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THOUGH HEALTHY, ANALYSTS SAY COMPANY NOT GROWING FAST ENOUGH

Slovakofarma churns out stable profits

While other staple Slovak companies like steel-maker VSŽ and the Slovnaft refinery struggle to regain lost profits and trust, pharmaceuticals producer Slovakofarma remains a model of stability. Based in the small western Slovak town Hlohovec, the company has consolidated its position on the Slovak and Czech markets and turned a steady profit over the last five years.
But equity analysts now say that Slovakofarma must expand into other central European markets if it hopes to attract investment, and add that they are worried by how little the company spends on developing its own products, a key component of success in the drug business. Management at the pharmaceutical giant has both acknowledged the need to expand and promised to put more money into research and development.


Ing. Ondřej GATTNAR, PhD - General Director. President of the Board of Directors. Employed by Slovakofarma since 1981. A member of the Company's management since 1990; Board Member since the establishment of the joint stock company on May 1, 1992
foto: Ondřej Gattnar

While other staple Slovak companies like steel-maker VSŽ and the Slovnaft refinery struggle to regain lost profits and trust, pharmaceuticals producer Slovakofarma remains a model of stability. Based in the small western Slovak town Hlohovec, the company has consolidated its position on the Slovak and Czech markets and turned a steady profit over the last five years.

But equity analysts now say that Slovakofarma must expand into other central European markets if it hopes to attract investment, and add that they are worried by how little the company spends on developing its own products, a key component of success in the drug business. Management at the pharmaceutical giant has both acknowledged the need to expand and promised to put more money into research and development.

After a considerable drop in profit from 1995, Slovakofarma has had stable profits over the last two years. Figures for the first half of 1999 put net profits at 172 million Slovak crowns, one million crowns more than the same period last year. The company expects net profit for 1999 to be between 300 and 350 million Slovak crowns. Other targets, including sales and before-tax income, also paint a satisfying picture (see chart, page 6).

Despite the encouraging company figures, Slovakofarma is in danger of falling behind the competition. The current trend among pharmaceutical companies in central Europe is towards merger, as shown by the Croatian pharmaceutical company Pliva's 1999 purchase of Polfa Krakow and Lachema Brno. Slovakofarma's one move to acquire another central European drug company, the Polish company Polfarma Starogard, began in March, 1999 but has since stalled.

According to Ivan Chodák, an equity analyst with CA IB Securities, Slovakofarma's future quite simply depends on expansion. "Today, investors look at the future expansion of the company rather than its revenues," he said. "I think that if Slovakofarma doesn't find a company to invest into, it won't expand, which means that it won't attract investors."

Karol Šiška, Slovakofarma's Sales and Marketing Director, agreed that his firm was too small and said that it was looking to buy a company in another market. "We realise that on the long-term horizon, Slovakofarma has to expand because this is the current trend," he said.


Ing. Helena JANDÍKOVÁ - Financial Director. Vice-President of the Board of Directors. Employed by Slovakofarma since 1973 and a member of the Company's management since 1990; Board Member since the establishment of the joint-stock company on May 1, 1992.
Helena Jandíková

According to Šiška, Slovakofarma finished its second audit of Polfarma in March last year and since then has kept in contact. The problem is that apart from Slovakofarma, there is also a domestic Polish investor interested in buying into Polfarma. But Šiška insisted that regardless of the outcome of that deal, Slovakofarma is "considering other options for investment in Poland and Romania."

A call for expansion was also put forward by Michal Kustra, an equity analyst with Tatra Banka, because of the limitations of the domestic market. "This is the reason why Poland with 35 million inhabitants is a suitable country for Slovakofarma's investments and expansion," Kustra said.

Slovakofarma's steady performance over the last two years also obscures the fact that net profits have in fact fallen - from 500 million Slovak crowns in 1995 to 300 million crowns expected in 1999. According Šiška, the main factors behind the decrease have been the crisis on the Russian market and lower sales in the Czech Republic.

"Since August, 1998 our sales to the countries of the former Soviet Union have fallen by 50%, and we have also stopped production of vitamin E because of strong Chinese competition," said Šiška. "Apart from that, we have had problems registering our products in the Czech Republic. We finally turned the situation around in both the former Soviet Union as well as the Czech Republic last year, and hope to see better results this year."

Slovakofarma used to export up to 66% of its production to the Czech Republic, but this figure fell to 44% last year. The firm's biggest competitor on the Slovak and Czech markets is the Czech producer Léčiva Praha, which holds an 11% share of the pharmaceutical market in Slovakia, 1% greater than Slovakofarma itself. In the Czech Republic, Léčiva Praha holds 15% of the market, followed by Slovakofarma with 7%.

Léčiva Praha still praised Slovakofarma's ability to preserve a stable position on the market. "We positively view the fact that despite pressure of strong foreign producers on the Czech and Slovak markets, Slovakofarma has preserved second place on both," said Milena Holoubková, spokeswoman of Léčiva Praha.


Ing. Karol ŠIŠKA- Sales and Marketing Director. Board Member. Employed by Slovakofarma since 1978 and a member of the Company's management since 1991; Board Member since the establishment of the joint-stock company, on May 1, 1992.
Karol Šiška

Low R&D

Although Slovakofarma is one of the top ten pharmaceutical producers in central Europe, the share of new products on the company's overall production is only 15-20%. Equity analyst Chodák said that this was worrying. "In comparison with other companies of the same kind, Slovakofarma doesn't belong into the category of top producers because the top companies earn most of their money from sales of their new products, which they themselves developed," he said.

Most of the medicine Slovakofarma produces are generic drugs, which are products that were developed by other companies over fifteen years ago and for which Slovakofarma must pay a license fee to produce "The company cannot charge so much for these products, because it doesn't have exclusive rights on them," Chodák explained.

To produce significant amounts of its own products, the company needs to invest far more money into research and development. In 1999, Slovakofarma invested only 3.5% of turnover into research, a figure that Šiška called "very little - we realise this."

The majority shareholder of Slovakofarma, which was established in 1941, is the Austrian S.L. Pharma Holding GmbH Wien, which has owned a 61% stake since Slovakofarma was privatised in 1994. The basic capital of the company is 1.75 billion crowns.

Total (SK million) 1H 1999 1H 1998 Growth 99 / 98 (%)

Sales 2.905 2.350 23.6

Income before taxation 302 300 0.66

Taxation 130 129 .77

Net profit 172 171 .58

Figures courtesy of Slovakofarma

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