Macro Group Pharmaceuticals [MCRO]: Not the Usual Pharma Stock
Pampered by high-margin cosmeceuticals
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Macro Group Pharmaceuticals [MCRO]
Egypt / Health Care / Pre-IPO Note
IPO Price EGP4.85/share
Implied Market Cap EGP2.8bn
Investment Rating: Not Rated | Risk Rating: Not Rated
The industry landscape
Cosmeceuticals is a hybrid between cosmetics and pharmaceuticals, where the amount of active ingredients lies within the limits set by the Egyptian Drug Authority (EDA) for cosmetics. Cosmeceuticals may have some therapeutic effects and can be prescribed, similar to pharmaceuticals. But similar to cosmetics on the other hand, cosmeceuticals are also offered over-the-counter (OTC) and the products are mainly applied as lotion, cream, spray, gel, serum, powder, or oil. The EDA regulates and supervises the local cosmeceuticals industry, which manufactures therapeutic products in the space of skin care, hair care, antiseptics, oral care, anti-scar, female intimate care, muscle relaxants, and nutraceuticals. MCRO is regulated by the EDA and the National Food Safety Authority (NFSA). Demand for cosmeceuticals, including beauty and personal products, is mainly driven by the macroeconomic environment, which affects disposable income. Another demand factor is Egypt’s steady population growth and large population relative to those in the MENA countries.
The company
Macro Group Pharmaceuticals [MCRO] was established in 2002 and became one of the fastest growing cosmeceuticals manufacturers in Egypt, with a market share of c.23% in 2020. MCRO has a diversified assortment of almost all therapeutic cosmeceutical products (in the sphere of skin care, hair care, anti-scar, antiseptics, topical muscle relaxants, female intimate care, oral care, and recently nutraceuticals). In November 2019, the company’s general assembly decided to add the manufacture and production of herbal medicines, herbal products, nutritional supplements and baby food to its activities. The company began the production of one nutritional supplement in 2020, which is now part of its 112 SKUs (as of 30 September 2021). It seeks to expand its production of nutritional supplements, which are more easily registered compared to other products. MCRO also exports to more than 10 Middle Eastern and African countries. Exports contribute c.2% to MCRO’s total revenues.
A clever strategy
MCRO’s strategy to introduce high-margin products within an affordable price range helped expose the company to a wide demographic. This in turn made it the market leader in Egypt’s cosmeceuticals sector, as most available products are expensive imports and mainly target high-income earners. The company's sales rely on (1) physician prescriptions which make up c.85% of total revenues and (2) OTC products which account for 15% of total revenues. MCRO has successfully made its products available in 60,000 pharmacies nationwide as of 30 September 2021.
Investment thesis
A leader in its trade. Higher contribution of new SKUs with higher prices could boost revenue. An ability to control its product prices unlike its pharmaceutical peers. Hitting higher margins than its EGX-listed pharmaceutical peers. Focusing on high-margin products and DTC marketing will likely improve margins even further.
Risks
Only two distributors account for a hefty c.28% of the company's total sales. If the relation with these two deteriorates or the distributors themselves experience exceptional circumstances, MCRO’s operations will be affected. MCRO only relies on one plant to produce most of its products, which threatens the company’s operations if this plant is compromised. Any delays in product registrations may harm the company’s business.
Valuation
Assigning MCRO a value is a bit tricky due in part to its relatively higher future growth potential, let alone where it is in its growth trajectory. Thus, the multiples of MCRO’s global peers have to be adjusted for growth. At its IPO price of EGP4.85/share:
(1) MCRO’s LTM P/E is 19.6x, a discount of 6% to global peers’ median of 20.9x.
(2) MCRO’s LTM EV/EBITDA is 14.2x, a discount of 4% to global peers’ median of 14.9x.
Without adjusting for growth, MCRO would be worth EGP5.1/share at its global peers’ LTM P/E and EV/EBITDA multiples, only 6% higher than the IPO price. That said, valuation aside, we believe subscribing to the public offering is worth the risk in view of the one-month stock price stabilization fund.
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Nada Wagdy
Equity Analyst
T +202 3300 5726