Egis held a conference for analysts and investors yesterday afternoon, where the company’s CFO Mr László Marossfy made the following comments regarding their 2007/06 fiscal year:
*Domestic y/y sales growth of the company is seen lower by Egis at 0 and +5% range instead of earlier +7% guidance due to higher price pressure seen on the back of drug subsidy rate cuts in January 2007.
*Egis reiterated that weak Russian private market sales were due to one-off US$ 10m inventory build-down at their buyers. DLO sales was also minimal in the quarter due to the cautious sales policy of the company, although they said, later this year they might restart their deliveries
*Sales of active ingredients (API) and sales to developed world are seen higher than expected earlier on the back of new orders the company received. Earlier sales guidance should be revisited from 60% y/y growth to 70% in case of API sales and from 10% increase to 20% in case of developed world sales
*Depreciation line is seen to shift by HUF 600m in 2007/06 due to changed IFRS rules
*Comprehensive cost-cutting program to offset the negative impact of regulatory changes is under consideration and the company might announce it in the next quarter
Our view: Market quickly folded in the worsened outlook on Egis’ domestic sales as the stock has declined 4% yesterday. However, analysts will likely come up with further earnings downgrades seeing the more intense price competition in Hungary stemming from drug reimbursement system changes. As far as the higher API and Western European sales are concerned, we believe their profit addition remain moderate. A comprehensive cost-cutting program, however, could be a clear price trigger once announced. Although market already expects this to come, no details available yet and therefore it is not yet folded into the share price, we believe.