Sales were 1% ahead of our estimates in Q2 but Ebitda missed by 6%. Net earnings adjusted for one time charge and forex gains were largely in line with our estimates. US revenues remained largely flat q-o-q. We had expected some improvement q-o-q. According to the company, pricing pressure in Azacitadine and the loss of the McNeil contract negated the impact of new launches. Ramp up in the US on back of high value launches remains key. Most of the other geographies reported growth ahead of our estimates. The PSAI segment recorded q-o-q improvement of $18 m. In India, the growth was 14% y-o-y. The base now includes the acquired portfolio of UCB. In Russia constant currency growth was weak at -5%. The ROW markets (ex Russia/CIS) were down 53% y-o-y due to no sales in Venezuela.
Overall gross margin at 56% is down 20 bps q-o-q. The Generic business gross margins at 62.3% improved 96 bps q-o-q. However, PSAI segment gross margin declined 210 bps q-o-q. R&D costs increased 8.6% q-o-q and 19% y-o-y as spending on the recently acquired portfolio from Xenoport and Eisai started. There were some costs associated with Teva’s acquired portfolio as well. The company has received Curis shares worth R1.24 bn in lieu of future milestone payments.
SG&A (ex one off charges and amortisation) increased 3% y-o-y and declined q-o-q on lower remediation charges: According to the company the remediation charges fell significantly during Q2FY17. There is a tight leash on costs. Employee spend increased 3.7% y-o-y. The company incurred a one-off charge of R344m due to demands from NPPA (National Pharmaceutical Pricing Authority).
P&LP&L (R mn) Q2 FY17
Gross profit P&L20,097
Other (income) -277
One off charge 344
Operating Income 3,386
P&L (R mn) Q2 FY17
Finance exp/(income) -365
Share of profit 84
Income Tax 885
Gross margin (%) 56.0
Ebitda margin (%) 17.8
Tax rate (%) 23.1
Source: Company, Nomura estimates
Balance sheet: Goodwill and intangibles increased due to the acquisition of Teva’s ANDA portfolio. Capex was R1.3 billion in line with the previous quarters. Net debt to equity is now at 33.9% vs 10.6% in the previous quarter.
We have a buy rating: We value DRRD at 22.5x our July 2018F EPS forecast of R167, which gives us a TP of R3,747. Risks that may impede achievement of target price are adverse currency movements, escalation of regulatory issues, higher-than-estimated price erosion in key products in the US, delays in approvals or adverse legal development with respect to ANDAs under litigation.