Romania

100

Sector Initiation of Coverage

December 2010

Pharma

THERE IS POTENTIAL, BUT ALSO SHORT TERM RISKS

ANTIBIOTICE, BIOFARM
Sector features In the last two decades Romanian pharmaceutical market was characterized by high

effervescence with major structural changes. The market passed from a closed market with mainly small

Sector
Weighting

local players and low imports to a open market where the international players entered directly or
through acquisition of domestic companies, with imports reaching 77.2% of the market as of end June

Neutral

2010. Moreover the market consolidated as Top 20 manufacturers and direct importers accounted for

Preferred stock

almost 80% stake at end June 2010 Cegedim data, while top 20 distributors account for around 95% of

Antibiotice
Least preferred stock

Biofarm

the market and pharmacies chains are gaining more and more ground ahead of independent ones.
Despite the market growth of 17.7% CAGR in EUR terms in the last 8 years, amounting to EUR 2.2bn
at end June 2010, it is still lagging behind European average in terms of drugs expenditure per capita,
healthcare expenditure as percentage of GDP as well as consumer sophistication and consumption of
preventive drugs (mainly OTC) and nutritive supplements.
Sector perspective We consider pharmaceutical industry will be one of the leading economic sectors

Antibiotice (ATB)
HOLD

on the long run. On one side we have a population base above average for Central and European region
(the second country as population after Poland) with the consumption features of an undeveloped

TP RON 0.621
Upside 3.49%

market (low healthcare expenditure per capita half of European average as well as percentage of

sophistication, undeveloped but fast growing private healthcare sector), so there is plenty room for

Development
strategy

Dividend play

Privatisation target

GDP about 60% of European average, low consumption of preventive drugs, low consumer
domestic demand growth, once the financial crisis will be surpassed and the living standard will
converge to EU average. On other side there is a considerable potential for the exports sector, EU
membership and still low cost base being the main advantages offered by the country. The investments
made recently by worlds large generics companies demonstrate the interest of international players for
the market both in terms of potential demand and potential export base.

Biofarm (BIO)
HOLD
TP RON 0.199
Downside 1.40%

Defensive

Speculative
on
short run

Acquisition target

Alternative scenarios and risk to our scenario Although we are positive regarding the long term

perspective of the sector, on the short and medium term the industry has to face several challenges.
Because of already chronic public healthcare system sub-financing and accumulated over due debts of
the state to drugs and other medical services suppliers, the whole market is confronting with an acute
liquidities shortage problem, which leads to increased financing cost for all players and even bankruptcy
for small companies especial from whole sale and retail segment. Additionally, weak macro economic
environment and prolonged recession will further affect personal income and out-of- pocket spending
on drugs and will slow down the estimated market growth.

Companies

Recommendation

Price

Target
12M

P/E
10e

EV/EBIT
10e

Div yld
10e

Comment

RON

RON

Antibiotice

Hold

0.600

0.621

19.8

11.9

1.0%

Strong exports advance

Biofarm

Hold

0.202

0.199

17.3

11.8

0.0%

Possible acquisition target

Laura Simion, CFA

+40 21 301 4461
laura.simion@brd.ro

Pharma sector

Contents
3 Sector anatomy Business overview
4 Pharma market overview
7 SWOT analysis
8 Antibiotice
Company anatomy Business overview
Investment summary
Company overview
Key drivers
Financials overview
Valuation
18 Biofarm
Company anatomy Business overview
Investment summary
Company overview
Key drivers
Financials overview
Valuation

Pharma sector

Sector anatomy business overview

Market value EURbn terms 2002 2009

Main therapeutic classes market shares as of June 2010

E&
Cardiovascular syst em

2
1.8

14.7%

Ant ineoplast ic and

Immunomodulat ing agent s

18.8%

1.6

Aliment ary t ract and met abolism

1.4

6.3%
Nervous syst em

1.2

Hospit al

7.0%
General syst emic ant i-inf ect ives

16.2%
0.8

Retail
Respirat ory syst em

0.6

10.5%

0.4

Musculo-skelet al syst em

0.2

13.7%

12.7%

Ot her
0
2002

2003

2004

2005

2006

2007

2008

2009

Source: Cegedim

Source: Cegedim

Top 15 producers by market share at June 2010

Exports pharmaceutical products EUR m 2000-2009

400.00

350.00

Sanofi-Aventis
9.60%

Hoffmann la Roche

300.00

Pfizer
9.20%

31.10%

GlaxoSmithKline

250.00

Norvatis
Servier
6.70%

200.00

M erck&Co
Astrazeneca

150.00

Daiichi-Sankyo
6.10%

100.00

Abbott
Bayer

50.00

Eli Lilly
6.00%

Antibiotice
0.00

M enarini
5.20%
3.70% 3.70% 4.60%
Source: Cegedim

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Krka
others
Source: Eurostat

Romanian Pharmaceutical Market - Commercial chain

Producers and direct

importers

Maximal selling prices

established by MoH
annually

Whole sale distributors

Maximal margins
capped to 14%

Pharmacies and
hospitals

Maximal margins
capped to 24%

Source : Ministry of Health (MoH)

December 2010

Pharma sector

Pharma market overview

Romanian pharmaceutical market analysis
According to the most recent data provided by the research company Cegedim, the Romanian
pharmaceutical market reached an annual value of RON 9.11bn (EUR 2.17bn) at the end of June 2010.
Accelerate market growth
driven by Retail segment.

Although the market grew at a CAGR of 17.7% in the last 8 years in EUR terms, it is still undeveloped
compared to European peers. The average drugs expenditure hovers at EUR 101 per inhabitant, half of
European average, while health expenditure ranged between 5.1% and 5.5% of GDP in the last 7 years,
compared to European average of roundly 8.2-8.3%.

.but

still

lagging

far

behind EU level

By the type of end users, the market is split between retail (sales in pharmacies) and hospitals. Worth
mentioning that market growth in the last years was sustained primarily by the retail segment which
advanced by a CAGR of 22.24% in the last 8 years in EUR terms, while hospitals sales slightly
advanced by a CAGR of 2.17% over the same period. Thus if in 2002 retail sales represented 67.43% of
total sales, their stake reached 89.1% at end June 2010. This is an unusual situation as the number of
hospitalisation days is higher in Romania compared with other countries in European Union, where the
drugs sales to hospitals account for about 20-25% of total market (Cegedim data).
The retail market is dominated by prescription drugs sales (83.3% at end June 2010 ), while OTC sales
accounted for 16.7% vs. 17.8% at end 2009 and 19.2% at end 2008. Most common therapeutic areas
(prescriptions drugs) in terms of sales as of end June 2010 are cardiovascular medications with sales of
RON 1.71bn or 18.8% market share, followed by antineoplastic and imunomodulating agents with sales
of RON 1.47bn or 16.2% market share and alimentary tract and metabolism drugs with sales of RON
1.25bn or 13.7% market share.
In contrast with the market size and the low health expenditure, generic drugs stake continuously
decreased in the last years from 33% stake in 2005 to 24.5% in 2009. For comparison generics sales in
total market are more significant in neighbourhood countries like Czech Republic (44% - 2008),
Hungary (37% - 2009) and Slovakia (32% - 2010), according to the data released by the Association of
Generics Drugs Producers from Romania.

The commercial chain: manufacturers, distributors, retail and hospitals

Market
consolidation:
International
players
entered

directly

or

by

acquiring local producers

The pharmaceutical market relies mostly on imports as about 77.21% of the drugs sold annually in
Romania are imported (12M period end June 2010), which increased exponentially in the last decade
from a 40% stake in the nineties according to a study of Business Monitor International. At
manufacturing level the market experienced a continuous consolidation process and thus at the end of
June 2010 top 10 producers held together almost 60% of the market, while top 20 producers covered
almost 80% of total drugs sales. In the last years, important European players entered the market as
direct importers or by acquiring local producers, so top 20 is dominated by international companies.
Here are the most important transactions in the last years:
-

the acquisition of local producer Sicomed (listed to Bucharest Stock Exchange under SCD ticker)
by the Czech company Zentiva (2006) next bought by Sanofi Aventis in 2009 (now the market
leader with 9.6% market share at end June 2010);

the takeover of Terapia the largest local generics producer by Ranbaxy Laboratories Limited
(2006), which was further taken over by the Japanese company Daiichi-Sankyo (2008);

December 2010

the acquisition of Europharm by GlaxoSmithKline (1998 and finalised in 2003);

Pharma sector

the acquisition of Armedica by Gedeon Richter (1998 and finalised in 2003);

the acquisition of Sindan, a local producer and distributor of oncology pharmaceutical products by
Actavis (2006).

The only local players in top 20 are Antibiotice (listed to Bucharest Stock Exchange under ATB ticker),
the last state owned producer, which constantly lost market share ranking the thirteenth place at end
June 2010 with a market share of 2.3% (compared to ninth place at end 2006 and a market share of
3.2%) and Labormed held by the private equity fund Advent International ranking the sixteenth place
with a market share of 1.9%.
The distributors segment of the market follows the same consolidation features: top 20 distributors hold
around 95% of the market. The market leader is Mediplus, part of the A&D Pharma group with 18.9%
market share in 2009, followed by Farmexpert DCI with 10.4% market share which surpassed its rival
Relad ranking the third with 9.24% market share (2009).
Last link of the distribution chain is formed by hospitals and pharmacies (pharmacy chains and
independent ones). At end June 2010 the retail market accounted for 89.1% of total, while hospitals
represented the rest of 10.9%. The stake of hospital sales continuously deteriorated in the latest period
because of the financing problems experienced by public healthcare system.

Regulatory features
Due to its particular features pharmaceutical market is highly regulated, in order to assure an efficient
quality control and therapeutic efficiency of the drugs sold as well as to avoid the sale of unauthorized

Highly regulated market

products. All producers have to comply with several quality standards - the most important being GMP
(Good Manufacturing Practice) certificate - and are revaluated on a regular basis. Before reaching to
pharmacies or hospitals and then to patients, any new drug must obtain a market authorisation from the
National Drug Authority. The required documentation is complex including all the characteristics of the
respective drug, the authorisations obtained in other EU countries, clinic and pre-clinic studies and the
authorisation is usually obtained in a few months term.
Regulated

prices

prescription drugs

for

Additionally the prices for the prescription drugs are set by the Ministry of Health which established
maximal producer prices in local currency (the same method applying both to local and foreign
producers) and maximal margins for whole sale distributors and pharmacies depending on the price
range. The price for any new drug is proposed by the market authorisation holder but must be lower or
equal with the lowest price for the same drug in a list of few European countries named by the Ministry
of Health. Additionally the prices for generic drugs must not exceed 65% of the corresponding original
product approved by MoH. Then the producer prices are updated annually using the outstanding price
and the exchange rates RON/EUR used for drafting the public budget for current and next year. Whole
sale distributor margins are capped to 14% or less depending on the product price, while retail margin is
set up to maximum 24% or less depending on product price (products with higher prices have lower
margins).

Projections & Outlook

There are several premises which sustain the good growth perspectives of Romanian pharmaceutical
market on medium/long term:
-

the country has a relatively large population base in the Eastern Europe region with a low
healthcare expenditure per capita compared to other European countries, but which is expected to
catch up as part of the convergence process to EU level;

December 2010

Pharma sector

the recent local entrances or expansions of international players which also announced further
investments from the production to retail segment confirm the long term growth potential of the
market;

prescription drugs market is expected to remain the leading segment both through generics (which
are expected to boost next years at international level after the patents for several original products
with sales of ten of millions US dollars will expire) and original drugs (which will be driven
forward by increasing presence of multinationals, increased consumer sophistication and overall

Some growth factors: EU

convergence
process,
investments announced by

trend of healthcare system modernisation);

-

main players, exports boom,

private healthcare
expansion

for OTC sector growth leading factors will be increased self-medication especially from younger
people, increased consumption of preventative OTC medications, vitamins and nutritive
supplements;

sector
-

export of pharmaceutical products has a high growth potential driven by Romanian low cost base
and EU membership which will allow international players to develop significant export based
production sites; after EU ascension in 2007, Romanian pharma exports exhibited an exponentially
growth from EUR 34.4m in 2006 to EUR 351.6m in 2009 (Eurostat data);

the private healthcare sector grew steadily in the last years and is expected to maintain an
accelerated growth; majors private healthcare providers in the market announced investments of
EUR 150m in the next years.

Although all these factors indicate the medium/long term potential of Romanian pharmaceutical market,
there are several short term threats which could significantly affect the market. The most important is
the current liquidity shortage due to the delayed payments of the state to medical suppliers. The

The sector as a whole faces

some

risks

as

liquidity

shortage
problem
and
chronic public healthcare
system sub-financing

payment period of 90 days for hospitals consumption and reimbursed drugs programme to pharmacies
and distributors was extended in July 2009 to 180 days and further to 210 days in April 2010. This will
force market players to look for alternatives to finance their increased working capital needs which will
lead to higher costs. Additionally, small players especially from retail and whole sale zone will face
insolvency or even bankruptcy problem. The hospital channel of the market had a disappointing
performance and continuously declined as stake in total market reaching around 11% at end June 2010,
while in other European countries the average stands at 20-25%. The situation is more confusing as
average hospitalisation days are higher in Romania compared to European peers and leads to the
conclusion that costs are transferred to patients. At the same time the weak macro data and the
prolonged economic recession will further affect personal income and consumption, as well out-of the
pocket spending on pharmaceutical products.
Another issue affecting producers and direct importers are the introduction of the claw-back tax.
Starting the second half of 2010 all producers and direct importers (marketing authorizations holders)
have to pay a tax between 5% and 11% of sales for the drugs sold to hospitals or through domestic
reimbursing programme. The claw-back tax is also applied in other European countries like United
Kingdom, France, Hungary, Czech Republic which adopted a series of measures in order to limit the
excessive spending of healthcare public funds. The tax is due on quarterly basis. This will further affect
the existing liquidity problems and net margins as there is no possibility to transfer these costs in prices
which are set up by the Ministry of Health, as we have above mentioned.
Resuming all these, we are positive regarding the long term perspectives for pharmaceutical sector
having as main drivers the convergence to EU level in terms of drugs expenditure, the exports growth
potential and development of private healthcare sector, once the current liquidity and financing system
problems will be surpassed.

December 2010

Pharma sector

SWOT analysis
Pharmaceutical market

Weaknesses

Strengths

Population of 21.4m, second place in CEE after

Poland

Still low cost production

GMP compliance in force

Recent entries of international players in the
market

E&

Opportunities

Export based production site

Development of private healthcare sector

Prolonged recession

Low GDP per capita

Low healthcare expenditure per capita

Strong deterioration of hospitals drugs consumption

Chronic public healthcare system sub-financing

Threats
E&

Convergence to EU level in terms of healthcare

expenditure

Liquidity shortage implied by overdue public payments to the

industry

Increasing emigration of specialised medical personnel both

doctors and nurses to EU countries

Increasing insolvency cases (mainly independent pharmacies

and small distributors)

Tighter regulations

Expansion of generics industry in the next years

The two companies in our coverage universe, main features

Antibiotice

Traditional anti infective drugs provider for

local market

Main anti infective drugs supplier for hospitals

Focus on prescription drugs

Enjoys consumer awareness and trust

Increased exports, strong presence on foreign
markets

Biofarm
E&

Traditional low price drugs producer

Traditional producer of herbal based drugs

Focus on OTC and nutritive supplements market

Enjoys consumer awareness and trust

Modest exports level, but plans to develop in coming future

Less affected by MoH pricing policy, introduction of claw back
tax

Significantly affected by MoH pricing policy,

introduction of claw back tax

November 2010

Romania
Initiation of Coverage

December 2010

Pharma industry

ANTIBIOTICE
Investment case

Hold (12m)

We initiate our coverage on Antibiotice with a Hold recommendation

suggested by our 12M target price of 0.621, which offers a 3.49% upside to current price (RON

Price 16/12/10

Target Price

0.600 as of December 16, 2010). Antibiotice remained the sole state owned Romanian drugs

RON 0.600

RON 0.621

producer with a free float of 36.89%. We consider the company has a stable long term growth
potential, although positive results could be delayed by a series of issuers, sector and

Sector
Weighting

macroeconomic risks. With a modern production site with nine manufacturing flows covering

Neutral

more than 130 drugs in different pharmaceutical forms both for human and veterinary use and

Preferred stock

Antibiotice

constant focus on keeping up with international quality standards, Antibiotice is well positioned

Least preferred stock

to benefit of both domestic and foreign markets opportunities. On the short to medium term we

Biofarm

see as key drivers exports development to both traditional and new markets and generics boom

Type of investment

associated with the expected expiration of several patents for original drugs. On the long run we

Development strategy
Dividend play
Privatisation target

expect Romanian market to catch up to European average in terms of healthcare expenditure per
capita and increased consumption of OTC and preventive drugs.

1 year price and volume

0.75

Catalysts for the share price

The price increased by 11.1% in the last three months fuelled

by an increased investors interest for the sector and good 9M10 results posted by the company.

0.70

0.65

Main future catalyst will be 2010 preliminary results release on 15 February 2011, which will

0.60

confirm if the recovery trend is on track.

0.55

0.50

0.45
Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Thousands

12M target price and methodology Our 12M target price was derived from a two stages DCF

3000

model with an explicit period of 5 years (2010-2014) and a second mature long term growth

2500
2000
1500
1000

period. FCFF from the explicit period were discounted using a variable WACC between 12.1% in

500
0
Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

2010 and 11.3% in 2014. For the second stage of mature growth period we assumed a WACC of

Source: FactSet, BRD GSG

10.8% and a long term growth rate of 2.5%.

Risk

Stock vs sector
Sector vs market

Over weight
Neutral

Alternative scenarios and risk to our scenario As we have mentioned there are several

risks of different type which could significantly impact companys activity and results and
consecutively our valuation model results. Going top down our model could be affected by
macroeconomic risks like lagging recovery, high FX volatility environment and increased risk
aversion, by sector specific factors like public healthcare system sub-financing, increased
competition especially from China and India generics producers, protective commercial barriers

Antibiotice on
www.antibiotice.ro

imposed by some foreign countries for imported drugs, long authorisation process for new drugs,
as well as issuers specific risks like high dependence of Nystatin export sales and of some raw
materials suppliers, short term liquidities problems.

Share data

Financial data (RON)

RIC ATBE.BX , Bloom ATB RO

Operating revenues (m)

52 weeks range

Net profit (m)

0.47 0.75

Mk. Cap. (RONm)

272.94

Free float (%)

36.89

Performance (%)

1m

Ordinary shares

2.6

11.1

-0.8

-0.6

-2.6

4.2

BET

3m 12m

2009

2010e

2011e

2012e

Ratios

2009

2010e

2011e

2012e

218.7

236.9

245.0

251.0

P/E (x)

22.9

19.8

12.7

10.2

11.9

13.8

21.4

26.7

P/CFO (x)

NA

22.7

9.6

7.7

-0.059

0.026

0.063

0.078

P/Sales (x)

1.2

1.2

1.1

1.1

EPS

0.026

0.030

0.047

0.059

P/B (x)

1.1

1.1

1.0

1.0

BVPS

0.532

0.556

0.582

0.612

EV/EBITDA (x)

8.7

8.2

7.7

7.2

Gross Dividend

0.005

0.006

0.021

0.029

EV/EBIT (x)

13.1

11.9

10.1

8.2

Payout(%)

19.1

20.0

45.0

50.0

Dividend yield (%)

0.8

1.0

3.5

4.9

Net debt/equity (%)

29.4

29.7

26.2

21.4

ROIC/WACC (%)

na

1.0

1.1

1.2

Cash earnings per sh

ATB

Company anatomy business overview

Production structure 2009

Sales breakdown domestic/exports 2003 H110

E&

Product ion st ruct ure 2009

E x por t s al es
Domes t i c s al es
250. 00

0.55%
8.84%
Powder inject ion drugs

27.30%

11.11%

200. 00

Capsules
Tablet s
150. 00

Oint ment s and creams

14.30%

Supposit ories
Nyst at in
20.90%

100. 00

Bio f ert ilizers

17%
50. 00

2003

Source: Antibiotice

2004

2005

2006

2007

2008

2009

H1'10

Source: Antibiotice

Domestic sales structure 2005 2014e

EBIT and EBITDA margins 2003 2014e

30.0%
Domes t i c s al es RON m

25.0%
Hospit al
250.00
Ret ail

20.0%
200.00

15.0%
15 0 . 0 0

10.0%
10 0 . 0 0

5.0%
50.00

0.0%
-

2003
2007

2008

2009

2 0 10 e

2 0 11e

2 0 12 e

2 0 13 e

2004

2005

2006

2007

2008

2009

2010e 2011e 2012e 2013e 2014e

2 0 14 e

EBIT mar gin

Source: Antibiotice, BRD GSG estimates

EBITDA mar gin

Source: Antibiotice, BRD GSG estimates

ATB vs. BET share price performance

30.0%

20.0%

Oct-10

Sep-10

Aug-10

Jul-10

Jun-10

May-10

Apr-10

Mar-10

Feb-10

-10.0%

Jan-10

0.0%

Dec-09

10.0%

Dec-10

2006

Nov-10

2005

-20.0%

-30.0%
ATB rebased

BET rebased

Source: BSE, BRD GSG

December 2010

ATB

Investment summary
Main arguments for our recommendation
BRD GSG view
Our Hold recommendation on ATB stock is based on quantitative data derived from DCF model and
peers comparison, but also on a sum of positive and negative qualitative features. We are confident the
company is well positioned for a stable long term growth although there are a series of issuers specific,
sector and macroeconomic risks which could delay significantly the expected results.
Traditionally, Antibiotice is the well known producer of generic anti-infective drugs in various

We see long term growth

potential, but results could
be
delayed
by
a
combination of issuers
specific,
sector
and
macroeconomic risks

pharmaceutical forms (capsules, tablets, ointments) on domestic market. With an expertise of over 55
years the company made continuous efforts to adapt to markets changes, to diversify its products range,
to modernize its equipment in order to comply with international quality standards, to strengthen the
market position of its traditional brands. In the past years, Antibiotice benefited of the local market
growth potential, but had to face several challenges such as increased competition from international
players which entered on Romanian market and worsening public healthcare system sub-financing
problem. Thus, Antibiotice lost few market share points and became a smaller player (13th place in top
producers at end June 2010).
We appreciate as positive the fact that companys management focused on continuous modernizing of
production base, renewal of products portfolio, improved marketing techniques and international
diversification of clients base, although these processes were sometimes delayed because of a series of
companys specific problems as liquidities shortages, or sector specific issues as long authorisation
processes for new products both for local and foreign markets.
Key drivers on short and medium run are good potential for exports development through consolidating
companys position on traditional markets (USA, Canada and Western Europe) and diversification to new
markets (Russia, CIS), diversification and improvement of drugs portfolio, expiration of patents for a
series of original drugs which will offer generic producers the opportunity to launch new products.
On the long run, Romanian market is expected to reach European average in terms of healthcare
expenditure per capita, increase of preventive drugs consumption and consequently increase of OTC
consumption.

Summary valuation
We valued Antibiotice using a two stages DCF model. We explicitly forecast FCFF for the period 20102014 using the managements guidance, especially regarding plans for exports development and CAPEX,
sector and macroeconomic trends. FCFF were discounted to a variable WACC for 2010-2014 period,
ranging between 12.1% and 11.3% in order to reflect Romanian specific macro environment. For the
terminal period we used a WACC of 10.8% and a long term growth rate of 2.5%, taking into account the
large gap between Romanian pharmaceutical market and European average under the conditions of
convergence process. Our model derived a fair value of RON 0.554, leading to a 12M target price of
RON 0.621. Alternatively, we conducted a relative valuation using a peers group from European region.
At current price (RON 0.600 as of December 16, 2010) Antibiotice looks expensive both in terms of P/E
(+98.3% in 2010 and +26.2% in 2011) and EV/EBITDA (+8.8% in 2010 and 25.5% in 2011), but offers
significant discounts in terms of P/Sales (30.2% in 2010 and 27.6% in 2011).

December 2010

ATB

Other investments considerations

Alternative scenarios and risks
We consider our valuation results could be affected by a series of issuer specific, sector and
macroeconomic risks.
Issuers specific:
-

after several failed privatisation attempts, the company remained the sole pharmaceutical producer in
states portfolio (Ministry of Health owns 53.01%) which could alter management decisions through
political implication;

liquidity shortage problems;

high dependence of some raw materials suppliers;

high dependence of Nystatin export.

Sector specific:
-

protective commercial barriers applied by some foreign countries regarding the imported drugs
access to their markets;

long authorisation process for new drugs both on domestic and foreign markets and possible changes
of the legislation in force;

domestic public healthcare system sub-financing and overdue public debts to drugs producers and
healthcare services providers;

increased competition on both domestic and foreign markets from international players, especially
Chinese and Indian generics producers which have adopted aggressive commercial policies and
dumping prices;

Macroeconomic risks:
-

lagging recovery determining declining purchasing power and consequently lower out-of-pocket
spending on pharmaceuticals as well as lower public financing for healthcare sector;

high FX volatility;

increase of investors risk aversion to Romanian assets driven by the deterioration of macro economic
fundamentals.

11

December 2010

ATB

Company overview
The companys history lies over 55 years starting with the set up of Chemical Factory back in 1955
which produced the first charge of Romanian Penicillin. In 1959 the company changed its name in
Over 55 years experience in
drugs production

Antibiotice and started the production of active substances Streptomycin, Erythromycin, Tetracycline,
Ox tetracycline as well as various ointments, suppositories and creams. In 1977 Antibiotice obtained the
Food and Drug Administration (FDA) authorisation for the Streptomycin production flow opening the
first export opportunities to USA market. During the 80s the company consolidated its position as
producer of active substances used for anti-infective drugs, developed the research department (44
registered patents in pharmaceutical field) and became more active on foreign markets, especially USA
(around 50% of production was exported). Starting with the nineties the production was shifted more to
end use drugs than active substances and the company became in 1999 the first Romanian producer with
GMP (Good Manufacturing Practice) certificate for one of its manufacturing flows. In the last ten years
the company invested heavily (around USD 25m) in the modernisation of production flows (all GMP
certified, two of them FDA certified), in pharmaceutical research and personnel training.

Over 130 drugs produced

on 9 modernized production
flows GMP certified

Antibiotice is one of the leading local producers in the pharmaceutical industry with nine production
flows modernised and certified according to Good Manufacturing Practice (GMP) producing over 130
human and veterinary use drugs covering main therapeutic classes: metabolism and alimentary tract,
cardiovascular system, general anti-infective systemic drugs, dermatologic products, muscular-skeletal
system, central nervous system.
Four of the nine production flows are designed for the manufacture of antibiotic drugs both powder
injection and capsules. The antibiotics powder injection flow is the oldest and the first obtaining GMP

Traditional
anti-infective
drugs
provider,
sole

certificate in 1999, revised in 2008, with a capacity of 55 million flacons annually. Antibiotic capsules
are obtained on three production flows with a total capacity of 350 millions capsules annually recertified

producer for
infective drugs

GMP in August 2008. Antibiotice is well known on the local market as the traditional provider of antiinfective drugs , both powder injection and capsules, consolidating its leader position in 2009 with a

14

anti-

market share of 35% for generic anti-infective drugs in 2009 (compared to 31% in 2008) and 27.6%
market share for powder injection drugs sold to hospitals (compared to 23.2% in 2008). On the
Romanian market the company is sole producer for a scale of 14 anti-infective drugs which accounted
for 20% of 2009 turnover.
Second world Nystatin
producer with 30% market

The other five production flows are designed for the manufacturing of tablets (350 millions tablets
annually), ointments and creams (16 millions tubes annually), suppositories (16 millions suppositories

share in 2009

annually), veterinary use products and the active substance Nystatin (53 tons annually). The company is
the second world producer of Nystatin, with a 30% market share in 2009. Also the company has a
production line for bio-fertilisers which obtained ecologic product certificate in 2009.
Companys products are sold on domestic market through two channels: hospitals and whole sale
distributors. Antibiotice collaborates with the most important local pharmaceutical distributors
(Mediplus, Farmexpert, Relad, Polisano, A&A Medical, Pharma Iasi, ADM, A&G) and also has
distribution contracts with over 450 hospitals. As the domestic sales in the last years were negatively
affected by increased competition and public healthcare system sub-financing, Antibiotice made
continuous steps in order to gain new foreign markets. Main export destinations are Europe and USA for
the active substance Nystatin (59% of total exports in 2009), but lately the company made efforts to enter
or consolidate its position on Russia CIS market and also Asia and Africa.

December 2010

ATB

Key drivers
Market position
On the domestic market Antibiotice faced the fiercing competition from large international

Ranking 13th place in top

producers at end June 2010,
preserving

6.6%

market

share for generics (H110)

pharmaceutical companies which entered on the market in the last years both directly or by acquiring
local producers. Although it constantly lost market share on the local market ranking the 13th place in top
drugs producers with a market share of 2.3% at end June 2010 (compared to 4.3% in 2001), Antibiotice
remained one of the main generics producers with a 6.6% market share in H110 and is well known as
the traditional provider of anti-infective drugs to the local market. Due to its long experience, but also
continuous research and innovation, Antibiotice constructed a portfolio of well known brands which are
market leaders within their therapeutic classes. Top 20 most visible Antibiotices brands cover mainly
general anti-infective systemic drugs class, but also cardiovascular system and dermatologic products
accounting for 44.5% of companys turnover in 2009.

Strategic plans
In order to consolidate the companys position, the management follows three main directions: portfolio
renewal through in house research and innovation and acquisition of licences, strong investments in
modernising production equipments and accelerate growth of export activity.
The focus of Antibiotice research department is on the development of new generic drugs especially in
the therapeutic classes which are the core business of the company, namely anti-infective drugs and
cardiovascular system drugs, but also the improvement of formulas or production technologies for
Future strategic plans based
on three pylons: portfolio
renewal,
equipment
modernization and growth
of export activity

traditional well known Antibiotice drugs. At the same time the company plans to gain new markets by
enlarging its traditional portfolio with new therapeutic classes such as central nervous system, muscularskeletal system, oncology products. In 2009 the research department obtained the authorisation for seven
new drugs which were launched on the internal market and optimised the formula for four traditional
drugs. At global pharmaceutics market level, 2011 is the expiration term for several patents of original
products which could enter then in generics category. Antibiotice planned for 2010-2012 period more
than 70 new drugs to be launched (in house developments and partnerships with eight foreign producers)
out of which 17 OTC drugs, a category currently poorly represented in the companys portfolio.
The partnerships with foreign partners and the presence of Antibiotice products on the external markets
imposed compliance with and maintenance of international quality standards. In the last years
Antibiotice consistently invested in modernizing its production base. The future investment projects
include the capacity increase for the anti-infective powder injection drugs and tablets production flows
and the modernisation of Nystatin production flow.

E xpor t sal es USD m

en d- use pr oduct s
act ive subst an ces
14 . 0 0

Traditionally, Antibiotice oriented part of its production to foreign markets, as in the eighties about half

12 . 0 0

of active substances production was exported. The export trend decreased in the ninnies when the
production shifted to end use drugs and GMP certificates needed for export sales were not in place, but

10 . 0 0

8.00

6.00

4.00

2.00

2006

2007

20 08

Source:Antibiotice

2009

H1'10

lately the company made continuous efforts to strengthen its position on foreign markets. The primary
advantages of increased export activity are clients base diversification and partial relax of liquidities
shortage as cash collection period for exported drugs is between 60-90 days while on the local market
reached 300 days as of end June 2010.
Export sales increased by 27% in 2009 and by 35% y-o-y in H110 reaching 18.5% and 22.4% of
companys turnover respectively. The managements strategy includes both consolidation of traditional
markets like Europe and USA and gain of new markets like Russia CIS, Asia and Africa, planning to
reach an exports/sales ratio of 25% in the next three years.

13

December 2010

ATB
More than half of Antibiotice exports are Nystatin sales (59% of 2009 exports) and the company targets
the preservation of its position as second worldwide Nystatin producer. In 2009 the FDA certificate for
Ampicillin powder injection was obtained, following that in 2011 three other anti-infective powder
injection drugs to receive the FDA certificate and to be commercialised on USA market. End use
Antibiotice drugs exports experienced a positive trend in 2009 (+12% y-o-y), while products sold under
contract, in partnerships with other companies reduced their weight from 64% (2008) to 37% (2009) in
total end use drugs exports.

Financials overview
During 2003 2007 period companys turnover experienced an accelerate growth (+17.2% CAGR)

Good growth perspectives

during 2003
dragged
by

2007,
worsening

macroeconomic situation in
2008-2009

reaching RON 230m in 2007 fuelled mostly by the sales on the internal market (+21.5% CAGR).
Practically Antibiotice followed at a slower pace the general growth trend of Romanian pharmaceutical
market (+27.8% CAGR during 2003 2007 period). Export sales during the respective period had a
decreasing trend both in absolute and relative terms (from 20% of 2003 turnover to 7.8% in 2007).
Among main reasons we could mention the appreciation of local currency against USD, the management
focus on the local market which offered strong growth opportunities and the ongoing process of
international certifications imposed for exported products (usually there is a time lag of a few months to
one year until a product receives authorization to be sold on a new foreign market). In 2008 amid
worsening macro environment both local and international companys sales declined by 5.9% and then
slightly rebounded in 2009 (+1.8%), despite still growing local pharmaceutical market (although at a
slower pace). The contraction was leaded by local business which sharply declined in 2008 by 10.3% and
further in 2009 by 5.4%, mainly because of chronic healthcare system sub-financing, state freezing of the
producer prices in 2008 corroborated with RON depreciation against EUR and USD and lower individual
income and consequently lower out-of- pocket spending on drugs. However, export sales entered on an
ascending trend gaining over 45% in RON terms during 2008 2009 and reaching to 18.5% of 2009
turnover. Exports boom was backed by a strong advance of end use drugs sales (+124% y-o-y in 2008),

Signs of recovery in H110

while active substances sales remained almost flat in volume terms. In H110 domestic sales remained at
contracted levels advancing only by 1.2% y-o-y, while exports continued their rally up 34.6% y-o-y and

driven by exports rally

reaching 22.4% of H110 turnover. Overall H110 sales growth reached +7.2% y-o-y.
In terms of gross profitability, Antibiotice had a relatively constant path with an average EBITDA
margin of 20.4% during 2003 2009 period, with a minimum of 17.6% in 2004 and a maximum of
25.3% in 2005. Operating and net profit margins had a more volatile pattern as were influenced by
depreciation expenses which almost doubled in 2005 vs 2004 and financial result which evolved from
positive in 2004 to deep negative values in 2008 and 2009. 2007 was the peak year in terms of
profitability, when Antibiotice posted an operating margin of 18.3% and a net margin of 14.3%. In 2008
2009 period EBITDA margin remained around 18% but operating margin declined to 11.7% - 11.9%
as the company continued to invest in modernizing its production base in order to gain more exposure on
external markets. Net margin was most affected and dropped to 4.9% (2008) - 5.4% (2009) mainly
influenced by significant financial losses derived from RON depreciation against EUR and USD and lack
of hedging instruments.

Accumulated

accounts

The negative financial result was also influenced by higher short term financing needs because of
liquidities shortage experienced recently. Working capital needs constantly grew during 2003 2009

receivables
higher wk

determined
needs, but

exclusively driven by the accumulation of receivables as the state successively expanded the payment
term of its debts to healthcare services providers. The company was forced to finance the current

debt/equity ratio remained

fairy low

liquidities needs by increasing its short term debt position (from RON 18.72m or 10.8% of total assets in
2003 to RON 74.75m or 19.8% in 2009). On the long term side of the balance sheet fixed assets base
increased by 14.9% CAGR during 2003 2009 period due to constant investments in modernization and
expansion of production sites, but also to revaluations of lands and buildings. The CAPEX programme
was financed mostly by retained profit than long term loans, so the company managed to keep
debt/equity ratio under 30% despite increased short term financing needs.

December 2010

ATB

Valuation
Target price calculation and fundamental valuation
We used a fundamental valuation approach by constructing a two stages DCF model, with a first explicit
period of five years (2010-2014) and a mature growth period. Our estimates for the explicit period are
based on companys guidance, market and macroeconomic trends and in house forecasts. We expect
export sales to grow at 10.8% CAGR during 2010-2014 driven by sales to traditional markets for
Nystatin like USA, Canada and Western Europe and increased presence on Russia and CIS, Asian and
African markets. We conservatively estimated domestic business increase by 2% CAGR for hospital
sales and 5% CAGR for retail sales during the same period because of short term sector and country
difficulties like public healthcare system sub-financing, accumulated overdue public debts to healthcare
providers, declining patients purchasing power. For 2010-2011 we expect EBITDA margin to remain at
2008-2009 level (18.1%) and to start recovering after 2012. As Antibiotice was constantly focused on
modernizing its production base in order to keep up with international quality standards we forecasted
annual capital expenditure of RON 12.5m RON 13.3m for 2010-2014 period.

We also expect

receivables turnover to decrease to 250 days by 2014, while inventory and accounts payable days will
rather remain around the current values.
Our FCFFs of the explicit period were discounted using a variable WACC between 12.1% and 11.3%
implying a risk free rate of 7% for 2010 -2012 period and 6.5% for 2013 - 2014, a market risk premium
of 7.5% for 2010-2012 and 7% for 2013-2014 and a beta of 0.79 determined as average beta for the peers
group used in relative valuation approach. For the terminal period we used a WACC of 10.8% and a long
term growth rate of 2.5%.
Table 1
FCFF assumptions & results
Indicator (RONm)

2010e

2011e

2012e

2013e

2014e

EBIT

29.26

34.03

40.32

42.36

44.09

EBIT*(1-t)

24.57

28.58

33.87

35.58

37.04

+D&A expenses

13.10

10.44

5.74

7.08

8.43

- CAPEX

-13.23

-13.10

-12.50

-12.50

-12.50

- change in Working Capital

-15.39

-2.78

8.82

-1.49

-4.49

FCFF

9.05

23.14

35.93

28.67

28.47

WACC

12.1%

12.1%

12.1%

11.3%

11.3%

20.55

28.46

20.41

18.22

Discounted FCFF

9.00

Present value of FCFFs

96.64

Terminal value

352.49

Firm fair value

323.16

(-) net debt (Dec09)

71.17

Equity value

251.99

Fair value per share

0.554

Target price 12M

0.621

Closing Price as of 16 Dec10

0.600

Upside/downside potential

3.49%

Source: BRD GSG estimations

At the current market price of RON 0.600 our target price offers a potential upside of 3.49% leading to a
Hold recommendation.

15

December 2010

ATB

Sensitivity
We conducted a sensitivity analysis on WACC and g which lead to the conclusion that our fair price is
influenced by both of them: a variation of one percentage point in WACC determined a variation of 3.94.1% of our fair price, while a change of 50 bps in g lead to a volatility of 5.5-6.2% in fair price.
Table 2
Fair price sensitivity to WACC and g
g/WACC

WACC-2%
0.5381
0.5675
0.6005
0.6377
0.6800

1.5%
2%
2.5%
3%
3.5%

WACC-1%
0.5166

WACC
0.4959

WACC+1%
0.4762

0.5449
0.5767
0.6126
0.6534

0.5233
0.5539
0.5885
0.6279

0.5026
0.5321
0.5655
0.6035

WACC+2%
0.4573
0.4827
0.5112
0.5434
0.5801

Source: BRD GSG estimations

Other valuation methodologies

We conducted a relative valuation by comparing Antibiotice price multiples with the means of a selected
peers group of companies acting in pharmaceutical sector from Europe, mainly Central and Eastern
region (Slovenia Krka, Hungary - Egis Gyogyszergyar, Poland Bioton, Bulgaria Sopharma, Latvia
Grindeks AS, Spain Laboratorios Farmaceuticos ROVI SA, Romania -Biofarm). Antibiotice looks
unattractive in terms of P/E as is trading at significant premiums to its peers (+98.3% in 2010 and
+26.2% in 2011), the result being influenced by companys bad management of FX losses and still looks
expensive in terms of EV/EBITDA (+8.8% premium in 2010 and +25.5% in 2011) as we expect that the
recovery after the recession will be slower for Romanian companies compared with their European
peers. In terms of P/Sales, Antibiotice offers high discounts to its peers group (30.2% in 2010 and 27.6%
in 2011), reflecting the positive expected trend of companys sales driven by exports.

Table 3
Peers valuation

Company

Ticker

Mk cap EUR m

P/E

EV/EBITDA

EV/EBIT

P/SALES

2010

2011

2010

2011

2010

2011

2010

2011

Krka d.d. Novo Mesto

KRKG.LJ

2232.09

13.4

12.9

8.0

7.6

11.0

10.5

2.2

2.0

Egis Gyogyszergyar Nyrt.

EGIS.BU

574.93

9.5

8.6

5.4

4.6

8.3

7.0

1.3

1.2

Bioton

BOTN.WA

229.9

15.5

21.3

10.1

5.5

23.7

7.2

2.3

2.1

Sopharma AD

SOFAR.BB

260.52

11.4

9.4

8.1

7.1

10.6

9.1

0.9

0.8
0.6

Grindeks AS

GRD1R.RI

55.91

7.7

6.8

4.2

3.5

5.5

4.5

0.6

Laboratorios Farmaceuticos ROVI SA

ROVI.MC

244.50

10.9

10.4

7.4

7.3

8.2

8.2

1.5

1.4

Biofarm

BIOF.BX

51.49

1.5

1.4

9.1

8.1

11.8

10.6

3.0

2.7

Average

521.33

10.0

10.1

7.5

6.2

11.3

8.2

1.7

1.6

Median

244.50

10.9

9.4

8.0

7.1

10.6

8.2

1.5

1.4

Antibiotice
Premium/Discount
Source: Reuters, BRD GSG estimations

December 2010

ATBE.BX

63.54

19.8

12.7

8.1

7.8

11.8

10.2

1.2

1.1

98.3%

26.2%

8.8%

25.5%

4.1%

25.3%

-30.2%

-27.6%

ATB
Pharma(Romania)

ANTIBIOTICE
Valuation* (RON m)
Average nb of shares (diluted)

Operating revenues
Oper at in g r even ues

Share price
EV

250 .00

200 .00

P/E adjusted (x)

Price/cash flow (x)

15 0 . 0 0

10 0 . 0 0

50 .00

EV/EBITDA (x)
EV/EBIT (x)

2 003

2 004

20 05

20 06

20 07

20 08

20 09

Price/book value (x)

P/Sales (x)

EBIT and net profit

Dividend yield
Per share data (RON)

45.00
40.00

EPS
CFO

35.00
30.00
25.00

Book value
Dividend

20.00
15.00
10.00
5.00
2003

2004

2005

2006

2007

2008

2009

ROE and ROIC evolution

20 . 0 %
18 . 0 %
16 . 0 %
14 . 0 %
12 . 0 %

Price (16/12/2010)

12m target

RON 0.600

RON 0.621

HOLD
2008

2009

2010e

2011e

2012e

2013e

2014e

454.9
0.600

454.9
0.600

454.9
0.600

454.9
0.600

454.9
0.600

454.9
0.600

454.9
0.600

302.2
25.8

344.1
22.9

348.1
19.8

342.3
12.7

332.6
10.2

327.8
9.6

320.7
9.1

23.8
7.8

-10.2
8.7

22.7
8.2

9.6
7.7

7.7
7.2

8.7
6.6

7.9
6.1

11.9
1.1

13.1
1.1

11.9
1.1

10.1
1.0

8.2
1.0

7.7
0.9

7.3
0.9

1.2
2.8%

1.2
0.8%

1.2
1.0%

1.1
3.5%

1.1
4.9%

1.0
5.2%

1.0
5.5%

0.023

0.026

0.030

0.047

0.059

0.063

0.066

0.025
0.543

-0.059
0.532

0.026
0.556

0.063
0.582

0.078
0.612

0.069
0.643

0.076
0.676

0.017

0.005

0.006

0.021

0.029

0.031

0.033

Income statement (RON m)

Total Operating revenues
EBITDA

226.8
38.8

218.7
39.8

236.9
42.4

245.0
44.5

251.0
46.1

262.2
49.4

278.4
52.5

Depreciation, depletion and amort.

EBIT

-13.5
25.3

-13.6
26.2

-13.1
29.3

-10.4
34.0

-5.7
40.3

-7.1
42.4

-8.4
44.1

Net interest income

EBT

-3.4
13.4

-3.1
15.6

-3.8
16.5

-3.5
25.5

-3.5
31.8

-3.5
33.9

-3.5
35.6

Corporate tax
Reported net income

-2.8
10.6

-3.7
11.9

-2.7
13.8

-4.1
21.4

-5.1
26.7

-5.4
28.4

-5.7
29.9

Cash flow statement (RON m)

Net profit
Depreciation, depletion and amort.

10.6
13.5

11.9
13.6

13.8
13.1

21.4
10.4

26.7
5.7

28.4
7.1

29.9
8.4

Change in working capital

Cash flow from operating activities

-10.2
11.5

-55.4
-26.8

-15.4
12.0

-2.8
28.6

8.8
35.5

-1.5
31.5

-4.5
34.5

Net capital expenditure

Cash flow from investing activities

-6.7
-6.7

-2.6
-2.6

-13.2
-13.2

-13.1
-13.1

-12.5
-12.5

-12.5
-12.5

-12.5
-12.5

0.7
5.4

-9.2
-38.5

-1.5
-2.7

-15.6
-0.2

-13.4
9.7

-14.2
4.8

-14.9
7.1

Balance sheet (RON m)

Total long-term assets

165.4

158.7

159.1

161.7

168.5

173.9

178.0

of which tangible
Working capital

163.6
128.9

156.8
184.3

156.9
199.7

159.3
202.5

165.8
193.7

171.0
195.1

175.0
199.6

10 . 0 %
8.0%
6.0%
4.0%
2.0%
0.0%
2003

2004

2005

2006

2007

2008

2009

Major shareholders (%)

Ministry of Health
SIF Oltenia

53.02
10.09

Others

36.89

Cash flow from financing activities

Net change in cash resulting from CF

Long term liabilities

of which long term debt

1.5
0.9

0.0
0.0

0.0
0.0

0.0
0.0

0.0
0.0

0.0
0.0

0.0
0.0

Shareholders' equity
Net debt (+)/cash (-)

246.9
29.3

242.0
71.2

253.0
75.1

264.8
69.3

278.2
59.6

292.4
54.9

307.4
47.8

Accounting ratios
ROIC

10.2%

10.8%

11.6%

12.8%

14.5%

14.5%

14.3%

ROE
Sales growth (%)

4.3%
-5.9%

4.9%
1.8%

5.4%
5.5%

8.1%
4.8%

9.6%
2.5%

9.7%
4.5%

9.7%
6.2%

EBITDA margin
EBIT margin

18.0%
11.7%

18.1%
11.9%

18.3%
12.6%

18.3%
14.0%

18.5%
16.2%

19.0%
16.3%

19.0%
16.0%

4.9%
1.8

5.4%
1.9

6.1%
2.0

8.8%
2.1

10.7%
2.1

10.9%
2.1

10.8%
2.2

0.1
7.2

0.3
7.7

0.3
7.7

0.3
9.7

0.2
11.5

0.2
12.1

0.2
12.6

71.7%

19.1%

20.0%

45.0%

50.0%

50.0%

50.0%

Net income margin

Current ratio
Net debt/equity
Interest cover (x)
Payout ratio (%)

17

December 2010

SIF2
Romania
Initiation of Coverage

December 2010
Pharma industry

BIOFARM
Investment case

Hold

(12m)

We initiate our coverage on Biofarm with a Hold recommendation with a

target price of RON 0.199 which shows a 1.4% downside to current market price of RON 0.202.

Price 16/12/10

Target Price

With an expertise of over eighty years on drugs production, Biofarm is one of traditional

RON 0.202

RON 0.199

domestic generics producers with a portfolio which expanded exponentially in the last four
years to over 160 products, mainly OTC drugs and nutritive supplements. Main shareholders of

Sector
Weighting

the company are three of the five listed investment companies (SIFs) which accumulated

Neutral

51.36% stake as of mid December 2010 controlling now the majority stake which could became

Preferred stock

Antibiotice

an interesting target for a strategic investor. Biofarm has a range of several well known brands

Least preferred stock

with leading or top ten positions on their market segment and enjoying consumer awareness and

Biofarm

trust. As key drivers on the short and medium run we see the consumer orientation to cheaper
Type of investment

products (Biofarm segment) because of declining purchasing power, sales diversification

Speculative on short run

Defensive stock
Acquisition target

through exports expansion and possible SIFs exit as well as possible profitable real estate deal
after the relocation of production site to industrial area. On the long run we expect Romanian

1 year price and volume

market to catch up to European average in terms of healthcare expenditure per capita and

0.26

increased consumption of OTC and preventive drugs.

0.24

0.22

0.20

Catalysts for the share price

0.18

0.16

As the three SIFs have already accumulated over 51% we

didnt expect buying pressure on the stock. We think the investors will have a wait and see

0.14

attitude until the release of 2010 preliminary results on 15 February 2011.

0.12
Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Millions

40000
35000

12M target price and methodology Our 12M target price was derived from a two stages

30000
25000
20000
15000
10000

DCF model with an explicit period of 5 years (2010-2014) and a second mature long term

5000
0
Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

growth period. FCFF from the explicit period were discounted using a variable WACC between

Source: FactSet, BRD GSG

Risk

12% and 11.1%. For the second stage of mature growth period we assumed a WACC of 10.6%

Stock vs Under weight

sector vs Neutral
Sector
market

and a long term growth rate of 2.5%.

Alternative scenarios and risk to our scenario There are several risks of different nature

which could significantly impact companys activity and results and consecutively our valuation
model. Going top down our model could be affected by macroeconomic risks like high FX
volatility environment and increased risk aversion, by sector specific factors like public
healthcare system sub-financing (although Biofarm would be affected to a lesser extent because
of its orientation to OTC and nutritive supplements), increased competition especially from

Biofarm on www.biofarm.ro

China and India generics producers, long authorisation process for new drugs, as well as issuers
specific risks like high dependence of domestic market or unclear ownership of main production
site land.
Share data

RIC BIOF.BX , Bloom

Financial data (RON)

2009

2010e

2011e

2012e

Ratios

2009

2010e 2011e

2012e

Operating revenues (m)

68.7

74.5

80.5

86.9

P/E (x)

11.3

17.3 16.2

15.2

Net profit (m)

19.6

12.8

13.7

14.7

P/CFO (x)

79.4

15.2 12.9

12.7

Cash earnings per sh

0.003

0.013

0.016

0.016

P/Sales (x)

3.2

3.0

2.7

2.5

47.8

EPS

0.018

0.012

0.013

0.013

P/B (x)

1.6

1.5

1.4

1.2

BVPS

0.124

0.136

0.148

0.162

EV/EBITDA (x)

10.1

9.1

8.1

7.2

Gross Dividend

0.0

0.0

0.0

0.0

EV/EBIT (x)

13.4

11.8 10.6

9.4

Payout(%)

0.0

0.0

0.0

0.0

Dividend yield (%)

-27.5

-27.6

-29.7

-31.5

BIO RO

52 weeks range

0.138 0.245

Mk. Cap. (RONm)

221.16

Free float (%)

Performance (%)

1m

3m

12m

Ordinary shares

8.0

10.4

-0.5

-0.6

-2.6

4.2

Rel. to BET

Net debt/equity (%)

December 2010

ROIC/WACC (%)

0.0

0.0

0.0

0.0

na

0.9

0.8

0.8

Biofarm

Company anatomy business overview

Shareholding as of November 2010

EBIT and EBITDA margins 2003 2014e

E&
35.0%

22.52%

33.0%
31.0%
29.0%

SIF Olt enia

47.59%

16.63%

SIF Banat Cr isana

27.0%

SIF Moldova

25.0%

AVAS

23.0%

Ot her s

21.0%
19.0%
17.0%

12%

Source: Biofarm, BRD GSG estimations

Market shares Cough, Cold, High Fever Remedies Romania

2009

Market shares Digestive Remedies Romania 2009

Reckit t Benckiser Romania

14
e

13
e

EBITDA margin

Source: BSE, BRD GSG

12.6%

20

11
e

12
e

20

20

10
e

EBIT margin

20

09

20

08

20

07

20

20

20

05

04

20

20

20

06

15.0%
03

1.05%

12.5%

Europharm
35.2%

10.8%

Glaxo Smit hKline

12.4%

Biof ar m
Zent iva
Boehringer Ingelheim Romania

Br ist ol- Myers Squibb

Int ernat ional

46.2%

Eur ophar m

Ur go Laborat oir es
10.1%

6.6%Phar co Phar ma Impex' 93

Ber lin- Chemie AG Romania

Biof ar m

Solvay
6.2%

Ot her s

Kr ka Romania
6.6%

6.0%

8.6%
Ot her s
7.4%

6.0%

5.8%

Source: Euromonitor International

Source: Euromonitor International

BIO vs. BET share price performance

30.0%

20.0%

Dec-10

Nov-10

Oct-10

Sep-10

Aug-10

Jul-10

Jun-10

Apr-10

Mar-10

Feb-10

-10.0%

Jan-10

0.0%

Dec-09

10.0%

May-10

7.2%

-20.0%
-30.0%

-40.0%
BIO rebased

BET rebased

Source: BSE. BRD GSG

19

December 2010

SIF2

Investment summary
Main arguments for our recommendation
BRD GSG view
We initiate Biofarm coverage with a Hold recommendation based on the results of our employed valuation
methods both DCF modeling and relative comparison, but also on a series of qualitative factors both
strengths and weaknesses.
Biofarm is one of the traditional Romanian generics producers with a focus on OTC and nutritive
supplements. Benefiting of an expertise of over 80 years the company is the most important local producer
of soft gelatin capsules and the third Romanian producer of liquid substances (syrups and solutions). The
Short run drivers: consumer

company is well positioned on a few market niches and has a series of well known brands enjoying

orientation
to
products
and

consumer awareness and trust. Amid worsening macro economic conditions during 2008-2010 period,

cheaper
exports

Biofarm took advantage of its cheap generics portfolio initiating an aggressive marketing campaign
focused on promoting traditional Biofarm brands as efficient and cheap. Still, as all local producers, the

diversification

company faced increased competition from international players in the last two decades and constantly lost
market share reaching 0.82% stake at end June 2010 on the domestic market.
We appreciate as positive the management focus on developing the product range which more than tripled
in the last 4 years (from 50 in 2006 to over 160 currently), on consolidation of the market position for
Biofarm traditional brands and on expanding the export sales, especially on the Eastern market (RussiaCIS). Other strengths of the company are its low indebtedness which leaves room for additional short term
financing in the conditions of increased working capital needs, the potential gain from selling its main
production site land located in downtown Bucharest and relocating to industrial area and the possible exit

and long run drivers: health

expenditure convergence to
European
average
and

of the three investment funds holding over 51% stake which transforms Biofarm in one of the few

increase
consumption
preventive drugs

cash collection period corroborated with the investing of an important cash amount (EUR 10m) in a stock
portfolio at end 2007 which currently lost more than 80% in value.

remained potential acquisition targets for international players. On the negative side we put the increased

of

Key drivers on the short and medium run are the consumer orientation to cheaper products which are
Biofarms traditional market segment and expansion on foreign markets which although offer lower
margins will determine a better cash collection period and in consequence overall costs (through lower
financing costs).
On the long run, Romanian market is expected to reach European average in terms of healthcare
expenditure per capita, increase of preventive drugs consumption and consequently increase of OTC and
nutritive supplements consumption which are Biofarms main sales area.

Summary valuation
We valued Biofarm using a two stages DCF model. We explicitly forecast FCFF for the period 2010-2014
based on companys guidance, market and macroeconomic trends and in house forecasts. FCFF were
discounted to a variable WACC for 2010-2014 period, ranging between 12% and 11.1% in order to reflect
Romanian specific macro environment. For the terminal period we used a WACC of 10.6% and a long term
growth rate of 2.5%, taking into account the large gap between Romanian pharmaceutical market and
European average under the conditions of convergence process. Our model derived a fair price of RON
0.178, leading to a 12M target price of RON 0.199. Alternatively, we conducted a relative valuation using a
peers group from Europe. At current price (RON 0.202 as of December 16, 2010) Biofarm looks expensive
both in terms of P/E (+37.2% in 2010 and +37.9% in 2011) and EV/EBITDA (+23.7% in 2010 and 30.5%
in 2011).

December 2010

Biofarm

Other investments considerations

Alternative scenarios and risks
We consider our valuation results could be affected by a series of issuer specific, sector and macroeconomic
risks.
Issuers specific:
-

increased cash collection period

a large amount of money (EUR 10m) were blocked in a stock portfolio which lost 80% in value since
its acquisition;

Biofarms headquarter and main production site is located on a plot of land with unclear ownership,
but relocation process should mitigate this risk;

high dependence on domestic market;

Sector specific:
-

long authorisation process for new drugs both on domestic and foreign markets and possible changes
of the regulations in force;

domestic public healthcare system sub-financing and overdue public debts to healthcare services
providers;

increased competition on both domestic and foreign markets from international players, especially
China and India generics producers which have promoted aggressive commercial policies and
dumping prices;

Macroeconomic risks:
-

high FX volatility;
increase of investors risk aversion to Romanian assets driven by the deterioration of macro economic
fundamentals.

21

December 2010

SIF2

Company overview
Biofarm is one of the oldest Romanian generics producers with a history starting more than 80 years ago
when several small production units for capsules, liquid solutions and tablets, using mostly active
Traditional
producer
than

generics
with

80

more

ingredients based on plants and animal products, jointed into one company, the Romanian Joint Stock
Company. Later in 1948 the company is nationalized and divided in two parts Chemical Pharmaceutical

years

Industry Company no. 2 and Chemical Pharmaceutical Industry Company no. 6. In 1969 Biofarm brand

experience

was launched through the joint of the two existing companies with drugs plant Galenica manufacturing
plants extracts, tinctures, pure vegetal substances and veterinary use products. In 1990 about 60% of the
shares owned by the state were distributed to individual investors through mass privatization program. In
1997 Biofarm became a 100% private held company following the sale of 40% stake in state hands to a
USA based pharmaceutical company.
Biofarm shares were traded on OTC segment of Bucharest Stock Exchange (Rasdaq market) during 1996
2005, and then translated to BSE main market, first tier. The main stake was fragmented and changed
hands several times during 1997-2007 and currently the company is controlled by three of the five closedend investments companies listed to Bucharest Stock Exchange namely SIF Banat Crisana, SIF Moldova
and SIF Oltenia which accumulated a 51.36% stake as of mid December (estimated by BRD GSG based on
SIFs official NAV as end November 2010 and insider trading reports during 1 December 2010 16
December 2010).
In 2004, Biofarm obtained Good Manufacturing Practice (GMP) certificate for all production flows
following an investment of EUR 9m and was recertified in May 2010. Currently the company has a range
of over 160 products both drugs (OTC and prescription drugs) and nutritive supplements. Main

First local producer of

soft gelatin capsules and
third local producer of
liquid substances

manufacturing flows are liquid substances - syrups, suspensions and solutions flow (ranking the third in
Top Romanian producers), soft gelatin capsules flow (the most important Romanian producer) and tablets
flow. Biofarm products cover more than ten therapeutic classes such as alimentary tract and metabolism,
respiratory system, muscular-skeletal system, cardiovascular system, cough and cold remedies, vitamins
and nutritive supplements. The company uses mainly the retail channel of pharmaceutical market as the
bulk of Biofarm sales came from nutritive supplements and OTC sales (approximately 80% of annual
turnover), while prescription drugs account for no more than 20%. Biofarm collaborates with the first ten
drugs distributors, which account for 64% of wholesale local market.

Key drivers
Market position
Same as other local producers Biofarm lost ground in the last years facing increased competition from
international players. Based on companys sales and Cegedim market data we estimated a market share of
0.82% at end June 2010. The company made continuous efforts to develop its products range and focused
Although it lost ground
before
international

on nutritive supplements market but also OTC and currently has a portfolio of over 160 products (from 50
in 2006).
Benefiting of over 80 years market presence, the company succeeded to construct several well known
brands which enjoy consumers awareness and trust and have a leading position in a few market niches.

competitors

Thus in 2009 Biofarms product Colebil was the leading brand for Digestive Remedies with a 12.5%
market share out of RON 121m sales on this segment. In Cough, Cold, High Fever Remedies segment
Biofarm ranked the sixth place in 2009 with a market share of 7.2% out of RON 205m due to its well
known brands Bixtonim (nasal decongestive) and herbal cough syrups Expectorant and Patlagina.
December 2010

Biofarm

Vitamins and nutritive supplements is one of Biofarm most important sales area but also a much disputed
market (more than three quarters of brands are owned by international producers). Still Biofarm succeed to
preserve a top 10 position, ranking seventh place in 2009 with a market share of 5.6% out of RON 306m
sales on the segment (source: Euromonitor International).
...Biofarm has leading
or top ten positions on

Also one of Biofarms competitive advantages especially in current market environment characterized by

digestive
remedies,
cough, cold, high fever

deteriorating consumer purchasing power is its low price for generic products compared to similar

remedies and vitamins

imported products. The companys management initiated an aggressive marketing campaign via media
publicity spots and increased sales force focused on promoting traditional Biofarm brands as efficient and

and

cheap. Best sold brands are Triferment, Colebil, Angirol (digestive remedies), Bixtonim (nasal

nutritive

supplements

decongestive), Carmol (antiseptic substance) and Cavit (vitamins).

In opposite with Antibiotice which distributes a significant part of its products directly to public hospitals,
Biofarm uses mainly the retail channel: direct pharmacies sales and sales through drugs distributors. In this
respect Biofarm is less affected than Antibiotice by the existing liquidities shortage problem at public
healthcare system level. Still as OTC and prescription drugs arent billed separately, the companys
collection period increased lately since the state extended two times the legal payment period for
reimbursed drugs.

Strategic plans
Currently Biofarm production sites and administrative buildings are located on two plots of land downtown
Bucharest. Although the company did not obtain the owner certificate for its main location (a plot of land
of aprox. 10,000 sqm) and the asset is not registered in the financial statements, the management is
Major

investment

confident that is only a matter of time and passing some legal procedures in order to get ownership of the

project:

companys

respective land. The good location of the current site offers the company the possibility of a profitable deal

relocation to industrial
area

on real estate market after obtaining the ownership certificate. Thus in the EGSM from 24 April 2010,
Biofarm shareholders approved companys relocation from downtown to the industrial area. The relocation
expenses are estimated at EUR 7.9m and the company applied for co-financing with European structural
funds through The Sector Operational Program for increasing Economic Competitiveness. According to
management, 60% of the project will be financed through companys own sources and the rest through
European funds if the application will be approved. There is no clear time line of the relocation process,
the only management indication being that there is no rush. We estimate the project will finalize in at
least 3 years or more if the co-financing from European funds is not approved and the company will be
forced to bear the entire relocation cost.

and

export

developments plans
to Russia CIS
area

Currently Biofarm sales its products on the domestic market and only 4.5% of annual turnover represents
exports. The management plans to strengthen exports business line in near future by entering or
consolidating the companys position on Eastern markets such as Ukraine, Russia and Moldova. Although
the export margins are lower than domestic margins according to companys management, the shorter cash
collection period helps the company to better manage its working capital needs and decrease total costs.
In 2008 Biofarm set up a joint venture in Ukraine where it holds 50% stake, while in February 2010 it
opened a representative in Moldova. Because of worsening macroeconomic environment, Biofarm delayed
the investment in Ukraine and the joint venture is not functional yet. Still, the Eastern market remains one
of the main export targets of the company, according to the management. Biofarm brands are well known
to Moldavian consumers which lead to the increase of exported products from 10 initially to 37 at end June
2010.

23

December 2010

SIF2

Financials overview
Biofarm sales experienced a CAGR of 12.3% during 2003 2009 period reaching RON 67m in 2009, but
lagging far behind market growth of 23.8% CAGR. We estimate the companys performance was dragged
Solid sales growth
but lagging behind
market rally, still
better

performance

during

recession

compared
Antibiotice

to

down on one hand by the enforcement of mandatory GMP certifications which forced Biofarm to focus on
investments and delayed production flows and on other by management weak (delayed) reaction to
increased competition from international players (which in fact affected all domestic producers).
Despite worsening macro economic conditions during 2007-2009 period, Biofarm managed to keep an
ascending sales path, although at a slower pace (+3.75% CAGR) and still behind market growth (+16.1%
CAGR). We see this as a performance compared to Antibiotice which had declining sales during 20082009 period and a consequence of Biofarm position on lower prices market segment which benefited of
increased consumer attention during crisis period. Indeed the company took advantage of its traditional
cheaper generic drugs and initiated an aggressive marketing campaign. The results were already visible in
2010 as 9M10 sales advanced by 18.1% y/y.
In terms of operational performance, Biofarm exhibited constant high margins with an average EBITDA of
30.6% and average EBIT of 24.4% during 2003 2009 period. The pattern is fairly linear over the period

Strong

operative

performance

with a maximum in 2003 (EBITDA margin 33% and EBIT margin 27.3%) and then below average in the
years affected by the economic crisis (EBITDA margin 28.6% in 2008 and 27.2% in 2009, while EBIT
margin reached 22.3% in 2008 and 20.4% in 2009). We estimate the company will be able to maintain its
historical average margins both for EBITDA and EBIT as it has plenty of room for prices increases at OTC
and nutritive supplements products (which are not established by the Ministry of Health), while the capital
expenditures needed in the following years are in line with historical levels. Net margin followed the same
linear path during 2003 -2007 period with an average of 22.6%, but the series was broken in 2008 when
the company registered a high financial loss because of declining market value of its stocks portfolio. The
net margin was also biased in 2009 when the reversal of RON 6m provisions overstated the bottom line.

and

In 2007 the management decided to invest some RON 40m cash from a share capital increase in stocks

cash flow affected

listed at BSE, mainly in financial sector (the five closed-end investment funds, BRD GSG, Banca

by
losses
from
shares portfolio

Transilvania), but also energy (Transelectrica, Dafora, Armax Gaz) and constructions (Transilvania

Bottom

line

Constructii). The decision timing was bad as it reached the capital market in a peak moment, so the
portfolio value sharply declined (by 80%) to the end of 2008. Consequently, the management adopted the
buy and hold strategy and plans to divest only when the whole initial portfolio value will be recovered.
We consider this a negative point for Biofarm as we estimate that peaking shares prices from 2007 well be
hardly reached in near term.

December 2010

Biofarm

Valuation
Target price calculation and fundamental valuation
We used a fundamental valuation approach by constructing a two stages DCF model, with a first explicit
period of five years (2010-2014) and a mature growth period. Our estimates for the explicit period are
based on companys guidance, market and macroeconomic trends and in house forecasts. We
conservatively estimate sales growth by a CAGR of 8.6% during 2010-2014 period because of short term
sector and country difficulties like public healthcare system sub-financing, accumulated overdue public
debts to healthcare providers, declining patients purchasing power. We expect EBITDA margin to
maintain a fairly linear pattern around 26.5% during 2010-2014 period, while EBIT margin will remain
around 20-21%. We also expect receivables turnover to decrease to 160 days by 2014, while inventory
and accounts payable days will rather remain around the current values. As regarding capital expenditure
we incorporated annual investments in equipments in line with historical levels from 2006-2009 period and
we assumed the relocation will finalise in three years and Biofarm will bear 60% of the costs while the rest
will be secured through European structural funds.
Our FCFFs of the explicit period were discounted using a variable WACC between 12% and 11.1%
implying a risk free rate of 7% during 2010-2012 period and 6.5% during 2013-2014, a market risk
premium of 7.5% for 2010-2012 and 7% for 2013-2014 and a beta of 0.79 determined as average beta for
the peers group used in relative valuation approach. For the terminal period we used a WACC of 10.6%
and a long term growth rate of 2.5%.
Table 1
FCFF assumptions & results
Indicator (RONm)

2010e

2011e

2012e

2013e

2014e

EBIT

15.22

16.29

17.49

19.03

21.03

EBIT*(1-t)

12.78

13.69

14.69

15.99

17.66

+D&A expenses

4.52

5.03

5.53

5.84

5.83

- CAPEX

-10.02

-9.94

-9.78

-5.00

-5.00

- change in Working Capital

-3.41

-1.86

-3.13

-2.08

-3.54

FCFF

3.88

6.91

7.32

14.75

14.95

WACC

12.0%

12.0%

12.0%

11.1%

11.1%

Discounted FCFF

3.86

6.15

5.81

10.53

9.60

Present value of FCFFs

35.95

Terminal value

188.06

Firm fair value

157.33

(-) net debt (Dec09)

-37.41

Equity value

194.73

Fair value per share

0.178

Target price 12M

0.199

Closing Price as of 16 Dec10

0.202

Upside/downside potential

-1.40%

Source: BRD GSG estimations

At the current market price of RON 0.202 our target price shows a potential downside of 1.4% leading to a
Hold recommendation

25

December 2010

SIF2

Sensitivity
We conducted a sensitivity analysis on WACC and g which lead to the conclusion that our fair price is
influenced by both of them: a variation of one percentage point in WACC determined a variation of 2.62.7% of our fair price, while a change of 50 bps in g lead to a volatility of 3.9-4.4% in fair price.
Table 2
Fair price sensitivity to WACC and g
g/WACC

WACC-2%
0,1737
0,1804
0,1878
0,1962
0,2058

1.5%
2%
2.5%
3%
3.5%

WACC-1%
0,1692

WACC
0,1648

WACC+1%
0,1606

0,1755
0,1827
0,1908
0,2001

0,1709
0,1779
0,1857
0,1946

0,1665
0,1732
0,1808
0,1894

WACC+2%
0,1566
0,1623
0,1688
0,1760
0,1843

Source: BRD GSG estimations

Other valuation methodologies

We conducted a relative valuation by comparing Biofarm price multiples with the means of a selected
peers group of companies acting in pharmaceutical sector from Europe, mainly Central and Eastern region
(Slovenia Krka, Hungary - Egis Gyogyszergyar, Poland Bioton, Bulgaria Sopharma, Latvia
Grindeks AS, Spain Laboratorios Farmaceuticos ROVI SA, Romania - Antibiotice). Biofarm looks
unattractive in terms of P/E as is trading at significant premiums to its peers (+37.2 % in 2010 and +37.9%
in 2011) and still looks expensive in terms of EV/EBITDA (+23.7% premium in 2010 and +30.5% in
2011) as we expect that the recovery after the recession will be slower for Romanian companies compared
their European peers.

Table 3
Peers valuation

Company

Ticker

Mk cap
EUR m
2010

2011

2010

2011

2010

2011

2010

2011

Krka d.d. Novo Mesto

KRKG.LJ

2231.74

2232.09

13.4

12.9

8.0

7.6

11.0

10.5

2.2

Egis Gyogyszergyar Nyrt.

EGIS.BU

588.73

574.93

9.5

8.6

5.4

4.6

8.3

7.0

1.3

Bioton

BOTN.WA

245.9

229.9

15.5

21.3

10.1

5.5

23.7

7.2

2.3

Sopharma AD

SOFAR.BB

265.24

260.52

11.4

9.4

8.1

7.1

10.6

9.1

0.9

Grindeks AS

GRD1R.RI

59.13

55.91

7.7

6.8

4.2

3.5

5.5

4.5

0.6

Farmaceuticos ROVI SA

ROVI.MC

246.50

244.50

10.9

10.4

7.4

7.3

8.2

8.2

1.5

Antibiotice

ATBE.BX

63.54

19.8

12.7

8.2

7.7

11.9

10.1

1.2

1.1

Average

523.05

12.6

11.7

7.4

6.2

11.4

8.1

1.4

1.3

Median

244.50

11.4

10.4

8.0

7.1

10.6

8.2

1.3

1.2

51.49

17.3

16.2

9.1

8.1

11.8

10.6

3.0

2.7

37.2%

37.9%

23.7%

30.5%

4.1%

30.4%

107.8%

108.3%

P/E

EV/EBITDA

EV/EBIT

P/SALES

Laboratorios

BIOF.BX

Biofarm
Premium/Discount
Source: Reuters, BRDGSG estimations

December 2010

BIO

Pharma(Romania)

BIOFARM
Valuation* (RON m)
Average nb of shares (diluted)

Operating revenues
Oper at in g r even ues

Share price
EV

80.0 0
70.0 0
60.0 0

P/E adjusted (x)

Price/cash flow (x)

50.0 0
40.0 0
30.0 0
20.0 0
10 . 0 0
20 03

20 04

20 05

20 06

20 07

20 08

20 09

EV/EBITDA (x)
EV/EBIT (x)
Price/book value (x)
P/Sales (x)

EBIT and net profit

Dividend yield
Per share data (RON)

25.00

Price (16/12/2010)

12m target

RON 0.202

RON 0.199

HOLD
2008
1046,0
0,211

2009
1094,9
0,202

2010e
1094,9
0,202

2011e
1094,9
0,202

2012e
1094,9
0,202

2013e
1094,9
0,202

2014e
1094,9
0,202

185,9
NA

183,8
11,3

180,0
17,3

172,9
16,2

165,3
15,1

150,2
13,8

135,0
12,5

13,7
10,0

79,4
10,1

15,2
9,1

12,9
8,1

12,7
7,2

11,0
6,0

10,9
5,0

12,8
1,7

13,4
1,6

11,8
1,5

10,6
1,4

9,4
1,2

7,9
1,1

6,4
1,0

3,3
0,0%

3,2
0,0%

3,0
0,0%

2,7
0,0%

2,5
0,0%

2,4
0,0%

2,2
0,0%

-0.019

0.018

0.012

0.013

0.013

0.015

0.016

0.015
0.124

0.003
0.124

0.013
0.136

0.016
0.148

0.016
0.162

0.018
0.176

0.019
0.193

20.00

EPS
CFO

15.00
10.00
5.00
(5.00)

2003

2004

2005

2006

2007

2008

2009

Book value
Dividend

0.000

0.000

0.000

0.000

0.000

0.000

0.000

Income statement (RON m)

Total Operating revenues
EBITDA

66.4
18.6

68.7
18.3

74.5
19.7

80.5
21.3

86.9
23.0

93.8
24.9

101.3
26.9

Depreciation, depletion and amort.

EBIT

-4.1
14.5

-4.5
13.7

-4.5
15.2

-5.0
16.3

-5.5
17.5

-5.8
19.0

-5.8
21.0

Net interest income

EBT

1.7
-18.9

2.9
22.6

0.0
15.2

0.0
16.3

0.0
17.5

0.0
19.0

0.0
21.0

Corporate tax
Reported net income

-2.4
-21.3

-3.0
19.6

-2.4
12.8

-2.6
13.7

-2.8
14.7

-3.0
16.0

-3.4
17.7

Cash flow statement (RON m)

Net profit
Depreciation, depletion and amort.

-21.3
4.1

19.6
4.5

12.8
4.5

13.7
5.0

14.7
5.5

16.0
5.8

17.7
5.8

Change in working capital

Cash flow from operating activities

0.6
16.1

-11.9
2.8

-3.4
14.6

-1.9
17.1

-3.1
17.4

-2.1
20.0

-3.5
20.3

Net capital expenditure

Cash flow from investing activities

-4.4
-3.3

-1.9
1.4

-10.0
-10.0

-9.9
-9.9

-9.8
-9.8

-5.0
-5.0

-5.0
-5.0

Cash flow from financing activities

Net change in cash resulting from CF

-1.9
11.0

-2.2
2.0

-0.4
4.2

0.0
7.2

0.0
7.6

0.0
15.0

0.0
15.3

Balance sheet (RON m)

Total long-term assets

78.4

72.8

78.3

83.2

87.4

86.6

85.8

of which tangible
Working capital

70.1
20.5

58.5
33.8

64.1
37.2

69.1
39.1

73.5
42.2

72.7
44.3

71.7
47.9

1.0
0.2

0.9
0.0

0.0
0.0

0.0
0.0

0.0
0.0

0.0
0.0

0.0
0.0

Shareholders' equity
Net debt (+)/cash (-)

129.7
-35.2

136.1
-37.4

148.8
-41.1

162.5
-48.3

177.2
-55.9

193.2
-70.9

210.9
-86.2

Accounting ratios
ROIC

11.1%

10.0%

10.2%

10.0%

9.9%

9.9%

10.0%

ROE
Sales growth (%)

NA
4.4%

14.4%
3.1%

8.6%
11.0%

8.4%
8.0%

8.3%
7.0%

8.3%
7.0%

8.4%
7.0%

28.6%
22.3%

27.2%
20.4%

26.5%
20.4%

26.5%
20.3%

26.5%
20.1%

26.5%
20.3%

26.5%
20.7%

NA
4.8

29.3%
6.6

17.2%
6.4

17.0%
6.6

16.9%
6.8

17.0%
7.4

17.4%
7.9

Net debt/equity
Interest cover (x)

-0.3
70.6

-0.3
96.4

-0.3
380.5

-0.3
407.3

-0.3
437.3

-0.4
475.8

-0.4
525.6

Payout ratio (%)

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

(10.00)
(15.00)
(20.00)
(25.00)

ROE and ROIC evolution

2 3. 0%
18 . 0 %
13 . 0 %
8. 0%
3. 0%
-2. 0%
20 03

2 00 4

20 05

2 00 6

20 07

20 08

2 00 9

-7. 0%
- 12 . 0 %
- 17 . 0 %

Major shareholders (%)

SIF Oltenia
SIF Banat Crisana

22.45
16.49

SIF Moldova

12.21

Long term liabilities

of which long term debt

EBITDA margin
EBIT margin
Net income margin
Current ratio

SIF2

BRD-GSG Research

+40 21 301 6850

research@brd.ro

Florian LIBOCOR

Chief Economist
Head of Research

+40 21 301 6869

florian.libocor@brd.ro

Carmen LIPAR

Head of Financial Markets Research

+40 21 301 4370

carmen.lipara@brd.ro

Monica NANIA

Economist

+40 21 301 6858

monica.nania@brd.ro

Florin HANIL, CFA

Equity Analyst

+40 21 301 4472

florin.hantila@brd.ro

Laura SIMION, CFA

Equity Analyst

+40 21 301 4461

laura.simion@brd.ro

Razvan PANTURU

Junior Analyst

BRD-GSG rating system

(December 2010)

razvan.panturu@brd.ro

IMPORTANT DISCLAIMER

Premium List
Selected from stocks expected to
outperform the market by over 25%.
Buy
Expected to outperform the market by at
least 10%.
Hold
Expected to perform in line with the
market +/10%.
Sell
Expected to underperform the market by
at least 10%.
Assumptions
12 month time horizon and flat market
over forecast period.

Disclaimer. This publication is issued in Romania by or through BRD Groupe Socit Gnrale (BRD - GSG), which is regulated by the Romanian Securities
and Exchange Commission and National Bank of Romania. The information herein is not intended to be an offer to buy or sell, or a solicitation of an offer to buy
or sell any securities. Investments in emerging markets can involve significant risks, such as uncertainty of dividends, of benefits or of profits, market, foreign
exchange, legal, credit, tax and other risks and are not suitable for all investors. The information contained herein, including any expression of opinion, has been
obtained from or is based upon sources believed to be reliable, but is not guaranteed as to accuracy or completeness although BRD - GSG believes it to be
accurate, clear, fair and not misleading at the time of publication. BRD - GSG, and its affiliated companies, may from time to time to deal in, profit from the
trading of, hold or act as market-makers or act as advisers, brokers or in relation to the securities, or derivatives thereof, of persons, firms or entities mentioned in
this document or be represented on the board of such persons, firms or entities. Employees of BRD - GSG, and its affiliated companies, or individuals connected
to them, may from time to time have a positioning or be to holding any of the investments or related investments mentioned in this document. BRD - GSG, and
its affiliated companies, are under no obligation to disclose or take account of this document when advising or dealing with or for their customers and may have
acted upon or made use of the information in this document prior to its publication. The views of BRD -GSG reflected in this document may change without
notice. To the maximum extent possible at law, BRD - GSG does not accept any liability whatsoever arising from the use of the material or information contained
herein. This research document is not intended for use by/or targeted to private customers. In case customers obtain a copy of this report, they should not base
their investment decisions solely on this document, but must search for independent financial advice.
Important notice: The circumstances in which materials provided by BRD - GSG have been produced are in such manner (for example because of reporting or
remuneration structures or the physical location of the author of the material) that it is not appropriate to characterise it the materials as independent investment
research as referred to in European MIFID directive and that it should be treated as a marketing material even if it contains a research recommendation. However,
it must be made clear that all publications issued by BRD GSG will be accurate, clear, fair, and not misleading.
This publication is also not subject to any prohibition or dealing ahead of the dissemination of investment research.
Analyst Certification: Each author of this research report hereby certifies that (i) the views expressed in the research report accurately reflect his or her personal
views about any and all of the subject securities or issuers and (ii) no part of his or her compensation was, is, or will be related, directly or indirectly, to the
specific recommendations or views expressed in this report.
Copyright BRD-Groupe Societe Generale 2010. All rights reserved. Nobody can reproduce, redistribute or pass on to any other person or publish in whole or in
part for any purpose this publication.

December 2010