Equity / Mid Cap. / Pharmaceutical and Health Selcuk Ecza Deposu Bloomberg: SELEC TI Reuters: SELEC IS OUTPERFORM

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1 Equity / Mid Cap. / Pharmaceutical and Health Selcuk Ecza Deposu Bloomberg: SELEC TI Reuters: SELEC IS New investments are on the agenda Investment Positives Regulatory changes started to be in favor of the pharma companies this time around after years of pain. The government embarked on bold changes in the sector starting from December 29, targeting to decrease the drug prices and in turn cut the Government s healthcare bill. Not surprisingly, these changes in the sector dented the company s profitability significantly in 21 and 211 due to lower drug prices. Recall that the government cut the drug prices initially in December 29 by changing the reference pricing system followed by an increase in the discounts offered for state s purchases in 21. Later in September 211 drug prices were cut once again, while state discounts were increased. These latest changes were highly criticized by manufacturers and pharmacies and the government stepped back at some of them in favor of the sector players. Therefore, we do not expect further negative regulations in the sector, that will affect the market players badly. Investment Negatives Outlook OUTPERFORM Upside Potential* 29% Stock Data TRY US$ Price at Month Target Price Mcap (mn) 1, Float Mcap (mn) No. of Shares Outstanding 621 mn Free Float (%) Avg.Daily Volume (3M, mn) Market Data 9/4/213 * Including dividend yield TRY ISE 1 83,347 US$ Spot Rate US$ 12-Month Forw ard Price Performance (%) 1 Mn 3 Mn 12 Mn TRY US$ Relative to ISE Although we deem as a remote possibility after recent changes, further cut in drug prices and change in reimbursement regulations are the major risks to our valuation. Outlook and Valuation Price / Relative Price 3. TRY 2.5 Relative 12 1 Some margin improvement seen in 212. Following two years of weak results, we have witnessed some margin improvement at Selcuk Ecza s margins thanks to lower discounts offered to pharmacies and cut in the number of warehouses. The company attained 8.3% gross margin in 212 up from 7.3% in 211 and 7.8% in 21. Due to lower discounts applied to the pharmacies we estimate the company s market share to come down 1pp to 35% leading to 3% drop in revenues in 212FY. Bottom-line, on the other hand, rose by 4% to TL144mn, thanks to improvement in operational margins. We do not assume further margin improvement in 213. After two quarters of very successful set of results, the company s margins came down significantly in 2H12, as the company increased again the discounts, in our view. Therefore, in 213 we assumed margins to remain constant and be similar to 212. Accordingly, we expect 8.3% gross margin in 213. Bottom-line, however set to rise by 13% YoY to reach at TL163mn, thanks mainly to 1% rise in top-line (parallel to the growth expectation in the pharmaceuticals sector) and better EBITDA margin on the back of lower personnel expenses SELEC Relative to ISE Week Range (Close TRY) Nur Karabacak nkarabacak@isyatirim.com.tr Offers 29% uspide potential. Selcuk Ecza shares offer 29% upside potential to our target price to TL2.92 per share. The stock trades at 213E P/E of 8.2x, versus the peers median of 14.6x and EV/EBITDA of 6.3x, versus peers median of 8.2x. Please refer to important disclaimer at the end of this report. 1

2 Largest pharmaceuticals wholesaler of Turkey. Selcuk Ecza is one of the two leading pharmaceuticals wholesaler of Turkey with around 25% market share. While the second player is a JV between Turkish Hedef Group and Alliance Unichem having similar market share as Selcuk Ecza, the third player is the pharmacy cooperatives with around 5% share. There are a total of over 3 wholesalers in the market, 15 of which have a meaningful size. Poised to benefit from the growth in the market. After weathering the storm successfully between 29 and 212 when the government cut drug prices significantly either through changing reference pricing bands or through reimbursement bands, we think that better days are ahead for Selcuk Ecza. During this tough period the company has taken considerable precautions through decreasing the number of warehouses and cutting operational expenses. Considering the aging population (population over age of 5 is estimated to reach 26% of the total population from 2% currently), improving macro economic backdrop and unsaturated market feature, we believe Turkish pharmaceuticals market exhibits a significant growth potential. Turkey is one of the biggest pharmaceuticals market of the World. Turkey is the 16th biggest pharmaceuticals market of the World and 6 th of the Europe with a size of US$8bn. Despite the ranking, per capita pharmaceuticals expenditure at US$121 is way below the OECD average at US$495. Moreover per-capita healthcare spending at around US$92 is again much lower than the average at US$3,265. Total expenditure on health makes 6% of the GDP vis-a-vis 9% average of OECD countries. 1,2 1, US$ Per-Capita Drug Consumption in selected countries USA Canada Ireland Greece Germany France Japan Belgium Spain Slovak Republic Australia Hungary Austria Iceland Italy Switzerland Portugal OECD Sample Avg Netherlands Sweden Slovenia Finland Korea Luxembourg Norway Czech Republic UK Denmark Poland New Zeland Estonia Mexico Chile Turkey 121 Source: OECD, IEIS The pharmaceutical sector has been one of the biggest beneficiaries of the improved macroeconomic balances of Turkey. The Turkish pharmaceutical market grew at a CAGR of 9% between 23 and 212, reaching a size of TL14.4bn in ex-factory price terms in 212. The growth in the sector was much higher at 15% levels annually between 23 and 29. Harsh measures taken by the government through cutting prices and lowering reimbursement band starting from December 29 took their toll on the growth. 2

3 Turkish pharmaceuticals market TL,bn % 25% 2% 15% 1% 5% % -5% E 214E 215E Source: IMS, IEIS, Is Investment estimates Macroeconomic and demographic factors all support the growth forecasts in pharmaceutical expenditures. Turkey experienced a fascinating performance in macroeconomic balances that pushed household income up, with dedicated economic programs and strict fiscal reforms. Increasing purchasing power, together with the supportive demographics factors, such as expansion in urbanization rates, the rising and aging population prove our positive view on the pharmaceuticals market. IMS global pharmaceuticals market expectations Country Source: IMS Market size, US$bn Growth Forecast US % Top-5 Europe % Japan % Rest of the World % Pharmerging Countries % Global Market 1,19 3-6% Pharmerging Countries: China, Brazil, Russia, India, Venezuela, Poland, Argentina, Turkey, Mexico, Vietnam, South Africa, Thailand, Indonesia, Romania, Egypt, Pakistan, Ukraine 3

4 Summary of Key Financials (TL mn) Income Statement (TL mn) 211A* 212A* 213E 214E Revenues 5,74 4,92 5,48 5,751 EBITDA Net income Cash Flow Statement (TL mn) Net Income Depreciation & Amortisation Change in Working Capital (48) (134) 29 (57) Cash Flow from Operations Capital Expenditure Free Cash Flow 61 (11) Balance Sheet (TL mn) Tangible Fixed Assets Cash & equivalents 175 1,66 1,162 1,295 Total assets 2,64 3,634 3,735 4,12 Short-term debt Total Debt Total equity 1,213 1,326 1,439 1,568 Ratios Net debt/ebitda (x) EBITDA Margin Net Margin Valuation Metrics EV/Sales (x).1x.2x.2x.2x EV/EBITDA (x) 5.x 7.3x 6.3x 6.x EV/IC (x).7x 1.x 1.1x 1.1x P/E (x) 9.3x 8.x 8.6x 7.6x FCF yield (%) 5% -1% 14% 9% Dividend yield (%) 3% 3% 4.1% 4.6% *based on average Mcap during the year 12M Trailing Historic Multiples 15. P/E Company Overview Selcuk Ecza Deposu Ticaret ve Sanayi A.S. (Selcuk Ecza) is a Turkey-based medical w arehousing company that serves as the distribution channel betw een pharmaceutical companies and pharmacies and hospitals. Shareholder Structure 2% 2.7% 77.3% 1 Selcuk Ecza Holding Float Gurgen Family 5. Price/Earnings Median Min. Max. 1/8 4/8 7/8 1/8 1/9 4/9 7/9 1/9 1/1 4/1 7/1 1/1 1/11 4/11 7/11 1/11 1/12 4/12 7/12 1/12 1/13 4/13 Foreign Ownership (%) 31/12/212 8/4/213 YTD change % 15. EV/EBITDA /21 3/21 SELEC Enterprise Value/EBITDA Median Min. Max. 5/21 7/21 9/21 11/21 1/211 Peer Multiple Comparison 3/211 5/211 7/211 9/211 11/211 1/212 3/212 5/212 7/212 Pharma Bloomberg Estimates Company EV/EBITDA P/E Country Ticker 213E 214E 215E 213E 214E 215E SELEC TI Equity SELCUK ECZA DEPO * * n.a * * n.a TURKEY ABC US Equity AMERISOURCEBERGE UNITED STATES CLS1 GR Equity CELESIO AG GERMANY FCL PW Equity FARMACOL POLAND PFRM3 BZ Equity PROFARMA BRAZIL *Is Investment Estimates PharmaVLOOKUP Median -All Companies PharmaVLOOKUP2 Median -Turkey * * * * PharmaVLOOKUP3 Median -Other Countries Turkey's discount premium -22% -8% -44% -4% 4 9/212 11/212 1/213 3/213

5 This report has been prepared by İş Yatırım Menkul Değerler A.Ş. (İş Investment) solely for the information of clients of İş Investment. Opinions and estimates contained in this material are not under the scope of investment advisory services. Investment advisory services are given according to the investment advisory contract, signed between the intermediary institutions, portfolio management companies, investment banks and the clients. Opinions and recommendations contained in this report reflect the personal views of the analysts who supplied them. The investments discussed or recommended in this report may involve significant risk, may be illiquid and may not be suitable for all investors. Investors must make their decisions based on their specific investment objectives and financial positions and with the assistance of independent advisors, as they believe necessary. The information presented in this report has been obtained from public institutions, such as Istanbul Stock Exchange (ISE), Capital Market Board of Turkey (CMB), Republic of Turkey, Prime Ministry State Institute of Statistics (SIS), Central Bank of the Republic of Turkey (CBT); various media institutions, and other sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed. All information in these pages remains the property of İş Investment and as such may not be disseminated, copied, altered or changed in any way, nor may this information be printed for distribution purposes or forwarded as electronic attachments without the prior written permission of İş Investment. ( This research report can also be accessed by subscribers of Capital IQ, a division of Standard & Poor's. 5