• Recurring earnings surge 33% Y-o-Y, broadly in line EIPICO’s 2Q16 reported earnings grew 25% Y-o-Y to EGP111mn. Recurring earnings (excluding FX gain/loss and provisions) surged 33% to EGP120mn, which was 16% above our estimate on better-than-expected margins. EBITDA rose 22% Y-o-Y driven by a 12% revenue increase and 3.2 pp EBITDA margin improvement to 37.0% (+2.5pp vs. our estimate). The margin improvement was due to: i) economies of scale; ii) better product mix (reduced production of low-margin products); and iii) likely usage of low-cost inventory. We will revisit our forecasts to reflect the stronger 1H16 results and recent trends.
• Solid revenue growth on volume and prices; entirely domestic Revenue grew 12% Y-o-Y to EGP467mn (in line), entirely driven by domestic sales that increased 17% on higher volume and prices, offsetting a 6% drop in exports. The drop in exports was due to a demand slowdown in some of EIPICO’s markets. The positive impact of a drug price increase in 2015 spilled-over in to 2016, and earlier in 2016 the Egyptian government allowed a further increase for some medicine prices (below EGP30), but we expect the full impact to materialise in 3Q16 (+50% of EIPICO’s medicines are below EGP30). EIPICO added seven news drugs in 1H16 and expects to launch seven more by end of the year. The hepatitis C drugs are in the testing phase at the Ministry of Health and EIPICO plans to produce it soon.
• Medicine shortage exacerbated by scarce FX A shortage of medicines in the Egyptian market is reportedly worsening, with the number of missing products increasing to 1,500 versus 1,000 in May 2016, according to the pharmacists syndicate. Pharmaceutical companies attributed the reduced medicines supply to a cut-back in raw material imports due to difficulties in sourcing foreign currencies from banks at the official rate along with the hike in the parallel rate. Further EGP devaluation will exacerbate the shortage if it is not accompanied with a timely increase in drugs prices (no intention so far) and increased supply of foreign currency.

Tarek El-Shawarby