2012-03-08 sr cee pharmaceuticals

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Erste Group Research Sector Report Page 1All prices are those current at the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors.

Erste Group ResearchErste Sector Healthcare | HEALTH CARE |08 March 2012

Erste Sector Healthcare2012 CEE pharma outlook:

CEE pharma stocks continue to represent solid defensive investment theme, butvolatility in short run is hard to avoid. Richter and Krka remain our top picks.

Vladimira Urbankova

[email protected]

Antibiotice, Biofarm contribution:

Raluca UngureanuRaluca. [email protected]

Contents

Executive summary 1

Valuation / Recommendation 4

Market overview 7

4Q11 results overview 19

2012 guidance /Erste forecast 22

Antibiotice 23

Biofarm 28

Bioton 33

Egis 41

Krka 50

Richter Gedeon 59

Contacts 70

Disclosures & disclaimer 74

Russia remains strong card to play forHungarian pharmas; forintweakness should bolster results further; Egis multiples are still attractive,RichtersR&D/specialty pharma foray yet to be priced in. Our new targetprices (HUF 20,455 per share for Egis and HUF 47,800 per share forRichter) suggest that the room for share price appreciation is veryappealing. We thus upgrade our recommendation for Egis fromAccumulate to Buy and reiterate our Buy call for Richter.

Krka maintains its regional competitive edge, prepared Warsaw listing isset to increase investors appetite. Our revised target price of EUR 73.5(vs. the earlier target of EUR 75.5) per share points to significant upsidepotential from its depressed levels and we confirm our Buyrecommendation.

Biotons turnaround story still largely hinges on progress in cooperationdeals. Incorporating the more grim than originally anticipated underlyingprofitability parameters, offset by proceeds from the finally inked Actavisdeal, our new 12-month target price for Bioton arrives at PLN 0.11 pershare (up from the earlier PLN 0.10 per share). We stick to Hold.

Biofarms investment story to be bolstered by new dividendpolicy/acquisition target status, overshadowing its peerAntibiotice.Weraise our Biofarm target price from RON 0.217 to RON 0.237 per shareand upgrade the stock from Hold to Accumulate. Reflecting the negativeimpact of the less favorable export developments alongside the expandingshare of contractual business, we cut our target price to RON 0.446 pershare and reduce our recommendation for Antibiotice fromAccumulate to Hold.


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Erste Group Research Erste Sector Healthcare 08 March 2012


Executive summary

Recommendations and target prices at a glance

Company Currency Recommendation Recommendation Target price (LC) Target price (LC) Current Price (LC) Upside potential (%)

before now before now

Antibiotice RON Accumulate Hold 0.4750 0.4460 0.425 4.9%

Biofarm RON Hold Accumulate 0.2170 0.2370 0.1994 18.8%

Bioton PLN Hold Hold 0.10 0.11 0.10 9.8%

Egis HUF Accumulate Buy 21,500 20,455 15,350 33.3%

Krka EUR Buy Buy 75.5 73.5 52.5 40.2%

Richter Gedeon HUF Buy Buy 45,650 47,800 37,485 27.5%

Source: Erste Group Research. Based on closing prices as of March 6, 2012.

CEE pharma stock performances were lackluster last year, with the financialmarket turmoil depressing their stock liquidity and dragging share prices tonew lows (with resulting attractive valuations, in particular from the long-term perspective). Worries related to the domestic macroeconomic outlookkept a lid on Hungarian stocks. Should negotiations with the IMF bring moreclarity and improve the sentiment towards the battered Hungarian equitymarket, we expect their performance to improve in the course of 2012, withthe market finally pricing in the benefits of the weak forint for both heavilyexport-geared Hungarian pharmas.

The 4Q11 reporting season confirmed that, despite all odds, 2011 wasanother solid year for CEE pharma companies from the business

perspective.Importantly, in 2012, Russia/CIS, the crucial export territory formost of them, is anticipated to continue in delivering robust growth,offsetting the temporary slowdown in the CEE region, hampered by costsavings accompanying healthcare reforms. Although equity markets mightremain fragile for a while, we believe that the fundamentally solidlypositioned and relatively recession-proof top CEE pharma stocks - Krka,Richter and Egis - have all prerequisites to outperform their local marketsand end 2012 with a positive sign.

We reviewed our models and set new 12-month target prices for CEEpharma stocks. The 2011 results demonstrated clearly that the Russianmarket represents a strong card to play for both Richter and Egis. Inaddition, while in 2012 the new government cost savings plans will

undoubtedly harm the Hungarian pharmas results, their impact will be lesssubstantial than originally assumed. And finally, both Richter and Egis areamong the biggest beneficiaries of the significantly weaker than earlierenvisaged forint, which bodes well for their results in the coming periods.Richters strategic foray into the R&D/specialty area bolsters the companysmedium- to long-term outlook, with more news from R&D pipeline progress(in cooperation with Forest Laboratories) set to provide a trigger to itsvaluation/stock price in the meantime. In summary, our new target pricesforRichter and Egis, incorporating the deterioration in their homemacroeconomic situation (translating into a higher risk-free rate andelevated equity market premium), arrive at HUF 47,800 per share forRichter and HUF 20,455 per share for Egis. Although both stocks havealready partly recovered from their autumn 2011 lows, they offer upsidepotential of 27.5% and 33.3%, respectively. Consequently, we stick to ourBuy recommendation for Richter and upgrade Egis from Accumulate to Buy.

CEE pharma stockperformances were lacklusterlast year, but the 4Q11reporting season confirmedthat, despite all odds, 2011 wasanother solid year for CEEpharma companies from thebusiness perspective

In 2012, Russia/CIS is set todeliver robust performance and

offset the region-wide pricingpressures linked to healthcarereforms

We reviewed our models andset new 12-month target pricesfor CEE pharma stocks


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Driven by the strong revival in Western European markets along with a solid

Russia/CIS showing, Krkas 2011 consolidated sales advanced 6.5% y/y toEUR 1,075.6mn. Although the region-wide pricing pressures accompanyinghealthcare reforms and regional currencies weakness took their toll, thecompanys operating performance remained sound. The companysregional competitive edge (with above-average profitability marginsreflecting the innovative generics pipeline as well as strict cost control) hasyet to be reflected in Krkas share price. The Warsaw Stock Exchangelisting targeted for June 2012 bodes well for the stocks liquidity as well asfurther share price appreciation. With a revised target price of EUR 73.5 pershare suggesting 40.2% upside potential, we leave our Buyrecommendation unchanged.

In the y/y absence of significant positive one-offs and dragged down further

by losses on discontinued operations, following the disposal of the Israeliplant, Biotons switch into the red was unavoidable in 2011. The 2012prospects are far rosier. Biotons core insulin business is set to benefit fromchanging home market reimbursement rules, as well as new deals (e.g. withIndar) and the Biolek acquisition. On top of that, the profound impact of thefinally signed Actavis cooperation contract promises to make Bioton thenext real turnaround story. Nonetheless, given the track record of numerousdelays, the execution risk-hampered outlook, and thus far weaktransparency on the Actavis (as well as Biolek) contract we opt for only aslight reduction of the earlier introduced risk related discount from 15% to10% in our DCF valuation. Our revised 12-month target price arrives at PLN0.11 per share (vs. the earlier PLN 0.10). Consequently, we see no reasonto rush into the stock and confirm our Hold recommendation.

The 2011 results of the Romanian pharmaceutical companies demonstratedonce again that the Romanian pharmaceutical market remains achallenging place to call home. The persistently poor payment disciplineand weakening local currency put a lid on their performance in 2011.Reflecting the unfavorable changes in the sales mix (expanding share ofcontract sales, along with difficulties in certain export markets) as well asthe hike in marketing costs (depressing profitability margins), we revise our12-month target price forAntibiotice down to RON 0.446 per share (fromRON 0.475 per share) and downgrade our recommendation fromAccumulate to Hold. We think that the new dividend policy increases theattractiveness ofBiofarm. Furthermore, we believe that Biofarm willcontinue to outperform its peer in terms of profitability parameters,supported by its edge in the domestic OTC sector and low indebtedness.Reflecting the stronger than earlier anticipated cash position, our revised12-month target price arrives at RON 0.237, indicating solid upside potentialfor the stock. Consequently, we upgrade our recommendation from Hold toAccumulate.


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Valuation/Recommendation

As their domestic political and macroeconomic front became a source ofworries for international investors, with new unorthodox governmentmeasures making media headlines, the Hungarian pharma stocks sawinvestors interest evaporate. Both Egis and Richters stock prices failed tofactor in the vastly positive impact of the weakening home currency on theirbusiness results (as well as the low dependence on external markets forfinancing of their investment plans) as of lately. In our opinion, the marketonce again overreacted to the negative news flow, yielding very appealingvaluations for both Hungarian pharmas at the moment. As per tradition, Egismaintains its status as the cheapest CEE pharma stock, with its valuationgap only partly justified by its inferior profitability parameters. AlthoughRichters multiples place the company well above its home market peer, wecontinue to think that Richters well defined niche portfolio strategy,including original R&D program related triggers, warrant the stockspremium. Our new target prices (HUF 20,455 per share for Egis and HUF47,800 per share for Richter) suggest that the room for share priceappreciation is very appealing. We thus upgrade our recommendation forEgis from Accumulate to Buy and reiterate our Buy call for Richter.

2011e 2012e 2011e 2012e 2011e 2012e 2011e 2012e 2011e 2012e

Egis to CEE Peers, Prem/Disc -31.7% -30.0% -39.0% -40.3% -31.9% -35.9% -56.7% -59.6% -43.2% -50.3%

Egis to Western Peers, Prem/Disc -27.1% -22.1% -55.3% -48.2% -64.5% -66.2% -73.9% -63.9% -63.9% -61.6%

Egis to Richter, Prem/Disc -31.7% -43.5% -39.3% -48.0% -45.9% -49.3% -59.4% -64.6% -42.4% -58.6%

Source: Erste Group Research, Factset, based on closing prices as of March 6, 2012

P/E P/CE P/BV EV/sales EV/EBITDA

Although Krka stock performance and liquidity suffered the least among itsregional peers last year, a brief look at Krkas multiples confirms that thereis still a long way for the company to return to its former position as the mostexpensive stock in the CEE region. In 2011, the home Ljubljana StockExchange was hit more severely than its regional counterparts, with somelocal investment funds experiencing difficulties and the lower foreigninvestor presence not sufficient to keep the trading volumes from shrinking.Fortunately, the company embarked on a share buyback program, keepingits stock price and liquidity aloft. Nonetheless, Krkas earlier premiumdisappeared and the stock is currently traded not only at a discount to itsWestern peers, but also to Richter (e.g. P/CE, EV/Sales, EV/EBITDA). The2011 sales report confirmed that Krka is delivering on its promises, with itsnet profit matching guidance of EUR 162mn. The outlook for 2012 is alsosolid, with Western European markets maintaining momentum andRussia/CIS delivering a robust performance, offsetting the temporarilysluggish Central European markets. The companys innovative genericsportfolio provides an antidote to the pricing pressures and Krkas profitabilitymargins are set to remain superior to its CEE-based peers. Finally, theprepared secondary listing on the Warsaw Stock Exchange promises tobring the company into the spotlight and inject fresh life into the stockliquidity. Our revised target price of EUR 73.5 per share points to significantupside potential and we stick to our Buy recommendation.

2011e 2012e 2011e 2012e 2011e 2012e 2011e 2012e 2011e 2012e

Krka to CEE Peers, Prem/Disc 0.1% -1.1% 0.0% -8.1% 57.8% 39.5% 16.2% -1.8% 8.1% -10.8%

Krka to Western Peers, Prem/Disc 6.8% 10.0% -26.7% -20.2% -17.7% -26.5% -30.0% -12.1% -31.4% -31.1%Krka to Richter, Prem/Disc 0.1% -20.2% -0.6% -19.9% 25.3% 10.5% 8.9% -14.0% 9.7% -25.8%

Source: Erste Group Research, Factset, based on closing prices as of March 6, 2012

P/E P/CE P/BV EV/sales EV/EBITDA

Richters R&D foray far fromadequately factored in;cariprazine path to market toprovide more stock triggers.Following recent share priceslump, Egis attracts with itswidened valuation gap

Krkas solid track record andoutlook, further lightened bythe prepared Warsaw listing,are not reflected in its currentmultiples


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CEE pharmaceuticals valuation at a glance

2010 2011e 2012e 2013e 2010 2011e 2012e 2013e 2010 2011e 2012e 2013eAntibiotice 19.7 10.8 10.0 8.9 9.6 5.8 8.4 5.1 0.9 0.8 0.8 0.7Biofarm 16.4 13.4 11.6 11.3 13.3 9.9 9.8 8.5 1.5 1.4 1.4 1.3

Bioton 6.9 nm 10.9 21.6 5.2 n.m. 6.9 9.7 0.7 0.3 0.5 0.5Egis 10.3 7.8 7.5 7.6 7.1 4.6 4.6 4.5 1.2 0.7 0.7 0.6Krka 13.0 11.5 10.6 9.6 8.8 7.6 7.1 6.4 2.1 1.6 1.5 1.3Richter Gedeon 12.2 11.5 13.3 11.9 9.2 7.7 8.9 8.0 1.8 1.3 1.3 1.2Median CEE 12.6 11.5 10.7 10.4 9.0 7.6 7.8 7.2 1.4 1.0 1.1 1.0

Teva Pharmaceutical Industries Ltd. 10.1 8.9 8.0 7.4 9.9 8.2 7.3 6.7 1.9 1.7 1.7 1.5Mylan Inc. 14.1 10.8 9.1 8.3 10.7 13.4 9.4 7.0 2.1 2.4 2.4 2.0Watson Pharmaceuticals Inc. 17.4 12.0 10.1 9.5 14.0 10.4 9.2 7.7 2.2 2.0 2.0 1.8Stada Arzneimittel AG 9.5 8.8 7.9 6.9 6.6 8.6 5.5 5.0 1.5 1.4 1.4 1.3Ranbaxy Laboratories Ltd. 12.5 22.1 13.8 16.1 8.6 17.8 8.9 11.2 2.8 4.6 4.6 3.5

Recordati S.p.A. 10.6 9.9 9.6 8.5 8.3 7.9 7.9 7.3 2.0 1.9 1.9 1.7Dr. Reddy's Laboratories Ltd. 23.6 20.1 17.9 16.5 20.1 15.2 14.1 11.8 5.7 5.2 5.2 4.0Median Peer Group 12.5 10.8 9.6 8.5 9.9 10.4 8.9 7.3 2.1 2.0 2.0 1.8

EuroStoxx Healthcare 15.1 14.9 14.3 13.1 10.4 9.8 9.9 9.7 2.5 2.2 2.0 1.7CEE to Peer, Prem/Disc 1% 7% 11% 23% -9% -27% -13% -1% -36% -48% -47% -46%

2010 2011e 2012e 2013e 2010 2011e 2012e 2013e 2010 2011e 2012e 2013e

Antibiotice 1.3 1.0 1.0 0.9 7.1 6.0 6.0 5.4 3.7% 4.6% 4.0% 4.5%Biofarm 1.9 1.4 1.7 1.6 7.2 6.4 6.9 6.1 2.7% 3.2% 3.9% 4.0%Bioton 2.7 2.8 2.3 2.2 8.0 -53.2 8.6 11.8 0.0% 0.0% 0.0% 0.0%Egis 1.3 0.7 0.7 0.6 6.2 3.4 3.2 3.0 0.5% 0.9% 0.8% 0.8%

Krka 2.3 1.8 1.7 1.5 8.0 6.4 5.7 5.2 2.2% 2.7% 3.0% 3.1%Richter Gedeon 2.7 1.6 1.9 1.6 8.8 5.8 7.7 6.5 2.0% 2.3% 1.9% 2.1%Median CEE 2.1 1.5 1.7 1.5 7.6 5.9 6.4 5.8 2.1% 2.5% 2.4% 2.6%

Teva Pharmaceutical Industries Ltd. 4.0 3.4 2.7 2.3 12.0 9.3 8.3 7.4 1.2% 1.6% 2.0% 2.4%Mylan Inc. 2.1 2.6 2.3 2.0 8.6 10.0 8.4 7.2 0.0% 0.0% 0.0% 0.0%

Watson Pharmaceuticals Inc. 2.0 2.1 1.9 1.5 8.5 9.0 8.0 6.0 0.0% 0.0% 0.0% 0.0%Stada Arzneimittel AG 1.5 1.4 1.2 1.3 8.3 7.9 6.1 6.5 2.6% 1.7% 1.7% 3.1%Ranbaxy Laboratories Ltd. 3.3 3.1 1.9 1.6 34.0 16.2 11.4 8.6 0.0% 0.5% 0.6% 0.9%Recordati S.p.A. 1.5 2.0 1.5 1.3 5.6 7.9 6.0 5.6 5.0% 5.0% 5.2% n.a.Dr. Reddy's Laboratories Ltd. 2.9 4.0 2.9 2.7 14.6 19.1 12.0 11.9 0.5% 0.7% 0.6% 0.7%Median Peer Group 2.1 2.6 1.9 1.6 8.6 9.3 8.3 7.2 0.5% 0.7% 0.6% 0.9%

EuroStoxx Healthcare 2.1 2.3 2.3 2.1 8.7 7.6 7.5 7.7 1.6% 1.7% 1.8% 2.0%CEE to Peer, Prem/Disc -1% -40% -10% -1% -11% -37% -23% -20% 371% 245% 283% 183%

2010 2011e 2012e 2013e 2010 2011e 2012e 2013e 2010 2011e 2012e 2013e

Antibiotice 17.8% 17.2% 17.2% 16.7% 5.1% 7.1% 7.6% 7.8% 5.0% 7.4% 8.0% 8.4%Biofarm 26.0% 22.5% 25.1% 25.7% 16.3% 16.6% 18.3% 17.4% 9.7% 10.4% 12.0% 12.0%Bioton 34.0% -5.3% 27.0% 18.7% 24.8% -12.3% 13.3% 6.5% 11.3% -6.1% 5.3% 2.5%Egis 21.4% 19.9% 21.3% 19.5% 14.1% 10.5% 12.2% 11.2% 11.9% 9.1% 9.4% 8.5%

Krka 29.0% 28.0% 28.9% 29.6% 16.9% 15.1% 15.3% 15.7% 17.4% 14.9% 14.6% 14.5%Richter Gedeon 30.4% 28.2% 24.9% 25.0% 23.5% 15.9% 16.1% 16.5% 15.8% 11.3% 10.7% 10.8%Median CEE 27.5% 21.2% 25.0% 22.2% 16.6% 12.8% 14.3% 13.5% 11.6% 9.8% 10.1% 9.6%

Teva Pharmaceutical Industries Ltd. 36.5% 33.0% 31.2% 31.7% 20.7% 15.1% 22.1% 22.6% 18.6% 18.9% 18.6% 17.7%Mylan Inc. 25.7% 27.2% 27.5% 27.6% 4.1% 14.6% 15.1% 16.0% 15.1% 22.6% 22.0% 23.0%Watson Pharmaceuticals Inc. 23.5% 23.7% 24.7% 25.7% 11.9% 5.7% 13.5% 14.8% 12.9% 16.6% 17.7% 17.1%

Stada Arzneimittel AG 18.4% 19.6% 20.4% 20.7% 4.2% 2.2% 7.6% 8.8% 15.2% 16.5% 16.4% 16.7%Ranbaxy Laboratories Ltd. 19.0% 16.3% 18.3% 15.1% 17.5% 9.5% 13.2% 10.1% 22.4% 20.7% 25.3% 19.1%Recordati S.p.A. 25.0% 25.5% 23.8% 24.3% 14.9% 15.2% 14.3% 14.7% 19.0% 18.9% 17.5% 17.9%Dr. Reddy's Laboratories Ltd. 20.9% 24.3% 22.3% 21.5% 14.8% 15.8% 14.7% 14.7% 24.0% 25.8% 22.5% 20.4%Median Peer Group 23.5% 24.3% 23.8% 24.3% 14.8% 14.6% 14.3% 14.7% 18.6% 18.9% 18.6% 17.9%

EuroStoxx Healthcare 22.7% 21.6% 21.8% 22.4% 8.1% 8.4% 8.5% 9.4% 14.2% 13.3% 13.8% 13.7%CEE to Peer, ppt 4.0 -3.0 1.2 -2.0 1.9 -1.7 0.0 -1.2 -7.0 -9.1 -8.5 -8.3

Source: Erste Group Research, Factset. Based on closing prices as of March 6, 2012

P/E P/CE P/BV

EV/Sales EV/EBITDA Dividend yield

EBITDA margin Net margin ROE


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Market Overview

With the Eurozone facing the biggest financial crisis thus far, worries aboutthe public debt situation in particular peripheral EU countries, along withmounting recession fears and no immediately effective solutions at hand, allCEE equity markets put in disappointing performances last year.

CEE pharma stocks performance remains volatile

LC terms EUR terms

% Change

1Q11

% Change

2Q11

% Change

3Q11

% Change

4Q11

% Change

YTD 2012

% Change

1Q11

% Change

2Q11

% Change

3Q11

% Change

4Q11

% Change

YTD 2012

Antibiotice SA -3.2% -1.1% -20.7% -1.4% 9.0% -0.4% -3.6% -23.0% -0.7% 8.2%

Biofarm SA 1.6% -4.9% -4.0% 1.5% 3.4% 4.6% -7.4% -6.8% 2.3% 2.6%

BET (RO) 22.8% -7.1% -22.5% 1.6% 28.2% 26.4% -9.4% -24.8% 2.3% 27.3%Bioton S.A. 13.3% -11.8% -46.7% -25.0% 66.7% 11.5% -10.7% -51.9% -25.7% 78.2%

WIG 20 Bench (PL) 2.7% -0.5% -21.9% -2.0% 4.9% 1.0% 0.7% -29.6% -3.0% 12.2%

Egis Plc -0.7% -1.2% -25.1% 20.0% -13.3% 4.0% -1.2% -32.2% 11.9% -7.4%

Richter Gedeon -8.4% -7.2% -17.3% 14.2% 9.6% -4.0% -7.1% -25.1% 6.4% 17.1%

BUX Bench (HU) 8.1% -3.5% -30.6% 7.6% 9.7% 13.3% -3.5% -37.2% 0.3% 17.2%

Krka -4.7% 0.0% -14.4% 2.9% -0.9% -4.7% 0.0% -14.4% 2.9% -0.9%

SBI Bench (SI) -3.0% -8.2% -15.6% -1.9% -2.3% -3.0% -8.2% -15.6% -1.9% -2.3%

Source: Erste Group Research, based on closing prices as of March 6 , 2012

A closer look at the CEE pharma stocks quarterly 2011 performance data

confirms that the sector was not spared the consequences that the loomingEurozone crisis had on CEE equity markets. Nevertheless, all CEE pharmasector stocks (except Bioton) fared better than the respective local stockindices. After the rather uninspiring 1H11 performance, the third quartermeltdown sent the stock prices to rarely seen lows. The changes in theHungarian drug market regulation dragged down Richter and Egis shareprices. In relative terms, reflecting the much bigger magnitude of the homeregulatory burden on the company, Egis lagged behind its local rival in3Q11. But as Egis valuation gap was still very appealing in the recoveryphase in 4Q, the stock managed to catch up and, for the full year, in EURterms Egis share price drop (of 22.1% y/y) was even less sizable than thatof Richter (28.9% y/y). While the uncertainties and diminishing appeal of theHungarian equity market prompted many international investors to stay onthe sidelines and Richters stock liquidity contracted 40.7% y/y, with atrading volume of EUR 881.8mn, the company nonetheless maintained itstop ranking in the CEE pharma universe in 2011.

Although 3Q11 business results beat market expectations, more delays inthe execution of promised corporate transactions weighed on Bioton andthe stock was the worst performer in the CEE pharma sector universe,slumping 64.4% in EUR terms in 2011 (vs. a WIG20 drop of 30.5%).

With its share price declining 7.7% in EUR terms, Romanias Biofarm wasthis time the best performer among the regional pharmas in 2011.Nonetheless, its already meager stock liquidity fell further (by 64.1% y/y) toEUR 7.4mn. Its local peer Antibiotice saw a less dramatic trading volumefall (of 36.8% y/y). Nevertheless, with a trading volume of just EUR 3.9mn in2011, the company ranked at the regions bottom. At the same time, itsshare price slipped 26.6% in EUR terms.

2011: CEE equity marketperformance lackluster; CEEpharma stocks headed south;Richter topped liquidity ranking


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The ongoing gathering of treasury shares (as part of the preparations for aforeign listing) helped Krka to minimize the shrinking of its liquidity and

decrease of its share price in 2011. While its share price slipped 16% y/y,Krkas trading volume slid a mere 4% y/y. With trading volume of EUR173.1mn, Krka accounted for nearly 50% of LJSE equity turnover in 2011and overtook Egis second position in the regional CEE pharma stockliquidity ranking.

CEE pharma stocks liquidity in 2011

881.8

173.1147.2

49.07.4 4.1

-40.7%

-4.0%

-37.9%

-82.8%

-64.1%

-36.8%

0

100

200

300

400

500

600

700

800

900

1,000

Richter Krka Egis Bioton Biofarm Antibiotice

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

stock turnover (EUR mn) stock turnover y/y (%)

Source: Erste Group Research, local stock exchanges

Unfortunately, the European crisis continues, with concerns about the public

debt situation in the EU region (with apart from Greece, Italy and Spain infocus) undermining investors confidence further. The technical recession inthe Eurozone is becoming a reality and the economic growth tempo in 2012in the CEE region will see a much more tempered pace compared toprevious forecasts. As before, with equity markets remaining highly volatile,stock picking keeps its utmost importance. We continue to believe thatpharma stocks (in particular, the Hungarian ones and Krka) offer good entrylevels. Should the situation on equity markets calm down somewhat in thecourse of the year, these stocks should start to shine more brightly oninvestors screens.

Going forward, we believe that, should their home political andmacroeconomic situation become more transparent and the deal with the

IMF/EU reached in a reasonable time, Hungarian pharma stocks will seeincreased investor interest and finally stock price appreciation, reflecting inpart the flip side of their home countrys macroeconomic woes: a morefavorable forex situation from the perspective of exporters. Although the2012 business results will be dampened by their less favorable homemarket fortunes, with blind bidding auctions tightening the grip, the exportmarkets performance (including crucial Russia/CIS), further underpinned byforint weakness, is set to save the show. On top of that, Richtersinvestment story will get new and hopefully positive triggers from the newsflow around the R&D progress (including another possible milestonepayment from Forest Laboratories). Although the impact of the unfavorablehome market developments is a greater burden forEgis than for its homerival Richter, while its profitability parameters remain some distance from

the regions best, Egis wide valuation gap to Richter and its regional peersstill justifies its attractiveness. The progress in the preparations ofKrkasWarsaw listing will be carefully watched by market participants, with the

Persisting recession worries

might help defensive titles,including CEE pharmas, in2012


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details on the parameters of the issue expected to be announced in May (atthe latest), while the listing is envisaged to take place in June 2012. We

continue to believe that such a step will be welcomed by internationalinvestors and would benefit the stock price, with the stocks possible returnto its earlier premium to CEE-based sector peers. Bioton keeps its statusas a potential turnaround story. With more of the restructuring gains andproceeds from cooperations (most importantly from the deal with Actavis)set to kick in, Bioton has all prerequisites to start delivering quarterly resultsthat finally please market participants in the coming periods. Nonetheless,as long as clouds around the exact timing and execution of the planneddeals remain, investors are likely to stay cautious and the pace of thepossible share price appreciation will remain relatively modest, dependingon the actual progress in revamping the underlying profitability parameters,after the market already priced in the news about the final Actavis dealsigning. While their low stock liquidity remains an Achilles heel for bothRomanian pharmas in the international perspective, we preferBiofarm, aswe believe that the company will outshine Antibiotice in terms of businessresults (with better profitability parameters) as well as stock attractiveness(with a newly defined dividend policy and the possibility of a reinforcedstrategic takeover status).

CEE pharma shares offer interesting long-term upside potential

Company Currency Current Price (LC) 5-year-high (LC) Current price vs 5 y high (%) Target price (LC) Upside potential (%)

Antibiotice RON 0.4250 1.738 -75.5% 0.446 4.9%

Biofarm RON 0.1994 0.621 -67.9% 0.237 18.8%

Bioton PLN 0.10 2.38 -95.8% 0.11 9.8%

Egis HUF 15,350 24,010 -36.1% 20,455 33.3%

Krka EUR 52.5 124.4 -57.8% 73.5 40.2%Richter Gedeon HUF 37,485 49,400 -24.1% 47,800 27.5%

Based on closing prices as of March 6, 2012; Source: Erste Group Research

The 2011 results of the CEE-based pharmaceutical companies, with theregional pharma markets delivering rather subdued sales growth, confirmedthat the respective home markets are far from safe havens for them. Justthe opposite, at the moment. Pricing pressures are mounting and theeconomic slowdown (reducing the purchasing power of patients) ismagnifying the impact of the ongoing healthcare reforms. Althoughregulatory pricing pressures are nothing new for the pharmaceuticalbusiness and CEE producers have permanently to cope with them, thecurrent scope of the pressures is increasing and maneuvering space isgetting tighter. Nonetheless, for the CEE-based companies to leave theircurrently troubled homes is not a viable alternative. The adjustment of theproduct offer to the relevant market (for example, Richter already stoppeddelivering six products to the Hungarian pharma market), expansion ofexports to still quickly developing markets (Russia/CIS), an innovativestrategy (with an increase of new products total share in sales, translatinginto higher margins) and cost savings in both manufacturing and sales andmarketing activities represent the main antidotes.

Nonetheless, after the 2011 sluggish sales performance, the 2012 guidanceprovided by Hungarian pharma companies for CEE markets is ratherpessimistic. Apart from the gloomy outlook for Hungary, the crucial Polishmarket is seen as a source of rather disappointing figures in 2012.Fortunately, Russia/CIS is still envisaged to remain a bright spot on themap, with pharmaceutical market growth pace there kept in double-digitterms. In addition, the long-term catch-up potential in drug consumption in

CEE pharma markets: 2011sales sluggish, 2012 outlookrather grim as healthcarereforms hurt


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the coming years in the CEE region remains untouched, as all of the majorcomponents of growth (ageing populations, increasing public healthcare

awareness and progress in bringing innovative medicines to the market,including those addressing poorly treated and/or as yet not adequatelydiagnosed diseases) are still present, with the currently unfavorableconditions putting just a temporary lid on the long-term trend of progress.

CEE pharmas performance in CEE markets in 2011

Hungary % Poland % Czech Rep. % Romania %

Sales(EURmn) y/y (%)

of totalsales


of totalsales


of totalsales


of totalsales

Richter Gedeon 127.2 3.9% 11.5% 69.7 5.9% 6.3% n.a. n.a. n.a. 129.6 -5.6% 11.7%

Richter Gedeon* 121.3 3.5% 12.3% 70.1 5.7% 7.1% 25.5 10.4% 2.6% 31.1 5.4% 3.2%

Egis 125.3 3.2% 27.4% 59.7 -8.1% 13.1% 18.0 4.1% 3.9% 17.2 9.1% 3.8%Krka 63.7 12.0% 5.9% 109.0 -16.3% 10.1% 64.3 18.0% 6.0% 48.6 21.0% 4.5%

Source: Erste Group Research, company data, * pharmaceuticals sales only, Krka results are preliminary, Egis data recalculated for calendar year

In 2011, the drug subsidy budget of HUF 343.5bn was slightly surpassed;the actual expenditures amounted to HUF 376.9bn. On the other hand, thepayments from pharmaceutical manufacturers and wholesalers to theNational Health Insurance Fund (OEP) also surpassed the budgeted sum ofHUF 43.5bn by HUF 16.1bn. The Hungarian government plan originallyassumed drug reimbursement savings reaching HUF 83bn in 2012 and anadditional HUF 37bn in 2013 (i.e. HUF 120bn in total, compared to the 2011comparative base of HUF 343.5bn).

The planned measures included - most importantly - raising the sales tax onreimbursed drug sales from the current 12% to 20% (to be implementedfrom July 2011) and doubling the medical rep fee (to HUF 10mn per salesrep per year, to be implemented from July 2011), renegotiation of contractsfor subsidy volumes, revision of the subsidy on cholesterol-reducing drugs,cutting the reimbursement on combination drugs, a new internationalreference pricing system (with a 20% ceiling above the average of the threecheapest prices of a given manufacturer applied in any of the EU countiesto retain reimbursement status), a preferred reference pricing range of 5%above the reference price for active substance reimbursement groups and10% in the case of therapeutic reimbursement groups (should the price not

be kept within the respective range, a 15% reduction of reimbursementamount will follow), a result-based subsidy system and promoting lower-priced first generics. In addition, from April 2012, as a pilot project, the INNprescription system is to be introduced for cholesterol-lowering drugs statinsas the first therapeutic group. A maximum one-month Rx dose on a singleprescription form is another measure set to affect the market dynamics in2012.

With the recession biting into the Hungarian state budget revenues and theHungarian government committed to carrying out further deficit decreasinginitiatives in 2012/13, more measures are anticipated to trim the drugsubsidies, on top of the earlier announced amount in the Szell Kalman planfrom autumn 2011.

Hungary: Drug savingspackage remains reason forconcern


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OEP drug subsidy spending developments

388.7

323.6 325.7343.2 343.5

376.9

277.7

357.2

21.2

31.4

38.8

43.6 43.5

59.6

52.050.9

0

50

100

150

200

250

300

350

400

450

2006 2007 2008 2009 2010 2011

budget

2011

actual

2012

budget

0

10

20

30

40

50

60

70

drug subsidy spending (HUF bn) manufacturers' payments (HUF bn)

Source: OEP, Erste Group Research

With the new harsh measures taking effect from autumn, price erosion hasagain become a significant factor to watch in Hungary. Bolstered by the newproduct launches, Richter and Egis saw solid growth in their Hungariansales in 2011. However, the October-December 2011 period alreadyprovided the first signal of deteriorating conditions. With the system of blindbidding auctions taking their toll, Egis reported that it was forced to cutprices of its products in Hungary by 6.9% on average from October 2011,the biggest quarterly decrease since April 2007. With another round of pricereductions anticipated to take effect from April 1, 2012, CFO Poroszlai

became more pessimistic, lowering his earlier guidance for 2011/12domestic sales from a drop of 6% to 8% to a fall of 8% to 10%. Thetraditionally cautious Richter CEO Bogsch said that he expects Richtersdomestic sales to plummet 15% to 20% in 2012. (All guidance in HUFterms.) Although no company provided guidance beyond 2012, in ouropinion, a further contraction of their home sales from the depressed levelsis unlikely. In 2013, we envisage the domestic sales of Richter and Egis toremain flat, with a gradual pick-up (low single-digit-term growth of around2.5% to 3% p.a.) to follow in the medium term.

While, unfortunately, details on the 2012 and 2013 savings measures,including their additional components, are still missing and hence difficult tofactor into our Richter and Egis projections, we want to emphasize that

there has been at least one positive (albeit temporary) regulatory step takenrecently. The new law provides for a 20%-60%-90% extraordinary taxdeduction for those pharmaceutical companies whose R&D expendituresreach or exceed 15%-20%-25% of the reimbursement based on themanufacturer price level during 2011. Both Richter and Egis qualify for themaximum allowable R&D-based relief to their OEP payment obligation in2012. As the sales tempo will be more subdued and reimbursement levelsare falling y/y, in Richters case, the law amendment is expected to reducethe net OEP payments in 2012 to HUF 2bn, down from the earlieranticipated HUF 4bn. InEgis case, CFO Poroszlai trimmed his estimate forthe OEP payment related burden from some HUF 4-5bn to just around HUF1bn in 2011/12.

After surprisingly strong 2011,Richter and Egis expect hardlanding on top line in 2012,with time-limited R&D reliefpartly softening impact onEBIT level


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Egis payments to OEP, 1Q06/07-1Q11/12

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

500

1,0001,500

1Q06/07

2Q06/07

3Q06/07

4Q06/07

1Q07/08

2Q07/08

3Q07/08

4Q07/08

1Q08/09

2Q08/09

3Q08/09

4Q08/09

1Q09/10

2Q09/10

3Q09/10

4Q09/10

1Q10/11

2Q10/11

3Q10/11

4Q10/11

1Q11/12

Payments (HUF mn) Reclaimed money (HUF mn) Balance (HUF mn)

Source: Egis

According to Cegedim, in 2011, the Romanian pharmaceutical market grew invalue terms by 12.4% y/y to RON 10.82bn; in volume terms, the tempo stoodat 6.6% y/y. Sales to hospitals (up 39.9% y/y) were the most dynamic marketsegment, with the high tempo partly attributable to the regulatory changes,moving certain products in the national health programs from pharmacies tohospitals. OTC product sales outpaced the overall market, advancing 15.2%y/y in 2011. While the data looks satisfactory at first glance, a closer lookreveals that pharma market participants still have reasons for worries in doingbusiness in Romania. The main reason for concern is, as before, the chronicdelays in payments to the healthcare system from the state budget, withescalating secondary indebtedness affecting all market participants. The legalterm for reimbursement by the state remains at an astonishing 300 days,while overdue receivables are on the rise, as evidenced by reports of CEE-based pharma players Richter and Krka (with the latter companys 1-3Q11write-offs reaching EUR 5.1mn, largely attributable to Romania). A closer lookat the 2011 sales of the major CEE players in Romania reveals a very mixedpicture, while Richters total consolidated sales in Romania, includingwholesale/retail operations, contracted 5.6% y/y, Krkas sales surged 21% y/y(both in EUR terms). The outlook for 2012 is seen as still rather sluggish byRichter, the only company providing detailed guidance, envisaging y/y flatpharmaceutical sales in RON terms.

After a series of delays, the clawback system (5-11% on sales ofreimbursed drugs, depending on turnover) is theoretically in place.Interestingly, referring to the unclear regulatory situation, CEE-basedpharma companies treat this obligation differently. Until now, Richter hasnot recorded any clawback payments or provisions for it, while Egisregistered an HUF 203mn clawback related provision in its other expensesin 1Q11/12. (Based on our information, Krka also registered an undisclosedamount of clawback in 2011 - weighing on its sales & marketing expenses.)The new Romanian basic healthcare package has yet to take a concreteshape, as, after the political unrest, the proposal was withdrawn. TheRomanian health minister, in order to calm the public, emphasized that the

revision, while regulating access to very expensive drugs and reducing thenumber of days in hospital for minor surgical procedures, should not bringany major hardship for patients. The new basic healthcare package is now

While Romanianpharmaceutical market showssolid growth, persistingproblems in receivablescollection still put it amongmost problematic hotspots inCEE region


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completed only at the end of 2011) along with the economic slowdown(affecting the purchasing power of patients, decisive for the OTC sales

growth) have started to show their effect. In total, according to the CzechState Institute for Drug Control (SUKL), Czech health insurance companieswill be able to save nearly CZK 9bn annually as a result of the reimburseddrug price revision (compared to Rx drugs spending of CZK 35.98bn in2010). Furthermore, in December 2011, the Czech Republic introduced anew system of formulas, based on which reimbursement levels for humandrugs are to be calculated without the necessity to recalculate them everytime the maximum allowed margins or VAT rate are amended. Thereimbursement levels for a given reference pricing group are set on thebasis of the lowest manufacturers price in the EU calculated per the usualdaily therapeutic dose. In addition, the reference basket for settingmaximum prices has been expanded from 8 to 21 EU countries, excludingthe Czech Republic, Estonia, Germany, Cyprus, Luxemburg and Malta. The

maximum price for a given product is set as the average of the three lowestprices among the 21 countries in the basket. Furthermore, from July 1,2012, OTC medicines (those which can be dispensed on prescription) willbe excluded from the reimbursement list. It is estimated that this step couldaffect around 400 drugs, with resulting savings for health insurancecompanies amounting to CZK 1bn per year. Nonetheless, yearly spendingof health insurance companies on prescription drugs will increase by anestimated CZK 1.31bn, due to the VAT hike on medicines from 10% to 14%in 2012, according to the Czech State Institute for Drug Control (SUKL).

In contrast to the lackluster outlook of CEE home markets, hampered by anew round of restrictive reform measures, Russia/CIS should keep itsposition as a shiny spot on the map for CEE pharma producers, givingsupport to both their top line tempo as well as profitability margins. The CEEmarkets underperformance further magnifies the importance of theirRussia/CIS business for their overall results. A brief look at the 2011 salesbreakdown by territory demonstrates that the share of Russia/CIS in totalsales is well above that of the home country; and with the growth tempo ofRussia/CIS outpacing other markets, it is set to expand further. In 2011, thequarterly developments were marked by relatively high volatility and bigdiscrepancies between the results, however. While the tempo was in highdouble-digit terms for Richter in Russia (and thanks to excellent Russianshowing, also for the whole Russia/CIS region), Krka - on the opposite sideof the spectrum - saw rather modest sales growth in Russia (just 2% y/y),compensated for by the extraordinarily high pace in Ukraine and other CISmarkets, beating its Hungarian peers there by a wide margin.

CEE pharmas performance in Russia/CIS in 2011

Russia % Ukraine % other CIS % Russia / CIS total %


of totalsales


of totalsales


of totalsales


of totalsales

Richter Gedeon 321.9 26.2% 29.1% 52.5 6.5% 4.8% 75.4 7.9% 6.8% 449.8 20.2% 40.7%

Richter Gedeon* 321.9 26.2% 32.7% 50.5 7.9% 5.1% 58.9 -3.9% 6.0% 431.3 18.8% 43.8%

Egis 111.6 10.9% 24.4% 14.7 0.9% 3.2% 25.8 -2.3% 5.6% 152.0 7.4% 33.2%

Krka 195.3 1.9% 18.2% 49.9 29.0% 4.6% 40.0 15.5% 3.7% 285.2 7.7% 26.5%

Source: Erste Group Research, company data, * pharmaceuticals sales only, Krka results are preliminary, Egis data recalculated for calendar year

According to preliminary DSM Group data, in 2011, the Russianpharmaceutical market advanced 12% y/y in ruble terms to RBL 823.7bn,while the market volume (number of packages sold) rose 1.1% y/y to 5.6bn

Russia/CIS sales prospectshealthy, set to bolster top linegrowth of all major CEEpharma players in 2012


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packages. The commercial pharmaceutical market was the most dynamicsegment, with sales surging 15.3% y/y to RBL 468.1bn. Detailed information

for 2011 shows that the average price of medicines on the commercialmarket in December 2011 amounted to RBL 88.57 per package, up 18.6%y/y. At the same time, despite the significantly faster price increase ofdomestically manufactured drugs, the difference between imported anddomestic drug prices remained strikingly high; the domestic medicinesaverage price per package stood at RBL 35.4 (up 20.8% y/y), vs. theimported drugs average of RBL 162.5 (up 11.8% y/y). In 2011, the share ofdomestic drugs on the total commercial pharmacy market totaled 24% invalue terms, but reached 60% in volume terms. As evidenced by the salesfigures reported by CEE pharma companies, as well as overall marketstatistics provided by DSM Group, the measures of the Russian authoritiesaimed at better price control (particularly of products included on theessential drug list) do not seem to have much harmed pharmaceutical

manufacturers, while the state authorities can claim at least partial costsaving success for the new initiative. According to DSM Group, the prices ofmedicines on the essential product list since the beginning of the year untilthe end of December 2011 rose just 3.32%.

Russian pharmaceutical market developments in January December 2011

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

65

70

75

80

85

90

2010 sales (RBL mn) 2011 sales (RBL mn)

2011 average price per package (RBL)

Source: DSM Group

Russia keeps its high dependence on pharmaceutical imports and (despite

the recent efforts) many of the modern drugs are not yet in the localmanufacturers portfolios. Consequently, the Russian government isstepping up its efforts to change the situation, while sticking to its strategyfor the Russian pharmaceutical market until 2020, according to which theshare of domestically manufactured drugs is projected to expand from thecurrent 23-24% to 50% (in value terms) by 2020. By 2015, some 57strategically important drugs (including the newest generation of antibiotics,anesthetics, anti-inflammatory medicines and drugs for the treatment ofcancer, hepatitis B and C, cardiovascular diseases, multiple sclerosis, etc.)are planned to be manufactured on the Russian territory. Meanwhile, with aclear preference for locally manufactured drugs in the government tenders(with a 15% discount required, should the drug winning the tender bemanufactured outside Russia), the foreign pharma manufacturers are

expanding their direct presence on the Russian territory. While thecompetition is heating up and many Western-based companies haverecently started to build up their greenfield investments or entered into jointventures, the CEE companies still enjoy the first mover advantage in this


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respect, with Krka and Richter in particular having already establishedsignificant local operations. The DSM Groups forecast for 2012 envisages

that, in the commercial segment, the tempo of the Russian market will bearound 12% y/y, while the government segment is foreseen to expand bysome 5% y/y in value terms. According to the PharmaExpert prognosis, in2012, the commercial segment of the Russian pharmaceutical market ispoised to see around a 10% y/y rise, while, together with hospitals and theDLO part, the overall pharmaceutical market pace could reach some 12%y/y. (All data in ruble terms.) Although it is likely that the performance willremain uneven on a quarterly basis, as well as comparing CEE-basedproducers (in part, also due to differences in the comparative base), we alsobelieve that a double-digit sales tempo in Russia is a realistic target for theCEE-based pharma producers in 2012.

Richter / Egis Russia/CIS sales guidance developments

Richter

y/y sales growth 1Q2011 1H2011 1-3Q2011 2011p Feb-11 May-11 Aug-11 Nov-11

Russia/CIS total 12.7% 17.7% -1.0% 18.8% n.a. n.a. n.a. n.a.

Russia 18.0% 28.5% 2.2% 26.2% 5.0% 5 to 10% 10 to 15% 10 to 15%

Ukraine -5.5% 16.6% 7.6% 14.5% 10.0% 10.0% 5 to 10% 5 to 10%

other CIS markets 2.1% -18.0% -15.8% -3.9% 5 to 10% 5 to 10% 0% -5.0%

Source: Richter, based on pharmaceutical consolidated sales in EUR terms, except for Ukraine in USD terms

Egis

y/y sales growth 1Q2010/11 1H2010/11 1-3Q2010/11 2010/11 Nov-10 Feb-11 May-11 Aug-11

Russia/CIS total 10.3% 15.5% 10.4% 9.1% 8 to 10% 10 to12% 12.0% 12.0%

Russia 10.0% 19.5% 13.8% 12.1% 9.0% 10 to12% 12 to 14% 12 to 14%

Source: Egis, based on consolidated results in EUR terms

guidance

guidance

actual sales performance

actual sales performance

The latest guidance revisions from the Hungarian companies confirm thisview as well. In February 2012, Egis CFO Poroszlai left the 2011/12 salestargets for Russia and Russia/CIS markets unchanged at +10-12% y/y.Although Richters CEO Bogsch remained optimistic regarding the outlookfor the overall Russian market, anticipating a 2012 rise of 10% y/y, given therelatively high comparative base (and somewhat higher initial level ofinventories, following the exceptionally high 4Q11 sales), he expectsRichters Russian sales growth of up to just 5% y/y. Nevertheless, one hasto bear in mind that the original target was a mere 5% y/y rise for 2011 aswell, with the company posting 26.2% y/y growth. At the same time, withRussia remaining their heaviest component, Richters 2012 sales for

Russia/CIS are projected to increase as much as 5% y/y in EUR terms.Finally, we continue to believe that the stable currency developmentsshould also play in favor of a successful business performance for CEE-based exporters to the Russian pharma market after they have all switchedto the ruble as their invoicing currency.

As a consequence of the change of the invoicing currency for Russia, firstfrom the US dollar to the euro and later to the ruble, Egis followed its peersand switched from the USD as its reporting currency for its exports to euro,making a direct comparison of its export fortunes with its peers easier at firstglance. Since then, the US dollars importance for the results of CEE-basedpharmas has diminished further, with CEE-based pharma companies(except Richter) having no significant sales to overseas markets and

sticking to the US dollar as an invoicing currency only for some CIS marketsthese days. Moreover, sales of Richter, Egis and Krka in most of the CEEmarkets are invoiced in local currencies; hence, the regional currencies'development remains critically important for their business results. In line

2H2011: CEE currencies ondepreciation path - morepressure for Krka


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extensive tapping of financial markets, the current credit market conditionshave not been of significant importance for their financial results. Thus, the

main factors we have to reconsider in our models are the applied equity riskpremiums and risk-free rates, as well as changing currency forecasts.Our methodology for setting equity risk premiums (linked to the respectivecountrys S&P long-term foreign currency rating) that we introduced in ourpharma sector report in May 2009 remains unchanged. In summary: 4.5% isused as a base equity risk premium (mirroring the long-termoutperformance of stocks vs. bonds), 25bp is added for each rating notchbelow AAA and 40bp is added for each rating notch below investment grade(i.e. below BBB-). For perpetuity, extra charges are trimmed to 20bp and35bp, respectively (while still based on the current rating).

Since our last report, some CEE countries saw their ratings cut by majorrating agencies, including S&P. Most importantly, Hungary was cut to junk

status, with its rating by S&P at BB+ (vs. BBB- in September 2011).Slovenia saw a downgrade to A+ .

As before, the application of the methodology keeps punishing the twoHungarian companies, with the resulting equity risk premium well aboveother regional peers, particularly that of Krka. The recent financial marketturmoil sharply increased the uncertainties and resulted in hikes ofgovernment bond yields in some of the CEE home countries of regionalpharma producers, prompting us to make adequate adjustments. While wecontinue to believe that the Hungarian macroeconomic picture will stabilizeand Hungarian government bond yields are set to again embark on adescending path in the future (leaving the bias on the positive side for ourvaluation), in our Richter and Egis DCF models, we opt to maintain ourconservative stance and, reflecting the recent developments, we raise therisk-free rate to 8.6%. At the same time, we increase the risk rate forSlovenia to 5.5%. For Romania, we decided to make an downwardadjustment from 7.5% to 7.0% and for Poland an downward fine-tuning from5.9% to 5.8%.


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4Q11 results review

Antibiotice: In 2011,Antibiotices sales growth was solidly in double-digitterms at 15.7% y/y to RON 281.9mn, still slightly lagging behind our moreoptimistic expectations. The main reason for the sales falling short of ourestimate was the less robust performance in the US market, where thecompany faced some difficulties with deliveries within the contract signedwith its US partner. Operating profit rose 5% y/y to RON 32.1mn, translatinginto an EBIT margin of 11.4%, down 1.1pp y/y, mainly as the result of 25%y/y higher material expenses, due to the RON depreciation, given the factthat a large part of material costs (including products made undermanufacturing contracts) is incurred in foreign currencies. On anencouraging note, net profit increased 60.1% y/y to RON 20.1mn, supportedby the halving of the financial loss, attributable to the y/y decreasingunrealized forex losses. Helped by significant reversals (RON 12mn), netprovisions for overdue receivables amounted to just RON 9.3mn, down 50%y/y.

Biofarm: While Biofarm sales advanced by double-digit terms (up 13.5%y/y to RON 93.4mn), EBIT declined 4.9% y/y to RON 16.1mn. Similarly to itspeer Antibiotice, Biofarms profitability suffered from a y/y hike in rawmaterial expenses (with their total share as a percentage of sales increasing2pp to 27%), due to the weakening RON. On top of that, the fiercecompetition in the companys core OTC market prompted a more than 20%y/y increase of marketing expenses. Furthermore, net profit was negativelyaffected by the RON 1.6mn unrealized loss from its listed share portfolio(almost 5x higher y/y). Net profit went up a mere 0.7% y/y to RON 14.5mnin 2011. Nevertheless, the adjusted net profit was 9.4% higher y/y. Giventhat the companys main shareholders, the financial investment companiesSIFs, are under significant pressure to distribute large dividends to theirshareholders (i.e. SIF4 Muntenia already announced a payout ratio of100%), we believe that these companies will force large payout ratios atthe companies within their portfolios. Consequently, we think that Biofarmwill adhere to a payout ratio of a minimum 50%, translating into a dividendyield of at least 3.3%.

Bioton: Bioton published its 4Q11 results on February 29, 2012. The 4Q10picture was dominated by huge one-off items (milestone payments fromBayer linked to the China insulin distribution deal), pushing up the top line,bolstering the operating level and, most importantly, lifting the bottom line

out of the red.Nonetheless, in the absence of similar support, in 4Q11,sales plunged by 61.8% y/y to PLN 72.9mn and Bioton reported anoperating loss of PLN 18.0mn. With positive one-offs replaced by negativeones (losses linked to the disposal of Israeli plant) in a y/y comparison, thebottom line swung deeply into red territory. The company posted a net lossafter minorities of PLN 46.0mn (vs. the year-earlier net profit of PLN102.1mn; all data consolidated according to IFRS standards).

Egis: Egis published its 1Q11/12 report on February 8, 2012, after themarket close. As the contribution of new product launches largelycounterbalanced the mounting pricing pressures, the domestic salesadvanced 0.9% y/y in the October - December 2011 period. With the firstthree months of the new fiscal year showing a temporary shrinking of

wholesale stocks, the companys sales in Russia rose just 5.3% y/y to EUR26.0mn in 1Q11/12. Reflecting the unfavorable developments in the crucialPolish market, along with the negative forex impact, sales to EasternEurope contracted 20.5% y/y to EUR 26.0mn in 1Q11/12. As expected,


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hampered by a high comparative base and y/y decreasing orders fromServier, bulk chemicals and others sales slid 49.1% y/y to EUR 5.5mn. All

told, despite the positive impact of the y/y weakening forint, sales retreated4.8% y/y to HUF 30,392mn. The improving sales mix (namely the shrinkingproportion of low-margin bulk sales) along with the more favorable forexsituation pushed up the companys gross margin to 59.1% in 1Q11/12. Thelower level of registration costs helped savings in the related R&Dexpenses, while the y/y decreasing provisions were behind the drop ofexpenses in the area of administrative and general costs. Furthermore, thecompany took advantage of the newly passed legislation allowing for partialR&D-based relief to the OEP payments. Consequently, operating profitgrew a hefty 15.3% y/y to HUF 5,522mn in 1Q11/12. Bolstered by thefavorable currency fortunes, the 1Q11/12 financial result improved y/y toHUF 1,215mn. Although part of these gains was wiped out by theaccounting for losses at the associated company Hungaropharma, 1Q11/12

net profit rose by a sound 14.1% y/y to HUF 5,333mn (all figuresconsolidated and according to IFRS).

Krka: Publishing its unaudited 2011 results only on March 1, 2012, Krkawrapped up the reporting season in the CEE pharma universe. In 2011,Krkas consolidated sales advanced 6.5% y/y to EUR 1,075.6mn, as the y/ypickup in Western European markets, complemented by the strongperformance in Russia/CIS, offset the subdued CEE sales. Reflecting theregion-wide mounting pricing pressures along with less favorable currencydevelopments, Krkas gross margin deteriorated y/y to 61.3% in 2011.Furthermore, although the company managed to trim its administrativecosts 2.5% y/y and its R&D expense rise also lagged behind the salestempo, the accelerating sales and marketing costs dampened Krkasoperating profit progress to 1.2% y/y (to EUR 214.0mn) in 2011. Althoughthe financial result recorded a significant improvement in 4Q11, due to theprevious quarters weak showing (hampered by receivables provisioningand write-offs, as well as the far less favorable forex result y/y), it ended farmore deeply in red territory than in 2010. Consequently, while the effectivetax rate decreased y/y, 2011 net profit ended 4.8% below the 2010 bottomline, broadly matching the companys guidance of EUR 162mn.

Richter Gedeon: Richter announced its 4Q11 results on February 7, 2012.Buoyed by Russia and EU-15 sales, Richters 4Q11 top line climbed 52.7%y/y to HUF 91,062mn. The y/y more favorable sales mix and weakeningforint bolstered gross profitability. Despite the hampering effect ofPregLem/Esmya related one-offs, both the operating and bottom linesimproved considerably y/y. With the year-earlier period boosted by licensepayments linked to the Watson US marketing agreement on Esmya (USD17mn), as well as some accounting changes, the comparative 4Q operatinglevel was relatively tough to surpass this time. Sales and marketing costscontinued to climb (up 32.5% y/y), reflecting the expenses for the buildup ofthe Western European marketing network. Other operating expenses werehampered by the accounting for the time value of the deferred purchaseprice due to the previous owners of PregLem (linked to the upcomingEsmya registration). Nonetheless, reflecting the bold move on the grossprofit line (up 58.8% y/y), operating profit surged 54.3% y/y to HUF13,719mn in 4Q11. While the forint weakening at the end of the quarterpositively affected the revaluation of receivables/payables, the financialresult suffered from revaluation of the PregLem linked financial liabilities.Net profit growth was tempered to 26.2% y/y to HUF 8,881mn in 4Q11.


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2011 CEE Pharma performance at a glance

AntibioticeRAS 4Q2011p 4Q2010 y/y 2011p 2010 y/y

Total sales (RON mn) 80.61 66.30 21.6% 281.86 243.63 15.7%

Operating profit (RON mn) -0.07 -3.44 -98.0% 32.08 30.56 5.0%

Net income (RON mn) -4.78 -8.57 -44.3% 20.07 12.54 60.1%

Operating margin -0.1% -5.2% 11.4% 12.5%

Net margin -5.9% -12.9% 7.1% 5.1%

Biofarm

RAS 4Q2011p 4Q2010 y/y 2011p 2010 y/y

Total sales (RON mn) 26.23 22.53 16.4% 93.44 82.29 13.5%

Operating profit (RON mn) 1.63 1.94 -16.1% 16.10 16.93 -4.9%

Net income (RON mn) 0.76 1.79 -57.8% 14.52 14.41 0.7%

Operating margin 6.2% 8.6% 17.2% 20.6%

Net margin 2.9% 7.9% 15.5% 17.5%

Bioton

IFRS consolidated 4Q2011p 4Q2010 y/y 2011p 2010 y/y

Total sales (PLN 000) 72,931 190,811 -61.8% 289,340 378,097 -23.5%

Operating profit (PLN 000) -17,979 108,459 n.m. -52,119 90,064 n.m.

Net income (PLN 000) -46,003 102,082 n.m. -69,231 117,180 n.m.

Operating margin -24.7% 56.8% -18.0% 23.8%

Net margin -63.1% 53.5% -23.9% 31.0%

Egis

IFRS consolidated 1Q11/12 1Q10/11 y/y

Net sales (HUF mn) 30,392 31,915 -4.8%

Operating profit (HUF mn) 5,522 4,789 15.3%

Net income (HUF mn) 5,333 4,676 14.1%

Operating margin 18.2% 15.0%

Net margin 17.5% 14.7%

Krka


Total sales (EUR 000) 307,477 283,394 8.5% 1,075,627 1,010,021 6.5%

Operating profit (EUR 000) 45,030 56,842 -20.8% 214,006 211,471 1.2%

Net income (EUR 000) 47,351 50,102 -5.5% 162,801 171,025 -4.8%

Operating margin 14.6% 20.1% 19.9% 20.9%

Net margin 15.4% 17.7% 15.1% 16.9%

Richter


Total sales (HUF mn) 91,062 59,632 52.7% 309,339 275,312 12.4%

Operating profit (HUF mn) 13,719 8,893 54.3% 62,623 62,653 0.0%

Net income (HUF mn) 8,881 7,036 26.2% 49,196 64,479 -23.7%

Operating margin 15.1% 14.9% 20.2% 22.8%Net margin 9.8% 11.8% 15.9% 23.4%

Source: Erste Group Research


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2012 CEE Pharma guidance at a glance

Company SalesSales growth

(y/y) EBITEBIT growth

(y/y %) Net profitNet profit growth

(y/y %)

Antibiotice RON 309mn 9.7% RON 39mn 21.6% RON 25mn 24.0%

Biofarm n.a. n.a. n.a. n.a. n.a. n.a.

Bioton n.a. n.a. n.a. n.a. n.a. n.a.

Egis HUF 128.9bn to HUF 131.5bn 0 to 2% in HUF terms n.a. n.a. n.a. n.a.

Krka EUR 1,134mn 5.4% n.a. n.a. EUR 170mn 4.4%

Richter Gedeon EUR 1,105mn 0% in EUR terms EBIT margin of 15 to 16% n.a. n.a. n.a.

Source: Company data, target sales figures of Richter and Egis recalculated based on guidance for y/y growth

2012 CEE Pharma Erste Group Research forecasts at a glance

Company Sales y/y % EBIT y/y % Net profit y/y % Comment

Antibiotice RON 315.6mn 12.0% RON 36.3mn 13.2% RON 24.0mn 19.6% Given the current shortcomings on the export side,domestic sales are expected to be the main driver.

However, this translates into low chances for

improving the financial liquidity position

(receivables in the company's core market are

collected in more than 300 days.)

Biofarm* RON 102.3mn 9.5% RON 20.2mn 25.5% RON 18.7mn 15.8% While sales growth will be more tempered, the

operating margin is poised to recover,

bolstered by the ceiling on the marketing budget and

benefits from the RON strengthening

(lowering the relative weight of material expenses in total costs).

Bioton* PLN 481.9mn 66.6% PLN 92.4mn n.m. PLN 65.8mn n.m. The 2012 results are to be boosted by the Actavis deal

related milestone of EUR 22.25mn.

Egis HUF 133,235mn 3.3% HUF 18,338mn 12.5% HUF 16,272mn 19.8% The relative weakness of the forint continues to play

a major role in the final outcome,with an HUF 1 weakening lifting the operating line by some HUF 100mn.

Krka EUR 1,146mn 6.5% EUR 235.2mn 9.9% EUR 175.0mn 7.5% Krka is the st rongest beneficiary of the potential appreciation

of CEE currencies in the course of 2012.

Richter HUF 330,276mn 6.8% HUF 56,059mn -10.5% HUF 53,148mn 8.0% The possible milestone payment from Forest Laboratories,

linked to the cariprazine US regulatory f iling before the year-end,

represents an upside to our forecast.

Source: Erste Group Research, Biofarm* net profit growth on comparable basis, i.e. excluding effect of equity portfolio revaluation from 2011 base

2012 CEE Pharma reporting calendarDate Company Release / ev ent

29 .3.20 12 Krka 2011 an nual repo rt

27 .4.20 12 Bioton 2011 an nual repo rt

30 .4.20 12 Antibio tice 2011 an nual repo rt

9.5 .201 2 Krka 1Q2012 results14 .5.20 12 Biofarm 1Q2012 results

15 .5.20 12 Antibio tice 1Q2012 results

15 .5.20 12 Bioton 1Q2012 results

16 .5.20 12 Egis 2Q2011/12 result s1. or 2. week of May Rich ter Gedeon 2Q2012 results

5.7 .201 2 Krka A GM

26 .7.20 12 Krka 1H2 012 re su lts

6.8 .201 2 Egis 3Q2011/12 result s

1. or 2. week of Aug ust Rich ter Gedeon 1H2 012 re su lts

14 .8.20 12 Antibio tice 1H2 012 re su lts

14 .8.20 12 Biofarm 1H2 012 re su lts

31 .8.20 12 Bioton 1H2 012 re su lts14 .11.2 012 Egis 4Q2011/12 result s

14 .11.2 012 Biofarm 1-3Q20 12 results

14 .11.2 012 Bioton 3Q2012 results

15 .11.2 012 Antibio tice 1-3Q20 12 results15 .11.2 012 Krka 1-3Q20 12 results1. or 2. week of Novemb er Rich ter Gedeon 3Q2012 results

Source: Erste Group Research, company data


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Erste Group Research Company ReportAntibiotice | Pharmaceuticals | Romania08 March 2012


Antibioticefrom Accumulate to Hold

All prices arethosecurrentat the endof theprevious trading sessionunless otherwise indicatedand aresourced from local exchanges viaReuters, Bloomberg andother vendors.

TEST Erste GroupResearch CompanyR eportAntibiotice | Pharmaceuticals | Romania07Marc h2012

52 weeks

0.340.360.380.400.420.44

0.460.480.500.52

Antibiotice BET

RON mn 2010 2011 2012e 2013e

Net sales 243.6 281.9 315.6 345.3

EBITDA 43.7 48.8 54.6 57.9EBIT 30.6 32.1 36.3 37.8

Net result after min. 12.5 20.1 24.0 27.1EPS (RON) 0.03 0.04 0.04 0.05

CEPS (RON) 0.05 0.07 0.05 0.08BVPS (RON) 0.55 0.50 0.55 0.59

Div./share (RON) 0.02 0.02 0.02 0.02EV/EBITDA (x) 7.2 6.1 6.0 5.4P/E (x) 19.9 11.0 10.1 8.9

P/CE (x) 9.7 5.9 8.4 5.1Dividend Yield 3.6% 4.5% 4.0% 4.5%

Performance 12M 6M 3M 1M

in RON -11.6% 2.7% 7.9% 3.0%

Share price (RON) close as of 06/03/2012 0.4250 Reuters ATBE.BX Free float 37.0%Number of shares (mn) 454.9 Bloomberg ATB RO Shareholders Ministry of Health (53.0%)Market capitalization (RON mn / EUR mn) 193 / 44 Div. Ex-date 12/05/11 SIF Oltenia (10%)Enterprise value (RON mn / EUR mn) 328 / 75 Target price 0.4460 Homepage: www.antibiotice.ro

Under too much stress

We have downgraded the stock from Accumulate to Hold and cut ourtarget price to RON 0.446 (from RON 0.475). We have three main reasonsfor this greater prudence: i) the increasing weight in sales of drugs madeunder manufacturing contracts, which provide lower margins; ii) difficultiesregarding exports to the US market and new rules on the Russian marketaffecting expansion plans; and iii) the liquidity shortage still affecting theRomanian healthcare sector.

We see the operating profitability advancing in the coming years inabsolute terms. However, the EBIT margin should come in below 12% over

the detailed forecast period, mainly as a result of the increasing weight in theportfolio of drugs made under manufacturing contract (with lower marginscompared with own-made drugs) and the elevated marketing expenses.

Short term financing is under pressure due to large working capitalneeds, as payment conditions (a more than 300-day receivables collectionperiod) have not improved over the last year. We see positive developmenthere as unlikely over the coming couple of years, at least. The longreceivables collection period translates into a lower quality of receivables,with the company recording for the last two write offs totaling RON 28mn.

Antibiotice will not become a dividend player, although as a state-ownedcompany, it should adhere to a minimum payout ratio (i.e. 50%; for the last

two years, the ratio was raised to 90% and 85%, respectively). Due to thecash constraints, we believe that the company and the Ministry ofHealthcare will agree that the FY11 dividend should be reinvested.

Analyst:

Raluca Ungureanu+4021 311 27 [email protected]


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FY11 results at a glance

Antibiotice managed to end 2011 with 16% higher net sales, to RON281.8mn, and a 12% y/y advance in EBITDA to RON 48.7mn. Net profitjumped 61% y/y to RON 20mn, supported by a substantial reduction of thefinancial loss. However, the results fell short of our estimates. Net salescame in 2% below our forecast, mainly due to lower than planned deliveriesof finished products on the US market.In mid-2010, the company started to sell finished products on this market,based on a five-year contract intended to mature this year, reaching USD15mn pa. Due to some technical issues with a supplier, less than half of theplanned sales were recorded last year, with management taking steps toovercome these hindrances.Moreover, the increasing weight of drugs produced under manufacturingcontract with foreign partners, providing lower margins than own-made

drugs, as well as the higher than envisaged marketing expenses caused adecline in the EBIT margin of more than 1pp.

RAS (RON mn) 2011 2010 y/y 4Q11 4Q10 y/y

Net sales 281.86 243.63 15.7% 80.61 66.30 21.6%

EBITDA 48.75 43.74 11.5% 36.27 37.33 -2.8%

EBIT 32.08 30.56 5.0% -0.07 -3.44 n.m.

Financial result -5.67 -12.09 n.m. -2.76 -3.97 n.m.

Net profit 20.07 12.54 60.1% -4.78 -8.57 n.m.

Operating margin 11.4% 12.5%

Net margin 7.1% 5.1%

Source: Antibiotice, Erste Group Research

Business outlook

For 2012 and 2013, we expect drugs made under manufacturing contractsto gain a further share in Antibiotices portfolio, which leaves rather limitedroom for the company to improve its operating margin. Although thecompany took steps to assimilate into its own production part of theseproducts, we expect concrete effects to be seen in three years, at theearliest, bearing in mind that authorizing new drugs is a long-lastingprocess.

We are confident that the company will manage to solve the problemaffecting the deliveries of finished products on the US market by the end ofthis year. Consequently, we have assumed for FY12 that 50% of thecontract value will be recorded, while in 2013, sales will reach the plannedUSD 15mn level. On the Russian market, new rules requiring that allfinished products be wrapped in this country made us less optimisticregarding the business potential in this high-demand market. Given thelatest developments, we expect exports weight in sales to stay at thecurrent 20% level at least in 2012 and 2013. We see sales in the domesticmarket advancing on average by 9% pa, triggered by the portfolioenlargement with drugs addressing therapeutic areas in high demand.

Good FY11 figures, but futureresults are expected well below

potential

Export contract in US market

still far from maturing

Operating margin pressured byincreasing weight in portfolioof drugs made undermanufacturing contract,exports below potential and

high exposure to Rx segment


25/74




RAS

(RON, mn) Now Before Change Now Before Change

Sales 315.6 310.5 2% 345.3 336.9 3%

EBITDA 54.6 60.1 -9% 57.9 63.1 -8%

EBIT 36.3 41.8 -13% 37.8 43.0 -12%

Net profit 24.0 29.4 -18% 27.1 30.7 -12%

Source: Erste Group Research

2012e 2013e

As mentioned above, the advancing weight in the portfolio of drugs madeunder manufacturing contract and the high marketing budgets will cap thecompanys ability to increase the operating margin. Our forecast scenariopoints to an EBIT margin over the detailed forecast period in the range 11-12%, which is comparable with the last three years levels, but well belowthe 15-18% margins recorded prior to 2008. Receivables are still collected

in more than 300 days in the Rx drugs segment, putting further pressure onST indebedness. We do not see significant improvement on this side overthe coming 1-2 years.

The long receivables collection period in the Romanian pharmaceuticalmarket induced a risk of not recovering money from distribution companies.Such was the case in the last couple of years, when write offs incurredamounted to RON 18.6mn and RON 9.4mn, respectively.

No chances for cash dividends

Although Antibiotice is a state-owned company and consequently shouldadhere to a mandatory state authority-set payout ratio (i.e. 50% up to 2009,

90% for 2010 and 85% for 2011), we see low chances that shareholders willsee any dividends. Our view is that last years scenario of reinvestingdividends will be repeated because the company has not seen animprovement in its liquidity position.

Long receivables collectionperiod puts pressure on STindebtedness and quality of

receivables portfolio

Still far from status of dividendplayer, due to weak liquidity

position and future CAPEXneeds


26/74




WACC calculation2012e 2013e 2014e 2015e 2016e 2017e (TV)

Risk free rate 7.0% 7.0% 7.0% 7.0% 7.0% 5.0%

Equity risk premium 7.2% 7.2% 7.2% 7.2% 7.2% 6.7%

Beta 1.1 1.1 1.1 1.1 1.1 1.0

Cost of equity 14.9% 14.9% 14.9% 14.9% 14.9% 11.7%

Cost of debt 10.5% 10.5% 10.5% 10.5% 10.5% 8.5%

Effective tax rate 18.0% 18.0% 18.0% 18.0% 18.0% 17.0%

After-tax cost of debt 8.6% 8.6% 8.6% 8.6% 8.6% 7.1%

Equity weight 80% 80% 80% 80% 80% 80%

WACC 13.6% 13.6% 13.6% 13.6% 13.6% 10.7%

DCF valuation

(RON mn) 2012e 2013e 2014e 2015e 2016e 2017e (TV)

Sales growth 12.0% 9.4% 7.0% 7.0% 7.1% 4.5%

EBIT 36.3 37.8 41.6 45.1 50.0 55.6

EBIT margin 11.4% 10.9% 11.2% 11.3% 11.8% 12.5%

Tax rate 18.0% 18.0% 18.0% 18.0% 18.0% 17.0%

Taxes on EBIT -6.5 -6.8 -7.5 -8.1 -9.0 -9.5

NOPLAT 29.8 31.0 34.1 37.0 41.0 46.1

+ Depreciation 18.3 20.1 21.8 23.8 26.0 24.0

Capital expenditures / Depreciation 101.1% 89.6% 103.0% 107.1% 102.1% 100.0%

+/- Change in working capital -22.4 -14.7 -11.8 -12.4 -9.2 -8.6

Chg. working capital / chg. Sales -65.1% -49.3% -49.2% -48.0% -32.6% -45.0%

- Capital expenditures -18.5 -18.0 -22.5 -25.5 -26.5 -24.0

Free cash flow to the firm 7.2 18.4 21.7 22.9 31.3 37.5

Terminal value growth 2.0%

Terminal value 438.3

Discounted free cash flow - Dec 31 2011 6.3 14.2 14.8 13.7 16.5 227.0

Enterprise value - Dec 31 2011 292.6

Minorities 0.0

Non-operating assets 0.0

Net debt 77.1

Other adjustments 0.0

Equity value - Dec 31 2011 215.5

Number of shares outstanding (mn) 568.0

Cost of equity 14.9%

12M target price per share (RON) 0.446

Current share price (RON) 0.425

Up/Downside 4.9%

Enterprise value breakdown Sensitivity (per share)

0 11.5% 12.0% 13% 13.0% 13.5%

9.7% 0.455 0.481 0.507 0.533 0.559

10.2% 0.426 0.450 0.475 0.499 0.524

10.7% 0.400 0.423 0.446 0.469 0.492

11.2% 0.377 0.399 0.421 0.442 0.464

11.7% 0.356 0.377 0.398 0.418 0.439

0 1.0% 1.5% 2.0% 2.5% 3.0%

9.7% 0.446 0.475 0.507 0.543 0.586

10.2% 0.421 0.446 0.475 0.507 0.54310.7% 0.398 0.421 0.446 0.475 0.507

11.2% 0.377 0.398 0.421 0.446 0.475

Source: Erste Group Research 11.7% 0.358 0.377 0.398 0.421 0.446

Terminal value EBIT margin

Terminal value growth

WACC

WACC

PV ofdetailedperiod

22%

PV ofterminal

value78%


27/74




Income Statement 2008 2009 2010 2011 2012e 2013e

(RAS, RON mn, 31/12) 31/12/2008 31/12/2009 31/12/2010 31/12/2011 31/12/2012 31/12/2013

Net sales 215.81 219.75 243.63 281.86 315.57 345.33

Invent. changes + capitali zed costs 9.32 -2.22 2.58 1.45 2.14 2.20Total revenues 225.13 217.53 246.21 283.31 317.71 347.53

Other operating revenues 1.72 1.21 2.32 1.17 1.31 1.43Material costs -69.12 -61.24 -76.02 -95.22 -111.92 -122.47Personnel costs -64.06 -63.42 -65.44 -68.43 -71.00 -72.10Other operating expenses -54.86 -54.30 -63.33 -72.08 -81.50 -96.51EBITDA 38.80 39.78 43.74 48.75 54.61 57.88

Depreciation/amortization -13.46 -13.61 -13.18 -16.67 -18.30 -20.10

EBIT 25.35 26.17 30.56 32.08 36.31 37.78

Financial result -11.97 -10.53 -12.09 -5.67 -7.04 -4.72Extraordinary result 0.00 0.00 0.00 0.00 0.00 0.00

EBT 13.38 15.65 18.47 26.41 29.27 33.06

Income taxes -2.81 -3.73 -5.93 -6.34 -5.27 -5.95

Result from discontinued operations 0.00 0.00 0.00 0.00 0.00 0.00Minorities and cost of hybrid capital 0.00 0.00 0.00 0.00 0.00 0.00Net result after minorities 10.57 11.92 12.54 20.07 24.00 27.11

Balance Sheet 2008 2009 2010 2011 2012e 2013e

(RAS, RON mn, 31/12)

Intangible assets 1.72 1.81 1.99 1.65 3.19 3.69Tangible assets 163.56 156.83 166.41 173.69 168.58 165.99Financial assets 0.08 0.08 0.08 0.02 0.08 0.08

Total fixed assets 165.35 158.72 168.48 175.36 171.86 169.76

Inventories 35.95 34.15 40.41 41.93 47.55 49.20Receivables and other current assets 124.45 179.77 179.81 224.84 231.71 250.72Other assets 0.31 0.48 0.33 0.30 0.35 0.37Cash and cash equivalents 42.12 3.58 3.72 5.34 -14.38 -10.87Total current assets 202.83 217.98 224.27 272.41 265.23 289.41

TOTAL ASSETS 368.19 376.70 392.75 447.77 437.09 459.17Shareholders'equity 246.90 242.02 262.61 286.83 310.83 337.94

Minorities 0.00 0.00 0.00 0.00 0.00 0.00

Hybrid capital and other reserves 0.00 0.00 0.00 0.00 0.00 0.00

Pension and other LT personnel accruals 0.00 0.00 0.00 0.00 0.00 0.00LT provisions 1.00 14.01 13.90 14.59 1.00 1.00Interest-bearing LT debts 0.87 0.00 0.00 0.00 0.00 0.00Other LT liabilities 0.58 0.03 0.00 0.00 0.10 0.10Total long-term liabilities 1.45 0.03 0.00 0.00 0.10 0.10

Interest-bearing ST debts 70.53 74.75 69.30 82.42 72.42 62.42Other ST liabilities 48.30 45.89 46.93 63.93 52.74 57.71Total short-term liabilities 118.83 120.63 116.23 146.35 125.16 120.13

TOTAL LIAB. , EQUITY 368.19 376.70 392.75 447.77 437.09 459.17

Cash Flow Statement 2008 2009 2010 2011 2012e 2013e

(RAS,RON mn, 31/12)

Cash flow from operating activities 16.30 -26.82 24.95 17.64 25.66 37.61Cash flow from investing activities -6.68 -10.66 -2.03 -17.04 -18.49 -18.03Cash flow from financing activities -4.18 -1.07 -22.77 1.01 -26.89 -16.06

CHANGE IN CASH , CASH EQU. 5.43 -38.54 0.14 1.61 -19.72 3.52

Margins & Ratios 2008 2009 2010 2011 2012e 2013e

Sales growth -5.9% 1.8% 10.9% 15.7% 12.0% 9.4%EBITDA margin 17.2% 18.3% 17.8% 17.2% 17.2% 16.7%EBIT margin 11.3% 12.0% 12.4% 11.3% 11.4% 10.9%Net profit margin 4.7% 5.5% 5.1% 7.1% 7.6% 7.8%ROE 4.3% 4.9% 5.0% 7.3% 8.0% 8.4%ROCE 4.9% 4.7% 4.4% 6.1% 7.4% 7.7%Equity ratio 67.1% 64.2% 66.9% 64.1% 71.1% 73.6%Net debt 29.3 71.2 65.6 77 .1 86.8 73.3

Working capital 83.7 96.9 107.7 125.8 139.7 168.9Capital employed 277.8 327.2 342.1 378 .5 398.7 412.3Inventory turnover 2.2 1.6 1.8 2 .1 2.3 2.3

Source: Company data, Erste Group estimates


28/74


Erste Group Research Company ReportBiofarm | Pharmaceuticals | Romania08 March 2012


Biofarmfrom Hold to Accumulate

All prices arethosecurrentat the endof theprevious trading sessionunless otherwise indicatedand aresourced from local exchanges viaReuters, Bloomberg andother vendors.

TEST Erste GroupResearch CompanyR eportBiofarm| Pharmaceuticals | Romania07Marc h2012

52 weeks

0.150.160.170.180.190.200.210.220.23

Biofarm BET

RON mn 2010 2011 2012e 2013e

Net sales 82.3 93.4 102.3 110.9

EBITDA 21.6 21.0 25.6 28.5EBIT 16.9 16.1 20.2 22.3

Net result after min. 13.6 15.5 18.7 19.4EPS (RON) 0.01 0.01 0.02 0.02

CEPS (RON) 0.02 0.02 0.02 0.02BVPS (RON) 0.13 0.14 0.14 0.15

Div./share (RON) 0.01 0.01 0.01 0.01EV/EBITDA (x) 7.3 6.5 6.9 6.1P/E (x) 16.5 13.7 11.7 11.3

P/CE (x) 13.4 10.1 9.8 8.5Dividend Yield 2.7% 3.1% 3.9% 4.0%

Performance 12M 6M 3M 1M

in RON -9.3% 3.9% 5.1% -0.3%

Share price (RON) close as of 06/03/2012 0.1994 Reuters BIOF.BX Free float 57.0%Number of shares (mn) 1,094.9 Bloomberg BIO RO Shareholders SIF Olten ia (17.0%)Market capitalization (RON mn / EUR mn) 218 / 50 Div. Ex-date SIF Banat Crisana (14%)

Enterprise value (RON mn / EUR mn) 176 / 40 Tar get price 0.2370 Homepage: www.biofarm.ro

Time to pay dividends

We have raised our target price to RON 0.237 (from RON 0.217), mainlydue to a stronger than anticipated cash position, which pushed up the equityvalue. Otherwise, the change in estimates compared with our previousreport is rather minor. Consequently, we have upgraded therecommendation from Hold to Accumulate, also considering the companysimpressive cash generation capability, despite the liquidity shortage in thedomestic pharma industry.

We see the company enjoying stable profitability in the medium term, withan EBIT margin of 20%, mainly supported by the possibility of increasing

product pric

2012-03-08 sr cee pharmaceuticals

Documents