A tough pill to swallow
Despite its shares being traded at the highest price-to-earnings ratio on the Prague Stock Exchange (PSE), pharmaceutical giant Zentiva may offer quite substantial upside potential since most analysts agree that its profit forecasts are conservative. The firm - which was the biggest generic drug manufacturer in the Czech Republic and the fourth-largest player in Eastern Europe in the first half of 2008 - managed to raise its profit during H1 by 19 percent y/y, to CZK911 (zł.125) million.
Last year the company was less fortunate. In early spring 2007, Zentiva purchased a controlling stake in Eczacibasi Generic Pharmaceuticals, the third-largest drug producer in Turkey. This was its second foreign acquisition, following the 2005 purchase of Romanian drug-maker Sicomed. The problems that Zentiva faced in conducting both takeovers caused a 36-percent fall in profits in 2007, interrupting a growth trend which began with Zentiva's PSE debut in early 2004.
Things appear to be on the mend for the company, however. "The results that we have already achieved give me great confidence that Turkey will be an important contributor to our growth over the next several years," said Jiří Michal, CEO and chairman of the board at Zentiva.
Emerging potential
Zentiva already operates in 15 countries in Eastern Europe and Asia. Turkey is the biggest of these markets and was worth $8.9 (CZK140, zł.19.6) billion at the end of 2007, according to the company's consolidated 2007 report. It is followed by Russia, at $6.4 (CZK102.9, zł.14.1) billion; Poland, at $5.1 (CZK82.1, zł.11.2) billion; and Romania, at $2.1 (CZK33.7, zł.4.6) billion.
Romania displayed the fastest market growth, 36 percent in 2007. InRussia the value of drug consumption in 2007 increased by 21 percent, while in Turkey it rose 16 percent. The Czech Republic, which is a relatively mature market worth $1.6 (CZK25.7, zł.3.5) billion, delivered 11-percent growth in 2007.
Analysts admit that expansion into emerging markets was a good step for Zentiva, but note that such moves are common among pharmaceutical majors like Hungary's Gedeon Richter, Slovenia's Krka and Lithuania's Sanitas.
"The health-care sector is highly regulated and if operations are spread in more countries it mitigates the risk of unfavorable government action in one of them. On the other hand, entering emerging markets is both an opportunity and a risk; [that] was visible in the problems Zentiva had in Romania last year, with uncollectible receivables, or now with impairment loss in Turkey," said Josef Němý, an equity analyst with Komerční banka (KB).
Domestic doldrums
New regulations in the Czech Republic, effective since the beginning of 2008, have reduced state subsidies for drugs and resulted in a decrease of the total value of merchandise sold, putting Zentiva's home sales under pressure. Within the last year, the firm's total revenues in the CzechRepublic fell from 34 percent to 26 percent.
"The introduction of mandatory fees for doctors' visits and prescriptions [in the Czech Republic] had an impact on our sales. However we have been able to respond to these developments by placing more efforts on promotion of our prescription and CHC [consumer health care] brands and maintaining our overall commercial efficiency," Michal said. Zentiva manufactures and sells generic pharmaceutical products, meaning drugs for which patent protection has expired and which can be manufactured and sold under a different brand. According to statistics from OECD Health Data 2007, generic drugs made up 14 percent of the global pharmaceutical market value and 40 percent of its volume in 2006.
Two-thirds of Zentiva's sales consist of prescription drugs, and 16 percent are CHC products which are available without a doctor's prescription. The third segment constitutes active pharmaceutical ingredients. The company focuses on drugs which treat cardiovascular disorders, inflammatory conditions, pain, infections and diseases of the central nervous system and also in the fields of gasroenterology and urology.
Consolidation galore
The legal regulatory framework is not the only risk Zentiva faces on the domestic market. "Another problem arises as the competition is becoming fiercer. The recent acquisition of Barr [Pharmaceuticals] by Teva will create a new big player in the CzechRepublic," Nûm× said.
Zentiva is number one in both the Czech and Slovak republics, with market shares of 13 percent and nine percent, respectively. Main competitors on both markets are Novartis, GlaxoSmithKline, Sanofi-Aventis, Servier, Pfizer, Teva and F. Hoffmann-La Roche. Zentiva competes with Novartis and Sanofi-Aventis in almost every market, including Poland, Romania, Russia and Turkey. In Romania, the firm is in sixth place, in Poland it holds 14th place and in Russia it is among the 30 biggest pharmaceutical companies.
According to OECD data, the global pharmaceutical market is quite consolidated, with 10 giants, known as "big pharma," controlling almost half of all sales in the sector. The last two years have shown continued consolidation in the sector through high-valued deals between the pharmaceutical companies, according to a report published on web portal Pharmexec.com. The site reported that the value of mergers and acquisitions amounted to $79 (CZK1,286, zł.175) billion in 2007 - the highest figures since the record in 2000, when sector companies signed deals worth over $230 (CZK3,744, zł.510) billion.
What is important for Zentiva, however, is that "the 2007 total was driven by medium-size deals, regional consolidation and portfolio enhancement," according to Pharmexec.com. The Turkish acquisition made by Zentiva in 2007 was undoubtedly part of this trend.
Bidding war
While Zentiva helped to consolidate the sector in 2007, this year it became an acquisition target itself. Since the beginning of May, the firm has been in the middle of a takeover fight between PPF Group, investment vehicle of Czech billionaire Petr Kellner, and international pharmaceutical giant Sanofi-Aventis. PPF has recently retreated, however, unwilling to engage in a bidding war.
"PPF is a financial investor; they bought shares in 2005 with the aim to sell them sooner or later for a profit. Therefore PPF doesn't have a strategic approach to Zentiva, and I think they didn't really mean to take the company over. It could be seen from their bid price of CZK950 [zł.129] per share, which was an unacceptably low premium over market price," explained Karel Potmû‰il, senior analyst with brokerage Cyrrus. "They seem to be satisfied as their initial move invoked a reaction from Sanofi-Aventis," he added. The management of Zentiva issued an official recommendation to shareholders to waive both takeover offers on the basis that price didn't reflect the company's fair value, although a number of analysts disagreed.
Who's at the helm?
For the moment, the question of who really controls Zentiva remains open. This has been an issue since the beginning of 2006, when main shareholder Warburg Pincus, a private equity fund, sold parts of its stake to both PPF Group and Sanofi-Aventis. Zentiva's managers also disposed of more than half of their holdings in the company at that time, decreasing their stake to less than six percent. The firm is currently in a state of flux, as both operational performance and shareholders structure is unclear. KB's Nûm× was cautiously optimistic about the future of the company, however.
"Zentiva improved its performance compared to a poor 2007, although the main problems still exist," he said.
| Company profile |
| Sector: Pharmaceuticals |
| Ownership: Sanofi-Aventis (24.9 percent), Generali PPF Holding (19.2 percent), J&T Financial Services (7.6 percent), management and employees (5.9 percent), other institutions and private investors (42.4 percent) |
| Year founded: 2003, through the merger of Czech firm Léãiva and Slovakian company Slovakofarma |
| Number of employees: Over 6,000 |
| Main competitors: GlaxoSmithKline, Pfizer, Novartis |
| The bottom line: Zentiva shareholders have until mid-September to respond to Sanofi-Aventis' tender offer. At the same time, the company seems to be finally delivering on its promises of good financial results after a series of profit warnings in 2007 |
Anna Sieczkoś
This is an edited version of an article
originally published in Czech Business Weekly
