Boiron SA (ISIN FR0000061129) – Boring enough to invest ?
It’s no secret that I like French family run companies. TFF Group, G. Perrier, Installux, Dom Security are just the main examples of these kind of companies.
Boiron SA is a French company which Bloomberg lists as “Specialty Pharmaceutical” company. Although “Specialty Pharma” is not exactly what they do. in fact, Boiron SA ist the only listed company that I know that exclusively produces and sells Homeopathic “pharmaceutical” products. The call themselves “World leader” of this field.
A few words on Homeopathy
Homeopathy is a system of alternative medicine created in 1796 by Samuel Hahnemann, based on his doctrine of like cures like (similia similibus curentur), a claim that a substance that causes the symptoms of a disease in healthy people would cure similar symptoms in sick people. Homeopathy is a pseudoscience – a belief that is incorrectly presented as scientific. Homeopathic preparations are not effective for treating any condition; large-scale studies have found homeopathy to be no more effective than a placebo, indicating that any positive effects that follow treatment are only due to the placebo effect, normal recovery from illness, or regression toward the mean.
“Controversial” is maybe a good description with regard to Homeopathy. In December last year for instance, the FDA took action against some “dangerous” homeopathic “drugs”. On the other hand the article clearly states that even in the US, homeopathy seems to be a fast growing industry:
Once a niche field, homeopathy has grown into to a $3 billion industry that peddles treatments for everything from cancer to colds, FDA Commissioner Scott Gottlieb noted in a statement.
I think it is clear that Scientifically.,Homeopathy has failed to prove that it is effective on its own in scientific tests. So why has this “snake oil” survived now for over 200 years ?
I think there are at least 4 potential explanations:
- People don’t trust the “classical” Pharma industry
Just one example is what is now called the “opioid epidemic” in the US, where the pharmaceutical industry was very successful to get dangerous opioids into the hand of the average US patient which seems to have led to widespread opioid painkiller abuse.
2. There seems to be a growing market for any kind of alternative medicine
Despite Homeopathy, there are many other forms of “alternative medicine” from Ayurveda, Traditional Chinese Medicine (TCM) to newer developments. Plus there is the whole vitamin industry and the current “superfood” craze which in the end also seems to be nonsense in a lot of cases such as the current “tumeric craze”. I do think there is some connection with the first point, so fewer people belive in classic pharma and look for different ways to feel better.
3. Self healing / Placebo
Although I am not esoteric at all, I think it is not unrealistic that the body has some capacity of self healing. One theory about homeopathy says that it can activate self-healing, which might be true or not. Or it is just another version of the famous “placebo effect”.
4. More holistic approach
In Germany, Homeopathy is very popular. There is even a separate profession called “Heilpraktiker”. Estimates say that there are at least 35.000 Heilpraktiker in Germany. I haven’t been to a Heilpraktiker but people who go there tell me that among other things. a Heilpraktiker ha much more time for patients and cares more about the overall situation a person is in. When you go to a classical medical doctor, a consultation normally only lasts a few minutes and at the end you walk out with a prescription for some kind of pill.
Biggest risk: Taking it too seriously
Clearly most homeopathic substances are harmless. However there is clearly the risk that some people believe too much in homeopathy (or other alternative medicines) and rely on it even in “life or death” situations where a traditional medication would clearly help. One of the most famous examples is clearly Steve Jobs, who thought he could beat his cancer by alternative means alone, which he then seemed to have regretted very late in his life. Bur that is clearly a risk of all alternative kind of medicine, not Homeopathy alone.
A few standard metrics (at 68 EUR per share)
Market cap: 1.36 bn
EV: 1,15 bn
P/E 2017 (est): 16,5
Profit margin 12,1%
EPS growth 3 years: +0,2%
Net Cash per share 06/2017: 10,8 EUR
P/E 2017 cash adj. 13,8
We can clearly see that the company doesn’t look too expensive but it stopped growing . More on that later.
Relative profitability & relative Valuation
In order to understand how Boiron differs from other “specialty Pharma” companies, I compared them against a “peer Group” that I selected, which consists of the following companies:
- Sanofi as a typical large-scale R&D heavy pharmaceutical company
- Recordati as a typical mid-sized pharmaceutical stock which is more distribution driven
- Vetoquinol & Zoetis as specialty veterinary pharmaceutical companies
- and finally Usana, a kind of multi level marketing nutritional additives company
Although it is not easy to compare those companies due to different ways of reporting their P&Ls, a few things are striking:
- Boiron spends almost nothing on R&D
- However they need to spend a lot on marketing and distribution
- On average, Boiron is equally profitable than the peer group but signficantly cheaper
- However the pears were also growing a lot more than Boiron
The Boiron family
The family controls according to the official website 62,4% of the share capital and 75% of the voting rights. 4,6% are owned by the employees and another 5,2% are held as treasury shares, leaving a free float of around 27%.
The CEO Christian Boiron is 70 years old but still quite active in the company. His successor will not be someone from the family but the current Deputy CEO Valerie Poinsot.
1.2.3 A DIFFERENT WAY TO WORK FOR A LIVING
Christian Boiron is convinced that a company can only be successful thanks to its employees. A source of motivation and creativity, their self-fulfillment is the key to the Company’s performance and growth.
Christian Boiron has always believed that it is possible to lead the Company and work differently by overcoming the divisions between management and staff. Therefore, in 1974, he imposed on BOIRON his unique vision of human relations based on the development of life skills as a source of motivation and innovation at the service of the economy. “Managers are at the disposal of the other employees and not the other way round.” This original approach still applies throughout the Company on an everyday basis.
The social philosophy at BOIRON grew out of the conviction that social and economic concerns are two dimensions of a company that cannot be dissociated or prioritized:
• the social dimension, because to progress the Company needs every employee to make a contribution with their know-how, their life skills, their competence, and motivation; this was the reason for a number of agreements to encourage self-fulfillment;
• the economic dimension, because any social innovation must find a sustainable source of funding.
The CEO Christian Boiron seems to be a quite “special character” and sees himself rather like an artist than a manager according to this interview.
He also modeled his company like a small “Club Med” according to this interview.
Employee Investment fund
With 4,6%, the percentage of employee shareholders is quite high. This seems to be the result of a pretty attractive share saving plan:
Employees can invest in the BOIRON employee investment fund via:
• the employee savings plan: on average, approximately 1/3 of employee savings are transferred to the BOIRON employee investment fund;
• profit sharing: on average, more than 1/3 of the funds from the profit sharing incentive are transferred into the BOIRON employee investment fund;
• voluntary contributions: Employees can also make voluntary transfers into the BOIRON employee investment fund. In 2016, 1,728 employees were paid a total of €2,510 thousand ;
• the employer contribution to voluntary payments into the BOIRON employee investment fund is based on a declining scale in three tranches providing eligibility for a maximum employer contribution of €1,500 for €3,000 of annual payments.
At December 31, 2016, the BOIRON employee investment fund’s assets amounted to more than €103 million, of which 75% was composed of BOIRON shares. About 90% of employees own a portion of the BOIRON employee investment fund.
This reminds me a little bit about Handelsbanken. In general I like companies where employees are motivated enough to put significant amounts of their own money into the company.
However: Little growth in the last few years
After strong growth some years ago, top line and bottom line have been stagnating over the past few years. However looking deeper we can see an interesting trend:
|– thereof int.||202.7||237.27||231.04||234.01||240.39||270.77||265.85||246.04||243.62||239|
|– therof France||264.01||288.82||292.16||299.21||325.9||346.96||343.9||361.76||370.78||378.5|
The issue in the last few years clearly seem to be international markets where sales contracted now for 4 years in a row. The French core market seems to be doing OK. What I also find interesting is that sales increased most in crisis years (2009, 2012 “Euro crisis”). I think their business is quite independent of the underlying business cycle which I like very much.
Boiron’s best seller is a “drug” that is supposed to help against influenza. In 2017 there was no major influenza event in their core French market.
Time for a quick Pro/Con exercise:
+ High margin business, less risky than “real” pharmaceuticals (no patents)
+ family owned/run
+ low salary for CEO (only 200k)
+ very conservative balance sheet
+ business relatively independent of business cycles
+ dominant position in France
+ share count decreasing over the years (from 22 mn shares some years ago to 18.4 mn)
+ family buying shares (2016: 62,5% vs. 2011: 50,4%)
+ little analyst coverage (only 3 French analysts cover the stock)
– CEO already 70 years old
– international business shrinking and most likely not possible
– capital allocation not optimal (international business)
– relatively little growth in core market France
– regular “attacks” on homeopathy in general (US, Russia etc.)
The stock price:
If we look at the last 5 years, Boiron clearly has seen better days:
It is interesting to see that the stock has been rising until 2015, although growth reversed already in 2014.
As I try to keep things simple, a very rough valuation approach: For me, Boiron is a “low risk” stock because it is conservatively financed and its underlying business shows little or no correlation to business cycles. In such cases, I would be happy to achieve a 10% return p.a. over time.
At currently around 69 EUR and an estimated 4 EUR per share earnings, the company trades at a cash adjusted P/E of ~14 or an earnings yield of around 7,1%.
As Boiron needs little or low capital for growth (mostly variable cost like marketing), any growth should translate into an equivalent long-term increase in earnings. At the current rate of growth (0%), the stock is clearly not meeting my return requirement.
One interesting point for French shares is the proposed reduction in Corporate Taxes. This is from a Deloitte paper:
Reduction of corporate income tax rate
The corporate income tax rate would be gradually reduced to 25% by 2022. The rate reduction would be spread over the period from 2018 to 2022 but—contrary to measures included in the 2017 finance law—each annual step to achieve the 25% rate would apply to all companies and to all taxable profits (for prior coverage, see the alert dated 23 December 2016).
However, keeping in line with company expectations, the rate reduction adopted under the 2017 finance law would be maintained for 2018: a 28% rate would apply to the first EUR 500,000 of profits for all companies (with the remaining profits subject to the 33.33% standard rate). In 2019, the standard rate would drop to 31% (but the 28% rate still would be applicable on profits below EUR 500,000). The 31% rate would be reduced to 28% in 2020 (applicable on the entire amount of taxable profits), 26.5% in 2021 and finally 25% in 2022. The 3.3% social surcharge that applies in certain circumstances would continue to apply to the corporate income tax, bringing the 25% standard rate in 2022 to an effective rate of 25.8%.
Just to illustrate the effect I created this table showing the effect on a hypothetical French company with constant earnings over this period:
So interestingly this tax effect alone creates ~3% earnings growth from 2019 to 2022.
It is fair to assume that most profit (or even all) at Boiron is made in its French home market, so the effect most likely will fully show in their after tax results until 2022.
With this tax rate driven boost, Boiron would just hit my hurdle rate of 10%. However this tax rate driven growth in my opinion is not as valuable as “real” growth. So I would at least put a 50% “haircut on that growth number.
This means that I would require a lower entry point into the stock to justify an investment or growth would need to pick up. I think I would be tempted to buy Boiron if the stock trades below 65 EUR.
Boiron SA ticks a lot of my preferred “boxes”: It is conservatively run and owned by a family, its business seems to be not connected to economic cycles and seems to be a good example of a “Boring but beautiful” business.
However, without any underlying growth of the business, the stock is not cheap enough in my opinion to justify an investment. I will therefore stay away for the time being but watch closely and start buying if the stock goes below 65 EUR/share.
P.S.: Some links on Boiron & Homeopathy: