(Adds details, charts) Hungarian pharmaceutical producer Egis has published its earnings report for the first quarter of 2013 and the key figures show a mixed picture. Whereas the company’s operating profit came in below expectations, net profit caused a bigger positive surprise.
The key items in the earnings report are the following:
- decline in sales has mitigated in Hungary; - thanks to exports consolidated revenues rose moderately; - the CIS region remained a key driving force; there was a double-digit sales growth in Ukraine and other CIS countries; - sales stagnated in the region; in Poland, the largest market for Egis in this region, unfavourable drug market regulations had a negative influence; - gross margin increased; - expenses rose significantly, causing an over 10% erosion in EBIT; - results from financial activities was a massive contributor, helping Egi reach a very nice increase in net profit; the 12-month trailing profit climbed to never-before-seen heights; - 70% of the 2013 EPS consensus was reached in the first two (financial) quarters; - net cash and cash equivalents expanded further and it already equals 40% of the share price.
Whereas the earnings report paints a mixed picture of the company’s quarterly performance, the results attest that the fundamental processes are sound at Egis. Therefore we would not be surprised to see a positive share price reaction on the Budapest Stock Exchange (BSE) today and also in the short term. Such response could be fuelled by the fact that Egis is very cheap, trading at 2.5x on an EV/EBITDA basis. But we should not forget that a number of question marks could have arisen in investors’ minds over the Celltrion story lately, which could be an impediment to a share price increase in the period to come.
How did Egis do in Q1?.
Egis Pharmaceuticals PLC’s financial year extends from October 1 to September 30. Accordingly, the period from 1 January 2013 to 31 March was the second quarter of the 2012/2013 business year. But for the sake of clarity and comparability we use calendar quarters in the following.
Egis published its Q1 earnings report on Tuesday after market close. The table below contains the comparison of the actual figures and analysts’ estimates. This shows that the company’s sales revenue came in largely as expected, and while gross profit also turned out almost in line with the consensus, operating profit beat the market’s call by 6%. The company’s net profit overshot the median forecast by as much as 15%.
Exchange rates
Due to its major export exposure exchange rate changes are of key importance for Egis, but the relevant currencies did not show a meaningful change on quarterly average in the reported period compared to Q1 2012.
Egis upped its consolidated revenues by 2% yr/yr, thanks to its exports that could counterbalance the erosion of sales revenues in Hungary. Exports contributed 79% of the company’s sales in Q1, which marks a moderate growth compared to the base period.
Gross margin
At a 2% revenue growth gross profit went up 3% yr/yr. This resulted from the advantageous change in sales structure and the effect of cost-efficiency measures of the recent years impacting cost of sales while the fall in selling prices in numerous markets over the past year, especially in Hungary, worked against it.
Gross margin came in at 59.1% in Q1, higher than both in the base period and Q4 2012.
Operating and net profit
Whereas the company’s gross profit came in slightly over the consensus estimate, operating profit undershot the market’s call by 6%, which may indicate that the analysts have underestimated the growth of operating expenses.
Key expense items all grew by a double-digit figure. Costs of sales grew by 11%, mainly due to the commercial network expansion in the CIS countries. Regarding the latter Egis’s CFO told a press conference today that the expansion cycle is over and although such expenses may rise some more in the coming quarters, the growth will not be as large as before.
R&D expenses went up 23% yr/yr, due to the slip of the costs of registrations and the level of expenditures of experiments forming part of the developments of new products. R&D expenses corresponded to 10% of revenues in Q1 and management expect a 9% ratio in the current financial year, similar to what was recorded in the previous years.
Administrative costs rose 19% and the balance of other operating income and expenses showed HUF -138 million, HUF 128 m smaller than a year earlier. This likely has to do with the fact that no further advance payment was made by Egis to Celltrion in Q1. In February 2010, Egis signed an agreement with Celltrion/South Korea for distribution of eight biosimilar products in the strategic markets of Egis Pharmaceuticals PLC. Under the general contract, also the product supply agreements for the first two products have been signed.
As a result of the above the operating profit of Egis dropped 16% yr/yr in January-March, but we need to note at this point that the base period was extremely strong. The company’s operating margin came in at around 17%, down both q/q and yr/yr (the latter decline being bigger)..
The result of financial activities gave a boost to profits, because Egis booked a cc. HUF 2 bn profit on this row vs. HUF 100 m a year earlier. This had to do with the favourable exchange rate changes at the end of the reported period. The HUF was 4% weaker at end-March than three months earlier.
The company’s after-tax profit grew by 17% yr/yr, as a result of which the 12-month trailing profit, which reflects the fundamental processes well, rose to a never-before-seen height.
Markets
The Hungarian drug market recorded a 2% slow-down in Q1 and consolidated revenues of Egis in Hungary also decreased by 2% in annual terms. In parallel with this the company’s market share shrunk to 4.6% from 4.9%. The decline in turnover is not as dramatic as in the previous quarter, but as Richter reported similar changes this was already expected.
The quarterly turnover was greatly affected by the price reductions which take place every six months in the frame of the new price and reimbursement system introduced in October 2011 (so-called blind bidding process). In addition to the blind bidding process, also the quarterly adjustment of reimbursement keys of medicines falling into the same INN category (so-called fixing) prevails. There was, however, no blind bidding at the start of this quarter (the price cuts effectuated in early January were negligible), but the price reductions stemming from the latest blind bidding round came into effect in April and their impact will be felt in the next quarterly earnings report. As a result of the blind bidding process in March both Egis and Richter had to carry out massive price cuts.
The export revenues of the company rose 3% yr/yr in euro terms, with the CIS region remaining the engine behind this grow despite the fact that sales in Russia ticked up by a mere 1%. At this point we need to note that two thirds of Egis’s turnover is related to DLO products, the regulated price of which did not change in Q1 either. Sales grew by 15% yr/yr in Ukraine and by 10% in other CIS countries in January March. In light of Richter’s Q1 numbers the good performance on these markets is no surprise.
Overall, sales stagnated in the region. In Poland Egis recorded a 1% growth. The company noted that progress of the whole Polish drug market came to a standstill as a consequence of the negative impact induced by the introduction of a new price and reimbursement regulation last year. Slovakian sales dipped by 19% yr/yr over rapidly declining drug prices, whereas in Romania sales grew by 8%.
Exports of active ingredients and finished products both grew - the former by a considerable 20%n annual terms. We could observe an ascending trend here over the past few quarters, but this is unfavourable for profitability, as especially API exports are eroding margins.
Cash flow
The company’s net cash and cash equivalents grew to a record level in the first quarter. Net cash per share is already nearly HUF 6,700, which corresponds to 37% of the last closing price on the Budapest Stock Exchange (BSE). The cc. HUF 2 bn dividend payment due in Q2 will practically go unnoticed.
As for Egis’s cash flow we need to note that the market has been actively contemplating potential acquisitions by Egis over the past few months. The company’s CFO has said today that Russia is the main focus, reiterating that the acquisition war chest remains EUR 100 m (cc. HUF 30 bn), and that a transaction is planned to be carried out before the end of the current financial year.
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