2012-03-08 SR CEE Pharmaceuticals

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

2012 CEE pharma outlook: CEE pharma stocks continue to represent solid defensive investment theme, but volatility in short run is hard to avoid. Richter and Krka remain our top picks.
Vladimira Urbankova Vladimira.Urbankova@erstegroup.com
Antibiotice, Biofarm contribution: Raluca Ungureanu Raluca. Ungureanu@bcr.ro
Russia remains strong card to play for Hungarian pharmas; forint weakness should bolster results further; Egis multiples are still attractive, Richters R&D/specialty pharma foray yet to be priced in. Our new target prices (HUF 20,455 per share for Egis and HUF 47,800 per share for Richter) suggest that the room for share price appreciation is very appealing. We thus upgrade our recommendation for Egis from Accumulate to Buy and reiterate our Buy call for Richter. Krka maintains its regional competitive edge, prepared Warsaw listing is set 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 upside potential from its depressed levels and we confirm our Buy recommendation.
Contents Executive summary Valuation / Recommendation Market overview 4Q11 results overview 2012 guidance /Erste forecast Antibiotice Biofarm Bioton Egis Krka Richter Gedeon Contacts Disclosures & disclaimer 1 4 7 19 22 23 28 33 41 50 59 70 74
Biotons turnaround story still largely hinges on progress in cooperation deals. Incorporating the more grim than originally anticipated underlying profitability parameters, offset by proceeds from the finally inked Actavis deal, our new 12-month target price for Bioton arrives at PLN 0.11 per share (up from the earlier PLN 0.10 per share). We stick to Hold. Biofarms investment story to be bolstered by new dividend policy/acquisition target status, overshadowing its peer Antibiotice. We raise our Biofarm target price from RON 0.217 to RON 0.237 per share and upgrade the stock from Hold to Accumulate. Reflecting the negative impact of the less favorable export developments alongside the expanding share of contractual business, we cut our target price to RON 0.446 per share and reduce our recommendation for Antibiotice from Accumulate to Hold.
Erste Group Research Sector Report
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All 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 Research Erste Sector Healthcare 08 March 2012
Executive summary
Recommendations and target prices at a glance
Company Antibiotice Biofarm Bioton Egis Krka Currency RON RON PLN HUF EUR Recommendation before Accumulate Hold Hold Accumulate Buy Buy Recommendation now Hold Accumulate Hold Buy Buy Buy Target price (LC) before 0.4750 0.2170 0.10 21,500 75.5 45,650 Target price (LC) now 0.4460 0.2370 0.11 20,455 73.5 47,800 0.425 0.1994 0.10 15,350 52.5 37,485 4.9% 18.8% 9.8% 33.3% 40.2% 27.5% Current Price (LC) Upside potential (%)
Richter Gedeon HUF
Source: Erste Group Research. Based on closing prices as of March 6, 2012.
CEE pharma stock performances were lackluster last year, but the 4Q11 reporting season confirmed that, despite all odds, 2011 was another solid year for CEE pharma companies from the business perspective In 2012, Russia/CIS is set to deliver robust performance and offset the region-wide pricing pressures linked to healthcare reforms
CEE pharma stock performances were lackluster last year, with the financial market turmoil depressing their stock liquidity and dragging share prices to new lows (with resulting attractive valuations, in particular from the longterm perspective). Worries related to the domestic macroeconomic outlook kept a lid on Hungarian stocks. Should negotiations with the IMF bring more clarity and improve the sentiment towards the battered Hungarian equity market, we expect their performance to improve in the course of 2012, with the market finally pricing in the benefits of the weak forint for both heavily export-geared Hungarian pharmas. The 4Q11 reporting season confirmed that, despite all odds, 2011 was another solid year for CEE pharma companies from the business perspective. Importantly, in 2012, Russia/CIS, the crucial export territory for most of them, is anticipated to continue in delivering robust growth, offsetting the temporary slowdown in the CEE region, hampered by cost savings accompanying healthcare reforms. Although equity markets might remain fragile for a while, we believe that the fundamentally solidly positioned and relatively recession-proof top CEE pharma stocks - Krka, Richter and Egis - have all prerequisites to outperform their local markets and end 2012 with a positive sign. We reviewed our models and set new 12-month target prices for CEE pharma stocks. The 2011 results demonstrated clearly that the Russian market represents a strong card to play for both Richter and Egis. In addition, while in 2012 the new government cost savings plans will undoubtedly harm the Hungarian pharmas results, their impact will be less substantial than originally assumed. And finally, both Richter and Egis are among the biggest beneficiaries of the significantly weaker than earlier envisaged forint, which bodes well for their results in the coming periods. Richters strategic foray into the R&D/specialty area bolsters the companys medium- to long-term outlook, with more news from R&D pipeline progress (in cooperation with Forest Laboratories) set to provide a trigger to its valuation/stock price in the meantime. In summary, our new target prices for Richter and Egis, incorporating the deterioration in their home macroeconomic situation (translating into a higher risk-free rate and elevated equity market premium), arrive at HUF 47,800 per share for Richter and HUF 20,455 per share for Egis. Although both stocks have already partly recovered from their autumn 2011 lows, they offer upside potential of 27.5% and 33.3%, respectively. Consequently, we stick to our Buy recommendation for Richter and upgrade Egis from Accumulate to Buy.
We reviewed our models and set new 12-month target prices for 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 to EUR 1,075.6mn. Although the region-wide pricing pressures accompanying healthcare reforms and regional currencies weakness took their toll, the companys operating performance remained sound. The companys regional competitive edge (with above-average profitability margins reflecting the innovative generics pipeline as well as strict cost control) has yet to be reflected in Krkas share price. The Warsaw Stock Exchange listing targeted for June 2012 bodes well for the stocks liquidity as well as further share price appreciation. With a revised target price of EUR 73.5 per share suggesting 40.2% upside potential, we leave our Buy recommendation 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 Israeli plant, Biotons switch into the red was unavoidable in 2011. The 2012 prospects are far rosier. Biotons core insulin business is set to benefit from changing home market reimbursement rules, as well as new deals (e.g. with Indar) and the Biolek acquisition. On top of that, the profound impact of the finally signed Actavis cooperation contract promises to make Bioton the next real turnaround story. Nonetheless, given the track record of numerous delays, the execution risk-hampered outlook, and thus far weak transparency on the Actavis (as well as Biolek) contract we opt for only a slight reduction of the earlier introduced risk related discount from 15% to 10% in our DCF valuation. Our revised 12-month target price arrives at PLN 0.11 per share (vs. the earlier PLN 0.10). Consequently, we see no reason to rush into the stock and confirm our Hold recommendation. The 2011 results of the Romanian pharmaceutical companies demonstrated once again that the Romanian pharmaceutical market remains a challenging place to call home. The persistently poor payment discipline and weakening local currency put a lid on their performance in 2011. Reflecting the unfavorable changes in the sales mix (expanding share of contract sales, along with difficulties in certain export markets) as well as the hike in marketing costs (depressing profitability margins), we revise our 12-month target price for Antibiotice down to RON 0.446 per share (from RON 0.475 per share) and downgrade our recommendation from Accumulate to Hold. We think that the new dividend policy increases the attractiveness of Biofarm. Furthermore, we believe that Biofarm will continue 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 revised 12-month target price arrives at RON 0.237, indicating solid upside potential for the stock. Consequently, we upgrade our recommendation from Hold to Accumulate.
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Valuation/Recommendation
Richters R&D foray far from adequately factored in; cariprazine path to market to provide more stock triggers. Following recent share price slump, Egis attracts with its widened valuation gap
As their domestic political and macroeconomic front became a source of worries for international investors, with new unorthodox government measures making media headlines, the Hungarian pharma stocks saw investors interest evaporate. Both Egis and Richters stock prices failed to factor in the vastly positive impact of the weakening home currency on their business results (as well as the low dependence on external markets for financing of their investment plans) as of lately. In our opinion, the market once again overreacted to the negative news flow, yielding very appealing valuations for both Hungarian pharmas at the moment. As per tradition, Egis maintains its status as the cheapest CEE pharma stock, with its valuation gap only partly justified by its inferior profitability parameters. Although Richters multiples place the company well above its home market peer, we continue to think that Richters well defined niche portfolio strategy, including original R&D program related triggers, warrant the stocks premium. Our new target prices (HUF 20,455 per share for Egis and HUF 47,800 per share for Richter) suggest that the room for share price appreciation is very appealing. We thus upgrade our recommendation for Egis from Accumulate to Buy and reiterate our Buy call for Richter.
P/BV 2011e 2012e -31.9% -35.9% -64.5% -66.2% -45.9% -49.3% EV/sales 2011e 2012e -56.7% -59.6% -73.9% -63.9% -59.4% -64.6% EV/EBITDA 2011e 2012e -43.2% -50.3% -63.9% -61.6% -42.4% -58.6%
P/E P/CE 2011e 2012e 2011e 2012e -31.7% -30.0% -39.0% -40.3% Egis to CEE Peers, Prem/Disc -27.1% -22.1% -55.3% -48.2% Egis to Western Peers, Prem/Disc -31.7% -43.5% -39.3% -48.0% Egis to Richter, Prem/Disc Source: Erste Group Research, Factset, based on closing prices as of March 6, 2012
Krkas solid track record and outlook, further lightened by the prepared Warsaw listing, are not reflected in its current multiples
Although Krka stock performance and liquidity suffered the least among its regional peers last year, a brief look at Krkas multiples confirms that there is still a long way for the company to return to its former position as the most expensive stock in the CEE region. In 2011, the home Ljubljana Stock Exchange was hit more severely than its regional counterparts, with some local investment funds experiencing difficulties and the lower foreign investor presence not sufficient to keep the trading volumes from shrinking. Fortunately, the company embarked on a share buyback program, keeping its stock price and liquidity aloft. Nonetheless, Krkas earlier premium disappeared and the stock is currently traded not only at a discount to its Western peers, but also to Richter (e.g. P/CE, EV/Sales, EV/EBITDA). The 2011 sales report confirmed that Krka is delivering on its promises, with its net profit matching guidance of EUR 162mn. The outlook for 2012 is also solid, with Western European markets maintaining momentum and Russia/CIS delivering a robust performance, offsetting the temporarily sluggish Central European markets. The companys innovative generics portfolio provides an antidote to the pricing pressures and Krkas profitability margins are set to remain superior to its CEE-based peers. Finally, the prepared secondary listing on the Warsaw Stock Exchange promises to bring the company into the spotlight and inject fresh life into the stock liquidity. Our revised target price of EUR 73.5 per share points to significant upside potential and we stick to our Buy recommendation.
P/BV 2011e 2012e 57.8% 39.5% -17.7% -26.5% 25.3% 10.5% EV/sales EV/EBITDA 2011e 2012e 2011e 2012e 16.2% -1.8% 8.1% -10.8% -30.0% -12.1% -31.4% -31.1% 8.9% -14.0% 9.7% -25.8%
P/E P/CE 2011e 2012e 2011e 2012e 0.1% -1.1% 0.0% -8.1% Krka to CEE Peers, Prem/Disc 6.8% 10.0% -26.7% -20.2% Krka to Western Peers, Prem/Disc 0.1% -20.2% -0.6% -19.9% Krka to Richter, Prem/Disc Source: Erste Group Research, Factset, based on closing prices as of March 6, 2012
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Excluding one-offs, Bioton multiples are most demanding; share price developments, valuation to be dictated by turning numerous cooperation deals into material progress of business performance
Biotons multiples evidence the volatility of the companys results, with major positive one-offs painting a rosy picture in 2010 and 2012. Nonetheless, in the absence of the bolstering impact of milestones, Biotons 2011-based valuation parameters (except for the P/BV) remain the most demanding in the CEE pharma universe. As before, we expect investors to be ready to forgive the company its currently bleak underlying business results and focus on the restructuring/cooperation deal related news flow. The brightening outlook for Biotons insulin business bodes well for an improvement of its business results in 2012. The company should be able to reap more benefits from the purchase of veterinary feed additive producer Biolek. Last but not least, in 2012, the first sizable proceeds (EUR 22.25mn) from the cooperation contract with Actavis are set to kick in. Incorporating the more grim than originally anticipated underlying profitability parameters, offset by proceeds from the finally inked Actavis deal, our new 12-month target price for Bioton arrives at PLN 0.11 per share (up from the earlier PLN 0.10 per share). Given the numerous delays in the execution of the previously announced transactions, uncertainties related to the companys outlook remain rather high. We thus opt to reduce the earlier introduced risk related discount only slightly, from 15% to 10%, for the time being. In summary, we leave our Hold recommendation unchanged.
P/BV 2011e 2012e -66.7% -48.5% -82.6% -72.9% EV/sales EV/EBITDA 2011e 2012e 2011e 2012e 84.3% 37.5% n.m. 33.6% 11.1% 23.1% n.m. 3.2%
P/E P/CE 2011e 2012e 2011e 2012e n.m. 1.1% n.m. -11.2% Bioton to CEE Peers, Prem/Disc n.m. 12.6% n.m. -22.9% Bioton to Western Peers, Prem/Disc Source: Erste Group Research, Factset, based on closing prices as of March 6, 2012
Biofarm is our preferred exposure to Romanian pharma sector. Despite its heavy exposure to the challenging Romanian market, Biofarms profitability parameters are only slightly below those of Krka and Richter
While the Romanian pharma companies valuation multiples remain in the middle range of the CEE pharma universe, Biofarm is traded at a premium to its local peer Antibiotice. We believe that the distance between the Romanian pharma peers is fully justified; in the current market situation, Biofarm, with its more favorable sales mix, along with a more stable financial position than its home peer, represents the better pick for investors considering entering Romanian pharmas. Despite its heavy exposure to the challenging Romanian market, Biofarms profitability parameters are only slightly below those of Krka and Richter at the moment. With the impact of the fierce competition on the Romanian OTC market largely factored into our earlier forecasts, reflecting the higher cash position, we raise our target price from RON 0.217 to RON 0.237 per share and upgrade the stock from Hold to Accumulate. The unsatisfactory payment discipline, resulting from the lack of budgetary resources for the state-subsidized drugs, as well as increasing competitive pressures (lifting marketing expenses), continues to bite into the results of Antibiotice. Although Antibiotice is set to benefit in the long run from the preference among regulators for cheap generics, export expansion remains the key to the companys long-term sustainable growth. Reflecting the negative impact of the less favorable export developments alongside the expanding share of contractual business (marked by lower profitability parameters), we cut our target price to RON 0.446 per share and reduce our recommendation for Antibiotice from Accumulate to Hold.
P/BV 2011e 2012e 31.3% 32.7% -31.6% -30.1% 77.3% 80.1% EV/sales EV/EBITDA 2011e 2012e 2011e 2012e -6.7% 1.8% 7.8% 6.7% -43.8% -8.9% -31.6% -17.6% 39.2% 66.6% 6.3% 14.3%
P/E P/CE 2011e 2012e 2011e 2012e 16.4% 8.4% 29.8% 25.8% Biofarm to CEE Peers, Prem/Disc 24.2% 20.7% -4.8% 9.2% Biofarm to Western Peers, Prem/Disc 23.8% 16.0% 70.6% 16.4% Biofarm to Antibiotice, Prem/Disc Source: Erste Group Research, Factset, based on closing prices as of March 6, 2012
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CEE pharmaceuticals valuation at a glance

Antibiotice Biofarm Bioton Egis Krka Richter Gedeon Median CEE Teva Pharmaceutical Industries Ltd. Mylan Inc. Watson Pharmaceuticals Inc. Stada Arzneimittel AG Ranbaxy Laboratories Ltd. Recordati S.p.A. Dr. Reddy's Laboratories Ltd. Median Peer Group EuroStoxx Healthcare CEE to Peer, Prem/Disc 2010 19.7 16.4 6.9 10.3 13.0 12.2 12.6 10.1 14.1 17.4 9.5 12.5 10.6 23.6 12.5 15.1 1% 2010 1.3 1.9 2.7 1.3 2.3 2.7 2.1 4.0 2.1 2.0 1.5 3.3 1.5 2.9 2.1 2.1 -1% 2010 17.8% 26.0% 34.0% 21.4% 29.0% 30.4% 27.5% 36.5% 25.7% 23.5% 18.4% 19.0% 25.0% 20.9% 23.5% 22.7% 4.0 P/E 2011e 2012e 10.8 10.0 13.4 11.6 nm 10.9 7.8 7.5 11.5 10.6 11.5 13.3 11.5 10.7 8.9 8.0 10.8 9.1 12.0 10.1 8.8 7.9 22.1 13.8 9.9 9.6 20.1 17.9 10.8 9.6 14.9 14.3 7% 11% EV/Sales 2011e 2012e 1.0 1.0 1.4 1.7 2.8 2.3 0.7 0.7 1.8 1.7 1.6 1.9 1.5 1.7 3.4 2.7 2.6 2.3 2.1 1.9 1.4 1.2 3.1 1.9 2.0 1.5 4.0 2.9 2.6 1.9 2.3 2.3 -40% -10% EBITDA margin 2011e 2012e 17.2% 17.2% 22.5% 25.1% -5.3% 27.0% 19.9% 21.3% 28.0% 28.9% 28.2% 24.9% 21.2% 25.0% 33.0% 31.2% 27.2% 27.5% 23.7% 24.7% 19.6% 20.4% 16.3% 18.3% 25.5% 23.8% 24.3% 22.3% 24.3% 23.8% 21.6% 21.8% -3.0 1.2 2013e 8.9 11.3 21.6 7.6 9.6 11.9 10.4 7.4 8.3 9.5 6.9 16.1 8.5 16.5 8.5 13.1 23% 2013e 0.9 1.6 2.2 0.6 1.5 1.6 1.5 2.3 2.0 1.5 1.3 1.6 1.3 2.7 1.6 2.1 -1% 2013e 16.7% 25.7% 18.7% 19.5% 29.6% 25.0% 22.2% 31.7% 27.6% 25.7% 20.7% 15.1% 24.3% 21.5% 24.3% 22.4% -2.0 2010 9.6 13.3 5.2 7.1 8.8 9.2 9.0 9.9 10.7 14.0 6.6 8.6 8.3 20.1 9.9 10.4 -9% 2010 7.1 7.2 8.0 6.2 8.0 8.8 7.6 12.0 8.6 8.5 8.3 34.0 5.6 14.6 8.6 8.7 -11% 2010 5.1% 16.3% 24.8% 14.1% 16.9% 23.5% 16.6% 20.7% 4.1% 11.9% 4.2% 17.5% 14.9% 14.8% 14.8% 8.1% 1.9 P/CE 2011e 2012e 5.8 8.4 9.9 9.8 n.m. 6.9 4.6 4.6 7.6 7.1 7.7 8.9 7.6 7.8 8.2 7.3 13.4 9.4 10.4 9.2 8.6 5.5 17.8 8.9 7.9 7.9 15.2 14.1 10.4 8.9 9.8 9.9 -27% -13% EV/EBITDA 2011e 2012e 6.0 6.0 6.4 6.9 -53.2 8.6 3.4 3.2 6.4 5.7 5.8 7.7 5.9 6.4 9.3 8.3 10.0 8.4 9.0 8.0 7.9 6.1 16.2 11.4 7.9 6.0 19.1 12.0 9.3 8.3 7.6 7.5 -37% -23% Net margin 2011e 2012e 7.1% 7.6% 16.6% 18.3% -12.3% 13.3% 10.5% 12.2% 15.1% 15.3% 15.9% 16.1% 12.8% 14.3% 15.1% 22.1% 14.6% 15.1% 5.7% 13.5% 2.2% 7.6% 9.5% 13.2% 15.2% 14.3% 15.8% 14.7% 14.6% 14.3% 8.4% 8.5% -1.7 0.0 2013e 5.1 8.5 9.7 4.5 6.4 8.0 7.2 6.7 7.0 7.7 5.0 11.2 7.3 11.8 7.3 9.7 -1% 2013e 5.4 6.1 11.8 3.0 5.2 6.5 5.8 7.4 7.2 6.0 6.5 8.6 5.6 11.9 7.2 7.7 -20% 2013e 7.8% 17.4% 6.5% 11.2% 15.7% 16.5% 13.5% 22.6% 16.0% 14.8% 8.8% 10.1% 14.7% 14.7% 14.7% 9.4% -1.2 2010 0.9 1.5 0.7 1.2 2.1 1.8 1.4 1.9 2.1 2.2 1.5 2.8 2.0 5.7 2.1 2.5 -36% 2010 3.7% 2.7% 0.0% 0.5% 2.2% 2.0% 2.1% 1.2% 0.0% 0.0% 2.6% 0.0% 5.0% 0.5% 0.5% 1.6% 371% 2010 5.0% 9.7% 11.3% 11.9% 17.4% 15.8% 11.6% 18.6% 15.1% 12.9% 15.2% 22.4% 19.0% 24.0% 18.6% 14.2% -7.0 P/BV 2011e 2012e 2013e 0.8 0.8 0.7 1.4 1.4 1.3 0.3 0.5 0.5 0.7 0.7 0.6 1.6 1.5 1.3 1.3 1.3 1.2 1.0 1.1 1.0 1.7 1.7 1.5 2.4 2.4 2.0 2.0 2.0 1.8 1.4 1.4 1.3 4.6 4.6 3.5 1.9 1.9 1.7 5.2 5.2 4.0 2.0 2.0 1.8 2.2 2.0 1.7 -48% -47% -46% Dividend yield 2011e 2012e 2013e 4.6% 4.0% 4.5% 3.2% 3.9% 4.0% 0.0% 0.0% 0.0% 0.9% 0.8% 0.8% 2.7% 3.0% 3.1% 2.3% 1.9% 2.1% 2.5% 2.4% 2.6% 1.6% 2.0% 2.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.7% 1.7% 3.1% 0.5% 0.6% 0.9% 5.0% 5.2% n.a. 0.7% 0.6% 0.7% 0.7% 0.6% 0.9% 1.7% 1.8% 2.0% 245% 283% 183% ROE 2011e 7.4% 10.4% -6.1% 9.1% 14.9% 11.3% 9.8% 18.9% 22.6% 16.6% 16.5% 20.7% 18.9% 25.8% 18.9% 13.3% -9.1 2012e 8.0% 12.0% 5.3% 9.4% 14.6% 10.7% 10.1% 18.6% 22.0% 17.7% 16.4% 25.3% 17.5% 22.5% 18.6% 13.8% -8.5 2013e 8.4% 12.0% 2.5% 8.5% 14.5% 10.8% 9.6% 17.7% 23.0% 17.1% 16.7% 19.1% 17.9% 20.4% 17.9% 13.7% -8.3
Antibiotice Biofarm Bioton Egis Krka Richter Gedeon Median CEE Teva Pharmaceutical Industries Ltd. Mylan Inc. Watson Pharmaceuticals Inc. Stada Arzneimittel AG Ranbaxy Laboratories Ltd. Recordati S.p.A. Dr. Reddy's Laboratories Ltd. Median Peer Group EuroStoxx Healthcare CEE to Peer, Prem/Disc
Antibiotice Biofarm Bioton Egis Krka Richter Gedeon Median CEE Teva Pharmaceutical Industries Ltd. Mylan Inc. Watson Pharmaceuticals Inc. Stada Arzneimittel AG Ranbaxy Laboratories Ltd. Recordati S.p.A. Dr. Reddy's Laboratories Ltd. Median Peer Group EuroStoxx Healthcare CEE to Peer, ppt
Source: Erste Group Research, Factset. Based on closing prices as of March 6, 2012
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Market Overview
2011: CEE equity market performance lackluster; CEE pharma stocks headed south; Richter topped liquidity ranking
With the Eurozone facing the biggest financial crisis thus far, worries about the public debt situation in particular peripheral EU countries, along with mounting recession fears and no immediately effective solutions at hand, all CEE equity markets put in disappointing performances last year.
CEE pharma stocks performance remains volatile

LC terms % Change % Change % Change 2Q11 3Q11 4Q11 -1.1% -4.9% -7.1% -11.8% -0.5% -1.2% -7.2% -3.5% 0.0% -8.2% -20.7% -4.0% -22.5% -46.7% -21.9% -25.1% -17.3% -30.6% -14.4% -15.6% -1.4% 1.5% 1.6% -25.0% -2.0% 20.0% 14.2% 7.6% 2.9% -1.9% EUR terms % Change 2Q11 -3.6% -7.4% -9.4% -10.7% 0.7% -1.2% -7.1% -3.5% 0.0% -8.2%
% Change 1Q11 Antibiotice SA Biofarm SA BET (RO) Bioton S.A. WIG 20 Bench (PL) Egis Plc Richter Gedeon BUX Bench (HU) Krka SBI Bench (SI) -3.2% 1.6% 22.8% 13.3% 2.7% -0.7% -8.4% 8.1% -4.7% -3.0%
% Change % Change YTD 2012 1Q11 9.0% 3.4% 28.2% 66.7% 4.9% -13.3% 9.6% 9.7% -0.9% -2.3% -0.4% 4.6% 26.4% 11.5% 1.0% 4.0% -4.0% 13.3% -4.7% -3.0%
% Change 3Q11 -23.0% -6.8% -24.8% -51.9% -29.6% -32.2% -25.1% -37.2% -14.4% -15.6%
% Change % Change 4Q11 YTD 2012 -0.7% 2.3% 2.3% -25.7% -3.0% 11.9% 6.4% 0.3% 2.9% -1.9% 8.2% 2.6% 27.3% 78.2% 12.2% -7.4% 17.1% 17.2% -0.9% -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 looming Eurozone crisis had on CEE equity markets. Nevertheless, all CEE pharma sector stocks (except Bioton) fared better than the respective local stock indices. After the rather uninspiring 1H11 performance, the third quarter meltdown sent the stock prices to rarely seen lows. The changes in the Hungarian drug market regulation dragged down Richter and Egis share prices. In relative terms, reflecting the much bigger magnitude of the home regulatory burden on the company, Egis lagged behind its local rival in 3Q11. But as Egis valuation gap was still very appealing in the recovery phase in 4Q, the stock managed to catch up and, for the full year, in EUR terms Egis share price drop (of 22.1% y/y) was even less sizable than that of Richter (28.9% y/y). While the uncertainties and diminishing appeal of the Hungarian equity market prompted many international investors to stay on the sidelines and Richters stock liquidity contracted 40.7% y/y, with a trading volume of EUR 881.8mn, the company nonetheless maintained its top ranking in the CEE pharma universe in 2011. Although 3Q11 business results beat market expectations, more delays in the execution of promised corporate transactions weighed on Bioton and the 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 was this time the best performer among the regional pharmas in 2011. Nonetheless, its already meager stock liquidity fell further (by 64.1% y/y) to EUR 7.4mn. Its local peer Antibiotice saw a less dramatic trading volume fall (of 36.8% y/y). Nevertheless, with a trading volume of just EUR 3.9mn in 2011, the company ranked at the regions bottom. At the same time, its share price slipped 26.6% in EUR terms.
Erste Group Research Sector Report Page 7
The ongoing gathering of treasury shares (as part of the preparations for a foreign 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 EUR 173.1mn, Krka accounted for nearly 50% of LJSE equity turnover in 2011 and overtook Egis second position in the regional CEE pharma stock liquidity ranking.
CEE pharma stocks liquidity in 2011

1,000 900 800 700 600 500 400 300 200 100 0 Richter Krka Egis Bioton 173.1 147.2 49.0 -82.8% 7.4 Biofarm 4.1 Antibiotice -64.1% -40.7% -37.9% 881.8 -4.0% 0% -10% -20% -30% -36.8% -40% -50% -60% -70% -80% -90%
stock turnover (EUR mn)
stock turnover y/y (%)
Source: Erste Group Research, local stock exchanges
Persisting recession worries might help defensive titles, including CEE pharmas, in 2012
Unfortunately, the European crisis continues, with concerns about the public debt situation in the EU region (with apart from Greece, Italy and Spain in focus) undermining investors confidence further. The technical recession in the Eurozone is becoming a reality and the economic growth tempo in 2012 in the CEE region will see a much more tempered pace compared to previous forecasts. As before, with equity markets remaining highly volatile, stock picking keeps its utmost importance. We continue to believe that pharma stocks (in particular, the Hungarian ones and Krka) offer good entry levels. Should the situation on equity markets calm down somewhat in the course of the year, these stocks should start to shine more brightly on investors screens. Going forward, we believe that, should their home political and macroeconomic situation become more transparent and the deal with the IMF/EU reached in a reasonable time, Hungarian pharma stocks will see increased investor interest and finally stock price appreciation, reflecting in part the flip side of their home countrys macroeconomic woes: a more favorable forex situation from the perspective of exporters. Although the 2012 business results will be dampened by their less favorable home market fortunes, with blind bidding auctions tightening the grip, the export markets performance (including crucial Russia/CIS), further underpinned by forint weakness, is set to save the show. On top of that, Richters investment story will get new and hopefully positive triggers from the news flow around the R&D progress (including another possible milestone payment from Forest Laboratories). Although the impact of the unfavorable home market developments is a greater burden for Egis than for its home rival Richter, while its profitability parameters remain some distance from the regions best, Egis wide valuation gap to Richter and its regional peers still justifies its attractiveness. The progress in the preparations of Krkas Warsaw listing will be carefully watched by market participants, with the
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details on the parameters of the issue expected to be announced in May (at the latest), while the listing is envisaged to take place in June 2012. We continue to believe that such a step will be welcomed by international investors and would benefit the stock price, with the stocks possible return to its earlier premium to CEE-based sector peers. Bioton keeps its status as a potential turnaround story. With more of the restructuring gains and proceeds from cooperations (most importantly from the deal with Actavis) set to kick in, Bioton has all prerequisites to start delivering quarterly results that finally please market participants in the coming periods. Nonetheless, as long as clouds around the exact timing and execution of the planned deals remain, investors are likely to stay cautious and the pace of the possible share price appreciation will remain relatively modest, depending on the actual progress in revamping the underlying profitability parameters, after the market already priced in the news about the final Actavis deal signing. While their low stock liquidity remains an Achilles heel for both Romanian pharmas in the international perspective, we prefer Biofarm, as we believe that the company will outshine Antibiotice in terms of business results (with better profitability parameters) as well as stock attractiveness (with a newly defined dividend policy and the possibility of a reinforced strategic takeover status).
CEE pharma shares offer interesting long-term upside potential

Company Antibiotice Biofarm Bioton Egis Krka Richter Gedeon Currency RON RON PLN HUF EUR HUF Current Price (LC) 0.4250 0.1994 0.10 15,350 52.5 37,485 5-year-high (LC) Current price vs 5 y high (%) 1.738 -75.5% 0.621 -67.9% 2.38 -95.8% 24,010 -36.1% 124.4 -57.8% 49,400 -24.1% Target price (LC) 0.446 0.237 0.11 20,455 73.5 47,800 Upside potential (%) 4.9% 18.8% 9.8% 33.3% 40.2% 27.5%
Based on closing prices as of March 6, 2012; Source: Erste Group Research
CEE pharma markets: 2011 sales sluggish, 2012 outlook rather grim as healthcare reforms hurt
The 2011 results of the CEE-based pharmaceutical companies, with the regional pharma markets delivering rather subdued sales growth, confirmed that the respective home markets are far from safe havens for them. Just the opposite, at the moment. Pricing pressures are mounting and the economic slowdown (reducing the purchasing power of patients) is magnifying the impact of the ongoing healthcare reforms. Although regulatory pricing pressures are nothing new for the pharmaceutical business and CEE producers have permanently to cope with them, the current scope of the pressures is increasing and maneuvering space is getting tighter. Nonetheless, for the CEE-based companies to leave their currently troubled homes is not a viable alternative. The adjustment of the product offer to the relevant market (for example, Richter already stopped delivering six products to the Hungarian pharma market), expansion of exports to still quickly developing markets (Russia/CIS), an innovative strategy (with an increase of new products total share in sales, translating into higher margins) and cost savings in both manufacturing and sales and marketing activities represent the main antidotes. Nonetheless, after the 2011 sluggish sales performance, the 2012 guidance provided by Hungarian pharma companies for CEE markets is rather pessimistic. Apart from the gloomy outlook for Hungary, the crucial Polish market is seen as a source of rather disappointing figures in 2012. Fortunately, Russia/CIS is still envisaged to remain a bright spot on the map, with pharmaceutical market growth pace there kept in double-digit terms. In addition, the long-term catch-up potential in drug consumption in
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the coming years in the CEE region remains untouched, as all of the major components 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 adequately diagnosed diseases) are still present, with the currently unfavorable conditions putting just a temporary lid on the long-term trend of progress.
CEE pharmas performance in CEE markets in 2011

Hungary Sales (EURmn) Richter Gedeon Richter Gedeon* Egis Krka 127.2 121.3 125.3 63.7 % of total sales 11.5% 12.3% 27.4% 5.9% Poland Sales (EURmn) y/y (%) 69.7 70.1 59.7 5.9% 5.7% -8.1% % of total sales 6.3% 7.1% 13.1% 10.1% Czech Rep. Sales (EURmn) n.a. 25.5 18.0 64.3 % of total sales n.a. 2.6% 3.9% 6.0% Romania Sales (EURmn) 129.6 31.1 17.2 48.6 % of total sales 11.7% 3.2% 3.8% 4.5%
y/y (%) 3.9% 3.5% 3.2% 12.0%
y/y (%) n.a. 10.4% 4.1% 18.0%
y/y (%) -5.6% 5.4% 9.1% 21.0%
109.0 -16.3%
Source: Erste Group Research, company data, * pharmaceuticals sales only, Krka results are preliminary, Egis data recalculated for calendar year
Hungary: Drug savings package remains reason for concern
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, the payments from pharmaceutical manufacturers and wholesalers to the National Health Insurance Fund (OEP) also surpassed the budgeted sum of HUF 43.5bn by HUF 16.1bn. The Hungarian government plan originally assumed drug reimbursement savings reaching HUF 83bn in 2012 and an additional HUF 37bn in 2013 (i.e. HUF 120bn in total, compared to the 2011 comparative base of HUF 343.5bn). The planned measures included - most importantly - raising the sales tax on reimbursed drug sales from the current 12% to 20% (to be implemented from July 2011) and doubling the medical rep fee (to HUF 10mn per sales rep per year, to be implemented from July 2011), renegotiation of contracts for subsidy volumes, revision of the subsidy on cholesterol-reducing drugs, cutting the reimbursement on combination drugs, a new international reference pricing system (with a 20% ceiling above the average of the three cheapest prices of a given manufacturer applied in any of the EU counties to retain reimbursement status), a preferred reference pricing range of 5% above the reference price for active substance reimbursement groups and 10% in the case of therapeutic reimbursement groups (should the price not be kept within the respective range, a 15% reduction of reimbursement amount will follow), a result-based subsidy system and promoting lowerpriced first generics. In addition, from April 2012, as a pilot project, the INN prescription system is to be introduced for cholesterol-lowering drugs statins as the first therapeutic group. A maximum one-month Rx dose on a single prescription form is another measure set to affect the market dynamics in 2012. With the recession biting into the Hungarian state budget revenues and the Hungarian government committed to carrying out further deficit decreasing initiatives in 2012/13, more measures are anticipated to trim the drug subsidies, on top of the earlier announced amount in the Szell Kalman plan from autumn 2011.
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OEP drug subsidy spending developments

450 400 350 300 250 200 150 100 50 0 2006 2007 2008 2009 2010 2011 budget 2011 actual 2012 budget 21.2 31.4 38.8 388.7 323.6 325.7 343.2 50.9 43.6 43.5 357.2 343.5 376.9 59.6 70 60 52.0 50 277.7 40 30 20 10 0
drug subsidy spending (HUF bn)
manufacturers' payments (HUF bn)
Source: OEP, Erste Group Research
After surprisingly strong 2011, Richter and Egis expect hard landing on top line in 2012, with time-limited R&D relief partly softening impact on EBIT level
With the new harsh measures taking effect from autumn, price erosion has again become a significant factor to watch in Hungary. Bolstered by the new product launches, Richter and Egis saw solid growth in their Hungarian sales in 2011. However, the October-December 2011 period already provided the first signal of deteriorating conditions. With the system of blind bidding auctions taking their toll, Egis reported that it was forced to cut prices of its products in Hungary by 6.9% on average from October 2011, the biggest quarterly decrease since April 2007. With another round of price reductions anticipated to take effect from April 1, 2012, CFO Poroszlai became more pessimistic, lowering his earlier guidance for 2011/12 domestic sales from a drop of 6% to 8% to a fall of 8% to 10%. The traditionally cautious Richter CEO Bogsch said that he expects Richters domestic sales to plummet 15% to 20% in 2012. (All guidance in HUF terms.) Although no company provided guidance beyond 2012, in our opinion, a further contraction of their home sales from the depressed levels is unlikely. In 2013, we envisage the domestic sales of Richter and Egis to remain flat, with a gradual pick-up (low single-digit-term growth of around 2.5% 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 to factor into our Richter and Egis projections, we want to emphasize that there has been at least one positive (albeit temporary) regulatory step taken recently. The new law provides for a 20%-60%-90% extraordinary tax deduction for those pharmaceutical companies whose R&D expenditures reach or exceed 15%-20%-25% of the reimbursement based on the manufacturer price level during 2011. Both Richter and Egis qualify for the maximum allowable R&D-based relief to their OEP payment obligation in 2012. As the sales tempo will be more subdued and reimbursement levels are falling y/y, in Richters case, the law amendment is expected to reduce the net OEP payments in 2012 to HUF 2bn, down from the earlier anticipated HUF 4bn. In Egis case, CFO Poroszlai trimmed his estimate for the OEP payment related burden from some HUF 4-5bn to just around HUF 1bn in 2011/12.
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Egis payments to OEP, 1Q06/07-1Q11/12

1,500 1,000 500 0 -500 -1,000 -1,500 -2,000 -2,500 -3,000
2Q06/07 3Q06/07 1Q07/08 3Q07/08 4Q07/08 1Q08/09 2Q08/09 4Q08/09 2Q09/10 3Q09/10 1Q10/11 3Q10/11 4Q10/11 1Q06/07 4Q06/07 2Q07/08 3Q08/09 1Q09/10 4Q09/10 2Q10/11 1Q11/12
Payments (HUF mn)
Reclaimed money (HUF mn)
Balance (HUF mn)
Source: Egis
While Romanian pharmaceutical market shows solid growth, persisting problems in receivables collection still put it among most problematic hotspots in CEE region
According to Cegedim, in 2011, the Romanian pharmaceutical market grew in value terms by 12.4% y/y to RON 10.82bn; in volume terms, the tempo stood at 6.6% y/y. Sales to hospitals (up 39.9% y/y) were the most dynamic market segment, with the high tempo partly attributable to the regulatory changes, moving certain products in the national health programs from pharmacies to hospitals. OTC product sales outpaced the overall market, advancing 15.2% y/y in 2011. While the data looks satisfactory at first glance, a closer look reveals that pharma market participants still have reasons for worries in doing business in Romania. The main reason for concern is, as before, the chronic delays in payments to the healthcare system from the state budget, with escalating secondary indebtedness affecting all market participants. The legal term for reimbursement by the state remains at an astonishing 300 days, while overdue receivables are on the rise, as evidenced by reports of CEEbased pharma players Richter and Krka (with the latter companys 1-3Q11 write-offs reaching EUR 5.1mn, largely attributable to Romania). A closer look at the 2011 sales of the major CEE players in Romania reveals a very mixed picture, while Richters total consolidated sales in Romania, including wholesale/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 by Richter, the only company providing detailed guidance, envisaging y/y flat pharmaceutical sales in RON terms. After a series of delays, the clawback system (5-11% on sales of reimbursed drugs, depending on turnover) is theoretically in place. Interestingly, referring to the unclear regulatory situation, CEE-based pharma companies treat this obligation differently. Until now, Richter has not recorded any clawback payments or provisions for it, while Egis registered an HUF 203mn clawback related provision in its other expenses in 1Q11/12. (Based on our information, Krka also registered an undisclosed amount of clawback in 2011 - weighing on its sales & marketing expenses.) The new Romanian basic healthcare package has yet to take a concrete shape, as, after the political unrest, the proposal was withdrawn. The Romanian health minister, in order to calm the public, emphasized that the revision, while regulating access to very expensive drugs and reducing the number of days in hospital for minor surgical procedures, should not bring any major hardship for patients. The new basic healthcare package is now
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under preparation by a working group of experts in 1H12 and is envisaged to come into force in late 2012/the beginning of 2013.
Polish reimbursement system overhaul marked by problems in implementation
As the second largest single market after Russia, Poland retains its priority for CEE-based pharma companies. The regulatory developments there are becoming more and more challenging as of lately. With the new Drug Reimbursement Act taking effect on January 1, 2012, patients worried by increasing co-payments opted to buy their medicines in advance, pushing up Polish retail pharmacy sales to record levels in December 2011, +24.2% m/m and +23.6% y/y to PLN 3.09bn. Sales of reimbursed medicines climbed 35% y/y. For the whole year 2011, the Polish pharmacy market expanded just 5% y/y to PLN 28.14bn, according to PharmaExpert. Nonetheless, the outlook is far from rosy for 2012; according to IMS Health, the value of the Polish market for reimbursed medicines is anticipated to decrease 3.5% y/y in 2012, while co-payments are set to rise by PLN 302mn. At the same time, the National Health Fund (NFZ) should save some PLN 738mn, out of which about PLN 454mn will be generated on generics and the rest on innovative products. The new reimbursement list that took effect on January 1, 2012, contains 2,638 items; reimbursement ceilings were raised for 1,305 medicines and lowered for 1,306 products. In particular, it is worth mentioning that the updated list is expected to reshape the market for blood glucose strips, after products accounting for nearly 70% of the Polish market were left out of the reimbursement system. Despite offering significant price reductions, major foreign players (Roche, Abbot Laboratories and J&J) failed to reach agreement with the Health Ministry over price, opening more space for Bayer, along with some until now rather small market players, including Bioton. In addition, Biotons Gensulin maintained its full reimbursement status, while insulin analogs delivered by its Western-based competitors saw the reimbursement level drop (and increasing co-payments by patients). Consequently, it seems that Bioton will benefit from the regulatory changes on the Polish market, while CEE-based pharmas are preparing for a tough year ahead, as indicated by their recent guidance. While Richter projects up to 5% y/y sales growth in PLN terms in Poland for 2012, Egis anticipates its Polish sales falling y/y at a faster pace than the overall guidance for CEE markets (assuming a 5% y/y drop in EUR terms for 2011/12). The recent statistics only confirm that there is no reason for much optimism. According to PharmaExpert, in January 2012, the Polish pharmacy market contracted 16.7% y/y (and 37.6% m/m). The reason for the slump on the Polish pharma market was not only the previous periods pre-stocking among patients, but also some legislative paragraphs in the Reimbursement Act causing unrest in the medical community. The new amendment to the Reimbursement Act was accepted by the Sejm already on January 13, 2012, scrapping strict financial penalties on doctors for incomplete or illwritten prescriptions and granting amnesty to those who issued or accepted such prescriptions since January 1, 2012. Still, the situation is not calm and pharmacists, threatened with pharmacy closures, are asking for a similar legislative change in their favor.
In Czech Republic, new reimbursement rules aim for more savings
According to IMS Health, wholesale drug sales in the Czech Republic rose 3% y/y to CZK 51.4bn; however, in volume terms, they saw a drop of 3.3% y/y to 276mn packages. While the IMS data does not include deliveries made to pharmacies directly by pharmaceutical companies, they indicate that the cost savings measures of the government (in particular, the revision of reimbursed drug prices, a project reviewing 9,729 items since 2008 and
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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 Czech State Institute for Drug Control (SUKL), Czech health insurance companies will be able to save nearly CZK 9bn annually as a result of the reimbursed drug price revision (compared to Rx drugs spending of CZK 35.98bn in 2010). Furthermore, in December 2011, the Czech Republic introduced a new system of formulas, based on which reimbursement levels for human drugs are to be calculated without the necessity to recalculate them every time the maximum allowed margins or VAT rate are amended. The reimbursement levels for a given reference pricing group are set on the basis of the lowest manufacturers price in the EU calculated per the usual daily therapeutic dose. In addition, the reference basket for setting maximum prices has been expanded from 8 to 21 EU countries, excluding the Czech Republic, Estonia, Germany, Cyprus, Luxemburg and Malta. The maximum price for a given product is set as the average of the three lowest prices among the 21 countries in the basket. Furthermore, from July 1, 2012, OTC medicines (those which can be dispensed on prescription) will be excluded from the reimbursement list. It is estimated that this step could affect around 400 drugs, with resulting savings for health insurance companies amounting to CZK 1bn per year. Nonetheless, yearly spending of health insurance companies on prescription drugs will increase by an estimated 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).
Russia/CIS sales prospects healthy, set to bolster top line growth of all major CEE pharma players in 2012
In contrast to the lackluster outlook of CEE home markets, hampered by a new round of restrictive reform measures, Russia/CIS should keep its position as a shiny spot on the map for CEE pharma producers, giving support to both their top line tempo as well as profitability margins. The CEE markets underperformance further magnifies the importance of their Russia/CIS business for their overall results. A brief look at the 2011 sales breakdown by territory demonstrates that the share of Russia/CIS in total sales is well above that of the home country; and with the growth tempo of Russia/CIS outpacing other markets, it is set to expand further. In 2011, the quarterly developments were marked by relatively high volatility and big discrepancies between the results, however. While the tempo was in high double-digit terms for Richter in Russia (and thanks to excellent Russian showing, also for the whole Russia/CIS region), Krka - on the opposite side of the spectrum - saw rather modest sales growth in Russia (just 2% y/y), compensated for by the extraordinarily high pace in Ukraine and other CIS markets, beating its Hungarian peers there by a wide margin.
CEE pharmas performance in Russia/CIS in 2011

Russia Sales (EURmn) Richter Gedeon Richter Gedeon* Egis Krka 321.9 321.9 111.6 195.3 % of total sales 29.1% 32.7% 24.4% 18.2% Ukraine Sales (EURmn) y/y (%) 52.5 50.5 14.7 49.9 6.5% 7.9% 0.9% 29.0% % of total sales 4.8% 5.1% 3.2% 4.6% other CIS Sales (EURmn) 75.4 58.9 25.8 40.0 % of total sales 6.8% 6.0% 5.6% 3.7% Russia / CIS total Sales (EURmn) y/y (%) 449.8 431.3 152.0 285.2 20.2% 18.8% 7.4% 7.7% % of total sales 40.7% 43.8% 33.2% 26.5%
y/y (%) 26.2% 26.2% 10.9% 1.9%
y/y (%) 7.9% -3.9% -2.3% 15.5%
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 Russian pharmaceutical 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
packages. The commercial pharmaceutical market was the most dynamic segment, with sales surging 15.3% y/y to RBL 468.1bn. Detailed information for 2011 shows that the average price of medicines on the commercial market 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 of domestically manufactured drugs, the difference between imported and domestic drug prices remained strikingly high; the domestic medicines average price per package stood at RBL 35.4 (up 20.8% y/y), vs. the imported drugs average of RBL 162.5 (up 11.8% y/y). In 2011, the share of domestic drugs on the total commercial pharmacy market totaled 24% in value terms, but reached 60% in volume terms. As evidenced by the sales figures reported by CEE pharma companies, as well as overall market statistics provided by DSM Group, the measures of the Russian authorities aimed at better price control (particularly of products included on the essential drug list) do not seem to have much harmed pharmaceutical manufacturers, while the state authorities can claim at least partial cost saving success for the new initiative. According to DSM Group, the prices of medicines on the essential product list since the beginning of the year until the end of December 2011 rose just 3.32%.
Russian pharmaceutical market developments in January December 2011

40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 65 2011 sales (RBL mn) 75 70 85 80 90
2010 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 local manufacturers portfolios. Consequently, the Russian government is stepping up its efforts to change the situation, while sticking to its strategy for the Russian pharmaceutical market until 2020, according to which the share of domestically manufactured drugs is projected to expand from the current 23-24% to 50% (in value terms) by 2020. By 2015, some 57 strategically important drugs (including the newest generation of antibiotics, anesthetics, anti-inflammatory medicines and drugs for the treatment of cancer, hepatitis B and C, cardiovascular diseases, multiple sclerosis, etc.) are planned to be manufactured on the Russian territory. Meanwhile, with a clear preference for locally manufactured drugs in the government tenders (with a 15% discount required, should the drug winning the tender be manufactured outside Russia), the foreign pharma manufacturers are expanding their direct presence on the Russian territory. While the competition is heating up and many Western-based companies have recently started to build up their greenfield investments or entered into joint ventures, the CEE companies still enjoy the first mover advantage in this
respect, with Krka and Richter in particular having already established significant local operations. The DSM Groups forecast for 2012 envisages that, in the commercial segment, the tempo of the Russian market will be around 12% y/y, while the government segment is foreseen to expand by some 5% y/y in value terms. According to the PharmaExpert prognosis, in 2012, the commercial segment of the Russian pharmaceutical market is poised to see around a 10% y/y rise, while, together with hospitals and the DLO part, the overall pharmaceutical market pace could reach some 12% y/y. (All data in ruble terms.) Although it is likely that the performance will remain uneven on a quarterly basis, as well as comparing CEE-based producers (in part, also due to differences in the comparative base), we also believe that a double-digit sales tempo in Russia is a realistic target for the CEE-based pharma producers in 2012.
Richter / Egis Russia/CIS sales guidance developments

Richter actual sales performance y/y sales growth 1Q2011 1H 2011 1-3Q2011 Russia/CIS total 12.7% 17.7% -1.0% Russia 18.0% 28.5% 2.2% Ukraine -5.5% 16.6% 7.6% other CIS markets 2.1% -18.0% -15.8% Source: Richter, based on pharmaceutical consolidated sales in EUR terms, except guidance 2011p Feb-11 May-11 Aug-11 Nov-11 18.8% n.a. n.a. n.a. n.a. 26.2% 5.0% 5 to 10% 10 to 15% 10 to 15% 14.5% 10.0% 10.0% 5 to 10% 5 to 10% -3.9% 5 to 10% 5 to 10% 0% -5.0% for Ukraine in USD terms
Egis actual sales performance guidance 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
The latest guidance revisions from the Hungarian companies confirm this view as well. In February 2012, Egis CFO Poroszlai left the 2011/12 sales targets for Russia and Russia/CIS markets unchanged at +10-12% y/y. Although Richters CEO Bogsch remained optimistic regarding the outlook for the overall Russian market, anticipating a 2012 rise of 10% y/y, given the relatively high comparative base (and somewhat higher initial level of inventories, following the exceptionally high 4Q11 sales), he expects Richters Russian sales growth of up to just 5% y/y. Nevertheless, one has to bear in mind that the original target was a mere 5% y/y rise for 2011 as well, with the company posting 26.2% y/y growth. At the same time, with Russia 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 developments should also play in favor of a successful business performance for CEEbased exporters to the Russian pharma market after they have all switched to the ruble as their invoicing currency.
2H2011: CEE currencies on depreciation path - more pressure for Krka
As a consequence of the change of the invoicing currency for Russia, first from the US dollar to the euro and later to the ruble, Egis followed its peers and 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 first glance. Since then, the US dollars importance for the results of CEE-based pharmas 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 markets these days. Moreover, sales of Richter, Egis and Krka in most of the CEE markets are invoiced in local currencies; hence, the regional currencies' development remains critically important for their business results. In line
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with our expectations, major CEE currencies (HUF, PLN and CZK) continued to appreciate vs. the US dollar in 1H11, although the pace of progress vs. the euro was (with the exception of the CZK) somewhat less steep and some of them (like the Romanian RON) even weakened vs. the euro over the first six months of 2011.
2012 should see gradual appreciation of CEE currencies easing pain for Krka
Nonetheless, the second half of 2011, and the fourth quarter in particular, witnessed a steep fall of the regional currencies vs. the euro and US dollar. The reversing forex fortunes, while benefiting the Hungarian pharmas, weighed on Krka, with its mostly euro-incurred costs and relatively high export revenue exposure to the CEE region. The forints volatility on a quarterly basis is very important, also due to the fact that the changes of the quarters final day closing rate play a major role for reassessment of payables and receivables, resulting in both realized and unrealized forex gains/losses. The PregLem acquisition financing exposed Richter to Swiss franc fluctuations, a new factor affecting interim 2011 results. Although the CEE currencies entered 2012 on a weaker basis and in 1Q12 they are expected mostly to stay there, the trend is envisaged to reverse compared to 2011, with appreciation of major currencies (CZK, PLN, HUF and RON) in the cards. Still, with respect to the y/y weaker forint in 2012, both Richter and Egis should see their top lines and profitability get an additional boost, while the y/y relatively less favorable picture (in particular in 1H12) is set to put a lid on Krkas results.
CEE currencies vs. USD, EUR in 2011

2H10 average USD Hungarian forint Czech crown Polish zloty Romanian leu Russian rouble Ukrainian hryvnia 210.9 18.8 3.0 3.2 30.7 7.9 2010 average USD Hungarian forint Czech crown Polish zloty Romanian leu Russian rouble Ukrainian hryvnia 208.2 19.1 3.0 3.2 30.4 7.9 2H11 average USD 209.96 18.0 3.1 3.1 30.1 8.0 2011 average USD 200.94 17.7 3.0 3.0 29.4 8.0 2011 y/y USD 3.6% 8.0% 1.8% 4.2% 3.4% -0.4% 2H11 y/y USD 0.4% 4.2% -3.1% 3.5% 1.8% -0.8% 2H10 average 2H11 average EUR 279.2 24.8 4.0 4.3 40.6 10.5 2010 average EUR 275.4 25.3 4.0 4.2 40.3 10.5 EUR 289.2 24.8 4.3 4.3 41.6 11.0 2011 average EUR 279.2 24.6 4.1 4.2 40.9 11.1 2H11 y/y EUR -3.5% 0.1% -6.9% -0.6% -2.3% -4.9% 2011 y/y EUR -1.4% 2.9% -3.0% -0.7% -1.4% -5.0%
Source: Erste Group Research, national banks' statistics
Government bond yields, equity market risk premiums up, forcing us to adjust our DCF-based valuation models
Since the publication of our last CEE pharma sector report in September 2011, interest rates in major world economies have stayed at their historically low levels (the US Federal Reserve keeps the key interest rate at the unprecedented range of zero to 0.25%). While in the Eurozone, interest rates are anticipated to remain low in the coming quarters (the European Central Banks interest rate is even expected to possibly be cut further to 0.5%), downward corrections of rates in CEE countries are expected to come sooner or later as well. After some major rates saw hikes recently (Hungary), the bias is seen on the easing side now. Nonetheless, the external indebtedness of CEE pharma companies continues to be minimal (with some of them, like Egis, sitting on a heavy cash pile). And as the investment plans of the regional pharma companies do not rely on
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extensive tapping of financial markets, the current credit market conditions have not been of significant importance for their financial results. Thus, the main factors we have to reconsider in our models are the applied equity risk premiums and risk-free rates, as well as changing currency forecasts. Our methodology for setting equity risk premiums (linked to the respective countrys S&P long-term foreign currency rating) that we introduced in our pharma sector report in May 2009 remains unchanged. In summary: 4.5% is used as a base equity risk premium (mirroring the long-term outperformance of stocks vs. bonds), 25bp is added for each rating notch below AAA and 40bp is added for each rating notch below investment grade (i.e. below BBB-). For perpetuity, extra charges are trimmed to 20bp and 35bp, respectively (while still based on the current rating). Since our last report, some CEE countries saw their ratings cut by major rating 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 two Hungarian companies, with the resulting equity risk premium well above other regional peers, particularly that of Krka. The recent financial market turmoil sharply increased the uncertainties and resulted in hikes of government bond yields in some of the CEE home countries of regional pharma producers, prompting us to make adequate adjustments. While we continue to believe that the Hungarian macroeconomic picture will stabilize and Hungarian government bond yields are set to again embark on a descending path in the future (leaving the bias on the positive side for our valuation), in our Richter and Egis DCF models, we opt to maintain our conservative stance and, reflecting the recent developments, we raise the risk-free rate to 8.6%. At the same time, we increase the risk rate for Slovenia to 5.5%. For Romania, we decided to make an downward adjustment from 7.5% to 7.0% and for Poland an downward fine-tuning from 5.9% to 5.8%.
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4Q11 results review

Antibiotice: In 2011, Antibiotices sales growth was solidly in double-digit terms at 15.7% y/y to RON 281.9mn, still slightly lagging behind our more optimistic expectations. The main reason for the sales falling short of our estimate was the less robust performance in the US market, where the company faced some difficulties with deliveries within the contract signed with its US partner. Operating profit rose 5% y/y to RON 32.1mn, translating into 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 fact that a large part of material costs (including products made under manufacturing contracts) is incurred in foreign currencies. On an encouraging note, net profit increased 60.1% y/y to RON 20.1mn, supported by the halving of the financial loss, attributable to the y/y decreasing unrealized forex losses. Helped by significant reversals (RON 12mn), net provisions 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 its peer Antibiotice, Biofarms profitability suffered from a y/y hike in raw material expenses (with their total share as a percentage of sales increasing 2pp to 27%), due to the weakening RON. On top of that, the fierce competition in the companys core OTC market prompted a more than 20% y/y increase of marketing expenses. Furthermore, net profit was negatively affected 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 14.5mn in 2011. Nevertheless, the adjusted net profit was 9.4% higher y/y. Given that the companys main shareholders, the financial investment companies SIFs, are under significant pressure to distribute large dividends to their shareholders (i.e. SIF4 Muntenia already announced a payout ratio of 100%), we believe that these companies will force large payout ratios at the companies within their portfolios. Consequently, we think that Biofarm will adhere to a payout ratio of a minimum 50%, translating into a dividend yield of at least 3.3%. Bioton: Bioton published its 4Q11 results on February 29, 2012. The 4Q10 picture was dominated by huge one-off items (milestone payments from Bayer 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 an operating loss of PLN 18.0mn. With positive one-offs replaced by negative ones (losses linked to the disposal of Israeli plant) in a y/y comparison, the bottom line swung deeply into red territory. The company posted a net loss after minorities of PLN 46.0mn (vs. the year-earlier net profit of PLN 102.1mn; all data consolidated according to IFRS standards). Egis: Egis published its 1Q11/12 report on February 8, 2012, after the market close. As the contribution of new product launches largely counterbalanced the mounting pricing pressures, the domestic sales advanced 0.9% y/y in the October - December 2011 period. With the first three 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 EUR 26.0mn in 1Q11/12. Reflecting the unfavorable developments in the crucial Polish market, along with the negative forex impact, sales to Eastern Europe contracted 20.5% y/y to EUR 26.0mn in 1Q11/12. As expected,
hampered by a high comparative base and y/y decreasing orders from Servier, 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 retreated 4.8% y/y to HUF 30,392mn. The improving sales mix (namely the shrinking proportion of low-margin bulk sales) along with the more favorable forex situation pushed up the companys gross margin to 59.1% in 1Q11/12. The lower level of registration costs helped savings in the related R&D expenses, while the y/y decreasing provisions were behind the drop of expenses in the area of administrative and general costs. Furthermore, the company took advantage of the newly passed legislation allowing for partial R&D-based relief to the OEP payments. Consequently, operating profit grew a hefty 15.3% y/y to HUF 5,522mn in 1Q11/12. Bolstered by the favorable currency fortunes, the 1Q11/12 financial result improved y/y to HUF 1,215mn. Although part of these gains was wiped out by the accounting for losses at the associated company Hungaropharma, 1Q11/12 net profit rose by a sound 14.1% y/y to HUF 5,333mn (all figures consolidated and according to IFRS).
Krka: Publishing its unaudited 2011 results only on March 1, 2012, Krka wrapped 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/y pickup in Western European markets, complemented by the strong performance in Russia/CIS, offset the subdued CEE sales. Reflecting the region-wide mounting pricing pressures along with less favorable currency developments, Krkas gross margin deteriorated y/y to 61.3% in 2011. Furthermore, although the company managed to trim its administrative costs 2.5% y/y and its R&D expense rise also lagged behind the sales tempo, the accelerating sales and marketing costs dampened Krkas operating profit progress to 1.2% y/y (to EUR 214.0mn) in 2011. Although the financial result recorded a significant improvement in 4Q11, due to the previous quarters weak showing (hampered by receivables provisioning and write-offs, as well as the far less favorable forex result y/y), it ended far more deeply in red territory than in 2010. Consequently, while the effective tax rate decreased y/y, 2011 net profit ended 4.8% below the 2010 bottom line, 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 weakening forint bolstered gross profitability. Despite the hampering effect of PregLem/Esmya related one-offs, both the operating and bottom lines improved considerably y/y. With the year-earlier period boosted by license payments linked to the Watson US marketing agreement on Esmya (USD 17mn), as well as some accounting changes, the comparative 4Q operating level was relatively tough to surpass this time. Sales and marketing costs continued to climb (up 32.5% y/y), reflecting the expenses for the buildup of the Western European marketing network. Other operating expenses were hampered by the accounting for the time value of the deferred purchase price due to the previous owners of PregLem (linked to the upcoming Esmya registration). Nonetheless, reflecting the bold move on the gross profit line (up 58.8% y/y), operating profit surged 54.3% y/y to HUF 13,719mn in 4Q11. While the forint weakening at the end of the quarter positively affected the revaluation of receivables/payables, the financial result 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

Antibiotice RAS Total sales (RON mn) Operating profit (RON mn) Net income (RON mn) Operating margin Net margin Biofarm RAS Total sales (RON mn) Operating profit (RON mn) Net income (RON mn) Operating margin Net margin Bioton IFRS consolidated Total sales (PLN 000) Operating profit (PLN 000) Net income (PLN 000) Operating margin Net margin Egis IFRS consolidated Net sales (HUF mn) Operating profit (HUF mn) Net income (HUF mn) Operating margin Net margin Krka IFRS consolidated Total sales (EU R 000) Operating profit (EUR 000) Net income (EUR 000) Operating margin Net margin Richter IFRS consolidated Total sales (HUF mn) Operating profit (HUF mn) Net income (HUF mn) Operating margin Net margin Source: Erste Group Research 4Q2011p 80.61 -0.07 -4.78 -0.1% -5.9% 4Q2011p 26.23 1.63 0.76 6.2% 2.9% 4Q2011p 72,931 -17,979 -46,003 -24.7% -63.1% 1Q11/12 30,392 5,522 5,333 18.2% 17.5% 4Q2011p 307,477 45,030 47,351 14.6% 15.4% 4Q2011p 91,062 13,719 8,881 15.1% 9.8% 4Q2010 66.30 -3.44 -8.57 -5.2% -12.9% 4Q2010 22.53 1.94 1.79 8.6% 7.9% 4Q2010 190,811 108,459 102,082 56.8% 53.5% 1Q10/11 31,915 4,789 4,676 15.0% 14.7% 4Q2010 283,394 56,842 50,102 20.1% 17.7% 4Q2010 59,632 8,893 7,036 14.9% 11.8% y/y 21.6% -98.0% -44.3% 2011p 281.86 32.08 20.07 11.4% 7.1% 2011p 93.44 16.10 14.52 17.2% 15.5% 2011p 289,340 -52,119 -69,231 -18.0% -23.9% 2010 243.63 30.56 12.54 12.5% 5.1% 2010 82.29 16.93 14.41 20.6% 17.5% 2010 378,097 90,064 117,180 23.8% 31.0% y/y 15.7% 5.0% 60.1%
y/y 16.4% -16.1% -57.8%
y/y 13.5% -4.9% 0.7%
y/y -61.8% n.m. n.m.
y/y -23.5% n.m. n.m.
y/y -4.8% 15.3% 14.1%
y/y 8.5% -20.8% -5.5%
2011p 1,075,627 214,006 162,801 19.9% 15.1% 2011p 309,339 62,623 49,196 20.2% 15.9%
2010 1,010,021 211,471 171,025 20.9% 16.9% 2010 275,312 62,653 64,479 22.8% 23.4%
y/y 6.5% 1.2% -4.8%
y/y 52.7% 54.3% 26.2%
y/y 12.4% 0.0% -23.7%
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2012 CEE Pharma guidance at a glance

Sales growth EBIT growth Company Sales (y/y) EBIT (y/y %) Antibiotice RON 309mn 9.7% RON 39mn 21.6% Biofarm n.a. n.a. n.a. n.a. Bioton 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. Krka EUR 1,134mn 5.4% n.a. n.a. Richter Gedeon EUR 1,105mn 0% in EUR terms EBIT margin of 15 to 16% n.a. Source: Company data, target sales figures of Richter and Egis recalculated based on guidance for y/y grow th Net profit RON 25mn n.a. n.a. n.a. EUR 170mn n.a. Net profit growth (y/y %) 24.0% n.a. n.a. n.a. 4.4% n.a.
2012 CEE Pharma Erste Group Research forecasts at a glance

Company Antibiotice Net profit y/y % Comment 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 strongest 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 filing 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 Sales RON 315.6mn y/y % 12.0% EBIT RON 36.3mn y/y % 13.2%
2012 CEE Pharma reporting calendar

Date 29 .3.20 12 27 .4.20 12 30 .4.20 12 9.5 .201 2 14 .5.20 12 15 .5.20 12 15 .5.20 12 16 .5.20 12 1. or 2. we ek of May 5.7 .201 2 26 .7.20 12 6.8 .201 2 1. or 2. we ek of Aug us t 14 .8.20 12 14 .8.20 12 31 .8.20 12 14 .11.2 012 14 .11.2 012 14 .11.2 012 15 .11.2 012 15 .11.2 012 1. or 2. we ek of Nov emb er Co m pany K rk a B iot on A ntibio tice K rk a B iof arm A ntibio tice B iot on E gis Rich ter G ede on K rk a K rk a E gis Rich ter G ede on A ntibio tice B iof arm B iot on E gis B iof arm B iot on A ntibio tice K rk a Rich ter G ede on Rel ease / ev en t 20 11 an nual repo rt 20 11 an nual repo rt 20 11 an nual repo rt 1Q 20 12 results 1Q 20 12 results 1Q 20 12 results 1Q 20 12 results 2Q 20 11/1 2 result s 2Q 20 12 results A GM 1H2 012 re su lts 3Q 20 11/1 2 result s 1H2 012 re su lts 1H2 012 re su lts 1H2 012 re su lts 1H2 012 re su lts 4Q 20 11/1 2 result s 1-3Q 20 12 res ults 3Q 20 12 results 1-3Q 20 12 res ults 1-3Q 20 12 res ults 3Q 20 12 results
S ource: E rst e G ro up R esearc h, comp any da ta
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Erste Group Research Erste Sector Healthcare 08 March 2012 Erste Group Research Company Report Antibiotice | Pharmaceuticals | Romania 08 March 2012
Antibiotice
from Accumulate to Hold
All pric es are thos e c urrent at the end of the previ ous tr adi ng session unl ess other wise indicated and ar e s ourc ed fr om loc al exc hanges vi a Reuters, Bl oomberg and other vendors .
TEST
Erste Gr oup R es earc h C ompany R eport Antibiotice | Phar maceutic als | Romania 07 Marc h 2012
RON mn 2 010 20 11 243.6 281.9 Net sales E BITDA 43.7 48.8 E BIT 30.6 32.1 Net result after min. 12.5 20.1 E PS (RON) 0.03 0.04 CEPS (RON) 0.05 0.07 B VPS (RON) 0.55 0.50 Div./share (RON) 0.02 0.02 E V/EBITDA (x) 7.2 6.1 P /E (x) 19.9 11.0 P /CE (x) 9.7 5.9 Divi dend Yield 3.6% 4.5% S hare price (RON) close as of 06/03/2012 Number of shares (mn) Market capitalization (RON mn / EUR mn) E nterprise value (RON mn / EUR mn)
2012 e 315.6 54.6 36.3 24.0 0.0 4 0.0 5 0.5 5 0.0 2 6.0 10.1 8.4 4.0%
2013e 345.3 57.9 37.8 27.1 0.05 0.08 0.59 0.02 5.4 8.9 5.1 4.5% 0.4250 454.9 193 / 44 328 / 75
0.52 0.50 0.48 0.46 0.44 0.42 0.40 0.38 0.36 0.34
52 weeks
Antibiotice
BET
Performance in RON
Reuters Bloomberg Div. Ex-da te Target price
12M -11.6%
6M 2.7%
3M 7.9%
1M 3.0%
ATBE.BX Free float 37.0% ATB RO Shareholders Ministry of Health (53.0%) 12/05/11 SIF Oltenia (10%) 0.4460 Homepage: www.antibiotice.ro
Under too much stress

Analyst: Raluca Ungureanu
+4021 311 27 54 raluca.ungureanu@bcr.ro
We have downgraded the stock from Accumulate to Hold and cut our target price to RON 0.446 (from RON 0.475). We have three main reasons for this greater prudence: i) the increasing weight in sales of drugs made under manufacturing contracts, which provide lower margins; ii) difficulties regarding exports to the US market and new rules on the Russian market affecting expansion plans; and iii) the liquidity shortage still affecting the Romanian healthcare sector. We see the operating profitability advancing in the coming years in absolute terms. However, the EBIT margin should come in below 12% over the detailed forecast period, mainly as a result of the increasing weight in the portfolio of drugs made under manufacturing contract (with lower margins compared with own-made drugs) and the elevated marketing expenses. Short term financing is under pressure due to large working capital needs, as payment conditions (a more than 300-day receivables collection period) have not improved over the last year. We see positive development here as unlikely over the coming couple of years, at least. The long receivables 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-owned company, 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 the cash constraints, we believe that the company and the Ministry of Healthcare will agree that the FY11 dividend should be reinvested.
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Erste Group Research Erste Sector Healthcare 08 March 2012 Erste Group Research Company Report Antibiotice | Pharmaceuticals | Romania 08 March 2012 FY11 results at a glance Good FY11 figures, but future results are expected well below potential
Antibiotice managed to end 2011 with 16% higher net sales, to RON 281.8mn, and a 12% y/y advance in EBITDA to RON 48.7mn. Net profit jumped 61% y/y to RON 20mn, supported by a substantial reduction of the financial loss. However, the results fell short of our estimates. Net sales came in 2% below our forecast, mainly due to lower than planned deliveries of 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 USD 15mn pa. Due to some technical issues with a supplier, less than half of the planned sales were recorded last year, with management taking steps to overcome these hindrances. Moreover, the increasing weight of drugs produced under manufacturing contract with foreign partners, providing lower margins than own-made drugs, as well as the higher than envisaged marketing expenses caused a decline in the EBIT margin of more than 1pp.
RAS (RON mn) 2011 2010 Net sales 281.86 243.63 EBITDA 48.75 43.74 EBIT 32.08 30.56 Financial result -5.67 -12.09 Net profit 20.07 12.54 Operating margin 11.4% 12.5% Net margin 7.1% 5.1% Source: Antibiotice, Erste Group Research y/y 15.7% 11.5% 5.0% n.m. 60.1% 4Q11 80.61 36.27 -0.07 -2.76 -4.78 4Q10 66.30 37.33 -3.44 -3.97 -8.57 y/y 21.6% -2.8% n.m. n.m. n.m.
Export contract in US market still far from maturing
Business outlook Operating margin pressured by increasing weight in portfolio of drugs made under manufacturing contract, exports below potential and high exposure to Rx segment
For 2012 and 2013, we expect drugs made under manufacturing contracts to gain a further share in Antibiotices portfolio, which leaves rather limited room for the company to improve its operating margin. Although the company took steps to assimilate into its own production part of these products, we expect concrete effects to be seen in three years, at the earliest, bearing in mind that authorizing new drugs is a long-lasting process. We are confident that the company will manage to solve the problem affecting the deliveries of finished products on the US market by the end of this year. Consequently, we have assumed for FY12 that 50% of the contract value will be recorded, while in 2013, sales will reach the planned USD 15mn level. On the Russian market, new rules requiring that all finished products be wrapped in this country made us less optimistic regarding the business potential in this high-demand market. Given the latest developments, we expect exports weight in sales to stay at the current 20% level at least in 2012 and 2013. We see sales in the domestic market advancing on average by 9% pa, triggered by the portfolio enlargement with drugs addressing therapeutic areas in high demand.
Page 24
RAS (RON, mn) Sales EBITDA EBIT Now 315.6 54.6 36.3 2012e Before 310.5 60.1 41.8 29.4 Change 2% -9% -13% -18% Now 345.3 57.9 37.8 27.1 2013e Before 336.9 63.1 43.0 30.7 Change 3% -8% -12% -12%
Net profit 24.0 Source: Erste Group Res earch
Long receivables collection period puts pressure on ST indebtedness and quality of receivables portfolio
As mentioned above, the advancing weight in the portfolio of drugs made under manufacturing contract and the high marketing budgets will cap the companys ability to increase the operating margin. Our forecast scenario points to an EBIT margin over the detailed forecast period in the range 1112%, which is comparable with the last three years levels, but well below the 15-18% margins recorded prior to 2008. Receivables are still collected in more than 300 days in the Rx drugs segment, putting further pressure on ST indebedness. We do not see significant improvement on this side over the coming 1-2 years. The long receivables collection period in the Romanian pharmaceutical market induced a risk of not recovering money from distribution companies. Such was the case in the last couple of years, when write offs incurred amounted to RON 18.6mn and RON 9.4mn, respectively.
No chances for cash dividends Still far from status of dividend player, due to weak liquidity position and future CAPEX needs
Although Antibiotice is a state-owned company and consequently should adhere 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 will see any dividends. Our view is that last years scenario of reinvesting dividends will be repeated because the company has not seen an improvement in its liquidity position.
Page 25
WACC calculation
2012e Risk free rate Equity risk premium Beta Cost of equity Cost of debt Effective tax rate After-tax cost of debt Equity weight WACC 7.0% 7.2% 1.1 14.9% 10.5% 18.0% 8.6% 80% 13.6% 2013e 7.0% 7.2% 1.1 14.9% 10.5% 18.0% 8.6% 80% 13.6% 2014e 7.0% 7.2% 1.1 14.9% 10.5% 18.0% 8.6% 80% 13.6% 2015e 7.0% 7.2% 1.1 14.9% 10.5% 18.0% 8.6% 80% 13.6% 2016e 7.0% 7.2% 1.1 14.9% 10.5% 18.0% 8.6% 80% 13.6% 2017e (TV) 5.0% 6.7% 1.0 11.7% 8.5% 17.0% 7.1% 80% 10.7%
DCF valuation
(RON mn) Sales growth EBIT EBIT margin Tax rate Taxes on EBIT NOPLAT + Depreciation Capital expenditures / Depreciation +/- Change in working capital Chg. working capital / chg. Sales - Capital expenditures Free cash flow to the firm Terminal value growth Terminal value Discounted free cash flow - Dec 31 2011 Enterprise value - Dec 31 2011 Minorities Non-operating assets Net debt Other adjustments Equity value - Dec 31 2011 Number of shares outstanding (mn) Cost of equity 12M target price per share (RON) Current share price (RON) Up/Downside 2012e 12.0% 36.3 11.4% 18.0% -6.5 29.8 18.3 101.1% -22.4 -65.1% -18.5 7.2 2013e 9.4% 37.8 10.9% 18.0% -6.8 31.0 20.1 89.6% -14.7 -49.3% -18.0 18.4 2014e 7.0% 41.6 11.2% 18.0% -7.5 34.1 21.8 103.0% -11.8 -49.2% -22.5 21.7 2015e 7.0% 45.1 11.3% 18.0% -8.1 37.0 23.8 107.1% -12.4 -48.0% -25.5 22.9 2016e 7.1% 50.0 11.8% 18.0% -9.0 41.0 26.0 102.1% -9.2 -32.6% -26.5 31.3 2017e (TV) 4.5% 55.6 12.5% 17.0% -9.5 46.1 24.0 100.0% -8.6 -45.0% -24.0 37.5 2.0% 438.3 227.0
6.3 292.6 0.0 0.0 77.1 0.0 215.5 568.0 14.9% 0.446 0.425 4.9%
14.2
14.8
13.7
16.5
Enterprise value breakdown

PV of detailed period 22%
Sensitivity (per share)

Terminal value EBIT m argin 0 9.7% 10.2% 10.7% 11.2% 11.7% 0 9.7% 10.2% 10.7% 11.2% 11.7% 11.5% 0.455 0.426 0.400 0.377 0.356 1.0% 0.446 0.421 0.398 0.377 0.358 12.0% 0.481 0.450 0.423 0.399 0.377 13% 0.507 0.475 0.446 0.421 0.398 13.0% 0.533 0.499 0.469 0.442 0.418 2.5% 0.543 0.507 0.475 0.446 0.421 13.5% 0.559 0.524 0.492 0.464 0.439 3.0% 0.586 0.543 0.507 0.475 0.446
Source: Erste Group Research
WACC
PV of terminal value 78%
WACC
Terminal value growth 1.5% 2.0% 0.475 0.507 0.446 0.475 0.421 0.446 0.398 0.421 0.377 0.398
Page 26
Income Statement
(RAS, RON mn, 31/12)
2008
31/12/2008
2009
31/12/2009
2010
31/12/2010
2011
31/12/2011
2012e
31/12/2012
2013e
31/12/2013
Net sales Invent. changes + capitali zed costs Total revenues O ther operating revenues Material costs P ersonnel costs O ther operating expenses E BITDA Depreciation/amortization E BIT Financial result E xtrao rdinary result E BT Income taxes Result from discontinued operations Minorities and cost of hybrid capital Net result after minorities
215.81 9.32 225.13 1.72 -69.12 -64.06 -54.86 38.80 -13.46 25.35 -11.97 0.00 13.38 -2.81 0.00 0.00 10.57
219.75 -2.22 217.53 1.21 -61.24 -63.42 -54.30 39.78 -13.61 26.17 -10.53 0.00 15.65 -3.73 0.00 0.00 11.92
243.63 2.58 246.21 2.32 -76.02 -65.44 -63.33 43.74 -13.18 30.56 -12.09 0.00 18.47 -5.93 0.00 0.00 12.54
281.86 1.45 283.31 1.17 -95.22 -68.43 -72.08 48.75 -16.67 32.08 -5.67 0.00 26.41 -6.34 0.00 0.00 20.07
315.57 2.14 317.71 1.31 -111.92 -71.00 -81.50 54.61 -18.30 36.31 -7.04 0.00 29.27 -5.27 0.00 0.00 24.00
345.3 3 2.2 0 347.5 3 1.4 3 -122.4 7 -72.1 0 -96.5 1 57.8 8 -20.1 0 37.7 8 -4.7 2 0.0 0 33.0 6 -5.9 5 0.0 0 0.0 0 27.1 1
Balance Sheet
2008
1.72 163.56 0.08 165.35 35.95 124.45 0.31 42.12 202.83 368.19 246.90 0.00 0.00 0.00 1.00 0.87 0.58 1.45 70.53 48.30 118.83 368.19
2009
1.81 156.83 0.08 158.72 34.15 179.77 0.48 3.58 217.98 376.70 242.02 0.00 0.00 0.00 14.01 0.00 0.03 0.03 74.75 45.89 120.63 376.70
2010
1.99 166.41 0.08 168.48 40.41 179.81 0.33 3.72 224.27 392.75 262.61 0.00 0.00 0.00 13.90 0.00 0.00 0.00 69.30 46.93 116.23 392.75
2011
1.65 173.69 0.02 175.36 41.93 224.84 0.30 5.34 272.41 447.77 286.83 0.00 0.00 0.00 14.59 0.00 0.00 0.00 82.42 63.93 146.35 447.77
2012e
3.19 168.58 0.08 171.86 47.55 231.71 0.35 -14.38 265.23 437.09 310.83 0.00 0.00 0.00 1.00 0.00 0.10 0.10 72.42 52.74 125.16 437.09
2013e
3.6 9 165.9 9 0.0 8 169.7 6 49.2 0 250.7 2 0.3 7 -10.8 7 289.4 1 459.1 7 337.9 4 0.0 0 0.0 0 0.0 0 1.0 0 0.0 0 0.1 0 0.1 0 62.4 2 57.7 1 120.1 3 459.1 7
Intangible assets Tangible assets Financial assets Total fixed assets Inventories Receivables an d other current assets O ther assets Cash and ca sh equivalents Total current ass ets TOTAL ASSETS S hareholders'equity Minorities Hybrid capital and other reserves P ension and other LT personnel accruals LT provisions Interest-bearing LT debts O ther LT liabilities Total long-term liabilities Interest-bearing ST debts O ther ST liabilities Total short-term liabilities TOTAL LIAB. , EQUITY
Cash Flow Statement

(RAS,RON mn, 31/12)
2008
16.30 -6.68 -4.18 5.43
2009
-26.82 -10.66 -1.07 -38.54
2010
24.95 -2.03 -22.77 0.14
2011
17.64 -17.04 1.01 1.61
2012e
25.66 -18.49 -26.89 -19.72
2013e
37.6 1 -18.0 3 -16.0 6 3.5 2
Cash flow from operating activities Cash flow from investi ng activities Cash flow from financing activities CHANGE IN CASH , CASH EQ U.
Margins & Ratios

S ales growth E BITDA margin E BIT margin Net profit margin ROE ROCE E quity ratio Net debt Working capital Capital employed Inventory turnover
2008
-5.9% 17.2% 11.3% 4.7% 4.3% 4.9% 67.1% 29.3 83.7 277.8 2.2
2009
1.8% 18.3% 12.0% 5.5% 4.9% 4.7% 64.2% 71.2 96.9 327.2 1.6
2010
10.9% 17.8% 12.4% 5.1% 5.0% 4.4% 66.9% 65.6 107.7 342.1 1.8
2011
15.7% 17.2% 11.3% 7.1% 7.3% 6.1% 64.1% 77 .1 125 .8 378 .5 2 .1
2012e
12.0% 17.2% 11.4% 7.6% 8.0% 7.4% 71.1% 86.8 139.7 398.7 2.3
2013e
9.4% 16.7% 10.9% 7.8% 8.4% 7.7% 73.6% 73.3 168.9 412.3 2.3
Source: Company data, Erste Group estimates Erste Group Research Sector Report Page 27
Erste Group Research Erste Sector Healthcare 08 March 2012 Erste Group Research Company Report Biofarm | Pharmaceuticals | Romania 08 March 2012
Biofarm
from Hold to Accumulate
TEST
Erste Gr oup R es earc h C ompany R eport Biofar m | Phar maceutic als | R omania 07 Marc h 2012
RON mn 2 010 20 11 Net sales 82.3 93.4 E BITDA 21.6 21.0 E BIT 16.9 16.1 Net result after min. 13.6 15.5 E PS (RON) 0.01 0.01 CEPS (RON) 0.02 0.02 B VPS (RON) 0.13 0.14 Div./share (RON) 0.01 0.01 E V/EBITDA (x) 7.3 6.5 P /E (x) 16.5 13.7 P /CE (x) 13.4 10.1 Divi dend Yield 2.7% 3.1% S hare price (RON) close as of 06/03/2012 Number of shares (mn) Market capitalization (RON mn / EUR mn) E nterprise value (RON mn / EUR mn)
2012 e 102.3 25.6 20.2 18.7 0.0 2 0.0 2 0.1 4 0.0 1 6.9 11.7 9.8 3.9%
2013e 110.9 28.5 22.3 19.4 0.02 0.02 0.15 0.01 6.1 11.3 8.5 4.0% 0.1994 1,094.9 218 / 50 176 / 40
0.23 0.22 0.21 0.20 0.19 0.18 0.17 0.16 0.15
52 weeks
Biofarm
BET
P erformance in RON
12M -9.3%
BIOF.BX Free float BIO RO Shareholders 0.2370 Homepage:
6M 3.9%
3M 5.1%
1M -0.3%
57.0% SIF Olten ia (17.0%) SIF Banat Crisana (14%)

www.biofarm.ro
Time to pay dividends

Analyst: Raluca Ungureanu
+4021 311 27 54 raluca.ungureanu@bcr.ro
We have raised our target price to RON 0.237 (from RON 0.217), mainly due to a stronger than anticipated cash position, which pushed up the equity value. Otherwise, the change in estimates compared with our previous report is rather minor. Consequently, we have upgraded the recommendation from Hold to Accumulate, also considering the companys impressive cash generation capability, despite the liquidity shortage in the domestic pharma industry.
We see the company enjoying stable profitability in the medium term, with an EBIT margin of 20%, mainly supported by the possibility of increasing product prices without risking a loss of market share to multinationals with more expensive drugs in their portfolios. We believe that the company will continue to sustainably grow its market share, with a sales rise of a minimum of 7% per year in the medium term. The operating margin should recover starting with 2012, on the back of a slower advance of marketing expenses and the positive effect of the RON appreciation against the EUR.
We are confident that the company will distribute at least 50% of last years net profit, meaning a dividend yield of a minimum of 3.3%. Two main reasons underlie our view: i) the main shareholders, three financial investment companies (SIFs), are under serious pressure to distribute substantial dividends for FY11 and we believe that they will subsequently force significant dividend distributions from the companies they control; ii) Biofarm has a sound cash position, allowing a large dividend distribution without hindering working capital management.
Erste Group Research Erste Sector Healthcare 08 March 2012 Erste Group Research Company Report Biofarm | Pharmaceuticals | Romania 08 March 2012 FY11 results at a glance Highly competitive OTC segment requires high marketing expenses, pressuring margins
In 2011, for the second year in a row, Biofarm posted a double-digit sales rise of 14%. However, this was a slower pace compared to the 20% advance seen in 2010. As anticipated, the operating margin declined, given the mandatory higher marketing expenses needed for the firm to keep its share in a highly competitive market. The companys core segment, OTC drug production, became a real battle field mainly in the last year, given the possibility of collecting receivables faster than in the Rx segment, where payments are made in more than 300 days.
RONmn 2011 2010 Sales 93.44 82.29 EBITDA 21.04 21.63 EBIT 16.10 16.93 Financial result 1.09 0.91 Net profit 14.52 14.41 Adjusted net profit 16.15 14.76 Source: Erste Group Res earch, Biofarm y/y 13.5% -2.7% -4.9% 20.1% 0.7% 9.4% 4Q11 26.23 2.89 1.63 -0.92 0.76 2.39 4Q10 22.53 3.14 1.94 0.10 1.79 2.13 y/y 16.4% -7.9% -16.1% n.a. -57.8% 11.8%
13.5% higher sales y/y in FY11, but EBIT margin contracted 3pp
However, with an EBIT margin of 17.3% and an EBITDA margin of 22.5%, Biofarm continues to be among the most profitable companies in our selected peer group.
Business outlook
For 2012, we expect sales to further increase, albeit at a declining rate of some 9.5%, and exceed the RON 100mn threshold. Although the company, unlike its competitors, did not increase its selling prices over the last few years, leading to a large growth reserve for the company, we assume that prices will be kept at the current levels in 2012, while the company will manage to further increase the volumes sold. Starting from 2013, we expect management to start increasing prices, albeit at a pace bearable by its target clientele. This means that Biofarms products will remain among the most affordable for the population. In order to be conservative, we have assumed that the annual sales growth rate will converge with the market growth pace, which we forecast at some 7% p.a.
Change in estimates EBIT margin should recover sustainably up to 20%, starting with 2012
RAS (RON, mn) Net s ales EBITDA EBIT Now 102.3 25.6 20.2 2012e Before 101.8 26.2 20.3 18.7 Change 0.5% -2.1% -0.4% 0.0% Now 110.9 28.5 22.3 19.4 2013e Before 110.4 28.3 21.6 20.2 Change 0.5% 0.7% 3.2% -4.2%
Net profit adj. 18.7 Source: Erste Group Research
Strong cash generation and balance sheet, despite long receivable collection period in sector
We expect the operating margin to increase this year by 2.5pp to 19.75%, with two factors indicating such a development: i) the LC strengthening y/y, with a large part of the raw materials imported; and ii) marketing and advertising expenses advancing at a slower rate than sales, in contrast with the development over the last couple of years. The aforementioned factors, together with an increase in selling prices, bode well for a rise of the companys EBIT margin to about 20%, with stabilization at this level. In terms of R&D, as in past years, managements target is to launch around 10 new products p.a., of which half are new active substances assimilated
Page 29
into production, while the balance is represented by improved existing formulas. Its innovative capabilities will help to conserve its high operating margins.
At least 50% payout ratio starting with FY11

A few developments over the last few weeks prompted us to assume a payout ratio for FY11 of at least 50%, meaning a dividend yield of a minimum of 3.3%. Thus, the companys main shareholders, three financial investment companies (SIFs), are under serious pressure to distribute high dividends to their shareholders. In this context, we expect the SIFs to force as high as possible dividend distributions from the companies under their control. Our view is that Biofarm will become a dividend payer and will distribute to shareholders at least half of the annual profit. This will erode over time the cash reserves of the company, with the intent to acquire a drugs producer or distribution company. As of the end of 2011, the companys cash and equivalents amounted to RON 74.2mn (EUR 17.5mn), with a 40% weight in total assets, surprisingly high considering the liquidity issues affecting the entire pharma market. The share portfolio of Biofarm, currently worth EUR 3.2mn, is a source from which to cover its future cash outflows from dividend distributions in the medium term. It is expected that the company will liquidate this portfolio in a few years. The cash will be tempting for the SIFs, especially given that the company does not need large CAPEX. For 2012, the company plans investments worth EUR 2.5mn, of which EUR 0.4mn will be invested in the modernization of a downtown building, with the aim to let it.
Comfortable cash position and reduced CAPEX needs should result in stable dividend payout
Strong reasons to monitor company Strong reasons to keep stock on short recommendation list
To summarize, we have a positive stance on this company, given: i) the conditions for it to become a dividend player; ii) its good working capital management and no indebtedness in a very challenging environment; iii) the room for a reasonable increase of sales, while operating with high margins, based on its valuable portfolio of value-for-money drugs; iv) the expected cash inflows from letting the building owned in downtown Bucharest; v) its status as an acquisition target for a strategic player.
Page 30
WACC calculation
DCF valuation
(RON mn) Sales growth EBIT EBIT margin Tax rate Taxes on EBIT NOPLAT + Depreciation Capital expenditures / Depreciation +/- Change in working capital Chg. working capital / chg. Sales - Capital expenditures Free cash flow to the firm Terminal value growth Terminal value Discounted free cash flow - Dec 31 2011 Enterprise value - Dec 31 2011 Minorities Non-operating assets Net debt Other adjustments Equity value - Dec 31 2011 Number of shares outstanding (mn) Cost of equity 12M target price per share (RON) Current share price (RON) Up/Downside 2012e 9.5% 20.2 19.8% 20.0% -4.0 16.2 5.4 176.1% -5.5 -61.8% -9.6 6.5 2013e 8.4% 22.3 20.1% 20.0% -4.5 17.8 6.2 187.8% -2.3 -26.6% -11.7 10.1 2014e 8.3% 24.3 20.2% 20.0% -4.9 19.4 6.7 156.7% -3.0 -32.9% -10.6 12.6 2015e 7.3% 27.2 19.7% 20.0% -5.4 21.8 7.3 122.1% -3.3 -37.8% -9.5 17.0 2016e 7.1% 27.2 19.7% 20.0% -5.4 21.8 7.8 122.1% -3.1 -33.3% -9.5 17.0 2017e (TV) 5.0% 27.6 19.0% 19.0% -5.2 22.3 8.5 100.0% -1.7 -25.0% -8.5 20.6 2.0% 219.2 110.9
5.7 151.6 0.0 0.0 -74.2 0.0 225.8 1,094.9 14.9% 0.237 0.199 18.8%
7.7
8.5
10.0
8.8


Terminal value EBIT m argin 0 10.6% 11.1% 11.6% 12.1% 12.6% 0 10.6% 11.1% 11.6% 12.1% 12.6% 18.0% 0.243 0.236 0.230 0.225 0.220 1.0% 0.237 0.231 0.226 0.221 0.217 18.5% 19% 19.5% 0.254 0.247 0.240 0.234 0.229 2.5% 0.258 0.250 0.243 0.237 0.231 20.0% 0.258 0.250 0.244 0.237 0.232 3.0% 0.267 0.258 0.250 0.243 0.237 0.247 0.250 0.240 0.243 0.237 0.234 0.228 0.231 0.223 0.226 Term inal value Hrowth 1.5% 2.0% 0.243 0.250 0.237 0.243 0.231 0.237 0.226 0.231 0.221 0.226
WACC
WACC
Page 31
Income Statement
2008
31/12/2008
2009
31/12/2009
2010
31/12/2010
2011
31/12/2011
2012e
31/12/2012
2013e
31/12/2013
Net sales Invent. changes + capitali zed costs Total revenues O ther operating revenues Material costs P ersonnel costs O ther operating expenses E BITDA Depreciation/amortization E BIT Financial result E xtrao rdinary result E BT Income taxes Result from discontinued operations Minorities and cost of hybrid capital Net result after minorities
65.10 1.11 66.21 0.14 -19.64 -13.11 -15.00 18.60 -4.05 14.55 -33.42 0.00 -18.87 -2.44 0.00 0.00 -21.31
67.11 1.49 68.60 0.14 -20.57 -13.08 -16.84 18.25 -4.54 13.71 8.88 0.00 22.59 -2.95 0.00 0.00 19.64
82.29 0.96 83.25 0.32 -24.93 -14.26 -22.75 21.63 -4.70 16.93 0.10 0.00 17.04 -3.43 0.00 0.00 13.60
93.44 -0.10 93.34 0.32 -29.41 -14.38 -28.81 21.04 -4.94 16.10 2.04 0.00 18.14 -2.68 0.00 0.00 15.47
102.32 0.00 102.32 0.00 -32.74 -14.92 -29.02 25.64 -5.43 20.21 2.06 0.00 22.27 -3.56 0.00 0.00 18.70
110.9 4 0.0 0 110.9 4 0.0 0 -34.6 9 -15.9 6 -31.7 9 28.5 0 -6.2 0 22.2 9 0.7 5 0.0 0 23.0 4 -3.6 9 0.0 0 0.0 0 19.3 5
Balance Sheet
2008
1.33 70.12 6.97 78.43 12.67 19.10 0.27 36.45 68.49 146.92 129.71 0.00 0.00 0.00 2.12 0.24 0.79 1.03 0.96 13.11 14.07 146.92
2009
1.25 58.51 13.04 72.79 11.28 32.43 0.17 37.41 81.29 154.08 136.05 0.00 0.00 0.00 4.89 0.00 0.85 0.85 0.00 12.29 12.29 154.08
2010
1.16 53.61 12.74 67.51 13.55 19.78 0.22 67.17 100.72 168.23 145.76 0.00 0.00 0.00 3.36 0.00 0.84 0.84 0.00 18.27 18.27 168.23
2011
0.87 56.69 11.10 68.66 15.23 26.43 0.27 74.23 116.17 184.83 154.25 0.00 0.00 0.00 3.88 0.00 0.40 0.40 0.00 26.30 26.30 184.83
2012e
2.93 79.90 11.10 93.93 18.50 24.39 0.00 42.26 85.15 179.08 156.12 0.00 0.00 0.00 2.05 0.00 0.72 0.72 0.00 20.19 20.19 179.08
2013e
3.1 0 85.1 8 11.1 0 99.3 8 20.6 7 27.0 5 0.0 0 44.3 1 92.0 3 191.4 1 166.7 7 0.0 0 0.0 0 0.0 0 2.0 5 0.0 0 0.7 0 0.7 0 0.0 0 21.8 9 21.8 9 191.4 1
Cash Flow Statement

(RAS,RON mn, 31/12)
2008
11.76 -3.28 -2.07 6.42
2009
4.49 -2.81 -0.72 0.96
2010
31.20 -4.69 3.26 29.77
2011
16.57 -5.09 -4.42 7.06
2012e
7.75 -5.52 -34.20 -31.97
2013e
20.5 1 -7.9 2 -10.5 3 2.0 6
Margins & Ratios

S ales growth E BITDA margin E BIT m argin Net profit m argin ROE ROCE E quity ratio Net debt W orking capital Capital employed Inventory turnover
2008
4.4% 28.1% 22.0% -32.2% -15.2% -20.8% 88.3% -35.2 54.1 97.4 1.6
2009
3.1% 26.6% 20.0% 28.6% 14.8% 17.0% 88.3% -37.4 68.8 104.4 1.6
2010
22.6% 26.0% 20.3% 16.3% 9.7% 12.8% 86.6% -67.2 82.2 82.8 1.8
2011
13.5% 22.5% 17.3% 16.6% 10.3% 15.7% 83.5% -74 .2 89 .6 84 .3 1 .9
2012e
9.5% 25.1% 19.8% 18.3% 12.1% 16.2% 87.2% -42.3 65.0 116.6 1.7
2013e
8.4% 25.7% 20.1% 17.4% 12.0% 14.9% 87.1% -44.3 70.1 125.2 1.5
Source: Company data, Erste Group estimates Erste Group Research Sector Report Page 32
Erste Group Research Erste Sector Healthcare 08 March 2012 Erste Group Research Company Report Bioton | Pharmaceuticals | Poland 08 March 2012
Bioton
Hold
TEST
Erste Gr oup R es earc h C ompany R eport Bioton | Phar maceutic als | Pol and 07 Marc h 2012
P LN mn 2 010 2011p Net sales 378.1 289.3 E BITDA 128.7 -15.5 E BIT 90.1 -52.1 Net result after min. 117.2 -69.2 E PS (PLN) 0.02 -0.01 CEPS (PLN) 0.03 -0.00 B VPS (P LN) 0.20 0.17 Div./share (PLN) 0.00 0.00 E V/EBITDA (x) 8.0 -57.6 P /E (x) 6.8 nm P /CE (x) 5.1 -12.5 Divi dend Yield 0.0% 0.0% S hare price (P LN) close as of 06/03/2012 Number of shares (mn) Market capitalization (PLN mn / EUR mn) E nterprise value (PLN mn / EUR mn)
2012 e 481.9 130.2 92.4 65.8 0.0 1 0.0 1 0.1 8 0.0 0 8.4 10.6 6.7 0.0%
2013e 471.0 88.2 48.6 32.4 0.00 0.01 0.19 0.00 11.8 21.6 9.7 0.0% 0.1000 6,723.1 672 / 161 1,092 / 262
0.20 0.18 0.16 0.14 0.12 0.10 0.08 0.06
52 weeks
Bioton
WIG 20
P erformance in PLN
12M -47.4%
6M 0.0%
3M 66.7%
1M -9.1%
Reuters BOTN.WA Free float 70.4% Bloomberg BIO P W Shareholders Prokom Investm. (15.1%) Div. Ex-da te Ryszard Krauze (5.97%) Target price 0.1100 Homepage: www. bioton.pl
Actavis cooperation deal to add more power to Biotons turnaround

Analyst: Vladimira Urbankova, MBA
+435010017343 vladimira.urbankova@erstegroup.com
With the final signing of the Actavis cooperation contract, Biotons investment story has found firmer ground. The cooperation with Actavis (on top of the previously inked Bayer and GSK deals) promises to strengthen Biotons position in the insulin product niche. Further backed by the Biolek acquisition, the company has all prerequisites to return firmly to black numbers. While the lack of transparency prevents us from a full reflection of the new contracts in our model and prompts us to keep a certain risk related discount in our valuation, our revised 12M DCF-derived target price arrives at PLN 0.11 per share. We believe that investors still need to be reassured by concrete progress in major projects before entering the stock. All told, we stick to our Hold recommendation. The major changes incorporated into our model include: 1) the proceeds linked to signing the Actavis cooperation contract; 2) the benefits from the Indar cooperation deal, paving return to the Ukrainian market; 3) the worse than envisaged gross profitability; 4) the impact of the sell-off of the Israeli plant; 5) initial estimates of the Biolek contribution to sales and profitability; and 6) the dilutive effect of capital hikes linked to the Biolek acquisition.
All told, factoring in the Actavis contract initial milestone (EUR 22.25mn) boost, alongside the first benefits from the Biolek consolidation, we raise our sales target for 2012 to PLN 481.9mn (up 43.3% vs. our earlier forecast). Although we expect the underlying profitability progress to still be rather slow, backed by the profound effect of the Actavis deal, our 2012 operating profit target arrives at PLN 92.4mn. We revise our bottom line forecast to a PLN 65.8mn profit (vs. our earlier net profit target of PLN 6.8mn).
Page 33
Changes in forecast/outlook
Similarly to previous years, the companys top line developments are envisaged to be volatile in the course of 2012, with the y/y comparison distorted by the impact of oneoff items.
After a sluggish start in 1Q11, Biotons sales regained momentum in the course of 2011, supported with more revenues coming in from the insulin sales within the frame of contracts with GSK (in Russia) and Bayer (in China). Nevertheless, with the year-earlier comparative base hiked in 4Q10 by the PLN 123mn milestone payment linked to the Bayer cooperation contract in China, in 2011, Biotons sales slipped 23.5% y/y to PLN 289.3mn, lagging 5.3% behind our forecast. (Here it is worth mentioning that, with respect to the disposal of the Israeli business, the company restated its 2010 as well as 2011 results, recording the results of the discontinued business as a separate item below the result from the continuing operations. As this change was made public only at the time of announcement of 4Q11 unaudited results, our projections were based on the original reporting format, i.e. factoring in the Israeli unit as an integral part of Bioton operations.) Based on the contract with Germany's Bayer (signed in June 2009 and valid until 2015), Bioton supplies its partner with insulin for the Chinese market. In 2010, for the exclusive right to market and distribute insulin produced by Bioton under the trade name SciLin in China, Bayer paid Bioton an upfront payment of EUR 31mn and - after some delays - the first insulin deliveries started in September 2010. However these are still uneven, in particular on a quarterly basis. In 2011, reflecting the shifting part of shipments to the 2012 calendar, Biotons insulin sales in China amounted to just PLN 5.8mn, somewhat below the original expectations of PLN 8-9mn. According to the new guidance in 2012, sales are expected more than doubling y/y. Secondly, in December 2010, Bioton signed an agreement with GlaxoSmithKline, paving the way for its comeback to the Russian market. The first shipments within the frame of the GSK contract started as planned in September 2011. For the full-year 2011, they reached around PLN 3mn in 2011 and are anticipated to at least double y/y to PLN 6mn in 2012. On top of that, as conditions stipulated in the GSK cooperation contract were met, Bioton received USD 3.5mn in licensing income from its partner in 2011. Furthermore, based on the recently signed contract with Indar ZAO, Bioton will return to the Ukrainian market, with deliveries envisaged at around PLN 21mn on an annual basis for the next three years. In 2011, domestic sales of insulin amounted to around PLN 83.3mn. While the Polish market is envisaged to be one of the most challenging for CEE pharma manufacturers in 2012, Bioton has no reason to worry, as the recent regulatory changes were going in the companys favor. With its competitive position improved due to the harsh impact of regulatory changes, restricting reimbursement of analog insulins made by foreign manufacturers (with the difference to be covered by patients), while the basic human insulin made by Bioton kept its full reimbursement status, Biotons domestic sales should rise by a solid tempo in 2012 and the coming years. Furthermore, its sales will be supported by the sales expansion of complementary products for diabetes care (insulin pen as well as glucometer distribution deal with ARKRAY). In particular, it is worth mentioning that the new regulatory changes completely changed the competitive landscape in the glucometers market in Poland, with top brands occupying some 70% market share being erased from the market by new regulation, with running space open for newcomers like Bioton. In summary, factoring in the faster than earlier envisaged home market sales pace complemented by initial deliveries within the Indar contract, but the somewhat less pronounced sales in China and Russia in 2011, we raise our
The insulin segment is set to dominate Biotons sales structure, with the export tempo driven by the recent cooperation contracts
assumptions for Biotons total 2012 insulin sales to PLN 200.6mn (vs. the earlier forecast of PLN 181.5mn), out of which some PLN 88mn is to be delivered by domestic sales.
The contributions from the Italian companies to the 2011 top line stood at PLN 54.9mn. For 2012, we continue to project low single-digit terms growth, bringing the sales contribution from the Italian business to around PLN 57.6mn in total. In 2012, Bioton will for the first time fully consolidate Biolek, the veterinary products manufacturer acquired in late 2011. Based on the latest guidance from the company, we expect Biolek to bring some PLN 50mn in sales in 2012, with expansion (due in part to newly signed contracts in China) to PLN 55mn seen as possible in 2013. Incorporating initial gains from Actavis cooperation deal, we lift our 2012 top line target to PLN 481.9mn
Last but not least, we incorporate into our projections the sizable first milestone linked to the signing of the Actavis cooperation contract. In total, Bioton is entitled to obtain EUR 55.5mn for its insulin distribution rights in the EU, US and Japan, out of which EUR 22.25mn will be recorded already in 2012, with the rest subject to achievement of certain milestones on bringing insulin to the respective markets in 2013-15. In summary, reflecting the sizable boost from Actavis contract-linked payments, we revise our 2012 sales forecast from PLN 336.3mn to PLN 481.9mn. While we continue to assume that the new dynamism in the Chinese, Russian and Ukrainian markets will lend momentum to Biotons top line in the coming periods, with respect the significantly less sizable one-offs (in 2013, we expect the Actavis deal related payment of EUR 5mn), we see a drop in the 2013 top line as unavoidable. We set our 2013 top line target at PLN 471.0mn (down 2.3% y/y).
Changes to 2012 and 2013 forecasts

Consolidated, IFRS (PLN, mn) Net sales Costs of goods sold Gross profit Sales & marketing exp. General & admin. exp. Other operating income Other operating exp. Operating profit Financial result Pre-tax profit Income taxes Minority interest Net income Gross margin EBIT margin Net margin Source: Erste Group Research 2012e Now Before 481.9 240.6 241.3 57.9 96.1 13.0 8.0 92.4 -13.3 79.1 15.0 1.7 65.8 50.1% 19.2% 13.7% 336.3 182.4 153.9 50.1 94.0 11.9 11.4 10.2 -5.5 4.7 0.9 2.9 6.8 45.8% 3.0% 2.0% Change 43.3% 31.9% 56.8% 15.6% 2.2% 9.5% -30.3% 802.6% 141.5% 1567.8% 1567.8% -42.9% 870.7% 2013e Now Before Change 471.0 269.6 201.4 60.8 97.0 12.8 7.8 48.6 -10.8 37.8 7.2 1.8 32.4 42.8% 10.3% 6.9% 28.0% 367.9 41.2% 191.0 176.9 13.9% 52.6 15.6% 91.7 5.8% 11.7 9.5% 11.3 -30.3% 46.9% 33.1 -4.5 140.4% 28.6 32.2% 5.4 32.2% 3.1 -42.9% 23.3% 26.2 48.1% 9.0% 7.1%
In the absence of one-offs, gross profitability remained subdued in 2011, with a gross margin of a mere 35.5%, lagging below our rather modest expectations (36.9%). Buoyed by the Actavis transaction and further bolstered by positive effects of improving economies of scale, the contribution from the Biolek consolidation (with an estimated gross margin of 40-50%) as well as savings connected with the disposal of non-core assets (the Israeli plant), we are prompted to make a sharp upward adjustment to our 2012 gross margin target, from 45.8% to 50.1%. In the absence of a significant milestone payment cushion (anticipated at EUR
22.25mn in 1Q12), our gross margin forecast would reach just 38.4% in 2012. As before, we expect a more favorable sales mix and better efficiencies to support the improving trend in the coming years. Nonetheless, in the absence of a comparable sizable one-off, we assume a deterioration of the gross margin to 42.8% to follow in 2013. In 2011, operating expenses surpassed our expectations, due in particular to the still relatively high G&A expenses (hiked by costs for legal services associated with numerous transactions underway). In addition, sales and marketing costs accelerated, reflecting the companys expanding activities in its home insulin market in 2011. Hence, we opt to slightly raise our assumptions for 2012 and project sales and marketing costs at around PLN 58.0mn, up 15.6% compared to our previous forecast. In 2011, the y/y increase in the administrative and general costs was well above expectations, but as the hike was partly attributable to one-off costs, while remaining on the conservative side, we lift our 2012 forecast by 2.2% compared to our previous estimate to PLN 96.1mn.
In 2012, cooperation revenues promise to lift operating line into black, with estimated EBIT of PLN 92.4mn
Despite gradual improvements in underlying operating profitability parameters, we envisage 2013 operating line retreating 47.4% y/y
In summary, reflecting the worse than estimated 2011 operating line performance (an operating loss of PLN 52.1mn, vs. our forecast of a PLN 47.3mn operating loss) on one side, but a significant impact of the Actavis deal related income on the other side, our new 2012 operating profit target arrives at PLN 92.4mn (this compares to our earlier target of PLN 10.2mn), translating into an operating profit margin of 19.2% (vs. the previous 3.0% forecast). However, it is worth mentioning that, excluding the buoying effect of the Actavis cooperation deal related income, the move on the operating line would be significantly less sizable, to an estimated operating profit of a mere PLN 1.2mn in 2012. For 2013, assuming improvements in the underlying gross profitability, but also elevated R&D expenses (associated with financing of clinical trials and registration costs within the frame of the Actavis cooperation deal), we envisage operating profit of PLN 48.6mn, down 47.4% y/y as reported, but significantly up y/y on a comparable basis (i.e. excluding the Actavis deal related income from both the 2012 and 2013 figures). Reflecting the more favorable forex situation, the company's financial result ended in black territory in 2011 at a financial profit of PLN 15.9mn, a much better figure than we cautiously projected (a loss of PLN 6.8mn). Not only the financial position of the company slightly worsened and the companys net debt position stood at PLN 238.9mn at the end of December 2011 (up from the PLN 144.1mn in December 2010), forex related financial expenses (in particular, forex and possible investment revaluation related losses) continue to pose a threat to the financial result. Although the 2011 financial result was significantly better than we envisaged, we opt to lift our 2012 forecast from a financial loss of PLN 5.5mn to a financial loss of PLN 13.3mn. While the tax situation is difficult to assess and the company might continue in the activation of tax losses carried forward in the coming periods, reducing the effective tax rate below the statutory one, we opt not to factor in yet the tax relief. In summary, we revise our net profit forecast from PLN 6.8mn to PLN 65.8mn for 2012 (this compares to the 2011 net loss of PLN 69.2mn). For 2013, we remain on the conservative side and, reflecting the significantly less sizable impact of positive one-offs, we project net profit of PLN 32.4mn.
Helped by Actavis related deal proceeds, lift into black is warranted for 2012
Page 36
2011 results review

Despite tax relief, hampered by losses from discontinued operations, bottom line dived deeply into red in 2011
Biotons 4Q11 results were published at the end of the official deadline, i.e. on February 29, 2012.
IFRS consolidated Total sales (PLN 000) Operating profit (PLN 000) Net income (PLN 000) Operating margin Net margin Source: Bioton 4Q2011p 72,931 -17,979 -46,003 -24.7% -63.1% 4Q2010 190,811 108,459 102,082 56.8% 53.5% y/y -61.8% n.m. n.m. 2011p 289,340 -52,119 -69,231 -18.0% -23.9% 2010 378,097 90,064 117,180 23.8% 31.0% y/y -23.5% n.m. n.m.
Despite the acceleration in the course of the year, reflecting the y/y absence of significant one-offs, Biotons revenues contracted 23.5% y/y to PLN 289.3mn in 2011. The lack of a one-off boost (the milestone linked to the Bayer deal brought in PLN 123mn in 4Q10) was not only mirrored on the top line, but also in other parameters of the companys performance. The companys profitability margins remained meager; despite the help from the GSK deal related milestone payment (USD 3.5mn), the gross margin improved in 4Q11 just to 44.1% and the 2011 gross margin stood at a mere 35.5%. In the y/y absence of significant milestone support, the operating line swung to a loss of PLN 52.1mn in 2011 (vs. the year earlier operating profit of PLN 90.1mn). Dragged further down by losses on discontinued operations of PLN 38.8mn (stemming from the disposal of the Israeli operations), the company posted a net loss after minorities of PLN 69.2mn (vs. the year-earlier net profit of PLN 117.2mn; all data consolidated according to IFRS standards and compared to the year-earlier periods results restated to reflect the disposal of the Israeli business).
Valuation / Recommendation
We stick to the unified methodology for setting the equity risk premium (applying the equity risk premium for 2012-16 of 6.0% and 5.7% for perpetuity). With Polish 10-year government bond yields somewhat below the level reached in September 2011, when we prepared our last update on Bioton, we adjust the risk-free rate applied in our DCF model for the explicit forecast period of 2012-16 to 5.8% (vs. the earlier 5.9%). The acquisition of Biolek, with the purchase price for the veterinary producer paid in Bioton shares, brought dilutive effects, with number of shares issued by the end of February 2012, higher by 22.7% compared to our last update. Incorporating the forecast changes (including a changing timeframe, elevated minorities following Biolek acquisition and capital hike) into our model, we arrive at a 12-month target value of PLN 0.12 per share. Nevertheless, as before, we think that the companys path to an operational turnaround might be rather bumpy, with many factors still difficult to predict. With the final signing of the Actavis deal, removing at least part of the clouds, but visibility still far from ideal, we decided to slightly reduce our earlier introduced risk related discount to our DCF-derived target price from 15% to 10%, yielding a new target price of PLN 0.11(up from the PLN 0.10 per share targeted earlier).
We revise our 12-month target price to PLN 0.11 and stick to Hold. Turning cooperation deals into material improvement of companys business performance and removing clouds from outlook remain keys to possible rating upgrade
Page 37
Erste Group Research Erste Sector Healthcare 08 March 2012 Erste Group Research Company Report Bioton | Pharmaceuticals | Poland 08 March 2012 Among deals inked recently, contract on future cooperation in insulin and insulin analogs with Actavis will be more farreaching
While the final agreement with Actavis was originally envisaged to be sealed by the end of April 2011, the deadline was repeatedly postponed, with final signing taking place on January 30, 2012. Most importantly, Bioton and Actavis will establish a 50:50 joint venture responsible for the development and commercialization of Biotons insulin, including insulin analogues in the EU, US, Japan, Switzerland, Iceland, Norway, Liechtenstein, Serbia, Bosnia & Herzegovina, Croatia, Macedonia, Albania, Montenegro and Kosovo. Bioton will transfer certain rights and grant the joint venture an exclusive license for commercialization (marketing, sales and distribution) of the insulin products in the above-mentioned territories. For transferring and granting the exclusive rights, Bioton will be entitled to obtain a EUR 55.5mn cash consideration, with EUR 22.25mn to be paid to Bioton by its partner after signing the contract and the rest to be paid in installments, depending on achievement of certain steps in the process of Biotons recombinant insulin registration with European and US regulatory authorities (anticipated in 2013-15). Bioton and Actavis will share the profit from commercialization of insulin products at a 50/50 ratio. The joint development of insulin products, including insulin analogs, will be based on 50:50 cost sharing. Within the frame of the agreement, Bioton will be responsible for manufacturing insulin products, while Actavis will be in charge of their distribution and marketing. In February 2012, Bioton informed that the 100% stake in the Israel-based plant as well as licensing rights for the manufacture and sale of Hepatitis B vaccine were sold to FDS Pharma LLP for a cash consideration of USD 2mn and a royalty income of 5% on future vaccine sales on global markets. According to Bioton CEO Ziegert, the expected savings associated with this move at Bioton Group are estimated to amount to some PLN 12mn in the coming 12 months. Last but not least, the company is still considering the disposal of the Italian subsidiaries, with the aim to further accelerate the restructuring of Bioton. However, at the moment, we lack information about the above-mentioned potential transactions (including their timing and likely proceeds), so we do not incorporate them into our forecasts. Although the news flow has intensified since the beginning 2012 and the company - most importantly -finally concluded the long-awaited Actavis cooperation contract, the optimism of market participants after the initial boost to the share price evaporated once again, with too many issues still to be clarified by the company. Thus, although the stock price remains well below Biotons book value of PLN 0.2 per share, given the perceived risks and lack of transparency, the investment story is not yet seen as sufficiently attractive for long-term-oriented investors. While we believe that the news flow should be more pleasing for investors going forward, we prefer to stick to our conservative stance. The future stock development might still be shaky, as, after the many delays accompanying the Actavis contract finalization, execution risks are still numerous and will be carefully watched by market participants. Our revised 12-month target price of PLN 0.11 per share suggests that the stock adequately reflects the pros and cons of Biotons investment case. Consequently, we leave our Hold recommendation unchanged for the time being.
While impact of sell-off of Israeli manufacturing plant is less sizable, this does not undermine its importance
Page 38
WACC calculation
DCF valuation
(PLN mn) Sales growth EBIT EBIT margin Tax rate Taxes on EBIT NOPLAT + Depreciation Capital expenditures / Depreciation +/- Change in working capital Chg. working capital / chg. Sales - Capital expenditures Free cash flow to the firm Terminal value growth Terminal value Discounted free cash flow - Dec 31 2011 Enterprise value - Dec 31 2011 Minorities Non-operating assets Net debt Other adjustments Equi ty value - Dec 31 2011 Number of shares outstanding (mn) Cost of equity 12M target price per share (PLN) - risk related discount 12M target price per share (PLN) Current share price (PLN) Up/Downside 2012e 66.6% 92.4 19.2% 19.0% -17.6 74.9 37.8 60.9% -2.7 -1.4% -23.0 86.9 2013e -2. 3% 48.6 10. 3% 19. 0% -9.2 39.4 39.6 68. 2% -3.5 31. 8% -27.0 48.5 2014e 16.0% 104.9 19.2% 19.0% -19.9 85.0 41.7 72.1% -4.3 -5.8% -30.0 92.3 2015e 9.1% 127.2 21.3% 19.0% -24.2 103.0 43.8 75.0% -5.1 -10.2% -32.8 108.9 2016e 8.2% 139.7 21.7% 19.0% -26.5 113.2 46.2 75.4% -6.0 -12.3% -34.8 118.5 2017e (TV) 6.0% 133.4 19.5% 19.0% -25.3 108.0 46.2 100.0% -2.7 -7.0% -46.2 105.3 2.5% 1,434.6 862.9
78.9 1,197.8 231.5 0.0 238.9 0.0 727.4 6,723.1 10.8% 0.12 10.0% 0.11 0.10 9.8%
40.0
69.0
73.9
73.1


Terminal value EBIT margin 0 9.0% 9.5% 10.0% 10.5% 11.0% 0 9.0% 9.5% 10.0% 10.5% 11.0% 18.5% 0.12 0.11 0.10 0.10 0.09 1.5% 0.11 0.10 0.09 0.09 0.08 19.0% 0.13 0.12 0.11 0.10 0.09 19.5% 0.13 0.12 0.11 0.10 0.09 20.0% 0.13 0.12 0.11 0.10 0.10 3.0% 0.14 0.13 0.12 0.11 0.10 20.5% 0.14 0.13 0.12 0.11 0.10 3.5% 0.16 0.14 0.13 0.12 0.11
WACC
WACC
Page 39
Income Statement
(IAS, PLN mn, 31/12)
2008
31/12/2008
2009
31/12/2009
2010
31/12/2010
2011p
31/12/2011
2012e
31/12/2012
2013e
31/12/2013
Net sales Cost of goods sold G ross profit S G&A O ther operating revenues O ther operating expenses E BITDA Depreciation/amortization E BIT Financial result E xtrao rdinary result E BT Income taxes Result from discontinued operations Minorities and cost of hybrid capital Net result after minorities
293.52 -164.37 129.15 -127.86 15.10 -87.88 -47.75 -23.73 -71.49 -196.52 0.00 -268.00 44.97 0.00 4.14 -218.89
286.23 -174.92 111.31 -173.92 22.14 -527.36 -536.74 -31.10 -567.84 -26.53 0.00 -594.37 -5.51 0.00 53.21 -546.67
378.10 -165.88 212.21 -153.17 43.86 -12.84 128.71 -38.64 90.06 9.77 0.00 99.84 -6.05 16.94 6.45 117.18
289.34 -186.53 102.81 -158.98 12.89 -8.85 -15.45 -36.67 -52.12 15.95 0.00 -36.17 0.44 -38.77 5.27 -69.23
481.91 -240.61 241.30 -153.94 13.02 -7.96 130.24 -37.82 92.41 -13.27 0.00 79.15 -15.04 0.00 1.68 65.78
471.0 4 -269.6 4 201.4 1 -157.8 0 12.8 2 -7.8 4 88.2 2 -39.6 3 48.5 9 -10.8 0 0.0 0 37.7 8 -7.1 8 0.0 0 1.7 6 32.3 6
Balance Sheet
(IAS, PLN mn, 31/12)
2008
1,023.53 488.85 181.92 1,694.30 92.97 215.78 0.00 61.72 370.47 2,064.77 1,106.55 131.14 0.00 0.00 0.00 163.90 72.74 236.63 328.81 261.64 590.45 2,064.77
2009
669.45 427.14 62.64 1,159.22 111.86 299.73 0.00 33.99 445.58 1,604.80 1,004.06 75.90 0.00 0.00 0.00 20.48 74.71 95.19 232.35 197.31 429.66 1,604.80
2010
699.60 392.24 51.19 1,143.03 98.39 302.55 0.00 37.70 438.64 1,581.66 1,093.70 76.18 0.00 0.00 0.00 115.50 74.77 190.27 66.32 155.19 221.51 1,581.66
2011p
1,190.94 424.70 63.50 1,679.15 97.16 306.68 0.00 24.68 428.52 2,107.67 1,206.85 231.47 0.00 0.00 0.00 129.85 161.68 291.53 133.77 244.04 377.82 2,107.67
2012e
1,154.50 423.70 69.13 1,647.33 122.01 343.92 0.00 94.47 560.40 2,207.74 1,285.95 231.47 0.00 0.00 0.00 129.85 169.77 299.62 127.08 263.62 390.70 2,207.74
2013e
1,148.8 7 421.9 6 75.2 9 1,646.1 2 133.4 1 376.7 6 0.0 0 128.8 0 638.9 7 2,285.0 9 1,326.2 6 231.4 7 0.0 0 0.0 0 0.0 0 123.3 6 178.2 5 301.6 1 120.7 3 305.0 2 425.7 5 2,285.0 9
Cash Flow Statement

(IAS,PLN mn, 31/12)
2008
37.75 -289.40 266.29 14.64
2009
-80.22 -127.97 203.98 -25.87
2010
27.17 57.98 -82.18 2.97
2011p
-32.61 -84.66 83.33 -33.94
2012e
99.51 -23.03 -6.69 69.79
2013e
74.2 1 -27.0 3 -12.8 5 34.3 3
Margins & Ratios

S ales growth E BITDA margin E BIT margin Net profit margin ROE ROCE E quity ratio Net debt Working capital Capital employed Inventory turnover Source: Company data, Erste Group estimates
2008
8.3% -16.3% -24.4% -76.0% -22.1% -13.9% 59.9% 431.0 -220.0 1,741.4 1.7
2009
-2.5% -187.5% -198.4% -209.6% -51.8% -38.2% 67.3% 218.8 15.9 1,373.5 1.7
2010
32.1% 34.0% 23.8% 24.8% 11.2% 7.3% 74.0% 144.1 217.1 1,388.8 1.6
2011p
-23.5% -5.3% -18.0% -12.3% -6.0% -1.5% 68.2% 238 .9 50 .7 1,838 .9 1 .9
2012e
66.6% 27.0% 19.2% 13.3% 5.3% 4.0% 68.7% 162.5 169.7 1,849.7 2.2
2013e
-2.3% 18.7% 10.3% 6.5% 2.5% 2.1% 68.2% 115.3 213.2 1,851.3 2.1
Page 40
Erste Group Research Erste Sector Healthcare 08 March 2012 Erste Group Research Company Report Egis | Pharmaceuticals | Hungary 08 March 2012
Egis
from Accumulate to Buy
TEST
Erste Gr oup R es earc h C ompany R eport Egis | Phar mac eutic als | Hungar y 07 Marc h 2012
HUF mn 2 010 20 11 2012 e 2013e Net sales 118,915.0 128,939.0 133,235.4 140,290.1 E BITDA 25,455.0 25,621.6 28,398.9 27,382.4 E BIT 17,158.0 16,302.0 18,337.6 16,664.3 Net result after min. 16,783.0 13,585.0 16,272.3 15,686.6 E PS (HUF) 2,155.61 1,744.86 2,090.0 1 2,014.79 CEPS (HUF) 3,107.36 2,945.47 3,390.2 9 3,399.82 B VPS (HUF) 19,153.25 20,760.93 22,730.9 5 24,625.74 Div./share (HUF) 120.00 120.00 120.0 0 120.00 E V/EBITDA (x) 6.2 3.6 3.1 3.0 P /E (x) 10.3 8.5 7.3 7.6 P /CE (x) 7.2 5.0 4.5 4.5 Divi dend Yield 0.5% 0.8% 0.8% 0.8% S hare price (HUF) close as of 06/03/2012 15,350 Number of shares (mn) 7.8 Market capitalization (HUF mn / EUR mn) 119,511 / 406 E nterprise value (HUF mn / EUR mn) 88,695 / 301
21,000 20,000 19,000 18,000 17,000 16,000 15,000 14,000 13,000 12,000
52 weeks
Egis
BUX
P erformance
in HUF
12M
-20.5%
E GIS.BU Free float E GIS HB Shareholders 20/05/11 20,455 Homepage:
6M
3.0%
3M
-16.6%
1M
-11.3%
49.1% Servier (50.9%)

www.egis.hu
Weak forint to help offset home and CEE market woes

Factoring in adjustments to our Egis model, including the changing timeframe and higher risk-free rate, our DCF-derived 12-month target price arrives at HUF 20,455 per share, only slightly (4.9%) below our previous target. Egis valuation gap remains wide and not fully justifiable by the companys sub-optimal profitability parameters. We believe that the solid fundamentals and healthy business outlook (with Celltrion deal benefits to kick in from 2013) are not adequately priced in. Following the recent share price slump, we upgrade our recommendation from Accumulate to Buy. We have incorporated into our model: 1) the gloomier domestic market sales outlook for 2011/12; 2) the subdued sales tempo in CEE markets, with the Polish market seen as the weakest link; 3) the slightly more rosy prospects for bulk chemicals sales in 2011/12; 3) the positive effect of the weaker than earlier envisaged forint for the top line as well as profitability parameters; 4) the new time-limited possibility of R&D-based relief to the OEP payments; 5) change in accounting for local tax; and 6) losses at Hungaropharma, weighing on the share of the associates result. In summary, we decrease our sales target for 2011/12 to HUF 133,235mn, still corresponding to a 3.3% y/y rise. With the positive impact of the significantly weaker than originally anticipated forint to be complemented by strict cost control and somewhat easier regulatory burden, our net profit target for 2011/12 arrives at HUF 16,272mn, 8.2% up compared to our previous forecast. For 2012/13, with the domestic price erosion still biting into the sales tempo, but the full hit from the increased regulatory toll already fully factored into our earlier forecast, we opt for only minor fine tuning of our sales and net profit targets.
Page 41
Domestic market: 1Q2011/12 tempo ahead of expectations, but outlook for 2011/12 gloomier than anticipated earlier Hungary: The contribution from new product launches and prevailing uncertainties (with patients worried about a possible increase in copayments increasing their purchases of medicines) largely offset the price erosion in October-December 2011, the first quarter of Egis new fiscal year. As a result, contrary to expectations, Egis domestic sales advanced 0.9% y/y to HUF 8,917mn in 1Q11/12. The growth was achieved even though Egis, in order to maintain reimbursement and defend its competitive position, was forced to cut prices in Hungary by an average of 6.9% from October 1, 2011, the steepest quarterly fall since April 2007. Referring to the mounting pricing pressures, in particular associated with the blind bidding auction process, in February 2012, CFO Poroszlai opted to lower the earlier guidance for 2011/12, envisaging that Egis domestic sales might fall as much as 8-10% y/y (vs. the earlier expected 6-8% y/y drop). Consequently, although 1Q11/12 domestic sales surpassed our forecast by 4.9%, reflecting the newly published 2011/12 guidance, we decided to reduce our 2011/12 domestic sales target for Egis to HUF 31.4bn, translating into a 10% y/y decrease. In the medium term, we envisage Egis domestic sales recovering and sales advancing some 2.5% p.a., albeit from a lower base. Russia/CIS: Although the 1Q11/12 sales tempo was dampened by the temporary shrinking of inventories on the wholesale side, Egis sales progress in Russia (sales up 5.3% y/y) broadly matched our expectations. Due the temporary shortfall of one product (due to logistics reasons) in Ukraine, sales in Russia/CIS lagged somewhat (by 1.4%) behind our forecast in 1Q11/12. Nonetheless, as the sluggish tempo was attributable to one-off factors and the company has good prerequisites to catch up in these markets later in the course of the year, CFO Poroszlai confirmed the 2011/12 guidance of around a 10-12% y/y rise for Russian as well as Russia/CIS (all guidance in euro terms, although the company switched its invoicing to ruble terms from January 2011). Consequently, we leave our earlier 2011/12 forecasts for Russia/CIS sales broadly unchanged at around EUR 167mn, corresponding to 10.9% y/y rise. CEE markets: Sales in Eastern Europe plunged 20.5% y/y in 1Q11/12. Although a slowdown in tempo was expected, the negative impact of the upcoming changes in the regulatory framework in Poland (taking effect from January 2012), along with unfavorable currency developments (weaker zloty vs. euro), was more pronounced and the scope of the drop was more sizable than we envisaged, with sales in CEE markets lagging 10.7% behind our forecast this time. In addition, CFO Poroszlai became more pessimistic, referring to regulatory pressures associated with ongoing healthcare reforms in the CEE region, cutting his guidance for 2011/12 from a 3-5% y/y rise to a 5% y/y drop. Consequently, we are prompted to trim our 2011/12 sales target accordingly, from EUR 140.2mn to EUR 127.2mn, corresponding to a 5% y/y fall. Western markets: The 1Q11/12 interim results demonstrated once again the key importance of the orders from Servier on Egis API sales, as well as the quarterly volatility of results of this order-driven segment. Although the 1Q11/12 bulk chemicals and other sales saw a contraction of 49.1% y/y, referring to the current order book from Servier, CFO Poroszlai even raised his guidance from the originally envisaged flat to up to a 5% y/y increase in this sales category. Consequently, while remaining on the conservative side, we opt for a minor increase of our 2011/12 sales target to around EUR
Supported by y/y weaker forint, export sales to bolster Egis top line growth
41.2mn (corresponding to 1% y/y growth). Also, sales of finished products, plummeting 49.2% y/y to EUR 2.7mn in 1Q11/12, are anticipated to recover in the course of the year, according to the CFO, who opted to stick to his original guidance, assuming sales growth of up to 5% y/y. Consequently, we leave our forecast, envisaging 2011/12 sales of finished pharmaceuticals to Western European markets of EUR 20mn (corresponding to 2.5% y/y rise) broadly unchanged.
After factoring abovementioned changes into our sales projections, we decrease (albeit marginally) our 2011/12 sales target to around HUF 133.2bn
Finally, we incorporate into our projections newly revised forex assumptions (for 2011, an actual annual average exchange rate as per National Bank of Hungary statistics of HUF 200.94 per USD, from HUF 190.1 per USD, and an annual average exchange rate of HUF 279.21 per EUR, from HUF 269.8 per EUR). For 2012, we revise our forecast from HUF 194.3/USD to HUF 236.0/USD and from HUF 266.2/EUR to HUF 295.0/EUR. After incorporating all of the above-mentioned changes into our sales projections, our 2011/12 sales target arrives at around HUF 133.2bn (marginally down from the earlier estimated HUF 134.7bn). For 2012/13, reflecting the more subdued than earlier envisaged domestic market sales, but also weaker than earlier expected forint, we set our new sales target at HUF 140.3bn, down 1% compared to our previous forecast.
Changes to 2011/12 and 2012/13 forecasts

Consolidated, IFRS (HUF, mn) Net sales Cost of sales Gross profit Marketing & distr. costs Administration costs R&D costs Other oper. exp. Other oper. income Opera ting profit Financial result Share of results of a ssociates Pre-tax profit Incom e taxes Net income Gross margin EBIT margin Net margin Source: Erste Group R esearch 2011/12e Now Before 133,235 134,713 58,562 59,384 74,673 75,329 31,135 31,131 10,990 11,046 12,001 12,117 3,467 7,568 1,257 1,064 18,338 14,532 1,593 1,497 -1,119 -264 18,812 15,765 2,540 727 16,272 15,039 56.0% 55.9% 13.8% 10.8% 12.2% 11.2% Cha nge -1.1% -1.4% -0.9% 0.0% -0.5% -1.0% -54.2% 18.2% 26.2% 6.4% 324.2% 19.3% 249.6% 8.2% 2012/13e N ow Be fore 140,290 141,732 61,509 62,321 78,781 79,410 32,915 32,916 11,508 11,563 12,605 12,729 6,359 7,830 1,270 1,074 16,664 15,446 1,638 1,540 -168 -158 18,135 16,828 2,448 1,010 15,687 15,818 56.2% 56.0% 11.9% 10.9% 11.2% 11.2% Ch ange -1.0% -1.3% -0.8% 0.0% -0.5% -1.0% -1 8.8% 1 8.2% 7.9% 6.4% 6.0% 7.8% 14 2.5% -0.8%
Weak forint and improving sales mix to offset price erosion and support gross margin in 2011/12.
Boosted by the y/y more favorable sales mix (in particular, a shrinking share of bulk chemicals sales) and currency impact, the gross margin improved considerably y/y, from 54.5% in 1Q10/11 to 59.1% in 1Q11/12, beating our expectation (of 58.3%). Consequently, although pricing pressures (particularly on the home market) will put a lid on the pace of progress in the course of the year, we opt to increase our gross margin target for 2011/12 from 55.9% to 56.0%. While the domestic price erosion will undoubtedly continue to dent the gross margin, reflecting the positive effect from the improving sales structure (with Russia/CIS sales outpacing the overall sales tempo) and somewhat weaker forint, our gross margin target for FY12/13 arrives at 56.2%, slightly above the earlier projected 56.0%.
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Erste Group Research Erste Sector Healthcare 08 March 2012 Erste Group Research Company Report Egis | Pharmaceuticals | Hungary 08 March 2012 Helped by some one-off effects, all operating costs lagged well behind 1Q11/12 sales tempo. Strict cost control to continue, fostering optimism going forward
Although the company managed to cut its sales & marketing expenses 0.6% y/y in 1Q11/12, their share increased to 23.4% of total sales in 1Q11/12, up from the year-earlier 22.4%, suggesting that the final full-year figure might be slightly worse in relative terms than our original expectation. Nonetheless, the anticipated relative expansion of Western markets sales (with no sales & marketing costs attached) in the course of the year (vs. the 1Q11/12 picture) should help and hence we fine-tune our forecast here only slightly, projecting sales and marketing costs accounting for 23.4% of sales in 2011/12 (up from the previously envisaged 23.1%). Although the 1Q11/12 data (with 7.1% of sales spent in the administration area) was slightly more encouraging than we expected, with the y/y heavy drop driven by one-off effects (the y/y decreasing provisions), we opt to stick to our forecast for general and administrative costs of 8.2% of sales in 2011/12. The R&D portfolio rejuvenation keeps its utmost importance as one of the antidotes to the tougher reimbursement regime, accompanied by pricing pressures. Consequently, although 1Q11/12 saw R&D expenses down 10.5% (to 8.1% of sales) based on the companys guidance, we continue to assume that the share of R&D costs will be maintained relatively unchanged y/y, at around 9% of sales in 2011/12. The change in the Hungarian legislation in December 2011 brought back the possibility of reclaiming the OEP payments, although only for a limited period of time for Hungarian pharma companies, including Egis. Although, the sales tax on reimbursed drug sales was increased to 20% and sales rep fees doubled from July 1, 2011, thanks to the newly available R&D-based relief, the company started to deduct a part of the respective burden from its 1Q11/12 obligation. Consequently, the total OEP related payments amounted to HUF 406mn in 1Q11/12, down from the otherwise applicable HUF 984mn. As our 2011/12 projections already factored in the elevated obligation, due to the fact that Egis will in 2011/12 account for the R&Dbased relief and domestic sales are now envisaged somewhat more subdued in 2011/12 and the average reimbursement level lower than we originally expected, the final 2011/12 OEP payment bill will be significantly lower than our original estimate. In our calculation, Egis will be obliged to pay some HUF 1,108mn (down from the earlier estimated HUF 4,280mn) in fiscal year 2011/12. Nonetheless, as the law currently envisages giving R&D-oriented pharma companies a respite of just one year, in 2012/13, despite the newly cut domestic sales forecast, we envisage the toll rising to HUF 4,227mn. Incorporating the positive effect of the weaker than earlier envisaged forint, along with the new R&D-based relief to the OEP payments, our operating margin target for 2011/12 arrives at 13.8%, up from the originally projected 10.8%. (However, here it is worth mentioning that, if we - for comparative purposes - adjust our original forecast to include the impact of the shifting of the local tax from other operating expenses to the corporate tax line, this would yield the originally projected EBIT margin of 12.0%.) In total, we raise our EBIT target for 2011/12 26.2% to HUF 18,338mn. (Stripping out the tax accounting changes, the increase in our EBIT forecast would be 13.7%.) Given the still challenging home situation, with pricing pressures coupled with OEP payments in the fully increased amount (i.e. a 20% sales tax plus doubled sales rep fees), we project operating profit in 2012/13 to slip by 9.1% y/y. Despite the companys ongoing efforts to keep costs under control, our EBIT target for 2012/13 arrives at HUF 16,664mn, translating into a y/y contraction of the EBIT margin, to 11.9%.
Thanks to newly reinstated R&D-based relief to OEP payments, pressure on operating profitability margin to ease in 2011/12 compared to our previous forecasts
Weak forint, less sizable OEP payments prompt us to increase our 2011/12 EBIT margin target
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Erste Group Research Erste Sector Healthcare 08 March 2012 Erste Group Research Company Report Egis | Pharmaceuticals | Hungary 08 March 2012 With forex gains only partly wiped out by accounting for losses at Hungaropharma, our net profit target for 2011/12 arrives at HUF 16,272mn, 8.2% up compared to our earlier forecast
Despite the losses at Hungaropharma burdening Egis share of its associates result, the overall 1Q11/12 financial result ended in black territory. According to Egis CFO, Hungaropharma losses in 1Q11/12 represent a one-off, which should not reoccur in the rest of this fiscal year, suggesting that our full-year 2011/12 forecast was slightly too cautious. As before, with respect to the fact that the company has huge cash reserves and virtually no debt, the final outcome will be largely dependent on the forex situation (with the forint/ruble exchange rate, apart from the forint/EUR, remaining the biggest factor) affecting the reassessment of the receivables/payables balance. (As we were informed, the company is hedging 70% of its net forint ruble exposure, while not entering into any new hedging HUF/EUR contracts for the time being.) In order to remain on the conservative side, we opt to raise our original 2011/12 financial result estimate only marginally, increasing it from HUF 1,497mn to HUF 1,593mn. Finally, we incorporate into our projections the accounting change, shifting the local taxes into the corporate tax line. All told, our new net profit target arrives at HUF 16,272mn for 2011/12 (vs. the earlier forecast of HUF 15,039mn) and HUF 15,687mn for 2012/13 (vs. the previous target of HUF 15,818mn).
1Q11/12 results review

Egis announced its 1Q11/12 results on February 8, 2012, after market close.
Consolidated sales Hungary (HU F mn) Russia (EUR mn) CIS (EU R mn) Eastern Europe (EUR mn) Other (EUR mn) Total export (EUR mn) IFRS consolidated Net sales (HUF mn) Operating profit (HUF mn) Net income (HUF mn) Operating margin Net margin Source: Egis 1Q11/12 1Q10/11 8,917 8,838 26.0 24.7 10.2 10.5 26.0 32.7 8.2 16.1 70.4 83.9 1Q11/12 1Q10/11 30,392 31,915 5,522 4,789 5,333 4,676 18.2% 15.0% 17.5% 14.7% y/y 0.9% 5.3% -1.9% -20.5% -49.1% -16.1% y/y -4.8% 15.3% 14.1%
Domestic sales: As the contribution of new product launches largely counterbalanced the mounting pricing pressures, domestic sales advanced 0.9% y/y in the October-December 2011 period. (In order to maintain the reimbursement and market position of certain products, Egis was forced to cut prices in Hungary by 6.9% on average from October 1, 2011.) Exports: Exports amounted to EUR 70.4mn (down 16.1% y/y) in 1Q11/12. With the first three months of the new fiscal year showing a temporary shrinking of wholesale stocks, the companys sales in Russia advanced just 5.3% y/y to EUR 26.0mn in 1Q11/12. Due to a temporary shortfall of one product for logistics reasons, Ukrainian sales plunged 20.8% y/y to EUR 3.5mn. However, sales in other CIS markets soared 12% y/y, sending Egis sales in Russia/CIS up 3.2% y/y to EUR 36.2mn in 1Q11/12. Reflecting the unfavorable developments in the crucial Polish market along with the negative forex impact, sales to Eastern Europe plummeted 20.5% y/y to EUR 26.0mn in 1Q11/12. As expected, hampered by a high comparative base and y/y decreasing orders from Servier, bulk chemicals and others sales slid 49.1% y/y to EUR 5.5mn. And finally, sales of finished
pharmaceuticals to other countries declined 49.2% y/y to EUR 2.7mn in 1Q11/12. According to the companys calculation, as 1Q11/12 saw a turn for the better (with the y/y weaker forint vs. euro), the favorable currency developments added HUF 1.6bn to Egis sales revenue in 1Q11/12.
Profitability: The improving sales mix (namely the shrinking proportion of low-margin bulk sales), along with the more favorable forex situation, marked by the weak forint, pushed up the companys gross margin from 54.5% in 1Q10/11 to 59.1% in 1Q11/12. The lower level of registration costs helped savings in the related R&D expenses (down 10.5% y/y), while the y/y decreasing provisions were behind the drop of expenses in the area of administrative and general costs (down 9.8% y/y). Sales and marketing costs were also trimmed (by 0.6% y/y). Furthermore, the company took advantage of the newly passed legislation allowing for partial R&D-based relief to the OEP payments recorded under other operating expenses (reducing the regulatory toll from the otherwise applicable HUF 984mn to HUF 406mn in 1Q11/12). Consequently, operating profit grew a hefty 15.3% y/y to HUF 5,522mn in 1Q11/12. The operating margin improved to 18.2% in 1Q11/12 (from 15.0% in the year-earlier period). Bolstered by the favorable currency fortunes (with the weakening of the forint at the end of 1Q11/12 resulting in forex gains), the 1Q11/12 financial result not only ended safely in black territory, but improved y/y to HUF 1,215mn. Although a part of these gains was wiped out by the accounting for losses at the associated company Hungaropharma (of HUF 1,026mn), bolstered further by the y/y decreasing effective tax rate, 1Q11/12 net profit rose a sound 14.1% y/y.
Valuation / Recommendation
We adjust our DCF model parameters to include increasing government bond yields and Hungarys rating downgrade
Compared to other core CEE countries, the economic situation in Hungary continues to be more challenging, which is reflected in government bond yields staying considerably well above their CEE-based counterparts. In addition, not only did the Hungarian government bond yield take a sharp upward trajectory, prompting us to increase the risk-free rate from the previously used 7.9% to 8.6% for the detailed forecast period of 2012-16, the country rating was also downgraded by S&P from BBB- to BB+, resulting in an increase of the applied equity risk premium (from 6.75% to 7.15% for the forecast period of 2012-16 and from 6.3% to 6.65% for perpetuity yields). Consequently, we derive a WACC of 14.5% for 2012-16 and 11.6% for perpetuity, up from the 13.5% and 11.2%, respectively, used in our previous valuation. After incorporating all of the above-mentioned changes to our forecasts into our DCF model (as well as a new timeframe), our DCF-derived 12-month target price arrives at HUF 20,455 per share, 4.9% below our earlier target price of HUF 21,500.
Our 12-month target price of HUF 20,455 per share points to solid upside potential from currently depressed levels. We upgrade to Buy
Although Egis 1Q11/12 net result was broadly in line with expectations, worries linked to the deteriorating sales outlook in certain markets, in particular Hungary and Poland, sent Egis share price to levels that are very appealing from the long-term perspective and which indicate that the stock is oversold. There is no doubt that the companys home market exposure, staying at a relatively high 27.0% in 2010/11, represents the companys disadvantage compared to its peers and that the maneuvering space is limited in the short run. Nevertheless, we believe that, with the help of the relatively weak forint, still solidly developing exports to Russia/CIS sales,
Page 46
complemented by strict cost control, the company has all prerequisites to post solid results in 2011/12. Although the quarterly price cut as of October 2011 was more sizable than the market anticipated and the outlook for price developments on its home pharmaceutical market remains opaque, we believe that the company is in better shape and is better equipped to cope with the pressure than it was back in 2007, at the onset of the latest big regulatory restrictions wave in Hungary. Egis generics portfolio rejuvenation has been gathering speed in the past two years, while the company also initiated cost efficiency enhancement programs, with visible results on both the gross and operating profitability levels. Management remains committed to reviewing its home market operations efficiency and responding with corresponding measures. (In the first step, the company already cut their sales force by 10% from October 2011). In addition, the Celltrion deal should yield tangible results soon, with the first two biosimilars product to be launched in the middle of the next year. Last but not least, a brief look at its balance sheet confirms that Egis is in very healthy shape, with practically no external debt and a solid cash pile (of HUF 21.1bn at the end of December 2011). All told, although the home pharma (as well as some CEE regional) market developments are not encouraging at the moment, we believe that the associated risks are more than adequately priced in and that Egis share price does not adequately reflect the companys solid long-term outlook. While we do not anticipate that the companys valuation gap will close completely (as Egis margins will continue to lag behind its peers and thus justify a certain discount), the valuation multiples are appealing. Following recent share price slump, magnifying the stocks already high valuation gap, we upgrade our recommendation on the stock from Accumulate to Buy.
Page 47
WACC calculation
DCF valuation
(HUF mn) Sales growth EBIT EBIT margin Tax rate Taxes on EBIT NOPLAT + Depreciation Capital expenditures / Depreciation +/- Change in working capital Chg. working capital / chg. Sales - Capital expenditures Free cash flow to the firm 2012e 3.3% 18,337.6 13.8% 13.5% -2,475.6 15,862.0 10,061.4 152.2% -1,407.9 -32.8% -15,318.0 9,197.5 2013e 5.3% 16,664.3 11.9% 13.5% -2,249.7 14,414.6 10,718.1 150.4% -2,159.9 -30.6% -16,123.5 6,849.4 2014e 7.8% 18,376.8 12.2% 13.5% -2,480.9 15,896.0 11,406.5 148.8% -3,141.7 -28.9% -16,978.4 7,182.4 2015e 8.2% 20,583.1 12.6% 13.5% -2,778.7 17,804.4 12,137.6 147.1% -3,512.6 -28.4% -17,857.3 8,572.1 2016e 8.6% 23,082.5 13.0% 13.5% -3,116.1 19,966.4 12,918.5 145.4% -3,921.1 -27.8% -18,788.1 10,175.6 2017e (TV) 6.0% 22,595.0 12.0% 19.0% -4,293.1 18,302.0 12,918.5 100.0% -3,037.5 -28.5% -12,918.5 15,264.4 2.0% 162,708.4 81,012.3
Terminal value growth Terminal value Discounted free cash flow - September 30 2011 8,031.9 Enterprise value - September 30 2011 109,203.6 Minorities Non-operating assets Net debt Other adjustments Equity value - September 30 2011 Number of shares outstanding (mn) Cost of equity 12M target price per share (HUF) Current share price (HUF) Up/Downside 0.0 0.0 -22,084.0 0.0 131,287.6 7.8 14.6% 20,455 15,350 33.3%
5,223.3
4,783.1
4,985.2
5,167.7

PV of detailed period 26% PV of terminal value 74%

Terminal value EBIT margin 20455 10.6% 11.1% 11.6% 12.1% 12.6% 20455 10.6% 11.1% 11.6% 12.1% 12.6% 11.0% 20,520 19,820 19,194 18,630 18,119 1.0% 20,455 19,828 19,261 18,745 18,273 11.5% 21,224 20,486 19,825 19,229 18,690 12.0% 21,928 21,151 20,455 19,828 19,261 12.5% 22,632 21,816 21,086 20,428 19,832 2.5% 22,802 21,928 21,151 20,455 19,828 13.0% 23,336 22,482 21,716 21,027 20,403 3.0% 23,790 22,802 21,928 21,151 20,455
WACC
Source: Erste Group R esearch
Terminal value growth 1.5% 2.0% 21,151 21,928 20,455 21,151 20,455 19,828 19,261 19,828 18,745 19,261
WACC
Page 48
Income Statement
(IAS, HUF mn, 30/09)
2008
30/09/2008
2009
30/09/2009
2010
30/09/2010
2011
30/09/2011
2012e
30/09/2012
2013e
30/09/2013
109,192.00 -51,638.00 57,554.00 -37,258.00 1,142.00 -12,841.00 16,696.00 -8,099.00 8,597.00 4,139.00 0.00 12,736.00 -692.00 0.00 0.00 12,044.00
116,142.00 -51,792.00 64,350.00 -37,515.00 1,397.00 -12,693.00 23,350.00 -7,811.00 15,539.00 485.00 0.00 16,024.00 -2,273.00 0.00 0.00 13,751.00
118,915.00 -52,206.00 66,709.00 -38,169.00 1,003.00 -12,385.00 25,455.00 -8,297.00 17,158.00 2,243.00 0.00 19,401.00 -2,618.00 0.00 0.00 16,783.00
128,939.00 -56,833.00 72,106.00 -40,511.00 1,245.00 -16,538.00 25,621.60 -9,319.60 16,302.00 -626.00 0.00 15,676.00 -2,091.00 0.00 0.00 13,585.00
13 3,235.42 -5 8,562.32 7 4,673.11 -4 2,125.26 1,257.45 -1 5,467.74 2 8,398.92 -1 0,061.36 1 8,337.56 474.30 0.00 1 8,811.86 -2,539.60 0.00 0.00 1 6,272.26
140,290.0 9 -61,508.9 7 78,781.1 2 -44,423.2 3 1,270.0 2 -18,963.6 5 27,382.4 0 -10,718.1 4 16,664.2 6 1,470.4 9 0.0 0 18,134.7 5 -2,448.1 9 0.0 0 0.0 0 15,686.5 6
Balance Sheet
2008
3,865.00 51,513.00 8,322.00 63,700.00 33,790.00 37,698.00 0.00 4,738.00 76,226.00 139,926.00 119,228.72 0.00 0.00 0.00 1,533.00 2,825.00 0.00 2,825.00 95.00 16,244.29 12,701.00 139,926.00
2009
4,286.00 57,189.00 7,943.00 69,418.00 38,957.00 26,457.00 0.00 23,238.00 88,652.00 158,070.00 132,756.72 0.00 0.00 0.00 2,103.00 3,029.00 0.00 3,029.00 111.00 20,070.29 15,415.00 158,070.00
2010
4,089.00 63,508.00 7,431.00 75,028.00 38,768.00 42,773.00 0.00 17,973.00 99,514.00 174,542.00 149,121.72 0.00 0.00 0.00 1,216.00 2,989.00 0.00 2,989.00 221.00 20,994.29 14,308.00 174,542.00
2011
4,101.00 69,347.00 5,055.00 78,503.00 35,836.00 51,121.00 0.00 25,260.00 112,217.00 190,720.00 161,638.72 0.00 0.00 0.00 1,244.00 3,017.00 0.00 3,017.00 159.00 24,661.29 15,400.00 190,720.00
2012e
4,201.00 7 4,110.37 5,181.38 8 3,492.75 3 6,474.65 5 2,478.42 0.00 3 3,848.34 12 2,801.41 20 6,294.16 17 6,976.69 0.00 0.00 0.00 1,306.20 2,866.15 0.00 2,866.15 166.95 2 4,978.17 1 5,915.80 20 6,294.16
2013e
4,301.0 0 78,847.1 5 5,310.9 1 88,459.0 6 37,349.7 8 54,600.3 0 0.0 0 40,950.3 5 132,900.4 3 221,359.4 9 191,728.9 6 0.0 0 0.0 0 0.0 0 1,371.5 1 2,794.5 0 0.0 0 2,794.5 0 176.9 7 25,287.5 5 16,759.7 0 221,359.4 9
Cash Flow Statement

(IAS,HUF mn, 30/09)
2008
14,279.00 -18,563.00 735.00 -3,549.00
2009
21,113.00 -1,289.00 -1,324.00 18,500.00
2010
12,948.00 -17,191.00 -1,022.00 -5,265.00
2011
25,027.00 -16,534.00 -1,206.00 7,287.00
2012e
2 4,925.73 -1 5,317.95 -1,019.44 8,588.34
2013e
24,244.8 2 -16,123.4 6 -1,019.3 6 7,102.0 0
Margins & Ratios

2008
-6.8% 15.3% 7.9% 11.0% 10.6% 10.0% 85.2% -1,818.0 63,525.0 118,943.7 1.6
2009
6.4% 20.1% 13.4% 11.8% 10.9% 10.6% 84.0% -20,098.0 73,237.0 114,761.7 1.4
2010
2.4% 21.4% 14.4% 14.1% 11.9% 12.4% 85.4% -14,763.0 85,206.0 135,574.7 1.3
2011
8.4% 19.9% 12.6% 10.5% 8.7% 8.9% 84.8% -22,084 .0 96,817 .0 140,798 .7 1 .5
2012e
3.3% 21.3% 13.8% 12.2% 9.6% 10.4% 85.8% -30,815.2 1 06,885.6 1 47,467.6 1.6
2013e
5.3% 19.5% 11.9% 11.2% 8.5% 9.5% 86.6% -37,978.9 116,140.7 155,121.6 1.7
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Erste Group Research Erste Sector Healthcare 08 March 2012 Erste Group Research Company Report Krka | Pharmaceuticals | Slovenia 08 March 2012
Krka
Buy
TEST
Erste Gr oup R es earc h C ompany R eport Kr ka | Pharmac eutic als | Slovenia 07 Marc h 2012
E UR mn 2 010 2011p Net sales 1,010.0 1,075.6 E BITDA 293.2 301.2 E BIT 211.5 214.0 Net result after min. 171.0 162.8 E PS (EUR) 4.83 4.60 CEPS (EUR) 7.18 6.94 B VPS (E UR) 29.69 32.13 Div./share (EUR) 1.40 1.45 E V/EBITDA (x) 8.0 6.4 P /E (x) 13.0 11.5 P /CE (x) 8.8 7.6 Divi dend Yield 2.2% 2.7% S hare price (E UR) close as of 0 6/03/2012 Number of shares (mn) Market capitalization (EUR mn) E nterprise value (EUR mn)
2012 e 1,146.0 331.1 235.2 175.0 4.9 4 7.3 5 35.6 7 1.5 5 5.7 10.6 7.1 3.0%
2013e 1,231.8 364.5 258.1 193.7 5.47 8.21 39.69 1.65 5.2 9.6 6.4 3.1% 52.5 35.4 1,858.1 1,897.5
65 60 55 50 45 40 Krka
52 weeks
SBI TOP
P erformance
in EUR
12M
-14.0%
6M
-6.3%
3M
5.1%
1M
3.9%
Reuters K RKG.LJ Free float Bloomberg KRKG SV Shareholders Div. Ex-da te 11/07/11 Target price 73.5 Homepage:
69.7% SOD Fu nd (15.0%) KAD (9.86%)

www.krka.si
Warsaw listing to augment sound fundamental story

With the gloomier macroeconomic picture in Krkas home Slovenia (resulting in an S&P rating downgrade and a hike in government bond yields) already factored into our previous update and business prospects largely unchanged following the publication of the 2011 unaudited results, we make only a minor fine-tuning of our DCF-derived 12-month target price to EUR 73.5 per share (vs. the earlier target of EUR 75.5). The company remains firmly committed to going ahead with its Warsaw listing plans, promising to improve its stock liquidity and visibility on the international scene. Consequently, supported by the ongoing share buyback as part of listing preparations, we believe that stock appreciation is in the cards. We confirm our Buy recommendation.
The changes to our model focus on incorporating 1) the mounting pricing pressures in the CEE pharma markets, dampening gross margin; 2) the less robust than envisaged operating profitability margin, as a result of lower gross profitability, coupled with the more sizable spending in the sales & marketing costs area; 3) the somewhat less deteriorating impact of the regional currencies weakening on the financial result.
All told, we leave our sales target for 2012 unchanged at EUR 1,146.0mn. Nonetheless, reflecting the increasing pricing pressures in the core CEE markets, we reduce our operating profit target to EUR 235.2mn (corresponding to a 9.9% y/y rise) for 2012. With regional currencies expected to witness a stop in their weakening trend later this year, we see some room for financial result improvement y/y, to a loss of EUR 8.0mn in 2012. We set our net profit target for 2012 at EUR 175.0mn, up 7.5% y/y, only slightly down (by 2.2%) compared to our previous forecast.
The 2011 report confirmed the earlier published sales highlights CEE markets: The 2011 results confirmed that Krka is taking a break from its traditionally robust performance in Central European markets. Like its peers, Krka cannot escape from the negative consequences of the ongoing healthcare reform in its crucial Polish market. The negative effects are magnified by its status as the only Euro Area-based pharma player, suffering from the zloty weakness far more than its Hungarian peers (who see their local currency on a depreciation path vs. the euro). While the currency grip for Krka is set to ease somewhat in the course of 2012, the tightening of reimbursement rules and price erosion are set to dampen the outlook. As the major trends were already reflected in our previous update (when we cut our 2012 forecast for Krkas sales in the CEE region by 11.7%), we feel that our reduced sales forecast of EUR 296.9mn is within reach. For 2013, we assume only a gradual revival and set a sales target of EUR 310.2mn, corresponding to a 4.5% y/y rise. Southeast Europe: The final 2011 sales report evidenced a healthy recovery of Krkas sales in SEE markets. In 2011, Krkas sales in SEE markets nearly perfectly matched our forecast of EUR 146.3mn. While we prefer to remain on the conservative side (due in particular to the Romanian pharma markets persistent woes in receivables collection), we stick to our recently fine-tuned projections (sales target of EUR 154.6mn) here. For 2013, we see the y/y pace staying at around the same level (a 5.8% y/y rise to EUR 163.5mn) as achievable. Russia/CIS: Krkas Russia/CIS sales advanced some 8% y/y in 2011. Although the 4Q11 sales were slightly behind the exceptional showing of 4Q10, the 2011 sales figure of EUR 285.2mn was fully in line with our original forecast (EUR 285.4mn). While in Russia alone, Krkas sales of EUR 195.3mn (up 2% y/y) lagged slightly behind our original estimate, this was compensated for by the impressive sales increase in Ukraine and other CIS markets. Consequently, we believe that more progress is still in the cards, with the solid ruble position and steadily high oil prices promising a sound macroeconomic picture, boding well for sales improvements in the Russian market. We leave our recently revised target for Krkas 2012 sales in Russia/CIS unchanged at EUR 310.9mn, corresponding to a 9% sales growth tempo. For 2013, we set a sales target at EUR 340.4mn. . Western Europe: After a lackluster sales performance in 2010 (with sales in Western Europe and Overseas markets contracting 7.3% y/y), the situation turned for the better in 2011, demonstrating the key importance of new product launches for Krkas Western European markets fortunes. In 4Q11, sales growth in Western markets accelerated to 43% y/y, pushing up the 2011 tempo to 22% y/y, prompting us to raise our 2012 sales target in this category to EUR 279.6mn in our recent update. Going forward, we believe that, further supported by the sales network expansion and new product introductions, Krkas sales in Western Europe should keep their momentum. For 2013, we project Krkas Western European sales to advance 11% y/y to EUR 310.4mn.
In summary, reflecting the final 2011 figures more accurately, we leave our sales target for 2012 of EUR 1,146mn unchanged, translating into a 6.5% y/y rise (a notch above the companys current guidance of sales of EUR 1,134mn).
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With major changes already reflected in our previous company update, we opt for only minor finetuning of our projections going forward, while leaving our 2012 sales target unchanged
Erste Group Research Erste Sector Healthcare 08 March 2012 Erste Group Research Company Report Krka | Pharmaceuticals | Slovenia 08 March 2012 Pricing pressures keep lid on gross profitability margin
Despite the improving sales mix, weighed down by unfavorable forex developments coupled with increasing pricing pressures, the 2011 gross profit margin deteriorated to 61.3%, below the year-earlier periods level of 61.8%, as well as our forecast of 61.7%. With the 2011 picture worse than we envisaged, and pricing pressures in the CEE region (in particular, Poland and Hungary) expected to escalate further this year, we prefer to take a more cautious stance going forward and opt for a downward adjustment of our estimates, trimming our gross margin forecast to 61.5% (vs. the earlier projected 61.7%) for 2012. Going forward, we anticipate that these trends are set to continue, with the positive effect stemming from changes in the product and territorial sales structure on Krkas gross profitability to be largely erased by the price erosion in CEE markets. Factoring in the somewhat easing regional currencies grip, we envisage the 2013 gross margin improving, but for the time being only marginally, to 61.8%.
Changes to 2012 and 2013 forecasts

Consolidated, IFRS (EUR, mn) Net sales Costs of goods sold Gross profit Sales & marketing exp. R&D expenses General & admin. exp. Other oper. income Operating profit Financial result Income taxes Minorities Net income Gross margin EBIT margin Net margin 2012e Now Before 1,146.0 1,146.0 441.8 439.4 704.3 706.7 296.1 285.7 101.4 102.6 77.9 81.9 6.4 8.3 235.2 244.7 -8.0 -12.5 52.3 53.4 -0.1 -0.1 175.0 179.0 61.5% 61.7% 20.5% 21.4% 15.3% 15.6% Change 0.0% 0.5% -0.3% 3.6% -1.1% -4.9% -22.2% -3.9% -35.6% -2.2% -43.9% -2.2% 2013e Now Before Change 1,231.8 1,231.8 470.1 469.8 761.7 761.9 318.3 307.1 110.2 111.5 82.5 86.8 7.4 8.6 258.1 265.1 -6.6 -7.0 57.8 59.4 -0.1 -0.1 193.7 198.9 61.8% 61.9% 21.0% 21.5% 15.7% 16.2% 0.0% 0.0% 0.0% 3.6% -1.1% -5.0% -14.3% -2.7% -5.0% -2.6% -43.9% -2.6%
Reflecting more subdued gross margin profitability along with more sizable sales & marketing spending, we reduce our 2012 EBIT target to EUR 235.2mn
After the 4Q acceleration, pushing up the 2011 sales and marketing costs rise to 9.6% y/y, sales and marketing expenses (accounting for 26.1% of the total 2011sales) surpassed our forecast by 5.1%. Assuming further expansion of sales & marketing costs in 2012, in order to support new product launches, we opt for an upward adjustment of our sales and marketing cost estimate and envisage these expenses accounting for around 25.8% of total 2012 sales (above the earlier envisaged 24.9% of sales). For 2013, we continue to assume sales and marketing cost growth returning to match the sales tempo, and hence its relative share unchanged compared to the 2012 level. In 2011, the company managed to decrease general and administrative costs by 2.5% y/y to EUR 75.6mn, 3.8% below our estimate of EUR 78.5mn. Although we think that, after the relatively sizable cost cutting move in 2011, the room for savings is getting narrower, this prompts us to trim our G&A expenses forecast to 77.9mn, or 6.8% of total 2012 sales. For 2013, we expect the company to continue with cost optimization in the G&A expenses area, with the share of G&A costs slipping to around 6.7% of total sales. In addition, Krkas R&D expenditures lagged (by 3.5%) behind our forecasts in 2011. Nonetheless, as the 2011 relative drop to 8.6% of sales was to a certain extent undoubtedly attributable to uneven quarterly spending in this area, and Krka remains committed to its heavy emphasis on investments in the R&D area as the
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main source of its future growth, we continue to envisage the share of R&D expenses in total sales at around the past years average level of 8.9% to 9.0% in 2012 and 2013. The levels of necessary new provisioning and the release of previous provisions have traditionally been among the biggest question marks in projecting Krkas results. After a bumpy 2009, when the total reversal of provisioning (recorded under other operating income) stood at EUR 91.4mn, while additional provisions (weighing on sales and distribution expenses) totaled EUR 47.5mn, neither 2010 nor 2011 saw any major events. Although the company believes that the provisions of EUR 47.5mn created for the perindopril case will be reversed at some point in the future, this is not envisaged to happen in 2012. As before, we assume no major litigation on the horizon and anticipate the level of provisioning remaining at a minimal level in 2012. At the same time, we also envisage a low level of provision release. In summary, reflecting the slightly lower 2011 other operating income balance (of EUR 4.7mn) than we originally assumed, we opt to decrease our earlier forecast, projecting other operating income of around EUR 6.4mn in 2012 and EUR 7.4mn in 2013. All told, our 2012 EBIT target arrives at EUR 235.2mn (3.9% down from the previously estimated EUR 244.7mn), translating into an EBIT margin of 20.5% (down from the 21.4% projected earlier). For 2013, we still believe that a slight improvement of the operating margin is achievable and set our EBIT target at EUR 258.1mn, corresponding to an EBIT margin of 21.0%.
We set our new net profit target for 2012 at EUR 175.0mn, only slightly (by 2.2%) down compared to our previous forecast
Although the regional currencies appreciation path might be somewhat more volatile in the course of 2012, we think that, after the unfavorable forex fortunes hit to the 2011 financial result, the company is poised to see a turn for better in 2012. In addition, the companys 2011 financial result was dragged down not only by forex losses, but also by high provisioning for bad receivables (the total impairment and write-off of receivables of EUR 5mn were reported already in 1-3Q11), creating a quite low comparative base and big room for possible y/y progress. In total, in 2011, following a turnaround in 4Q11 (with a gain of EUR 7.8mn), the financial result was better than we expected (a EUR 14.0mn loss, vs. our forecast of a EUR 18.9mn loss). And as the company reassured us that no provisioning of a similar scope is anticipated to weigh on the 2012 results, we believe that our recently revised estimates are too conservative at the moment. Consequently, although we still project the financial result ending in red territory, we now anticipate the financial loss to be of a smaller magnitude at EUR 8.0mn (vs. the earlier projected EUR 12.5mn). Going forward, we fine tune our estimate for the 2013 financial result slightly downwards, to EUR 6.6mn loss. In summary, our net profit target for 2012 arrives at EUR 175.0mn, only slightly changed from the previous EUR 179.0mn. For 2013, we assume that, backed by the strong Russia/CIS performance coupled with the patent expiration-driven expansion in Western markets, Krka has all prerequisites to accelerate its top line growth and, thanks to the ongoing strict cost control, post solid improvements on the bottom line too. We set our 2013 consolidated net profit target at EUR 193.7mn, corresponding to a 10.7% y/y increase.
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2011 results review

Krka published its 2011 report on March 1, 2012, wrapping up the reporting season in the CEE pharma universe.
Consolidated sales review EUR 000 Slovenia South-East Europe Russia/CIS Central Europe Western Europe & Overseas IFRS consolidated Total sales (EUR 000) Operating profit (EUR 000) Net income (EUR 000) Operating margin Net margin Source: Krka 4Q2011p/e 4Q2010 24,361 26,416 38,648 35,141 95,625 97,516 71,129 69,811 77,714 54,510 4Q2011p 4Q2010 307,477 283,394 45,030 56,842 47,351 50,102 14.6% 20.1% 15.4% 17.7% 2011p/e 2010 -7.8% 101,817 104,640 10.0% 146,148 138,014 -1.9% 285,225 264,897 1.9% 288,238 293,675 42.6% 254,199 208,795 y/y 2011p 2010 8.5% 1,075,627 1,010,021 -20.8% 214,006 211,471 -5.5% 162,801 171,025 19.9% 20.9% 15.1% 16.9%
y/y y/y -2.7% 5.9% 7.7% -1.9% 21.7% y/y 6.5% 1.2% -4.8%
Fueled by pickup in Western European sales and support from solid Russia/CIS performance, 2011 sales advanced 6.5% y/y to EUR 1,075.6mn, fully confirming earlier revealed sales highlights
As Krka published its key 2011 sales performance data earlier in January, the full 2011 report did not bring any major surprises as far as the top line is concerned, but rather reassured investors that the companys sales tempo did not take a pause in 4Q11. In 2011, the top line was reported to have advanced 6.5% y/y to EUR 1,075.6mn, out of which the fourth quarter contributed EUR 307.5mn (28.6% of the total). Exports accounted for around 91% of total consolidated sales in 2011. With a tailwind from new product launches accelerating in 4Q, sales in Western Europe and overseas markets surged 22% y/y to EUR 254.2mn (in 4Q11 alone, they jumped 43% y/y). Although the exceptionally high comparative base put a brake on y/y progress in 4Q, the performance in Russia/CIS markets was sound, with Krkas 2011 sales advancing 8% y/y to EUR 285.2mn, or 26% of total 2011 sales. In Russia alone, Krkas 2011 sales tempo stood at a rather modest 2% y/y, with sales reaching EUR 195.3mn. Krka did significantly better in Ukraine, where its sales jumped 29% y/y, and in Kazakhstan, where its sales soared 31% y/y. Sales in Southeast Europe continued in their acceleration in 4Q (up 10% y/y and 13.7% q/q), lifting 2011 sales there to EUR 146.1mn, up a solid 6% y/y. On the other hand, as already indicated by interim data, dampened by the negative impact of the ongoing healthcare reforms as well as regional currencies depreciation, Krkas sales performance in Central European markets was sluggish. The companys sales slipped 2% y/y (to EUR 288.2mn), while still delivering 27% of the 2011 total. Krkas sales in Poland, the largest of its CEE markets, plunged 16% y/y to EUR 109mn in 2011. Reflecting the region-wide escalating pricing pressures along with less favorable currency developments (with CEE region currencies weakening vs. the EUR in the course of the year), Krkas gross margin deteriorated y/y (albeit not dramatically), from 61.8% in 2010 to 61.3% in 2011. Furthermore, although the company managed to cut its administrative costs by 2.5% y/y and its R&D expense rise also lagged behind the sales tempo, the accelerating sales and marketing costs (up 12.3% y/y in 4Q11 and 9.6% y/y in 2011) dampened Krkas operating profit progress to 1.2% y/y (to EUR 214.0mn) in 2011. The EBIT margin worsened to 19.9% (down from 20.9% in 2010). Although the financial result recorded a significant improvement in 4Q11 (ending at a gain of EUR 7.8mn), due to the previous quarters weak showing (dragged down by the forex losses along with the receivables write-offs in Romania), it ended far more deeply in red territory than in 2010.
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As y/y less favorable currency fortunes and price erosion took their toll, bottom line retreated 4.8% y/y in 2011
Consequently, while the effective tax rate decreased y/y, 2011 net profit ended 4.8% below the 2010 bottom line, but still broadly matching the companys guidance of EUR 162mn.
Valuation /Recommendation
Despite recent deterioration, its home country status warrants relative advantage for Krkas valuation compared to its peers
Although its home country Slovenia did not escape the consequences of the deepening Eurozone crisis, Krkas valuation model parameters are still far more favorable than those of its Hungarian rivals. First, despite the recent rise, the risk-free rate remains lower compared to the one we apply for the home countries of Krkas regional peers. Reflecting the currently relatively elevated levels of Slovene government bond yields, we stick to our risk-free rate assumptions in our DCF model for Krka at 5.5% for 2012-16. For perpetuity, we continue to apply a risk-free rate of 5%. Secondly, our methodology for setting equity risk premiums is linked to the countrys S&P long-term currency rating. Here, Slovenia, despite its recent downgrade (with an A+ rating), keeps its status as one of the top performers in the CEE region. The methodology yields an equity risk premium for the explicitly forecast period at 5.5% and for perpetuity at 5.3%, still well below equity risk premiums for Krkas Hungarian peers. Our calculated WACC arrives at 10.0% for 2012-16 and 10.2% for perpetuity. Incorporating the revised estimates and changing timeframe into our model (compared to our last company update from February 2012), we arrive at a new DCF-derived 12month target price of EUR 73.5 per share, only marginally changed from the earlier value of EUR 75.5 per share. We continue to believe that Krkas long-term investment case remains very solid. The companys sales structure is very well balanced and Krkas results are not overly dependent on any of its markets, with the company able to compensate for a temporary setback in some by acceleration in others. Consequently, although healthcare reforms in the CEE region are likely to take a higher toll on Krkas results than originally expected, the companys solid growth is not endangered. Krkas improving Western markets fortunes, driven by a product pipeline full of generic bestsellers waiting for patent expirations, complemented by the strong presence in Russia/CIS, provide a sufficient antidote to a temporary slowdown in the CEE region. Although Krka (unlike Richter) does not plan to enter the original drug research arena even in cooperation projects, it maintains its innovative edge in the generics field, staying at the regions top in providing modern, up-to-date generics for the most widely prescribed therapeutic indications (in particular, the cardiovascular and CNS area), and first to market exploiting the patent expiration niche in Western Europe. The innovative edge bodes well for maintaining above-average prices, translating into above-average profitability margins. While Krkas market capitalization is nearly on par with that of Richter, the stocks liquidity is well below that of its Hungarian rival, discouraging in part the most demanding foreign portfolio investors. Nonetheless, the prepared Warsaw Stock Exchange listing promises to make this problem history for Krka. Krkas management remains very much committed to the prepared Warsaw listing and sticks to the original deadline of the end of June 2012. We continue to believe that the stock is set to benefit from this move, as it will increase the stocks appeal and should help it to return to its earlier premium vs. its CEE-based sector peers, which is fully warranted, given Krkas stable growth and above-average profitability parameters. Meanwhile, the companys further gathering of shares on the Ljubljana Stock Exchange for the dual listing provides solid support to the stocks
Our new target price arrives at EUR 73.5 and we confirm our Buy call on Krka
liquidity and share price, amid market turbulence. (In 2011, Krka repurchased 362,836 own shares, for a total value of around EUR 20.9mn, corresponding to 12.1% of the total stock turnover of Krka shares on the Ljubljana Stock Exchange. In the first two months of 2012, Krka bought an additional 35,535 shares, worth EUR 1.8mn.) With our DCF-based target price pointing to 40.2% upside potential, we confirm our Buy call on Krka.
Krkas share gathering on the stock exchange continues in 2012

900 800 700 600 500 400 300 200 100 0 70 60 50 40 30 20 10 0
Source: LJSE
14.7.2011 18.8.2011 25.8.2011 1.9.2011 8.9.2011 15.9.2011 22.9.2011 29.9.2011 6.10.2011 13.10.2011 20.10.2011 27.10.2011 3.11.2011 24.11.2011 1.12.2011 8.12.2011 15.12.2011 22.12.2011 29.12.2011 6.1.2012 26.1.2012 2.2.2012 9.2.2012 16.2.2012
total value (EUR 000)
average price (EUR)
Page 56
WACC calculation
DCF valuation
(EUR mn) Sales growth EBIT EBIT margin Tax rate Taxes on EBIT NOPLAT + Depreciation Capital expenditures / Depreciation +/- Change in working capital Chg. working capital / chg. Sales - Capital expenditures Free cash flow to the firm Terminal value growth Terminal value Discounted free cash flow - Dec 31 2011 Enterprise value - Dec 31 2011 Minorities Non-operating assets Net debt Other adjustments Equity value - Dec 31 2011 Number of shares outstanding (mn) Cost of equity 12M target price per share (EUR) Current share price (EUR) Up/Downside 2012e 6.5% 235.2 20.5% 23.0% -54.1 181.1 95.9 179.9% -29.4 -41.8% -172.6 75.1 2013e 7.5% 258.1 21.0% 23.0% -59.4 198.7 106.5 163.0% -35.1 -41.0% -173.6 96.5 2014e 8.5% 282.4 21.1% 23.0% -65.0 217.4 118.2 147.3% -42.3 -40.5% -174.1 119.2 2015e 9.0% 309.7 21.3% 23.0% -71.2 238.4 131.2 134.1% -48.4 -40.4% -175.9 145.3 2016e 9.5% 341.1 21.4% 23.0% -78.4 262.6 145.6 122.8% -55.3 -40.2% -178.7 174.1 2017e (TV) 7.0% 341.1 20.0% 20.0% -68.2 272.9 145.6 100.0% -47.4 -42.5% -145.6 225.4 3.0% 3,206.7 1,935.1
68.3 2,380.4 1.6 0.0 50.7 0.0 2,328.1 35.4 10.1% 73.5 52.5 40.2%
79.8
89.6
99.4
108.2


Terminal value EBIT margin 74 9.2% 9.7% 10.2% 10.7% 11.2% 74 9.2% 9.7% 10.2% 10.7% 11.2% 19.0% 79.0 74.1 69.8 66.1 62.9 2.0% 73.5 69.6 66.1 63.1 60.3 19.5% 81.2 76.1 71.7 67.9 64.5 20.0% 83.3 78.1 73.5 69.6 66.1 20.5% 85.5 80.1 75.4 71.3 67.7 3.5% 89.5 83.3 78.1 73.5 69.6 21.0% 87.6 82.0 77.2 73.1 69.4 4.0% 96.9 89.5 83.3 78.1 73.5
WACC
WACC
Page 57
Income Statement
(IAS, EUR mn, 31/12)
2008
31/12/2008
2009
31/12/2009
2010
31/12/2010
2011p
31/12/2011
2012e
31/12/2012
2013e
31/12/2013
949.92 -325.10 624.82 -311.91 8.62 -84.75 308.39 -71.61 236.78 -31.15 0.00 205.63 -49.74 0.00 0.06 155.96
953.04 -370.24 582.79 -362.31 102.79 -88.28 311.67 -76.68 234.99 -10.67 0.00 224.32 -50.64 0.00 0.08 173.77
1,010.02 -385.41 624.61 -334.11 11.89 -90.92 293.19 -81.72 211.47 -0.10 0.00 211.37 -40.45 0.00 0.11 171.03
1,075.63 -416.70 658.92 -356.71 4.72 -92.93 301.19 -87.19 214.01 -14.03 0.00 199.98 -37.24 0.00 0.07 162.80
1,146.05 -441.77 704.28 -374.04 6.42 -101.43 331.14 -95.90 235.23 -8.05 0.00 227.18 -52.25 0.00 0.07 175.00
1,231.7 6 -470.0 6 761.7 0 -400.7 9 7.3 9 -110.2 4 364.5 2 -106.4 5 258.0 6 -6.6 1 0.0 0 251.4 6 -57.8 3 0.0 0 0.0 8 193.7 0
Balance Sheet
(IAS, EUR mn, 31/12)
2008
128.98 635.25 44.84 809.07 211.35 243.01 0.00 7.60 461.96 1,271.04 781.47 1.82 0.00 0.00 149.66 83.73 24.13 107.86 110.64 119.57 230.21 1,271.04
2009
126.58 649.15 32.30 808.02 181.65 337.95 0.00 13.41 533.01 1,341.03 918.69 1.68 0.00 0.00 107.40 105.11 25.32 130.43 52.78 130.05 182.83 1,341.03
2010
122.82 686.46 37.23 846.51 229.34 404.57 0.00 7.79 641.70 1,488.20 1,051.75 1.58 0.00 0.00 108.89 67.21 26.61 93.82 67.72 164.44 232.17 1,488.20
2011p
119.08 703.11 37.27 859.47 253.21 401.16 0.00 20.19 674.56 1,534.03 1,138.24 1.51 0.00 0.00 104.82 25.50 24.77 50.27 45.40 193.78 239.18 1,534.03
2012e
118.13 773.42 44.17 935.72 265.60 424.54 0.00 25.23 715.38 1,651.10 1,263.65 1.51 0.00 0.00 94.34 24.23 19.76 43.99 38.93 208.68 247.61 1,651.10
2013e
117.2 2 850.7 7 52.3 4 1,020.3 3 279.7 6 453.2 5 0.0 0 30.6 6 763.6 7 1,784.0 0 1,405.9 8 1.5 1 0.0 0 0.0 0 84.9 0 23.0 1 15.4 8 38.4 9 32.3 6 220.7 5 253.1 1 1,784.0 0
Cash Flow Statement

(IAS,EUR mn, 31/12)
2008
146.89 -148.60 -6.48 -8.18
2009
165.74 -91.21 -68.72 5.81
2010
181.52 -112.62 -74.52 -5.62
2011p
242.15 -107.44 -127.22 7.49
2012e
247.19 -172.56 -69.59 5.05
2013e
251.1 0 -173.5 5 -72.1 3 5.4 3
Margins & Ratios

2008
21.6% 32.5% 24.9% 16.4% 21.5% 15.3% 61.6% 186.8 231.7 1,143.9 1.7
2009
0.3% 32.7% 24.7% 18.2% 20.4% 15.1% 68.6% 144.5 350.2 1,197.6 1.9
2010
6.0% 29.0% 20.9% 16.9% 17.4% 13.8% 70.8% 127.1 409.5 1,316.0 1.9
2011p
6.5% 28.0% 19.9% 15.1% 14.9% 12.5% 74.3% 50 .7 435 .4 1,320 .1 1 .7
2012e
6.5% 28.9% 20.5% 15.3% 14.6% 12.9% 76.6% 37.9 467.8 1,417.2 1.7
2013e
7.5% 29.6% 21.0% 15.7% 14.5% 13.2% 78.9% 24.7 510.6 1,532.6 1.7
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Erste Group Research Erste Sector Healthcare 08 March 2012 Erste Group Research Company Report Richter Gedeon | Pharmaceuticals | Hungary 08 March 2012
Richter Gedeon
Buy
TEST
Erste Gr oup R es earc h C ompany R eport | Phar maceutic als | Hungar y Richter Gedeon 07 Marc h 2012
HUF mn 2 010 2011p 2012 e 2013e Net sales 275,312.0 309,339.0 330,275.6 357,408.0 E BITDA 83,788.0 87,225.0 82,308.7 89,218.1 E BIT 62,653.0 62,623.0 56,059.1 61,148.5 Net result after min. 64,479.0 49,196.0 53,148.1 58,885.6 E PS (HUF) 3,459.64 2,639.63 2,851.6 8 3,159.52 CEPS (HUF) 4,593.65 3,959.65 4,260.1 1 4,665.61 B VPS (HUF) 23,553.82 26,026.53 28,159.4 0 30,538.93 Div./share (HUF) 860.00 700.00 735.0 0 780.00 E V/EBITDA (x) 8.9 6.6 7.6 6.5 P /E (x) 12.3 13.0 13.1 11.9 P /CE (x) 9.3 8.6 8.8 8.0 Divi dend Yield 2.0% 2.0% 2.0% 2.1% S hare price (HUF) close as of 06/03/2012 37,485 Number of shares (mn) 18.6 Market capitalization (HUF mn / EUR mn) 698,626 / 2,371 E nterprise value (HUF mn / EUR mn) 628,444 / 2,133
42,000 40,000 38,000 36,000 34,000 32,000 30,000 28,000 26,000 24,000
52 weeks
Richter Gedeon
BUX
P erformance
in HUF
12M
-0.5%
6M
9.0%
3M
9.0%
1M
-4.7%
Reuters GDRB.BU Free float Bloomberg RICHT HB Shareholders Div. Ex-da te 03/06/11 Target price 47,800 Homepage:
74.7% Hu ngarian State (25.1%)

www. richter.hu
R&D foray to give new impetus to stock price/valuation

Our revised DCF-derived 12-month target price arrives at HUF 47,800 per share (up vs. our previous target of HUF 45,650), pointing to attractive upside potential for the stock. Consequently, we confirm our Buy recommendation on Richter.
We believe that, with its long-term outlook highly likely to be buoyed by benefits from its original R&D foray, Richters investment case remains unique in the current investable CEE pharma universe. The companys strong presence in the expanding Russia/CIS market and solidified specialty niche positioning (augmented by the upcoming Esmya launch), alongside the weak forint, should offset the pressures stemming from healthcare reforms in the CEE region, including its home market, in the short term.
The most important changes to our model include the following: 1) the worse than envisaged domestic sales outlook for 2012; 2) the stronger than anticipated Grnenthal contribution to the EU-15 sales, but steeper fall in the US market; 3) the newly available R&D-based relief to the OEP payments in 2012; 4) the impact linked to the liabilities related to the PregLem purchase; and 5) positive data from phase III clinical trials of cariprazine (increasing the likelihood of a successful launch of the product on the US market as soon as in late 2013/early 2014).
In summary, we raise our consolidated net profit target for 2012 to HUF 53,148mn, on sales of HUF 330,276mn, up 0.1% and down 1.7%, respectively, compared to our previous forecasts. For 2013, we set a new net profit target of HUF 58,886mn, on sales of HUF 357,408mn.
Changes in forecasts/outlook
2012 domestic sales performance foreseen as more subdued than originally thought Domestic market: The 2011 domestic market performance, with Richters sales advancing 5.5% y/y, was slightly behind our expectations. More importantly, the outlook is grimmer than originally thought. Referring to the significant pricing pressures, CEO Bogsch opted as per tradition for very cautious initial guidance, envisaging Richters domestic sales plummeting 15% to 20% y/y in 2012. While we assume that the regulatory changes will bite rather deeply into Richters home top line in 2012, the guidance of Richters CEO seems too conservative. (For comparison, for 2011, CEO Bogsch originally targeted flat domestic sales.) With 2011 domestic sales lagging (by 1.0%) our forecasts and the outlook now foreseen more cloudy (in part, due to uncertainties linked to the blind bidding auctions system impact, as well as some yet to be announced savings in the drug subsidy budget), we opt to trim our 2012 consolidated domestic sales target from HUF 34.8bn to HUF 32.1bn (translating into a 10% y/y drop vs. the earlier anticipated 3.3% y/y decline). Although it is still impossible to quantify the effects of all of the regulatory pressures more accurately in the medium term, as many of them are of a complex nature and likely to change the competitive landscape, there is no doubt that Richters domestic sales tempo will be tempered, with sales likely to rebound only slightly from their 2012 lows in 2013, returning to low single-digit growth. Consequently, for 2013, we set our new domestic sales target at HUF 32.7bn, up 2% y/y, but down 8.3% compared to our previous forecast. Russia/CIS: Reflecting the low comparative base, with 4Q10 depressed by the earlier quarters massive pre-shipments, Richters Russian sales in 4Q11 climbed skywards, up 184.8% y/y in euro terms. Consequently, the 2011 y/y sales tempo was at a robust 26.2% y/y in euro terms, well above CEO Bogschs guidance (of a 10-15% y/y rise) as well as our more optimistic forecast of 18% y/y growth. Nonetheless, as the extremely high tempo in 4Q11 was partly attributable to somewhat higher inventory buildup at wholesalers towards the end of the year, Bogsch tempered his optimism regarding the 2012 outlook, envisaging Richters sales in Russia rising just 0-5% y/y. Consequently, taking into account the possibly high preshipments element dampening the 1Q12 performance, we decided to leave our earlier forecasts for Russian sales in 2012 broadly unchanged in nominal terms, at some EUR 338mn; given the higher comparative base, this translates into a 5% y/y rise (vs. the earlier expected 12% y/y). In addition, the companys 4Q11 performance in other CIS markets, although not as shiny as in the buoyant Russia, outpaced our projections. Consequently, while slightly raising our forecast for other CIS markets, we lift our forecast for Russia/CIS sales from EUR 470.0mn to EUR 476.1mn in 2012 (translating into 6% y/y growth in EUR terms). Given the promising economic outlook (bolstered by steadily high oil prices) as well as stabilizing currency situation, we believe that the Russia/CIS region is poised to maintain a solid tempo in the medium term. For 2013, we fine tune our sales target for Russia/CIS of around EUR 527.3mn, corresponding to sales growth of around 10.8% y/y. EU: In 2011, the first-time consolidation of Grnenthals OC business propelled sales in the EU 15 region. Consequently, Richters export tempo to EU markets reached 15.0% y/y (to EUR 389.0mn). In the EU15 region alone, Richters 2011 sales jumped 74.7% y/y to EUR 113.4mn, out of which Grnenthal added EUR 52.5mn, well above the companys original guidance of EUR 45mn. In all EU territories, Richters 2011 sales matched or even slightly surpassed our forecast (Romania by 1.5%, the EU-9 by
Weak forint, still solid Russian sales should back up top line growth
0.9% and EU-15 by 2.7%). The only exception was Poland, where Richters sales (hampered by the market turbulence ahead of the new reimbursement change introduction from January 2012) slumped 15.2% y/y in 4Q11, lagging our estimates for 4Q11 by 18.2% and for the full-year 2011 by 4.1% (all figures in EUR terms). Consequently, we opt for an adequate adjustment of our projections for 2012. In line with the companys guidance, we raise the contribution of sales of oral contraceptive products from the Grnenthal portfolio to around EUR 50mn, while we slightly revise our forecast for EU-15 sales up to EUR 116.0mn. At the same time, we decided to make a cut to our sales forecasts for Poland, where the problematic start of the healthcare reform from January 2012 keeps weighing on Richters sales. All told, our new target for Richters sales to the EU in 2012 arrives at EUR 394.5mn, corresponding to a 1.4% y/y rise. While in 2012 the contribution of Esmya to the EU sales is estimated at a rather modest EUR 15mn, the positive impact from Esmya is anticipated to become more visible from 2013 onwards, with the peak sales in major EU markets to be reached rather quickly, in three years after market introduction, i.e. in 2015. All told, we believe that our EU sales target for 2013 of around EUR 445mn is achievable; driven by the Esmya sales pickup, the tempo should be in high single-digit terms in the medium run.
US: With the revenue from the profit sharing arrangement with Barr Laboratories on drospirenone drying up y/y, Richters US sales contracted 27.9% y/y (to USD 100.9mn), a slightly less steep drop than assumed by the companys earlier guidance, anticipating Richters sales in the US decreasing by around 35% y/y in USD terms in 2011. As there is no significant turnaround on the horizon yet, CEO Bogsch continues to paint a rather bleak picture for Richters US sales, expecting them to slump 40% y/y in USD terms. Assuming no significant product launches, stiffening competition on the drospirenone market, as well as reflecting the more conservative stance of the company, we opt to make another cut to our target for Richters US sales in 2012, from USD 88.1mn to USD 70.6mn. As before, for 2013, we foresee a minor increase as possible, should the cariprazine-based product hit the market before the end of the year (If everything goes according to plan, the market launch is currently anticipated for end of 2013/beginning of 2014.)
Finally, with our projections already incorporating the far weaker than earlier expected forint, along with the relative strength of the US dollar, we stick to our recently revised forex assumptions from 2012 onwards as follows. We use the average exchange rate of HUF 236.0/USD and an average exchange rate of HUF 295.0/EUR for 2012. For 2013, we leave our forecast unchanged at the average exchange rate of HUF 224.0/USD and the average exchange rate of HUF 279.0/EUR. After factoring in all of the above-mentioned changes, our consolidated sales target for 2012 arrives at HUF 330.3bn, down from the previous forecast of HUF 335.9bn, with some HUF 38.4bn to be delivered by wholesale and retail operations and HUF 291.9bn to be contributed by the pharmaceutical business segment. For 2013, our new consolidated sales target is at HUF 357.4bn (marginally below the earlier HUF 360.2bn), out of which HUF 317.4bn is expected to come from the pharmaceutical segment and HUF 40.0bn from the wholesale and retail arm.
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Erste Group Research Erste Sector Healthcare 08 March 2012 Erste Group Research Company Report Richter Gedeon | Pharmaceuticals | Hungary 08 March 2012 Changes to 2012 and 2013 consolidated forecasts
Consolidated, IFRS (HUF, mn) Sales Cost of sales Gross profit Sales & marketing costs Admin. & general costs R&D costs Other income / expense Operating profit Net financial income Taxation Minorities Net profit 2012e Now Before C hange -1.7% -1.8% -1.6% 0.2% -1.3% -1.7% -47.5% 0.0% -3.1% -0.1% -59.8% 0.1% 2013e Now Before Change -0.8% -0.8% -0.8% -0.2% -0.8% -0.8% -6.4% -1.2% -1.7% -1.3% -59.8% -1.1%
330,276 335,851 124,454 126,784 205,822 209,067 85,428 22,376 39,303 -2,656 56,059 1,170 4,006 -75 53,148 85,293 22,670 39,966 -5,054 56,084 1,207 4,010 -186 53,095 62.3% 16.7% 15.8%
357,408 360,227 134,274 135,306 223,134 224,921 90,682 23,946 42,532 -4,826 61,149 2,601 4,781 -82 58,886 62.4% 17.1% 16.5% 90,846 24,135 42,867 -5,156 61,917 2,646 4,842 -205 59,516 62.4% 17.2% 16.5%
Gross margin 62.3% EBIT margin 17.0% Net margin 16.1% Source: Erste Group R esearch
Weak forint set to bolster gross margin in 2012
With the magnitude of the Russia/CIS sales jump and the EU-15 progress bigger than we expected, Richters gross margin in 4Q11 (at 62.8%) ended well above our estimate of 60.1%. Going forward, we assume that the persisting positive effects from the more favorable currency situation (with the Hungarian forint depreciating vs. both the USD and EUR) will be partly compromised by the pricing pressures both at home and in the CEE markets. Consequently, sticking to our conservative stance, although the gross margin in 2011 surpassed our forecast (62.9%, vs. our estimate of 62.2%), we opt to leave our recently revised target for the 2012 consolidated gross margin of 62.3% unchanged for the time being. (Here we are slightly more optimistic than the companys rather conservative guidance from February 2012, projecting a gross margin of around 60% in 2012. But one has to bear in mind that the company navigated investors to assume a 2011 gross margin of around 60% still in November 2011.) Although pricing pressures associated with healthcare reforms in CEE markets are anticipated to put a lid on the gross profitability margin improvements in the coming years, for 2013, we think that, backed by the improving sales mix, further modest y/y progress in the gross margin (to 62.4%) is realistic. Sales and marketing expenditures surged 32.6% y/y in 2011 to account for 25.5% of total sales in the period. The level of expenses in the sales & marketing area was nearly perfectly in line with of our expectations. With the major drivers behind the high tempo (i.e. the buildup of sales and marketing infrastructure in Western European markets and amortization of marketing and patent rights acquired from Grnenthal) still in place and the launch of Esmya (already in 2Q12 in major EU markets, such as UK and Germany) bringing an additional impetus to spending, we envisage sales and marketing costs remaining at relatively high levels in the coming periods. For 2012, mirroring the slightly less robust top line, we opt for only a minor upward adjustment of our forecasts in relative terms and envisage sales and marketing costs at 25.9% (vs. the earlier projected 25.4%) of consolidated sales. For 2013, we continue to assume another - albeit less steep - increase in absolute terms, but still translating into a slight drop in relative terms (to 25.4% of total sales).
Western European sales network expansion takes its toll on sales and marketing costs
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Erste Group Research Erste Sector Healthcare 08 March 2012 Erste Group Research Company Report Richter Gedeon | Pharmaceuticals | Hungary 08 March 2012 R&D costs estimated to expand to nearly 12% of sales in 2012
With certain payments linked to the R&D cooperation with Forest Laboratories slipping from 4Q11 to 1Q12, research and development costs rose only 5.8% y/y in 2011 to account for just 9.3% of sales. This compares with the trimmed company guidance of 11% to 12% of sales from November 2011 and our forecast of 10.8% of sales. Also going forward, the timing of expenses associated with the R&D projects in cooperation with Forest Laboratories (already in phase III clinical trials) is set to remain uneven. Reflecting the start of the phase III clinical trials of Esmya in a new indication, the new guidance envisages R&D expenses accounting for around 12% in 2012. Consequently, we have no reason to change our forecast and continue to project R&D expenses for 2012 at around 11.9% of sales (or HUF 39.3bn). For 2013, we assume R&D spending remaining at the same level in relative terms as in our previous forecast, i.e. 11.9% of sales. As per the amendment to the healthcare law, Richter is entitled to reclaim part of its 2011 OEP payments in 2012, improving its operating results. As the company informed us, in 2012, reflecting the R&D-based relief, its regulatory toll will decrease by some HUF 2bn compared to the original expectations. While the Hungarian pharma industry manufacturers are keeping up their lobbying activities and the state verbally acknowledged a need to support R&D-oriented industries, such as pharma, in the forthcoming years the R&D-based relief for the OEP payments is still impossible, and the new measures validity is limited for one year only. Hence, we incorporate the R&D-based benefits just for 2012. 2011, in particular the fourth quarter, was marked by numerous one-offs, partly offsetting each other. 2012 is likely to be very similar. The recently announced positive data from phase III clinical trials of cariprazine in both schizophrenia and bipolar mania indications significantly increases the likelihood of the US product filing in 4Q12, and consequently the arrival of the related milestone payment from Forest Laboratories, brightening the picture. Nevertheless, we opt to leave the milestone payment as an interesting upside and for the time being calculate - apart from the impact of the R&D-based relief to the OEP payments - with the already announced estimated value adjustment expenses linked to the upcoming Esmya launch (of HUF 1.5bn, according to the company). In summary, our other income/expense balance target arrives at a negative HUF 2.7bn (vs. the earlier projected loss of HUF 5.0bn) in 2012. Although the picture might become rosier (should the possible future milestone payment from Forest Laboratories, linked to the product approval, be obtained already in 2013), we project that, dragged down by the OEP payments, the other income/expense balance will further slide into red territory, to a loss of HUF 4.8bn, in 2013.
Other income/expense balance expected to end in red; however, given positive effects of relief from home market regulatory toll, dive will be less deep
We leave our operating profit target for 2012 broadly unchanged at around HUF 56.1bn
Incorporating in particular the negative effect from the weaker than earlier domestic sales performance on the top line, but also the benefits from the newly available R&D-based relief to the OEP payments, our new operating profit target arrives at HUF 56,059mn for 2012 (only marginally changed compared to the earlier estimate of HUF 56,084mn), corresponding to a consolidated operating profit margin of 17.0%. For 2013, with the hike in the home market regulatory toll partly offset by the improving sales mix, we see a slight improvement in the EBIT margin as achievable. We set the EBIT target at 17.1%, above the 2012 level, but still marginally below our previous forecast of 17.2%.
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Erste Group Research Erste Sector Healthcare 08 March 2012 Erste Group Research Company Report Richter Gedeon | Pharmaceuticals | Hungary 08 March 2012 Forex situation still largely dictates financial result
The swinging fortunes of the Hungarian forint remain the major reason for the relatively high volatility of Richters financial result as well as its net profit on a quarterly basis. The 2011 results brought in some new elements in the financial result developments that need to be watched closely going forward. Most importantly, the regular reassessments related to the deferred purchase price of PregLem (stated in Swiss francs) along with reassessment of credit (in EUR) brought an element of instability to Richters financial result; while in 1Q11 these two items were the major force behind the push of the unrealized financial income to HUF 2,397mn, in subsequent periods (with the forint losing ground vs. the Swiss franc as well as euro), they worked in the opposite way. In 2011, the unrealized financial loss amounted to HUF 12,232mn, out of which the above-mentioned items contributed HUF 9,997mn. On top of that, in 4Q11, Richter recorded an unexpected impairment loss on investment, reflecting the adjusted fair value of Richters share in Protek. A deteriorating solvency situation at Hungarian pharmacies resulted in an accumulation of overdue debts at Hungaropharma and prompted a further increase of the share proportionate impairment loss to be accounted for at Richter to HUF 4,236mn in 2011 (compared to the HUF 2,310mn recorded in 1-3Q11). Although the 2011 net financial result was worse than we anticipated, the majority of the negative difference was attributable to one-off effects; consequently, our adjustment to our original forecast for net financial income for 2012 is not dramatic - from HUF 1.2bn to HUF 1.17bn. The uncertainties related to future forint developments prompt us to take a more conservative stance and we lower our financial result forecast for 2013 to around HUF 2.6bn (down from the HUF 2.65bn projected earlier).
Due to higher comparative base, we expect 2012 net profit rise to be slightly less pronounced than originally anticipated
Until 2011 (inclusive), Richter was entitled to a privileged tax status, enjoying a 100% tax holiday in Hungary. With the majority of taxable income derived from the companys home operations, the resulting effective tax rate on the group level remained very low. With the tax holiday coming to an end, but allowances related to investments (in particularly, related to the Debrecen biotech plant construction) still available, we assume that the effective tax rate will be at around 7.0% in 2012, rising to 7.5% in 2013 and to 14% thereafter. In summary, our new consolidated net profit target arrives at HUF 53,148mn for 2012, corresponding to an 8.0% y/y increase, a slightly less sizable rise than assumed earlier (14.6% y/y) from the slightly higher comparative base achieved in 2011. For 2013, we forecast Richters consolidated net profit at HUF 58,886mn (up 10.8% y/y, but down 1.1% compared to our previous estimate).
4Q11 results review

Richter announced its 4Q11 results on February 7, 2012. Buoyed by Russia and EU-15 sales, Richters 4Q11 top line climbed y/y. The y/y more favorable sales mix along with the weakening forint bolstered gross profitability. Despite the hampering effect of PregLem/Esmya related oneoffs, both the operating and bottom lines improved considerably y/y.
Domestic sales: Reflecting the renewed pricing pressures, partly compensated for by the beneficial effect of new product introductions, Richters domestic sales in 4Q11 contracted 6.6% y/y to HUF 7,536mn. Given the previous quarters strong showing, this translated into a 2011 sales rise of 5.5% y/y (to HUF 35,619mn).
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Erste Group Research Erste Sector Healthcare 08 March 2012 Erste Group Research Company Report Richter Gedeon | Pharmaceuticals | Hungary 08 March 2012 Exports: The export picture was mixed once again. With 4Q10 dampened by previous pre-shipments (worth two months sales), sales to Russia skyrocketed to EUR 95.4mn (up 184.8% y/y). In addition, the tempo in Ukraine and other CIS markets was sound, sending the total Russia/CIS sales up 120.6% y/y to EUR 135.9mn in 4Q11. The companys 4Q11 sales performance in the EU (sales up 24.2% y/y to EUR 100.2mn) remained solid, with sluggish sales in the EU-9 and Polish market offset by expanding sales to the EU-15, backed up by the Grnenthal portfolio contribution. Reflecting the y/y diminishing drospirenone related revenues, sales to the US market fell 21.6% y/y to EUR 23.2mn in 4Q11. In total, Richters 4Q11 exports advanced 47.3% y/y to EUR 275.5mn. 4Q11 results review
Consolidated sales review Hungary (HUF bn) USA (EUR mn) EU (EUR mn) Russia, CIS (EUR mn) Other (EUR mn) Total export (EUR mn) IFRS consolidated Total sales (HUF mn) Operating profit (HUF mn) Net income (HUF mn) Operating margin Net margin Source: Richter 4Q2011p 7,536 23.2 100.2 135.9 16.2 275.5 4Q2011p 91,062 13,719 8,881 15.1% 9.8% 4Q2010 8,067 29.6 80.7 61.6 15.1 187.0 4Q2010 59,632 8,893 7,036 14.9% 11.8% y/y -6.6% -21.6% 24.2% 120.6% 7.3% 47.3% y/y 52.7% 54.3% 26.2% 2011p 35,619 73.3 389.0 449.8 65.5 977.6 2011p 309,339 62,623 49,196 20.2% 15.9% 2010 33,759 108.2 338.3 374.3 55.0 875.8 2010 275,312 62,653 64,479 22.8% 23.4% y/y 5.5% -32.3% 15.0% 20.2% 19.1% 11.6% y/y 12.4% 0.0% -23.7%
Profitability: As the positive impact from the jump in Russian sales was complemented by the y/y more favorable forex situation, as well as shrinking share of low-margin wholesale/retail business, Richters consolidated gross margin improved y/y from 60.4% in 4Q10 to 62.8% in 4Q11. With the year-earlier period boosted by license payments linked to the Watson US marketing agreement on Esmya (USD 17mn), as well as some accounting changes, the comparative operating level was relatively tough to surpass this time. Sales and marketing costs continued to climb (up 32.5% y/y), reflecting the costs for the buildup of the Western European marketing network as well as expanding sales force in Russia. Accounting for the time value of the deferred purchase price due to the previous owners of PregLem (linked to the upcoming Esmya registration) hampered the other operating expenses (HUF 5,041mn). Nonetheless, reflecting the bold move on the gross profit line (up 58.8% y/y), operating profit surged 54.3% y/y to HUF 13,719mn in 4Q11.
While the forint weakening at the end of the quarter positively affected the revaluation of receivables/payables, the financial result suffered from revaluation of the PregLem linked financial liabilities. And as the company also recorded an impairment loss (of HUF 4,194mn) related to its investment in Protek, the financial result ended deeply in red territory in 4Q11. Net profit growth was tempered to 26.2% y/y in 4Q11.
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Valuation /Recommendation
Our 12-month target price arrives at HUF 47,800 per share, pointing to interesting upside potential, despite recent stock price appreciation
We have reviewed the parameters of our DCF model. In line with our previous company report from February 2012, we use the methodology for setting equity risk premiums based on S&P long-term currency ratings. With the S&P downgrade of Richters home country rating from BBB- to BB+ already factored into our model, we stick to the equity risk premium of 7.15% for the explicit forecast period of 2012-16 and of 6.65% for perpetuity. Furthermore, although yields on Hungarian 10-year government bonds are set to decline in the medium to long run, with respect to the currently shaky situation, we opt for only a minor fine tuning of our recently raised risk-free rate assumption from 8.8% to 8.6% for the detailed forecast period of 2012-16. Consequently, our WACC is at 14.1% for 2012-2013, at 14% for 2014-16 and 11.2% for perpetuity. All told, reflecting the revised projections as well as changing timeframe, our DCF-derived 12-month target price arrives at HUF 47,800 per share, vs. our earlier target of HUF 45,650 per share. We continue to believe that, in the still relatively shaky Hungarian equity market context, Richter represents one of the best investment opportunities. Although the company is not spared from the austerity measures of the Hungarian government, dampening the Hungarian pharmaceutical market, its primarily export-oriented sales structure, including heavy exposure to the promising Russia /CIS territory, with additional benefits from the weak forint on its profitability margins, bodes well for achieving solid results. While Richters business results benefit from the currently weak forint, the valuation parameters suffer at the same time. Should the pressure on the forint ease, the risks attached to an investment in Hungarian stocks should go down as well (immediately visible in decreasing yields on government bonds), with Richters investment story appeal unharmed. Importantly, Richters investment case remains rather unique in the investable CEE pharma universe. Richter keeps its status as the only CEE generics player with a (recently increasing) chance to bring (in cooperation with its US partner Forest Laboratories) its own original drug to the market. Importantly, the related news flow is set to get more frequent in the course of 2012. The first news hit investors screens in February 2012, with positive preliminary data from cariprazine phase III clinical trials in patients with acute mania associated with bipolar I disorder being soon followed by the more critically watched top line data from phase III clinical studies on cariprazine for schizophrenia. With the results announced so far supportive of the anticipated product filing by Forest Laboratories later this year in the US, the stock received a strong new trigger. We were prompted to increase the related probabilities for future cariprazine related revenues from the earlier applied success rate of 65% to 75%. All told, reflecting the fine tuning of our DCF model risk free rate parameters and adjustments to the envisaged royalty rate (from 9% to 13.5%), the cariprazine project contribution to our target price arrives at HUF 4,500 per share (up from the earlier estimated HUF 3,500 per share). Furthermore, Richters future product pipeline contains more possible triggers; apart from cariprazine being tested in other adjunct indications (major depression), the company still owes investors its final word on the cariprazine EU market entry strategy - discussions with possible partners are ongoing and more should be known in the course of the year. The more detailed information about the future cariprazine prospects along with the reported progress in the project (lifting the probability of success) bode well for the Richter valuation, as well its further share price appreciation. In addition, the Esmya potential might be
We believe that Richters investment story retains its appeal, with benefits from R&D foray yet to be priced in. We stick to Buy
significantly higher than currently assumed, should the new phase III clinical trials (to be initiated by Richter this year), aimed at expanding the indication for Esmya to a long-term myoma treatment, be successfully concluded (adding the new indication might double peak sales for Esmya from the currently envisaged EUR 100-150mn to EUR 200-300mn, according to the companys estimates). For comparison, in our model, we currently factor in Esmya peak sales of EUR 180mn and see Esmya as contributing HUF 1,585 per share to our target price. All told, we continue to believe that, combining the news flow pipeline full of attractive triggering events with sound fundamentals, the stock should provide some shelter from the storm to investors worried about Hungarys economic outlook and the impact of the unorthodox government measures. With the share price offering 27.5% upside potential to our revised target price of HUF 47,800 per share, we confirm our Buy recommendation on the stock.
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WACC calculation
DCF valuation
(HUF mn) Sales growth EBIT EBIT margin Tax rate Taxes on EBIT NOPLAT + Depreciation Capital expenditures / Depreciation +/- Change in working capital Chg. working capital / chg. Sales - Capital expenditures Free cash flow to the firm Terminal value growth Terminal value Discounted free cash flow - Dec 31 2011 Enterprise value - Dec 31 2011 Minorities Non-operating assets Net debt Other adjustments Equity value - Dec 31 2011 Number of shares outstanding (mn) Cost of equity 12M target price per share (HUF) Current share price (HUF) Up/Downside 2012e 6.8% 56,059.1 17.0% 5.0% -2,803.0 53,256.2 26,249.6 113.6% -1,220.2 -5.8% -29,814.2 48,471.4 2013e 8.2% 61,148.5 17.1% 14.0% -8,560.8 52,587.7 28,069.6 107.9% -1,897.8 -7.0% -30,295.2 48,464.4 2014e 11.6% 72,939.6 18.3% 14.0% -10,211.5 62,728.1 30,129.6 105.4% -3,417.5 -8.2% -31,742.3 57,697.9 2015e 11.8% 84,925.4 19.0% 14.0% -11,889.6 73,035.8 32,289.6 103.2% -5,587.5 -11.9% -33,326.9 66,411.1 2016e 9.8% 95,611.7 19.5% 14.0% -13,385.6 82,226.0 34,549.6 100.8% -5,370.7 -12.3% -34,815.5 76,589.4 2017e (TV) 8.0% 103,096.4 19.5% 19.0% -19,588.3 83,508.1 34,549.6 100.0% -4,895.4 -12.5% -34,549.6 78,612.7 3.0% 989,412.9 498,038.6
42,488.0 695,614.2 3,706.0 0.0 -67,969.0 0.0 759,877.2 18.6 14.6% 47,800 37,485 27.5%
37,237.7
38,884.3
39,256.3
39,709.2


Terminal value EBIT margin 47800 10.2% 10.7% 11.2% 11.7% 12.2% 47800 10.2% 10.7% 11.2% 11.7% 12.2% 18.5% 50,217 48,021 46,094 44,388 42,868 2.0% 47,800 45,996 44,389 42,948 41,648 19.0% 51,189 48,930 46,947 45,192 43,629 19.5% 52,162 49,839 47,800 45,996 44,389 20.0% 53,134 50,748 48,654 46,801 45,149 3.5% 54,831 52,162 49,839 47,800 45,996 20.5% 54,106 51,657 49,507 47,605 45,910 4.0% 57,933 54,831 52,162 49,839 47,800
WACC
Terminal value growth 2.5% 3.0% 49,839 52,162 47,800 49,839 47,800 45,996 44,389 45,996 42,948 44,389
WACC
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Income Statement
2008
31/12/2008
2009
31/12/2009
2010
31/12/2010
2011p
31/12/2011
2012e
31/12/2012
2013e
31/12/2013
236,518.00 -108,421.00 128,097.00 -67,886.00 0.00 -26,055.00 54,739.00 -20,583.00 34,156.00 9,297.00 0.00 43,453.00 -1,876.00 0.00 -167.00 41,410.00
267,344.00 -116,443.00 150,901.00 -70,983.00 0.00 -27,449.00 72,184.00 -19,715.00 52,469.00 4,431.00 0.00 56,900.00 -5,947.00 0.00 33.00 50,986.00
275,312.00 -107,137.00 168,175.00 -81,434.00 0.00 -24,088.00 83,788.00 -21,135.00 62,653.00 5,123.00 0.00 67,776.00 -3,136.00 0.00 -161.00 64,479.00
309,339.00 -114,842.00 194,497.00 -103,129.00 0.00 -28,745.00 87,225.00 -24,602.00 62,623.00 -10,728.00 0.00 51,895.00 -2,631.00 0.00 -68.00 49,196.00
33 0,275.55 -12 4,453.91 20 5,821.64 -10 7,803.72 0.00 -4 1,958.80 8 2,308.74 -2 6,249.62 5 6,059.12 1,169.76 0.00 5 7,228.88 -4,006.02 0.00 -74.80 5 3,148.06
357,407.9 7 -134,273.8 7 223,134.1 0 -114,628.3 3 0.0 0 -47,357.2 5 89,218.1 4 -28,069.6 2 61,148.5 2 2,600.5 4 0.0 0 63,749.0 6 -4,781.1 8 0.0 0 -82.2 8 58,885.6 0
Balance Sheet
2008
15,636.00 141,935.00 13,486.00 171,057.00 56,808.00 79,950.00 0.00 76,318.00 213,076.00 384,133.00 336,499.00 2,787.00 0.00 0.00 0.00 70.00 1,029.00 1,099.00 5,053.00 38,695.00 43,748.00 384,133.00
2009
14,558.00 142,363.00 18,247.00 175,168.00 51,459.00 88,333.00 0.00 115,010.00 254,802.00 429,970.00 376,142.00 2,613.00 0.00 0.00 0.00 702.00 818.00 1,520.00 5,387.00 44,308.00 49,695.00 429,970.00
2010
185,116.00 144,674.00 29,694.00 359,484.00 51,657.00 96,251.00 0.00 95,885.00 243,793.00 603,277.00 438,984.00 3,131.00 0.00 0.00 0.00 41,694.00 57,410.00 99,104.00 21.00 62,037.00 62,058.00 603,277.00
2011p
199,307.00 155,952.00 24,588.00 379,847.00 63,632.00 114,370.00 0.00 130,359.00 308,361.00 688,208.00 485,069.00 3,706.00 0.00 0.00 0.00 62,226.00 32,339.00 94,565.00 164.00 104,704.00 104,868.00 688,208.00
2012e
19 5,990.76 15 9,731.00 2 5,202.70 38 0,924.46 6 4,711.62 11 7,226.60 0.00 13 8,970.29 32 0,908.52 70 1,832.98 52 4,820.51 3,761.59 0.00 0.00 0.00 6 4,780.80 2 5,871.20 9 0,652.00 246.00 8 2,352.88 8 2,598.88 70 1,832.98
2013e
197,421.1 4 164,231.0 0 25,832.7 7 387,484.9 1 66,876.4 9 120,479.2 4 0.0 0 182,520.1 4 369,875.8 8 757,360.7 8 569,168.8 7 3,818.0 1 0.0 0 0.0 0 0.0 0 63,585.6 0 25,612.4 9 89,198.0 9 369.0 0 94,806.8 1 95,175.8 1 757,360.7 8
Cash Flow Statement

(IAS,HUF mn, 31/12)
2008
42,417.00 -35,429.00 2,131.00 7,625.00
2009
73,135.00 -25,941.00 -10,232.00 35,838.00
2010
74,674.00 -116,372.00 21,604.00 -17,694.00
2011p
65,565.00 -24,680.00 -5,253.00 43,006.00
2012e
4 9,487.20 -2 9,814.16 -1 1,061.75 8,611.29
2013e
89,454.5 0 -30,295.2 1 -15,609.4 4 43,549.8 5
Margins & Ratios

2008
5.6% 23.1% 14.4% 17.6% 12.9% 14.5% 88.3% -71,195.0 169,328.0 269,120.0 2.0
2009
13.0% 27.0% 19.6% 19.1% 14.3% 17.5% 88.1% -108,921.0 205,107.0 270,652.0 2.2
2010
3.0% 30.4% 22.8% 23.5% 15.8% 17.0% 73.3% -54,170.0 181,735.0 445,355.0 2.1
2011p
12.4% 28.2% 20.2% 15.9% 10.6% 10.5% 71.0% -67,969 .0 203,493 .0 453,145 .0 2 .0
2012e
6.8% 24.9% 17.0% 16.1% 10.5% 11.4% 75.3% -73,943.5 2 38,309.6 4 80,509.8 1.9
2013e
8.2% 25.0% 17.1% 16.5% 10.8% 12.0% 75.7% -118,565.5 274,700.1 480,033.8 2.0
Page 69
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Group Institutional & Retail Sales

Institutional Equity Sales Vienna Head: Brigitte Zeitlberger-Schmid +43 (0)5 0100 - 83123 Cash Equity Sales Hind Al Jassani +43 (0)5 0100 - 83111 +43 (0)5 0100 - 83121 Werner Fuerst Josef Kerekes +43 (0)5 0100 - 83125 Cormac Lyden +43 (0)5 0100 - 83127 Stefan Raidl +43 (0)5 0100 - 83113 Simone Rentschler +43 (0)5 0100 - 83124 Derivative Sales Christian Luig +43 (0)5 0100 - 83181 Brigitta Weilinger +43 (0)5 0100 - 83182 Sabine Kircher +43 (0)5 0100 - 83161 Christian Klikovich +43 (0)5 0100 - 83162 Armin Pfingstl +43 (0)5 0100 - 83171 Roman Rafeiner +43 (0)5 0100 - 83172 Institutional Equity Sales London Head: Michal Rizek +44 20 7623 - 4154 Jiri Feres +44 20 7623 - 4154 Tatyana Dachyshyn +44 20 7623 - 4154 Declan Wooloughan +44 20 7623 - 4154 Institutional Equity Sales Croatia Damir Eror (Equity) +38 562 37 28 13 Zeljka Kajkut (Equity) +38 562 37 28 11 Institutional Sales Czech Republic Head: Michal Rizek +420 224 995-537 Ondrej Cech (Fixed income) +420 224 995-577 Radim Kramule +420 224 995-537 Jiri Smehlik (Equity) +420 224 995-510 Pavel Zdichynec (Fixed income) +420 224 995-590 Institutional Sales Hungary Gregor Glatzer (Equity) +361 235-5144 Attila Preisz (Equity) +361 235-5162 Norbert Siklosi (Fixed income) +361 235-5842 Institutional Equity Sales Poland Head: Marin Hresic +48 22 330 6206 Pawel Czuprynski (Equity) +4822 330 62 12 Lukasz Mitan (Equity) +4822 330 62 13 Jacek Krysinski (Equity) +4822 330 62 18 Grzegorz Stepien (Equity) +48 22 330 6211 Institutional Equity Sales Turkey Simin z Gerards (Head) +9 0212 371 2525 Mine Yoruk +9 0212 371 2526 Institutional Equity Sales Slovakia Head: Dusan Svitek +48 62 56 20 Andrea Slesarova (Client sales) +48 62 56 27 Saving Banks & Sales Retail Head: Thomas Schaufler +43 (0)5 0100 - 84225 Equity Retail Sales Head: Kurt Gerhold +43 (0)5 0100 - 84232 Fixed Income & Certificate Sales Head: Uwe Kolar +43 (0)5 0100 - 83214 Treasury Domestic Sales Head: Markus Kaller +43 (0)5 0100 - 84239 Corporate Sales AT Mag. Martina Kranzl +43 (0)5 0100 84147 Karin Rattay +43 (0)5 0100 84112 Mag. Markus Pistracher +43 (0)5 0100 - 84152 Gnther Gneiss +43 (0)5 0100 - 84145 Jrgen Flassak, MA +43 (0)5 0100 - 84141 Antonius Burger-Scheidlin, MBA +43 (0)5 0100 - 84624 Fixed Income Institutional Desk Head G7: Thomas Almen +43 (0)5 0100 - 84323 Head Germany: Ingo Lusch +43 (0)5 0100 - 84111 Fixed Income International & High End Sales Vienna Jaromir Malak/ Zach Carvell +43 (0)5 100 - 84254 U. Inhofner/ P. Zagan/ C. Mitu +43 (0)5 100 - 84254 Fixed Income International Sales London Antony Brown +44 20 7623 4159
Page 70
Erste Group Research Erste Sector Healthcare 08 March 2012 Erste Group Research Company Report Richter Gedeon | Pharmaceuticals | Hungary 08 March 2012 Antibiotice
0.65 0.60 0.55 0.50 0.45 0.40 0.35 Jun 10
Rating history
Date 02. Feb 11 21. Jun 10 06. Nov 09 Rating Accumulate Hold Reduce Price 0.47 0.47 0.49 Target Price 0.54 0.50 0.49
Company description
Antibiotice Iasi is Romania' largest anti infective drugs producer and the only producer of injectable cephalosporin, the company ranking 10th on the Romanian pharmaceutical market with a 2.7% market share. The company is strategic for the Romanian healthcare system and sells almost 40% of output towards hospitals. Antibiotice is also world's second largest producer of active substance Nystatin, owing a market share of 25%. The product portfolio weights towards Rx drugs which accounted for some 80% of sales over the last three years.
06/09 H
Sep 10 Dec 10
02/02 A
Mar 11 Jun 11 Sep 11 Dec 11 Mar 12
Target price 12 m fwd
Company
Antibio tice
Specific disclosure(s) if applicable
Bioton
0.24 0.22 0.20 0.18 0.16 0.14 0.12 0.10 0.08 0.06 0.04 Jun 10
Rating history
Date 29. Jul 09 29. Jan 09 16. Jan 09 14. Jan 08 15. Jun 07 Rating Hold Reduce Under review Hold Accumulate Price 0.30 0.20 0.23 0.94 1.96 Target Price 0.31 0.19 1.03 2.25
Company description
Bioton entered the Polish stock market in March 2005. While the company was originally engaged in antibiotics manufacturing, thanks to its investment in up-to-date human insulin technology, insulin became the driver of its current success. Bioton is the only company in the CEE region manufacturing modern human insulin, and, given the still unsaturated insulin market in the region (especially in Russia) and the company's distinctive price competitiveness, Bioton's long-term prospects are promising. Its expansion targets include China, India and other Asian markets.
06/09 H
Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12
Company
Biot on
Page 71
Erste Group Research Erste Sector Healthcare 08 March 2012 Erste Group Research Company Report Richter Gedeon | Pharmaceuticals | Hungary 08 March 2012 Biofarm
0.250 0.240 0.230 0.220 0.210 0.200 0.190 0.180 0.170 0.160 Jun 10
Rating history
Date 10. Feb 12 03. Aug 11 02. Feb 11 28. Jun 10 06. Nov 09 Rating Hold Accumulate Hold Accumulate Hold Price 0.20 0.20 0.22 0.17 0.20 Target Price 0.22 0.25 0.23 0.23 0.21
Company description
Biofarm was set up in 1924, being one of the oldest and important Romanian drug producers. Company's drug portfolio consists mostly of OTC drugs and nutritive supplements, which account for more than 80% of sales. With few traditional brands and affordable prices, Biofarm managed to consolidate its position on few market niches such as digestive disorders treatment, cold/flu treatment and liver protection.
06/09 A
Sep 10 Dec 10
02/02 H
Mar 11 Jun 11
03/08 A
Sep 11 Dec 11
10/02 H
Mar 12
Company
Biof arm
Egis
28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 Jun 10
Rating history
Date 02. Nov 11 16. Sep 11 29. Jul 09 27. Feb 08 24. Oct 06 26. May 06 17. Aug 05 20. May 05 18. Aug 03 Rating Accumulate Buy Accumulate Buy Accumulate Buy Accumulate Buy Accumulate Price 17985.00 15180.00 17800.00 18850.00 26570.00 28820.00 17995.00 16950.00 7600.00 Target Price 21500.00 22000.00 21785.00 24400.00 31120.00 35600.00 20400.00 20450.00 11250.00
Company description
06/09 A
Sep 10 Dec 10 Mar 11 Jun 11
16/0902/11 A B
Sep 11 Dec 11 Mar 12
Egis, the fifth-largest player in the Hungarian pharmaceutical market by sales, already has a strategic partner in contrast to rival Richter. France's Servier bought 50.9% of Egis in December 1995. Despite this, Egis remains the focus of international investors, who appreciate the company's steadily expanding exports. Egis' cooperation with Servier accounted for 19% of Hungarian company's consolidated sales in 2009/10, and consisted of sales of drugs licensed by Servier to Egis in the Hungarian and CEE markets, bulk supplies from Egis to Servier, and sales of Egis products in France.
Company
Egis
Page 72
Erste Group Research Erste Sector Healthcare 08 March 2012 Erste Group Research Company Report Richter Gedeon | Pharmaceuticals | Hungary 08 March 2012 Krka
95 90 85 80 75 70 65 60 55 50 45 40 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12
Rating history
Date 30. Nov 07 02. Apr 07 Rating Buy Accumulate Price 113.58 83.05 Target Price 139.50 96.00
Company description
Krka remains one of the best long-term investment opportunities for foreign and domestic institutional investors on the Ljubljana Stock Exchange (LJSE). With trading volume of EUR 180.2mn in 2010, Krka ranked as the most liquid Slovenian stock on the LJSE. Traditionally viewed as a Russian player (closely following Richter, in absolute terms), the company has recently made considerable progress in Western European markets, exploiting the expired patents of internationally best-selling drugs.
Company
Krka
Richter Gedeon
55,000 50,000 45,000 40,000 35,000 30,000 25,000 Jun 10
Rating history
Date 09. Jun 11 29. Jul 09 10. Aug 07 15. Feb 07 24. Oct 06 19. May 06 13. Jun 05 11. Nov 04 10. Nov 04 11. May 04 06. Aug 03 Rating Buy Accumulate Buy Accumulate Hold Accumulate Hold Buy Accumulate Buy Accumulate Price 34605.00 35550.00 36250.00 40700.00 44000.00 42700.00 28920.00 22400.00 22400.00 20115.00 18100.00 Target Price 45500.00 41900.00 46000.00 46310.00 45225.00 49350.00 29200.00 26650.00 29067.00 26650.00 19438.00
06/09 A
Sep 10 Dec 10 Mar 11
09/06 B
Jun 11 Sep 11 Dec 11 Mar 12
Company description
Richter Gedeon is Hungarys largest pharmaceutical exporter. Its niche portfolio strategy, with a focus on gynecological products, is bringing sizable gains in Western markets, namely the US (partnership with Teva / Barr Labs). Richters traditionally strong position in Russia/CIS and CEE is another key asset of the company. Richter ranks among the most liquid shares on the BSE.
Company
Rich ter Gedeon
Page 73
Important Disclosures
General disclosures: All recommendations given by Erste Group Research are independent and based on the latest company, industry and general information publicly available. The best possible care and integrity is used to avoid errors and/or misstatements. No influence on the rating and/or target price is being exerted by either the covered company or other internal Erste Group departments. Each research piece is reviewed by a senior research executive, the rating is agreed upon with an internal rating committee of senior research executives. Erste Group Compliance Rules state that no analyst is allowed to hold a direct ownership position in securities issued by the covered company or derivatives thereof. Analysts are not allowed to involve themselves in any paid activities with the covered companies except as disclosed otherwise. The analyst's compensation is primarily based not on investment banking fees received, but rather on performance and quality of research produced. Description of specific disclosures: (1) Erste Group and/or its affiliates hold(s) an investment in any class of common equity of the covered company of more than 5% (for Croatian companies 1%). (2) Erste Group and/or its affiliates act(s) as market maker or liquidity provider for securities issued by the covered company. (3) Within the past year, Erste Group and/or its affiliates have managed or co-managed a public offering for the covered company. (4) Erste Group and/or its affiliates have an agreement with the covered company relating to the provision of investment banking services or have received compensation during the past 12 months. (5) Erste Group and/or its affiliate(s) have other significant financial interests in relation to the covered company. Erste Group rating definitions Buy Accumulate Hold Reduce Sell > +20% to target price +10% < target price < +20% 0% < target price < +10% -10% < target price < 0% < -10% to target price
Our target prices are established by determining the fair value of stocks, taking into account additional fundamental factors and news of relevance for the stock price (such as M&A activities, major forthcoming share deals, positive/negative share/sector sentiment, news) and refer to 12 months from now. All recommendations are to be understood relative to our current fundamental valuation of the stock. The recommendation does not indicate any relative performance of the stock vs. a regional or sector benchmark. Distribution of ratings
Coverage universe No. in % 65 35.7 41 22.5 42 23.1 8 4.4 6 3.3 20 11.0 182 100.0 Inv. banking-relationship No. in % 11 39.3 8 28.6 6 21.4 2 7.1 0 0.0 1 3.6 28 100.0
Recommendation Buy Accumulate Hold Reduce Sell N.R./UND.REV./RESTR. Total
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Erste Group Research Erste Sector Healthcare | HEALTH CARE | 08 March 2012

Erste Sector Healthcare

Antibiotice, Biofarm contribution: Raluca Ungureanu Raluca. Ungureanu@bcr.ro

Erste Group Research Sector Report

Erste Group Research Erste Sector Healthcare 08 March 2012

Richter Gedeon HUF

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

Erste Group Research Sector Report

Erste Group Research Erste Sector Healthcare 08 March 2012

Erste Group Research Sector Report

Erste Group Research Erste Sector Healthcare 08 March 2012

Erste Group Research Sector Report

Erste Group Research Erste Sector Healthcare 08 March 2012

Erste Group Research Sector Report

Erste Group Research Erste Sector Healthcare 08 March 2012

CEE pharmaceuticals valuation at a glance

Erste Group Research Sector Report

Erste Group Research Erste Sector Healthcare 08 March 2012

CEE pharma stocks performance remains volatile

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

Erste Group Research Erste Sector Healthcare 08 March 2012

CEE pharma stocks liquidity in 2011

stock turnover (EUR mn)

stock turnover y/y (%)

Source: Erste Group Research, local stock exchanges

Erste Group Research Sector Report

Erste Group Research Erste Sector Healthcare 08 March 2012

CEE pharma shares offer interesting long-term upside potential

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

Erste Group Research Sector Report

Erste Group Research Erste Sector Healthcare 08 March 2012

CEE pharmas performance in CEE markets in 2011

y/y (%) 3.9% 3.5% 3.2% 12.0%

y/y (%) n.a. 10.4% 4.1% 18.0%

y/y (%) -5.6% 5.4% 9.1% 21.0%

Hungary: Drug savings package remains reason for concern

Erste Group Research Sector Report

Erste Group Research Erste Sector Healthcare 08 March 2012

OEP drug subsidy spending developments

drug subsidy spending (HUF bn)

manufacturers' payments (HUF bn)

Source: OEP, Erste Group Research

Erste Group Research Sector Report

Erste Group Research Erste Sector Healthcare 08 March 2012

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

Payments (HUF mn)

Reclaimed money (HUF mn)

Balance (HUF mn)

Erste Group Research Sector Report

Erste Group Research Erste Sector Healthcare 08 March 2012

Polish reimbursement system overhaul marked by problems in implementation

In Czech Republic, new reimbursement rules aim for more savings

Erste Group Research Sector Report

Erste Group Research Erste Sector Healthcare 08 March 2012

CEE pharmas performance in Russia/CIS in 2011

y/y (%) 26.2% 26.2% 10.9% 1.9%

y/y (%) 7.9% -3.9% -2.3% 15.5%

Erste Group Research Erste Sector Healthcare 08 March 2012

Russian pharmaceutical market developments in January December 2011

Source: DSM Group

Erste Group Research Erste Sector Healthcare 08 March 2012

Richter / Egis Russia/CIS sales guidance developments

2H2011: CEE currencies on depreciation path - more pressure for Krka