Egis, Hungary’s second-largest pharmaceutical manufacturer, published its earnings report for the third quarter of 2013 on Tuesday, not that it will give a thrill to many investors as most of them have already offered their shares to Servier that had made a buyout offer for all outstanding Egis shares at HUF 28,000 per share on 24 September.
Q3 results were mixed, in light of the market’s call, with both the operating and net profits undershooting the consensus estimates. Most of the Q3 figures show major growth in annual terms, which can be attributed to the extremely low base in case of the two aforementioned items, but the earnings estimates for the full business year were still missed.
Egis Pharmaceuticals PLC’s business year extends from October 1 to September 30. Accordingly, the period from 1 July 2013 to 30 September was the fourth quarter of the 2012/2013 business year. But for the sake of clarity and comparability we use calendar quarters in the following. The earning report is not presented in as many details as before because in the meantime Servier obtained more than 90% of Egis’s shares and thus is most likely to delist the company from the Budapest Stock Exchange (BSE) shortly.
Egis published its Q3 earnings figures on Tuesday after market close. The data are mixed. Revenues and gross profit turned out virtually in line with the market’s expectation, whereas the company’s EBIT and net profit undershot the consensus. At this point we need to note that due to Servier’s buyout offer fewer analysts have submitted their forecasts for our survey than before.
FX
Consolidated turnover of Egis rose 3% yr/yr in July-September. Due to the company’s considerably export exposure exchange rates are of key importance and the changes had a mixed impact on the company in Q3. The forint weakened by 5% on average versus the euro compared to Q3 2012, while it firmed by about 3% against the RUB. Due to the large weight of the Russian market in Egis’s sales the RUB/HUF exchange rate is key for the company and it has a massive net exposure in this currency.
Consolidated revenues in the full business year went up 2.2% yr/yr, which means that only the low end of the management’s guidance for this year given in August was reached. In the course of the quarter, the continuing price erosion in Hungary and Eastern Europe was offset by the change in sales structure and production cost efficiency measures. In addition, the year-end settlements of accounts debited the cost of sales by lower amounts. Gross margin rose some 5 ppts yr/yr, but it came in lower than in the preceding quarter.
Profit
Whereas revenues and gross profit came in largely as expected, Egis’s EBIT undershot the consensus which could indicate that the analysts projected a much smaller rise in costs than what the company actually recorded. In Q3, sales, general and administration expenses of Egis increased 6% yr/yr. The level of usual costs in total have not changed, the increase was entirely due to the unfavourable balance of provisions and other items of value correction. Commercial costs (general selling costs) achieved corresponding level as in the base period. Research and development expenses declined 6% compared to the outstanding value of the year-earlier basis.
Administrative costs jumped by 44% yr/yr. Among cost items, the ordinary operational costs rose 7% while balance of provisions and other items of value correction was HUF 555 million, HUF 910 million higher cost value than a year earlier.
Q4 consolidated balance of other operating expenses and income came to minus HUF 54 million, HUF 17 million more favourable than in the same period of the previous business year. This was partly attributable to a smaller special levy on drug manufacturers.
Egis accounted HUF 682 million for the reported period as cost reduction item, based on the fact that the R&D spending related option to reclaim payment obligations was reinforced in December 2012. Regarding its composition HUF 485 million reclaim of payment obligations proportionate to manufacturer’s price is presented as part of other operating expenses, while HUF 197 million deduction related to registration fee on medical representatives reduced the general selling costs. In the fourth quarter the balance of different state-run payment obligation items, pharmaceutical industry related charges, accounted as part of other operating expenses, was minus HUF 184 million, including HUF 104 million as the value of expenditures abroad (predominantly in Romania) besides the balance of expenditures and allowances accounted in this line on obligations in Hungary. Other accounts showed HUF 130 million surplus on the revenue side.
As a result of the above Egis’s operating profit leaped by more than 60% yr/yr, but we must not forget that in the base period the company posted extremely poor results, which were weak even in historical comparison. Operating margin rose some 4 percentage points in annual terms, but compared to Q2 it was weaker.
In the fourth quarter of the financial year, Egis’s consolidated profit resulting from financial activities together with the share of results of associated companies showed, in total, a positive HUF 197 million. This is HUF 298 million favourable than that in the same period of the previous year. This favourable alteration stems from the difference of the exchange rate effects and share of results of associated companies. As a result net profit jumped 80% and the 12-month trailing profit rose further.
As for the whole of the current business year Egis reached 95% of the market’s EPS (earnings per share) consensus estimate.
Markets
The domestic sales revenue has dropped as a consequence of the difficult market conditions brought about by the negative government measures. However, this has been offset by the dynamic growth of exports. The highest ever export revenues played a decisive role in the further development of profitability.
In Hungary, of the strategically important markets, the consolidated net sales revenue declined 5% during Q3 as a consequence of the so-called blind bidding process introduced in the fall of 2011. The manufacturer’s price of generic pharmaceuticals has further sunk. At the same time it is advantageous for Egis to have had the possibility of making deductions from the payment obligations based on R&D spending in Hungary also in the July-Sept period.
Exports came to 80% of the Egis Group’s quarterly turnover which, unlike the domestic sales, showed improvement also in Q3. Its value grew 0.1% in euro terms vs the comparative figure. The strengthening of euro decreased the growth of exports by 4 percentage points (in forint terms, there was a 5% rise in exports). Despite the appreciation of the euro, the euro value of consolidated sales revenue expanded 19% in Russia and on other CIS markets while Eastern Europe showed a 1% expansion against the comparative quarter of 2011/2012. On other export markets, the aggregate euro value of exports went down 38% in y/y comparison.
In Q3, the Egis Group realised sales of EUR 36.6 million in their largest market, Russia (1.59 billion roubles, 37% growth in rouble terms). This shows a 27% higher value than the comparative figure. Following its temporary slackening in the preceding quarters, the market turnover has again expanded at an accelerating pace.
Q3 sales in Ukraine accounted for EUR 5.2 million with a 10% boost compared to the year earlier quarter (17% higher in dollar terms).
Cash
As a result of an export-driven growth and stable core activities Egis further boosted its cash poll and at the end of Q3 its cash and cash equivalents reached HUF 7,000 per share (some 25% of the share price).
Charting is displayed using TradingView's technology, a platform, where you can build advanced charts,
spot upcoming trends in the stock screener, and find inspiration in multiple trading ideas
