Ciech makes move to consolidate pharma firms

By Karol Chlipalski

Henryk Klinkosz, president of Ciech, Poland's largest chemical group, has submitted an offer concerning a potential takeover of four state-owned pharmaceutical firms to Treasury Minister Piotr Czyżewski. Once the merger is successfully completed, Ciech plans to go public on the Warsaw Stock Exchange, an event it is tentatively planning for 2004.

Klinkosz foresees as the first stage of the operation the consolidation of three Polfas, or state-owned pharmaceutical companies, namely Tarchomin, Warszawa and Pabianice, with Biomed, a vaccine producer. The consolidated company would then merge with Ciech. The company has submitted an outline of its development strategy in the Polish pharmaceutical sector to the State Treasury.

Ciech would not discuss the details of the strategy. "Questions (regarding this matter) should be directed to State Treasury representatives," said Jarosława Garczyńska, a Ciech spokesperson.

As we learned from the State Treasury, the offer is subject to a detailed study by the treasury as well as by the consulting company BAA (Business Analysts and Advisors), which has been hired by the treasury to advise in the privatization of pharmaceutical sector enterprises.

The Business Journal has also been informed that talks are being held with representatives of the companies involved with Minister Czyżewski. The consultations concern the consolidation and future of the state-owned companies. Ciech representatives are not present at these talks.

"The merger with Ciech could bring about positive results, if additional conditions were to be fulfilled," said Janusz Koziara, head of the Pabianice pharmaceutical plant. "Consolidation of plants would eliminate competition among them and would result in cost reduction. Nevertheless, more aspects of this will be decided by government policy towards the pharmaceutical sector, than by Ciech itself."

Ciech is a holding company active in the chemical sector. It takes its roots in the state-owned Centrala Handlu Zagranicznego (Center for Foreign Trade) during the communist era. Currently the company owns the "Polfa" trademark outside Poland. Ciech manages nine companies, whose revenues amounted to €1.9 billion (zł. 4.3 billion) in 2002. Ciech is the eighth-largest producer of soda in the world (1.15 million tons a year) and fifth-largest soda exporter.

"Ciech wants to build a strong pharmaceutical group, making three Polfas more competitive, increasing pharmaceutical exports and, at the same time, increasing the value of those companies," said Klinkosz. "Ciech's intention is to also fulfil state requirements towards the pharmaceutical sector."

Andrzej Cylwik, a consultant with Case-Doradcy, doubts that Ciech's strategy to enter the pharmaceutical market will be successful.

"The merger with Ciech would add no value to the pharmaceutical companies," he said. "Ciech has no experience in the pharmaceutical sector. It traded in medicine prior to 1989, especially with the former Soviet Union. The market has changed a lot since then."

Cylwik considers the consolidation of the state-owned pharmaceutical companies a move in the right direction. In his opinion, consolidation will result in cost cutting, as it will allow for the elimination of redundant activities among the various pharmaceutical plants.

"The five largest pharmaceutical companies in the world have a greater share of the world market than the five largest Polish companies have of the Polish market," he said. "So the consolidation on this market is not over."

In Cylwik's opinion, Polish companies should look for a major corporation from the pharmaceutical sector to become a strategic investor in the domestic outfit. A foreign investor would have the wherewithal to support the new company with capital and know-how.

The company that would develop from Ciech's proposed consolidation would be among the three largest players on the Polish market, along with GlaxoSmithKline and Polpharma.

"It is very hard to say anything about the market position of the future company, so long as many details concerning the merger have not been revealed yet," said Cylwik.

In the opinion of many experts, the Polish pharmaceutical market has good future prospects. Poles still spend one-third to one-half as much on medicine as the average EU citizen. In 2002, they spent almost €3.2 billion (zł. 14 billion) on drugs.

According to research carried out by Case-Doradcy, the revenues of pharmaceutical companies increased by almost 17 percent last year, the only sector of the Polish economy to have recorded such a significant growth rate during that period. Nevertheless, the market share of generic medicines is still much larger than in western countries. The ratio of patented drugs to generics is around 60-40, while in the west patented medicines constitute 80 percent of drug sales. Patented drugs, mainly imported, are on average four times more expensive than generics.