12 April 2012
Amman-based Hikma Pharmaceuticals says it is delivering on its promise to shareholders and investors to double revenues and profits every five years.
One of the key components of this strategy is to target and acquire under-valued companies and products worldwide, and integrate them into the Hikma network.
After spending USD 325 million of acquisitions in 2011, the company says it has the firepower to deploy another USD 290 million this year.
Zawya caught up with the London and Dubai listed company's chief financial officer, Khalid Nabilsi, to understand how Hikma has performed in the challenging years of the Arab Spring and the financial crisis, and to get more visibility on the opportunities it sees going forward:
Excerpts from the interview:
Hikma appears to have a very clear strategy for growth. You acquire to grow. Your organic growth was 7% in 2011 whereas your growth through acquisitions was much higher. Do you have visibility on acquisition opportunities in 2011? And will you be raising cash for such opportunities?
Our focus for 2012 is on technology. We want to look at, for example, product acquisitions rather than company acquisitions. Technology acquisitions that make our injectables business more competitive, for instance... Once we find the right opportunity, we have very strong relationships with most of our banks - Arab Bank, Citibank, HSBC, National Bank of Kuwait - so we can easily go to them for additional cash and we can work together immediately. Currently we have enough.
We raised USD 110 million from the International Finance Corporation for two years, which is still unutilized. We still have unutilized facilities that we will deploy when we have the right opportunity. Raising cash is not an issue.
So how much did you actually spend on acquisitions in 2011 and value did these add to top line and bottom line?
We spent more than USD 325 million in 2011 and USD 40 million so far in 2012. So that makes USD 365 million, spread over US, Morocco, Sudan, India and China. Morocco is going to provide USD 50 to 60 million to the top line, although in 2011 for the three months after we acquired the company it gave us around USD 11 million in sales and not much to the profit line. However, we are more concerned about the strategic fit of our acquisitions than the immediate impact on the top and bottom lines. So you will see a significant growth in 2013 and especially in 2014 and onward coming from these products. so there will be a percentage in that.
The US acquisition added USD 120 million in 2011. This year it's going to add around USD 200 million in sales. We are not giving guidance; this is the rough expectation. The company we bought was neglected by its owners when we came in. We've reduced staff by 20%, increased productivity... We will invest USD 20 to 25 million in that business this year to double production capacity.
What is the acquisitions strategy for this year? In terms of regions, where are they coming from?
We've been talking about Egypt for a long time and it took us almost two years to complete the acquisition. Morocco took us almost three years to complete. This is because we do not go after assets that are available to everyone in the market; we know that this usually makes valuations untenable. These are family-owned businesses. We convince them to sell and it takes time to convince them. We've done the same for Jordan.
In the MENA region there are still countries where we have less than 5% market share and our target is to have 5% share in each market that we operate in. Now Turkey is one of the countries [we are looking at] but the foundations are very high so we're not going to go with these high multiples unless we find the right deal. If we find the right opportunity today at the right rice with the synergies of Hikma complementing our product pipeline then we can go in.
Have you identified targets in Turkey?
Our team is always active in Turkey, but there's nothing concrete on the table at this time. In Egypt, we have a market share of 1.7%. If we find another opportunity we can go ahead with an acquisition in Egypt. Africa, maybe, we can look into, Kazakhstan. Our focus is going to be product acquisition related to injectables - any technology that we don't have that complements our operations.
Do you work with a single-number ROI expectation as a guidance when you do an acquisition?
It's very hard to have a single ROI. It depends on the market, the country... When you do an acquisition in Sudan, you look to a higher rate than when you acquire in the US. We did a great job with the company we acquired in the US. We reduced costs, increased prices, increased productivity... This is where Hikma comes in. This is the experience of Hikma. This is part of Hikma's culture.
But is there a dollar figure that you are willing to put into the market in terms of acquisitions this year?
Since 2005, between capital expenditure and acquisitions, we've done over a billion US dollars. In MENA over USD 500-600 million; that's just in acquisition, not capex. This year, we still are in a very healthy financial position even with the USD 325 million that we've done. We can still grow and do acquisition between USD 150 to 200 million. On top of that we have our capex of USD 90 million that will be funded by our internal cash resources.
Are all acquisitions integrated into the mother ship or are they operated as separate entities?
It really depends on the region. We are firm believers in localization. However, in general, we introduce our processes but we give them the freedom to act so they bring the products, we sell them. So it's not the same as integration. There's a decentralization, but at the same time [there are] the synergies that we identify at the beginning of the acquisition.
Your financial results seem to indicate that Hikma sees more value in expanding revenues explosively through acquisition, rather than in increasing profits. Do you get any blowback from your investors on this strategy?
Most of our investors know what kind of acquisition we've done in the past few years. We also delivered on revenues and bottom line. We have committed to double revenues and profits every four years and we've been executing that. You might take a hit on the short term on the bottom line due to the financing costs, the tax, etc., but we believe in the long term. Our business plan for the next five years is to deliver growth in top line and growth in bottom line. Even on adjusted basis for 2012, you will see growth in top line as well as bottom line.
Most of our investors are happy investors, they are long-term investors. They believe in Hikma; it's a unique company. We are the only regional pharma player in MENA with a presence in 18 countries. Most of the other local players are single-country focused.
You did take on some debt because of your acquisitions last year. What is the level of debt now and how do you see that going forward in 2012, 2013, and 2014?
Our net debt to EBITDA ratio 2.5-2.6 excluding the one-off transaction costs. So we are still in a very healthy financial position. Our net debt is USD 422 million - it increased by about USD 300-something million because of the acquisitions that we've done. We can continue to raise another USD 200 million and still be in a very comfortable financial position. Our target is three times net debt to EBITDA. We can go higher than that because the banks are offering much more relaxed covenants, but set our own targets. Now we have a very strong cash flow which supports paying capex, dividends, paying the long-term debts. We believe that at the end of this year our leverage will go down close to 2.0 or below 2.0. This will also give us the flexibility to raise more financing when opportunities come.
Are you looking at refinancing some of the old debt?
Our cost of financing is probably less than the cost of financing of most banks in Europe! These banks tell us they want to participate, but their cost of financing is higher than our cost.
What is your guidance for the first quarter and the year?
We don't give guidance by quarters. For the full year, we expect a top line growth of 20%. We expect a relatively extended margin. Although there are some additional pressures on wages we expect the margin to stay flat. We expect very strong growth for the injectables business, especially with the new acquisition, with margins in the high teens, I would say. The generics business sometimes grows, sometimes it declines. It still provides us with the cash. Financing costs, of course, will increase; tax will increased because of our products coming from the US... So we are expecting very good growth, top line and bottom line.
One last thing. You are in a sector which is considered recession-proof. Did you derive any benefit out of the Arab Spring, and do you see any benefit going forward?
I would say in general that in the Arab world we are still not investing much in healthcare. Healthcare spending as a percentage of GDP is still low at about 2% compared to other countries like the US, with 15%, or Europe with 10%. Healthcare spending per capita is also still very low. Going forward, with the healthcare awareness increasing and with Islamists coming into power, we may see that changing. They are expected to focus more on social services like healthcare and education. People are asking for better living conditions. Healthcare is one of the areas where you can satisfy their needs, so we expect higher spending on healthcare.
© Zawya 2012
Amman-based Hikma Pharmaceuticals says it is delivering on its promise to shareholders and investors to double revenues and profits every five years.
One of the key components of this strategy is to target and acquire under-valued companies and products worldwide, and integrate them into the Hikma network.
After spending USD 325 million of acquisitions in 2011, the company says it has the firepower to deploy another USD 290 million this year.
Zawya caught up with the London and Dubai listed company's chief financial officer, Khalid Nabilsi, to understand how Hikma has performed in the challenging years of the Arab Spring and the financial crisis, and to get more visibility on the opportunities it sees going forward:
Excerpts from the interview:
Hikma appears to have a very clear strategy for growth. You acquire to grow. Your organic growth was 7% in 2011 whereas your growth through acquisitions was much higher. Do you have visibility on acquisition opportunities in 2011? And will you be raising cash for such opportunities?
Our focus for 2012 is on technology. We want to look at, for example, product acquisitions rather than company acquisitions. Technology acquisitions that make our injectables business more competitive, for instance... Once we find the right opportunity, we have very strong relationships with most of our banks - Arab Bank, Citibank, HSBC, National Bank of Kuwait - so we can easily go to them for additional cash and we can work together immediately. Currently we have enough.
We raised USD 110 million from the International Finance Corporation for two years, which is still unutilized. We still have unutilized facilities that we will deploy when we have the right opportunity. Raising cash is not an issue.
So how much did you actually spend on acquisitions in 2011 and value did these add to top line and bottom line?
We spent more than USD 325 million in 2011 and USD 40 million so far in 2012. So that makes USD 365 million, spread over US, Morocco, Sudan, India and China. Morocco is going to provide USD 50 to 60 million to the top line, although in 2011 for the three months after we acquired the company it gave us around USD 11 million in sales and not much to the profit line. However, we are more concerned about the strategic fit of our acquisitions than the immediate impact on the top and bottom lines. So you will see a significant growth in 2013 and especially in 2014 and onward coming from these products. so there will be a percentage in that.
The US acquisition added USD 120 million in 2011. This year it's going to add around USD 200 million in sales. We are not giving guidance; this is the rough expectation. The company we bought was neglected by its owners when we came in. We've reduced staff by 20%, increased productivity... We will invest USD 20 to 25 million in that business this year to double production capacity.
What is the acquisitions strategy for this year? In terms of regions, where are they coming from?
We've been talking about Egypt for a long time and it took us almost two years to complete the acquisition. Morocco took us almost three years to complete. This is because we do not go after assets that are available to everyone in the market; we know that this usually makes valuations untenable. These are family-owned businesses. We convince them to sell and it takes time to convince them. We've done the same for Jordan.
In the MENA region there are still countries where we have less than 5% market share and our target is to have 5% share in each market that we operate in. Now Turkey is one of the countries [we are looking at] but the foundations are very high so we're not going to go with these high multiples unless we find the right deal. If we find the right opportunity today at the right rice with the synergies of Hikma complementing our product pipeline then we can go in.
Have you identified targets in Turkey?
Our team is always active in Turkey, but there's nothing concrete on the table at this time. In Egypt, we have a market share of 1.7%. If we find another opportunity we can go ahead with an acquisition in Egypt. Africa, maybe, we can look into, Kazakhstan. Our focus is going to be product acquisition related to injectables - any technology that we don't have that complements our operations.
Do you work with a single-number ROI expectation as a guidance when you do an acquisition?
It's very hard to have a single ROI. It depends on the market, the country... When you do an acquisition in Sudan, you look to a higher rate than when you acquire in the US. We did a great job with the company we acquired in the US. We reduced costs, increased prices, increased productivity... This is where Hikma comes in. This is the experience of Hikma. This is part of Hikma's culture.
But is there a dollar figure that you are willing to put into the market in terms of acquisitions this year?
Since 2005, between capital expenditure and acquisitions, we've done over a billion US dollars. In MENA over USD 500-600 million; that's just in acquisition, not capex. This year, we still are in a very healthy financial position even with the USD 325 million that we've done. We can still grow and do acquisition between USD 150 to 200 million. On top of that we have our capex of USD 90 million that will be funded by our internal cash resources.
Are all acquisitions integrated into the mother ship or are they operated as separate entities?
It really depends on the region. We are firm believers in localization. However, in general, we introduce our processes but we give them the freedom to act so they bring the products, we sell them. So it's not the same as integration. There's a decentralization, but at the same time [there are] the synergies that we identify at the beginning of the acquisition.
Your financial results seem to indicate that Hikma sees more value in expanding revenues explosively through acquisition, rather than in increasing profits. Do you get any blowback from your investors on this strategy?
Most of our investors know what kind of acquisition we've done in the past few years. We also delivered on revenues and bottom line. We have committed to double revenues and profits every four years and we've been executing that. You might take a hit on the short term on the bottom line due to the financing costs, the tax, etc., but we believe in the long term. Our business plan for the next five years is to deliver growth in top line and growth in bottom line. Even on adjusted basis for 2012, you will see growth in top line as well as bottom line.
Most of our investors are happy investors, they are long-term investors. They believe in Hikma; it's a unique company. We are the only regional pharma player in MENA with a presence in 18 countries. Most of the other local players are single-country focused.
You did take on some debt because of your acquisitions last year. What is the level of debt now and how do you see that going forward in 2012, 2013, and 2014?
Our net debt to EBITDA ratio 2.5-2.6 excluding the one-off transaction costs. So we are still in a very healthy financial position. Our net debt is USD 422 million - it increased by about USD 300-something million because of the acquisitions that we've done. We can continue to raise another USD 200 million and still be in a very comfortable financial position. Our target is three times net debt to EBITDA. We can go higher than that because the banks are offering much more relaxed covenants, but set our own targets. Now we have a very strong cash flow which supports paying capex, dividends, paying the long-term debts. We believe that at the end of this year our leverage will go down close to 2.0 or below 2.0. This will also give us the flexibility to raise more financing when opportunities come.
Are you looking at refinancing some of the old debt?
Our cost of financing is probably less than the cost of financing of most banks in Europe! These banks tell us they want to participate, but their cost of financing is higher than our cost.
What is your guidance for the first quarter and the year?
We don't give guidance by quarters. For the full year, we expect a top line growth of 20%. We expect a relatively extended margin. Although there are some additional pressures on wages we expect the margin to stay flat. We expect very strong growth for the injectables business, especially with the new acquisition, with margins in the high teens, I would say. The generics business sometimes grows, sometimes it declines. It still provides us with the cash. Financing costs, of course, will increase; tax will increased because of our products coming from the US... So we are expecting very good growth, top line and bottom line.
One last thing. You are in a sector which is considered recession-proof. Did you derive any benefit out of the Arab Spring, and do you see any benefit going forward?
I would say in general that in the Arab world we are still not investing much in healthcare. Healthcare spending as a percentage of GDP is still low at about 2% compared to other countries like the US, with 15%, or Europe with 10%. Healthcare spending per capita is also still very low. Going forward, with the healthcare awareness increasing and with Islamists coming into power, we may see that changing. They are expected to focus more on social services like healthcare and education. People are asking for better living conditions. Healthcare is one of the areas where you can satisfy their needs, so we expect higher spending on healthcare.
© Zawya 2012
