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Fagron has three main business units:
Fagron Specialty Pharma Services (FSPS) prepares ready-to-use and ready-to administer tailor-made medication that satisfies the specific needs of patients. FSPS offers compounding both for individual patients and on a large scale, before a prescription for a particular patient is received. An example of large scale compounding would be in order to supply hospital pharmacies with the most commonly prescribed individualized medications. FSPS has sterile and non-sterile compounding facilities in Europe, North America, Colombia and South Africa which supply pharmaceutical medication to public pharmacies and hospital pharmacies, as well as directly to patients in South Africa, Colombia and France. FSPS represents 36% of FAGR’s total revenues.
Fagron Trademarks are innovative vehicles, formulations, compounding instructions and combinations that are developed for pharmaceutical compounding to satisfy the specific needs and preferences of patients, public pharmacies and hospital pharmacies, and prescribers. A vehicle, also called a base, contains no APIs and can either be mixed with APIs to create pharmaceutical medication or be prescribed directly to patients. Fagron Trademarks represents 13% of FAGR’s total revenues.
Fagron Essentials are conditioned (repackaged) and distributed pharmaceutical raw materials, necessities and equipment that pharmacists worldwide need in order to prepare medication. Fagron Essentials are sold to public pharmacies and hospital pharmacies, as well as veterinary clinics and pharmaceutical companies. Fagron Essentials also supplies materials to FSPS for compounding. Fagron Essentials represents 51% of FAGR’s total revenues.
Fagron was founded in Rotterdam (the Netherlands) in 1990. Through a combination of organic growth and an active acquisition strategy, it has grown into a company generating over €400mm of revenue per year. In 2015, Fagron stumbled when changes to the reimbursement system for non-sterile compounding in the US affected the profitability of that non-sterile compounding market. This can be seen in the charts above, which show revenues roughly steady in the period 2014-2016, but REBITDA (recurring EBITDA) falling dramatically during the same period. The fall in REBITDA caused Fagron to break some of the financial covenants on its debt. Management worked with debt holders to obtain waivers and extensions on the bank loan. The firm then raised €220mm in new equity, which was used to pay down maturing debt in 2017. During this time management also moved to consolidate its non-sterile compounding businesses in the US, and to trim expenses throughout the company. These efforts helped to stabilize the firm both operationally and financially by mid-2016.
Fagron’s growth in the future will come from organic growth within its operating units, acquisitions, and the ramping up of sales from its new sterile compounding facility in Wichita. Organic growth is estimated to be approximately 3% in North America, 2% in Europe, and 2.5% in Brazil. These three markets are currently the biggest drivers of organic growth for the firm. In 2017, Fagron has made two small acquisitions, one in Croatia and Bosnia and Herzegovina, and one in Brazil. The biggest driver of growth over the next 5 years will be from the new compounding facility in Wichita. The facility in Wichita specializes in sterile pharmaceuticals, which was unaffected by the changes to the non-sterile market that affected Fagron in the US. Over the next 3-5 years, it is expected that revenues will grow to over €100mm from this one facility. This equates to growth of over 20% per year for the next 4 years (median timeframe) due to the Wichita facility.
If Fagron generates an additional €100mm within the next 5 years, FAGR could trade as high as €60 in 2022. This would represent a P/E ratio of 15, and an EV/REBITDA of 12.6 in 2022. More conservatively, it is reasonable to see the stock price trade between €20-30 within the next two years, assuming the Wichita facility ramps up to €40mm of revenue.
The biggest risk to this scenario is that the Wichita facility takes longer to ramp up sales than anticipated. The facility currently is licensed in 47 states, with California being the biggest state Fagron is awaiting the issuance of a license. The timing and process for obtaining the license from California are out of Fagron’s hands, meaning part of the timing in the ramp-up of revenues is also out of Fagron’s hands.
Fagron’s management has managed to effectively navigate through a very treacherous time for the company. The firm has stabilized operations and begun to grow once again. Its balance sheet has been restructured, reducing overall leverage. Adding into these positive developments, with the opening of the new sterile compounding facility in Wichita the path for significant growth seems clear.