EIPICO: Sequential recovery paves the way for a better 2021

  • Revenue growth annually and sequentially confirms gradual recovery
  • Cost-curbing and supply chain management efforts continue to pay off
  • Blurred Biosimilar outlook is hindering stock performance

Pharma market continues to slowly recover in 1Q21

According to IQVIA, retail pharma sales recorded EGP6.75 billion and EGP6.14 billion in January and February 2021, an increase of 14% and 5%  YoY, according to the latest available data. This confirms a sequential recovery from 2020 (+4% YoY growth), but is still below 2019 double-digit growth levels of c.17% YoY.

Retail Pharma market has sequentially started to recover in January and February 2021, this confirms the sustainability of the gradual sequential recovery witnessed in 4Q20, where November and December 2020 retail pharma sales grew by 13% and 8%, respectively and paves the way for a better outlook in 2021. During 2021, we expect the retail pharma market to record sales of EGP87.3 billion (+8.8% YoY) and non-retail pharma sales to record EGP41.3 billion (+7.1% YoY), bringing total pharma sales to EGP128.6 billion, up from EGP116.1 billion in 2020e, with growth of 10.8% YoY. This should be driven by the retail sales during 1H21 and non-retail sales during 2H21.

During 1Q21, PHAR’s retail sales segment showed an increase of 3.1% YoY and 12.0% QoQ, recording EGP600 million, this comes despite a decline of 12% YoY in the number of units sold, according to IQVIA; driven by a higher ASP per unit. However, PHAR’s ASP per unit remains below the market average of EGP33.2/unit, standing at EGP14.7/unit as of March 2021, according to the latest data available

PHAR’s tender business recorded sales of EGP36 million in 1Q21 (-34.4% YoY, +67.2% QoQ). The annual decline is driven by the orders shift to the UMPA, from the MoH purchasing authority, that started operations in July 2020 and caused a slowdown in tender sales. However, the quarterly surge is partially stemming from the gradual normalization/adaption to the UMPA new ordering system.

PHAR’s exports recorded EGP178 million in 1Q21, implying a significant increase of 33.8% YoY and a decline of 5.9% QoQ. The annual increase is coming from a weak base in 1Q20, that witnessed export restrictions, flight bans and countries closing their borders. The slight quarterly decline is probably because of the impact of the third wave of covid-19.

Revenue growth annually and sequentially confirms gradual recovery

PHAR reported 1Q21 revenues of EGP814 million, an increase of 5.7% YoY and 8.9% QoQ, where the sequential recovery is attributed to gradual monthly recovery witnessed in the retail market in 1Q21 along with gradual normalization/adaption to the shift to the UMPA, where PHAR’s retail and tender sales grew by 12.0% QoQ and 67.2% QoQ during 1Q21; respectively.

During 1Q21, local market sales recorded EGP600 million (+3.1% YoY, +12.0% QoQ), contributing 73.7% of total revenues (-1.9pps YoY, +2.0pps QoQ). Tender revenues recorded EGP36 million in 1Q21 (-34.4% YoY, +67.2% QoQ), contributing 4.4% of total revenues (-2.7pps YoY, +1.6pps QoQ). Export revenues recorded EGP178 million in 1Q21 (+33.8% YoY, -5.9pps QoQ), contributing 21.8% of total revenues (+4.6pps YoY, -3.4pps QoQ). Toll manufacturing revenues recorded EGP0.198 million in 1Q21, contributing 0.02% of revenues. 

Cost-curbing and supply chain management efforts continue to pay off

Gross profit came in at EGP381 million in 1Q21, compared to EGP325 million in 1Q20, and compared to EGP342 million in 4Q20, this implies an increase of 17.1% YoY and an increase of 11.3% QoQ. During 1Q21, GPM stood at 46.8%, which is an expansion of 4.6pps YoY and an expansion of 1.0pps QoQ. Solid GPM is mainly driven by solid revenue performance (+5.7% YoY, +8.9% QoQ) along with slower-growing COGS than revenues (-2.7% YoY, +6.8% QoQ). Moreover, continuous cost curbing efforts have seen the company’s headcount narrowed down to 5,034 employees in 2020, compared to 5,263 employees in 2019 and down from 5,838 employees in 2018. Cost-curbing efforts along with supply chain management efforts collectively resulted in cost savings that started to show off in 2020 and will continue to pay off in 2021.

Efficiency in spending drives sequential bottom line growth; Provisions and financing cost pressure annual bottom-line change

Net profit recorded EGP178 million in 1Q21, compared to EGP189 million in 1Q20 and compared to EGP148 million in 4Q20, reflecting a decline of 5.8% YoY and an increase of 20.4% QoQ.  The sequential QoQ rise in 1Q21 bottom line is mainly stemming from:

  • a gradual sequential recovery in revenues (+8.9% QoQ),

  • GPM expansion (+1.0pps QoQ),

  • lower marketing expenses (-22.0% QoQ)

  • lower financing expenses (-27.2% QoQ), on the back of a lower debt balance in 1Q21, standing at EGP1.48 billion, compared to EGP1.78 billion in 4Q20.

On an annual basis, net profit slightly declined by 5.8% YoY, mainly attributed to a surge of 1.92x in provisions to stand at EGP19 million in 1Q21, compared to EGP7 million in 1Q20, along with a surge in financing expenses (+2.28x YoY), due to a higher debt balance of EGP1.48 billion in 1Q21, compared to EGP1.10 billion in 1Q20.

Management outlook for 2021

  • Management plans to focus on new launches at high ASP along with submitting re-pricing requests of the existing products to the regulatory authorities; this should bode well for sales growth during 2021 and going forward.

  • EIPICO’s current focus is on the production of medicines used in Covid-19 treatment protocols, where the company currently produces seven Covid-19 related medicines including favipiravir, remdesivir, and paracetamol.

  • EIPICO’s plans to capture the recovery happening in the local market currently, given that no lockdowns are implemented during the third wave of Covid-19.

  • The company produces 18% of the total antibiotics market in Egypt (representing around 22% of total sales); being hit in 2020 (because of the closure of outpatient clinics and lockdowns) and given no lockdowns during the second wave, EIPICO plans to capitalize on its solid ground in the antibiotics market and compensate the 2020 hit caused by the lockdowns.

Pharos 2021 earnings expectations

  • Revenues are expected to grow by around 11% in 2021, driven by gradual pharma market recovery and management plans to increase the prices of 20-25 products in 2021, with 3 products already re-priced during the first 10 days of January 2021. EIPICO is on track to reach an ASP per unit of EGP15.00/unit by the end of 2021, compared to an average of EGP14.7/unit in March 2021 and up from an average of around EGP13.9/unit in 2020, according to the latest available data.

  • Net profit is expected to report a healthy 18.7% net profit growth in 2021 to reach EGP579 million (still 13.8% below 2019 figures) on gradual local and global partial market recovery expected in 2021. This should be driven by cost-curbing efforts implemented by management along with supply chain efforts that result in continuous cost savings.

Blurred Biosimilar outlook is hindering stock performance; Maintain Overweight

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. Total potential market size for biological and biosimilar products is around 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, bring the GPM of the Biosimilar project to 62-66%, assuming that the conventional/traditional business generates 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; however some of the company’s shareholders favor the capital increase over internal financing, which means that a capital increase is on the table. 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 2021e P/E of 7.1x and EV/EBITDA of 6.0x, compared to local pharma peers 2021e P/E and EV/EBITDA of 8.3x and 4.1x;  respectively.

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