Pharma Distribution M&A Opportunity

An estimated 15-20% of pharma products are sold illegally in the country, a similar estimate to that of Kyrgyzstan pharma market.

Mongolia’s pharmaceuticals sector has doubled over the last decade, from about $60mil to about $100mil, depending on the definition. This translates to +/-$30 per capita, still leaving a significant upside to catch up to comparable peers. So for example this in line where neighbouring Kazakhstan @ $32/cap was 12 years ago.

All in line with pharma consumption being very much related to increasing living standards, whereby health consciousness translates to a stronger demand for preventive medicine, food supplements and vitamins.

Currently, Mongolian drug consumption is still very much a developing world type, with the top five categories being antibiotics, digestives, cardiovascular, neurotropic & respiratory medicines.

There are seven government bodies or agencies involved in the pharma market regulation, which can be viewed as relatively lenient compared to some peer countries. The following functions and/or periodic (re)licensing / review / approval: licensing of manufacturing, licensing of importation, licensing of wholesale, licensing of retail, product assessment and registration, GMP Inspection, inspection of distribution channels, import control, quality control of products, control of medicines promotion& advertising, price control for the essential list, generic substitution, control of prescribing, technical elements (standards, norms, guidelines, procedures).

Monos is a family business started by brother and sister Luvsan in 1990, as a small pharma & cosmetics workshop producing skin treatment creams, powders and solutions for respiratory diseases using local herbal ingredients.

Being a pharmacologist by training, educated in the former USSR, the brother was an industry insider having worked for the Pharmaceuticals Institute and MEIC, a former state import & distribution monopoly.

It has diversified into other sectors over the last decade but with pharmaceuticals still at its heart. With 1,600 employees and 30 businesses, the group as a whole is a significant contributor to employment and state taxes.

Monos operates a nationwide wholesale & distribution network, and a pharmacy chain (mainly in Ulaanbaatar and Central Mongolia). It also has a number of drug-, cosmetic- & health-foods-making facilities, which manufacture approx.100 types of medicines including 30 own brands. The retail chain has 90 pharmacy stores, a roughly equivalent amount to the incumbent competitor.

Mr. Luvsan / Monos won a number of state awards including for scientific research on kidneys and immune booster development. Given that the country relies on 80% of its drug consumption from imports, a rare event is that its own brand Nefromon is exported to Russia since 2014. Today the business has a pharma academy and medical research centres for bolstering innovation and future growth. 

Production technology, WHO GMP-compliant and financed by the EBRD, allows for manufacturing of plain tablets, coated tablets, galen, capsules, powder, pills, cream, talcum powder, liquid, extract & syrup.

Monos’ pharmaceutical market share is probably at about a third of what is estimated to be just about a $100mil total pharma market, depending on the definition. Whereby being a straight-out leader in local production, which in total accounts for less than 20% of pharmaceutical demand in the country; a joint co-leader in wholesale with the sate MEIC; and a top player in the fragmented retail space.

Probably operating at a consolidated pharma EBITDA of 15-20%, where profitability from better to worse goes from own production to drug wholesale to retail outlets.

Given Mongolia’s landlocked status & relative isolation, its harsh winters with related seasonality, and high import dependence coupled with relative unfavourable supplier terms given the size of the production & overall significance in world markets- pharma business should have a longer asset conversion cycle than some comparable peer countries.

Managing working capital where a lot of cash is tied up, and in particular inventory turnover, is of great importance for its distribution units. At perceived volumes, modernised facilities and installed ERP, inventory days-on-hand should probably aim at (+/-): 100 days for the main warehouse, with logistics sub-points & city outlets at around 25 days, while areas outside Ulaanbaatar should be allowed up to 75 days.

The company should be well bankable (strong fixed asset base, reasonable net debt, predictable & growing cash flow, etc.), if it did not get too playful with the non-core businesses, and should be easily able to organically operate solely with the local financial institutions. It also does not look like that Monos has potential problems with succession, as it remains largely an extended family affair. On the other hand, it could have going public potential.!?

 

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