“Kamada Ltd. (TASE: KMDA) will reach operating profit in 2008, not in 2009, as the company previously predicted,” says Poalim IBI analyst Noa Weisberg. “The company’s breakthrough will occur in the second half of 2009.” She gives the share a target price of NIS 28.50, compared with its current price of NIS 21.20.
Kamada’s key financial figures are as follows: first quarter 2006 sales totaled NIS 16.4 million, up 27% on the preceding quarter; the gross profit margin was 22%, or NIS 3.6 million; and the company invests 23% of revenue in R&D - more than its gross profit. As a consequence, the company posted an operating loss of NIS 2.8 million for the first quarter, and it posted a net profit only because of a payment by the American Red Cross, on the basis of a longstanding contract.
Kamada was once profitable, but a fall in prices for the generic drugs the company markets eroded its profits. The company decided to market its products in the US and Europe, where competition is lower and profit higher. It also decided to develop a completely new product an inhaleable drug for the treatment of emphysema. These two measures require heavy investment in development and production, which pushed the company into the red in recent years, as well as prompting its IPO.
When judging Kamada, it is therefore necessary to check whether it has been able to increase sales of high added value products as a proportion of total sales in a way that covers the investment in these products. The company was able to do this: the proportion of sales of added value products rose from 65% of sales of industrial products in the first quarter of 2005 to 72% in the first quarter of this year. Sales of added value products totaled NIS 8.2 million in the first quarter. The company also provides development and distribution services.
Nevertheless, the increase in sales of strategic products did not boost Kamada’s gross profit margin as expected it actually fell from 24% to 22%. The company attributes this decline to the replacement of its manufacturing process with a more expensive one, in order to market its strategic products in the US and Europe, but it has not yet launched sales in either market. The company believes that when it begins the marketing of its strategic products in these markets, their high prices will cover the increased production costs.
The projected switch to an operating profit in 2008 is basically due to an accounting change. Beginning with the present quarter, Kamada will calculate pharmaceuticals production costs for clinical trials during the use stage, and not during the production stage as well, as the company has done to date. Weisberg nevertheless believes that the company will begin its turnaround in 2008. She believes that the company’s first drug - a rabies treatment - will reach the US market during the second half of 2008, and that its injectable API product will be launched in the US in 2009, when the company will achieve a breakthrough. “Even though I have not taken the inhaleable API product into account, because it scheduled for launch only in 2010, I took into account the risk that the rabies treatment and injectable API will not reach the market, or will be delayed. Even though Kamada’s share has risen strongly in recent months, it still appears to be a buy opportunity.”
By law, the research and underwriting activities of a company such as Poalim IBI Underwriting and Investments Ltd. (TASE:PIU) must be completely separate. Nevertheless, it should be noted that Poalim IBI led Kamada’s IPO.
Published by Globes [online], Israel business news - www.globes.co.il - on June 7, 2006
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