Polfa Holding: Stay state-owned or go private?

By Hillary Davies

Of the eleven Polfa companies which once made up Poland's state-owned pharmaceutical industry, most were privatized long ago, and are doing well. But government plans for the last three state-owned pharmaceutical companies have gained little support from most in the business.

The government will control 100 percent of shares in the proposed holding, which will hold an 80 percent share in Polfa Warszawa, Polfa Pabianice and Polfa Tarchomin. Up to 30 percent of shares in the holding may be floated on the Warsaw Stock Exchange next year. Their sale is intended to enable the government to follow its strategy regarding medicines.

According to the government, which paid out zl.5 billion last year in medicine refunds, a significant aim is to reduce this kind of budget expenditure. However, doubts remain as to the feasibility of the planned holding.

"Today the companies have become too different in terms of market position, modernity, and management style," says Mariusz Lewandowski, of the Polish Chamber of the Pharmaceutical and Medical Products Industry. "If any of the Polfa companies loses as a result of the idea, then the idea would be bad."

In the first six months of 2003, Polfa Warszawa made a net profit of zł.17.3 million; Polfa Pabianice made zł.4.0 million and Polfa Tarchomin just zł.0.5 million. Definitely the stronger of the three, Polfa Warszawa has a 3.9 percent share in the domestic market, beaten only by Polpharma and GlaxoSmithKline. Investments at Pabianice between 1998 and 2003 worth about 152,3 million złoty saw Pabianice increase its market share by 5.4 percent in the first half of 2003.

But, Polfa Tarchomin is, by any standard, struggling. Intransigent trade unions on the one hand, and a practice of selling medicines direct to cash-strapped hospitals have combined to bring the companies down. If the holding is created, then Polska Farmacja just won't be able to compete with big players such as GlaxoSmithKline, because of the investments that will have to be diverted into picking up Tarchomin.

"Why's the government creating a holding? Because they can't sell Polfa Tarchomin," say anonymous sources close to the subject. What is more, it is possible that Ciech Polfa, currently owned by the Ciech group, may also be included in the Holding. Ciech, in exchange, would also get a little piece of the Farmacja Polska pie. "With a piece of the holding, they would go some way to solving their own financial problems," said a source who didn't want to be named.

Press insinuations claiming that the mastermind behind the the Farmacja Polska scheme seems to have been the discredited ex-vice health minister, Alexander Nauman, plus the fact that Ciech is friendly with Premier Miller's son, have recently cast aspersions over the whole idea of Ciech's inclusion in the deal. However, the government has still not entirely excluded this possibility.

Meanwhile, investors on the W.S.E. are already showing their distaste for the developing situation. Share prices of Polskiej Grupy Farmaceuticzne, Farmacolu and Prospera all fell by around five to six percent last week, a clear indication of what the market thinks of the scheme.