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Hyphens Pharma International Limited
16-05-2018, 08:49 PM, (This post was last modified: 16-05-2018, 08:52 PM by karlmarx.)
Post: #1
Hyphens Pharma International Limited
Having seen numerous articles on Hyphens Pharma -- mostly reiterating the first 4 pages of the 362 page IPO prospectus -- it seems that there is a consensus that this stock will be a sure winner on the opening day. If the views are bullish and there are plenty of bidders for the stock, it will be difficult for the price to not rise. But retail investors who see this as a potential long-term investment should pause and ask themselves, can Hyphens Pharma be a sure winner over the longer term?


Hyphens Pharma has 3 businesses, over several geographical territories. But most of its revenue and profit is derived from 2 businesses on 2 geographies.


1) The first core business is its distribution of European and North American 'specialty pharmaceutical' products in Vietnam. Hyphens imports these products and sells them to the Vietnamese distributors and wholesalers, which mostly end up in public hospitals. It distributes theses specialty pharma products in other countries as well, such as in Singapore, Malaysia, and Indonesia. But Vietnam is Hyphen's largest market for its specialty pharma segment, generating $46.8m out of $60.7m of revenue for specialty pharma. Hyphen's total group revenue is $113.1m, so Vietnam contributes about 41.1% of total revenue. Take a look at this segment's PBT, and its percentage contribution to total PBT.

Specialty Pharmaceutical PBT, and its % contribution to total PBT
FY15:              $2.9m                48.3%
FY16:              $4.1m                75.9%
FY17:              $5.1m                71.4%

The point here is that 'specialty pharmaceutical' (as a business) in Vietnam (the geography) will control the direction of Hyphen's future prosperity.

a) The geography. China, which possess significant economic and security leverage over Vietnam, may 'persuade' Vietnam to give preferential treatment to Chinese pharma products, when China makes a push to export its pharma products. China has already been exporting its construction materials, engineering services, and plant machinery to Asia. This was especially pronounced during the past decade, and looks to accelerate in the next with the BRI. Most of these deals are secured by lower prices and cheaper loans. When China gets up to speed in its pharma technology, and decides to export its pharma products, 'western' pharma products may have a hard time competing. Since the 'western' pharma products are not produced in Vietnam, distributors such as Hyphens are the only ones who will suffer; the Vietnamese politburo will not have a difficult decision to make if China tries to twist its arm on this. It could take 10 years or more for China's pharma products to be accepted, but if this happens, Hyphens will be in big trouble. Of course, I must emphasize that all these are conjecture and may be deemed to be very speculative. They are, however, based on the past and present behaviour of China towards smaller countries in the region.

b) The business. Hyphens' 'specialty pharma' portfolio serves a large market in the medical business. Such as contrast agents for x-ray, CT, and MRI scans; coronary stents, and cholesterol control drugs. The problem is that a good portion of the contracts that Hyphens have with these product manufacturers are quite short. For example, its contract with Biosensors for coronary stents expire in April 2019; Guerbet SA, which provides contrast agents, expire December 2020; Bauch&Lomb, which provides eye drops, expires January 2019. Its longer-term contracts are with SMB Technology, which provides cholestrol treatment drugs, has no expiry date; and J. Uriach y Compañía, S.A., which provides anti-histamine to treat allergies, expires in February 2003. If its contracts are renegotiated regularly, this allows Hyphens' suppliers to have significant influence over its margins, especially if the sales are strong. 

Most of Hyphens' products in Vietnam is sold to public hospitals. But it does not sell to them directly. Local Vietnamese distributors/wholesalers tender bids to public hospitals on the pharma products that public hospitals require. Hyphens then prices its products sold to local Vietnamese distributors/wholesalers according to how much they bid, plus a spread. In other words, the price which Hyphens sells its product to its distributors/wholesalers is dependent on how much the distributors/wholesalers bid. Outside of the public hospital market, the Vietnamese regulatory body also imposes an upper limit on the prices that Hyphens as distributor can sell to the Vietnamese distributor/wholesaler. The regulatory body also controls the type of pharma product that is permitted to be sold. The system encourages competition between manufacturers of pharma products, imposes a ceiling on prices, and can bar you from the market if it wishes to. 

Since Hyphens' suppliers exercises strong control over the prices at which it sell its products to Hyphens, and the Vietnamese regulatory body caps the prices at which Hyphens can sell its products, it will be realistic to not expect a high growth rate for Hyphens' Vietnam operations. Assuming Hyphens' maintains its market position, it is likely that its profit will grow in step with Vietnam's income level, and consequent demand for pharmaceutical products.

If Hyphens' is simply a conduit between the European and North American suppliers, and Vietnam, then what is Hyphens' value-add in Vietnam? And why hasn't it been replaced by local operators? Also, the chief executive running the operations in Vietnam, Tan Chwee Choon, is 61 years old.


2) The second core business is its wholesaling of pharmaceutical products in Singapore. It contributes $39.5m of revenue but only $1.8m of PBT. When compared to its Vietnam operations, the margins are much lower. The operation here is more tedious, where it maintains a warehouse and runs deliveries to its retail customers, compared to Vietnam. Yet, while revenue has grown -- ostensibly due to the growth of the medical services industry -- profit has actually gone the other way.

Wholesale Revenue, PBT, and its % contribution to total PBT
FY15:     $34.9        $2.5          39.6%
FY16:     $37.7        $2.0          37.0%
FY17:     $39.5        $1.8          23.6%

Most of Hyphens' Singapore wholesaling business goes to Guardian, Watson, and private clinics. These are stable and enduring customers. But it looks like the market for pharma products in Singapore is much more competitive. Its inventory turnover days are 42 (FY15), 45 (FY16), 59 (FY17). Evidently, there has been some changes in the market, and it will be challenging for Hyphens to rely on this segment for its future prosperity. This situation it faces in Singapore makes its Vietnam operations all the more crucial.


3) Hyphens also sells pharmaceutical products under its 3 'proprietary brands.' Ceradan is a line of moisturizers intended for eczema patients; TDF is a line of facial creams for acne, dry, pigmented, etc skin conditions; Ocean Health is a line of health supplements such as multivitamins. Hyphens subcontracts the production of all these to a third party manufacturer.

Proprietary Brands Revenue, PBT, and its % percentage contribution to total PBT
FY15:               $2.7m          $0.8m          12.1%
FY16:               $11.3m       -$0.04m          n.m.
FY17:               $12.3m        $1.0m           5.0%

The margins are better, but the small contribution to PBT (and also book value) means it should not be the focus of the investor's attention. This could be Hyphens' future driver of growth. Or not. The markets for these types of products are very competitive.


Should Hyphens Pharma trade at a multiple that is similar to a medical service provider, such Raffles Medical or Singapore O&G? Some seem to think so.


You can find Hyphens Pharma's IPO prospectus here:

http://www.sgx.com/wps/wcm/connect/0d3cd...116c8a0206

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17-05-2018, 11:43 PM,
Post: #2
RE: Hyphens Pharma International Limited
Thanks karlmarx, for the insightful write-up on Hyphens Pharma International Limited(HYP). Shy According to BT article today, it was 152 times subscribed ! (Ref : https://www.businesstimes.com.sg/compani...subscribed)

I applied quite last minute but wasn't allocated any. For me, I feel HYP is selling "ëstablished products", i.e. the pdts are already on the market for some time, and there is a certain demand for them(e.g. eczema  is a common condition) . Furthermore, it is also a net cash company.

You are right to point out the questions on its competitive advantage - I don't think its pdts are so called "best in class" as an ordinary person like me isn't familiar with its products/brands. It would be interesting to see how its expansion plans pan out in the future(maybe it can produce a winner), but personally, I don't think its going to be a multi-bagger.

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