Equity Analysis /

AXPH: Volume impacts topline performance; margins face pressure

    Mohamed Hamza

    Alexandria Pharma (AXPH) recorded EGP213 mn in revenues in 3Q18/19, +3% YoY, but 12% down QoQ. With no recent price-hike announcements by the Ministry of Health (MoH), we believe topline performance is attributable to volumes. On the back of 46 drugs sold at a loss in FY18/19, we believe management could have curbed production volumes for these drugs to limit their impact on margins; hence the sequential drop in volumes. On the other hand, YoY volume growth is assumed to be a result of the introduction of five new drugs added to AXPH’s portfolio in FY18/19. 

    GPM sustained; SG&A pressures margins  

    GPM recorded 29% in 3Q18/19 versus 30% in 2Q18/19 and 29% in 3Q17/18. Margins have started to show signs of recovery since the start of FY18/19, where 1Q18/19 GPM recorded 26%. AXPH’s export sales contribute 17.5% of FX needs, therefore we believe margins could be further supported by increased export sales, if and when this materializes. 

    EBITDA margin came in at 21%, down 2pps QoQ and 5pps YoY. The annual & sequential drop came on the back of a spike in SG&A expenses. Further down the line, the impact reflected also on NPM also dropped to record 15% vs 17% in 3Q17/18 & 2Q18/19.

    Catalysts to look forward to

    1. The implementation of the ‘Universal Healthcare System’ (UHS) promises to provide healthcare insurance (including access to more medical drugs) to all Egyptians and become a golden opportunity to push sector sales volumes. It was recently announced that the MoH finalized agreements with Cleopatra, As-Salam, Dar Al Fouad, and Magrabi hospitals to train medical and administrative staff, in light of the Universal Healthcare System’s rollout in July 2019. 
    2. With increasing population and urbanization rates, the customer base is expected to increase; therefore higher demand for medical drugs.
    3. Average Egyptian drug price is USD1.5; exceptionally cheap compared to global average prices.
    4. Governmental pharma companies accounted for 2.9% of FY18 total drug sales in Egypt, presenting an opportunity to gain higher contribution to total pharma sales through the introduction of cheaper drugs.
    5. HoldiPharma has recently requested international consulting companies, specialized in pharmaceutical industries’ quality control, to carry out technical reviews of its affiliates’ production lines, which might imply renovations for higher efficiency or improved product offering with the objective of market share gains. 
    6. MoH recently increased the prices of ‘Eltroxin 50 mg’ by 23% and ‘Eltroxin 100 mg’ by 67%. It is noteworthy that this drug is subject to the MoH’s price-cap scheme, indicating flexibility in future drug price increases and giving hope for other pharma manufacturers such as AXPH. Also, the Ministry of Public Enterprises’ enacted an agreement with the MoH to study the repricing of some 330 drugs produced by public manufacturers in the near future.

    Trading at low multiples; rerating awaits catalysts  

    AXPH is trading at an EV/EBITDA19/20 of 1.9x and P/E19/20 of 4.9x, which are below the market average of 11.1x and 13.7x respectively. Small-cap pharma manufacturers such as AXPH are trading at cheap multiples as a result of relatively lower liquidity, poor access to management and strategic planning, and continuous underperformance from lack of development plans, labour inefficiencies and high production costs in addition to low price-point SKUs. 

    We believe the sector could unlock its potential following technical upgrades, deployment/sale of unutilized land plots, and price hikes. In FY19/20, AXPH plans to introduce 5 new drugs, including Panadol Advance. Management also announced FY19/20 capex of EGP93.25 million (EGP61.4 million for renovations and EGP31.85 million for expansions). It was also reported earlier that the Ministry of Public Enterprises revealed plans to raise the prices of loss-making drugs, which could be a key catalyst for stocks like AXPH. 

    We maintain our DCF FV of EGP165.0 and Overweight recommendation.