Equity 5 August 2013, 11:00am

ANALYST VIEW - Jefferies cuts target price for Hungary's Richter, Egis

Portfolio

Hungarian pharmaceutical producers Richter and Egis published their second-quarter earnings data last week, following which Jefferies has updated its model and lowered its target price for both companies, retaining its ‘Hold’ recommendation for Richter and ‘Buy’ rating for Egis.

Richter
Although Richter’s 1H sales beat enthused the market, James Vane-Tempest, equity analyst at Jefferies has highlighted strong 1H seasonality, which combined with mix benefits boosted gross margins.

His EBIT forecasts are largely unchanged as SG&A spend is still accelerating ahead of the estimates of Jefferies. Vane-Tempest does not expect a repeat of the strong 1H performance in 2H and would look to catalysts in 2014 to support the shares. Lowering his sales estimate by <1% and EPS by 3%-4% the analyst trimmed his target price for Richter to HUF 3,400 from HUF 3,410 and retained his ‘Hold’ recommendation for the stock.

Vane-Tempest left his 2013 margin forecasts largely unchanged (14.3%) “as higher gross profitability (c.63%) is compensating for higher SG&A costs." Richter delivered a solid 7% 1H sales growth (EUR) largely driven by China, EU15 and Ukraine, but the analyst noted 2H is usually weaker; hence would caution extrapolating strong growth and a high 1H 16.8% EBIT margin to 2H.

Vane-Tempest noted that Esmya pick-up is not expected until 2014. “We are delighted the company has recently received reimbursement in two important EU markets (France and Spain) for Esmya; just Italy remains out of the major EU markets."

Richter has also applied to expand the pre-surgery indication to two cycles of treatment; an update is expected in 1Q ’14; approval for use longer term is anticipated by 2015, in line with Jefferies estimates. The analyst forecasts EUR 15 m Esmya sales in 2013, in line with guidance, and EUR 45 m in 2014E.

Egis

Vane-Tempest cut EPS by 9% in 2013E (3% excl. FX impact) and EPS 6%-9% thereafter, primarily due to lower sales, but also higher SG&A costs to support Egis' biosimilar rollout activities. The new TP is HUF 24,300, down from HUF 24,600 previously. There is no change to the ‘Buy’ rating.

Egis narrowed its 2013 group guidance range in HUF terms from 4%-6% to 2%-3%, primarily as a result of FX. That said, guidance has been narrowed for a number of countries in EUR terms, with the biggest impact in API which grew 10.4% at 9M and Egis now expects a 10%-15% decline for the FY (implies >50% decline in 4Q) and 25%-30% decline in 2014. This is due to lower API orders from Servier, as Egis will not supply an intermediary for a major product. Although Ukraine only grew 5% in USD terms in 3Q, Vane-Tempest notes a tough 3Q base due to pre-deliveries; underlying growth was 16%. With fewer low margin API sales he believes this change should have a mix benefit.

Egis delivered its first shipments of infliximab to Belarus, the analyst noted, adding that the EMA recommended the biosimilar infliximab for approval in June 2013; hence EU approval could be disclosed shortly. Jefferies anticipates Russia approval in 2014, providing the bulk of Egis’ potential sales from the product. Egis has guided to EUR 30 m sales from biosimilar products after a year of all launches. An update is expected at Egis’ Capital Markets Day on Sept 25.