Pharma Distribution M&A Opportunity

The regulation is delegated by the Ministry of Health to the Department for drug & medical equipment which is responsible for the examination of quality, efficiency / safety of drugs imported, state registration, licensing in the pharmaceutical market, inspection and certification. Typically licenses are valid and renewed after five years. Overall, it is ill-regulated and requires significant local know-how (barriers to entry).

“Pharmaceutical business is very profitable, yet in order to ensure uninterrupted quality drugs in the necessary quantities, additional investments are required”, the majority owner of Neman, Mr.Artykbayev was reported saying, eyeing a 50% market share with only limited resources.

Neman was established in 1995, and has since been the leading pharma distributor in Kyrgyzstan for a quarter of a century. Apart from the capital, it has regional representatives in Osh, Jalalabat, Issyk-Kul and Talas with warehouses and retail stores. It also has consignment warehouses of three large multinationals from Switzerland, Turkey and Kazakhstan.

From 1997, Neman is in the medical equipment distribution business with a local consultancy for installation & maintenance. It is a major line of its business, supplying both state and private facilities.

The company probably retains a 25-30% market share and employs more than 500 people directly. Its distribution is approximately evenly split into wholesale and retail contribution. Whereby it operates an interesting retail business model having both own and ‘franchised’ pharmacies, at a ratio of about 30-to-100 outlets across the country.

Neman should be operating at gross margins of around 20% and net profit levels of around 7%. With a countrywide distribution model- warehousing, materials handling & packaging- are well structured; so is payment collection given the large number of ‘independent’ pharmacists under the umbrella.

Unlike many other market leaders in peer countries, the company has not ventured into production after a successful distribution coverage, and this could be an untapped opportunity: For example, Aidan Farm, a pharmaceutical factory on an area of 4.5ha, initially built for military effort in Afghanistan, with the production line non-operational for almost 20 years (tablets, capsules, liquids, powders, ointments. 43 drugs used to be on repertoire – with 10 potentially profitable). Business potential to be mostly in packaging & production of syrups and other liquids, or as hub for Indian companies looking at Central Asia. Unresolved legal / ownership / debt issues, put a red flag over a potential deal ($5-20mil?), but someone with a grit could possibly pull it off for mutual stakeholder satisfaction.

Neman owns some real estate (30+ outlets, warehouses & offices), should have reasonable debt levels and strong / predictable cash flows. Active financial institutions can finance the growth of such relatively large companies as Neman, but the interest rates remain relatively high. Neman’s logistics capacities across the country could be used for a wider range of FMCG or other products, given its foothold in the five major regions of the country. It could have succession issues and may be up for sale!? 

 

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