saudi pharmaceutical industries & medical appliances ... · strong growth across markets boosts...

of 27 April 2010

Saudi Pharmaceutical Industries & Medical Appliances Corporation

Saudi Pharmaceutical Industries & Medical Appliances CorporationSPIMACO: Inside Look and Vision

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Research DepartmentCompany Reports May 2010

of 27 May 2010


Asset Management Department

Brokerage and Investment Centers DivisionResearch Division

Head of Funds DistributionKhaled Al-Sorayea+966 1 [email protected]

Assistant General Manager for Brokerage and Investment CentersAla’a Al-Yousef+966 1 [email protected]

Division ManagerAbdullah Alawi+966 2 [email protected]

Regional ManagerCentral RegionSultan Al-Mutawa+966 1 [email protected]

Assistant ManagerSaleh Al-Quati+966 2 [email protected]

Regional ManagerWest and South RegionsAbdullah Al-Misbahi+966 2 [email protected]

OfficerWael Sindi+966 2 [email protected]

Area Manager - QassimAbdullah Al-Rahit+966 6 [email protected]

Area Manager - Eastern ProvinceMaher Al-Ajaji+966 3 [email protected]

International, GCC, and Corporate Stock Department ManagerAmjad Subeih+966 2 [email protected]

Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), License No. 07076-37

of 27 May 2010


Executive Summary 1

Investment Risks 2

Valuation Summary 3DCF Valuation 3Sensitivity Analysis 4Valuation under Different Scenarios 5Comparative Valuation 6Blended Valuation 6

1. Rising incidence of chronic diseases to propel demand 7Changing lifestyles leading to growth in chronic diseases 7High life expectancy, birth rates lift demand for specific services 7Healthcare infrastructure density well below global benchmarks 7Government spending on healthcare begins to rise 8Demand for private healthcare is also growing 9Mandatory health insurance to accelerate demand further 9Pharmaceutical sector’s prospects look promising 9

2. Leading position in GCC’s largest pharmaceutical market 10SPIMACO – largest local producer in the Saudi market 1045% drugs patented, SPIMACO banks on KSA’s largest pharma sub-segment 11

3. Expansion in new markets to augment sales growth 12Varied product portfolio with widespread geographic presence 12Launch of new products… 12…and partnerships with leading pharmaceutical companies 13Expansion into MENA and Europe to aid sales growth 13

4. Focus on improving productivity can drive margin expansion 14Renovation of production facility likely to translate into cost savings 14API facility could end dependence on raw material imports 14Significant room for margin have expansion 15

5. 2009 financial performance 16Strong growth across markets boosts revenues; better margins lift bottom-line 16Long cash conversion cycle; improvement in working capital management 16Low debt levels 171Q 10 Financial Performance: Stable Top-Line and Bottom-Line Growth 17

6. Company Overview 18Growth Strategy 18Product Offerings 18Shareholding Pattern 18Management 18

7. Financial Forecasts: Profitability to improve 19Income Statement 19Balance Sheet 21Cash Flow Statement 22

Table of Contents

of 22 May 2010



I n i t i a t i o n | K S A | P h a r m a c e u t i c a l s | M a y 2 0 1 0

Key informationReuters code: 2070.SEBloomberg code: SPIMACO ABCountry: Saudi ArabiaSector: PharmaceuticalsPrimary Listing: TASIM-Cap: SAR 2,619.8 mn52 Weeks H/L: SAR 37.60 / 28.13

Saudi Pharmaceutical Industries & Medical Appliances Corpora-tion (SPIMACO)

Established in 1986, SPIMACO is the second largest pharmaceutical company in Saudi Arabia.

SPIMACO derives almost 80% of its revenues from Saudi Arabia; its other target markets include GCC countries, MENA region and Sudan.

Rising incidence of chronic diseases in Saudi Arabia is driving demand for drugs treating these ailments. Moreover, expansion in the attractive MENA region and Europe bode well for sales growth. On the other hand, focus on enhancing profitability is driving margin improvement. Initiative to establish the first API facility in Saudi Arabia is encouraging.

Strong Demand Across End Markets to Drive Top-Line Growth

We initiate coverage on Saudi Pharmaceutical Industries and Medical Appliances

Corp. (SPIMACO) with a fair value of SAR45.2. This implies an upside potential

of 35.6% from current levels. We used a blended valuation approach based on

the DCF and comparative methods to value SPIMACO. Currently, the stock is

trading at a P/E multiple of 17.3x, in the midst of its two-year historical range of

11.53x-25.14x. We believe the company offers an attractive opportunity, given

the rising demand for drugs, both in its domestic market and in the MENA region.

SPIMACO’s push to explore high-growth markets and extend its product portfolio

both horizontally, with new additions, and vertically by innovating into new fields

of medicine further supports our optimism.

Increasing Prevalence of Chronic Diseases Driving Demand

Rapid changes in lifestyle, eating habits and in the social system of Saudi Arabia over the last few years have accelerated the spread of lifestyle-related chronic ailments, such as diabetes and cardiovascular diseases (CVD), mainly caused by obesity. Saudi Arabia ranks third in the list of most obese nations as well as in the number of people suffering from diabetes. Consequently, incidences of CVD-related deaths have increased, as diabetics and the obese are more susceptible to heart diseases. We expect these numbers to keep rising, creating strong demand for associated drugs. Additionally, the increase in life expectancy levels as well as birth rates and the resultant demographic changes are driving demand for medicines and specific services such as child-care and maternity facilities. The government’s increasing focus on developing domestic healthcare facilities and growing private sector participation are also expected to boost public spending. These factors, supported by the Business Monitor International (BMI) forecasts’ of Saudi pharma market to record a CAGR of 6.3% during 2009-14 to reach SAR14.1bn by 2014 buoys our optimism.

Strong Position in Attractive Domestic Market

SPIMACO accounts for the second-largest market share of 9.4% in the Saudi Arabian pharmaceutical market – largest in the GCC region – after GlaxoSmithKline (market share of 10.3%). Among local players, SPIMACO has the largest market share of 39.4%. This, we believe gives the company a significant competitive edge in capturing rising domestic demand, 82% of which are met by imports. Moreover, 45% of SPIMACO’s offerings are branded drugs, which command the largest market share of 80.8% in the Saudi pharmaceutical market.

Fair Value: SAR 45.2 Current Price: SAR 33.3Upside: 35.6%

Price Chart

Table 1: Key Financial and Valuation Data

Source : AlJazira Capital

0

175

140

105

70

35

Apr-08 Sep-08 Mar-09 Sep-09 Mar-100

SPIMACO TASI

All fig. in SAR mn unless specified 2008 2009 2010E 2011E 2012E 2013E 2014E

Sales 871.9 950.7 1,091.5 1,224.9 1,361.1 1,512.8 1,655.7

EBITDA 159.6 185.8 199.9 231.2 263.4 300.6 338.6

Net Income 128.3 154.8 171.4 201.7 232.6 268.4 304.8

EPS (SAR) 1.6 2.0 2.2 2.6 3.0 3.4 3.9

P/E 20.4x 16.9x 15.2x 13.0x 11.2x 9.7x 8.6x

ROE 6% 9% 7% 8% 9% 10% 11%

ROA 5% 7% 6% 7% 7% 8% 9%

of 22 May 2010


Expansion in New Markets, Product Launches to Augment Sales Growth

SPIMACO is consistently focusing on expanding into new markets as well as developing new products to tap growth opportunities. The company is currently present in 11 countries across the MENA region and is increasing its footprint there, notably in high-growth African markets. SPIMACO also plans to expand into Eastern Europe, which has a large generic market. That aside, the company is extending its product portfolio to treat the growing number of lifestyle-related diseases, including diabetes, blood pressure, CVD, and hypertension. Moreover, the company is also actively growing its branded drugs portfolio – the largest market in Saudi Arabia – by entering into new contracts with leading multinational pharmaceutical companies (such as Sanofi Aventis, Eli Lilly, Schering-Plough and GSK) to market their products in Saudi Arabia. We, therefore, expect SPIMACO to record strong top-line growth in the coming years as contributions from other parts of the Middle East and Africa grow.

Margins to Benefit from Upcoming API Facility

Heavy reliance on imports (90% of raw materials) due to unavailability of locally produced raw materials raises input costs of domestic producers, thereby suppressing their margins. Moreover, tight price controls by the Saudi government to keep healthcare costs under check add to margin pressure. SPIMACO, to overcome these bottlenecks, has entered into a joint venture to establish the first API (Active Pharmaceutical Ingredient) facility in Saudi Arabia which is expected to be operational in 2011. Although we expect SPIMACO’s margins to improve once this facility goes live, we continue to be conservative with our margin forecasts, given the tight price controls in Saudi Arabia.

Tight Price Controls Could Hurt Margins

As the Saudi government provides free medical facilities to its citizens and subsidized medicines to expatriates, it aggressively monitors healthcare costs by controlling drug prices. The government cut prices of around 1400 drugs in February 2008. Any additional price cuts administered by the government could significantly hurt margins of local producers.

Delay in the API Facility

SPIMACO joint venture API facility is expected to be operational in 2011. Any delay has the potential to significantly affect our margin assumptions for SPIMACO.

Increasing Presence of International Players in Local Market

SPIMACO is the largest domestic producer in the Saudi Arabian market and the second largest overall after GlaxoSmithKline. Although the company commands significant market share in the domestic market, intensifying competition from multinationals can eat into its share. This is because international players compete on margins, have better technical know-how, a huge financial base, and a wide product portfolio. Any loss of market share contrary to our assumptions could result in SPIMACO missing our revenue projections.

Investment Risks

The company is currently present in 11 countries across the MENA region and is increasing its footprint there, notably in high-growth African markets. SPIMACO also plans to expand into Eastern Europe, which has a large generic market.

Heavy reliance on imports (90% of raw materials) raises input costs of domestic producers, thereby suppressing their margins.

The government cut prices of around 1400 drugs in February 2008.

SPIMACO is the largest domestic producer in the Saudi Arabian market and the second largest overall after GlaxoSmithKline.

of 22 May 2010


We initiate coverage on SPIMACO with a fair value estimate of SAR45.2. This implies an upside potential of 35.6% from the current price level. Our fair value estimate is derived from a weighted average of Discounted Cash Flow (DCF) and peer comparison-based methods. We have assigned 60% weightage to DCF and 40% to the comparables-based method.

DCF Valuation

Our DCF model generated an enterprise value of SAR1.7bn. This implies an equity value of SAR3.5bn (SAR45.2 per share) after adjusting for net debt, long-term investments and minority interests. The DCF-generated fair value is based on a five-year explicit forecast period (FY10-14E) and a terminal value. The terminal value assumes an average growth

rate of 2.5%.

All figures in SAR Mn, unless specified 2008 2009 2010E 2011E 2012E 2013E 2014E

Sales 872 951 1,092 1,225 1,361 1,513 1,656

EBITDA 160 186 200 231 263 301 339

Margins (%) 18.3% 19.5% 18.3% 18.9% 19.4% 19.9% 20.4%

EBIT 130 156 172 202 233 269 306

Margins (%) 14.9% 16.4% 15.8% 16.5% 17.1% 17.8% 18.5%

Net income 128 155 171 202 233 268 305

Margins (%) 14.7% 16.3% 15.7% 16.5% 17.1% 17.7% 18.4%

Cash from operations 109 124 123 154 181 226 246

Total assets 1,937 2,722 2,978 3,095 3,225 3,381 3,541

Shareholder’s equity 1,397 2,178 2,420 2,488 2,567 2,658 2,762

Total liabilities & equity 1,937 2,722 2,978 3,095 3,225 3,381 3,541

Free Cash Flow Analysis (FCF)

NOPLAT 104 131 162 190 219 253 287

Depreciation and amortization 30 30 28 29 30 31 33

Change in working capital (60) (67) (82) (82) (87) (80) (99)

Capex (14) (22) (27) (31) (34) (38) (41)

FCF 59 72 80 106 128 166 179

FCF consideration 100% 100% 100% 100% 100%

Discount factor 0.93 0.83 0.74 0.67 0.60

PV of FCF 75 88 95 111 107

Sum of PV of FCF 475

Terminal value 2,009

PV of Terminal value 1,197

Enterprise value 1,672

Add: Net debt & others 1,874

Total equity value 3,546

Shares 78.4

Fair Value (SAR Per share) 45.2

WACC (%) 11.7%

Valuation Summary

Table 2: DCF Valuation, Key Financial Metrics

Source : Company data, AlJazira Capital

We initiate coverage on SPIMACO with a fair value estimate of SAR45.2. This implies an upside potential of 35.6% from the current price level.

Our DCF model generated an enterprise value of SAR1.7bn.

of 22 May 2010


Core Assumptions:

Financial Estimates

Revenues:

Revenues are expected to increase 14.8% YoY in FY10E. Thereafter, it is forecast to grow at an annual average growth rate of 11.0% over the period FY10-14E.

Margins:

We expect SPIMACO’s gross margins to expand to 44.8% in 2010 (it was 44.1% in FY09). We expect gross margins to average at 45.5% during FY10-14E, as the company benefits from the upcoming API facility. Yet, we are conservative on margin expansion due to tight price controls in Saudi Arabia.

Weighted Average Cost of Capital (WACC)

A WACC of 11.8% is based on the following assumptions:

Cost of Equity:

Cost of Equity of 11.8% assumes a risk-free rate of 3.7% (equivalent to the 10-year US treasury yield of 3.7% at present), risk premium of 6.8%, a beta of 1.00, and 1.3% towards additional risk associated with the country.

Cost of Debt: We arrived at the cost of debt by considering the interest rate on both short-term and long-term borrowings. We arrived at a post tax cost of debt of 1.8%.

Terminal Value

Terminal Value represents the present value of perpetuity free cash flows, growing at a conservative perpetual growth rate of 2.5%.

Sensitivity Analysis

As cost of capital and terminal growth rate assumptions form a core part of our DCF-based fair value, we have also performed a sensitivity analysis. The table below highlights the sensitivity of SPIMACO’s fair value estimate to changes in perpetual growth and cost of capital.

Table 3: Sensitivity Analysis

Term

inal

Gro

wth

Rat

e

Cost of Capital

9.7% 10.7% 11.7% 12.7% 13.7%

1.5% 48.74 45.87 43.57 41.69 40.12

2.0% 50.05 46.87 44.35 42.31 40.62

2.5% 51.53 47.98 45.21 42.99 41.17

3.0% 53.24 49.24 46.17 43.74 41.77

3.5% 55.23 50.68 47.25 44.57 42.43


Revenues are expected to increase 14.8% YoY in FY10E.

We expect SPIMACO’s gross margins to expand to 44.8% in 2010.

WACC of 11.8%, cost of equity of 11.8%, terminal value growing at a conservative perpetual growth rate of 2.5%.

of 22 May 2010


We further tested our core fundamental assumptions under two possible scenarios: Bull Case and Bear Case. These scenarios illustrate how sensitive our DCF-based fair value is to changes in key input variables. We chose costs, market share and WACC as three important variables.

Bull Case:In the Bull Case scenario, we have assumed that:

Market share would increase 2% in Saudi Arabia;Costs would decrease 5%; andWACC would decrease 1%.

This generated a fair value of SAR57.6, representing an upside of 72.9% to the current market price.

Bear Case:In this scenario, we have assumed that:

Market share would decrease 2% in Saudi Arabia;Costs would increase 10%; andWACC would increase by 1%.

This generated a fair value of SAR41.9, representing an upside of 25.8% to the current market value.

Table 4: Scenario Analysis

1.68 1.20 0.43 0.43

7.60

4.34

0

10

20

30

40

SA

R

50

60

70

DCF Bea

r cas

e

WACC incre

ase b

y 1%

Costs

increa

se by

5%

Market

Share

drop b

y 2%

DCF Bas

e Cas

e

Market

Share

increa

se by

2%

Costs

decre

ase b

y 5%

WACC decre

ase b

y 1%

DCF Bull

case

41.90

45.21

57.58


Valuation Under Different Scenarios

of 22 May 2010


Comparative Valuation

Blended Valuation

We have also used comparative valuation based on P/E and EV/EBITDA metrics to value SPIMACO relative to its peers in the region. Since SPIMACO derives its revenues from the MENA region, we considered Middle East-based pharmaceutical companies for our com-parative valuation. Moreover, we have included companies from similar business lines and with similar revenue base from emerging markets to make the valuation more comparable.

SPIMACO’s current TTM P/E and EV/EBITDA multiples are 17.3x and 17.6x, respectively. Both multiples are in the middle of the historical range of 11.53x-25.14x and 10.4x-24.2x, respectively, for the last eight quarters. We believe SPIMACO’s competitive position in its domestic market, as well as expansion in the MENA region, is expected to help the com-pany tap rising demand in these markets for pharmaceuticals. Moreover, product innovation and growing number of products in the branded drug segment – the largest market in Saudi Arabia – are further expected to support sales growth. This, coupled with improving mar-gins, is likely to increase SPIMACO’s profitability, going forward. Therefore, we believe its P/E and EV/EBITDA multiples to trade at a premium to industry multiples, going forward.

Based on P/E metrics, we derived a fair value of SAR45.7 per share. EV/EBITDA metrics yielded a fair value estimate of SAR44.4 per share.

Company CountryP/E EV/EBITDA

Current 2009 2010E Current 2009 2010E

Hikma Pharmaceuticals PLC UK 28.2x 25.0x 19.7x 16.5x 13.7x 11.4x

Egyptian Int’l Pharmaceutical Ind. Egypt 9.2x 8.0x 8.5x 6.4x 5.1x 5.1x

KYORIN Co., Ltd. Japan 11.4x 48.9x 11.9x 4.8x 6.6x 5.3x

Kissei Pharmaceutical Co.,Ltd. Japan 29.8x 54.5x 27.6x 60.1x 37.7x 29.3x

Kangmei Pharmaceutical Co., Ltd. China 53.2x 50.2x 36.4x 6.9x 7.9x 8.5x

Divi’s Laboratories Limited India 22.4x 21.7x 30.9x 11.5x 11.5x 15.8x

Adcock Ingram Holdings Limited South Africa 28.1x 13.0x 11.3x 18.2x 7.9x 7.4x

SPIMACO KSA 17.3x 12.9x 15.2x 17.6x 14.3x 13.3x

Peer average 25.0x 29.3x 20.2x 17.7x 13.1x 12.0x

Max 53.2x 54.5x 36.4x 60.1x 37.7x 29.3x

Min 9.2x 8.0x 8.5x 4.8x 5.1x 5.1x

SPIMACO KSA 17.3x 12.9x 15.2x 17.6x 14.3x 13.3x

We used a blended approach to derive the fair value for SPIMACO. We assigned a weightage of 60% to the DCF approach and 40% to relative valuation (20% each to P/E and EV/EBITDA metrics). Based on this, the fair value is estimated at SAR45.2 per share, implying an upside of 35.6% to the current market price.

Table 5: Comparative Valuation – P/BV

Source :Reuters, AlJazira Capital

Methodology Weights Fair Value (SAR) Weighted Average (SAR)DCF 60% 45.2 27.1

Comparables

P/E 20% 45.7 9.1

EV/EBITDA 20% 44.4 8.9

Weighted Average Fair Value (SAR) 45.2

Current Stock Price (SAR) 33.3

Upside/ (Downside) potential 35.6%


Table 6: Weighted Average Valuation Summary

SPIMACO’s current TTM P/E and EV/EBITDA multiples are 17.3x and 17.6x, respectively. Both multiples are in the middle of the historical range of 11.53x-25.14x and 10.4x-24.2x, respectively, for the last eight quarters.

of 22 May 2010


Changing Lifestyles Leading to Growth in Chronic Diseases

Growing disposable incomes in Saudi Arabia and the resultant rapid changes in lifestyle and food habits as well as in the social system have triggered a spurt in lifestyle-related ailments, including obesity, diabetes and cardiovascular diseases. These diseases now comprise a large part of Saudi Arabia’s epidemiological profile. According to WHO estimates, 36% of Saudi Arabia’s adult population was obese in 2008, ranking it third in the list of top ten obese nations. Obesity increases the risk of diabetes; Saudi Arabia was also ranked third in the top ten diabetic countries, with 16.7% of its total adult population suffering from the disease. WHO estimates the number of diabetes cases in Saudi Arabia to rise to 2.5mn by 2030.

Obesity and diabetes also increase the risk of cardiovascular diseases, a major cause of deaths in Saudi Arabia. According to WHO’s East Mediterranean regional office, two types of heart disease represent the top two causes of deaths in Saudi Arabia - ischemic heart disease (17% of total deaths) and hypertensive heart disease (9%), with heart strokes responsible for a further 4% of deaths. Overall, heart disease is directly responsible for 30% of total deaths in Saudi Arabia, with diabetes responsible for a further 5% of deaths. We expect the rising incidence of these diseases to create huge demand for drugs that are used in treating these ailments. BMI (Business Monitor International) estimates cardiovascular drug sales – account for the largest of around 18% of total pharmaceutical sales in Saudi Arabia – to expand at a CAGR of 5.5% during 2009-14.

Furthermore, lack of awareness of fatal diseases such as cancer, notably colon and breast cancer, is also resulting in treatment delays. To address this problem, the government is establishing infrastructure for the treatment of cancer. In Saudi Arabia, around 5000 people are diagnosed with cancer every year, most in the advanced stage. The prevalence of HIV/AIDs, although low, is also on the rise. According to government statistics, the number of reported HIV/AIDs cases was 12,000 at the start of 2007.

High Life Expectancy, Birth Rates Lift Demand for Specific Services

Saudi Arabia has the second highest life expectancy at birth of 76.3 years in the GCC region after Kuwait. Higher life expectancy is expected to increase the population of elderly people above the age of 65, thereby propelling demand for medical care and pharmaceuticals. Saudi Arabia’s growing young population due to high birth rates is driving demand for specific medical services, such as maternity and child-care. Saudi Arabia’s birth rate of 28.55 births per 1000 population is the second highest in the GCC region. This could increase demand for specific healthcare services and products, such as vaccinations and vitamin supplements. Moreover, growing awareness about maternity health facilities as reflected in higher number births attended by skilled medical staff, is also supporting demand for advanced maternity medical care. According to WHO (World Health Organization), births attended by skilled health personnel in Saudi Arabia increased to 96% in 2008 from 91% in 1999.

Healthcare Infrastructure Density Well Below Global Benchmarks

Saudi Arabia’s healthcare infrastructure density falls way below global standards. According to WHO (World Health Organization), the number of physicians per 10,000 population in Saudi Arabia is just 14, the lowest among GCC and global benchmarks, including the US and UK. The primary reasons for the poor state of Saudi Arabia’s healthcare infrastructure is the lack of participation from the private sector. Although government expenditure on health and social development has increased in absolute numbers, it has declined as a percentage of total expenditure from 8.7% in 2001 to 8.0% in 2006. Moreover, private sector contribution to health expenditure is very low compared to international standards. Of the total health expenditure, the private sector’s contribution is a low 23%. In contrast, private sector contributes as high as 54% in the US, 75% in India and 59% in China.

1. Rising Incidence of Chronic Diseases to Propel Demand

According to WHO estimates, 36% of Saudi Arabia’s adult population was obese in 2008, Saudi Arabia was ranked third in the top ten diabetic countries, with 16.7% of its total adult population suffering from the disease. WHO estimates the number of diabetes cases in Saudi Arabia to rise to 2.5mn by 2030.

Saudi Arabia has the second highest life expectancy at birth of 76.3 years in the GCC region after Kuwait.

According to WHO (World Health Organization), the number of physicians per 10,000, private sector contribution to health expenditure is very low compared to international standards, running at a low of 23% in contrast to 54% in the US, 75% in India and 59% in China.

of 22 May 2010


Government Spending on Healthcare Begins to Rise

The Saudi government is increasing its focus on improving the health infrastructure, realizing the need to address the growing incidence of chronic diseases and the sector’s importance in protecting the country’s economic growth prospects. Health expenditure as a percentage of total expenditure has increased from 8.0% in 2006 to 8.5% in 2009. Additionally, the health ministry aims to add 80 new hospitals by 2011. The Saudi government also announced in January 2008 to establish a SAR430mn advanced cancer treatment centre in Riyadh. Scarcity of trained medical staff is another hurdle faced by the sector, a gap that is currently being bridged by expatriates. The government, to address this problem, is encouraging its citizens to pursue the study of medicine; initiatives include specialized nursing courses reserved for Saudi women. Hence, private companies, including SPIMACO, that supply medicines to the Ministry of Health, stand to gain from increased public spending.

Chart 2: Health expenditure trend, 2001-2009

Source : SAMA

Chart 1: Density of physician and hospital beds, 2008 (per 10.000 people)

Source : World Health Organization (WHO)

14 14 17 17 18

23 26 26 27

22 22 19 20 19

39

25

31

27

0

5

10

15

20

25

30

35

40

45

Saudi Arabia UAE China Oman U.K. U.S.A.Kuwait Qatar Bahrain

Physicians Hospital Beds

7.5%

8.0%

8.5%

9.0%

9.5%

0

10

20

30

40

50

2001 2002 2003 2004 2005 2006 2007 2008 2009 Budgeted Saudi Government Expenditure on Health and Social Development

As a % of Total Expenditure

The Saudi government realizing the need to address the growing incidence of chronic diseases and the sector’s importance in protecting the country’s economic growth prospects. Health expenditure as a percentage of total expenditure has increased from 8.0% in 2006 to 8.5% in 2009. 80 new hospitals will be added by 2011. The Saudi government also announced in January 2008 to establish a SAR430mn advanced cancer treatment centre in Riyadh.

of 22 May 2010


Demand for Private Healthcare is Also Growing

Although the government has ambitious projects to develop local health facilities, bureaucracy, shortage of skilled personnel, and rising construction costs are leading to delays in implementation. Hence, the Saudi government is also encouraging public-private partnerships. The government has also approved loans for the construction of private hospitals. Demand for private healthcare is also expected to increase as rising incomes enable more people to access these services. Increase in expatriates is also expected to be a major demand booster for private healthcare, as foreigners are not eligible for free healthcare. Official figures place the number of expatriates at 6.5mn, but the real figure is likely to be higher if one factors in illegal immigration.

Mandatory Health Insurance to Accelerate Demand Further

In 2008, Saudi Arabia made private health insurance compulsory for all expatriates, a mandate that has been pushing up demand for private pharmaceutical companies. Moreover, the government has indicated that when this scheme is due for review (probably after three years since introduction), it may launch a national health insurance scheme for Saudi citizens which would be funded by the public and finance healthcare for Saudi nationals at public or private hospitals. If this plan materializes, it will unlock significant demand for medical facilities. However, as this plan is likely to take a few years to fructify, we expect the increase in expatriate workers to fuel healthcare demand for now.

Pharmaceutical Sector’s Prospects Look Promising

Given its huge demand potential, the Saudi Arabian healthcare sector offers attractive growth opportunities for pharmaceutical companies. Our optimism stems from various factors, including the spike in lifestyle-related diseases, rise in life expectancy levels, and the government’s increased focus on healthcare spending. We expect lifestyle-related diseases to emerge as a key demand driver for pharmaceutical companies in the coming years. Moreover, we are encouraged by the government’s renewed vigor in developing domestic medical facilities; government spending had declined to 2.0% of GDP in 2008 from 2.2% in 2007, due to the global financial meltdown. Separately, stringent government regulations acting as entry barriers for foreign multinationals enhance the ability of domestic pharmaceutical companies to leverage the period of rapid growth expected in the sector, in our view.

In 2008, Saudi Arabia made private health insurance compulsory for all expatriates, a mandate that has been pushing up demand for private pharmaceutical companies.

Demand for private healthcare is also expected to increase as rising incomes enable more people to access these services.

of 22 May 2010


SPIMACO – Largest Local Producer in The Saudi Market

Saudi Arabia accounts for about 65% of total pharmaceutical sales in the GCC region. Moreover, 82% of the Kingdom’s demand is met through imports, presenting a significant growth opportunity for domestic pharmaceutical companies. However, low investment in research & development due to the shortage of skilled personnel and the resultant lack of technical knowledge and inadequate infrastructure has resulted in the underdevelopment of the domestic pharmaceutical sector. Although greater R&D support will enable domestic companies to develop their own brands, this will take considerable time to materialize, given the scale and funding constraints. As a result, many local producers undertake the production of patented products by paying royalties to foreign companies and by manufacturing generics. Adopting the same strategy, SPIMACO, apart from manufacturing own products, produces patented products under agreement with patent holders.

The company commands the second largest market share of 9.4% in the Saudi Arabian pharmaceutical market after GlaxoSmithKline (market share of 10.3%). The company also is the largest player among domestic producers with around 39.4% market share. Sales within Saudi Arabia account for 81.44% of SPIMACO’s revenues, with other markets of the Middle East contributing 10.03%. The company’s ability to capitalize on the strong growth in the Saudi Arabian pharmaceutical market, as well as its focus on expanding into GCC and other Middle East markets and extending its product portfolio, helped SPIMACO record robust increase in revenues and earnings during 2004-2009. The company’s sales grew at a CAGR of 10.3% to SAR950.7mn, while net profit recorded a CAGR of 18.8% to SAR154.8mn during 2004-2009. SPIMACO’s strategy of expanding into high growth markets is adding to revenues as highlighted by the 15.3% increase in contribution from the North African market to 8.5% in 2009 from 7.4% in 2008. The Kingdom’s rapidly growing population and rising income levels are likely to propel demand for healthcare services, and we expect SPIMACO, with its strong market position, to be in a better position to tap the incremental demand.

2. Leading Position in GCC’s Largest Pharmaceutical Market

Chart 3: Market Share 2008

Source : Company Documents

0%

2%

4%

6%

8%

10%

12%

GSK SPIMACO Pfizer Tabuk Novartis Jamjoom Astra Julphar MSD Janssen

10.3%

9.4%

6.4%

3.9% 3.3% 3.2% 3.1% 3.1%

2.5% 2.5%

Saudi Arabia accounts for about 65% of total pharmaceutical sales in the GCC region. Moreover, 82% of the Kingdom’s demand is met through imports, presenting a significant growth opportunity for domestic pharmaceutical companies.

The company commands the second largest market share of 9.4% in the Saudi Arabian pharmaceutical market after GlaxoSmithKline (market share of 10.3%). The company also is the largest player among domestic producers with around 39.4% market share.

of 22 May 2010


Chart 4: Sales and Net Income: 2004 - 2009


45% Drugs Patented, SPIMACO Banks on KSA’s Largest Pharma Sub-Segment

Patented drugs account for 80.8% (according to Business Monitor International) of total pharmaceutical sales in Saudi Arabia, due to the high income levels and the consequent preference for high value drugs. This gives SPIMACO an added advantage, considering the large number of branded drugs offered by the company (45% of drugs are produced under license). However, the current regulatory regime does not support patented drugs due to rising health costs. This is because the prices of branded drugs are high in Saudi Arabia due to the heavy reliance on imports, thereby exposing it to currency fluctuations. The government, in February 2008, reduced prices of about 1,400 drugs. Going forward, patented drugs are expected to continue to dominate the Saudi Arabian market due to scarce demand for low cost drugs. Yet, market share of patented products, though largest, is expected to come down as branded generics are likely to gain traction due to generic-friendly government policies. Moreover, increase in domestic production, with higher government support for R&D activities, is also likely to lower the dependence on imported drugs.

65.5 96.1 105.0 121.9 128.3 154.8

-

150

300

450

600

750

900

1,050

2004 2005 2006 2007 2008 2009 Sales Net Income

582.5 648.9

727.8 797.7

871.9

950.7

Chart 5: Saudi pharmaceutical market by sub-sector, 2009

Generics 7.1%

Patented Drugs 81.3%

OTC Market 11.6%

Source : Business Monitor International (BMI)

However, the current regulatory regime does not support patented drugs due to rising health costs. This is because the prices of branded drugs are high in Saudi Arabia due to the heavy reliance on imports, thereby exposing it to currency fluctuations.

of 22 May 2010


Varied Product Portfolio with Widespread Geographic Presence

SPIMACO markets around 74 products across the KSA, GCC & MENA markets and Sudan, covering both the private and government sectors. The company’s revenue is split between: KSA market (81.44%), Middle East (10.03%) and other Arab countries and the North Africa region (8.53%). The company’s leading product areas include antibiotics, analgesics, vitamins, anti-rheumatics and cough/cold preparations. SPIMACO also is a market leader in sexual dysfunction medication through its drug SNAFI (32.4% market share); iron solutions with Fruzt (69.2%); and flu medication with Flutab (39.2%). The company also offers drugs for diabetes (Diatab, Formit, Glaze) and for hypertension (Capoten and Lustral), diseases that are on the rise in Saudi Arabia. Moreover, the company has in-licensing agreements with global pharmaceutical companies, including Sanofi Aventis, Eli Lilly, Schering-Plough and GSK.

Launch of New Products…

SPIMACO is constantly expanding and diversifying its product portfolio by including new products as well as by entering new areas of treatment. As of end of 2009, the company had 74 products under development and 32 under registration. In 2008, SPIMACO introduced a number of new products in the market, including Osteve tablets for treating Osteoporosis; Tovast in 10, 20, 40 ml tablets for cholesterol; Hymox syrup, an antibiotic for children in 200 and 400 ml syrup; and Glim for monitoring blood sugar. According to latest WHO (World Health Organization) database, around 44% of KSA’s female population and 26% of male population were classified as overweight, while around 5000 people died due to diabetes in 2004. Saudi Arabia is ranked third in top ten diabetic countries. Moreover, by 2030, WHO estimates the number of people suffering from diabetes will grow to 2.5mn from 0.89mn in 2000. During 2009, SPIMACO launched a new drug Paroxat, its first anti-depressant, and reintroduced its solution Lorinase. Considering the rising incidence of lifestyle-related diseases, including diabetes, CVD and obesity, we expect demand for SPIMACO’s products is to increase significantly, going forward.

Product name Launch year Treatment

Paroxat 30mg/20mg 2009 Depression & related symptoms

Lorinase (Re-introduction) 2009 Cough & cold

Flocazole Capsules 2009 Curing fungi infection

Trocon Capsules 2009 Curing fungi infection

Tovast (10/20/40 ml) 2008 Curing Cholesterol

Hymox syrup (200/400 ml) 2008 Children antibiotic

Glim 2008 Monitoring blood sugar

Osteve tablets 2008 Curing Osteoporosis

3. Expansion in New Markets to Augment Sales Growth

Table 7: New products


The company’s revenue is split between: KSA market (81.44%), Middle East (10.03%) and other Arab countries and the North Africa region (8.53%).

As of end of 2009, the company had 74 products under development and 32 under registration.

Around 5000 people died due to diabetes in 2004.

of 22 May 2010


…and Partnerships With Leading Pharmaceutical Companies

SPIMACO, by entering into collaborating agreements with leading foreign multinational pharmaceutical companies seeks to introduce foreign products into GCC markets by either manufacturing them after paying royalties or by importing them. This strategy has helped the company gain significant market share in KSA’s licensed products segment, given the huge demand for branded products. In 2009, SPIMACO signed a number of such agreements, including the one with MEDIS – the affiliate of ACTAVIS from Iceland – for the preparation of five products relevant to treating psychological disorders, hypertension, stomach ulcers, and asthma; an agreement with Swedish company MEDA for the distribution of five products for treating rheumatism through SPIMACO’s daughter company Arak; and an agreement with SANOFI for conducting clinical studies on the product Amaryl used for curing diabetes. It has also received approval from Scherring for marketing the Neorin product in the GCC region. Other prominent deals during the year included the one with Kyorin of Japan for the product URITOS used to treat involuntary urination, and a licensing pact for the product Than La

Expansion into MENA and Europe to Aid Sales Growth

SPIMACO plans to expand its operations in the Middle East and other international markets. The company is present in 13 countries across the MENA region and has announced plans to expand its foothold in Eastern Europe and North Africa. During 2009, the company signed sales agreements to distribute its products in Ukraine, Romania, and Ethiopia. Moreover, SPIMACO launched its Metaz Oint Cream in Sudan, and Rofenac-D Tab (one of its top selling drugs) in Algeria. Banking on its solid expansion drive, the company reported 16% YoY growth in total export revenues during 2009 compared to 14% YoY growth recorded in 2008. The company already exports its products to select Central African countries, including Sudan, and has recently appointed a new representative in Libya. SPIMACO’s push into the African region is also encouraging, given the size of the market and the presence of a large Arabic-speaking population. The limited presence of multinationals in this region also augurs well for SPIMACO’s sales growth. Eastern Europe too offers lucrative growth opportunities as a result of its large generic drug market supported by pro-generic government policies. The company is also focused on strengthening its position in existing markets. In 2009, SPIMACO introduced a group of antibiotic products in the markets of UAE, Kuwait and Lebanon. Furthermore, the company launched Proton 20mg tablet in the markets of Kuwait, Bahrain, Qatar, and Oman. SPIMACO also is employing an inorganic growth strategy as evident from its recent bid (January 2010) for an Egyptian peer, details of which are yet to be disclosed. If this deal materializes, it would offer the company an opportunity to expand into a 81.5mn-people strong market, three times bigger than Saudi Arabia. We expect SPIMACO’s expanding product portfolio, coupled with rising demand in domestic and international markets, to drive revenue growth, going forward.

We expect SPIMACO’s expanding product portfolio, coupled with rising demand in domestic and international markets, to drive revenue growth, going forward.

of 22 May 2010


In December 2009, SPIMACO raised SAR184mn through a rights issue, primarily to expand its production plant in Al-Qassim, increase the productivity of some of its lines, and establish a centre for pharmaceutical development and technical services.

SPIMACO is setting up CAD Middle East Pharmaceuticals Industries (CAD) – the first API (Active Pharmaceutical Ingredient) facility in Saudi Arabia - in which the company owns 25% stake.

Renovation of Production Facility Likely to Translate into Cost Savings

The company is adopting several measures to improve the productivity of its manufacturing plants either through renovation or expansion of production lines. In December 2009, SPIMACO raised SAR184mn through a rights issue, primarily to expand its production plant in Al-Qassim, increase the productivity of some of its lines, and establish a centre for pharmaceutical development and technical services. The funds raised will be utilized mainly to refurbish the production facilities. During 2008, SPIMACO, as part of its goal to enhance productivity, also hired a consulting firm to conduct a detailed study of its organizational structure. Backed by these initiatives, the company reduced costs at its department engaged in the production of liquids in 2009 by expanding production lines. Consequently, gross and net margins expanded to 44.1% and 16.3% in 2009 from 41.6% and 14.7% in 2008, respectively.

API Facility Could End Dependence on Raw Material Imports

Lack of adequate production of pharmaceutical raw materials in Saudi Arabia has resulted in local drug manufacturers relying heavily on imported raw materials. Saudi companies meet close to 90% of their raw material requirements through imports from France, Switzerland, Belgium, Germany and the United Kingdom. This pushes up cost of operations and lowers margins. To address this issue, SPIMACO is setting up CAD Middle East Pharmaceuticals Industries (CAD) – the first API (Active Pharmaceutical Ingredient) facility in Saudi Arabia - in which the company owns 25% stake. Phase 1 planning has been completed, and Phase 2 was scheduled to be completed by the fourth quarter 2009. SPIMACO, in latest annual report, expects CAD to be operational by 2011. Once functional, CAD is set to end the monopoly of foreign raw material suppliers by catering to the Kingdom as well as GCC.

4. Focus on Improving Productivity Can Drive Margin Expansion

Chart 6: Gross and Net Margin, 2004-2009 (%)

Source : Reuters

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

30.0%

33.0%

36.0%

39.0%

42.0%

45.0%

2004 2005 2006 2007 2008 2009

Net m

argi

n (%

)

Gros

s Mar

gin

mar

(%)

Gross Margin Net Margin

of 22 May 2010


Significant Room for Margin Expansion

High raw material cost means gross margins of Saudi and other Middle East companies have remained significantly below those of global pharmaceutical companies. Moreover, tight price controls further pressurize margins of private players. SPIMACO’s gross margin of 44.1% is the third lowest, while Hikma – its closest competitor operating mainly in the Saudi and Jordanian pharmaceutical markets – has the fourth lowest gross margin of 45%. Japanese (Kyorin & Kissei) and Egyptian (Pharco) pharmaceutical companies are better placed in terms of margins compared to SPIMACO. Hence, we believe the upcoming API facility will act as an important catalyst for margin growth. We, therefore, expect gross and net margins to improve post 2011 and reach 46% and 18% by the end of 2014. These are conservative estimates considering the controlled pricing environment in Saudi Arabia.

High raw material cost means gross margins of Saudi and other Middle East companies have remained significantly below those of global pharmaceutical companies.

Chart 7: Gross margin comparison, latest year end (%)

Source : Bloomberg

0%

10%

20%

30%

40%

50%

60%

70%

80%

Glaxo Sanofi Aventis

KISSEI KYORIN Pharco Novartis TEVA Adcock Hikma SPIMACO EIPI Divi's

75% 73%

63% 63%

54% 53% 53% 51%

45% 44%

38% 37%

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Strong domestic demand, as well as rising exports due to presence in high-growth markets, is driving revenue growth at SPIMACO.

Cost of sales increased 4.4% YoY to SAR531.1mn in 2009, lower than the growth in revenues. Consequently, SPIMACO’s gross margin expanded to 44.1% in 2009 from 41.6% in 2008.

The bottom-line expanded 20.7% YoY to SAR154.8mn in 2009, translating into a net margin of 16.3% compared to 14.7% in 2008.

SPIMACO has a long cash conversion cycle, mainly due to long days receivable and low inventory turnover.

Strong Growth Across Markets Boosts Revenues; Better Margins Lift Bottom-Line

SPIMACO’s sales grew 9.0% YoY to SAR950.7mn in 2009 (CAGR of 10.6% during FY04-08), driven mainly by increased sales across end markets. Sales in Saudi Arabia – contributing 81.4% to total sales – rose 7.6% YoY to SAR774.3mn in 2009. Sales to other Middle East markets – accounting for 10% of total sales – increased 8.3% YoY to SAR95.4mn, while sales from North Africa – 8.5% of total sales – grew the maximum 15.3% YoY to SAR81.1 mn during the year. Strong domestic demand, as well as rising exports due to presence in high-growth markets, is driving revenue growth at SPIMACO. Expansion into the MENA region, notably in Africa, is further supporting revenue growth. Extension of product portfolio with the inclusion of own products as well as branded drugs by signing contracts with leading multinational pharmaceutical companies is also adding to demand for the company’s products. Increased revenues, coupled with lower cost of sales as a percentage of revenues, led to robust bottom-line growth. Cost of sales increased 4.4% YoY to SAR531.1mn in 2009, lower than the growth in revenues. Consequently, SPIMACO’s gross margin expanded to 44.1% in 2009 from 41.6% in 2008. Therefore, the company’s gross profit grew 15.6% YoY to SAR419.6mn during the same period. Higher gross profits have translated into improved operating performance, with operating margins rising to 15.4% in 2009 from 12.9% a year ago. Resultantly, SPIMACO’s income from operations jumped 29.8% YoY to SAR146.1mn during 2009. However, the company’s investment income declined 8.7% YoY to SAR24.2mn in 2009. Consequently, the bottom-line expanded 20.7% YoY to SAR154.8mn in 2009, translating into a net margin of 16.3% compared to 14.7% in 2008.

Long Cash Conversion Cycle; Improvement in Working Capital Management

SPIMACO has a long cash conversion cycle, mainly due to long days receivable and low inventory turnover. Its cash cycle was 165 days during FY04-08, mainly due to very long receivable days, which ranged from 185-193 days during the same period. In contrast, SPIMACO’s days payable were 164-180 days during 2004-2008. Inventory days increased from 144 days in FY04 to 153 in FY08. However, inventories declined during 2009 to SAR195.2mn from SAR203.1mn in 2008, while days payable were also down to 151 from 180 in 2008. Days receivable too dropped to 182 days in 2009 from 193 days in 2008. The company is implementing a reserved production policy as well as improved purchasing policies in order to streamline its working capital management. Higher sales also contributed to the reduction in inventory levels in 2009. SPIMACO’s cash from operations increased to SAR124.4mn in 2009 from SAR109.3mn in 2008, mainly due to higher earnings during the year.

5. 2009 Financial Performance

All figures in SAR Mn, unless specified 2008 2009 YoY Change

Sales 871.9 950.7 9.0%

Cost of sales (509.0) (531.1) 4.4%

Gross Profit 363.0 419.6 15.6%

Selling, General & Administrative Expenses (250.5) (273.5) 9.2%

Operating Income 112.5 146.1 29.8%

Other income (Net) 28.3 24.5 -13.2

Share in Loss of Associates (0.5) (1.2) 140.7%

Profit before minority interest 140.3 169.4 20.8%

Minority partners' interests (8.1) (11.3) 39.2%

Expenses of Capital Increase & Other (3.9) (3.3) -15.2%

Net Income Before Zakat 128.3 154.8 20.7%

Normalized earnings per share (SAR) 1.6 4 1.97 20.7%

TAble 8: Income Statement: FY09


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Low Debt Levels

SPIMACO had no debt on its balance sheet until 2007, as the company relied more on equity financing. The company, however, raised SAR40mn in 2008 and another SAR20mn in 2009 in short Islamic financing, upping its total debt level to SAR60mn at the end of 2009. Yet, the company’s debt-equity ratio was just 2.8% in 2009. The company again paid SAR35mn of its short term Islamic financing during 1Q 10, bringing down the total level to SAR25 mn and highlighting its comfortable cash position The company also raised its capital to SAR784.4mn in January 2010 from SAR600mn at the end of 2009, further raising its equity base. Due to low debt levels, SPIMACO’s net debt was negative SAR227.9mn as of 1st Quarter 2010.

1Q 10 Financial Performance: Stable Top-Line and Bottom-Line Growth

SPIMACO’s revenue increased 6.4% YoY to reach SAR274.3 mn in 1Q 10 driven largely by growth across its end markets. The company continued to benefit from its expansion of product portfolio, particularly in MENA region. The stable top-line growth coupled with lower cost of sales as a percentage of revenues, resulted in to company reporting attractive growth in operating income. Cost of sales increased 4.1% YoY to SAR155.4mn in 1Q 10 lower than the growth in revenues. As a result, SPIMACO’s gross margin expanded to 43.3% in 1Q 10 from 42.1% in 1Q 09. Consequently, the company’s gross profit grew 9.5% YoY to SAR108.6mn during the quarter. Growth in gross profit was reflected into improved operating performance, with operating margins rising to 19.3% in 1Q 10 from 17.9% a year ago. Led by growth in operating income, net income grew6.1% YoY to SAR45.3mn during 1Q 10.

All figures in SAR Mn, unless specified 1Q 10 1Q 09 YOY changeSales 274.3 257.9 6.4%Cost of Revenues -155.4 -149.3 4.1%

Gross Profit 118.9 108.6 9.5%

Selling, General & Administrative expenses -66.0 -62.5 5.5%

Operating Income 52.9 46.1 14.9%Other income, net 0.4 -0.1 NM

Profit before minority interest 53.3 46.0 15.9%Minority partners’ interests -4.8 -3.1 53.6%

Net Income before Zakat 48.5 42.9 13.2%Net icome for the quarter 45.3 42.7 6.1%Normalized earnings per share (SAR) 0.58 0.71 -18.3%

Financial Ratios 2008 2009Profitability Ratios (%)Gross Profit Margin 41.6% 44.1%

Operating Margin 31.0% 34.8%

Net Profit Margin 14.7% 16.3%

Return on Average Assets 4.8% 6.6%

Return on Average Equity 6.0% 8.7%

Liquidity Ratios (x)Current Ratio 1.8 2.0

Turnover Ratios (Days)Inventory 153 140

Receivables Outstanding 193 182

Payables Outstanding 180 151

Operating Cycle 346 322

Cash Cycle 166 171

Capital StructureDebt/Equity (%) 2.9% 2.8%

TAble 9: Financial Ratios

TAble 9: Financial Ratios

Source : Company Documents, Aljazira Capital

Source : Zawya, Tadawul

SPIMACO’s net debt was negative SAR227.9mn as of 1st Quarter 2010.

SPIMACO’s revenue increased 6.4% YoY to reach SAR274.3 mn in 1Q 10 driven largely by growth across its end markets.

of 22 May 2010


6. Company Overview

Saudi Pharmaceutical Industries and Medical Appliances Corp. (SPIMACO), established in 1986, is the second largest pharmaceutical company in Saudi Arabia. The company, through its subsidiaries, markets around 74 products comprising 55 generics and 19 licensed pharmaceuticals throughout the MENA region. The company’s products include medicines in the field of analgesics, anti-rheumatics, antibiotics, antimicrobials, anti-tuberculosis, anti-allergic drugs, cough sedatives, expectorants, topical corticosteroids and medical appliances. The company’s production plant is located at Al Qassim Industrial City. The geographical breakdown of the company’s revenues is – Saudi Arabia (81.4% of total revenue), Other Middle East (10%) and North Africa (8.5%).

Growth Strategy

SPIMACO’s growth strategy is focused on expansion into new markets and on product portfolio extensions. The company’s geographic expansion drive has enabled it to grow its presence in the MENA region, with increasing contributions from the African region. International expansion is also on the cards with the company planning to enter Eastern Europe. In terms of product portfolio, SPIMACO is growing its product portfolio vertically by launching new products in existing fields and horizontally by entering into new treatment areas. Although research & development activity is limited by lack of government support and skilled personnel, we expect increased government support and improved infrastructure to help the company develop more own products.

Name Designation

Dr. Hussain M. Ghannam SPIMACO President

Mr. Fahad I. Al Khalaf Vice President – Marketing and Sales

Eng. Ahmed A. Alrebdi Vice President –Manufacturing and Technical Affairs

Mr. Fahad S. Al Rebdi General Manager of Support Services

Product Offerings

SPIMACO currently offers 74 products with 55 generics and 19 licensed brands. Prescription products form the largest part of its total product portfolio, followed by OTC products. Snafi (Sexual dysfunction), Rofenac (Antirheumatic & analgesic), Klavox (Respiratory tract infections), and Flutab (Cold & flu) are its leading products with high revenue contributions.

Shareholding Pattern

SPIMACO is listed on the Saudi Stock Exchange. Arab Company for Drug Industries and Medical Appliances owns 20% of total outstanding shares; public pension agency owns 13% while remaining 67% is with the public.

Chart 8: Product breakdown by segment

Anticeptic & Others 10%

Perscription 49%

OTC Market 15%


Chart 9: Current Shareholding Pattern

Arab Co. fo Drug Industries and Medical Appliances 20%

Public 67%

Public PensionAgency 13%

Source : Zawya

TAble 10: Management Team

Source : Zawya

of 22 May 2010


Income Statement

Revenues

We expect SPIMACO’s revenues to reach SAR1,665.7mn by FY14E, a CAGR of 11.0% (FY10E-14E), slightly higher than the 10.3% CAGR recorded in FY04-09. Revenues are expected to benefit from the company’s expansion drive, notably in North Africa. We expect revenue contributions from other Middle East markets and North Africa to increase. Revenues from Saudi Arabia are expected to expand at a CAGR of 8.0%, from other Middle East markets at 17.8%, and from North Africa at 25.5% during FY10E-14E. We expect North Africa to log the highest growth rate, led by the rising demand for generics there.

Costs/Margins

We expect gross margins to improve over our forecast period due to the company’s focus on improving productivity and the scheduled commissioning of the API facility in 2011. SPIMACO has raised capital to improve and expand its production facilities in order to improve efficiency and reduce costs, which, in turn, will improve margins. Moreover, the company’s initiative to establish the first API facility in Saudi Arabia is also expected to end its reliance on imported raw materials and help save on cost. Gross margins are forecast to reach 46.1% in 2014 from 44.1% in 2009. Operating and net margins are also expected to expand and reach 19.4% and 18.4%, respectively, in 2014. Yet, we are conservative about out margin forecasts due to tight price controls in the Kingdom.

Earnings per share

We expect SPIMACO’s EPS to increase from SAR1.97 in 2009 to SAR3.89 in 2014 as earnings expand with improvement in margins.

7. Financial Forecasts: Profitability to Improve

Chart 10: Revenue (SAR mn) and gross margins (%) (FY09E-14)

39%

40%

41%

42%

43%

44%

45%

46%

47%

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2008 2009 2010E 2011E 2012E 2013E 2014E

Sales Gross MarginSource : AlJazira Capital

We expect SPIMACO’s revenues to reach SAR1,665.7mn by FY14E, a CAGR of 11.0% (FY10E-14E).

Gross margins are forecast to reach 46.1% in 2014 from 44.1% in 2009.

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All figures in SAR Mn, unless specified 2008 2009 2010E 2011E 2012E

Sales 871.9 950.7 1,091.5 1,224.9 1,361.1

Cost of sales (509.0) (531.1) (602.4) (671.7) (742.1)

Gross Profit 363.0 419.6 489.1 553.2 619.0

SG&A Expenses (250.5) (273.5) (308.2) (340.5) (374.0)

Operating Income 112.5 146.1 181.0 212.7 245.1

Investment income 26.6 24.2 - - -

Share in loss of an associated company (0.5) (1.2) - - -

Other income 3.4 1.5 1.8 2.2 2.6

Financial charges (1.7) (1.2) (0.8) (0.8) (0.8)

Profit before minority interest 140.3 169.4 182.0 214.1 246.9

Minority partners’ interests in net income of a subsidiary (8.1) (11.3) (10.6) (12.4) (14.3)

Extraordinary accounts, Expenses of Capital Increase (3.9) (3.3) - - -

Net Income 128.3 154.8 171.4 201.7 232.6

Earnings per share (SAR) 2.6 2.6 2.2 2.6 3.0

Normalized earnings per share (SAR) 1.6 2.0 2.2 2.6 3.0

Source : Company Data. Aljazira Capital

Table 11: SPIMACO Income Statement (FY08-12E)

of 22 May 2010



Current AssetsCash & cash equivalents 62.7 106.6 252.9 261.2 277.6

Trade accounts receivable 461.0 473.6 553.2 620.8 689.9

Amounts due from related parties 3.7 18.7 21.5 24.1 26.8

Inventories 203.1 195.2 214.5 239.8 265.5

Prepayments and other receivables 27.3 30.3 32.7 36.7 40.8

Total Current Assets 757.6 824.4 1,074.9 1,182.7 1,300.5 Non-current assetsLong term trade receivables 10.7 10.8 13.5 15.2 16.9

Investments in available for sale securities 908.0 1,635.8 1,635.8 1,635.8 1,635.8

Investment in an associated company 11.5 10.3 10.3 10.3 10.3

Property, plant & equipment 204.9 206.5 214.3 224.6 237.4

Intangible assets 44.3 34.8 29.5 26.8 24.4

Total non-current assets 1,179.4 1,898.1 1,903.3 1,912.6 1,924.7 Total Assets 1,937.0 2,722.5 2,978.2 3,095.3 3,225.3 Current LiabilitiesAccounts payable and accruals 239.5 209.6 246.3 280.7 314.6

Amounts due to related parties 5.7 6.5 7.5 8.4 9.3

Zakat and income tax 13.9 16.7 19.4 22.5 26.2

Amounts due to shareholders 119.2 123.0 123.0 123.0 123.0

Short term islamic financing 40.0 60.0 25.0 25.0 25.0

Total Current Liabilities 418.4 415.8 421.1 459.6 498.1 Non-current liabilitiesEmployees’ terminal benefits 108.0 111.6 117.2 123.1 129.2

Total liabilities 526.4 527.4 538.3 582.6 627.3 Shareholder’s equityShare capital 600.0 600.0 784.4 784.4 784.4

Statutory reserve 300.0 300.0 300.0 300.0 300.0

Consensual reserve 63.1 70.8 79.4 89.5 101.1

General reserve 220.0 220.0 220.0 220.0 220.0

Retained earnings 184.6 230.3 279.5 337.6 404.8

Unrealized gains on revaluation of investments in available for sale securities

29.1 756.9 756.9 756.9 756.9

Minority interests 13.9 17.0 19.7 24.3 30.8

Total shareholder equity 1,410.7 2,195.1 2,439.9 2,512.7 2,598.0 Total liabilities & shareholder’s equity 1,937.0 2,722.5 2,978.2 3,095.3 3,225.3

Balance Sheet

Capital Expenditure Plans

We expect SPIMACO to incur maintenance capital expenditure (capex) every year besides expenses related to capacity expansions. We also expect the company to incur higher capex during our forecast period, given its focus on growth initiatives, namely entering new markets and expanding production facilities.

Debt Balance

Although the company had no debt on its balance sheet until 2007, it raised debt by issuing short-term Islamic financing during 2008 and 2009. Hence, as of FY09, SPIMACO had debt outstanding of SAR60mn and a corresponding debt-equity ratio of 2.8%. However, the company paid SAR35mn of its debt during 1Q 10 sighting its comfortable cash position. The company relies more on equity financing as indicated by the low debt levels. Moreover, the company has raised its capital to SAR784.4 in January 2010 through a rights issue, which we expect will further reduce the debt-equity ratio to 1.0% in 2011, with no additional debt expected to be raised during this period.


Table 12: SPIMACO Balance Sheet (FY08-12E)

The company relies more on equity financing as indicated by the low debt levels. The company has raised its capital to SAR784.4 in January 2010 through a rights issue, which we expect will further reduce the debt-equity ratio to 1.0% in 2011.

of 22 May 2010


Cash Flow Statement

Cash Flow from Operations

SPIMACO’s cash from operating activities is expected to grow steadily with consistent earnings growth and reach SAR245.6mn by FY14E.

Cash Flow from Investments

We expect SPIMACO’s investments in fixed assets to increase over our forecast period with higher investment on modernization of production facilities.

Cash Flow from Financing Activities

We expect SPIMACO to maintain a dividend payout ratio of 55% during the forecast period, in line with the historical average.


Cash flow from operating activities

Net income for the year 128.3 154.8 171.4 201.7 232.6

Depreciation & Amortization 29.6 29.7 27.7 28.8 30.0

Other non cash items 11.5 6.9 5.6 5.9 6.2

Change in working capital (60.1) (67.0) (81.9) (82.3) (87.4)

Total cash from operating activities 109.3 124.4 122.8 154.0 181.4

Cash flow from investing activities

Purchase of property, plant and equipment (14.5) (21.9) (27.3) (30.7) (34.1)

Proceeds from sale of property, plant and equipment 0.3 0.2 - - -

Net change in intangible assets (0.8) (0.1) (2.9) (5.7) (6.4)

Net change in investments (157.5) (0.0) (2.7) (1.7) (1.7)

Total cash from investing activities (172.5) (21.8) (32.9) (38.1) (42.1)

Cash flow from financing activities

Net change in amounts due to shareholders and proposed dividends (81.4) (80.4) (94.3) (110.9) (127.9)

Increase/decrease in loans 40.0 20.0 (35.0) - -

Increase in capital - - 184.4 - -

Minority interests (1.6) 3.1 2.7 4.6 6.5

Board of directors’ remuneration (1.4) (1.4) (1.4) (1.4) (1.4)

Total cash from financing activities (44.4) (58.7) 56.4 (107.7) 122.8)

Net cash change during the year (107.6) 43.9 146.3 8.2 16.4

Cash at the beginning of the year 170.3 62.7 106.6 252.9 261.2

Cash at the end of the year 62.7 106.6 252.9 261.2 277.6

Table 13: SPIMACO Cash Flow Statement (FY08-12E)


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COMPANY PROFILE

AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business.

For further queries about our special services, contact us at the toll free number 800 116 9999.

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Disclaimer

The information and opinions contained on this report is believed to be compiled from various reliable sources; however neither Aljazira Capital nor its mother, sister and coordinating companies can guarantee or assure the accuracy of the information provided. The purpose of this report is to offer a clear picture of the company, the sector or the national economy for our clients and the public, and not to offer recommendation to a certain stock or other Investment Assets. Based on that, we strongly advise clients to take other measurements and factors into account to make such decisions. To the maximum extent permitted by applicable law and regulation, Aljazira Capital, its mother, sister and coordinating companies shall not be liable for any loss that may arise from the use of this report or its contents. All opinions, numbers and statements on this report are subject to change without prior notice. No part of this report may be reproduced without the written permission of Aljazira Capital.

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