One of the most interesting shares on the Tel Aviv Stock Exchange (TASE) over the past year has been pharmaceutical company Agis Industries. Only a year ago, capital market traders referred to Agis as a boring and hidebound company. In recent months, Agis has engineered a series of moves that have doubled its value, elegantly lifting it into the Tel Aviv 25 the 25 shares on the TASE with the highest market cap.
If people thought that entering the Tel Aviv 25 would halt the shares upward surge, they have been disabused of that notion. The share has soared more than 40% this year, and the company’s market value has grown to $440 million. The company currently trades at a historic profit multiple of 26, and an expected profit multiple of 15 for the coming year.
That is precisely Agis’s problem. The recent rises have caused concern that the share is already too expensive. For the sake of comparison, generic pharmaceutical companies have an average historic profit multiple of 22, and a future profit multiple of 18. Even Teva (Nasdaq: TEVA; TASE:TEVA) now trades at a historic multiple of 27, and Teva is a multinational, with annual sales in the vicinity of $2.5 billion.
It was all very different a year ago. Agis was then of little interest to anyone, and attracted criticism for its large pile of cash, used neither as a dividend, nor for external growth, i.e. acquiring companies or products. As long as a year ago, Apex-Mutavim Investments analyst Moshe Mais was already predicting that the company was about to make its big breakthrough, which would involve both distribution of a dividend and the beckoning external growth. He forecast then that the share could even double its price. He has been proved right so far.
”Globes”: After Agis’s amazing surge, many would ask whether the share is too expensive. What do you think?
Mais: ”Agis has had a truly stunning run, and now trades at a multiple of 17 for the profit I forecast. That’s not cheap for the local market, but if you compare it with the competition, such as Taro Pharmaceutical Industries (Nasdaq: TARO) and others, it’s not expensive. I, for example, believe that Teva is much more expensive than Agis, because its future multiple is much higher, and its growth potential is not unlimited. Agis has much further to go, and although it’s not cheap, it’s still attractive.”
And that’s before we even mention Mupirocin, Agis’s unique drug (a uniquely formulated generic drug developed by Agis, Y.F.), which could prove to be significant growth engine.
”Mopirocin is a substitute for the Bactroban antibiotic, which has annual sales of $150-170 million. Sales of Agis’s version are expected to be lower, about $100 million. Agis won’t market the drug by itself; it will use a local supplier. As far as is known, the company is negotiating with US distributors, and conclusion of the agreement is expected within a few months. The potential of this agreement is enormous, because Agis will get a large payment in advance, plus sales royalties, which will greatly boost its profits, and make its multiple attractive.”
We may see a rerun of last year’s surge. Can the market value double again?
”The share could post another major gain, but I don’t believe it will double its value again. A year ago, I predicted the value would double, but that was a different story. The company was on the eve of its breakthrough then, trading at a cheap price, and was attracting no interest from either the market or the media. Everyone’s in the share now, and the interest is extensive, so it will be very difficult to repeat last year’s success, although there’s still potential for an upside.”
The plant in Germany can also help.
”Agis bought a plant for manufacturing active pharmaceutical ingredients (API) from Aventis (NYSE: AVE; LSE: AVN; XETRA, Paris: AVEP) this year. Aventis is committed to buying raw materials from Agis for the next decade. Agis has made rather conservative forecasts for the plant, and in my opinion, there’s room for another upside here.”
What about the company pipeline?
”Agis currently has 10 products waiting for US Food and Drug Administration (FDA) approval; sales of the original drugs amount to $300 million a year. In my opinion, more than five of these drugs will be approved, adding more than $45 million in sales over a full year.”
Not everything is rosy at Agis, though. What about the company’s consumer products division cosmetics and toiletries?
”This field has been hit hard this year, but it’s not that big a deal. Agis adjusted its expenses to revenue, merged its activity with NESH Cosmetics (Natural Formula), and will pass the break-even point by the end of the year. Actually, there’s not much opportunity here for big profits, just a reasonable rate, until there’s a real turnaround in the economy.
”The drug market in Israel is still being hurt by imports, and Agis’s profits have fallen. Here, too, there’s not much chance of a turnaround in either direction, and the share won’t be affected very much; the company’s focus is increasingly shifting overseas. In my opinion, this portion of the company business will rise from its current 50%."
Agis chairman and controlling shareholder Moshe (Mori) Arkin was quoted yesterday as saying a Nasdaq IPO was possible. How much will that contribute to the share?
”It’s unquestionably good for the share. It means exposure to more investors, in a field that is very fashionable on stock exchanges around the world. It all depends how stock is listed whether it takes place through the purchase of a shell corporation, without any PR or IR, in which case being listed will have no real effect. A more reasonable assumption, however, is that they’ll do the listing the right way an orderly issue, shepherded by major underwriters, which will attract interest and be a success, thereby contributing to the company value.”
In short, the best is yet to come for Agis.
”The company is undoubtedly still at the beginning of the road, even after its big leap in the past year. Keep in mind that as of now, only half of Agis’s sales are overseas. In my opinion, the ratio of exports to total sales will rise to over 57% in 2003, and gain more momentum in the future. Agis is ridding itself of its dependence on the local market, which will be beneficial to its results.
”The company has brought two new drugs to the market, and is marketing them successfully, so far without competition, in contrast to the predictions, even though these are generic drugs without patent protection. These drugs contribute $20 million in sales to Agis, with very high 70-80% profit margins. These margins won’t last; they’ll plummet, when competitors arise for these drugs.”
What are your forecasts for the company in 2003?
”I expect Agis will have sales of NIS 1.6 billion, and a NIS 105 million net profit in the coming year.”
Published by Globes [online] - www.globes.co.il - on April 2, 2003