One remark: I hold the EGIS stock via the German direct broker DAB Bank. The service here is really really bad. I called them with regard to the squeeze out proceedings and they said the cannot do anything because they did not officially receive the information. They refused to look at the web site with the offer and help me in any regard. They already disappointed me more than once with trading European shares, especially French small caps.
Krka, the Slovenian version of EGIS reported very good Q3 results. Interestingly enough, all the growth and profit increase came from Russia. All the other areas are not doing that well.
Finally there is some news on the spin-off. For me the situation is still not clear, but on their website they mention that even GDR holders might get spin-off shares, although the might not be listed:
HOLDERS OF GDRs: GDR PROGRAM.
If the spin-off is approved and once NewCo has been formed, NewCo is expected to consider establishing a separate GDR program in which new GDRs would be issued representing the shares of NewCo distributed to Depositary on behalf of the Company’s existing GDR holders.
If decided on, the GDR program will be set by the time of the registration of the NewCo; GDRs will be unlisted.
The reason that I still follow the stock is that in my opnion this is a very good way to learn more about Russian stocks and how things work there. I am not sure if this will be rewarded but I find it highly interesting (and entertaining….).
The entertainment factor at Rhoen Klinikum is hard to beat. Founder Eugen Muench gave an interview yesterday, where among other stuff, he suddenly wants to use the sale proceeds from Fresenius for a share buy back at 28 EUR per share. Suprisingly, he also mentioned not to sell any shares personally.
Clearly, one should be careful with everything Münch is saying. I will stick to my strategy and sell out if the “old” purchase price from the first deal is reached (22,50 EUR).
This is from a broker report issued end of September by “Wood & Company”_
During the brief analysts’ conference call yesterday morning, Servier stressed two points: 1) regardless of the acceptance of the offer, Servier plans to delist the shares; and 2) Servier’s HUF 28,000/sh offer is final and will not be revised.
The minimum threshold to trigger a squeeze out under Hungarian regulations is 90%, which means that Servier needs acceptance from 79.63% of the outstanding free float, or 3.043m shares.
Regardless of the acceptance of the offer, Servier still intends to call an EGM to delist the shares from public trading, a step that requires a 75% majority of the votes cast; to block the delisting would require an absolute minimum of c.1.32m votes against, or c.35% of the free float.
Only 4 months after I bought EGIS for the portfolio, majority owner Servier has offered (for me totally unexpected) 28.000 HUF per share to minority shareholders.
This is roughly a 40% gain in 4 months, so quite oK, although in my opinion, the stock should be worth more especially compared to peers. The current offer is around 8.3 x 2013 earnings (ex net cash) and 1.1 x book value.
That’s what I wrote back then:
I think one doesn’t need to be to sophisticated here. A decent company like EGIS with a solid, non cyclical business should not trade at a P/E of 5 and P/B of 0.8. A fair price in my opinion, taking into account some issues from above should be a P/E of 10 or 1.5 times book, which would be still significantly below western peer companies.
Now the problem is the following: Acceppt the offer (and/or sell) or wait for a better offer ?
In most German cases I had so far, the first offer was ususally followed by a better offer and/or much higher stock prices, such as AIRE KgAA and Draegerwerke Genußschein.
In the EGIS case, Servier communicated the following:
– there will be no second offer
– they will ask the AGM to delist the company after the offer is settled
After googling a little bit, I found this from Lawfirm Weil (written in 2005):
In general, a simple majority of the votes is required to adopt a decision at a shareholders’ meeting. However, certain fundamental decisions (eg changes to the charter, merger or winding-up of the company, listing/delisting of shares) require a three-quarters majority of the votes. The charter may also impose supermajority voting requirements for decisions which, by law, could be adopted by a simple majority.
A 75% majority of votes is most likely relatively easy to achieve, unless an activist fund steps in and buys a large anough stake. I don’t have any clue how likely that is and how chances are in Hungarian courts.
So all in all, I guess the best will be to accept the offer and try to find another place to invest in. Somehow the number of cheap shares seem to become smaller and smaller….
A few days ago, I introduced EGIS as one of my new positions (part 1, part 2).
At that point in time I did not spend so much time on the generic drug business in general. However I think its makes a lot of sense to look at this a little bit more closely as it seems to be quite interesting. As this collection is mostly a reminder to myself, I will start with a summary and then have the details afterwards:
The generic drug secor seems to be in a secular tailwind which might explain the nice margins for the sector as a whole. I personally do not believe fully in the “common knowledge” that company size is key, as the large players look less profitable. Finally, the market in Russia, EGIS biggest single market, seems to be a great opportunity although the risks are clearly there as well.
General business model generics:
The general business model for generic drug companies is in theory quite simple: You have to copy expired patented drugs as quickly as possible and then try to sell them either as
a) the cheapest alternative
b) as a “generic brand”
So in order to be succesful, one has either to be a trusted brand (see all the Ratiopharm adverts in Germany) or the cheapest one. As we all now, advertising has significant effects of scale, so for a small player to become a trusted brand is quite difficult. Low cost in contrast is in theory easier to achieve as a smaller player. As generic companies have to produce a lot of different products, I would assume that it is possible to become cost efficient in some drugs if one concentrates on those which have maybe a similar prodcution process.
Clearly, distribution plays a role as well. A generic drug company has to get into pharmacies. Usually, large pharmaceutical wholesalers (Celesio etc.) try to control that part of the supply chain. A big Generic company may have advantages here as well.
Interestingly, at least some of the big players do not have better margins than EGIS. Teva for instance has on average around 13% NI margin and 11% ROCE vs. EGIS 11.9% net margin and 12% ROCE for the last 15 years. So at least in hard numbers the size advantage does not look so significant. Maybe big players like Teva are not so interested in small markets like Serbia, Bulgaria and Romania ? Also some of the big US players (Actavis) are a lot less profitable than the smaller players.
Additionally, I think many people greatly mistake size and competitive advantage. Size can be a competitive advantage in some cases, but often, “diseconomics” of scale dominate, especially in companies which are the results of frequent mergers. This leaves a lot of room for smaller, more agile players to gain ground.
A further difference in business models is the fact, that some generic companies actually produce the so-called Active pharmaceutical Ingredients (API) themselves like for instance EGIS. other, like Stada buy them and only “mix” the drugs. Maybe this is the reason why Stada scores so badly both in margins and ROCE against EGIS ?
“Pay for delay”
An even more interesting business model has developed for some generic companies in the last years, the so-called “pay for delay” market. Here, R&D pharamaceuticals pay directly to Generics companies to delay their start of production and distribution. This almost seems to good to be true: You get paid for doing nothing. As often, things which are too good to be true will go away quickly. In this case, both in the US and Europe courts have already indicated that they consider this practice as illegal to a large extent.
The generic drug business has a strong secular tailwind. Medical costs skyrocket in most countries. One of the “quick fixes” for Governments is to make life easier for generics and harder for patented drugs in order to drive down costs for drugs.
Clearly, in many countries also Generic drug makers suffer, such as in EGIS home market Hungary. However, I think they can adapt better than “research companies” who need to invest a lot more into the development of new drugs.
All in all, it is better to invest into a sector with secular tailwinds than in a distressed sector.
Special Case Russia
Russia is currently the biggest single market for EGIS and the main driver for growth. The major driver here seems to be a Government led program established in 2009 to increase the supply of medication to Russian people significantly until 2020. Part of that program is also to increase the percentage of domestically manufactured drugs. So it might make some sense for EGIS to find a local partner or m&A target. Nevertheless, this will of course be risky. Stada for instance tried to take over Russia’s Pharmstandard, but ultimately failed to do so.
This seems to be a big “buzz word” in generics at the moment. Biotech drugs cannot be as easily copied as “normal” drugs. Generics companies will have to invest a lot more money and effort into producing socalled “biosimilar” drugs. EGIS has already ligned up a deal with a Korean Biotech company, but as far as I understand it is only a distribution deal. Clearly an area to watch.
Krka (ISIN SI0031102120)- Slovenian Generics company
Krka is another Eastern European generic company based in Slovenia. It is nominally more expensive than EGIS, but it is more profitable as well. It might even be a “special situatioN” as the Slovenian Government which currently control the company, might be forced to sell their stake.
More to come on Krka….
Interesting Interview with the EGIS CFO 2 years ago:
When the business cycle goes down, public budgets go into the red and governments need to cut spending. This significantly affects the health sector as a major area of public spending. Thus, through the reimbursement system, a macro-economic crisis hits the pharmaceutical business usually with a delay of approximately two years.
Finally a big link dump from where I have compiled my “knowledge” above: