afrinvest pharmaceutical & healthcare sector update

8/7/2019 Afrinvest Pharmaceutical & Healthcare Sector Update

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Nigerian Healthcare & PharmaceuticalsSector Update

January 2011


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Healthcare/Pharmaceuticals Sector

Healthcare in Nigeria The provision of healthcare in Nigeria is the responsibility of all three tiers

of government. The federal government's role is centered primarily around

the formulation and implementation of broad healthcare policy as well as

the management of teaching hospitals (tertiary healthcare). The state

governments manage various general hospitals (secondary healthcare)

while local governments are tasked with the provision of primary

healthcare services in the form of dispensaries and clinics. Nigerias

pharmaceuticals sector is regulated by the National Agency for Food and

Drug Administration and Control (NAFDAC).

In the last five decades, the Nigerian health sector has remained grossly

underdeveloped, despite seeming better off than other African peers.

Healthcare delivery in Nigeria is characterized by inefficient budget

execution, inadequate funding, poor service quality and a shortage of

qualified personnel essential to the delivery of public health services.

Despite modest increases in healthcare budgetary allocation,

improvements to key health indicators have been rather limited. Nigerias

health indices remain amongst the poorest in the world. As of 2009, life

expectancy was estimated at 47.7 years, while infant mortality rate was 75

per 1000 live births. The countrys maternal mortality rate deteriorated

from 800 to 1,100 per 100,000 live births between 2000 and 2010. High

infant and child mortality/morbidity rates are the effects of poor

sanitation, low income and other determinants of poverty through theoccurrence of infectious diseases such as malaria, HIV/AIDs, TB, diarrhoea

and cholera. Poverty is widespread with over 70.0% of the population

living below the poverty line, with an ever widening gap between the rich

and the poor.

The absence of effective methods of addressing the healthcare needs of

the poor and underserved populations (mainly in rural areas) as well as the

low levels of government expenditure (currently averaging 5.4% of the

total budget since 2008) have contributed to the nations dismal health

statistics. Other indicators show that only about 10.0% of Nigerians have

access to essential drugs, with a workforce estimated at 4 physicians to

every 10,000 people. Worse still, the level of healthcare for such chronic

conditions as hypertension, diabetes and arthritis prevalent in ageing

populations is grossly insufficient.

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Nigerian Healthcare & Pharmaceuticals SectorUpdate


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Chart 3: 2010 Life Expectancy at Birth Nigeria vs Others Chart 4: 2010 Life Expectancy at Birth Developed Countries

Source: WHO, Afrinvest Research

8174

81 80 83

68

80 78

0

10

20

30

40

50

60

70

80

90

Can

ada

China

Fra

nce

Germ

any

Japan

Ru

ssia

UK

USA


47 4951 53

55 5760

6469 71

7379

0

10

20

30

40

50

60

70

80

90

Nigeria

CAR

Cameroon

C

ongo

South

Africa

Kenya

G

hana

India

Algeria

Mo

rocco

Brazil

Chile

2

Chart 1: 1990 Life Expectancy at Birth Nigeria vs. Others


4651

55 58 5860 60 63

65 66 6772

0

10

20

3040

50

60

70

80

Nigeria

CAR

Cameroon

Ghana

India

Congo

Kenya

South

Africa

Morocco

Algeria

Brazil

Chile


77

68

77

75

79

69

7675

62

64

66

68

70

72

74

76

78

80

Canada

China

France

Germany

Japan

Russia

UK

USA

Chart 2: 1990 Life Expectancy at Birth Developed Countries

Years Years

Years Years

3 4 6 8 1121 22

67 6976

128144

186

0

40

80

120

160

200

Japan

France

UK

USA

Russia

China

Brazil

SouthAfrica

India

Ghana

Kenya

Liberia

Nigeria

Chart 5: Estimated Under 5 Mortality Rate in 2008


3 3 5 59

18 18

48 51 52

81

96 100

0

2040

60

80

100

120

Japan

France

UK

USA

Russia

China

Brazil

SouthAfrica

Ghana

India

Kenya

Nigeria

Liberia

Chart 6: Infant mortality rate Per 1000 Live Births 2008



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Malaria is a major health problem in Nigeria, as the country accounts for as

much as a quarter of the total malaria burden in Africa. Malaria is

responsible for about 60.0% of all clinic attendances and accounts for

approximately 20.0% of childhood mortality and 11.0% of maternalmortality cases in Nigeria. The key challenges facing malaria control

include inadequate provision of anti-malaria drugs and the use of

preventive measures such as insecticide-treated nets, a dearth of technical

skills/competence, infrastructure for managing the storage and distribution

of large quantities of medicines, insufficient human capital, high cost of

service delivery at sub-national levels, lack of proper/efficient

management structures and capacity at state and local government levels

and inadequate funding. There have however been renewed efforts aimed

at controlling malaria such as the targeted use of Artemisinin-based

Combination Therapies (ACTs, a more effective treatment), encouraging

the widespread use of insecticidal nets and indoor residual insecticide

sprays to combat the vector, mosquitoes.

Estimates by the Federal Ministry of Health indicate that approximately 3.0

million people were living with HIV/AIDS in Nigeria in 2009, with a total of

192,000 deaths attributed to the disease. One of the most significant social

and economic impacts of HIV/AIDS is the ever increasing number of AIDS

orphans, which was estimated at 2.1million in 2008 and 2.2million in 2009.The Nigerian government has however shown considerable commitment to

the fight against HIV/AIDS. Through the HIV/AIDS governing body, the

National Agency for the Control of Aids (NACA), government has

articulated policies which influence every area of the nations response to

the HIV/AIDS scourge. The revised HIV/AIDS policy is a result of broad

consultations with various relevant stakeholders such as civil society

organizations, government ministries and parastatals, development

partners, donor agencies and community based organizations.

The National Health Policy emphasizes the importance of adequate health

care to social and economic development and acknowledges primary

healthcare as the foundation of Nigerias healthcare system. Over the last

few years, there has been an increase in government spending directed

towards providing new facilities mainly at the primary healthcare level.

Nigerias Disease Burden

HIV/AIDS

Malaria

3

Cholera


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Over the years, Nigeria has maintained a high incidence of Wild Poliovirus

(WPV) cases due to persistently low levels of immunization in children. In

2008, Nigeria reported 798 polio cases, the highest number in the world.

Reported polio cases however decreased to 388 in 2009 (24% of global

cases), reaching an all-time low during the first half of 2010, with onlythree reported cases. In 2009 - 2010, the increased involvement of

traditional, religious and political leaders aided the acceptance of

vaccination and implementation of high-quality supplementary

immunization activity. In June 2010, the Centers for Disease Control and

Prevention reported a significant drop in polio cases in Nigeria. Improved

poliovirus surveillance and immediate immunization responses to new

cases are critical factors in bringing an end to the occurrence of the virus.

According to the WHO 2010 World Health Statistics Report, the number of

incidences of TB fell marginally from 311 to 300 cases per 100,000 persons

between 2007 and 2008. Nigeria, a country of about 150.0 million people,

ranks amongst the top 5 of 22 countries with the highest incidences of TB

with some 100,000 recorded deaths annually. An analysis of the

distribution pattern of TB reveals a high level of concentration around

densely populated communities, with Lagos having the highest number of

recorded cases in the country. Major challenges to the reduction of the TB

burden include human resource constraints, poor coordination of various

efforts, ineffective resource management and existing significant funding

gaps.

Tuberculosis

4

Polio

19%

0%

20%

16%

8%

8%

6%

2%

17%

1%3%

HIV/AIDS

Diarrhoea

Measles

Malaria

Pneumonia

Prematurity

Birth asphyxia

Neonatal sepsis

Congenital abnormalities

Other diseases

Injuries

Chart 7: Distribution of Causes of Death in Children < 5 years in Nigeria 2008



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The National Health Policy emphasizes the importance of adequate health

care to social and economic development and acknowledges primary

healthcare as the foundation of Nigerias healthcare system. Over the last

few years, there has been an increase in government spending directed

towards providing new facilities mainly at the primary healthcare level.However, most health facilities still lack modern medical equipment.

Healthcare facilities are often staffed by a few highly skilled often

inadequately remunerated professionals and endure frequent drug

scarcities resulting in the continued dependence on secondary and tertiary

health care institutions. In spite of the fact that government-funded

primary health care facilities constitute the vast majority of medical

facilities in Nigeria, the private sector still provides most of the secondary

healthcare services while most Nigerians continue to depend on outof

pocket expenditure for meeting their healthcare needs.

According to the WHO 2010 statistics report, the total expenditure on

health care as a percentage of GDP was 6.6% in 2007, up from 4.6% in

2000. Despite the country's profile as one of the worlds developing

economies, over a decade of sustained democratic governance and the

governments economic reforms, the health care sector remains critically

underdeveloped and continues to suffer neglect, while other sectors such

as defence, oil and gas, Niger Delta and security have received better

government attention. In contrast, the governments of Ghana and South

Africa allocated over 10.0% of their total annual expenditure to their

healthcare sectors.

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Funding


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There have been several attempts at reforming the health sector in Nigeria,

centered around developing institutional capacity and accessibility to

public health services. One of the more notable initiatives aimed at

addressing the issue of qualitative healthcare delivery was the creation of

the National Health Insurance Scheme (NHIS). The NHIS was signed into law

in May 1999 by the Obasanjo administration but actually took off in 2005.

It was aimed at complementing sources of financing for the health sector

and improving access to health care for the majority of Nigerians.

The NHIS was designed to mirror practices of health insurance schemes in

more developed countries such as the United States of America and the

United Kingdom. Its objectives upon inception were to:

Ensure that all Nigerians have access to quality healthcare services and

protect families from colossal medical bills;

Ensure impartial distribution of healthcare costs among different social

strata;

Sustain a high standard of healthcare delivery;

Ensure efficiency in healthcare services;

Improve and harness private sector participation in the provision of

healthcare services;

6

35.0

16.8 18.5

78.6

6.3

27.7

40.0

12.6

47.2

3.6

30.8

0

10

20

30

40

50

60

70

80

90

Power

Tran

sport

H

ealth

Agriculture

W

ater

Reso

urces

Education

Works

Niger

Delta

FCTA

PoliceA

ffairs

TotalBudget

Average

Chart 8: HY 2010 Budget Implementation Various Sectors

Source: Federal Ministry Of Finance


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Ensure adequate distribution of health facilities within the Federation;

Ensure the availability of funds to the health sector for improved

services.

Despite its noble intentions, limited progress has been made regarding the

adoption of the scheme which, for the most part, remains limited to public

sector employees. As most Nigerians still depend on out-of-pocket

spending for meeting their healthcare needs, there are concerns regarding

the governments ability to manage such complex schemes, given its track

record on other similar public schemes, such as the National Housing Fund.

In retrospect, Afrinvest Research is of the opinion that the original goals of

the NHIS may have been somewhat ambitious, given the current state of

the countrys primary healthcare system. This is due to the lack of a

comprehensive approach to the formulation and implementation of

healthcare administration to aid the development rather than the

adoption of a system of primary health care.

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The pharmaceutical industry in Nigeria began in 1957 with the

establishment of the first pharmacy in Lagos. At the time, the

pharmaceuticals business primarily involved the distribution of drugs by

representatives of different multinational drug manufacturing companiespresent in Nigeria such as Beecham, May & Baker, Pfizer and Glaxo. This

was followed by the establishment of manufacturing plants by some of

these multinationals who thereafter scaled up their operations following

the end of the Nigeria-Biafra civil war and the onset of the oil boom in the

early 1970s. These companies were completely owned and controlled by

foreigners, with no indigenous participation. The indigenization policy of

1978 ushered in the next phase of development in the industry, forcing the

multinational companies into selling a minimum 60.0% equity stake to

Nigerians. This was followed by the establishment of indigenous

pharmaceutical manufacturing companies both by individuals and the

government. Between 1980 and 1982, there was an increase in the local

production of drugs from 5.0% to 20.0% of total demand, thereby

impacting economic growth positively and presenting many individuals

with investment opportunities.

The chronic dependence on importation of finished goods, following the

oil boom, had a catastrophic effect on the economy and ultimately the

pharmaceutical industry. The introduction of the notorious import licenses(which covered drug imports) also impacted the industry negatively as

these licenses were not issued based on merit or technical competence. This

resulted in the sidelining of genuine manufacturers, importers and

pharmacists who then had to repurchase these licenses (often at a

premium). As a result, the Nigerian market was flooded with fake,

counterfeit and substandard drugs. During this period however, there was

an increase in the number of indigenous manufacturers though local

capacity for the production of the most basic of raw materials for

manufacturing pharmaceuticals remained grossly underdeveloped. In morerecent times, there has been a measure of respite in the industry due to;

the amendment of the Essential Drugs List (EDL) Decree, the abolition of

the import licensing system and Value Added Tax (VAT) on pharmaceutical

products, in addition to the reduction of tariffs on raw materials.

Furthermore, the unrelenting campaign by NAFDAC in the war against

counterfeit, fake and substandard drugs has greatly impacted the industry.

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Nigerias Pharmaceuticals Sector


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The sector can be classified based on product type, as well as by

manufacturer location (local manufacturers versus foreign importers).

Over-the-Counter (OTC) drugs are easier to manufacture and account for

larger volumes albeit, with thinner margins in a more competitive market

space. Ethicals on the other hand are, in most cases, products of years ofResearch and Development (R&D) and are estimated to have only a 20.0%

market share of the Nigerian market but with much wider margins. Large

multinational corporations currently dominate the ethicals segment of the

market. Imported drugs however account for an estimated 65.0% of

market size. According to data from the Pharmaceuticals Manufacturers

Group of the Manufacturers Association of Nigeria (PMG-MAN), the local

market of pharmaceutical producers (accounting for an estimated 35.0% of

market size) is a highly fragmented one. The industry consists of 128

registered local pharmaceutical manufacturing companies, 292 registered

importers, 724 registered distributors, as well as a large number of

unregulated manufacturing, importing and distribution businesses. The

size of this unregulated market is difficult to accurately quantify as these

operators do not make returns to industry associations or regulatory

bodies.

The Nigerian pharmaceuticals sector has consistently been underutilized

(from a capacity perspective) over the past few decades as a result of

widespread counterfeiting, infrastructural challenges and corruption,

despite evident demand for effective drugs. In spite of the substantial

growth potential within the pharmaceutical and healthcare industry, the

elements of risk and uncertainty that currently subsist, limit international

interest/investment in the sector. The government has demonstrated its

willingness to make the country self-sufficient in terms of drug

production, by restricting imports through partial regulatory regimes and

tackling counterfeits.

There are 2 main layers in the production of pharmaceutical products in

Nigeria. These include (i. manufacturing and ii. packaging/repackaging) of

drugs, predominantly done by multi-nationals and a few indigenous drug

companies. These multinational organizations are also involved in the

wholesale distribution of pharmaceuticals, while the indigenous

wholesalers and retailers concentrate on sales to consumers. The retailers

mainly consist of pharmacies and patent medicine stores that dispense

both over-the-counter as well as prescription drugs, amongst others.

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Overview


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It is important to note that most of the companies in the

pharmaceuticals sector function primarily as importers, distributors or

retailers for international brands. By extension, Nigerias health services fall

under the control of Western countries (Britain, USA and France) as well as

some Asian countries (India, China and Indonesia). This could have seriousimplications as economic and socio-political developments in these

countries could directly or indirectly impact prices, availability and

affordability of drugs for Nigerian consumers. The Nigerian pharmaceutical

industry is made up of 86 local manufacturers who collectively produce less

than 30.0% of Nigerias pharmaceutical needs. A major reason for the

underutilization of local pharmaceutical capacity is the increased

competition by imported products from countries such as China and India.

Access to essential medicines is fundamental to the realization of the

Millennium Development Goals (MDGs). Despite governments noble

intentions, poor availability, high cost and irrational use of essential

medicines continue to plague the pharmaceuticals sector. Efficient

provision of essential drugs depends on appropriate selection,

quantification, procurement, quality and storage, distribution, human

resources and information management.

Reports indicate an uncoordinated approach to the management of drugs

between various stakeholders, especially the government and aid

organizations. This has resulted in the poor management and procurement

of drugs by the Ministry of Health as it makes use of inadequate

procedures in the selection of drugs, despite the awareness of the national

Essential Drugs List (EDL). This lack of synergy between the governments

procurement procedures and the efficient use of the EDL in meeting the

actual pharmaceutical needs of the country has led to the overstocking of

certain drugs. Bulk procurement of drugs without proper negotiation,

geared towards optimizing the benefits of economies of scale, has also led

to higher costs of drugs relative to other countries. Drugs are also procured

without having mapped out effective distribution plans, thus resulting in

the delivery of drugs with short shelf lives.

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Overview


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Nigerias pharmaceutical market is considered one of the smallest in the

Middle East and African region. It is dominated by a few large

organizations predominantly involved in the importation and distribution

of internationally recognized brands, production and distribution of

consumer goods and consumer health products. Most domesticpharmaceutical companies and health care providers find it extremely

difficult to compete internationally which is evident in their generally low

levels of investment in research and development. Reasons for their

inability to compete include; inadequate government funding, low drug

expenditure, poor infrastructural development, insufficient facilities to

meet the demand for health care, the absence of an adequate regulatory

environment, insufficient foreign investment due to low confidence on

growth prospects, dearth of professional and technical competence in the

research and formulation of complex drugs. High levels of inequality

within the social system also play a part as low income earners are the

highest users of medical and pharmaceutical care. There is also a high level

competition from low-cost generic drug producers in the emerging Asia

markets and the prevalence of fake and counterfeit drugs especially in the

rural areas.

The makeup of Nigerias disease burden should provide economic

opportunities within the market in the areas of Antiretroviral (ARVs),

Artemisinin-based Combination Therapy (ACT) and vaccines in the

continuous battle against HIV/AIDS, Malaria, TB and Polio. However, the

current health profile of the country suggests a huge, though largely

unmet, demand for drugs and medical care. This in turn presents various

opportunities for the development of the market and individual producers

providing a large customer base. The federal governments restructuring of

NAFDAC in view of its past successes has moderately improved

confidence in the sectors reform. NAFDACs determined efforts at

reducing the prevalence of counterfeit and substandard drugs has

recorded some levels of success, with the agency being regarded as one ofthe most effective and influential government agencies since Nigeria

returned to civilian rule. Governments increased awareness and budgetary

allocations should have a positive effect on the industry, as it aims to

achieve its 4th and 5th Millennium Development Goals which are to reduce

child mortality rate among children and reduce maternal mortality rate by

75.0% by the year 2015.

11

Stunted Growth

Opportunities


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Since its inception in 2002, Nigeria has been granted approximately

US$500.0 million by the Global Fund (a multilateral financing organization

for health with a focus on Malaria, HIV/AIDS and TB) and has recently

made a voluntarily contribution to the fund to the tune of US$10.0 million,

bringing its total contributions to US$30.0 million. The organizationsAffordable Medicine Facility-malaria (AMFm) scheme aims to slash the

price of Artemesinin-based Combination Therapies (ACTs) by providing

large quantities of highly subsidized ACTs. This poses a considerable risk for

local manufacturers as none of the locally produced ACTs has been selected

to be part of this 2 year program in which up to 95.0% of the costs of these

drugs will be subsidized. The supposed local companies that have been

selected are actually multinational entities who have established

companies within the country. The absence of indigenously manufactured

ACTs on the list of accepted drugs underscores the inability of the domestic

pharmaceutical industry to compete internationally. The main reason

behind the non-inclusion of locally manufactured ACTs in the scheme is

down to their exclusion from the WHO list of pre-qualified drugs despite

the fact that some of these medications have been certified by the same

organization.

Afrinvest Researchs coverage of the pharmaceuticals industry is based on

production capacity, asset base and market capitalization of the listed

equities on the Nigerian Stock Exchange. In our view, the key listed players

in this market space are GlaxoSmithKline (GSK), May & Baker and Fidson

Healthcare (a fairly new addition to the listed healthcare companies). Most

companies within the sector achieved negative sales growth in 2009,

cascading down to dismal bottom line numbers with few exceptions (GSK

and Fidson). This is largely due to unsuccessful forays into the

consumer goods market and inadequate working capital management as a

result of funding gaps necessary for capacity upgrades in addition to the

difficult operating conditions. Overall, the sectors growth has been limited

(Afrinvest Research estimates 2.6% in 2009), with a few players chasing the

expensive and difficult to attain WHO pre-qualification, putting pressure

on working capital positions.

Further analysis of the balance sheet of these companies reveals that

majority of the sector participants are considerably leveraged, with a large

dependence on short term funding without significant capital raising

activity throughout the year.

12

Unhealthy Competition

Sector Performance & Outlook


14/19


An analysis of operating and valuation statistics remains less than

encouraging, reflecting our view on the state of the countrys healthcare

industry despite huge market opportunities. In comparison to 2009, the

sector performed considerably better on the NSE in 2010 appreciating by

19.1% in 2010 relative to 18.9% increase in the NSE All Share Index (NSEASI). This was largely due to the price appreciation movements in May &

Baker, Fidson and GSK by 52.3%, 71.9% and 16.1% respectively.

13

80.0

90.0

100.0

110.0

120.0

130.0

140.0

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Sector

NSE ASI

Chart 9: 2010 Performance of Healthcare Companies Chart 10: NSE ASI vs. Healthcare/Pharmaceutical Sector 2010

Source: Afrinvest Research, NSE Source: Afrinvest Research, NSE

Rebased. Jan 04, 2010=100

71.9

52.3

19.1

18.9

16.1

2.8

-4.8

-13.9

-14.2

-18.0

-29.3

-40.0 -20.0 0.0 20.0 40.0 60.0 80.0

Fidson

May & Baker

Sector

NSE ASI

GSK

Evans

Ekocorp

Pharma-Deko

Morison

Union Diagnostic

Neimeth


15/19

Healthcare/Pharmaceuticals Sector14

Price TSO (MM) Market Cap EV EBITDA FYA EBITDA 1YF

CompanyLatest Audited

Accounts

31-Dec-10 Ordinary (Naira) (Naira) (Naira) (Naira)

Fidson 30-Jun-09 3.06 1,500.0 4,800.0 4,985.4 937.2 1,003.8

GSK 31-Dec-09 26.00 956.7 24,874.3 22,724.9 2,984.7 3,810.4

Neimeth 31-Mar-10 1.06 821.6 870.9 1,010.9 (218.0) 305.2

May & Baker 31-Dec-09 4.20 980.0 4,116.0 4,194.2 643.4 660.9

Evans 31-Dec-08 1.10 486.5 535.1 1,432.4 113.5 363.6

Source: Afrinvest Research, NSE, Company Annual Accounts

EPS EV/Sales EV/EBITDA Price / Book Value P/E

Company FYA 1YR E FYA 1 YR F FYA 1 YR F FYA 1 YR F Trailing 1 YR F

Fidson 0.29 0.36 1.0x 0.9x 5.3x 5.0x 1.0x 0.9x 11.2x 8.8x

GSK 1.78 2.34 1.5x 1.3x 7.6x 6.0x 3.5x 2.9x 14.6x 11.1x

Neimeth (0.55) 0.19 0.5x 0.5x N/M 3.3x 0.9x 0.8x N/M 5.5x

May & Baker 0.33 0.71 0.9x 0.9x 6.5x 3.5x 1.6x 1.2x 12.7x 5.9x

Evans (1.05) (0.08) 0.3x 0.3x 12.6x 3.9x 1.7x 1.8x N/M N/M

Mean 1.0x 0.9x 6.5x 4.4x 1.7x 1.5x 12.8x 8.6x

Median 1.0x 0.9x 5.9x 4.2x 1.3x 1.1x 11.9x 7.4x

Source: Afrinvest Research, NSE, Company Annual Accounts

Table 1: Trading & Valuation Statistics Healthcare /Pharmaceuticals Sector, (Naira in MM, Except Where Noted)

Table 2: Trading & Valuation Statistics Healthcare /Pharmaceuticals Sector


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0.0

50.0

100.0

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200.0

250.0

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

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Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Sector

NSE ASI

Fidson

New Kid On The Block

Fidson Healthcare Plc commenced operations in 2002 and was listed on the Nigerian Stock

Exchange in June 2008. The company is parent to Fidson Products Limited (FPL), a wholly

owned subsidiary and a conduit for the companys diversification into the consumer goods

market. FPL produces a handful of unique consumer goods such as absorbent materials,

tissues, diapers and hair removal cream. The companys pharmaceutical product range

includes antibiotics, vitamin supplements, generics, ACTs, ARTs antidepressants and

dermatological creams.

Just Above Par

In 2009, there was a decrease in the companys bio-science and generics business lines, while

receiving increased contributions from their specialties and general goods businesses. Fidsons

performance in 2009 was encouraging (given the difficult operating environment), growing

sales by 11.5% and increasing EBITDA by 6.9%. In 2009, EBITDA and EBIT margins were

consistent at 18.7% and 16.2% respectively, above the industry average. However, in its more

recently published Q3 March 2010 results, there was a reduction in sales (-1.4%) with a

marginal 1.3% growth in earnings. Margins remained consistent at 13.7% and 9.3% (pre and

post tax), implying successful cost control measures, although we believe sales growth during

the period was restricted due to ineffective marketing and distribution strategies.

We Remain Overweight on Fidson

The companys share price performance was impressive last year (YTD 71.9% to 31st December

2010) owing to its more favorable trading liquidity than some sector peers. Based on a trailing

and forward P/E of 10.1x and 9.1x and EV/EBITDA of 4.8x and 4.9x, we expect its share price to

settle around the N3.89 mark in twelve months, implying a 34.0% potential upside to its

current trading price. While we await its FY 2010 results, we are optimistic on Fidson, in light

of recent plans to setup the countrys first Biotech facility, supported by its own range of

consumer healthcare brands, generics, anti-malarial prescriptions, ARVs and Nigerias huge

healthcare demands.

Chart 11: Fidson Healthcare Versus Sector and NSE (LTM Price Performance)

Source: Afrinvest Research

Market Data

Price Range (Low/High) 1.86 - 3.70

Price Performance % (YTD) 71.9

Share Price (Dec 31, 2010) 3.06

Shares Outstanding (m) 1,500.0

Market Cap (Nm) 4,590.0

Market Cap (US$m) 30.6

Avg Daily Value (Nm) 3.9

Avg Daily Value (US$'m) 0.03

Avg Daily Vol (Nm) 1.4

Adjusted Prices, Rebased. Jan 04, 2010=100

Year Ended, June 30 2009 2010F

Sales (Nm) 5,019.8 5,270.8

Profit After Tax (Nm) 429.1 486.2

Earnings per Share (Kobo) 0.29 0.32

Dividend per Share (Kobo) 0.22 0.24

Sales Growth (%) 11.5 5.0

PAT Growth (%) 126.7 13.3

ROE (%) 1.9 2.0

Dividend Yield (%) 9.9 11.0

Company Data

Valuations

EV/Sales (x) 0.9

EV/EBIT (x) 6.1

EV/EBITDA (x) 5.0

Working Capital/Sales (%) 36.4

Capex/EBITDA (%) 126.9

DCF Value (N) 2.41

Fidson Healthcare Nigeria Plc

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80.0

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150.0

Jan-10

Feb-10

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Jun-10

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Dec-10

Sector

NSE ASI

GSK

Leading the Pack..

GSK remains Nigerias largest manufacturer of consumer healthcare and pharmaceutical

products and has been operating in the country since 1972 prior to its listing on the NSE in

1977. GSK is the result of a merger between SmithKline Beecham Limited and Glaxo Wellcome

in 2000. The company has a strong market presence and well established pharmaceutical and

consumer healthcare brands such as Panadol, Ribena, lucozade, Macleans, Ampiclox, Amoxil

and Halfan.

..with Consistent Earnings Growth.

GSKs performance in 2009 reaffirmed its position as the market leader, growing sales and

earnings (EBITDA) substantially (considering the tough economic conditions) by 19.2% and

29.7% respectively. Similarly, margins for the period under review also improved, as both EBIT

and EBITDA margins increased to 16.6% and 20.1% respectively from 14.8% and 18.3% in

2008. There has been consistent growth in top line to Q3 September 2010 as a result of

increased marketing and distribution efforts. The introduction of new products to its

consumer health and pharmaceutical portfolio has also helped in fortifying its brand strength

and consolidating its market share. The most recent quarterly earnings results for Q3 2010

show an improved performance in comparison to the equivalent period in 2009. Sales grew by

12.6% while profits increased marginally by 1.2%, although pre-tax margins declined from

21.0% to 18.9%.

Expected to Maintain Sector Dominance.

GSK trades at trailing P/E of 16.0 times and at a discount to our DCF value estimate of N29.89.

Based on a forward P/E of 11.6x and EV/EBITDA 6.4x, we estimate a 12 month price target of

N34.00, representing an 18.5% upside potential and maintain our BUY recommendation on

the stock. Going forward we believe GSK will continue to dominate the sector by taking

advantage of financial, technical, technological, scientific and professional assistance from

GSK worldwide. We are positive on the companys future earnings potential and believe its

dividend payment will be sustained to FY 10.

Chart 12: GSK Versus Sector and NSE (LTM Price Performance)



GlaxoSmithKline Consumer Nigeria Plc

Market Data


Price Performance % (YTD) 16.1


Shares Outstanding (m) 956.7




Avg Daily Value (US$'m) 0.05


Valuations

EV/Sales (x) 1.5

EV/EBIT (x) 9.2

EV/EBITDA (x) 7.6



DCF Value (N) 29.18

Company Data


Sales (Nm) 14,952.4 17,174.9

Profit After Tax (Nm) 1,701.8 2,240.7

Earnings per Share (Kobo) 1.78 2.34

Dividend per Share (Kobo) 0.75 1.05

Sales Growth (%) 19.2 14.9

PAT Growth (%) 33.2 31.7

ROE (%) 25.9 28.7

Dividend Yield (%) 2.63 3.70

16


18/19


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Jan-10

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Dec-10

Sector

NSE ASI

MAY & BAKER

First on the scene..

May & Baker is the oldest pharmaceutical manufacturer in Nigeria, founded in 1944 as a

trading outpost for May & Baker Limited UK. The company manufactures and distributes

pharmaceuticals and vaccines and consumer products. The company began an expansion

strategy which commenced with the development of its own branded products, followed by

the introduction of Lily table water and Mimee Noodles. This was supported by its acquisition

of 51.0% stake in Biovaccines Nigeria limited in partnership with the federal government.

Wading Through Muddy Waters

Over the past 5 years, May & Baker has achieved a steady growth of 23.2% (CAGR). In 2009,

the companys sales dropped by 15.0% as a result of negative contributions from its poor

performing food lines and public sector operations. In addition, EBIT & EBITDA also decreased

by 7.0% and 3.6% despite some improvement in margins. Further analysis raises concerns over

the firms debt and working capital positions which have been exacerbated due to efforts to

complete construction of a WHO prequalified production plant, while attempting to revive its

agreement with the federal government over Biovaccines.

Cautious Optimism

Based on the companys performance up to Q3 10, we express concerns on the companys

outlook as the it currently trades at a premium of 14.8% to our intrinsic valuation of N3.66.

We remain cautiously optimistic on the stock as we are skeptical of the added benefits of the

long awaited production facility and the reactivation of its agreement with the government

over Biovaccines. In the interim, we value May & Baker at a forward PE of 11.3x and an

EV/EBITDA of 6.5x translating to a target price of N4.52 thereby placing a NEUTRAL

recommendation on the stock. We note that management has disclosed plans to improve its

marketing and distribution efforts with incursions into new geographical locations and

markets as well as its interests in the Nutraceuticals and insecticide-treated mosquito netmarket segment. We expect this to translate to enhanced earnings and market share in the

near term.

Chart 13: May & Baker Versus Sector and NSE (LTM Price Performance)



May & Baker Nigeria Plc

Market Data


Price Performance (YTD, %) 52.3


Shares Outstanding (m) 980.0




Avg Daily Value (US$ '000) 0.03


Company Data


Sales (Nm) 4,604.5 4,696.5

Profit After Tax (Nm) 232.1 699.5

Earnings per Share (Kobo)* 0.27 0.71

Dividend per Share (Kobo) - -

Sales Growth (%) -15.4 2.0

PAT Growth (%) -44.5 201.4

ROE (%) 8.6 19.7

Dividend Yield (%) - -

17

Valuations

EV/Sales (x) 1.0

EV/EBIT (x) 9.8

EV/EBITDA (x) 6.9



DCF Value (N) 3.66

Adjusted EPS*


19/19

Healthcare/Pharmaceuticals Sector8

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