BF Biosciences Limited, a pharmaceutical company that was set up as a joint venture between Ferozsons Laboratories and Bago Group based out of Argentina, was chuffed early on Thursday by the response to its Initial Public Offering (IPO).
The company had set its book building on the 26th of September with institutional investors being bullish on the prospects of the company. The company was looking to raise Rs 1.375 billion from the process but saw the price being set at Rs 77 per share leading to an additional investment of Rs 1.93 billion. The subscription was carried out at a 40% premium compared to a planned rate of Rs 55 per share which is the highest price band allowed under the law.
Institutional investors and high-net-worth individuals have looked to oversubscribe their portion of the offering by subscribing 3.4 times the size of the shares offered. Based on the allocation of 18.75 million shares, there were bids of almost 64 million shares which can be valued at around Rs 5 billion based on the bids made. An interesting fact about the issue is that the face value of each share is Rs 3 per share whereas the norm is to have a face value of Rs 10.
The optimism and bullish trend of this will bleed into the general public as well as it would be expected that the investors will look to get their share in the 6.25 million shares on offer for them. So what exactly is BF Bioscience and why has it seen such an overwhelming response?
BF Biosciences is a pharmaceutical company that was set up as a joint venture between Ferozsons Laboratories and Bago Group based out of Argentina. After the issue has been carried out, Ferozsons will see its share go from 80% to 57.36% while Bago will see its holding fall from 20% to 14.34%. The remaining 28.3% will be owned by the public. The company is involved in the import, manufacturing and marketing of pharmaceutical products with an emphasis on liquid and lyophilized form of products. The company was set up in 2006 and has nearly 2 decades’ worth of experience and history behind it. The company has broken ground in terms of biotech manufacturing in the country and produces medicines for cancer, kidney disease, hepatitis C, nephrology, cardiology, gastroenterology and diabetes. Based in Raiwind Lahore, the company has been able to establish itself locally while also serving international markets simultaneously.
The biggest advantage the company has provided is the fact that it is able to manufacture many of the products locally that were being imported before. The company has jumped onto this opportunity as it provides a high margin, and consequently, low volume market niche. During 2020, the company saw an expansion of opportunities in the face of the pandemic and expanded its operations which have recently been completed. The company boasts the fact that its manufacturing facilities are state of the art and have been designed and installed in compliance with international standards and certification. This means the company is not only the first of its kind in terms of biotechnology but also the best facilities in the pharmaceutical sector.
In addition to the local market, the company has also exported to Indonesia, Belarus and Ukraine, and, pending certain certifications, the company expects to export further in the coming years. The company currently exports to Central American countries due to the presence of its partner Bago in this region. Ferozsons has also marketed these products in Far Eastern and Central Asian countries where it has an export market in. The next step would be to expand into Africa and Middle Eastern markets after the necessary approvals are obtained.
The plan for the company was to raise Rs 1.375 billion from the issue which was going to be used to procure additional plant and machinery in order to increase product base, obtain export-related certifications, and fund its working capital needs by purchasing raw materials. With an additional 40% being raised above the requirement, it can be expected that the company will have a further source of funds that can be utilized.
In terms of its financial performance, the company saw revenues of Rs 2 billion last year which translated into gross profit of Rs 449 million. The operating profits clocked in at Rs 356 million and the profit after taxes was around Rs 150 million. In the last 9 months of operations, the company has been able to surpass the revenues from last year recording revenues of Rs 2.2 billion while it has seen its gross profit margin increase from 25% to 43% earning gross profits of Rs 1.3 billion. The company saw similar operating profit and net profit margins leading to operating profits of Rs 605 million and profit after taxes of Rs 314 million.
One reason that an offering was carried out was due to the fact that the company has had a debt-to-equity ratio in excess of 100%. The company had debt to equity of 164% at year end 2023 which has slightly decreased to 122% in 9 months since. The company has taken debt from Habib Bank and MCB Bank under the Temporary Economic Refinance Facility (TERF) introduced by the government during Covid-19 valued at around Rs 2.1 billion. It also has an additional convertible loan from Karandaaz Pakistan worth Rs 835 million.
In terms of sponsors, Ferozsons is a company that was founded in 1954 and has been a leader in terms of manufacturing pharmaceuticals for gastroenterology, hepatology, cardiology, and oncology. The company has international companies like Boston Scientific and Gilead in the US, Biogaia in Sweden, and Nihon Kohden in Japan. The company also has a license to manufacture generics of Gilead Sciences in Pakistan. Bago group was founded in 1934 in Argentina and was the first company to manufacture penicillin-based products. The company has now diversified into biopharmaceuticals, animal health, and bulk chemical manufacturing as well. Both these companies have a plethora of experience in terms of operating in this field.
With an ever-expanding portfolio of products, BF can expect to see its revenues increase based on the aging population and the prevalence of diseases related to rheumatoid arthritis, diabetes, cardiology, and kidney diseases. Pakistan is a country which is seeing these diseases in higher numbers and with an aging population it can be expected that the potential for revenue is present. In Pakistan alone, around 30% of the adult population sees a prevalence of diabetes which shows that revenues can be generated in this market. With the exit of international brands like Eli Lilly, there is a source of revenue for the insulin manufactured by BF Bioscience.
The company also expects to see better results in the future on the back of the fact that the government is looking to increase healthcare expenditure. This will prove to be a stream of revenue for the company. In addition to that, the export market is a huge opportunity for the company. With the pak rupee seeing some stability, the company can expect to capitalize on this opportunity. With the exit of companies like Bayer, Sandoz, Pfizer and Eli Lilly, the market size is ever-increasing and whoever is better equipped to fill this gap will be able to see increased profits going into the future.
In terms of risks, the biggest cost driver for the company is to procure raw materials. Around 30% of its raw material is sourced from Ferozsons which decreases the exposure of the company to foreign currency, however, there is no denying the fact that the company is still importing a significant part of its raw materials. Any fluctuation of currency or disruption in the supply chain can prove to be a headache for the company which can impact its bottom line.
One of the biggest hurdles or challenges faced by the pharmaceutical industry is the role of the Drug Regulatory Authority of Pakistan (DRAP). The regulatory body has the function of giving out licenses to drug manufacturers, allowing for the registration and pricing of new drugs, and regulating the prices of drugs that are already present in the market. This is the biggest bone of contention that is raised by the industry as DRAP had a pricing mechanism to restrict an increase in the price of essential drugs to 70% of the Consumer Price Index (CPI) and non-essential drugs to increase by 100% of CPI. This is a populist move that has been ingrained into the role of DRAP as it allows the government to keep a check on prices of drugs in the market.
The industry states that this is a mechanism that does not count for the cost of raw materials or the currency rate. As companies see their costs increase, their profits diminish over time. This leads to plant shutdowns, shortages in the market, and the prevalence of low-quality drugs or black market alternatives. From 2000 to 2013, there was actually a price freeze that was put in place by DRAP which meant prices of drugs could not be increased under any circumstances leading to losses being incurred by many pharmaceutical companies. Recently, the government has deregulated prices of non-essential drugs which does ease the complications of the industry to some extent.
