Equity 10 November 2017, 10:55am

ANALYST VIEW - Jefferies raises target price for Hungary's Richter

Portfolio

After the release of Richter’s third-quarter earnings report, Jefferies has raised its target price for Hungary’s leading pharmaceutical producer to HUF 7,890 from HUF 7,470 previously. The rating remains ‘Buy’.

Key takeaway:

On robust 9M figures, with a guidance raise driven by Vraylar and cost control, Jefferies has raised its earnings per share (EPS) estimate by 5-6% on an u/l basis and increased its target price to HUF 7,890 from HUF 7,470 previously.
Jefferies still expects buyside cons to be more cautious until visibility improves which is the buying opportunity as it believe the mid-term story remains intact. Jefferies has retain its ‘Buy’ recommendation as Richter is its preferred name in EMEA generics.
Jefferies noted that Vraylar royalties were robust (USD 35.9 mn at 9M), driven by continued uptake and things are “looking good for the rest of the year". Esmya growth was also above its expectations, with sales at EUR 67.5 mn at 9M (+40%) and guidance was raised for the year.
Growth was mainly in the EU15 region, though additional launches and its expanded use in the long-term management of uterine fibroids also had a benefit. As a reminder, the US filing for Esmya was accepted on Oct 10 and we anticipate approval 1H ‘18E which Jefferies believes would be a boost for the stock. On Biosimilars, Richter anticipates to refile pegfilgrastim in 1Q.
EBIT margin guidance was also raised, and Jefferies expects GM expansion next year: Although GM’s were sequentially flat despite higher royalties, it noted pricing pressure, 1H FX headwinds, higher amortization (Esmya & Bemfola) and an impact due to inventories on Bemfola profitability all had an impact. Going forward, Richter affirmed that the mix should shift to higher margin products which Jefferies would view favourably, allowing its bull thesis to play out.
Jefferies also noted that Richter’s net cash position gives the group significant strategic flexibility. It forecasts EUR 237 mn net cash by end 2017.
Although the dividend payout is unlikely to go >30%, (raised last year from 25%), Jefferies expects cash to be prioritised for product deals across women’s healthcare or other deals which bolster its biosimilar and specialty pharma credentials.

As regards the risks, Jefferies listed the following: Esmya fails to achieve US approval, Vraylar begins to disappoint, CIS declines, FX volatility, a more rapid decline in US base business.