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JulpharPharmaceutical Sector

Initiation of Coverage January 25, 2007

UAE

Value in Growth

• Gulf Pharmaceutical Industries Company (Julphar) was incorporated in 1980 asthe first pharmaceutical producing company in the GCC, and is currently posi-tioned as the largest with regards to scale of operations in the UAE. Julphar’sexpansion and multi-fold growth has proven remarkable, having commencedcommercial production with a single plant in Ras Al Khaimah in 1984, it has grownto boast its current status of 6 state of the art plants split between the UAE andGermany.

• Julphar strategy going forward centers around the construction of new plants,buying out of existing pharmacies in the UAE and the KSA, and the acquisition ofeffective stakes in entities positioned along its value chain. With regards to soliddisclosed expansion plans, Julphar will be constructing 11 new plants with an

estimated cost of ca. AED800 million, 7 in the UAE and one in each of Sudan, Afghanistan, Morocco and Bangladesh over the coming 3 years.

• In calculating aggregate pharmaceutical sales over the period 2006-2011 for theUAE and Saudi Arabia, we ran a multiple regression encompassing pharmaceuticalsales as the dependant variable against country population and nominal GDP asthe independent variables. We found population to be a statistically significantdeterminant of growth in pharmaceutical sales, recording a coefficient of deter-mination of 0.99 and 0.98 for the UAE and Saudi Arabia, respectively, and con-cluded the nominal GDP growth effect as already factored in within populationgrowth statistics. With regards to our revenue assumptions, we maintained Jul-phar’s market share in Saudi Arabia and the UAE at their current levels of 4.3%and 3.3%, and in line with management guidance, gradually reduced these 2markets’ cumulative contribution to the company’s top line from current 53% to30% by the end of our forecast period.

• Julphar reported impressive FY05 figures, in which the top line and bottom linereported hikes pertaining to 11.6% and 75.6%, to settle at AED547.9 million and AED115.2 million respectively; the latter fuelled by extraordinary stock marketrelated gains and the selling of its Ecuador plant. Looking ahead, we estimateEBITDA to expand 30.6% in 2006, to reach AED127.5 million, while we foreseeNAI to drop by 38.8% in the same year.

• We have concluded a DCF value for Julphar pertaining to AED2.46/share. Withthe company currently trading at AED2/share, this affords investors 23.0% upsidepotential. We accordingly initiate coverage with a Buy recommendation. Stock Performance (AED)

FY Ending December 2004a 2005a 2006e 2007f 2008f

Revenues (AED mn) 491 548 607 710 987

Growth 10.0% 11.6% 10.8% 16.9% 39.1%

EBITDA margin 18.1% 17.8% 21.0% 21.0% 21.0%

NAI (AED mn) 66 115 70 110 157

EPS (AED) 0.13 0.22 0.14 0.21 0.30

EPS Growth 15.6% 75.6% -38.8% 56.5% 42.0%

DPS (AED) 0.05 0.00 0.01 0.05 0.09

BVPS (AED) 1.23 1.46 1.91 2.55 3.23

P/E x 15.72 8.96 14.65 9.36 6.59

Dividend Yield 2.44% 0.00% 0.69% 2.71% 4.61%

P/BV x 1.62 1.37 1.04 0.78 0.62

EV/Sales x 2.21 2.15 1.72 1.44 1.07

EV/EBITDA x 12.19 12.09 8.21 6.84 5.11

PRIME EGYPT S ALES TEAM Hassan Samir +202-300-5666 [email protected]

Yasmine Guindy +202-300-5666 [email protected]

Mohamed Fouad +202-300-5666 [email protected]

Tarek Khayyat +202-300-5666 [email protected]

Chahir Hosni +971-2-6910707 [email protected] Ahmad Hamdy +971-2-6910701 [email protected]

PRIME UAE S ALES TEAM

BUY Target Price (AED) 2.46

Recent Price (AED) 2.00

Upside Potential 23.0%

Investment Grade Growth

Previous Target (AED) NA

Share Data

Exchange Rate AED3.67/US$

Reuters Code GPHI.AD

Most Recent Shares (000) 516,016

Par Value/share AED1

Financial Year December

Mkt. Cap (AED mn) 1,032

Free Float 20.00%

52 Wk. Low – High (AED) 1.7-3.9

Shareholder Structure

RAK Government 23.5%

ACDIMA 9.70%

Islamic Development Bank 6.7%

IRAQ Government 4.10%

Others 36.00%

Free Float 20.00%

Prime Group Research Department

[email protected]

Tel: +971-2 -6910800

Tel: +971-2-6670907

1

1.5

2

2.5

3

3.5

4

J an - 06 M ar - 06 M ay - 06 J ul - 06 S ep - 06 N ov - 06 J an -0 7

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Julphar Pharmaceutical industry overview

A. Global overview

Pharmaceutical sales have seen substantialgrowth over the last few years, recording a

CAGR of 11% over the period 2002-2005,comfortably surpassing the 9% recordedover the period 1998-2001. In 2004 and2005, global pharmaceutical sales broke twomajor thresholds, surpassing the US$500billion and US$600 billion boundaries, re-spectively.

Main growth drivers

This ample growth was fuelled by the risinghealth care expenditure reflected in in-creased demand for medications, improveddemographic dynamics like higher life expec-tancy and new innovations in fields like bio-technology, which we will discuss in a latersection of this report. New products in gen-eral represent ca. 40% of aggregate phar-maceutical market’ growth, while the contin-ued high usage of generics remains promi-nent, even in developed markets, accountingfor 30% of the volume consumption of drugsin countries like the US, Germany, Canadaand the UK.

A changing trend?

As illustrated from table 1, North Americaand specifically the US, is the main target forpharmaceutical companies to market theirproducts. However, this trend has been

changing over the last few years, with moreattention being drawn towards developingmarkets, which provide viable growth oppor-tunities. It is worth mentioning that North America’s pharmaceutical sales’ growth in2000 was 14%, as compared to 2005, whichreported a far more moderate 5%, while itsassociated market share dropped by 100basis points over the 5 year period. To con-solidate this fact, consider Latin America incontrast, which grew 19% in 2005 as compared to 9% in 2000.

Potential of emerging markets

It is worth mentioning that the ten leading developed countries in terms of pharmaceutical sales grewca. 5.7% in 2005, down from 7.2% recorded in 2004. On the other hand, emerging markets like China,

South Korea, Brazil, Russia and Turkey experienced double-digit growth figures, illustrative of the shiftcurrently taking place in the drugs and medicine market. Developing markets are experiencing signifi-cant GDP growth, reflected in turn in higher expenditures on their health care systems. China’s 10%plus economic growth for example is fuelling its medical expenditure, leading to rising diagnosis andtreatment rates. This phenomenon has induced global pharmaceutical companies to capitalize on Chinaas a long term business opportunity. In response, pharmaceutical sales in China grew 20.4% in 2005 toUS$11.7 billion, representing the third consecutive year of growth in excess of 20%.

The aggregate pharmaceutical market is estimated to record a CAGR of 6% to 7% over the next 5years, with the Asia Pacific region set to experience the highest growth, estimated at 10% led by Chinawhich is expected to expand 18% in 2006 to reach US$13.8 billion, while Latin America is expected togrow at a lower rate, ca. 8%, nevertheless surpassing the global average. Preliminary figures for globalpharmaceutical sales in 2006 point to ca. US$640 billion, which translates into a Y-o-Y growth rate of6%, inline with our above-mentioned CAGR.

2Prime Research

CAGR of 11% over the period 2002-2005

More attention beingdrawn towards developingmarkets.

A shift is currently taking

place in the drugs andmedicine market.

UAE

Figure 1 Source: IMS

Global pharmaceutical sales by region-2005

Region % Growth Y-o-Y

North America 47% 5%

Europe 30% 7%

Japan 11% 7%

Asia, Africa and Australia 8% 11%

Latin America 4% 19%

TOTAL 100% 8%

Table1 Source: IMS

0

100

200

300

400

500

600

700

2000 2001 2002 2003 2004 2005

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Global pharmaceutical sales US$ bnGrowth rate Y-o-Y

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Julphar Pharmaceutical industry overview, cont’d

A. Global overview, cont’d

Major market players ….

Pfizer is the largest global pharmaceutical manufacturer recording a market share of ca. 8% in 2005.The company’s sales took a serious blow in 2005, dropping 7% to settle at US$47.7 billion, attributed inlarge part to a number of patent expiries, the withdrawal of some medicines from the market like “Bextra”, the anti-inflammatory drug for example, and the drop in sales of various other products like “Celebrex”, another anti-inflammatory drug which suffered bouts of safety concerns. In contrast, Euro-pean based companies like Roche and Novartis showed the highest growth rates performing better thanthe US counter parts due in large part to geographical proximity to developing Eastern Europe marketslike Turkey and Russia.

and therapy classes

The cholesterol and triglyceride therapy class maintained its position as the leading pharmaceutical classin 2005. As illustrated from table 3, all leading classes witnessed positive growth rates in 2005, with theexception of antidepressants, which recorded an annual decline of 4%, attributed to patent expiries. “All

Other Antineoplastics” therapy class experienced the highest growth rate-culminating at 31%, whichshows the rising expenditures on cancer treatments.

Biotechnology: the future of the pharmaceutical industry

The increasing focus on anti-cancer drugs and accompanying high associated growth rates reflects theincreasing importance of biotech products, a foreseen dominant driver in the future of the pharmaceuti-cal market. In 2004, pharmaceutical companies formed 451 licensing and investment deals with variousBiotech companies, compared to an associated figure of 314 in 2003. Moreover, Biotech products ac-counted for 27% of the total global Research & Development costs in 2005, with estimates showing thatinnovative drugs derived from Biotechnology are expected to experience double-digit growth over thenext 5 years.

Resultantly over the past few years, the sector has undergone an aggressive move towards consolida-tion in the form of global pharmaceutical companies acquiring biotech companies, lured by the amplegrowth prospects of the biotechnology market, and specific lucrative products within associated productranges. The most important acquisitions are listed below:

1) Lilly’s acquisition Applied Molecular Evolution.

2) Schering-Plough acquiring Neogenesis.

3) Pfizer acquiring Bioren.

Pharmaceutical and biotech company alliances meanwhile continue to prove an alternative method forthe former to facilitate penetration of latter market. Taking Merck and Co as an example in kind, wenote an increase in alliances with biotech companies from 10 in 1999 to 50 by 2004. Finally, licensing,while remaining the least favored method to conduct business with biotech companies from the per-spective of pharmaceutical companies, which are required to payout royalty and a percentage of prof-its, has also persisted in force.

3Prime Research

Increasing importance ofbiotech products

UAE

Global pharmaceutical sales by therapy class-2005

Therapy class Sales US$ bn Growth Y-o-Y

Cholesterol & triglyceridereducers

32.6 7%

Anti-ulcerants 26.9 4%

Antidepressants 19.9 -4%

Antipsychotics 16.3 11%

Erythropoietins 12.4 7%

Calcium antagonists, plain 12 2%

Anti-epileptics 11.7 1%

All other antineoplastics 11.5 31%

Oral antidiabetics 10.8 7%

Platelet aggregation inhibitors 9.8 10%

Table2&3 Source: IMS

Global pharmaceutical sales by manufacturer-2005

Manufacturer Sales US$ bn Growth Y-o-Y

Pfizer 47.7 -7%

GSK 34.9 5%

sanofi-aventis 30.5 8%

Novartis 28.7 11%

J&J 25.4 0%

AstraZeneca 24.2 9%

Merck & Co 23.6 -3%

Roche 19.9 17%

Abbott 15.7 9%

BMS 14.8 -6%

Nationality

USA

UK

France

Switzerland

USA

UK

USA

Switzerland

USA

USA

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4Prime Research

UAE

Branded VS generic

Pharmaceutical products are classified as either branded or generic, with the former defined as a drugthat has a trade name and is exclusively produced by a specific pharmaceutical company that owns its

patent. A generic drug meanwhile is the bio-equivalent of the branded product, and its generic namestands for the chemical name of the drug. Generic products have the same “active” ingredients of thebranded drugs, which provides the curing capabilities, while other “inactive” ingredients like chemicalsthat provide taste or color of the drug can be different in the generic product, allowing for a lowering ofcosts.

The debate concerning the use of generics over branded drugs is not a new one, but has heated upover the last few years due to the significant increase in generic sales, compounded by the rising healthcare costs incurred by individuals, governments and insurance companies, inducing them to seek othercheap but safe substitutes. Other factors which make generics a cheaper drug to produce include:

1) Significant funds are required for necessary Research & Development in order to invent a brandeddrug.

2) A considerable amount of money is spent on governmental and authority approval of the drug, in aprocess that takes years of expensive clinical trials, tests and regulations. Statistics point to a phar-maceutical company spending ca. US$800 million to get branded drug approved.

3) Post branded drug approval, further substantial funds are spent on marketing and promoting theproduct.

Cheap drugs

Generic drugs producers have no R&D expenditure, with the product already having undergone a strin-gent approval process. The company files a request entitled “Abbreviated Drug New Application”-(ADNA) to the Food and Drug Administration (FDA), where approval requires only limited cheap clinicaltrials to prove the equivalency of the generic drug to the branded one. Marketing expenses are also farlower with the product having been in circulation for an extended period of time.

In most cases, generics can be produced and sold after the patent expiry of the branded drug, whichconstitutes a period of 17 years. However, in other cases, generics can be produced as the equivalentof some branded drugs which do not have patents or are sold in unregulated markets, countries wherepatent protection laws are not enforceable.

On average, consumers can save 30% to 80% by using generic drugs, which increases to 90% in somecases like “Zantac”, an ulcer treating drug for example. The branded drug cost stands at US$94.68 for a1 month supply, as opposed to its generic cost of US$3.6. Another example is the antidepressant “Prozac”, costing US$75.65 to purchase the branded drug, compared to the US$6 generic drug whichhit the markets in 2001. Pharmaceutical companies’ branded blockbusters face increasing competitionfrom their equivalent generic drugs, with Pfizer’s cholesterol treating drug “Lipitor” for example, themost sold drug in the world, increasing 6.4% in 2005, as compared to 13.8% in 2004 due to risingcompetition from its generic equivalent drug.

Looking forward

Generics are to play a more vital role in shaping the future global pharmaceutical industry, as brandeddrugs continually witness patent expiry. In 2005 for example, it is believed that US$17 billion worth ofproduct patents expired, making them more vulnerable to generics overtaking their market position.

Moreover, 2006 was even more aggressive, with numerous groundbreaking drugs losing their patents ,including GSK’s antidepressant “Wellburtin XL” and Pfizer’s similar antidepressant drug “Zoloft”. It isbelieved that out of the US$640 billion sold drugs in 2006, some US$100 billion worth of branded drugswill lose their patents in the upcoming 5 years. Consolidating this fact, officials forecasts that globalgeneric sales will grow 20% on average annually in the upcoming 5 years, relative to overall pharma-ceutical CAGR pertaining to 6%.

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B. Regional overview

A growing regional pharmaceutical sector

Drawing on the aggressive liberalization movements across the Arab world over the last 50 years, com-pounded by state ambition to develop a strong national economic infrastructure, supported by enhancedpublic services, with health sector at the forefront, significant investments have been directed into hos-pitals, health-care centers and national pharmaceutical companies. Consequently, the Arab Company forDrug Industries and Medical Appliances (ACDIMA) was established by the Arab Economic Unity Councilin March, 6 1976 with the purpose of developing the regional pharmaceutical sector through establish-ing national drug manufacturing companies throughout the region. Today, ACDIMA has 7 affiliates inEgypt, enjoys a 20% share in Algerian TAPHCO, in addition to a 20% holding in Saudi SPIMACO, 11%of Saudi PSI, and 9.70% of UAE Julphar. Finally, ACDIMA established a center of bioequivalence studiesand pharmaceutical research in Jordan.

140 pharmaceutical plants are reported to be operational in the Arab world, while an additional 40 are inthe pipeline. The pace of development meanwhile varies considerably; Syria for example witnessed theinauguration of 37 factories since 1990, while Jordan similarly established 5 plants in the 1980s, 5 in the1990s, and another 10 as of 2000. On the other hand, various nations continue to lag significantly,namely Kuwait and Bahrain.

Driven by aggressive population growth and enhanced health standards, Arab pharmaceutical consump-tion recorded an impressive CAGR of 10.6% over the period 1999-2003, with consumption in 2005 set-tling at US$8 billion, representing ca. 1.3% of global pharmaceutical consumption.

Major regional markets

Egypt is the largest pharmaceutical market in the region, essentially due to population size of ca. 74million. The Egyptian market is 90% self-sufficient in terms of pharmaceutical consumption, importingonly 10% of its pharmaceutical needs. Other similar markets in terms of sufficient local production in-clude Syria and Morocco, where 85% of the national pharmaceutical consumption is met by local pro-duction. In contrast, Lebanon is an all-importer market, while the bulk of GCC nations import up to80% of their pharmaceutical requirements. Jordan is the largest exporter in the region, with pharmaceu-tical exports positioned second only to mining. Jordan exports to 60 different markets around the world,in addition to meeting domestic pharmaceutical needs.

A future outlook

The Egyptian, Lebanese and Jordanian

pharmaceutical markets are expected torecord CAGRs of 10%, 5% and 11%,respectively over the period 2005-2010.Egypt is expected to show steady growththroughout the period reaching US$3.9billion by 2010 with the fact that most ofits products are locally sold, ensuring asafe and highly guaranteed market.Jordan is meanwhile expected to experi-ence major fluctuations throughout theforecasted period, due to the fact thatmajority of its products are exported toglobal markets, making sales vulnerableto stiff competition from other similarproducts.

5Prime Research

Arab pharmaceutical consumption recorded animpressive CAGR of10.6% over the period1999-2003.

The bulk of GCC nationsimport up to 80% of their pharmaceutical requirements.

UAE

Major Arab pharmaceutical markets-2004

Country Sales US$ bn

Egypt 2.25

Saudi Arabia 1.6

UAE 0.6

Lebanon 0.45

Jordan 0.31

Table 4 Source: Industry report

Growth rates in major arab pharmaceutical

markets

0%

5%

10%

15%

20%

2005 2006 2007 2008 2009 2010

Egypt Lebanon Jordan

Figure 2 Source: Industry report

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B. Regional overview, cont’d

GCC VS Ex-GCC

As illustrated from figure 3, the GCC con-sumes ca. 30% of total pharmaceuticals inthe region, driven essentially by an increas-ing population, which expanded significantlyover the last 10 years, reaching ca. 34.2million at end of 2005. The other majordriver includes healthcare spending fuelledby a petro-dollar boom. Consumption percapita in the GCC stands at US$52, versusan Arab world average of US$20.3. The GCCpharmaceutical market is characterized bythe strong influence of the public sector, asshown in table 5. Oman’s government forexample accounts for 70% of the country’stotal pharmaceutical consumption.

The GCC are net importers of drugs due tothe absence of large-scale local pharmaceu-tical plants, as in the case of Qatar or Bah-rain for example. Oman meanwhile is under-taking efforts to change this, investing sub-stantial amounts in establishing 3 local phar-maceutical plants; OPPC, NPI and a third inNizwa.

6Prime Research

Consumption per capita inthe GCC stands at US$52,versus an Arab worldaverage of US$20.3.

UAE

GCC pharmaceutical markets

Country Public Private

Oman 70% 30%

Kuwait 65% 35%

Qatar 64% 36%

Bahrain 50% 50%


Arab pharmaceutical market

30%

70%

GCC ex-GCC


Number of pharmaceutical firms in the GCC

Country 1995 1996

UAE 3 2

Bahrain 2 2

Saudi Arabia 12 17

Oman 1 1

Qatar 0 0

Kuwait 0 0

TOTAL 18 22

1998

2

2

25

1

0

1

31

1997

2

2

25

1

0

0

30

1999 2000 2001 2002

3 4 5 6

2 3 3 3

24 24 25 30

1 1 1 2

0 0 0 0

1 1 1 1

31 33 35 42

2003 2004

8 8

11 11

27 27

5 5

1 3

1 1

53 55

Investments in pharmaceutical firms in the GCC (US$ mn)

Country 1995 1996

UAE 37.72 36.85

Bahrain 4.54 2.78

Saudi Arabia 129.91 172.99

Oman 2.28 2.28

Qatar 0.00 0.00

Kuwait 0.00 0.00TOTAL 174.45 214.90

1998

36.85

2.73

471.82

2.28

0.00

35.09548.87

1997

36.85

2.73

252.25

2.28

0.00

0.00294.11

1999 2000 2001 2002

43.66 44.85 45.12 62.83

5.28 8.06 8.06 8.06

445.38 453.58 475.00 620.34

2.28 2.28 2.28 15.29

0.00 0.00 0.00 0.00

39.54 42.01 42.01 42.01536.14 550.78 572.47 748.53

2003 2004

64.19 64.19

6.26 6.01

596.20 618.95

30.52 30.52

2.23 31.20

42.01 42.01741.41 793.13

Number of labour working in pharmaceutical firms in the GCC

Country 1995 1996

UAE 503 484

Bahrain 67 70

Saudi Arabia 1,384 1,647

Oman 137 137

Qatar 0 0

Kuwait 0 0

TOTAL 2,091 2,338

1998

491

70

2,344

44

0

51

3,000

1997

484

70

2,243

137

0

0

2,934

1999 2000 2001 2002

523 530 633 633

77 77 77 77

2,241 2,510 2,437 3,146

44 44 44 128

0 0 0 0

113 101 101 101

2,998 3,262 3,292 4,085

2003 2004

673 703

108 1,082

2,975 3,128

182 182

40 3,120

101 101

4,079 4,592

Table 6,7,8 Source: GOIC report

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The pharmaceutical industry in the Arab world follows a complex pattern, split between the need toenhance associated production facilities, and promote domestic R&D, and the increasing pressure of

multinational pharmaceutical companies wishing to enter the market and demanding Arab governmentsadhere to WTO and TRIPS agreements. The Arab pharmaceutical industry for the most part remains inits infancy stage, with plants classified as manufacturing entities that lack the adequate R&D centersand technical know how to produce their own branded self-innovated drugs. The region is also relianton importing active ingredients of global drugs in order to produce generic equivalents, which makesthese companies’ costs vulnerable to any price increases in associated foreign raw materials.

A transitional phase

The pharmaceutical industry appears in our opinion on the brink of a transitional phase world wide andspecifically so in the Middle East, as the WTO exerts substantial pressure on member countries(including most of the Arab countries) to apply Trade Related Aspects of Intellectual Property Rights(TRIPS); an agreement signed by the majority of the member countries, providing protection to patentrights throughout the globe.

The effective implementation of this agreement would have a sounding effect on the pharmaceuticalindustry in the following ways:

1) Generic equivalents’ production or registration will be disallowed until patent expiry occurs (17years) and the generic equivalent attains regulatory approval by the required authorities. This willhave a direct effect on companies that are manufacturing generic equivalents of products still un-der patent.

2) All government intervention schemes will be stopped, including price controls exerted by numerous Arab governments to ensure affordable drugs and medicines prices, and subsidization of the localpharmaceutical industry. The current practice of banning finished pharmaceutical product imports,and the requiring of multi national pharmaceutical companies to license the manufacture and saleof these imported medicines to local companies will also have to be terminated. According to theTRIPS agreement, the market should be freely open to any global player to conduct business in theabsence of trade barriers.

Implementation of WTO agreement and TRIPS in the Middle East is also set to indirectly increase medi-cine prices as stricter compliance with regards to international labor laws and quality control require-ments are enforced. On the upside however, local producers will have the opportunity to substituteexpensive western raw materials with more competitive ones produced in cheaper developing membermarkets like China and India. This is in contrast to current practice where in order to granted interna-tional recognition, including FDA approval, raw materials must be imported from select developed na-tions.

The Pharmaceutical Research and Manufacturers of America (Phrma); an association representing themajor US pharmaceutical companies is consistently demanding the Middle East governments abide bytheir WTO and TRIPS commitments. The organization labels Egypt as a prime violator, stating that USpharmaceutical companies hold a current market share of 18%, which would increase to 25% with im-plementation of TRIPS. Phrma is postponing an estimated US$300 million planned investments inEgypt’s pharmaceutical sector, due to their current losses amounting to US$100 million.

Other alternatives?

When and if TRIPS and WTO agreements are fully implemented, companies that rely on producing ge-neric equivalents for medicines still under patent will be faced with 3 choices:

1) Manufacture their own patented, self-innovated medicines, which would require substantial invest-ments in technology, know-how, and R&D centers. This option appears unfeasible at due to thenascent stage of the pharmaceutical industry in the region at present.

2) Under-licensing: the local manufacturer attains approval of the Mother company holding the patentof the medicine to manufacture it and sell it locally.

3) Contract manufacturing: the local manufacturer produces the medicine having attained approvalfrom the Mother company holding the patent for a fee. The local company is afforded no rightswith regards to selling the drug.

7Prime Research

The Arab world follows acomplex pattern.

Companies that rely on producing generic equivalents for medicines stillunder patent will be facedwith 3 choices

UAE

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Saudi Arabia: a case study

Saudi Arabia is the largest consumer of pharma-ceuticals in the GCC, in addition to enjoying thelargest healthcare sector. The Saudi governmentoffers free healthcare services to its locals inaddition to visiting pilgrims, estimated at 1.8million annually. 70% of healthcare expenditureis accounted for by the Saudi government, whichoperates 60% of the country’s hospitals and 50%of its clinics and centers. In August 2000, thegovernment approved a 5 year plan to build 59new hospitals in addition to 500 other modernhealthcare units. The Saudi government is fur-ther enhancing its healthcare sector by launchingvarious other mega-projects including theUS$534 million King Fahd Medical City in Riyadh,following the increase in allocation of health andsocial services of the country’s budget from 7.8%in 2003 to 9.6% in 2005. In total, Saudi Arabiahas approximately 1,800 healthcare centers, 800private clinics, 330 hospitals, placing it as thebest healthcare and medical services provider inthe Middle East.

Cutting costs

In conjunction with the Saudi government’s decision to enhance its healthcare sector, other measureswere undertaken in efforts toward cost containment with a target to reduce its current share of health-care expenditure from 70% to 50%:

1) The Saudi government applied a new co-operative medical insurance system for expatriates in2002, directed at the 7 million residing employees in the Kingdom along with their dependants.

This newly introduced system aims at increasing the share of the private sector in healthcare ex-penditure. Applied in 2 phases; the first included companies employing in excess of 500 workers,and the second included companies employing more than 100 workers. The next phase will includeSaudi citizens working in the private sector.

2) Purchasing of all public sector pharmaceutical needs through bulk buying tenders organized by thePermanent Secretariat General of Health (SGH); which is the healthcare arm of the Gulf Coopera-tion Council (GCC). The SGH issues tenders for the pharmaceutical needs of the six GCC countries,thus assuring a better price and a reasonable stock. These joint tenders are reported to be ca.30% cheaper than purchases undertaken by individual nations.

The pharmaceutical sector

Pharmaceutical sales (drugs and medicines) in Saudi Arabia culminated at US$1.7 billion in 2005, in-creasing 6.3% Y-o-Y, and recording a CAGR of 7.2% over the period 2001-2005. The Saudi governmentis reported to bear ca. 35% to 40% of pharmaceuticals costs, essentially through its large tenders, as

compared to 60% to 65% represented by the private market in the form of pharmacies and other indi-rect vendors. We expect the contribution of the private market to increase to approximately 70% effec-tive 2007 as initiation of the private medical insurance system takes off.

8Prime Research

Saudi Arabia has approximately 1,800 healthcarecenters, 800 private clinics, 330 hospitals, placingit as the best healthcareand medical services provider in the middle east.

We expect the contribution of the private marketto increase to approximately 70% effective2007 as initiation of the private medical insurancesystem takes off.

UAE

0

2

4

6

8

10

12

14

2002 2003 2004 2005

4.50%

4.60%

4.70%

4.80%

4.90%

5.00%

5.10%

Health care spending US$bn % of GDP

Figure 4 Source: EIU

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Saudi Arabia: a case study, cont’d

Pharmaceutical sales in Saudi Arabia are expectedat US$1.8 billion for 2006 according to industrysources and our calculations based on the corre-lation between pharmaceutical sales and theKingdom’s population, which will be explained ina later section of the report. We estimate Saudi Arabia to record a CAGR of 7.5% over the period2006-2010, higher than the 7.2% CAGR recordedover the period 2001-2005 driven by the: 1) in-creasing population currently estimated at 23.1million, in conjunction with a rising GDP per cap-ita– recording a CAGR of 14% over the period2002-2005, 2) the need for an improved pharma-ceutical sector, 3) the 1.8 pilgrims inflowing an-nually, expected to increase, 4) the increasingprivate market contribution as we previouslymentioned, 5) very gradual reforms towards com-pliance to the WTO and TRIPS agreements, re-sulting in a sharp rise in pharmaceutical FDIsaccompanied by a similar rise in medicine pricesas government intervention in the form of pricecontrols and subsidies is removed.

The supply side

200 pharmaceutical companies are registeredwith the Saudi Ministry of Health. However, asillustrated from figure 6, the multi-national phar-maceutical existence in the Kingdom is dominant,with Saudi Arabia importing ca. 80% to 90% ofits pharmaceutical needs from Europe and the

US.

3 Arab countries represent the major regionalexporters to the Kingdom namely: Egypt, UAEand Jordan. Gulf Pharmaceutical Industries-Julphar is the largest Arab exporter to Saudi Ara-bia, holding a 3.3% market share in the Saudipharmaceutical market, strengthened over theprevious few years due to introduction of thegenerics to the Saudi market.

The 10% to 20% domestic balance is producedby 8 local pharmaceutical companies. Essentiallyproducing generics, their combined capacity isrelatively small when compared to the massivepharmaceutical demand in the Kingdom. 2 com-panies however have notable market share fig-ures, namely: Saudi Pharmaceutical Industriesand Medical Appliances Corporation (SPIMACO)and Tabuk Pharmaceutical Manufacturing Com-pany (Tabuk), which ranked second and fifth interms of market shares in 2005. The former company was established in 1986 and is listed on the SaudiStock Exchange with a paid up capital of SR600 million. The company has 80 partnerships agreementswith pharmaceutical MNCs, produces 40 under-license product, and has another 150 products registeredin the MENA region. Meanwhile, Tabuk exports its 150 registered products to 15 countries in the MENAregion. The company is reported to be in the process of registering some of its products in Europeanmarkets like Italy, Spain and France, in addition to sporting partnerships with various pharmaceuticalMNCs specially in the Japan and the UK.

9Prime Research

We estimate Saudi Arabiato record a CAGR of 7.5%over the period 2006- 2010.

Gulf Pharmaceutical In- dustries-Julphar is thelargest Arab exporter toSaudi Arabia, holding a

3.3% market share in theSaudi private pharmaceutical market.

The 10% to 20% domestic balance is produced by8 local pharmaceuticalcompanies.

UAE

0

0.2

0.4

0.6

0.8

1

1.2

1.41.6

1.8

2000 2001 2002 2003 2004 2005

58%

60%

62%

64%

66%

68%

70%

Pharmaceutical sales US$bn

Private market contribution

Figure 5 Source: Industry report and prime estimates

Pharmaceutical sales estimates US$ bn

2006e 2007f 2008f 2009f 2010f

Pharmaceuticalmarket

1.8 2.0 2.1 2.2 2.4

Private marketcontribution

70% 70% 70% 70% 70%

Private marketvalue

1.3 1.4 1.5 1.6 1.7

Table 9 Source: Industry report and prime estimates

Major companies in the private market-

2005

10.3%

10.2%

6.7%4.0%

3.6%

3.3%

3.3%

3.2%

3.1% 2.3%

GSK

SPIMACO

Pfizer

Novart is

Tabuk

Julphar

Janssen-Cilag

AstraZeneca

Merck & Co.

Bayer


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Saudi Arabia: a case study, cont’d

Barriers to entry

The Saudi government applies protectionist policies with reference to its pharmaceutical market in avariety of ways. Indirect barriers to entry include the Saudi government decision to provide free land inaddition to interest-free loans and a 10% subsidy on manufacturing costs of any local green field phar-maceutical company, in efforts to enhance and develop the pharmaceutical sector, and lessen importdependence. Direct barriers to entry within the Saudi market can be broken down into the following:

1) Distribution:

The distribution of pharmaceuticals is exclusively conducted through Saudi agents, with 40 associatedcompanies and agents importing medicines from MNCs and regional players to the Kingdom, led byBanaja Saudi Import Company, which imports essentially from GSK, Roche, Wyeth, Amriya Pharmaceuti-cal Industries. In addition, Banaja enjoys a 51% share in Glaxo Saudi Arabia; the first Saudi medicineproduction plant to be operating in partnership with a pharmaceutical MNC.

2) Pricing:

Medicine prices in Saudi Arabia are amongst the cheapest in the region, due to price controls exerted bythe Saudi government. The pricing commission within the general directorate of medicinal and pharma-ceutical licenses compile price comparisons between medicines in the Kingdom and its equivalents in 30other countries in order to determine the lowest global price which is then imposed in the Kingdom.Other price control methods include the 2002 decision of the Saudi Ministry of Health to reduce pricesfor a large number of medicines. However, Saudi Arabia is considered the most expensive pharmaceuti-cal market in the region in terms of opening and operating a business by a foreign investor or importer,and it is obligatory to work with a Saudi partner, JV, agent or distributor.

3) Subsidies:

Government subsidies and exemptions are granted to local companies in order to enhance the national

pharmaceutical sector.

4) Protectionism:

Local and GCC pharmaceutical companies are granted faster registrations and a 10% price advantageover the MNCs.

10Prime Research

The Saudi governmentapplies protectionist policies with reference to its pharmaceutical market ina variety of ways.

Saudi Arabia is consideredthe most expensive pharmaceutical market in theregion in terms of openingand operating a businessby a foreign investor orimporter, and it is obligatory to work with a Saudi partner, JV, agent or distributor.

UAE

Saudi Arabia local pharmaceutical companies SPIMACO

Tabuk

Riyadh Pharma

Pharmaceutical Solution Industries

Tamer Group

Jamjoom Pharma

Jazeera Pharmaceutical Industries

Gulf Manufacturing Biomedical Products

Glaxo Saudi Arabia


Major Saudi Arabia pharmaceutical distributors Banaja Saudi Import Company

Salehiya Establishment

Ahmed & Naghi Sons Company

ARAC Healthcare Company

Al Haya Medical Company (AMCO)

SITCO Pharma

Bassam Trading Establishment

Abdulrahman GTB Company

Al Alameya Pharmaceutical


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C. Local UAE overview

80% of the country’s healthcare expenditure is accounted for by the state, which provides free healthcareto UAE locals at public hospitals and clinics. In addition the Abu Dhabi government issues health cards to

expatriates working in the country allowing recipients treatment at public medical facilities for minimal fees.Due to the increasing burden of healthcare expenditure on the country’s budget, the government issued acompulsory private medical insurance system in early 2006, requiring companies to medically cover all theirexpatriate workers, with public health cards to be eventually withdrawn from circulation, stimulating privatehospitals, clinics and health insurance companies, the latter of which reported a 25% to 30% increase inmedical premiums received since the practice was introduced. Government representation of healthcareexpenditure has fallen by 1,000 bps to 70%, while according to the latest statistics, over 90% of the coun-try’s population are medically covered under either the private or the public schemes.

A growing sector

UAE pharmaceutical sales culminated at US$650million in 2005, increasing 8.3% Y-o-Y, inline withour 8% population growth rate estimate for 2005.The pharmaceutical sector in the UAE is similar tothe Saudi Arabian market with regards to its high

dependence on imported drugs, with 85% to 90%of total pharmaceutical needs imported from 72countries. The top 10 drug exporters to the UAEinclude the UK, several other western countries,India and Jordan. The majority of associated phar-maceuticals are classified as branded, with genericdrugs representing approximately 5% of total phar-maceutical sales. The government has of late ap-proved 54 generic medicines in an attempt to cutdown high pharmaceuticals costs. In December2004, the Ministry of Health approved 50 new ge-neric drugs to be sold in the country, while in June2005, out of a further 34 regulatory drug approvals,a bulk 31 comprised of generics.

Local supply

With regards to local pharmaceutical production,Julphar was until recently positioned as the solemanufacturer in the country. The company’s outputis essentially comprised of generics, with the focuson exporting production to neighboring markets inthe region. Only 19% of its products are consumedlocally. The company is essentially targeting un-regulated markets where high profit margin poten-tial is prevalent. In the UAE, Julphar has meanwhilebeen in continuous negotiations with local authori-ties over pricing issues. In June 2004, the companyrefused to apply new Ministry of Health regulationsaimed at decreasing pharmaceutical profit margins,however, was forced to comply with reduction in

drug prices in November of last year.

Major local companies

2 other generic manufacturing pharmaceutical companies are currently operating in the country, namelyGlobalpharma and Neopharma. The former was founded in 1995 as a joint venture between a local com-pany and an Indian pharmaceutical company. Located in Dubai Investment Park, the company has 2manufacturing plants specialized in producing penicillin and non-penicillin medicines. With regards to Neo-pharma, it was established in July 2003 as a subsidiary of New Medical Center (NMC); a US$1.5 billionglobal healthcare company. Neopharma has several partnerships with pharmaceutical MNCs includingPfizer and Biocon, and is planning to produce over 300 medicines to be sold in the UAE , Middle East aswell as Europe. The company has already shipped medical supplies on 3 different occasions to Switzer-land. Further forward, Abu Dhabi Pharmaceutical Company is establishing an AED880 million plant in theIndustrial City of Abu Dhabi (ICAD), specializing essentially in producing under-license medicines.

11Prime Research

Abu Dhabi governmentissued a compulsory private medical insurance system in early2006, requiring companies to medically coverall their expatriateworkers.

The majority of associated pharmaceuticalsare classif ied as

branded, with genericdrugs representingapproximately 5% oftotal pharmaceuticalsales.

2 other generic manufacturing pharmaceutical companies are currently operating in thecountry, namely Global- pharma and Neo- pharma.

UAE

520

540

560

580

600

620

640

660

2003 2004 2005

UAE pharmaceutical sales US$ mn

Linear (UAE pharmaceutical sales US$ mn)


UAE major pharmaceutical companies-

2005

14%

10%

9%

5%

62%

GSK

Pfizer

Novart is

Merck & Co.

Others

Figure 8 Source: osec report

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C. Local overview, cont’d

Increasing population: the main growth driver

The UAE population has grown by ca. 5% annually over the last 20 years, the highest growth rate in the Arab world, to settle at 4.32 million in 2004 according to most recent CBUAE data, and is forecasted tohave increased by a further 8% in 2005. The influx of expatriates is the dominant growth driver for thepharmaceutical sector, with population increase providing the primary demand for drugs and medicines.69.07% of the UAE’s population reside in Abu Dhabi and Dubai, down marginally from 69.17% in 2003. 2of the smaller northern emirates, Ajman and Umm Al Qaiwain, meanwhile recorded the highest growthrates in associated available data, expanding 9.79% and 9.68% respectively over 2004. Population demo-graphics further support the pharmaceutical potential, with people positioned in the “above 40 and under60” and “60 and above” age brackets representing ca. 20% of the associated total, thus increasing thecountry’s population longevity and need for healthcare drugs and medicines. These two critical segmentsof the population witnessed 6.74% and 6.61% growth in 2004.

A future outlook

We have forecast a steady increasein population of 7% per annumbetween 2006 and 2010 for thecountry as a whole, as well as forthe two larger cities supportedessentially by the inflow of immi-grants. The expected increasingpopulation along with the economicgrowth taking place in the countryhas induced the government toexpand and develop its healthcaresector and services. New hospitals,clinics and medical centers havebeen built in addition to the launch-ing of several mega healthcareprojects including the following:

1) Ozone Center: located in Abu Dhabi, this state of the art medical center will target GCC patients head-ing to the US and Europe for treatment.

2) DuBiotech: a tax-free biotechnology park located in Dubai, offering biotechnology research firms’100% foreign ownership.

3) Dubai Healthcare City (DHCC): this US$1.8 billion project will operate as the regional hub for health-care service, research and education.

12Prime Research

Increase in populationof 7% per annum between 2006 and 2010for the country as awhole.

UAE

Population by gender & age group (000s)

2002 a 2003 a 2004 a

Male Female Total Male Female Total Male Female Total

Less than 15 499.132 456.679 955.811 535.414 487.560 1,022.974 571.862 522.163 1,094.025

Growth Y-o-Y n/a n/a n/a 7.27% 6.76% 7.03% 6.81% 7.10% 6.95%

% of total pop. 19.63% 37.71% 25.46% 19.51% 37.62% 25.31% 19.52% 37.54% 25.32%

15 to less than 40 1,454.816 594.729 2,049.545 1,572.762 637.758 2,210.520 1,678.448 685.696 2,364.144


% of total pop. 57.21% 49.11% 54.60% 57.30% 49.21% 54.70% 57.30% 49.30% 54.73%

40 to less than 60 522.802 135.181 687.983 598.155 144.798 742.953 637.440 155.573 793.013


% of total pop. 20.56% 11.16% 18.33% 21.79% 11.17% 18.39% 21.76% 11.18% 18.36%

60 and above 36.250 24.411 60.661 38.669 25.884 64.553 41.250 27.568 68.818


% of total pop. 1.43% 2.02% 1.62% 1.41% 2.00% 1.60% 1.41% 1.98% 1.59%

TOTAL POP. 2,543 1,211 3,754 2,745 1,296 4,041 2,929 1,391 4,320

Table 12 Source: Ministry of Planning

2005e 2006e 2007f 2008f 2009f 2010f

UAE 4,666 4,992 5,342 5,716 6,116 6,544

Annual Growth 8.00% 7.00% 7.00% 7.00% 7.00% 7.00%

Dubai 1,410 1,509 1,615 1,728 1,849 1,978

Annual Growth 8.00% 7.00% 7.00% 7.00% 7.00% 7.00%

Abu Dhabi 1,812 1,939 2,075 2,220 2,375 2,542

Annual Growth 8.00% 7.00% 7.00% 7.00% 7.00% 7.00%

Table 13 Source: Ministry of Planning, Prime Estimates

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Our future estimates

Going forward, we expect the pharmaceuticalmarket in the UAE to grow 5% Y-o-Y in 2006,settling at ca. US$682 million, and to record aCAGR of 6% over the period 2006-2010. Ourcalculations are derived from the positive correla-tion between pharmaceutical sales and popula-tion. As illustrated in figure 9, pharmaceuticalsales will increase 5.7% in 2007 to settle atUS$721 million, attributed to pharmaceutical prod-uct price cuts in November 2005 issued by theMinistry of Health, witnessing their full effect in2006. We expect prices to pick up in 2007 due tothe increasing demand in turn a function of risingpopulation of 7%. Other factors which wouldconceivably drive up prices and accordingly phar-maceutical sales include: increasing pressure from

various governments and entities requiring theUAE to adhere to WTO and TRIPS agreements,which would open up the market and put a stopto any form of government intervention. If andwhen this was to occur, the current situation per-taining to almost complete reliance on westernpharmaceutical products, in addition to the ab-sence of domestic high-quality manufacturers andweak government intervention would result inhigher drug prices across the board. Moreover, ina more general sense, enhanced governmentregulations, including the new private medicalinsurance system is also foreseen to have a pros-perous effects on the healthcare and pharmaceu-tical markets going forward.

Pricing

Pricing of drugs and medicine in the UAE is conducted through the Ministry of Health through a departmententitled the Registration and Pricing Unit. Medicine prices inside the country are currently fixed against thecurrencies of the country of origin, however the Ministry of Health reported earlier this year that it will shiftits policies to set pharmaceutical product prices against the dollar. Moreover, plans were revealed regard-ing a possible decrease in the CIF (cost, insurance, freight) of imported pharmaceuticals. The regulatorybody is further responsible for comparing medicine prices within the UAE to other countries, in order toadjust for any major variances.

The major pricing overhaul, as aforementioned, occurred in November 2005, when the Ministry of Healthdecreased pharmaceutical products prices by a ca. 7%, driven by a compulsory reduction in profit marginsof approximately 3,000 drugs. Associated products were classified into 1 of 3 profit margin categories,listed below, according to selling price:

1) First Category: profit margin of 25% - 35% for medicines with prices exceeding AED500.

2) Second Category: profit margin of 35% - 45% for medicines with prices between AED300 and AED500.

3) Third Category: profit margin of 50% for medicines with prices below AED300.

UAE drug prices remain amongst the highest in the region, with the county’s pharmaceutical per capitaexpenditure at US$80, compared to US$52 in the GCC and US$20.3 for the Arab world. Generic drugs con-stitute only 5% of available medication, while expensive branded imported drugs make up the bulk ofsales. The major determinant behind this fact is the requirement that all imported drugs are approved prehand by at least 3 countries from a short list of 20, dominated essentially by EU nations. It was for thisreason Indian imports of medium quality and low pricing were decreased significantly in the 1990s.

13Prime Research

Positive correlationbetween pharmaceutical sales and population.

UAE drug prices remainamongst the highest inthe region, with thecounty’s pharmaceutical per capita expenditureat US$80, compared toUS$52 in the GCC andUS$20.3 for the Arabworld.

UAE


0

100

200

300

400

500

600

700

800

900

2006 2007 2008 2009 2010

4.4%

4.6%

4.8%

5.0%

5.2%

5.4%

5.6%

5.8%

6.0%

Pharmaceutical sales US$ mn

Growth rat e Y-o-Y

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Regulations

The Pharmaceutical and Medicine Control Department, under the auspice of the Ministry of Health, is themain regulatory authority in the UAE, responsible for overseeing the supply of pharmaceutical productsbrought to the market, in addition to the issuing of medicine tenders. Registering companies and productswithin the department is essential, in order to be granted state approval to sell the product.

Company registration requirements include:

1) Information about the company, including data such as sales figures and product mix.

2) Good manufacturing practice (GMP) certification from the country of origin, to be certified by the UAEembassy or any other GCC embassy.

3) A manufacturing license from the country of origin, to be certified by the UAE embassy or any otherGCC embassy.

Product registration requirements include:

1) 1) A certificate of free sales (CFS) from the country of origin, to be certified by the UAE embassy or

any other GCC embassy.

2) A certificate assuring the equivalency of the product sold in the UAE to that sold in the country oforigin.

3) The product’s leaflet, a document showing the preparation method and 3 sample products.

Industry obstacles

In a recent report issued by the Dubai Cham-ber of Commerce and Industry (DCCI) on theUAE pharmaceutical sector, 42% of industryspecialists the DCCI met agreed that regula-tions are the major obstacle facing the sector.They referred consistently to the un-levelplaying field which would prevail were theWTO and TRIPS agreements to be imple-

mented, and the distinct competitive disad-vantage local players would suffer relative toglobal MNC counter-parts due to the formers’reliance on generic production.

Interviewees also pointed extensively to theissue of financing requirements necessary forR&D, tests and trials, registration and market-ing, making it economically unfeasible for localmanufacturers to compete efficiently. Special-ized labor and technology intensive nature ofthe industry are 2 items closely related tofinancing, with costs of employing scientistsand industry experts in addition to capitaloutlays in terms of equipment and technology

of further concern. Meanwhile, 10% agreedthat imports were a major obstacle againstthe development of the UAE pharmaceuticalsector, referring to the fact that 85% to 90%of the country’s pharmaceutical needs are metby imports.

14Prime Research

42% of industry spe- cialists the DCCI met

agreed that regulationsare the major obstaclefacing the sector.

UAE

Obstacles facing UAE pharmaceuticals

42%

20%

15%

10%

9%

2%

2%

0% 10% 20% 30% 40% 50%

Regulations

Financing

Specialized Labor

Imports

Others

High tech

Export

Figure 10 Source: DCCI Survey

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Julphar Company profile & operational analysis

A. Overview

Gulf Pharmaceutical Industries Company (Julphar) was incorporated in 1980 as the first pharmaceuticalproducing company in the GCC, and is currently the largest with regards to scale of operations in the

UAE. Julphar’s expansion and multi-fold growth has proven remarkable, having commenced commercialproduction with a single plant in Ras Al Khaimah in 1984 recording revenues of AED32 million in 1987, ithas grown to boast 6 state of the art plants split between the UAE and Germany, and a turn-over per-taining to AED544 million in 2005. Julphar has been awarded the ISO 9001 certification and ISO 14001certificate for effective environmental management, and is also recognized as cGMP compliant company,and was recently granted FDA approval on 4 of its products. The Julphar group is comprised of the fol-lowing entities:

1)Plants: (as illustrated in table 14).

2) Marketing Department: Through its diversified roles, the marketing departments can be describedas the major facilitator of the growth that has been achieved by Julphar over the years, with marketingoffices in over 45 countries around the globe.

3) Julphar Drug Information: Performs multiple studies on drugs & medicines through its seven sub-

divisions, in addition to clinical and bio-equivalence tests.

4) Julphar Drug Store: A wholly owned Julphar subsidiary, responsible for marketing Julphar’s prod-ucts within the UAE. In addition, JDS also possess a large net work of retail business represented by 21pharmacies operating throughout the UAE. It is worth noting that JDS continues to command in excessof 15% of total retail business in UAE.

5) Scientific Pharmacy Oman: Another wholly owned subsidiary of Julphar, representing Julphar’sproducts in the Sultanate of Oman. As well as marketing Julphar products, SPO also holds exclusiverights for distribution of multiple global pharmaceutical brands and products.

6) Awafi Drug Store: A wholly owned subsidiary of Julphar in the UAE, responsible for acquiring agen-cies of several world renowned brands of baby food, medical equipment, health care and cosmetic prod-ucts.

15Prime Research

Incorporated in 1980 asthe first pharmaceutical producing company in theGCC, and the largest withregards to scale of operations in the UAE to date.

UAE

Plant Start Date Location Product range Capacity

Julphar 1 1981 UAE non-sterile solid dosageforms

A) 800 Mn TabletsB) 250 Mn CapsulesC) 20 Mn Powder Pro Suspension

Julphar 2 1999 UAE Sterile and antibiotics

A) 6 Mn Lyophilized VialsB) 5 Mn Pre-Filled SyringesC) 10 Mn Powder for SuspensionD) 25 Mn VialsE) 150 Mn CapsulesF) 25 Mn Ampoules

Julphar 3 1999 UAE Consumer and OTC prod-ucts 20 Mn unitd

Julphar 4 1996 Germany modern drugs, food supple-

ments and cosmetics insolid and semi-solid form

A) Compressed Tablets-450 mn

B) Capsule-90 Mn UnitsC) Liquids & Gels-20 Mn Units

D) Ointments/Creams-4 Mn Units

Julphar 6 2002 UAE Liquid & Semi-solid dosageforms

A) 93 Mn Bottles of Syrups, Suspen-sions & Drops.B) 40 mn Tubes of Ointments andcreams.C) 60 Mn Suppositories

Julphar 7 2003 UAE Biotechnological

A) capacity to manufacture theentire requirement of erythropoi-etin, interferon, GCSF and inter-leukin for the Middle East region.B) 1.44 Mn vials of EPOTIN.

Table 14 Source: Julphar website

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Julphar Company profile & operational analysis, cont’d

B. Ownership structure

As mentioned earlier, ACDIMA holds a stake in Gulf Pharmaceutical Company as illustrated in table 15.Both the RAK and Iraqi governments also enjoy strategic holdings in the company, while Sheikh Faisal

Bin Saqer Al Qasimi is the Chairman of the board.

C. Sales breakdown

Gulf Pharmaceutical Company sales’ increased from AED333.3 million in 2001 to AED544 million in2005 , as the company produces over 176 brands and approximately 800 formulations from its 6 facto-ries located in the UAE and Germany. Its products cover most therapeutic categories including: respira-tory system, paramedical and infections, with the associated 3 groups accounting for ca. 53% of thecompany’s sales in FY05. In 2005, the company established 8 new marketing offices in various countriesincluding Malaysia, Philippines, Thailand, Pakistan, Uganda, Eritrea, Nigeria and South Africa. IndeedJulphar boasts a sound presence in all continents, with the exception of Australia.

The UAE represented 19% of turnover in 2005, coming second to Saudi Arabia, the largest market forGulf Pharmaceutical Industries, accounting for ca. 34% of the company’s sales for the same year. Otherimportant markets in the Middle East include Iraq and Lebanon, representing 14% and 4% of FY05revenues, respectively. With regards to sales to Europe, Germany proves dominant, essentially servedby the company's plant located there. Other important markets in Asia and Africa are Afghanistan andSudan, sporting a cumulative ca. 5% of the company’s sales.

16Prime Research

The company producesover 176 brands and approximately 800 formulations from its 6 factorieslocated in the UAE and

Germany.

The UAE represented 19%of the company’s sales in2005, coming second toSaudi Arabia, the largestmarket for Gulf Pharma- ceutical Industries, accounting for ca. 34% ofthe company’s sales forthe same year.

UAE

Table 15 Source: Julphar

ShareholdersShares held

in million% Ownership

RAK Government 121.26 23.5%

ACDIMA 50.05 9.70%

Islamic Development Bank 34.57 6.7%

IRAQ Government 21.16 4.10%

Others 185.77 36.00%

Free float 103.20 20.00%

TOTAL 516.016 100%

Julphar sales breakdown by region-2005

22%

7%

3%

67%

2%GCC including UAE

Middle East

Africa

Europe

Asia

Figure 11 Source: Julphar

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Julphar Company profile & operational analysis, cont’d

C. Massive expansion plans

Gulf Pharmaceutical Industries strategy going forward centers around the construction of numerous newplants, the buying out of existing pharmacies within in the UAE and the KSA, to allow for the increase

of retail sales in their two most important markets, and the acquisition of effective stakes in entitiespositioned along its value chain. In more detail, and as has been disclosed to date, Julphar will be con-structing 11 new plants with an estimated cumulative cost pertaining to ca. AED800 million, 7 of whichwill be located within the UAE and one in each of the following:

1) Sudan: The free trade agreement between Sudan and the COMESA( Common Market For Eastern And Southern Africa ) will enable Julphar to export to member nations from their plant in Sudan. More-over, cheap production costs are a further viable reason to establish a plant there.

2) Afghanistan: Solid market potential in neighboring markets like Kazakhstan, Uzbekistan, etc…. More-over, the absence of pharmaceutical MNCs in that specific region will position Julphar as the first foreignpharmaceutical company operate in Afghanistan, which is already the company’s dominant Asian mar-ket.

3) Bangladesh: A significant population size of ca. 120 million in addition to the weak presence of MNCscompounded by low production costs ensure it attractive.

4) Morocco: Positioned as a closed market, similar to Egypt, renders the option of Julphar exporting tothe associated market unfeasible, due to significant BTEs on foreign medicine. Additionally, the currentrestriction on imports will allow Julphar to develop a strong presence in the country prior to gradualliberalization upon WTO implementation.

With regards to the 7 local plants, Julphar will be both increasing production capacity, in addition tointernalizing production of various essential raw materials, reducing bargaining power of suppliers interms of pricing and overcoming current transportation obstacles.

17Prime Research

UAE

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Julphar Financial assessment & growth drivers

A. Full Year Financial Highlights

FY05 financial results reflected notable operational growth. The top line increased 12% to record AED547.9 million, with exports representing 81% of total sales. As illustrated from figure 12, sales of

Julphar’s UAE subsidiary generated the bulk of sales, amounting to ca. AED420 million in 2005. Thehuge industrial complex located in Ras Al Khaimah sports 5 modern pharmaceutical plants, responsiblefor the production of approximately 90% of company products.

The COGS item saw an annual expansion pertaining to 4.6% in FY05, settling at AED239.2 million upfrom AED228.7 million reported in the previous year, while the COGS/Revenue ratio decreased a signifi-cant 300 basis points to 43.7%, attributed in large part to the company’s significant efforts in decreas-ing labor costs from AED14 million in 2004 to AED13 million in 2005 in addition to the aforementionedhike in sales.

Continuing with profitability margin determinants, SG&A saw the largest annual jump over 2005, per-taining to 21.9% to settle at AED211.2 million up from a comparable AED173.3 million in 2004. SG&A/Revenues witnessed a 320 basis point deterioration to 38.5%, due to a notable leap in marketing ex-penses as Julphar increased its promotion and advertising campaigns. EBITDA accordingly grew a mod-erate 9.7% to settle at AED97.6 million in FY05, up from AED88.9 million achieved in the previous year,pertaining to an EBITDA margin of 17.8% down a marginal 30 basis points year on year. Finally, Julpharsaw impressive growth in its bottom line figure, one that exceeded its top line surge. In FY05 it re-corded net attributable income of AED115.2 million versus a figure of AED65.6 million in FY04, illustrat-ing a 75.6% increase, attributed essentially to AED40.9 million in income generated from investment inshares, in addition to AED7.2 million realized as income from the sale of its Ecuador plant.

B. Rights Issue

In April 2006, Julphar’s extra ordinary general assembly meeting (EGA) approved a 20% bonus issue,thus raising the paid in capital from 385.2 million shares with a par value of AED1 to 462.24 million

shares. The same EGA approved raising the company’s capital further to settle at AED1 billion through a537.76 million shares rights issue, at a par value of AED1 per share in addition to offering costs of AED0.75 per share. The company commenced an initial phase of their rights issue, pertaining to 10% ofthe total approved amount or 53.776 million shares, on August 1 through to August, 10, 2006, withsubscriptions reaching 130%. Resultantly, paid in capital increased by 53.776 million shares to reach516.016 million shares, with a par value of AED1. The additional premium of AED40.331 million wastransferred to reserves.

Moving forward, the remaining 90% of the rights issue will occur over the coming 3 years, with 140million shares to be offered in 2007 and 2008 respectively, raising the paid in capital to approximately796 million shares, with a par value of AED1 per share. The final 204 million shares will be offered in April 2009, raising the paid in capital to AED1 billion. Cumulative associated premiums stemming fromoffering fees, amounting to ca. AED363 million, will be transferred to reserves.

18Prime Research

The huge industrial complex located in Ras AlKhaimah sports 5 modern pharmaceutical plants,responsible for the production of approximately90% of company products.

FY05 net income settledat AED115.2 million versus a figure of AED65.6million in FY04, illustratinga 75.6% increase.

EGA approved raising the

company’s capital to settleat AED1 billion through a537.76 million sharesrights issue, at a par valueof AED1 per share in addition to offering costs of AED0.75 per share.

UAE

Julphar sales breakdown-2005

3%4%

6%

11%

76%

Julphar - UAE

Julphar Drug Stores - UAE

Julphar P harmacies - UAE

Scientific Pharmacy - Oman

Julphar - Germany

Figure 12 Source: Julphar

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Julphar Financial assessment & growth drivers, cont’d

B. Interim Financial Highlights

A. Revenues

9M FY06 revenues expanded a further 12.1% to record AED442.5 million as a result of Julphar’s suc-cessful expansion into new markets including the Philippines, with our FY06 revenue estimate pertainingto AED607.2 million, illustrating an annual 10.8% increase. Going forward, our revenue forecasts havebeen determined by Julphar’s historical sales and operational trends, announced expansions and theirfuture sales’ composition outlook. As aforementioned, Julphar’s sales within the UAE and Saudi Arabiacomprise ca. 53% of the total in 2005, and translate into a market share of 4.3% and 3.3% in the UAEand Saudi Arabia pharmaceutical markets, respectively. Going forward, we have forecast Julphar tomaintain its market share figures in its 2 key markets, yielding the following figures:

In calculating aggregate pharmaceutical sales over the period 2006-2011 for the UAE and Saudi Arabia,we ran a multiple regression encompassing pharmaceutical sales as the dependant variable againstcountry population and nominal GDP as the independent variables. Results were tested using multiplestatistical tools including T-tests and F-tests to examine the statistical significance of the independentvariables on pharmaceutical sales in the UAE and Saudi Arabia. We found population to be a statisticallysignificant determinant of growth in pharmaceutical sales, recording a coefficient of determination of0.99 and 0.98 for the UAE and Saudi Arabia, respectively, and concluded the nominal GDP growth effectas already factored in within the population growth statistics. This is especially true within the gulf re-gion, which is dependant on expatriates to constitute the bulk of its labor force which in turn are onlyattracted to the region on the basis of attractive economic growth. Associated expatriate numbers forthe UAE and Saudi Arabia are as high as 75% and 27% of the total population, respectively.

As aforementioned, while we are confident that Julphar will at worst be able to maintain its 4.3% and3.3% market shares in the UAE and Saudi Arabia pharmaceutical sectors, we were provided no quanti-tative data with reference to targeted market capture within other viable pharmaceutical markets, ex-pected in light of Julphar’s factory expansions, of which 4 plants will prove ex-UAE. The company’s con-tinuous efforts to seek new markets for its products, reflected in the inauguration of 8 new marketingoffices in various countries during 2005, in addition to the approval of 4 of its products by the FDA arealso projected to fuel sales in ex UAE/KSA, while we are also expecting Julphar to solidify its presence invarious existing markets including Iraq and Lebanon for example, where growth potential is massive.

We were accordingly forced to rely on Julphar’s management guidance in estimating the company’sfuture dependence on key markets of the UAE and Saudi Arabia. In short, Julphar is projecting the UAEand Saudi Arabia’s joint contribution to total sales to fall from approximately 53% to 30% over the longterm as expansions take off. Our model accordingly reflects a gradual decline to the associated 30% inperpetuity.

Our final and most important growth driver proves the company’s planned biotechnology plant, which

will undertake the manufacture of various biotechnology products. Management is budgeting this plantto generate US$40 million profits in its first year of operations in 2008 increasing to US$70 million andUS$100 million in 2009 and 2010, respectively. By 2011, we expect the company’s biotechnology reve-nues to slow considerably, increasing at a conservative 5%.

Downside risk

The major downside risk in our revenue assumptions, which we believe requires pointing out, lies in ourreliance on management guidance in forecasting Julphar’s market share in its 2 most important mar-kets; the UAE and Saudi Arabia going forward, and in determining associated country weights withintotal company’s sales. That said, in the absence of sufficient information with reference to the newplants, we are confident this was the best option open to us. Needless to say, our revenue assumptionswill be adjusted if and when we obtain other adequate information regarding pharmaceutical marketgrowth in addition to the company’s specific sales in associated nations.

19Prime Research

We found population to

be a statistically significant determinant ofgrowth in pharmaceuticalsales, recording a coefficient of determination of0.99 and 0.98 for the UAEand Saudi Arabia, respectively.

UAE

Shareholders 2006 2007

UAE and KSA pharmaceutical sales AED mn 9,237 9,851

Julphar sales in KSA&UAE AED mn 330 352

Julphar sales ex-UAE & KSA AED mn 272 352

Biotechnology products sales AED mn - -

Total sales AED mn (excluding other rev) 602 704

2009

11,152

398

597

257

1,252

2010

11,841

423

785

367

1,575

2008

10,489

375

458

147

979Table 16 Source: Prime estimates and Julphar

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Julphar Financial assessment & growth drivers, cont’d

B. Cost of goods sold

9M FY06 COGS expanded 2.1% to record AED178.8 million, while the COGS/Rev ratio recorded 40.4%,down from 44.4% in the comparable period, attributed to efficient cost containment methods applied by

the company including decreasing raw material costs.

Going forward, we have estimated an FY06 COGS/Rev ratio of 42% which we have sustained through-out our forecast horizon.

C. EBITDA, net profit, Capex, and payout ratio

We expect EBITDA to increase 30.6% in 2006, settling at AED127.5 million, attributed to the combinedeffects of surging revenues and lower COGS/Rev. The EBITDA margin is accordingly estimated to re-cord 21% in 2006 up from 17.8% in 2005. Moving forward, we have forecast a notable 39.1%, 27.9%and 25.7% EBITDA expansion in 2008, 2009 and 2010 to settle at AED207.3 million, AED265.1 millionand AED333.3 million respectively, resulting from the roll out of the new pharmaceutical plants in addi-tion to revenue generated from biotechnology products sales, with our margins fixed at 21% goingforward.

9M FY06 net attributable income settled at AED55.3 million, illustrating a drop of 26.9% over the com-parable figure recorded last year, as stock market related investments incurred a loss of AED17.8 millionversus a AED13.3 million profit in the comparable period of last year.

Moving forward, we foresee net attributable income culminating at AED70.5 million in 2006, down38.8% from last year’s comparable period figure, in which the company sold its pharmaceutical plantlocated in Ecuador in addition to recording notable profits from investment in shares . Effective 2007,

we expect the company’s net attributable income will start to pick up, on the back of the gradual roll outof the 11 new pharmaceutical plants, in addition to the expected revenue boost resulting from biotech-nology products sales. In 2008, 2009 and 2010, we expect the company to record net attributable in-come of AED156.5 million, AED190.2 million and AED246.8 million, increasing by 41.9%, 21.5% and29.8%, respectively.

Julphar’s AED800 million forecasted capital expenditure essentially consists of its ca. 11 new pharma-ceutical plants, to be constructed within the UAE and 4 other countries. As this massive expansion planwill be financed essentially by the rights issue mentioned earlier, we assumed the plants will be built inaccordance to cash receiving dates of the rights issue.

Julphar adopted a zero cash distribution policy in 2005, however we expect this policy to reverse in2006, having assumed a conservative 10% payout, increasing gradually going forward to settle at 45%in 2010.

20Prime Research

We expect EBITDA toincrease 30.6% in 2006,settling at AED127.5 million, attributed to thecombined effects of surging revenues and lowerCOGS/Rev.

We foresee net attributable income culminatingat AED70.5 million in2006, down 38.8% fromlast year’s comparable period figure, in which thecompany sold its pharmaceutical plant located inEcuador in addition torecording notable profitsfrom investment inshares .

UAE

Figure13 Source: Prime estimates

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Julphar Valuation

We used the discounted cash flow model as our preferred valuation technique for Julphar, and fromwhich we have derived our fair value for the company.

In short the net present value of Julphar’s future cash flows have been determined through informed

assumption building, and subsequently discounted by a WACC of 11.23%.

The cost of equity has been calculated by utilizing the capital asset pricing model, and based on a riskfree rate of 6.0%, which is the current yield on the 10 year US Treasury benchmark bonds, inclusive ofa UAE country risk premium of 133 bps, in line with the premium present on the 30 year Qatar sover-eign bond over its US equivalent. In the absence of UAE denominated sovereign bonds as a benchmark,and the popularity of US sovereign debt as a haven investment in times of uncertainty across the GCCas a whole, we believe this to be a fair proxy for a UAE risk free investment alternative. We have as-signed an equity risk premium of 7%, utilized an average regional industry beta of 0.72 and assumed aperpetual growth rate of 4.5%.

We have concluded a DCF value for Julphar of AED2.46/share. With the company currently tradingat AED2.0/share, this affords investors 23.0% upside potential . We accordingly initiate coverage with aBuy recommendation.

21Prime Research

Applying the DCF model

11.23% WACC, and per- petual growth of 4.5%.

UAE

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Julphar

22Prime Research

Source: Julphar financials & Prime projections

FINANCIAL SUMMARY

Figures in AED million

Fiscal year ending December

UAE

Income Statement 2004a 2005a 2006e 2007f 2008f

Revenues 491.0 547.9 607.2 709.7 987.2

Growth 10.0% 11.6% 10.8% 16.9% 39.1%

COGS 228.7 239.2 255.0 298.1 414.6

S,G & Admin. Expenses 173.3 211.2 224.7 262.6 365.3

EBITDA 88.9 97.6 127.5 149.0 207.3

Growth 6.1% 9.7% 30.7% 16.9% 39.1%

EBITDA Margin 18.1% 17.8% 21.0% 21.0% 21.0%Depreciation & Amortization 18.5 21.8 23.0 29.1 43.8

Operating EBIT 70.4 75.7 104.5 120.0 163.5

Interest Income 0.0 0.0 0.0 0.0 0.0

Investment Income 0.0 0.0 0.0 0.0 0.0

Interest Expense 3.7 6.9 9.3 7.9 4.5

Non-Operating Revenues 0.0 0.0 0.0 0.0 0.0

Pre Tax Income 66.7 68.9 95.1 112.0 159.0

Pre Tax Income Growth 17.6% 3% 38% 18% 42%

Income Tax 0.1 0.1 0.2 0.2 0.3

Effective Tax Rate 0.2% 0.2% 0.2% 0.2% 0.2%

NPAT 66.6 68.8 95.0 111.8 158.8

Growth 17.9% 3.2% 38.1% 17.8% 42.0%

Extraordinary Items 0.5 48.1 (23.5) - -

Net Income 67.1 116.9 71.5 111.8 158.8

Minority Interest & Non-Appropriation items 1.4 1.7 1.0 1.6 2.2

Net Attributable Income - NAI 65.6 115.2 70.5 110.3 156.5

Growth 19.2% 75.6% -38.8% 56.5% 42.0%

ROS 13.4% 21.0% 11.6% 15.5% 15.9%

Balance Sheet 2004a 2005a 2006e 2007f 2008f

Cash & Marketable Securities 24.0 144.9 231.4 167.1 102.1

Trade Receivables-Net 311.1 376.5 394.7 461.3 641.7

Inventory 151.4 172.2 242.9 248.4 345.5

Other Current Asset 19.7 0.0 0.0 0.0 0.0

Total Current Asset 506.2 693.7 869.0 876.8 1,089.3

Net Fixed Assets 305.1 310.7 320.7 593.9 781.1

Other Assets 11.5 21.5 56.0 50.4 45.4

Total Assets 822.8 1,025.9 1,245.8 1,521.1 1,915.7

Short Term Debt 20.4 107.5 24.7 30.9 38.6

CPLTD 34.3 42.6 93.7 27.2 0.0

Accounts Payable 68.1 64.4 79.4 91.6 124.1

Dividend Payable 25.2 0.0 7.1 28.0 47.6

Other Current Liabilities 11.4 14.1 15.6 17.7 25.1

Total Current Liabilities 159.4 228.6 220.6 195.3 235.5

Long-Term Debt 20.9 36.0 27.2 0.0 0.0

Provisions & Minority Interest 6.4 7.8 10.0 10.5 11.0

Total Shareholders' Equity 636.1 753.5 988.0 1,315.3 1,669.2

Total Liab.& Shareholders' Equity 822.8 1,025.9 1,245.8 1,521.1 1,915.7

Free Cash Flow Statement 2004a 2005a 2006e 2007f 2008f

NOPLAT 70.3 75.7 104.3 119.8 163.3

Non-Cash Items 18.5 21.8 23.0 29.1 43.8

Gross Cash Flow 88.8 97.5 127.3 148.9 207.0

Gross Investments 93.6 105.0 85.6 396.4 498.3

Operating Free Cash Flow -4.8 -7.5 41.7 -247.6 -291.3

Non -Operating Cash Flow 0.5 48.0 -23.5 0.0 0.0

Free Cash Flow -4.3 40.6 18.3 -247.6 -291.3

Financing Flow

Interest Income After-Tax 0.0 0.0 0.0 0.0 0.0

Investment Income After-Tax 0.0 0.0 0.0 0.0 0.0

Change in Excess Cash & Mkt. Sec 8.9 119.4 72.2 -67.4 -73.3

Change in Sub. And LT investments 0.0 0.0 0.0 0.0 0.0

After-Tax Interest Expense 3.7 6.9 9.3 7.9 4.5

Change in Debt & Bonds 38.3 -110.4 106.9 48.2 -7.7

Provisions Used 0.0 0.0 0.0 0.0 0.0

Dividends Paid 0.0 25.2 0.0 7.1 28.0

Non-Appropriation Items 1.4 1.7 1.0 1.6 2.2

Change in Shareholder’s Equity -56.6 -2.2 -171.1 -245.0 -245.0Total Financing Flow -4.3 40.6 18.3 -247.6 -291.3

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