Richter Gedeon - Cuts In Profit Estimate But Keeping Rating Unchanged

Gedeon Richter - Earnings Revision
Rating: Accumulate (unch.)

Target price (12-month): HUF 6,100 (prev. HUF 6,320) 

Current share price: HUF 5,440

 

We reduce our estimate for Richter’s 2019 and 2020 EBIT from HUF 76 bn and HUF 86 bn to HUF 67 bn and HUF 70 bn, respectively, recognizing that reduction in cons. gross margin is likely to be more severe than previously thought. The main reasons which led us to cut our gross margin estimates for 2019 to 57.5% (2018: 57%), and for 2020 to 57.5% from 58.6% and 58.7% previously, are the followings: 1) slowing Russian sales growth; 2) setback in high-margin Chinese revenue that once was believed to grow fast on a sustainable basis; 3) the low-margin wholesale activity (ca. 18% of cons. sales) gaining traction gradually; 4) increasing pricing pressure and sluggish OC market in EU, 5) FX headwinds and 6) increased cost of regulation (serialization cost, in particular). What could turn to be tailwind, however, is the growing royalty income received from Allergan and Recordati on the sales of Vraylar and Reagila in the U.S and EU, a decrease in the amount of sales proportional royalties and crawl-backs, as well as amortization in respect of Esmya, advancing Bemfola sales, and even higher gross margin on wholesale YoY in 2018 (from 9% to 9.5%), explaining why we expect slightly higher gross margin in 2019 vs. 57% in 2018 and management guidance of 57% for 2019. 

Management’s sales guidance for 2019 is by and large in line with our expectations except for Esmya (EUR 35 mn), Russian sales (slight decline in RUB) Chinese sales (-15% YoY in EUR, where we were more optimistic previously though not taking into account pre-shipments last year. We earlier anticipated 45 mn in Esmya sales for 2019, 2% sales growth in Russia and 5% to 7% growth in Chinese sales. It is worth also noting that 2019 sales guidance does not include any growth in Vraylar sales that we think is a nonsense. We expect USD 105 mn royalty from Allergan, implying an increase of 17% on 2018.

Due to a reduction in our gross margin estimate we need to cut our clean EBIT forecast for 2018 and 2019 from from HUF 76.3 bn and HUF 86 bn to 66.7 bn (+12% YoY) and HUF 70 bn (+5% YoY). We note that Vraylar and Reagila are expected to account for near 50% of cons. EBIT in 2020 vs. 20% in 2017.

We also note that Richter accounted for milestone income payment from Allegran and Recordati amounting to HUF 8.4 bn (EUR 26 mln) in 2018 following the license agreement amendment subsequent to the European authorization of Reagila® (cariprazine) entering into force, and the sNDA submitted by Allergan in respect of the label extension of Vraylar. Also importantly, Richter recorded further impairment losses of HUF 24.3 bn on Esmya in 2018 (HUF 48.73 bn in 2017) after concluding that Esmya’s market potential has faded away with the EMA recommending restriction on the use of the drug following liver failure cases in EU. We removed potential Esmya US royalty income completely from our earnings estimates for the coming years given a very low probability that the drug could enter the US market.

Despite the lackluster cons. gross margin performance ahead that prompts us to cut EBIT forecasts for the coming years, we still believe that management guidance for clean cons. EBIT margin for 2019 is very conservative at 12% (2018: 13.4%). We anticipate clean EBIT margin should average at 14.4% in 2019 and improve further to 14.6% in 2020, with S&G and R&D expenses likely remaining in the neighborhood of 26% and 9% of cons. sales as against management guidance of 27% for S&G expenses and 10% for R&D expenses as a percentage of total revenue.

We also reduce cons. net income estimates for 2019 from 73.5 bn to HUF 64.5 bn, and also for 2019 from HUF 84.5 bn to HUF 69.3 bn, implying an EPS of HUF 346 (+106.8% YoY) and HUF 371 (+1.2% YoY) vs. previously expected HUF 395 and HUF 453, respectively.

We believe the underlying story of Richter has remained intact. Richter is in a transitioning period in which it does its utmost to transform itself from a CEE-focused branded generics player towards a pan-European specialty pharma company with niche women’s health, CNS and biosimilar products portfolio, which is not yet fully reflected in its top line, while its cost structure is more of a specialty pharma company already.

Valuation: Richter is trading at a 2019 EV/EBITDA multiple, based on our earnings estimate, of 8.6x, which is ca. 40% lower than historically. Due to somewhat weaker than anticipated operating performance we lower our 12-month TP from HUF 6,320 to HUF 6,100 a share, yet leaving a 12% upside potential from the current share price (plus ca. 2% DIVY). In our sum-of the parts valuation model we value cariprazine at HUF 900 per share not including the impact of the potential of patient extension to bipolar depression. However, slower than expected recovery in Esmya revenue prompts us to cut our fair value estimate for it from HUF 250 a share to HUF 167.

Net cash and equivalents (including tradable securities) amounted to HUF 633 a share at the end of 2018, accounting for ca.12% of the current share price. We maintain our Accumulate rating on Richter.

 

 

 

Attila Vago
Senior Analyst

CONCORDE SECURITIES LTD.

Hillside
55-61 Alkotás street, H-1123 Budapest.
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MEMBER OF THE CONCORDE GROUP

 

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