Zentiva posted CZK 312m second quarter 2007 net profit (down 18.0% y/y and 39.8% q/q), 11.4% above our expectation of CZK 281m calculated based on the mid-point indicated by Zentiva's profit warning more than a week ago. The quarterly net profit came above our expectation due to higher-than expected FX gains and slightly lower-than expected operating expenses. We expect the results could trigger a downward revision on the market as 1H07 net profit stands at 31.6% of the full year Bloomberg consensus estimate of CZK 2,627m and 37.0% of our full year forecast of CZK 2,246m.
Total sales reached CZK 3,418.9m (up 4.7% y/y and 1.2% q/q), 0.1% below our expectation of CZK 3,422.4m on the back of lower-than expected Czech, Romanian and Bulgarian sales fully offset by better-than expected Slovakian and API sales. Czech sales reached CZK 1,118.4m (down 10.8% y/y and up 0.9% q/q), 3.9% below our expectation of CZK 1,155.8m on the back of higher-than expected regulatory pressure. Romanian sales came at CZK 673m (up 16.1% y/y and 2.4% q/q) below our expectation of CZK 704.5m. Bulgarian sales amounted to CZK 18.5m (down 64.8% y/y and 43.3% q/q) below our expectation of CZK 57.5m, as we underestiamted the drug registration problems in the country. API sales came at CZK 56.4m (up 30.0% y/y and down 2.9% q/q) above our expectation of CZK 31.3m.
Gross margin reached 63.2% in 2Q07 (down 128 bp y/y and 356 bp q/q), below our expectation of 65.4% mainly due to the worse than expected sales mix towards lower margin markets and higher than-expected write-offs increasing quarterly COGS. Zentiva reported one-off write-off of inventories related to their Romanian operations of CZK 64.6m and a write-off of trademark in Hungary related to the acquisition of product portfolio from Sanofi of CZK 14.1m (altogether CZK 78.7m), above our expectation of CZK 40m.
Operating expenses came at CZK 1.81bn in 2Q07 (up 17.7% y/y and 21.1% q/q), 4.5% below our estimate of CZK 1.90bn on the back of lower-than expected A&G and R&D costs. Administrative & General evelopment expenses came at CZK 552m or 16.1% of sales in 2Q07 (down 19.5% y/y and 50.7% q/q) below our estiamte of CZK 628m. One-off provisioning against Romanian trade receivables were CZK 126.8m in 2Q07, lower-than our estiamte of CZK 160m, which explains partially why we overestimated this cost line.
Financial result – Zentiva booked CZK 128m financial gain in 2Q07 (vs CZK -56m in 1Q07 and CZK-42m in 2Q06) , well above our expectation of CZK -9m on the back of higher-than-expected FX gains on revaluation of trade receivables.
Overall, we expect mild negative market reaction to the quarterly results.