Modest growth in the retail pharma market caps performance
The retail pharma market continued to sequentially recover during 9M21, which confirms the sustainability of the gradual sequential recovery expected in 4Q21. According to IQVIA, retail pharma sales recorded EGP62.0 billion during 9M21, showing modest growth of 6% 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. Retail pharma market volumes recorded a decline of 3% to reach 1.75 billion units sold during 9M21. During 2021, we expect the retail pharma market to record sales of EGP86.5 billion (+7.3% YoY) and non-retail pharma sales to record EGP42.3 billion (+10.0% YoY), bringing 2021f total pharma sales to EGP128.8 billion, up from EGP119.0 billion in 2020, with growth of 8.2% YoY. We expect 2022f retail pharma market sales to record EGP95.2 billion (+10.1% YoY), the non-retail pharma market to record EGP48.0 billion (+13.4% YoY), and total pharma market sales to record EGP143.2 billion (11.2% YoY).
During 3Q21, PHAR’s retail sales segment showed an increase of 27.5% YoY and 15.9% QoQ, recording EGP625 million, noting that the number of units sold grew by 7.7% YoY in 9M21, according to IQVIA. However, PHAR’s ASP per unit remains below the market average of EGP35.4/unit, standing at EGP15.7/unit as of September 2021, according to the latest data available.
PHAR’s tender business recorded sales of EGP69 million in 3Q21 (2.5x YoY, +43.2% QoQ). On an annual basis, this is driven by a weak base effect in 3Q20 when the UMPA new ordering system started, and the solid quarterly increase is due to the normalization/adaption to the UMPA new ordering system, which started operations in July 2020 and initially caused a slowdown in tender sales due to orders being shifted to the UMPA from the MoH purchasing authority.
PHAR’s exports recorded EGP205 million in 3Q21, growing by 5.0% YoY and 13.2% QoQ. This implies the gradual recovery in export markets as a result of lifting border restrictions and flight bans that were previously imposed due to the pandemic.
Solid revenue growth
PHAR recorded 9M21 revenue of EGP2.48 billion, up 14.9% YoY, broadly in line with our estimate of EGP2.4 billion. On a quarterly basis, this implies 3Q21 revenue of EGP899 million, up 27.3% YoY and 16.7% QoQ.
During 3Q21, local market sales recorded EGP625 million (+27.5% YoY, +15.9% QoQ), contributing 69.6% to total revenue (+0.1pps YoY, -0.5pps QoQ). Tender revenue recorded EGP69 million in 3Q21 (+2.5x YoY, +43.2% QoQ), contributing 7.6% to total revenue (+4.9pps YoY, +1.4pps QoQ). Export revenue recorded EGP205 million in 3Q21 (+5.0% YoY, +13.2pps QoQ), contributing 22.8% to total revenue (-4.8pps YoY, -0.7pps QoQ). Toll manufacturing revenue recorded EGP0.5 million in 3Q21, contributing 0.1% to total revenue.
GPM expands on faster-growing revenues than COGS
Gross profit came in at EGP1,087 million in 9M21, up 22.5% YoY. This translates to a GPM of 43.8%, an expansion of 2.7pps YoY. On a quarterly basis, gross profit recorded EGP378 million in 3Q21, up 24.8% YoY, and 15.1% QoQ. Accordingly, GPM for the quarter stood at 42.0%, slightly contracting by 0.8pps YoY and 0.6pps QoQ.
It is noteworthy that PHAR has undertaken cost-curbing efforts, which narrowed down the company’s headcount 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 started to pay off in 2021 and are sustainable going forward.
Bottom line pressured by R&D costs and higher financing expenses
Net profit recorded EGP359 million in 9M21, growing by 5.7% YoY, which implies an NPM of 14.4% (-1.3pps YoY), lower than our estimates of EGP393 million. On a quarterly basis, net profit came in at EGP88 million in 3Q21, rising by 14.8% YoY but dropping by 5.2% QoQ. Weak bottom-line performance is mainly stemming from a rise in financing expenses by 42% YoY in 9M21, with a net debt balance of EGP1.57 billion as of September 2021, compared to a net debt balance of EGP1.04 billion in 2020. In addition, PHAR recorded R&D expenses of EGP26 million (+72% YoY) in 9M21.
Pharos 2022 earnings expectations
Revenues are expected to grow by around 11.9% in 2022 to stand at EGP3.62 billion, driven by gradual pharma market recovery and management plans to increase the prices of 20-25 products in 2021, that would result in a gradual increase in the company’s ASP. PHAR has already surpassed its ASP per unit target for 2021 of EGP15.00/unit, with ASP standing at EGP15.7 per unit as of September 2021 up from an average of around EGP13.9/unit in 2020, according to the latest available data.
Net profit is expected to report a moderate 13.4% growth in 2022 to reach EGP590 million (still 12.1% below 2019 figures) on gradual local and global partial market recovery expected in 2022. 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. The 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. 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 6.8x and EV/EBITDA of 4.9x