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EQUITY RESEARCH - Initiation of Coverage
April 18th, 2018 III
The Issuer is a corporate client of EnVent Capital Markets Ltd., thus this Note is to be intended as a marketing communication, not an independent research. See final two pages for important disclosures.
OUTPERFORM Current Share Price (€): 7.05
Target Price - diluted (€): 8.54
Kolinpharma - Performance since IPO
70
80
90
100
110
9/3 14/3 19/3 24/3 29/3 3/4 8/4 13/4 18/4
Kolinpharma Share Price FTSE AIM Italia Index Source: S&P Capital IQ - Note: 9/3/2018=100
Company data
ISIN number IT0005322950
Bloomberg code KIP IM
Reuters code KIP.MI
Share Price (€) 7.05
Date of Price
Shares Outstanding (m) - excluding PAS 1.5
Market Cap (€m) 10.3
Market Float (%) 31.7%
Daily Volume 0
Avg Daily Volume YTD 3,852
Target Price (€) 8.54
Upside (%)
Recommendation OUTPERFORM
18/04/2018
21%
Share price performance
1M 3M 1Y
Kolinpharma - Absolute (%) 4.7% n.a. n.a.
FTSE AIM Italia (%) -0.2% n.a. n.a.
1Y Range H/L (€) 7.14 6.73
YTD Change (€)/% n.a. n.a. Source: S&P Capital IQ
Analysts
Tommaso Maria Cucchiarelli -
Viviana Sepe - [email protected]
EnVent Capital Markets Limited 42, Berkeley Square - London W1J 5AW (UK) Phone +44 (0) 20 35198451
This Note is issued by arrangement with Banca
Aletti, Issuer’s broker This document may not be distributed in the United States, Canada, Japan or Australia or to U.S. persons.
Nutraceutical specialties
We initiate coverage of Kolinpharma with an OUTPERFORM rating, based on a Target
Price of €8.54 per share.
KOLinPharma (KPH), listed on AIM Italia in March 2018, is a nutraceutical Italian company
established in 2013. KPH products are positioned just below pure pharmaceutical
formulations, distinguished from generic functional food/nutritional supplements. The
industry segment as a whole is worth some €3bn and is expected to reach €3.7bn within
2020.
Stepping towards a sound financial performance
From the negligible sales in 2014 (€0.1m), the growth has been regular and impressive,
reaching €4.1m in 2017 (202% CAGR 2014-17). KPH’s business model does not see value
in general advertising, instead is addressed to physicians, whose recognition of KPH
products is, in our view, the solid base of the steady success of a newcomer in such a
large and crowded industry segment.
KPH, initiating operations as late as 2013, has been able to reach break-even at operating
margin level in 2016. We estimate KPH reaching a financial performance consistent with
industry standards within the next three years.
Large headroom in salesforce effectiveness
Present coverage of marketplace is uncomplete, so that the improvement potential is
significant. We see the productivity gaps as normal in a recently-born organization. The
excellent growth track record warrants significant room left for enhancing salesforce
effectiveness tapping residual sales capacity, also supported by product portfolio
enrichment.
Working capital dynamics
KPH has a significant investment in working capital. In view of growing sales and
expenses, we see working capital size and management as critical factors that influence
significantly financial performance. In our estimates we assume a gradual rebalancing.
Value potential
Key assumptions of our projections are MSR network expansion to complete the
coverage of domestic market and a progressive increase of productivity as to revenues
per MSR. Our DCF model applied to our estimates indicates an equity value of €14m,
which yields a Target Price of €8.54 per diluted share (assuming the full conversion of
PAS into ordinary shares consistently with our estimates), with a potential upside of 21%
on current price.
Key financials and estimates
€m 2015A 2016A 2017A 2018E 2019E 2020E
Revenues 1.3 2.6 4.1 7.1 9.5 11.8
YoY % - 103.5% 60.4% 72.5% 34.9% 24.2%
EBITDA (0.4) 0.3 0.6 1.7 2.6 3.4
Margin -30.6% 10.3% 14.5% 23.7% 27.6% 28.4%
EBIT (1.0) (0.3) 0.0 0.9 1.8 2.7
Margin -79.4% -12.7% 0.8% 12.8% 19.1% 22.8%
Net Income (Loss) (0.8) (0.4) (0.1) 0.5 1.2 1.9
Trade Working Capital 0.1 0.3 0.8 2.0 2.9 3.5
Net (Debt) Cash (1.8) (2.7) (2.5) (0.0) 0.2 1.3
Equity 0.5 0.1 1.2 4.9 6.1 8.0
TWC/Revenues 7% 11% 19% 29% 30% 29%
Net Debt / EBITDA n.m. 10.2x 4.2x 0.0x cash cash
Cash flow from operations / EBITDA n.a. 114% 100% 87% 82% 79% Source: Company data for 2015-17A, EnVent Research for 2018-20E
1
Investment Case
Kolinpharma SpA (KPH) is an Italian company which develops, produces and markets
nutraceutical products, made of natural ingredients, whose purpose is help to prevent or cure
disease.
2017A Sales: €4.1m - 2014-17A CAGR 202% - Geographical breakdown: Italy 100% -
Employees (2017): 12 - Medical Sales Representatives: 58 (2017), 63 (February 2018)
KPH - Historical sales (€m)
0.1
1.3
2.5
4.1
2014A 2015A 2016A 2017A Source: Company data
Drivers
Global and domestic industry drivers
Nutraceuticals continue to gain ground. The global nutraceutical industry has so far
experienced exceptional growth rates. Growth of the nutraceutical market is driven by an
aging population, rise in disposable income, increasing healthcare awareness, and higher
occurrence of allergies/intolerance. Nutraceuticals are expected to play a central role in
prevention, especially by mitigating the effect of lifestyle-related diseases in aging population,
along the lines of making healthier choices earlier in life. Consumers share the perception that
the onset of many chronic diseases can be prevented with intake of proper nutritious
supplements.
Ageing/healthy ageing. The life expectancy increase is and will continue to boost demand for
medical treatments, health care services and nutritional products.
Global middle class population growth. The observed and still expected global growth of
middle class population will increase demand for all goods and services associated with a
healthier lifestyle.
Increasing opportunity to divert spending from medical services to nutrition and wellness.
2
As a consequence of both policy-making and shifting of consumers’ lifestyle, there is a
consensus of an increasing switch from medical services to nutrition and wellness
expenditure.
Pharmacies decreasing price/margins for traditional medical prescriptions. In Italy, as well as
in other countries in the western world, nutraceuticals represent a suitable alternative to
traditional prescription drugs which deliver gradually decreasing margins for pharmacies.
Nutraceutical market in Italy. According to IMS Health Italia (a pharma marketing consultant),
in 2014 spending in nutraceutical products in Italy was €2.4bn, with a growth rate of 8.2% (vs.
7.2% in the rest of Europe). The market continued to rise, reaching €2.7bn in 2016, and is
expected to reach €3.7bn by the end of 2020 (Source: IMS Health, Multichannel view, 2016).
Company drivers
A product portfolio marketable to the medical profession. Quality and Innovation are a must
have to enter a crowded market and gain market share. Differently from most competitors,
KPH was established with a mission to operate in the nutraceutical market functioning as a
pharma company, rather than a simple nutritional supplements player.
Nutraceutical products are perceived as “lighter” and more natural with respect to drugs.
Advertising can be effective, but physicians play a crucial role with their recommendation to
patients. An exhaustive explanation of the effects of nutraceuticals by a physician is seen as a
crucial factor in order to generate customer/patient retention (Source: Quintiles IMS Italy,
2017).
Quality recognized by physicians. KPH has established agreements with the University of
Pavia and the University of Calabria. The Company currently owns four Italian patents, others
are pending, and all products are certified Kosher and Halal. The fast growth experienced in
the first four years of the Company’s life proves its appreciation by the medical profession,
which is a key source of sales.
A skilled and valuable affiliated salesforce. The presence of skilled and successful Medical
Sales Representatives (MSR) is a key driver to be successful in the industry. In order to
operate with first class professionals and to affiliate them, KPH, for its exclusive salesforce,
only seeks graduated MSRs. The fast growth of prescriptions per MSR reflects the quality of
their communication.
Certifications are a distinctive factor. KPH is an ISO 9001 (Quality Management) and ISO
22000 (Food Safety Management) certified company and is pending to be ISO 13485 (Medical
Devices) certified. Moreover, KPH’s products have the following certifications and
endorsements: Italy Kosher Union, Dairy-Free, Lactose-Free, Halal, Play Sure Doping-Free, UCI,
ECS. All KPH’s product packaging can be also read in Braille.
Management experience. The CEO and founder’s industry experience were gained in large
pharmaceutical companies and the organization was modeled according to pharma
companies best practices.
3
Challenges
Low barriers to entry and pricing trends. The nutraceutical industry has relatively low barriers
to entry. New competitors can enter the marketplace without significant obstacles. Since
purchase decisions are normally addressed by physicians and pharmacies, new large
competitors might offer underpriced specialties in order to capture market share or as a
strategic decision, affecting the industry’s margins as a whole.
Pharma giants entering the competitive arena. Should nutraceuticals confirm their growth
rate observed in the past years, more and more pharmaceutical companies will invest in this
industry, capitalizing on the average small size of its operators. Increasing intense rivalry
coupled with attractive profit margins might bring to a wave of market consolidation. The
consequence would be a growing importance for well-established players to act quickly in
acquiring additional portfolios for their product range. Large promotion and advertising
budgets, unaffordable by smaller companies, will follow suit. Pharma companies could then
easily gain market share by squeezing existing players out.
Regulatory changes. More limitations or a tightening of laws regulating the nutraceutical
industry could require unexpected investment and other expenses on behalf of current
operators which could even end-up altering the competitive arena.
Supply chain. All along the supply chain, KPH presently has some sole suppliers, with
consequent risks which should be mitigated by selecting additional suppliers.
Agreements among drugstores. Pharmacies cooperate in order to increase their bargaining
power towards wholesalers to face lower prices (which, in turn, could decrease the final price
indicated by nutraceutical companies towards wholesalers).
Pharmacies moral suasion towards end-users. Pharmacies may address end-users’ decisions
in favor of products which guarantee better margins.
Salesforce retention. KPH relies on its network of MSRs, who play a key role in driving sales
and profitability. KPH’s capability to attract and retain salespeople who can create a value-
added relationship with physicians is critical. As such, after recruiting the best competencies
on the market, the Company faces the challenge of motivating and rewarding the sales team.
In addition, the industry’s continuous growth could raise the cost of retaining top performing
Medical Sales Representatives.
4
2. PROFILE
The ambition to create a new paradigm for a fast growing industry
History and key developments
KPH was established in 2013 and operates in the core segment of the wider nutraceutical
industry, with a strategic positioning between generic functional foods & nutritional
supplements, producers and pure pharmaceutical companies.
The rationale of launching a venture in a highly populated segment of the wider nutraceutical
industry was to leverage on the shift from treatment to prevention, a general trend that is
encouraging clinicians and patients to rethink their approach to health and disease.
KPH’s products are sold to end users by pharmacies and Over the Counter stores, which buy
them from wholesalers (who are the Company’s customers) and are usually prescribed by
physicians to their patients in order to either support and strengthen medical treatment
offered by medicines or, alternatively, to improve health conditions and consequently helping
to prevent physical discomfort.
The Company has so far launched five products, three of them supporting orthopedic
therapies and two for gynecological and urological treatment.
A promising history
Kolinpharma - History milestones
2013 Establishment of the Company
2014
The Company launches its first 4 products: Almetax (orthopedic), Ivuxur
(gynecologic), Dolatrox (orthopedic) and Milesax (gynecologic)
Certification as innovative start-up
2015 Xinepa, the 5th product (orthopedic) is launched
2016 Partnership on a research project with Pavia University
Italian patents obtained for Xinepa, Almetax and Milesax
2017
4th industrial patent Xinepa 2
Partnership with University of Calabria
Certification as innovative SME
2018 IPO on AIM Italia
Source: Company data
Key people
Name and Role Background
Emanuele Lusenti
Co-founder and CEO
Marketing and sales manager. Served at Schiapparelli, Sigma Tau, Alfa Wassermann,
Bracco and Laborest Italia (nutraceutical industry)
Rita Paola Petrelli
Co-founder, Chairman
and CFO
Certified professional Accountant, registered on the Roll of Auditors and member of the
approved list of Experts at the Court of Catanzaro since 2004
Experience as managing director of a consulting company for administrative services
Source: Company data
5
Shareholders
Rita Paola Petrelli52.61%
Emanuele Lusenti19.21%
Carmine di Vincenzo
0.61%
Anna Maria Lanza0.30%
Market27.26%
Source: Company data
KPH’s IPO and stock market performance on AIM Italia
Kolinpharma on AIM Italia
Stock market AIM Italia - MAC
ISIN number IT0005322950
Bloomberg code KIP IM
Reuters code KIP.MI
IPO date 09/03/2018
Offer Price (€) 7.00
Money raised (€m) 3.1
Market Cap at IPO (€m) 10.2
Free float at IPO 31.65%
Shares outstanding - Ordinary Shares 1,459,571
Price Adjustments Shares 180,000
Total Shares outstanding 1,639,571
Current Share Price (€) 7.05
Market Cap (€m) 10.3 Source: Company data and S&P Capital IQ, update: 18/04/18
Price Adjustment
Shares mechanism
Total shares outstanding after the IPO are 1,639,571, of which 1,459,571 ordinary shares
listed on AIM Italia and 180,000 Price Adjustment Shares (PAS) not listed on AIM Italia, owned
by the founding shareholders Rita Paola Petrelli and Emanuele Lusenti.
The mechanism underlying PAS is: in case of unmet financial targets (FY17 EBITDA > €0.5 m,
FY18 EBITDA > €1.4 m), PAS will be cancelled, with proportional increase of free float share;
should targets be achieved, PAS will be converted into ordinary shares after approval of FY18
financial statements.
6
Use of the IPO proceeds:
Program % Proceeds
Expansion of the MSR network 30%
Investment in own laboratory/research center 30%
Product portfolio expansion 30%
Internationalization 10%
Source: Company data
Share price performance since IPO
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
90
95
100
105
9/3 14/3 19/3 24/3 29/3 3/4 8/4 13/4 18/4
Kolinpharma Volumes Kolinpharma Share Price FTSE AIM Italia Index Source: S&P Capital IQ, update: 18/04/18
7
3. INDUSTRY INSIGHTS
Industry logics and drivers
Focus on prevention
Nutraceutical industry
at first glance
Nutraceuticals encompass various classes of products derived from food sources with extra
health benefits in addition to the basic nutritional value found in foods. They can be
considered non-specific biological therapies used to promote general well-being, control
symptoms and prevent malignant processes.
Nutraceuticals may be used to improve health, prevent chronic diseases, postpone the aging
process, or just support functions and integrity of the body. They are also considered to be
effective for prevention of life threatening diseases such as diabetes, renal and
gastrointestinal disorders, as well as different infections.
The philosophy behind nutraceuticals is to focus on prevention, while over the years they
have attracted considerable interest due to their potential nutritional, safety and therapeutic
effects.
Definition of Nutraceuticals
Nutraceutical
products are
positioned between
conventional foods
and pure drugs
Broad Definition of Nutraceuticals
Food
Target group
Examples
Channels
Functional Foods and Nutritional
SupplementsCore nutraceuticals Medical Nutrition Pharmaceuticals
• Probiotic yogurts• Wight-loss bars• Isotonic sports drinks• Vitamin and mineral
supplements
• Cholesterol lowering products
• Products to slow progression of diabetes, dementia, or age-related muscle loss
• Specialized infant feeding formulas
• Nutrition solutions for the frail or chronically ill
• Other clinical nutrition products
Healthy people seeking to preserve wellness
People with common health problems
Patients with special nutritional needs
• Supermarkets• Internet
• Supermarkets• Pharmacies• Internet
• Pharmacies (often requiring some medical supervision)
Source: ATKearney, Nutraceuticals: The Front Line of the Battle for Consumer Health, 2014
Lifestyle choices
Nutritional needs and prevention are crucial issues in modern lifestyle of western and
developing countries. Food supplements have become part of our lifestyle choices, with an
increasing awareness on the function of minerals, vitamins and other natural substances for
well-being.
Food supplements are concentrated sources of nutrients or other substances with a
nutritional or physiological effect and are marketed as pills, tablets, etc.
Both specialized companies and consumer health divisions of traditional pharma
8
manufacturers entered the nutraceutical industry, whose growth rates and potential
developments are seen as a strong revenue and profit opportunity.
Demand side: why is there a market?
How to satisfy crucial
needs?
Global trends pushing for increasing demand for food supplements, above all in western
world and more advanced developing countries, are:
prevention rather than medical treatment
ageing and need for healthy ageing
growing global middle class
increasing care for physical and mental wellness
Increasing opportunity to divert spending from medical services to nutrition and wellness.
In 2013, 90% of US health expenditure was concentrated on medical services and only 9% on
healthy behaviours, while it is acknowledged that healthy behaviours represent 37% of health
determinants - others being: socioeconomic & physical environments 22%, genetics 20%,
access to care 6%, interactions among determinants 15% (Source: Boston Foundation and
NEHI, Healthy People/Healthy Economy - Annual Report, 2013).
Ageing/healthy ageing. Life expectancy rose globally during the last century due to several
factors among which rising living standards, improved lifestyle, progress in healthcare and
medicine. In Italy over the last 30 years life expectancy for people aged around 60 years has
increased by 5 years, from 84 to 89 years (Source: ISTAT, Mortality and life expectancy
statistics). Increasing life expectancy is boosting demand for medical treatments and services,
and nutraceuticals/medical nutrition.
Global middle class population growth. A growing awareness of opportunities offered by a
better lifestyle is also associated with an observed and still expected growth of global middle
class population. Households that spend $10-100 per day were 3.0 billion in 2015, are
expected to be 3.8 billion in 2020 and 5.4 billion in 2030 (Source: Brookings, The
unprecedented expansion of the global middle class, 2017).
Global wellness industry growth. Healthy eating, nutrition, & weight loss represent a $648bn
segment, while complementary and alternative medicine represent another $199bn segment
of the total $3.7trn global wellness industry in 2015.
The global wellness industry grew by 10.6% from 2013 to 2015, while the global economy
shrank by 3.6%. The healthy eating, nutrition, & weight loss segment had an increase by
12.8% from 2013 to 2015 (Source: Global Wellness Institute, 2016 Global Wellness Economy
Monitor, 2016).
Evidence According to KPMG, global sales of functional foods are predicted to reach $250bn by 2018
(5x larger than in 1999), which is substantial when compared with the $900bn pharmaceutical
market (Source: KPMG, Nutraceuticals: The Future of intelligent food, 2015).
US and Japan appear as the largest nutraceutical markets in the world, followed by Europe:
9
Global nutraceutical market by country/region, 2010
Europe 14%
Japan22% U.S.
30%
Row34%
Source: KPMG, Nutraceuticals: The Future of intelligent food, 2015 on Euromonitor 2010 figures
Nutraceuticals keep being a very promising market, in all segments. Using the definitions
based on the intrinsic properties of the products, the picture for 2009-2014 was:
Global consumer nutraceutical market (€bn)
139 149 161 174 186 201
62 6570
7580
856163
6669
7377
0
50
100
150
200
250
300
350
400
2009 2010 2011 2012 2013 2014
Titolo del grafico
OTC Food supplements Functional food
261
362
Source: FederSalus, Scenario attuale su nutrizione e benessere - I mille volti della nutrizione, 2015 on Euromonitor International
Supply side: consumer/food or pharmaceutical companies?
Consumer/food vs
pharmaceutical
companies
The nutraceutical sector is seen as the place where pharma and food companies could find
ways to match some of current and future challenges to their traditional/core activity:
10
Food
CHALLENGESRELEVANCE OF
NUTRACEUTICALS
Pharmaceuticals
• Declining return on R&D investment
• ‘Patent cliff’ • Pressures on health
budgets • Regulatory oversight
• Slow-growing• Retailer-owned brands • Retailer power• Internet marketing
• New sector with lower R&D costs
• New revenue source • Most purchases are by
consumers • Less onerous regulatory
requirements
• Fast growing• Source of differentiation &
higher margins • Innovative products
increase bargaining power • Accepted channel for new
products
Source: KPMG, Nutraceuticals: The Future of intelligent food, 2015
Who can satisfy this
increasing demand?
Due to its nature, the nutraceutical market is as an opportunity for both consumer food and
pharma companies. The industry will be dominated by those able to exploit and drive the
convergence of medicine, food and technology.
“Food companies have strong expertise in large-scale manufacturing and global logistics that
reach into mass markets of consumers, but their research expertise does not go as deep as
that of the pharmaceuticals industry. Successful companies will have to hit the bullseye in six
main areas: technology, product strategy, compliance, marketing, supply chain management
and corporate deal-making” (Source: KPMG, Nutraceuticals: The Future of intelligent food,
2015).
In the “battle for nutraceuticals” between consumer/food and pharmaceutical companies, for
food/consumer companies, “nutraceuticals offer the chance to access into science-driven,
higher margin products where retailers’ private labels find it difficult to compete”. For pharma
companies, “nutraceuticals are a revenue stream to offset lost sales as drug patents expire
and new blockbusters fail to appear” (Source: ATKearney, Nutraceuticals: The Front Line of the
Battle for Consumer Health, 2014).
Consumer/food companies have been leading the competition, thanks to their competencies
on branding, consumer market expertise and access to mass distribution channels.
But in the long run, the challenge is much more uncertain. Pharmaceutical companies are
much stronger “in the fields of innovation, regulatory affairs and medical market insight”
Moreover, with increasing pressure on regulatory issues, consumer companies could be
seriously and negatively affected by more tightening rules on giving clinical evidence to
support claims and in the crucial need to convince health professionals about medical benefits
of products (Source: ATKearney, Nutraceuticals: The Front Line of the Battle for Consumer
11
Health, 2014).
The regulatory issue
Different regions,
different rules
Regulations and compliance play a key role. The market for nutraceuticals cannot be
considered global. Consumers cannot agree whether products in this market are food or
drugs and they are usually suspicious about exaggerated health claims.
Moreover, each country has different regulations. In the US and Japan, nutraceuticals are not
subject to stringent tests, as long as they do not claim to treat or prevent a specific disease.
EU region The regulatory framework for EU is:
2002/46/CE Directive “Ensuring safe food supplements in the EU”, which “harmonizes
rules on food supplements to protect consumers from potential health risks and to
ensure that they are not provided with misleading information”
Regulation EC No. 1924/2006 “Nutrition and health claims made on food”
Regulation EC 432/12 “Establishing a list of permitted health claims made on foods,
other than those referring to the reduction of disease risk and to children’s development
and health”
According to this regulatory set, health claims on products are forbidden if not authorized on
the basis of a scientific proof of the link between the supplement and the declared effect of
the product.
According 2002/46/CE, article 2:
a) “ ‘food supplements’ means foodstuffs the purpose of which is to supplement the
normal diet and which are concentrated sources of nutrients or other substances with a
nutritional or physiological effect, alone or in combination, marketed in dose form,
namely forms such as capsules, pastilles, tablets, pills and other similar forms, sachets
of powder, ampoules of liquids, drop dispensing bottles, and other similar forms of
liquids and powders designed to be taken in measured small unit quantities”
b) ‘nutrients’ means the following substances: (i) vitamins, (ii) minerals”
Italy detailed
overview: therapeutic
vs nutraceutical
products
In Italy, therapeutic products/drugs must be registered in order to be sold. Registration can
occur according to either a national (Autorizzazione all’Immissione in Commercio) or a EU (via
the European Medicines Agency) procedure. Some registered therapeutic products/drugs can
be sold only with a specific prescription, while other ones do not need prescription (Over the
Counter, or OTC).
Non-therapeutic products, such as nutraceuticals, need just a preliminary notification of their
label to the Ministry of Health. Once notification procedure is successful, nutraceutical
products are included in a list with their own code.
Some supplements sold as notified products can also be included/part of registered products.
Usually these are drugs against cough and cold, probiotics and analgesics.
Innovation and R&D
Innovation and technology are going to play a key role in this industry. On one side, due to
lower protection with respect to drugs (patents have a different impact and protection
12
compared to drugs, in terms of both entry barrier and life cycle duration) and because of a
higher sensitivity to marketing issues, product innovation and launch of new products seem to
be extremely critical to succeed and different from the typical pharma company business
model. With respect to total Italian industry in 2016 (almost €3.0bn), products launched in the
previous 24 months represented 10% of total consumption and 11% of total sales (Source:
Quintiles IMS Italy, 2017).
Italy - Innovative products on nutraceutical sales via pharmacies (€m)
2,192
-38 21108 83
2,367
Pharmacy sell-out 2014
Mature products Launches 2013 Launches 2014 Launches 2015 Pharmacy sell-out 2015
Source: IMS Health, Nutra Day 2016 - Commento al mercato 2015, 2016
On the other side, technology and R&D capex seem to be different, both for size and
relevance, with respect to food industry. Nutraceutical lifecycle is longer than in food industry
“Much of the technological progress in the field of nutraceuticals will require patience, deep
pockets and a willingness to place risky bets” (Source: KPMG, Nutraceuticals: The Future of
intelligent food, 2015).
Distribution channels/models
Distribution models depend on intrinsic features of the products. Moving along an increasing
scale as far as technology and regulatory issues are concerned, we observe the change from
typical distribution channels of food companies to those of the pharma-industry ones.
Market powers
The assessment based on the industry analysis has revealed a very wide arena of competitors,
who compete by a proprietary range of products that, at least in the medium-high segment in
which KPH operates, are proposed to physicians, who will in turn prescribe the product to
their patients.
This kind of environment shows low power of suppliers, low impact of substitute products,
low barriers to entry, low customer/end users power, intense rivalry.
13
Competitive forces
Suppliers Substitutes
CustomersNew entrants
Rivalry among existing firms
Intense
• Low power
• Low barriers to entry• Serious challenge
• Low power
• Low customers / end-users power
Source: EnVent Research
Nutraceuticals M&A
According to Thomson Reuters, Bourne Partners, a merchant bank specialized in healthcare
market research, reported 185 mergers and acquisitions involving private and public
nutraceutical companies in 2014, up from 95 in 2011. Moss Adams, a US based consulting
firm, recorded a yearly average M&A transaction of around 100 deals from 2011 to 2017.
Salesforce communication skills: a key success factor
In any business model, where sales are promoted by expert intermediaries - as are physicians
in the pharma and nutraceutical industry – and the end-consumer has no reason to express a
preference for a brand or product, promotion efforts and investments need to target the
expert professionals. General advertising, or other forms of communication to the public, has
little sense, if any.
The outcome is that the quality and effectiveness of the salesforce are a major success factor
in this industry. Recruitment, education, training, compensation, organization, motivation, are
ever important activities that can make the difference among such companies whose success
depends largely on effective influence of the medical profession.
14
4. MARKET TRENDS AND OUTLOOK
The Italian nutraceutical market
Historical trend
Italy According to IMS Health, in 2015 Italy reported a spending of €2.4bn in nutraceutical
products, +27% yoy.
Product distribution is mainly covered by pharmacies, which operate in two segments: ethic
(formed by licensed medicines with medical prescriptions) and over the counter (medicines
without medical prescription, which include nutraceutical products).
While the ethic segment declines over years, the nutraceutical segment keeps rising, reaching
€2.7bn in 2016.
Italy - Sell-out trend of ethic segment versus nutraceutical segment in value (€bn)
Ethic segment Nutraceutical segment
16.6 17.2 17.3 16.615.4 15.4 15 15 14.9
4%1%
-4%-7%
0%-3%
0% -1%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
-10
-5
0
5
10
15
20
2008 2009 2010 2011 2012 2013 2014 2015 2016
CAGR 2008-2016: -1.3%
1.2 1.4 1.4 1.6 1.7 1.7 1.9 2.4 2.7 1.9
+14%
4%
+13%
+2% +3%
+9%
+27%
+16%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
-10
-5
0
5
10
15
20
2008 2009 2010 2011 2012 2013 2014 2015 2016 09.17
CAGR 2008-2016: 10.7%
Source: IMS Health, Multichannel view, 2016
Italy - Sales breakdown by distribution channel (Amounts, Sept 2016-Aug 2017)
OTC stores2%
Pharmacy91%
Large-scale retail trade7%
Source: FederSalus, Il Mercato degli Integratori. Il mercato in Farmacia, Iper & Super e Corner: dimensioni, trend e dinamiche dei
segmenti, 2017
15
Italy - Pharmacies sell-out breakdown by product (Volumes, Sept 2016-Aug 2017)
Italian breakdown by
product
Other supplements31%
Minerals8%
Tonics6%
Gastro-intestinal5%
Cough products4%
Multivitamins -Multiminerals
4%Vitamins
4%
Sedative4%
Throat products
3%
Antiacids3%
Cholesterol-lowering
3%
Immune-system3%
Veintonic3%Joints
2%Eyes health2%
Probiotics14%
68%
Source: FederSalus, Il Mercato degli Integratori. Il mercato in Farmacia, Iper & Super e Corner: dimensioni, trend e dinamiche dei
segmenti, 2017
Italy - Other distributional channels sell-out breakdown by product (Volumes, Sept 2016-Aug
2017)
Other supplements15%
Minerals9%
Tonics8%
Probiotics4%
Multivitamins -Multiminerals
4%
Weight control3%
Gastro-intestinal
3%
Vitamins3% Cholesterol-
lowering other3%
Cholesterol-lowering
3%
Sedative2%
Anti-flatulence2%
Detox2%
Vitamins and minerals
1%
Antiacid21%
Energy food17%
85%
Source: FederSalus, Il Mercato degli Integratori. Il mercato in Farmacia, Iper & Super e Corner: dimensioni, trend e dinamiche dei
segmenti, 2017
Italy - Price of main products by channel
€ € 5 € 10 € 15 € 20 € 25
Probiotics
Minerals
Tonics
cholesterol-lowering
Multivitamins - Multiminerals
Gastro-intestinal
Vitamins
Cough products
Joints
Veintonic
Chart Title
Large-scale retail trade OTC stores Pharmacy
Source: FederSalus, Il Mercato degli Integratori. Il mercato in Farmacia, Iper & Super e Corner: dimensioni, trend e dinamiche dei
segmenti, 2017
16
The Italian nutraceutical market is currently increasing its value and is expected to reach
€3.7bn in 2020 (Source: IMS Health, Multichannel view, 2016). According to Quintiles IMS,
Italy is the first European country per capita expenditure for nutraceutical products, despite
the downtrend of consumer health market reported in 2015.
Italy - Nutraceutical market (€bn)
Italian outlook
1.7 1.9
2.42.7
3.03.2
3.43.7
9%
27%
16%
8% 8% 8% 8%
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
00
01
01
02
02
03
03
04
04
05
05
2013 2014 2015 2016 2017E 2018E 2019E 2020E
CAGR 2016-2020: 7.8%
Source: IMS Health, Multichannel view, 2016
17
5. ITALIAN MARKET ARENA
Overview
The companies that operate in the wider nutraceutical and food/dietary supplements market
in Italy are almost two thousand. Out of these, approximately 250 companies report sell-out
over €1m, 68 over €10m and 30 over €20m with proportionally low market shares.
The top 20 Italian competitors by sell-out are listed below.
Top 20 companies in Italy by sell-out
Ranking Company Mkt share Sell-out 04/2016 (€k) YoY 15-16 1 ABOCA 4.23% 112,335 4.62%
2 PFIZER CONS.HEALTH 4.08% 108,555 12.34%
3 SOFAR 2.94% 78,192 4.05%
4 MEDA PHARMA 2.67% 71,000 -8.22%
5 MONTEFARMACO 2.20% 58,427 3.19%
6 NAMED 1.83% 48,659 2.43%
7 POOL PHARMA 1.70% 45,274 2.96%
8 UNIFARCO 1.48% 39,338 17.15%
9 LABOREST ITALIA 1.46% 38,822 5.71%
10 SHEDIR PHARMA 1.44% 38,189 7.21%
11 BIOFUTURA PHARMA 1.40% 37,159 0.37%
12 JOHNSON & JOHN. 1.40% 37,119 -1.52%
13 ESI 1.34% 35,714 6.85%
14 SOLGAR ITALIA 1.25% 33,314 16.57%
15 GIULIANI 1.20% 31,947 2.06%
16 MARCO VITI FARM. 1.13% 29,968 25.98%
17 BAYER 1.10% 29,334 -3.65%
18 MENARINI 1.08% 28,825 66.05%
19 CHEFARO PHARMA 1.07% 28,538 -1.73%
20 SANOFI 1.07% 28,452 56.50%
Source: IMS Health, Multichannel view, 2016
Italy - Number of nutraceutical companies and market shares by Sell-out
30
38
1562
182
<1 €m
1-10 €m
10-20 €m
20 €m +
Sell-out Market shareNumber of companies
9%
26%
20%
45%
Source: EnVent Research on IMS Health, Multichannel view, 2016
18
6. BUSINESS MODEL AND STRATEGY
Similarities to the traditional pharmaceutical approach
KPH is organized and managed as a pharmaceutical operator. As such, it oversees conception,
scientific development, production and sale of a range of nutritional supplements. Its
corporate mission is to become a benchmark in each of the different stages of the value
chain, with a brand and a range of products constantly perceived as first-in-class by patients.
Although Kolinpharma cannot be defined properly as a pharma company, the idea of its
founders and top managers is to replicate, as far as possible, the logics and strategy at the
base of the success factors in the pharma industry. The first three letters of the name
KoLinPHARMA are the acronym of Key Opinion Leaders, i.e. the medical profession. This
approach, although very challenging, is seen by Management as the best way to lead the
Company to a fast growth and value creation.
Success based on product quality and salesforce effectiveness
KPH’s business model is based on prescriptions, which are in turn based on the perception of
the quality of its products by physicians. Success factors for KPH’s business model are:
Focus on R&D and scientific development, together with establishing partnership
agreements with some university research departments, leading to the obtainment of
patents
Quality and effectiveness of the salesforce. As a consequence, recruitment, education,
training, compensation, organization and motivation are critical factors.
KPH’s core product segment
KPH’s product range is designed to be beneficial to people affected by common healthy
problems, classifiable as products having a medium effect on pathologies:
KPH - Strategic positioning
STRONG
THERAPEUTIC EFFECT ON SPECIFIC PATHOLOGY
MEDIUM/STRONG
MEDIUM/LIGHT
LIGHT
DRUGS
NUTRACEUTICALS/KPH’S PRODUCTS
MEDICAL NUTRITION FOR SPECIFIC PURPOSES
COMMON NUTRITIONAL SUPPLEMENTS/
FUNCTIONAL FOODS
FOODNONE
NU
TR
AC
EU
TIC
AL
SEC
TO
R
People with specific nutrition
needs
People with common healthy
problems
Healthy people seeking to preserve wellness
Source: Company data
19
Product portfolio
Name and
Packaging
Category/Main
nutritional
supplements
Year
Launch
Therapeutic use % of
2017
sales
Almetax
Alpha-lipoic acid,
L-tryptophan,
Curcuma,
Vitamin B5, B6, and C,
Chromium picolinate,
Zinc
2014
Gynaecology
12%
Dolatrox
MSM, ASI, SAM,
Vitamin C, Copper,
Manganese
2014
Orthopaedics
17%
Ivuxur
Cranberry (dry extract
of cranberry, seeds
and fruit peel),
D-mannose,
Uva-Uris,
Zinc
2014
Gynaecology
15%
Milesax
Magnesium,
Boswellia,
L-tryptophan
2014
Orthopaedics
29%
Xinepa
Alpha lipoic acid,
N-acetyl-L-carnitine,
Turmeric,
Vitamin B, C and E
2015
Orthopaedics
27%
Source: Company data
In March 2018, the Company announced that the clinical effectiveness of Xinepa for the
treatment of peripheral neuropathies has been recognized thanks to a clinical study
performed at the Policlinico Umberto I° hospital in Rome.
20
KPH’s products benefit of the following certifications:
Kosher: compliant to Jewish religion nutritional standards, accepted rules and/or
criteria
Halal: compliant to Muslim religion nutritional standards, accepted rules and/or criteria
Dairy-free: milk and derivatives free
Associazione Italiana di Celiachia: compliant to standards/needs acceptable for people
affected by celiac disease
ECS: compliant to the highest Italian production standards
UIC: packaging according to Braille reading
Play Sure Doping Free: compliant to international sport federations and World Anti-
Doping Agency standards
ISO certifications issued by Bureau Veritas: ISO 9001, ISO 22000, ISO 13485.
Value Chain
R&D
New product ideas are originated within the Company, staffed with a R&D Manager, a PhD
graduate who is in charge of the research of original supplements.
The R&D Manager interacts with MSRs, who have direct feedback from their network of
physicians with respect to consumers/patients’ needs, and cooperates with two external R&D
laboratories, part of the Pavia University and Calabria University Pharmacy faculties.
For R&D and launch of new products, KPH is also staffed with:
A Scientific Manager, in charge of the information/communication package aimed at
illustrating new products to physicians
A Medical Director, in charge of the clinical tests/trials activity preliminary to the launch
of new products
A Statistician who supports the Medical Director in the analysis of clinical results
Patents KPH has obtained four patents in Italy and has requested their recognition also in other
countries. There are also pending requests for two new patents.
21
Product Patent target Country Expiry Other requests
Almetax
Prevention and
treatment of
metabolic disorders
associated with
menopause and
climacteric
Italy
(2016)
2034
EU, USA, Israel
Xinepa
Treatment of
neuropathies and/or
neuropathic plan
(first Xinepa patent)
Italy
(2016)
2034
EU, USA, Israel,
Uruguay, Argentina
Xinepa2
Treatment of
neuropathies and/or
neuropathic plan
(2nd Xinepa patent)
Italy
(2017)
2035
Uruguay, Argentina
Milesax
Muscle-relaxant and
anti-inflammatory
activity
Italy
(2016)
2034
EU, USA, Israel
Dolatrox (formerly
Dolasix)
Treatment of
arthropaties and
osteoarthritis
EU
2035
USA, Israel
Ivuxur
Treatment and
prevention of urinary
tract infections
-
-
EU, USA, Israel
Source: Company data
Product portfolio
expansion
After the launch of four products in 2014 and one in 2015, KPH is expected to launch three
new products in 2018.
Production and logistics
Production, packaging and logistics are outsourced and take place in accordance with quality
standards and certifications required by KPH. The production company is authorized by the
Ministry of Health to produce nutritional supplements through its facilities.
22
Marketing and sales
The network of MSRs and their interaction with physicians, responsible of prescribing KPH’s
products to patients/end-consumers, is critical. Geographical coverage and effectiveness of
MSR are key success factor for the Company’s growth.
Salesforce organization and training
The sales function is headed by a Key Area Manager, to whom Area Managers and MSRs
report. KPH, in light of the crucial role of its salesforce, must select and affiliate highly skilled
MSRs, such as graduates, binding them via exclusive arrangements.
The marketing activity of MSRs towards physicians is planned and organized throughout the
year, according to seasonal cycles, in line with pharma sector practice. Common phases:
Selection of relevant pathologies according to seasonality criteria
Selection of target criteria (number of assisted patients by single physicians, size of
catchment area of hospitals, etc.)
Planning of meetings/interviews (with both pharmacies and physicians)
Selection of marketing and communication tools in cooperation with the Medical
Director and Scientific Manager
KPH - Sales and MSRs
1.3
2.5
4.1
28
35
58
0
10
20
30
40
50
60
70
00
01
01
02
02
03
03
04
04
05
2015 2016 2017
Net Sales (€m) MSRs Source: Company data
As of February 2018, the Company’s MSRs were 63.
Distribution channels
KPH’s customers are wholesalers of pharmaceutical products, distributed all over Italy. There
are no long-term agreements with wholesalers. Sales are direct or indirect. Direct sales are
originated by MSRs, through physicians who prescribe products to their patients. Indirect
sales refer to products directly sold to end-users by pharmacies, OTC stores, or supermarkets,
in which products can be purchased without medical prescription.
23
7. MARKET METRICS
Market value of comparable companies
Selection criteria
The primary criteria for the selection of listed company comparables is the entire or
predominant part of revenues deriving from nutraceutical products. Alternatively, a
comparable may be present in a different segment whose drivers are though similar to those
of the nutraceutical industry (i.e. Boiron operating in homeopathy).
Many pharmaceutical companies have products present in in the nutraceutical industry.
However, business models (including role, time span, resources absorbed and impact of R&D
activity and capex) and key drivers for growth of a typical pharmaceutical company are
different. Companies substantially engaged in the traditional pharma industry are therefore
not considered in our chosen comparable peer sample.
Comparability of selected peers
Though comparable as to activity, the selected peers show differences on certain issues.
Among them, size and track record look more critical than others. KPH was established in
2013 and 2016 sales amounted to €2.5m. Among peers, revenues are in a wide range
between €30m and €4,300m. The youngest company is Pharmanutra, founded in 2003.
Another major difference is also the geographical presence: so far KPH has been operating
only in Italy, while the selected peers have export sales.
Profile of business peers
Pharmanutra. Pharmanutra is a pharmaceutical company established in 2003 in Pisa,
specialized in the development of nutraceutical supplements and medical devices. The Group
includes Alesco, manufacturer and distributor of raw materials (active ingredients) for the
pharmaceutical, food and dietary supplement industry and JuniaPharma, developing and
distributing pediatric medicines, medical devices, OTC and nutritional supplements.
2017 revenues: €38m
Comparability: high
BioDue. BioDue develops and manufactures cosmetics, solid and liquid food supplements and
medical devices on behalf of national and international pharmaceutical companies, and under
its own brands (Pharcos, BiOfta and Selerbe).
2017 revenues: €36m
Comparability: average
Usana. USANA Health Sciences, Inc. develops, manufactures, and markets nutritionals,
personal care, and weight management products. Nutritionals account for over 80% of sales.
2017 revenues: €872m
Comparability: average
Enervit. Core business is sport food supplements and functional nutrition.
24
2017 revenues: €57m
Comparability: low
Herbalife. Herbalife International is a global multi-level marketing corporation that develops,
markets and sells nutrition supplements, weight management, sports nutrition and personal-
care products.
2017 revenues: €3,687m
Comparability: low (size and distribution model)
Balchem. Balchem develops, manufactures and sells specialty performance ingredients and
products for the food, nutritional, feed, pharmaceutical, medical sterilization and industrial
markets. Human and animal nutrition products account for more than 80% of total sales.
2017 revenues: €495m
Comparability: average
Boiron. Boiron produces and sells homeopathic medicines.
2016 revenues: €614m
Comparability: average
Key data comparison
The following chart shows a summary of key data and financial metrics of the selected
industry players.
Revenues Rev. CAGR Rev. CAGR EBITDA % EBITDA % EBITDA % EBITDA %
2017 (€m) '13-17 '17-19E 2017 Avg. 5Y Min 5Y Max 5Y
Pharmanutra 38 31% 18% 25% 21% 18% 25%
BioDue 36 7% 10% 13% 12% 10% 14%
USANA Health Sciences 872 14% 5% 14% 16% 14% 18%
Enervit 57 2% 7% 12% 10% 6% 12%
Herbalife 3,687 1% 4% 16% 15% 12% 17%
Balchem 495 19% 3% 24% 23% 22% 25%
Boiron 614 2% 2% 25% 27% 24% 28%
Mean 11% 7% 19% 18% 15% 20%
Median 7% 5% 16% 16% 14% 18%
Company
Source: EnVent Research on S&P Capital IQ data; Update: 11/04/2018 - Note: for Boiron FY16 last year available
Key facts:
Overall, operating margins have never been lower than 10% in the last five years,
except for Enervit (whose comparability we consider too low to rely on its metrics)
After a significant sales growth in 2013-17, a deceleration is expected in 2018-19 in
most cases, being most of them established companies
As a consequence, in a fast growing global and local market, successful early-stage
companies have good chances to outperform
25
Market multiples
EV/REVENUES EV/EBITDA EV/EBIT
2017A 2018E 2019E 2017A 2018E 2019E 2017A 2018E 2019E
Pharmanutra 3.0x 2.6x 2.3x 12.0x 10.6x 9.6x 12.8x 12.0x 10.8x
BioDue 1.9x 1.5x 1.4x 14.6x 9.5x 8.2x 21.1x 12.6x 10.5x
USANA Health Sciences 1.5x 1.8x 1.7x 10.1x 12.3x n.a. 11.3x 13.5x 12.3x
Enervit 1.0x 1.0x 0.9x 8.6x 9.4x 8.3x 12.3x 14.5x 12.2x
Herbalife 1.5x 2.0x 1.9x 9.2x 12.4x 12.4x 10.7x 14.4x 13.5x
Balchem 4.6x 4.7x 4.6x 19.2x 18.7x 18.7x 27.7x 27.2x 26.2x
Boiron 1.9x 1.7x 1.6x 7.8x 7.0x 6.5x 9.5x 8.5x 8.0x
Mean 2.2x 2.2x 2.1x 11.6x 11.4x 10.6x 15.0x 14.7x 13.4x
Median 1.9x 1.8x 1.7x 10.1x 10.6x 8.9x 12.3x 13.5x 12.2x
Company
Source: EnVent Research on S&P Capital IQ data; Update: 11/04/2018
We notice a quite wide range among EV/Revenues multiples, confirmed by the distance
between mean and median. Two companies enjoy over 2x EV/Revenues multiples, which
generally imply revenues and income strong expectations, while the others stay below.
Regression Analysis
A linear regression analysis between EBITDA Margin 2018E and EV/Revenues 2018E of
comparable peers shows a value of R2 lower than 50%. This reflects the facts that some peers
show a market premium and others a market discount with respect to their profitability.
2018 Regression Analysis
y = 14.203x - 0.4778R² = 0.4729
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
4.0x
4.5x
5.0x
0% 5% 10% 15% 20% 25% 30%
EV
/ R
even
ues 2
018E
EBITDA Margin % 2018E
PHARMANUTRA
USANA HEALTH SCIENCES
ENERVIT
HERBALIFE
BALCHEM
BOIRON
BIODUE
Source: EnVent Research on S&P Capital IQ data; Update: 11/04/2018
26
8. FINANCIAL ANALYSIS AND PROJECTIONS
Fast growth in a promising market
2017 sales reached €4.1m (+62% YoY). So far, sales increased proportionally with the growth
of MSRs (full-year equivalent figures are lower than the represented year-end data).
KPH - 3Y Sales (€m) and MSRs
1.3
2.5
4.1
28 35 580
10
20
30
40
50
60
70
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2015A 2016A 2017A
Sales (€m) MSRs (Units)
Source: Company data for 2015-17A; Note: MSRs at year-end
MSRs in detail In the first 18 months, considered as an average training period, new MSRs may receive,
regardless of fees calculated on actual sales, a paid in advance-entry fee. The entry fees are
accounted for as deferred charges.
In order to evaluate performances and cost efficiency, we have estimated revenues per MSR.
The historical per capita performances are shown as follows:
KPH - 3Y MSR direct sales per-capita (€)
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Revenues/ IMS
Source: EnVent Research estimate
Along with marketing cost represented by MSR compensation, the income statement contains
27
production and distribution costs, while costs for trials are partially accounted as deferred
charges. R&D and brand/patent costs are capitalized.
The balance sheet and cash flow analysis, and related KPIs, show that:
DSO (175) and DPO (127) exceed usual standards or comparable practices
Intangible assets significant and growing balances reflects the capitalization policy of
operating costs deemed to be promotional and not directly matching period revenues
EBITDA in 2017 was €0.6m (14.5% margin), doubled compared to prior year. The net result of
the year was a €66k loss (vs. -€366k in 2016).
What’s next?
Market and the Company’s expected trend assumptions
Based on market analysis and expected trends, our general assumption is that the industry
will continue to grow at a sustained pace. Moreover, our analysis of the salesforce coverage,
together with the average individual sales effectiveness still at early-stage levels, lead us to
assume that KPH has significant room to grow beyond the market’s trend.
Key growth drivers
2018-19-20E assumptions:
MSRs increase 12, 15, 10
Revenues per MSR increase +40%, +10%, +10%
Working capital dynamics: a substantial issue
Historical working capital indicators - over 150 DSO and 120 DPO - reflect the typical dynamics
of a startup business, with flexible customer terms to allow confidence and facilitate sales,
counterbalanced by pressure on suppliers to obtain longer than normal terms in payments, in
view of fast growing orders. The implicit financial effect is a significant investment in working
capital, partially financed by a delay on payments that helps to lower financial debt. In view of
growing sales and expenses, related risks rise: significant working capital investment together
with the debt-like nature of long-standing payables which influences financial performance;
concurrently, operations may be impacted if suppliers require normal payment terms.
Moreover, the Company’s value perception could be negatively affected, should abnormal
indicators continue to persist. Accordingly, in our estimates we assume a gradual rebalancing
of the above figures considered. The underlying rationale is that the normalization in the
collection cycle will be used to finance the normalization of the payables. Under our estimates
assumptions, the excess payables balance would be normalized as a consequence of the cash
flow generation in the business, affected/improved by the DSO normalization. Different
scenarios would have a material effect on financial debt and valuation.
Operating profit subjectivity
KPH has substantial investments in intangible assets - €3.1m as of December 31st, 2017 -
which include R&D, brands, patents, certifications, trials and MSRs’ entry incentives. The
28
capitalization accounting policy so far adopted has a material effect on operating margins,
thus the reported and prospective EBITDA levels depend to a certain extent on the
subjectivity in the accounting policies to be applied to the components of the fixed assets. We
expect investments in R&D to become less material than before with respect to the growing
sales and expenses, while the MSRs’ incentives might be even higher, following the salesforce
fast expansion program. A portion of initial joining fees may be offset on future after MSRs
performance evaluation.
In our projections we take into account this matter by:
A decreasing amount of R&D and trial costs as percentage on sales
A 2018 peak in joining fees to MSRs and decreasing new entrants into the salesforce
Attributing reduced significance to EBITDA and higher reliability to EBIT in our model
Projections
Assumptions
Sales
MSRs increase 12, 15, 10 in 2018,19,20
Revenues per MSR increase +40%, +10%, +10%
Operating costs
COGS: around 30% of sales in 2018-20
Salesforce cost net of new MSRs joining fees: around 30% of
sales in 2018-20
Overheads: €1.7m in 2018, €1.8m in 2019, €2m in 2020
D&A
D&A rates:
6.67% brands, R&D, certifications
20% capitalized MSR joining fees, trial costs, IPO costs
15% equipment
Interest expenses Financial debt: average implicit interest rate at 4%
Income taxes
Corporate tax (IRES): 24%
Regional tax (IRAP): 3.9%
Cash out for taxes takes into account available tax assets
Working Capital
2018,19,20 DSO: 165, 150, 135 days
2018,19,20 DPO: 115, 100, 90 days
2018-20 DOI: 37 days
Other current assets/liabilities (different from tax assets): stable
Capex
2018,19,20 €0.9m, €1.1m, €0.8m
R&D, trials, brands/patents, joining fees, equipment, IPO
Equity No dividends in projections
Source: EnVent Research
29
Projections
Profit and Loss
€m 2016A 2017A 2018E 2019E 2020E
Sales 2.5 4.1 7.1 9.5 11.8
Other revenues 0.1 0.0 0.0 0.0 0.0
Revenues 2.6 4.1 7.1 9.5 11.8
YoY % 103.5% 60.4% 72.5% 34.9% 24.2%
Operating costs (1.9) (2.8) (4.6) (6.1) (7.6)
Personnel (0.4) (0.7) (0.8) (0.8) (0.9)
EBITDA 0.3 0.6 1.7 2.6 3.4
Margin 10.3% 14.5% 23.7% 27.6% 28.4%
D&A (0.6) (0.6) (0.8) (0.8) (0.7)
EBIT (0.3) 0.0 0.9 1.8 2.7
Margin -12.7% 0.8% 12.8% 19.1% 22.8%
Interest (0.1) (0.1) (0.1) (0.2) (0.1)
EBT (0.4) (0.0) 0.8 1.7 2.6
Margin -15.3% -1.1% 10.9% 17.5% 21.8%
Income taxes 0.0 (0.0) (0.2) (0.5) (0.7)
Net Income (Loss) (0.4) (0.1) 0.5 1.2 1.9 Source: Company data for 2016-17A - EnVent Research for 2018-20E
Balance Sheet
€m 2016A 2017A 2018E 2019E 2020E
Inventory 0.3 0.4 0.7 1.0 1.2
Trade receivables 1.1 2.1 3.5 4.3 4.8
Trade payables (1.2) (1.7) (2.2) (2.4) (2.5)
Trade Working Capital 0.3 0.8 2.0 2.9 3.5
Other assets (liabilities) 0.1 (0.1) (0.3) (0.4) (0.4)
Net Working Capital 0.4 0.6 1.7 2.4 3.0
Intangible assets 2.4 3.1 3.3 3.6 3.8
Property, plant and equipment 0.03 0.04 0.02 0.02 0.02
Non-current assets 2.5 3.1 3.3 3.6 3.8
Provisions (0.03) (0.05) (0.1) (0.1) (0.2)
Net Invested Capital 2.8 3.7 5.0 5.9 6.6
Net Debt (Cash) 2.7 2.5 0.0 (0.2) (1.3)
Equity 0.1 1.2 4.9 6.1 8.0
Sources 2.8 3.7 5.0 5.9 6.6
Source: Company data for 2016-17A - EnVent Research for 2018-20E
30
Cash Flow
€m 2016A 2017A 2018E 2019E 2020E
EBIT (0.3) 0.0 0.9 1.8 2.7
Current taxes 0.0 (0.0) (0.3) (0.5) (0.8)
D&A 0.6 0.6 0.8 0.8 0.7
Cash flow from operations 0.3 0.6 1.5 2.2 2.7
Trade Working Capital (0.2) (0.5) (1.2) (0.8) (0.6)
Capex (1.0) (1.2) (0.7) (1.1) (0.8)
Other assets and liabilities 0.1 0.2 0.2 0.1 0.0
Free cash flow (0.8) (0.9) (0.4) 0.4 1.2
Interest (0.1) (0.1) (0.1) (0.2) (0.1)
Paid-in capital 0.1 1.2 0.0 0.0 0.0Capex - IPO cost 0.0 0.0 (0.2) 0.0 0.0IPO proceeds 0.0 0.0 3.1 0.0 0.0
Net cash flow (0.8) 0.2 2.4 0.2 1.1
Net (Debt) Cash - Beginning (1.8) (2.7) (2.5) (0.0) 0.2
Net (Debt) Cash - End (2.7) (2.5) (0.0) 0.2 1.3
Change in Net (Debt) Cash (0.8) 0.2 2.4 0.2 1.1 Source: Company data for 2016-17A - EnVent Research for 2018-20E
Ratio analysis
KPIs 2016A 2017A 2018E 2019E 2020E
ROE neg. neg. 11% 20% 23%
ROS (EBIT/Revenues) neg. 1% 13% 19% 23%
ROIC (NOPAT/Invested Capital) neg. 0% 13% 22% 29%
DSO 150 175 165 150 135
DPO 119 127 115 100 90
DOI 48 33 37 37 37
TWC/Revenues 11% 19% 29% 30% 29%
NWC/Revenues 15% 16% 24% 26% 26%
Net Debt / EBITDA 10.2x 4.2x 0.0x cash cash
Net Debt / Equity 2.3x 1.7x 0.0x cash cash
Net Debt / (Net Debt+Equity) 0.9x 0.7x 0.0x cash cash
Cash flow from operations / EBITDA 114% 100% 87% 82% 79%
FCF / EBITDA neg. neg. neg. 13% 36% Source: Company data for 2016-17A - EnVent Research for 2018-20E
In order to assess the sustainability of KPH’s expected sales growth, we compared the
Company’s trend with that of other Italian nutraceutical companies. Selection criteria:
2016 sales in the range €3-€15m
Sales originated only by nutraceutical products
Companies founded in the last 10-15 years
KPH’s competitors
Company Since Revenues 2016 (€m) EBITDA 2016 (€m)
Difass International 2010 15.2 1.7
Cristalfarma 2004 9.6 2.8
Agave 2004 9.9 1.2
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Konpharma 2005 9.6 2.6
Pharmasuisse 2004 5.7 1.1
Farmaceutica mev 2008 3.0 0.4
Source: AIDA
We calculated sales CAGR starting from the 3rd year after foundation for each company in the
sample, for the following periods:
3-5 years
3-8 years
5-8 years
Therefore, we compared the sample combined CAGR with our estimates on KPH for the same
periods after foundation:
2015-17E
2015-20E
2017E-20E
Revenue CAGR for KPH and selected competitors
37%
21%
13%
79%
57%
44%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
CAGR 3rd-5th year activity CAGR 3rd-8th year activity CAGR 5th-8th year activity
Median KPH CRISTALFARMA
AGAVE KONPHARMA PHARMASUISSE
DIFASS INTERNATIONAL FARMACEUTICA MEV Source: EnVent Research on AIDA, 2004-2016 - Note: Revenue CAGR for Difass and Agave calculated over 7 years
Kolinpharma appears as the best performer with respect to observed 3-5 years after
foundation sales CAGR
The expected sales trend in our 2018-20 estimates assumes that the outperformance of
KPH will be confirmed even considering the 5-8 years period after foundation
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9. VALUATION
A growing company in a growing market
Key nutraceutical valuation issues
According to our assessment of the business model, the key driver for growth in the industry
is the salesforce network performance coupled with the continuing customer perception of
product quality and effectiveness.
Value drivers and use of market data
So far, the Company has shown stronger growth than comparable companies along their
first 3-5 years of activity
The nutraceutical industry is expected to keep growing in the future, due to macro trends
which will continue to support and stimulate demand/consumption
Selected listed peers, all in a more advanced life-cycle stage compared to Kolinpharma,
show average Enterprise Values in the range 1.8x-2.2x expected 2018 revenues, 10.6x-
11.4x expected 2018 EBITDA, 13.4x-14.6x expected 2018 EBIT
The average 2018 expected EBITDA margin for listed companies is in the region of 20%.
Since these are not early-stage companies anymore, we have consistently aligned
Kolinpharma’s long-run targets to the industry benchmark
The accounting policy of capitalizing joining fees for new MSRs has generated and will
generate a bias between the Company’s EBITDA and cash conversion associated with
EBITDA. This bias will terminate as soon as the number of MSRs will reach a steady state.
However, we consider an adjusted EBITDA, adding-back capitalized salesforce joining
fees, and relative EBIT, more proper for market multiples derived from well-established
peers.
Valuation
Our valuation metrics include discounted cash flows and market multiples. Regression analysis
has been deemed not suitable for KPH’s case given a low observed correlation coefficient (R2)
amidst peers.
Discounted cash flows
We have applied the DCF model to our projections with the following assumptions:
- Risk free rate: 1.6% (Italian 10-year government bonds interest rate - 3Y average.
Source: Bloomberg, April 2018)
- Market return: 13.7% (3Y average. Source: Bloomberg, April 2018)
- Market risk premium: 12.1%
- Beta: 0.9 (KPH’s Beta; Median of selected industry peers is 0.7. Source: Bloomberg, April
2018)
- Cost of equity: 12.8%
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- Cost of debt: 4.3% (Source: implicit L/T bank debt rate, assumed stable)
- Tax rate: 24% (IRES)
- 30% debt/(debt + equity) as a sustainable target capital structure considering the
opportunity for KPH to finance at least NWC (around 22% of expected Net Invested
Capital in our 2020 estimates)
- WACC calculated at 10%
- Perpetual growth rate after explicit projections: 2.0%
- Terminal Value assumes an EBIT margin of 16% (mean and median EBIT margin expected
in 2018, from the sample of comparable listed companies, underperforming companies
excluded)
DCF Valuation
€m 2017A 2018E 2019E 2020E Perpetuity
Revenues 4.1 7.1 9.5 11.8 12.1
EBITDA 0.6 1.7 2.6 3.4 2.4
Margin 14.5% 23.7% 27.6% 28.4% 20.0%
EBIT 0.0 0.9 1.8 2.7 1.9
Margin 0.8% 12.8% 19.1% 22.8% 16.0%
Taxes (0.0) (0.3) (0.5) (0.8) (0.5)
NOPAT 0.0 0.6 1.3 1.9 1.4
D&A 0.6 0.8 0.8 0.7
Provisions 0.0 0.0 0.0 0.0 0.0
Cash flow from operations 0.6 1.5 2.2 2.7 1.4
Trade Working Capital (0.5) (1.2) (0.8) (0.6) (0.1)
Capex (1.2) (0.7) (1.1) (0.8)
Other assets and liabilities 0.2 0.2 0.1 0.0 0.0
Unlevered free cash flow (0.9) (0.4) 0.4 1.2 1.3
WACC 10.0%
Long-term growth (G) 2.0%
Discounted Cash Flows (0.3) 0.3 0.9
Sum of Discounted Cash Flows 0.9
Terminal Value 16.6
Discounted TV 12.5
Enterprise Value 13.4
Net Debt as of 31/12/17 (2.5)
IPO proceeds 3.1
Equity Value 14.0
DCF - Implied multiples 2018E 2019E 2020E
EV/Revenues 1.9x 1.4x 1.1x
EV/EBITDA 8.0x 5.1x 4.0x
EV/EBIT 14.7x 7.3x 5.0x
P/E 26.2x 11.7x 7.5x Source: EnVent Research
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Valuation based on market multiples
The comparable listed companies were selected according to criteria which take into
consideration:
presence in the industry, in broad sense, with some of the selected peers selling common
nutritional supplements and others selling medical nutritionals
business models similarities
EV/EBITDA multiple derived from the sample is also applied to the adjusted EBITDA of KPH
(net of capitalized salesforce joining fee).
Application of market multiples
€m
KPH Valuation - Multiples Multiple EV Net Debt IPO Proceeds Equity Value
2018E Revenues 7.1 Mean 2.2x 15.5 (2.5) 3.1 16.1
2018E Revenues 7.1 Median 1.8x 12.9 (2.5) 3.1 13.6
Mean 14.8
2018E EBITDA 1.7 Mean 11.4x 19.1 (2.5) 3.1 19.7
2018E EBITDA 1.7 Median 10.6x 17.8 (2.5) 3.1 18.4
Mean 19.1
2018E Adj. EBITDA 0.9 Mean 11.4x 10.8 (2.5) 3.1 11.4
2018E Adj. EBITDA 0.9 Median 10.6x 10.1 (2.5) 3.1 10.7
Mean 11.0
2018E EBIT 0.9 Mean 14.6x 13.3 (2.5) 3.1 13.9
2018E EBIT 0.9 Median 13.4x 12.2 (2.5) 3.1 12.8
Mean 13.3
Source: EnVent Research
The convergence of values coming from the industry multiples confirms the assumption that
profitability based on adjusted EBITDA is more suitable with respect to accounting-based
EBITDA.
Target Price
Kolinpharma is a recently established and successful company in a growing and very
competitive environment. Operating profitability has been rewarding from the very
beginning, while the overall financial performance is, and will be, in the short/medium-term
conditioned by the completion of the current investment cycle and especially by working
capital dynamics.
The DCF valuation model based on our estimates - that implies the full conversion of PAS into
ordinary shares - yields a Target Price of €8.54 per diluted share - consistently with the
assumption of full conversion, +22% on the IPO placement price of €7 and with a potential
upside of 21% on the current share price.
35
As a consequence, we initiate the coverage of Kolinpharma with an OUTPERFORM
recommendation on the stock.
The undiluted Target Price would be €9.59 per share - under the assumption of unreached
financial targets and cancellation of PAS, +37% on the IPO placement price and with a
potential upside of 36% on the current share price. However, in case of unreached financial
targets and cancellation of PAS, a value adjustment downwards can be expected.
Please refer to important
disclosures at the end of
this report.
Kolinpharma Price per Share €
Target Price - diluted 8.54
Target Price - undiluted 9.59
Current Share Price (18/04/2018) 7.05
Premium (Discount) on diluted TP 21%
Premium (Discount) on undiluted TP 36% Source: EnVent Research
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DISCLAIMER (for more details go to www.enventcapitalmarkets.co.uk under “Disclaimer”) This publication has been prepared by Tommaso Maria Cucchiarelli and Viviana Sepe, Analysts on behalf of the Research & Analysis Division of EnVent Capital Markets Limited (“EnVentCM”). EnVent Capital Markets Limited is authorised and regulated by the Financial Conduct Authority (Reference no. 651385). Italian branch registered number is 132. According to article 35, paragraph 2b of AIM Italia Rules for Companies (Regolamento Emittenti AIM Italia/Mercato Alternativo del Capitale), EnVentCM has been commissioned to produce Equity Research, and particularly this publication, for the Company by arrangement with Banca Aletti, the broker (specialist according to AIM Italia Rules) engaged by the Company. This publication does not represent to be, nor can it be construed as being, an offer or solicitation to buy, subscribe or sell financial products or instruments, or to execute any operation whatsoever concerning such products or instruments. This publication is not, under any circumstances, intended for distribution to the general public. Accordingly, this document is only for persons who are Eligible Counterparties or Professional Clients only, i.e. persons having professional experience in investments who are authorized persons or exempted persons within the meaning of the Financial Services and Markets Act 2000 and COBS 4.12 of the FCA’s New Conduct of Business Sourcebook. For residents in Italy, this document is intended for distribution only to professional clients and qualified counterparties as defined in Consob Regulation n. 16190 of the 29th October 2007, as subsequently amended and supplemented. EnVentCM does not guarantee any specific result as regards the information contained in the present publication, and accepts no responsibility or liability for the outcome of the transactions recommended therein or for the results produced by such transactions. Each and every investment/divestiture decision is the sole responsibility of the party receiving the advice and recommendations, who is free to decide whether or not to implement them. The price of the investments and the income derived from them can go down as well as up, and investors may not get back the amount originally invested. Therefore, EnVentCM and/or the author(s) of the present publication cannot in any way be held liable for any losses, damage or lower earnings that the party using the publication might suffer following execution of transactions on the basis of the information and/or recommendations contained therein. The purpose of this publication is merely to provide information that is up to date and as accurate as possible. The information and each possible estimate and/or opinion and/or recommendation contained in this publication is based on sources believed to be reliable. Although EnVentCM makes every reasonable endeavour to obtain information from sources that it deems to be reliable, it accepts no responsibility or liability as to the completeness, accuracy or exactitude of such information and sources. Past performance is not a guarantee of future results. Most important sources of information used for the preparation of this publication are the documentation published by the Company (annual and interim financial statements, press releases, company presentations, IPO prospectus), the information provided by business and credit information providers (as Bloomberg, S&P Capital IQ, AIDA) and industry reports. EnVentCM has no obligation to update, modify or amend this publication or to otherwise notify a reader or recipient of this publication in the case that any matter, opinion, forecast or estimate contained herein, changes or subsequently becomes inaccurate, or if the research on the subject company is withdrawn. The estimates, opinions, and recommendations expressed in this publication may be subject to change without notice, on the basis of new and/or further available information. EnVentCM intends to provide continuous coverage of the Company and financial instrument forming the subject of the present publication, with a semi-annual frequency and, in any case, with a frequency consistent with the timing of the Company’s periodical financial reporting and of any exceptional event occurring in its sphere of activity. A draft copy of this publication may be sent to the subject Company for its information and review (without target price and/or recommendation), for the purpose of correcting any inadvertent material inaccuracies. EnVentCM did not disclose the rating to the issuer before publication and dissemination of this document. This publication, nor any copy of it, can not be brought, transmitted or distributed in the United States of America, Canada, Japan or Australia. Any failure to comply with these restrictions may constitute a violation of the securities laws provided by the United States of America, Canada, Japan or Australia. EnVentCM is distributing this publication as from the date indicated on the front page of this publication. ANALYST DISCLOSURES For each company mentioned in this publication, all of the views expressed in this publication accurately reflect the financial analysts’ personal views about any or all of the subject company (companies) or securities. Neither the analysts nor any member of the analysts’ households have a financial interest in the securities of the subject company. Neither the analysts nor any member of the analysts’ households serve as an officer, director or advisory board member of the subject company. Analysts' remuneration was not, is not or will be not related, either directly or indirectly, to specific proprietary investment transactions or to market operations in which EnVentCM has played a role (as Nomad, for example) or to the specific recommendation or view in this publication. EnVentCM has adopted internal procedures and an internal code of conduct aimed to ensure the independence of its financial analysts. EnVentCM research analysts and other staff involved in issuing and disseminating
37
research reports operate independently of EnVentCM Capital Market business. EnVentCM, within the Research & Analysis Division, may collaborate with external professionals. It may, directly or indirectly, have a potential conflict of interest with the Company and, for that reason, EnVentCM adopts organizational and procedural measures for the prevention and management of conflicts of interest (for more details go to www.enventcapitalmarkets.co.uk under “Disclaimer” and “Procedures for prevention of conflicts of interest”). MIFID II DISCLOSURES Kolinpharma S.p.A. (the “Issuer or the “Company”) is a corporate client of Envent Capital Markets. This document, being paid for by a corporate Issuer, is a Minor Non-monetary Benefit as set out in Article 12 (3) of the Commission Delegated Act (C2016) 2031. This note is a marketing communication and not independent research. As such, it has not been prepared in accordance with legal requirements designed to promote the independence of investment research and this note is not subject to the prohibition on dealing ahead of the dissemination of investment research. CONFLICTS OF INTEREST In order to disclose its possible conflicts of interest, EnVentCM states that it acts or has acted in the past 12 months as Nominated Adviser (“Nomad”) and Global Coordinator to the subject Company on the AIM Italia-Mercato Alternativo del Capitale, a Multilateral Trading Facility regulated by Borsa Italiana (for more details go to www.enventcapitalmarkets.co.uk under “Disclaimer” and “Potential conflicts of interest”). CONFIDENTIALITY Neither this publication nor any portions thereof (including, without limitation, any conclusion as to values or any individual associated with this publication or the professional associations or organizations with which they are affiliated) shall be reproduced to third parties by any means without the prior written consent and approval from EnVentCM. VALUATION METHODOLOGIES EnVentCM Research & Analysis Division calculates range of values and fair values for the companies under coverage using professional valuation methodologies, such as the discounted cash flows method (DCF), dividend discount model (DDM) and multiple-based models (e.g. EV/Revenues, EV/EBITDA, EV/EBIT, P/E, P/BV). Alternative valuation methodologies may be used, according to circumstances or judgement of non-adequacy of most used methods. The target price could be also influenced by market conditions or events and corporate or share peculiarities. STOCK RATINGS The “OUTPERFORM”, “NEUTRAL”, AND “UNDERPERFORM” recommendations are based on the expectations within 12-month period of date of initial rating (shown in the chart on the front page of this publication). Equity ratings and valuations are issued in absolute terms, not relative to market performance. Rating rationale: OUTPERFORM: stocks are expected to have a total return of at least 20% in the mid-term; NEUTRAL: stocks are expected to have a performance consistent with market or industry trend and appear less attractive than Outperform rated stocks; UNDERPERFORM: stocks are among the least attractive in a peer group; UNDER REVIEW: target price under review, waiting for updated financial data, or other key information such as material transactions involving share capital or financing; SUSPENDED: no rating/target price assigned, due to material uncertainties or other issues that seriously impair our previous investment ratings, price targets and earnings estimates; NOT RATED: no rating or target price assigned. The stock price indicated is the reference price on the day indicated as “Date of Price” in the table on the front page of this publication. DETAILS ON STOCK RECOMMENDATION AND TARGET PRICE
Date Recommendation Target Price (€) Share Price (€)
18/04/2018 OUTPERFORM 8.54 7.05
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ENVENTCM RECOMMENDATION DISTRIBUTION (April 18th
, 2018) Number of companies covered: 7 OUTPERFORM NEUTRAL UNDERPERFORM SUSPENDED UNDER REVIEW NOT RATED
Total Equity Research Coverage % 43% 29% 0% 0% 29% 0%
of which EnVentCM clients % * 100% 100% 0% 0% 100% 0%
* Note: Companies to which corporate and capita l markets services were suppl ied in the last 12 months. This disclaimer is constantly updated on the website at www.enventcapitalmarkets.co.uk under “Disclaimer”. Additional information are available upon request. © Copyright 2018 by EnVent Capital Markets Limited - All rights reserved.
