Retail pharma market confirmed signs of recovery in 1Q22
Retail pharma has partially recovered in 2021, confirming the sustainability of the gradual sequential recovery expected in 2022. According to IQVIA, retail pharma sales recorded EGP86.45 billion in 2021, showing a modest of 7% YoY, according to the latest available data. Such YoY growth is higher than 2020 retail pharma market growth (+4% YoY growth) but is still below 2019 double-digit growth levels of c.17% YoY.
In 1Q22, retail pharma sales grew by 13% YoY, reaching EGP22.2 bn; driven by a healthy volumes recovery (+7% YoY) and price increases. We expect 2022f retail pharma market sales to record EGP95.2 billion (+10.1% YoY), the non-retail pharma market is to record EGP48.0 billion (+13.4% YoY), and total pharma market sales are to record EGP143.2 billion (11.2% YoY).
During 1Q22, PHAR’s retail sales segment showed a slight increase of 3.0% YoY and a drop of 7.1% QoQ, recording EGP604 million. However, PHAR’s ASP per unit remains below the market average of EGP35.8/unit, standing at EGP16.4/unit by the end of 1Q22, according to the latest data available.
PHAR’s tender business recorded sales of EGP106 million in 1Q22 (1.9x YoY, -2.4% QoQ). On an annual basis, this is driven by a weak base effect in 1Q21, on unfavorable market dynamics because of UMPA practices and the covid-19 pandemic. The quarterly decline is due to the weak seasonality of tender business in the first quarter of the year, compared to the fourth quarter. PHAR’s exports recorded EGP217 million in 1Q22 (+22.0% YoY, +14.4% QoQ), primarily driven by easing export restrictions compared to 2021.
Healthy revenue growth annually but weaker sequentially
PHAR recorded 1Q22 revenue of EGP927 million, up 15.9% YoY and slightly down 2.7% QoQ, lower than our estimate of EGP1.04 billion. During 1Q22:
local market sales recorded EGP604 million (+3.0% YoY, -7.1% QoQ), contributing 65.1% to total revenue (-8.2pps YoY, -3.1pps QoQ),
tender revenue recorded EGP106 million (1.9x YoY, -2.4% QoQ), contributing 11.4% to total revenue (+6.9pps YoY, flat QoQ), flat sequential performance is driven by a strong base effect in 4Q21 on higher seasonality of tender business in the final quarter of the year.
export revenue recorded EGP217 million (+22.0% YoY, +14.4% QoQ), contributing 23.4% to total revenue (+1.2pps YoY, +3.5pps QoQ),
toll manufacturing revenue recorded EGP1.0 million, contributing 0.1% to total revenue.
GPM contracts on an unfavorable revenue mix and higher raw material costs
Gross profit recorded EGP416 million in 1Q22, up 13.1% YoY and down 3.9% QoQ. Accordingly, GPM for the quarter stood at 44.8% (-2.0pps YoY, -0.6pps QoQ). Margin contraction is attributed to the higher contribution of tender business over retail sales. Additionally, raw materials and packaging costs recorded an increase of 20.9% YoY, contributing 41.8% of total sales (+1.8pps YoY).
We expect margins to further contract during 2Q22 on the back of higher raw materials costs on EGP depreciation, despite the fact that PHAR has been working throughout 2021 on upward revising of products’ pricing and undertaken cost-curbing efforts, which in our view is not enough to offset a weaker currency.
Income from subsidiaries and FX gain fuel bottom-line despite higher SG&A to sales
Net profit came in at EGP174 million in 1Q22, compared to our estimate of EGP183 million, rising by 21.3% YoY and 5.8% QoQ and implying a NPM of 18.7% (+0.8pps YoY, +1.5pps QoQ). Bottom-line performance is attributed to:
a spike in investment income from subsidiaries to stand at EGP34.6 million in 1Q22, compared to EGP6.1 million in 1Q21, on the back of an accounting treatment on the investment income from subsidiaries,
FX gain of EGP15.83 million in 1Q22, compared to FX losses of EGP2.2 million in 1Q21,
This came despite higher SG&A/sales to stand at 17.2% of sales (+0.8pps YoY, +3.3pps QoQ), growing by 21.7% YoY and 20.2% QoQ.
Al Ahly Pharos 2022 Earnings Expectations
Revenues are expected to conservatively stand at EGP4.01 billion (+16.7% YoY), driven by a solid rebound in the pharma market and price increases that took place in 2021, which would result in a gradual increase in the company’s ASP.
Net profit is expected to report an increase of 20.5% growth in 2022 to reach EGP630 million (still 6.2% below 2019 figures) on gradual local and global market recovery expected in 2022, cost-curbing efforts implemented by management along with supply chain efforts that result in continuous cost savings and taking into account potential margin contraction on EGP depreciation.
Multiple investment opportunities should drive future growth; Maintain Overweight
EIPICO’s BoD preliminary approved acquiring ACDIMA’s 99.9% stake in UPE Pharma, however, no further details are yet disclosed. EIPICO’s BoD has previously approved the establishment of a factory for the APIs production with an authorized capital of EGP1.0 billion and an issued capital of EGP400 million, out of which PHAR’s share is 25%. This comes as government plans to localize APIs manufacturing to hedge against potential challenges. The ownership of the new company is split between PHAR (25%), ACDIMA (55%), and others (20%). However, no further details are currently available on the timeline of establishment, targeted sales, and margins.
Additionally, PHAR has been allocated the land for its Biosimilar project, producing oncology and hormone products, where construction should take around 24 months at an investment cost of around EGP1.0-1.2 billion. Operations at the new plant are expected to start by 2023. The total potential market size for biological and biosimilar products is about EGP1.0-1.5 billion, where management expects to record revenues of around EGP500.0 million during the first year of operations. Management noted that COGS of the Biosimilar project are 20% lower than the conventional business, which, according to our estimates, brings the GPM of the Biosimilar project to 62-66%, given that the conventional/traditional business generates a GPM of around 42-46% on average. According to management, PHAR secured the debt financing (local currency-denominated) portion from local banks. Management also noted that the equity portion should be financed from the company’s internal resources. We are waiting for management to share more details about the Biosimilar margins, production capacity, financing terms, and borrowing rates to gauge the impact on valuation and financial performance.
PHAR is currently trading at 2022e P/E of 4.9x and EV/EBITDA of 4.0x.