the UAE, which would augur well for the local companies.
Though the market is expected to grow at a high rate, regulatory changes would have
substantial indirect impact, through relaxation of import and pricing restrictions. It is not clear
Relaxation of traderestrictions to have
whether the current restrictions on imports and pricing would be lifted, as the authorities in the
UAE and Saudi Arabia are keen on protecting the local industries. However, with time, these
restrictions would be relaxed, which could lead to a major drop in prices. Simultaneously,
local companies would be favored by the relaxation of restrictions on imports from third
world countries, which would reduce costs. We expect these developments to offset each
other, and the profitability of local companies to remain status quo.
Global Research - U.A.E
We also expect privatization of the industry to go hand in hand with the opening up of
the GCC markets. This would mark a major change in the mode of purchase.
Distributors would have a more important role to play, compared to the present
scenario in which most of the purchases are through the tender route. More
importantly, privatization would also lead to a strict preference for the most
competitive supplier, which might not always favor the local players. Considering the
evolving scenario and the present regulatory environment, we can identify a few
common success factors for the companies following this model. Key success factors for the business: As we have seen before, most of the
unregulated, developing markets are price driven, owing to the low income levels of
the customers, and the lower costs for the manufacturers, mainly due to the absence of
research costs. Consequently, prices and costs are highly critical in these markets.
Ability to cut prices to meet competition is essential, especially in developing
markets. Price sensitivity of medicines is generally lower than many other essential
goods. However, this is much higher in some of the unregulated markets, in
particular for certain segments like anti-infectives, vaccines and treatments for
contagious diseases, which companies use as an opportunity to cut prices. For
instance, price of AIDS drugs declined from $10,000/year to $350/year, in the space
of 12 months, owing to the government allowing generic imports from India. An
increase in the number of generic players leads to a dramatic decline in the prices in
developed countries as shown below, and it is even more radical in the case of
unregulated markets, where generic players abound in the market. Chart 12: Price decline with the increase in number of players Source: Study done by Congressional Budget Office, USA Global Research - U.A.E
In order to be price competitive, companies would have to be highly efficient in
Companies can beprice competitive bymanaging their raw material costs. Raw material costs would largely depend on
1. Having captive bulk drug manufacturing,
2. Location of the manufacturing facilities or source of raw materials.
Captive bulk drug facilities help the company to take advantage of high prices at the
time of shortages, which are quite common for some bulk drugs. However, a more
important factor is the source of raw materials, as the costs vary widely across
locations. Raw material costs in countries like China, Egypt and India are much
lower than others, thanks to the large number of cost efficient small-scale players in
Though not as important as the raw material costs, management of running costs
too are critical, especially in the case of production of some bulk drugs (like anti-TB
drugs), which are power intensive. Companies based in areas like Middle East,
where power is highly subsidised are at an advantage on this front.
Even if a company is not very cost efficient, it can still operate at high margins, if it
can be the ‘first to launch’ many of the products. It would have a window of
opportunity to sell at high prices, till the second player comes in. Even 3-6 months
of high priced sales assumes significance, considering the shorter product life cycle
As in the case of being early to launch, another value generating strategy is to
concentrate on launching innovative variants of an existing product. The most
common innovation is reducing the frequency of dosage, thus bolstering
compliance. Others include innovative delivery systems like transdermal patches or
simple injections, which could act faster, or having mechanisms of symptomatic
release of formulations, all of which allow premium pricing. These could also
enhance the life cycles of products.
Launching an innovative variant or being early in the market needs exceptional
chemistry and reverse engineering skills. Skills in NDDS also come handy in
developing new variants. The importance of this can be understood from the fact
that the domestic industry in India and China, which are famous for companies with
good chemistry skills, are well developed.
Another factor that affects profitability and growth is the exposure to chronic categories. Categories like CV and CNS are relatively less crowded and more
profitable in unregulated markets, thanks to these segments being much smaller and
Global Research - U.A.E
less attractive compared to anti infectives, in the past. However, with the rising
income levels and changing lifestyles, these ailments are becoming common in
Developing countries are also becoming quality conscious, with cGMP of
manufacturing already compulsory in many countries. This in turn is advantageous
for the larger companies, as it could alleviate competition from smaller substandard
Choice and quality of products take the companies only through the halfway. To
take it forward, products have to be registered in different markets. Registration
could take a long time in some of the markets, for instance up to 18 months in Saudi
Arabia and 12 months in Russia. Given below are the registration costs per product
in some of the unregulated markets across the world. Table 8: Cost of registration in some of the unregulated markets
Any company looking at being a major exporter should have the wherewithal to bear
these registration costs and should have the intent to look at it as a long-term investment.
However, in some of the markets like Brazil, government plays a major part in procuring
generic products, generally through the tender route. Sales in such markets can be highly
volatile depending on the number of tenders that the company wins.
Post registration, effective management of the different marketing channels
completes the job. Unlike in developed markets, where monopoly and brand power
facilitates selling, products have to be pushed through the middlemen in unregulated
markets. Consistent communication on price and product launches with distributors,
wholesalers and retailers could give an edge over others, who sell the same
products. In some of the markets, companies also employ numerous ‘push’
strategies like discounts and complements to woo the channel partners.
Having a range of products is also important in getting into tie-ups with
distributors, especially in markets like Russia, which are controlled by large
Global Research - U.A.E
distributors. However, detailing skills are less important in many of these Middle
East markets, due to the large proportion of tender sales, or the cardinal role of the
distributors. The complexity of the distribution system vis-à-vis the brand
concentration is very important in the approach that a player takes in each market.
In most of the markets that Julphar operates in, MNCs hold substantial shares, mostly
Julphar is one of thelargest among the
marketing patented and other advanced products. For example, GlaxoSmithKline has
around 13% share in the UAE market. Local companies and importers from countries
like Jordan and Egypt compete for the rest of the pie, on the basis of price, selling ‘out
of patent’ products. Share of the regional companies is particularly low in the UAE,
while it is much higher in countries like Saudi Arabia and Iraq. For example, Julphar,
which is the largest domestic player has 8% share in the UAE market. Within the listed
companies in the region, Julphar is one of the largest as shown in the comparison
Chart 13: 2003 Revenues of major listed pharmaceutical companies in the Source: Company reports, www.zawya.com
Arab Pharmaceutical Manufacturing Company (APM) and Dar Al Dawa are based in
Jordan, while Eipico is an Egyptian company. It should be noted that the company
would additionally face competition in the future from generic companies in India and
China, as and when doors are opened for them. In this context, Julphar has to be
competitive in comparison with these companies too, for long-term success.
Global Research - U.A.E Cost competitiveness of Julphar Positives Negatives
companies in other developing coun-tries.
Coming on to the competence on the product development and selection side, the
company looks to be ahead of many of the local companies.
It became the first company in the region to launch specialty biotech products.
The company has adequate exposure to faster growing chronic segments.
However, on a global perspective, currently the generic companies focus on NDDS
research and try to outwit competition by bringing newer and efficient variants. Julphar
is yet to be exposed to a situation of such unrelenting competition due to the regulated
scenario. It would be imperative to hone up the research skills in a free market
As we have seen before, effective selling is as important as research and product
selection. This is where Julphar has a definite advantage over the other companies.
Its experience in bidding for tenders in the GCC markets will leave it in good stead
to pursue expansion ambitions in other markets, especially Iraq.
Getting the first product registered in a new market is always a hard task. Julphar
has got number of products registered in numerous markets.
Having own marketing offices in many countries helps in building the brand and
It has a complete range of products, making it ripe for partnering large distributors.
Over the years, the company has acquired the name of a quality manufacturer. This
not only facilitates entry into newer markets, but also renders it the best candidate in
the region to enter into under-license manufacturing tie-ups. Global Research - U.A.E
Julphar’s performance in the last few years fitted its profile as a leading pharmaceutical
company in the region. Revenues grew at a CAGR exceeding 15% in the last two
decades. It was also successful in warding off competition and maintaining its
Revenue growth: Revenues for the group grew by a CAGR of 16% in the last three
years. This was despite the inconsistent growth exhibited by some of its subsidiaries.
Julphar UAE, the parent company grew by 15.3% in the same period. Growth for the
group peaked at 18.8% in ‘03, owing to the robust demand growth in major markets
like Saudi Arabia and UAE. This would have been even higher but for the indifferent
performances of the subsidiaries, Julphar Ecuador and SPO, both of whose revenues
declined. Julphar’s sales growth is higher than the other major companies in the MENA
Chart 14: Revenue growth of major listed pharmaceutical companies in the Source: Company reports, www.zawya.com
Growth trends as seen above further confirm the opportunity in the GCC markets
compared to the other markets in the Middle East. Julphar’s growth was also helped by
its ongoing focus on entering newer markets. The company has a mix of both tender sales
and sales through distributors, which in turn has considerable impact on its profitability.
Trends in profitability: Julphar’s gross profit margins declined to 48.9% in ’03 from
52.7% in ’02. This was due to an increase in the proportion of tender sales, according
to the management. It is further substantiated by a decline in the distribution costs to
27.2% of sales in ’03 from 29.7% in the previous year. Overall profitability was further
boosted by the streamlining of administrative expenses which came down to 8.1% of
sales in ’03 from 10% last year. Effectively, Julphar’s operating profit margins
Global Research - U.A.E
increased to 13.4% from 12.4% in ’02. Net margins increased to 12.8% from 11.5%
last year, further helped by a decline in the finance costs. However, Julphar’s
profitability pales in comparison to other pharmaceutical companies in the region and
generic companies in India and China. Chart 15: Julphar’s profitability compared to other major companies in the Source: Company reports, www.zawya.com
Sun Pharmaceutical Industries (SPI) is an Indian company which sells ‘out of patent’
formulations. It has captive bulk drug production and cheap sources of raw materials,
helping it to achieve high levels of profit margins, the area in which Julphar lacks.
However, Julphar has been continuously improving, and is taking steps to cut costs. In
the last few years, growth in profit and sales comfortably outperformed the increase in
assets for the company, thus improving its returns. Return on invested capital (ROIC): Notwithstanding the improvement over the
years, the company is still a value destroyer based on its ROIC. It had an ROIC of
8.1% in ’03, which is much lower than the estimated weighted average cost of capital
(WACC) of 9.5%. Apart from the low margins, below average asset turnover ratio too
pulls down the return generated by the business. The company has 212 days sales of
accounts receivable, which is very high compared to the industry norms. This is due to
the huge proportion of exports in sales, and also its exposure to markets which are
known for long credit periods. Apart from the working capital, the company also has
put in large capital in the form of fixed assets, pointing to the high investment cost in
the country. Investment in advanced technology, though would give the company a
competitive edge, has further inflated the asset size. However, lower than average
profitability and turnover ratio illustrate the future scope of improvement for the
company. The chart below shows how the various parameters have been improving
Global Research - U.A.E Chart 16: Changes in return ratios during 2001-03 Source: Julphar, Global Research
With the investment for the future already made and most of the plants being relatively
new, the company is in a position to improve its turnover ratio and increase the returns
generated. Further, the company’s plans to reduce exposure to low margin segments
would also help towards this. The performance in the first half of ’04 already reflects
Interim results: Julphar’s sales for the first half of ’04 increased to AED241.6mn,
8.3% higher than the corresponding period last year. Relatively lower growth compared
to previous years was mainly due to the geopolitical tensions in the major markets.
However, the company was successful in reducing its raw material costs as a
proportion of sales, consequent to an increase in exposure to specialty products.
Table 9: Performance of Julphar in the first half of ‘04 Global Research - U.A.E
An increase in the gross profits was offset by the escalation in distribution costs.
Further, there has also been an increase in finance costs pulling down the bottomline
growth to 8.4%. EPS recorded a decline, as share capital was increased by 20%. This
lower growth can be considered as a temporary blip, and initiatives in Iraq aided by an
improving geopolitical situation should help the company to improve its performance
Risk Analysis: The pharmaceutical sector is characterised by low risk, as revenues are
not affected by the economic cycles. This applies more to a company like Julphar, as
the company is into selling of out of patent products, in turn alleviating the volatility
further. Moreover, pharmaceutical business in general has low operating leverage,
though sensitivity of profit on that count would be relatively higher for the company,
due to its high working capital intensity. However, Julphar has very low financial
leverage too (D/E ratio-0.11), which lessens the risk. The company faces a few
non-systematic risks, mainly due to the scenario in which it operates in.
Though UAE is considered as an open economy, industries like pharmaceuticals are
protected to a large extent from low cost imports. Compliance with WTO
regulations would force UAE to allow free imports from all the other countries,
Also, the product patent regime would force the company to stop marketing
While Saudi Arabia, the largest market for Julphar, is unlikely to comply with WTO
regulation in the medium term, any other changes in the protectionist policies of the
country would have an impact on the company’s performance.
The company operates in a regulated pricing environment in many of its markets,
which would probably change in the future.
Apart from the risk due to regulatory changes, the company also face the risk of
potential defaults by customers in foreign markets. This assumes significance as it
operates at high level of receivables, as already mentioned. Global Research - U.A.E
We performed a discounted cash flow valuation (DCF) of the company to arrive at a fair
value. The DCF valuation used here is based on the free cash flow to firm (FCFF)
defined as cash flow left over after covering capital expenditure and working capital
needs. The FCFF is estimated for the period 2004 to 2007, and 2007 is the terminal year.
In the terminal year, all FCFF is capitalised. The FCFF and terminal value are then
discounted back to present value on the basis of discounting factor. The summation of all
the present values of future cash flows and terminal value is the firm value of Julphar.
Value of the long term debt is deducted to arrive at the equity value of Julphar.
The key assumptions made for the DCF are given below.
We have assumed a risk-free rate of 4.25%, which is taken in line with the
discounting rate in Kuwait, considering that both the countries have the same risk
ratings, incidentally the best among the GCC countries.
We have assumed an equity risk premium of 5.75%. This is lower than average, and
is meant to capture the steady and low-risk nature of the pharmaceutical business.
A beta of 1 is taken for Julphar to reflect the market risk appropriately.
Based on the above assumptions and the CAPM model, the cost of equity for
Cost of debt is assumed to be 4.5% based on cost of financing in the past. It would seldom
require to rely on long-term financing, as most of the investments are already made.
Major Assumptions on growth:
We expect the pharmaceutical industry in GCC markets to exhibit low double digit
volume growth rates. The company is expected to grow in line with the industry.
assumed based onthe operations in a
However, we expect the prices of ‘out of patent’ products to decline, as a result of
increasing competition consequent to the opening up of the economy. The price
decline is assumed to be drastic in UAE, as the country is the most likely to be
opened up soon. Assumed price decline in Saudi Arabia is much milder, as we
expect the country to continue following the protectionist policies.
We expect the Iraq market to grow at very high rates from ‘05. An improving
geopolitical situation would boost sales. Privatisation and opening up of the market
should facilitate Julphar to increase its market share in the country.
We have assumed a terminal growth rate of 5%. Pharmaceutical sector world over has
been growing at above average growth rates for many years. Growth in GCC markets is
bound to be even higher in the future, due to the relatively higher population growth.
Global Research - U.A.E Major assumptions on margins:
The contribution from higher margin under-licence manufacturing is expected to
Owing to the change in sources of supply, we expect the cost of raw materials to
Distribution expenses are expected to come down in ’05 owing to the expected
reduction in distribution margins in UAE. It would be reduced to 42% of the
primary sales value from the current 63%, according to the management.
Reduction of distribution margins would affect the revenues of JDS, the retail
Assumptions on asset size:
As stated before, the company seems to have already made the investments for the
future. We expect the fixed asset turnover ratios to improve in the years to come.
Receivable level for the company is extraordinarily high, and we expect this to
come down gradually owing to the regional diversification.
Table 10: DCF valuation Global Research - U.A.E
Since Julphar is a high growth company, it should be noted that most of the value is
back ended or in other words captured in the terminal value. This renders the fair value
highly sensitive to the terminal assumptions on growth, margins and asset turnover.
Table 11: Sensitivity analysis Relative valuation: There are no other companies of similar size in the UAE for the
valuations to be compared with. Given below is the comparison with few of the larger
Table 12: Valuations of major pharmaceutical companies in the region Source: company reports, www.zawya.com, Global research*Current prices and profit and sale in ’03 are considered**SPIMACO not considered as it is an outlier
The abnormally high figure for SPIMACO is due to the halving of its profits in ’03. In the
case of the companies in Egypt and Jordan, business models are different from that of
Julphar’s, as these companies primarily cater to the respective domestic markets unlike
Julphar, which depends on exports. However, based on the comparison, it can be seen that
Julphar’s P/E is higher than the industry average. Based on the estimated earnings in ’04
Julphar is trading at a P/E of 18.3. However, since P/Es based on the trailing four quarters are
not available for all the companies, and since the companies have divergent characteristics, we
have not taken relative valuations into account in our final recommendation. Julphar is doing business in a market conducive to high growth. The company has the advantage of being an early mover in the region, and the brand image Global Research - U.A.E that it has made for itself. Going forward, the company is bound to face more competition, consequent to the opening up of the GCC economies, which would necessitate better cost efficiency for survival. The fact that the company currently relies on high cost European imports reflects the scope of profitability improvement. An expected increase in the contribution of revenues from under-licence manufacturing would also augment the company’s margins. Further, Julphar is in a position to derive the fruits of the investments made in the last few years. We believe that the current share price does not fully capture the upsides. Based on the fair value of AED4.03 arrived through DCF valuation, which is 15.1% higher than the current price of AED3.50, we recommend a ‘buy’ on the share. Global Research - U.A.E Account: opriation Global Research - Kuwait
ferences from translation of foreign currencies
ALANCE SHEET otal Liabilities Assets: Liabilities:
Proposed board of Director's remuneration
Global Research - U.A.E (64,471) (53,286) (51,169) (20,804) (18,754) inancing acti vided by operating acti o
xchange rate change on cash and cash equi
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Add: Proceeds from disposal of plant and equipment
Add: Proceeds from medium term bank loans
Less: Settlements of medium term bank loans
Net cash fr Global Research - Kuwait aluation er ratios v itability erage Ratios vidend pay Ratios used f
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researches. Only the relevant disclosures which apply to this particular research has been mentioned
in the table below under the heading of disclosure. Disclosure Checklist
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