2010.12.17-pharma sector report - initiating coverage.pdf

8/19/2019 2010.12.17-Pharma sector report - Initiating coverage.pdf

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Pharma

THERE IS POTENTIAL BUT ALSO SHORT TERM RISKSANTIBIOTICE, BIOFARM

Sector

WeightingNeutralPreferred stock

AntibioticeLeast preferred stock

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

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

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

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

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

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

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

GDP – about 60% of European average, low consumption of preventive drugs, low consumer

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

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 world’s large generics companies demonstrate the interest of international players for

the market both in terms of potential demand and potential export base.

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 PriceTarget12M

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

Romania

Sector Initiation of Coverage

December 2010

100

Laura Simion, CFA

+40 21 301 4461

[email protected]

Antibiotice (ATB)HOLD

TP RON 0.621Upside 3.49%

Developmentstrategy

Dividend play Privatisation target

Biofarm (BIO)HOLD

TP RON 0.199Downside 1.40%

Defensive Speculative on

short run Acquisition target


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Pharma sector

Contents

3 Sector anatomy – Business overview

4 Pharma market overview

7 SWOT analysis

8 AntibioticeCompany anatomy – Business overviewInvestment summaryCompany overviewKey driversFinancials overview

Valuation

18 BiofarmCompany anatomy – Business overviewInvestment summaryCompany overviewKey driversFinancials overviewValuation


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Pharma sector

3 December 2010

Sector anatomy – business overview

Market value EURbn terms 2002 – 2009 Main therapeutic classes market shares as of June 2010

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

2002 2003 2004 2005 2006 2007 2008 2009

Hospital

Retail

18.8%

16.2%

13.7%12.7%

10.5%

7.0%

6.3%

14.7%

Cardiovascular system

Antineoplastic and

Immunomodulating agent s

Alimentary tract and metabolism

Nervou s system

General systemic anti- infect ives

Respirat ory system

Musculo-skeletal system

Other

Source: Cegedim Source: Cegedim

Top 15 producers by market share at June 2010 Exports pharmaceutical products EUR m 2000-2009

9.60%

9.20%

6.70%

6.10%

6.00%

5.20%

4.60%3.70%3.70%

31.10%

Sanofi-Aventis

Hoffmann la Roche

Pfizer

GlaxoSmithKline

Norvatis

Servier

Merck&Co

Astrazeneca

Daiichi-Sankyo

Abbott

Bayer

Eli Lilly

Antibiotice

Menarini

Krka

others

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Cegedim Source: Eurostat

Romanian Pharmaceutical Market - Commercial chain

Source : Ministry of Health (MoH)

Producers and directimporters

Maximal selling pricesestablished by MoHannually

Whole sale distributors

Maximal margins

capped to 14%

Pharmacies andhospitals

Maximal margins

capped to 24%


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Pharma sector

December 2010

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.

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%.

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

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);

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

Accelerate market growth

driven by Retail segment….

….but still lagging far

behind EU level

Market consolidation:

International players

entered directly or by

acquiring local producers


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Pharma sector

5 December 2010

- 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

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.

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;

Highly regulated market

Regulated prices for

prescription drugs


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Pharma sector

December 2010

- 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

trend of healthcare system modernisation);

- 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;

- 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

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 disappointingperformance 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 theexcessive 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.

Some growth factors: EU

convergence process,

investments announced by

main players, exports boom,

private healthcare sector

expansion

The sector as a whole faces

some risks as liquidity

shortage problem and

chronic public healthcare

system sub-financing


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Pharma sector

7 November 2010

SWOT analysis

Pharmaceutical market

Strengths Weaknesses

• Population of 21.4m, second place in CEE after

Poland

• Still low cost production

• GMP compliance in force

• Recent entries of international players in themarket

• Prolonged recession

• Low GDP per capita

• Low healthcare expenditure per capita

• Strong deterioration of hospitals’ drugs consumption

• Chronic public healthcare system sub-financing

Opportunities Threats

•

Export based production site

• Development of private healthcare sector

• Convergence to EU level in terms of healthcareexpenditure

• Expansion of generics industry in the next years

•

Liquidity shortage implied by overdue public payments to theindustry

• Increasing emigration of specialised medical personnel both

doctors and nurses to EU countries

• Increasing insolvency cases (mainly independent pharmacies

and small distributors)

• Tighter regulations

The two companies in our coverage universe, main features

Antibiotice Biofarm

• 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 foreignmarkets

• Significantly affected by MoH pricing policy,

introduction of claw back tax

• 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


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Pharma industry

ANTIBIOTICE

Hold (12m)

Price 16/12/10 Target Price

RON 0.600 RON 0.621

Sector

Weighting

Neutral

Preferred stock

Antibiotice

Least preferred stock

Biofarm

Type of investment

Development strategy

Dividend play

Privatisation target

1 year price and volume

0.45

0.50

0.55

0.60

0.65

0.70

0.75

D e c- 09 J an -1 0 F eb -1 0 M ar -1 0 A p r- 10 M ay -1 0 J un -1 0 J ul -1 0 A ug -1 0 S ep -1 0 O ct -1 0 N ov -1 0 D e c- 10

Thousands

0

500

1000

1500

2000

2500

3000

D e c- 09 J an -1 0 F eb -1 0 M ar -1 0 A pr -1 0 M ay -1 0 J un -1 0 J ul -1 0 A ug -1 0 S ep -1 0 O ct -1 0 N ov -1 0 D e c- 10

Source: FactSet, BRD GSG

Risk

Stock vs sector Over weight

Sector vs market Neutral

Antibiotice onwww.antibiotice.ro

Investment case 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

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

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 issuer’s, sector and

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

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

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

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

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

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

expect Romanian market to catch up to European average in terms of healthcare expenditure per

capita and increased consumption of OTC and preventive drugs.

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 9M’10 results posted by the company.

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

confirm if the recovery trend is on track.

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

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

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

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

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

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

risks of different type which could significantly impact company’s 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

imposed by some foreign countries for imported drugs, long authorisation process for new drugs,

as well as issuer’s specific risks like high dependence of Nystatin export sales and of some raw

materials suppliers, short term l iquidities problems.

Share data Financial data (RON) 2009 2010e 2011e 2012e Ratios 2009 2010e 2011e 2012e

RIC ATBE.BX , Bloom ATB RO Operating revenues (m) 218.7 236.9 245.0 251.0 P/E (x) 22.9 19.8 12.7 10.2

52 weeks range 0.47 – 0.75 Net profit (m) 11.9 13.8 21.4 26.7 P/CFO (x) NA 22.7 9.6 7.7

Mk. Cap. (RONm) 272.94 Cash earnings per sh -0.059 0.026 0.063 0.078 P/Sales (x) 1.2 1.2 1.1 1.1

Free float (%) 36.89 EPS 0.026 0.030 0.047 0.059 P/B (x) 1.1 1.1 1.0 1.0

Performance (%) 1m 3m 12m BVPS 0.532 0.556 0.582 0.612 EV/EBITDA (x) 8.7 8.2 7.7 7.2

Ordinary shares 2.6 11.1 -0.8 Gross Dividend 0.005 0.006 0.021 0.029 EV/EBIT (x) 13.1 11.9 10.1 8.2

BET -0.6 -2.6 4.2 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

Romania

Initiation of Coverage

December 2010


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ATB

9 December 2010

Company anatomy – business overview

Production structure 2009 Sales breakdown domestic/exports 2003 – H1’10

Production structure 2009

27.30%

20.90%

17%

14.30%

11.11%

8.84%0.55%

Powder injection drugs

Capsules

Tablets

Ointments and creams

Suppositories

Nystatin

Bio fertilizers

-

50.00

100.00

150.00

200.00

250.00

2003 2004 2005 2006 2007 2008 2009 H1'10

Expor t sales

Domestic sales

Source: Antibiotice Source: Antibiotice

Domestic sales structure 2005 – 2014e EBIT and EBITDA margins 2003 – 2014e

-

5 0 . 0 0

100.00

150.00

2 0 0 . 0 0

2 5 0 . 0 0

2 0 0 5 2 0 0 6 2 0 07 2 0 0 8 2 0 0 9 2 0 10 e 2 0 11e 2 0 12 e 2 0 13 e 2 0 14 e

Domestic sales RON m

Hospit al

Retail

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2003 2004 2005 2006 2007 2008 2009 2010e 2011e 2012e 2013e 2014e

EBIT mar gi n EBITDA mar gi n

Source: Antibiotice, BRD GSG estimates Source: Antibiotice, BRD GSG estimates

ATB vs. BET share price performance

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

D e c - 0 9

J a n - 1 0

F e b - 1 0

M a r - 1 0

A p r - 1 0

M a y - 1 0

J u n - 1 0

J u l - 1 0

A u g - 1 0

S e p - 1 0

O c t - 1 0

N o v - 1 0

D e c - 1 0

ATB rebased BET rebased

Source: BSE, BRD GSG


10/28

ATB

December 2010

Investment summaryMain 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 issuer’s 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

pharmaceutical forms (capsules, tablets, ointments) on domestic market. With an expertise of over 55

years the company made continuous efforts to adapt to market’s 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 topproducers at end June 2010).

We appreciate as positive the fact that company’s 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

company’s 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

company’s 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 2010-

2014 using the management’s 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).

We see long term growth

potential, but results could

be delayed by a

combination of issuer’s

specific, sector and

macroeconomic risks


11/28

ATB

11 December 2010

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.

Issuer’s specific:

- after several failed privatisation attempts, the company remained the sole pharmaceutical producer in

state’s 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.


12/28

ATB

December 2010

Company overview

The company’s 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

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 thefirst 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.

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

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

GMP in August 2008. Antibiotice is well known on the local market as the traditional provider of anti-

infective drugs , both powder injection and capsules, consolidating its leader position in 2009 with a

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.

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

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.

Company’s 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.

Over 130 drugs produced

on 9 modernized production

flows GMP certified

Traditional anti-infective

drugs provider, sole

producer for 14 anti-

infective drugs

Second world Nystatin

producer with 30% market

share in 2009

Over 55 years experience in

drugs production


13/28

ATB

13 December 2010

Key drivers

Market position

On the domestic market Antibiotice faced the fiercing competition from large international

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 13

th

place in topdrugs 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 H1’10 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 Antibiotice’s brands cover mainly

general anti-infective systemic drugs class, but also cardiovascular system and dermatologic products

accounting for 44.5% of company’s turnover in 2009.

Strategic plans

In order to consolidate the company’s 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

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, muscular-

skeletal 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 company’s 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.

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

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

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 H1’10 reaching 18.5% and 22.4% of

company’s turnover respectively. The management’s 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.

Future strategic plans based

on three pylons: portfolio

renewal, equipment

modernization and growth

of export activity

Ranking 13th place in top

producers at end June 2010,

preserving 6.6% market

share for generics (H1’10)

-

2 . 0 0

4 . 0 0

6 . 0 0

8 . 0 0

10 .00

12 .00

14 .00

20 0 6 20 0 7 20 08 20 0 9 H1'10

Export sales USD m

end-useproducts

activesubstances

Source:Antibiotice


14/28

ATB

December 2010

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 company’s turnover experienced an accelerate growth (+17.2% CAGR)

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 amidworsening macro environment both local and international company’s 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),

while active substances sales remained almost flat in volume terms. In H1’10 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

reaching 22.4% of H1’10 turnover. Overall H1’10 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.

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

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

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.

Good growth perspectives

during 2003 – 2007,

dragged by worsening

macroeconomic situation in

2008-2009

Signs of recovery in H1’10

driven by exports rally

Accumulated accounts

receivables determined

higher wk needs, but

debt/equity ratio remained

fairy low


15/28

ATB

15 December 2010

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 company’s 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%

Discounted FCFF 9.00 20.55 28.46 20.41 18.22

Present value of FCFFs 96.64

Terminal value 352.49

Firm fair value 323.16

(-) net debt (Dec’09) 71.17

Equity value 251.99

Fair value per share 0.554

Target price 12M 0.621

Closing Price as of 16 Dec’10 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.


16/28

ATB

December 2010

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 3.9-

4.1% 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% WACC-1% WACC WACC+1% WACC+2%

1.5% 0.5381 0.5166 0.4959 0.4762 0.457

2% 0.5675 0.5449 0.5233 0.5026 0.482

2.5% 0.6005 0.5767 0.5539 0.5321 0.511

3% 0.6377 0.6126 0.5885 0.5655 0.543

3.5% 0.6800 0.6534 0.6279 0.6035 0.580


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 company’s 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 company’s sales driven by exports.

Table 3

Peers valuation

Source: Reuters, BRD GSG estimations

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

Grindeks AS GRD1R.RI 55.91 7.7 6.8 4.2 3.5 5.5 4.5 0.6 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 ATBE.BX 63.54 19.8 12.7 8.1 7.8 11.8 10.2 1.2 1.1

Premium/Discount 98.3% 26.2% 8.8% 25.5% 4.1% 25.3% -30.2% -27.6%


17/28

ATB

17 December 2010

Operating revenues

Operating reven ues

-

50 .00

100 .00

150 .00

200 .00

250 .00

2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9

EBIT and net profit

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

2003 2004 2005 2006 2007 2008 2009

ROE and ROIC evolution

0 . 0 %

2 . 0 %

4 . 0 %

6 . 0 %

8 . 0 %

10. 0%

12. 0%

14. 0%

16. 0%

18. 0%

20. 0%

2 00 3 20 04 2 00 5 20 06 20 07 2 00 8 20 09

Major shareholders (%)

Ministry of Health 53.02

SIF Oltenia 10.09

Others 36.89

Pharma(Romania) Price (16/12/2010) 12m target

ANTIBIOTICE HOLD RON 0.600 RON 0.621Valuation* (RON m) 2008 2009 2010e 2011e 2012e 2013e 2014e

Average nb of shares (diluted) 454.9 454.9 454.9 454.9 454.9 454.9 454.9

Share price 0.600 0.600 0.600 0.600 0.600 0.600 0.600

EV 302.2 344.1 348.1 342.3 332.6 327.8 320.7

P/E adjusted (x) 25.8 22.9 19.8 12.7 10.2 9.6 9.1

Price/cash flow (x) 23.8 -10.2 22.7 9.6 7.7 8.7 7.9

EV/EBITDA (x) 7.8 8.7 8.2 7.7 7.2 6.6 6.1

EV/EBIT (x) 11.9 13.1 11.9 10.1 8.2 7.7 7.3

Price/book value (x) 1.1 1.1 1.1 1.0 1.0 0.9 0.9

P/Sales (x) 1.2 1.2 1.2 1.1 1.1 1.0 1.0

Dividend yield 2.8% 0.8% 1.0% 3.5% 4.9% 5.2% 5.5%

Per share data (RON)

EPS 0.023 0.026 0.030 0.047 0.059 0.063 0.066

CFO 0.025 -0.059 0.026 0.063 0.078 0.069 0.076

Book value 0.543 0.532 0.556 0.582 0.612 0.643 0.676

Dividend 0.017 0.005 0.006 0.021 0.029 0.031 0.033

Income statement (RON m)

Total Operating revenues 226.8 218.7 236.9 245.0 251.0 262.2 278.4EBITDA 38.8 39.8 42.4 44.5 46.1 49.4 52.5Depreciation, depletion and amort. -13.5 -13.6 -13.1 -10.4 -5.7 -7.1 -8.4EBIT 25.3 26.2 29.3 34.0 40.3 42.4 44.1Net interest income -3.4 -3.1 -3.8 -3.5 -3.5 -3.5 -3.5EBT 13.4 15.6 16.5 25.5 31.8 33.9 35.6Corporate tax -2.8 -3.7 -2.7 -4.1 -5.1 -5.4 -5.7Reported net income 10.6 11.9 13.8 21.4 26.7 28.4 29.9

Cash flow statement (RON m)Net profit 10.6 11.9 13.8 21.4 26.7 28.4 29.9Depreciation, depletion and amort. 13.5 13.6 13.1 10.4 5.7 7.1 8.4Change in working capital -10.2 -55.4 -15.4 -2.8 8.8 -1.5 -4.5Cash flow from operating activities 11.5 -26.8 12.0 28.6 35.5 31.5 34.5Net capital expenditure -6.7 -2.6 -13.2 -13.1 -12.5 -12.5 -12.5Cash flow from investing activities -6.7 -2.6 -13.2 -13.1 -12.5 -12.5 -12.5Cash flow from financing activities 0.7 -9.2 -1.5 -15.6 -13.4 -14.2 -14.9Net change in cash resulting from CF 5.4 -38.5 -2.7 -0.2 9.7 4.8 7.1

Balance sheet (RON m)

Total long-term assets 165.4 158.7 159.1 161.7 168.5 173.9 178.0of which tangible 163.6 156.8 156.9 159.3 165.8 171.0 175.0Working capital 128.9 184.3 199.7 202.5 193.7 195.1 199.6Long term liabilities 1.5 0.0 0.0 0.0 0.0 0.0 0.0of which long term debt 0.9 0.0 0.0 0.0 0.0 0.0 0.0Shareholders' equity 246.9 242.0 253.0 264.8 278.2 292.4 307.4Net debt (+)/cash (-) 29.3 71.2 75.1 69.3 59.6 54.9 47.8

Accounting ratios

ROIC 10.2% 10.8% 11.6% 12.8% 14.5% 14.5% 14.3%ROE 4.3% 4.9% 5.4% 8.1% 9.6% 9.7% 9.7%Sales growth (%) -5.9% 1.8% 5.5% 4.8% 2.5% 4.5% 6.2%EBITDA margin 18.0% 18.1% 18.3% 18.3% 18.5% 19.0% 19.0%EBIT margin 11.7% 11.9% 12.6% 14.0% 16.2% 16.3% 16.0%Net income margin 4.9% 5.4% 6.1% 8.8% 10.7% 10.9% 10.8%Current ratio 1.8 1.9 2.0 2.1 2.1 2.1 2.2Net debt/equity 0.1 0.3 0.3 0.3 0.2 0.2 0.2Interest cover (x) 7.2 7.7 7.7 9.7 11.5 12.1 12.6Payout ratio (%) 71.7% 19.1% 20.0% 45.0% 50.0% 50.0% 50.0%


18/28

SIF2

December 2010

Pharma industry

BIOFARMHold (12m)

Price 16/12/10 Target Price

RON 0.202 RON 0.199

Sector

Weighting

Neutral

Preferred stock

Antibiotice

Least preferred stock

Biofarm

Type of investment

Speculative on short run

Defensive stock

Acquisition target

1 year price and volume

0.12

0.14

0.16

0.18

0.20

0.22

0.24

0.26

D e c- 09 J an -1 0 F eb -1 0 M ar -1 0 A pr -1 0 M ay -1 0 J un -1 0 J ul -1 0 A ug -1 0 S ep -1 0 O ct -1 0 N ov -1 0 D ec -1 0

Millions

0

5000

10000

15000

20000

25000

30000

35000

40000

D ec -0 9 J an -1 0 F eb -1 0 M ar -1 0 A pr -1 0 M ay -1 0 J un -1 0 J ul -1 0 A ug -1 0 S ep -1 0 O ct -1 0 N ov -1 0 D e c- 10

Source: FactSet, BRD GSG

Risk

Stock vs Under weight

Sector vs Neutral

Biofarm on www.biofarm.ro

Investment case We initiate our coverage on Biofarm with a Hold recommendation with atarget price of RON 0.199 which shows a 1.4% downside to current market price of RON 0.202.

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

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

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

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

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

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

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

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

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

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

increased consumption of OTC and preventive drugs.

Catalysts for the share price As the three SIFs have already accumulated over 51% we

didn’t expect buying pressure on the stock. We think the investors will have a wait and see

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

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

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

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

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

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 company’s 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

China and India generics producers, long authorisation process for new drugs, as well as issuer’s

specific risks like high dependence of domestic market or unclear ownership of main production

site land.

Share data Financial data (RON) 2009 2010e 2011e 2012e Ratios 2009 2010e 2011e 2012e

RIC BIOF.BX , Bloom BIO RO Operating revenues (m) 68.7 74.5 80.5 86.9 P/E (x) 11.3 17.3 16.2 15.2

52 weeks range 0.138 – 0.245 Net profit (m) 19.6 12.8 13.7 14.7 P/CFO (x) 79.4 15.2 12.9 12.7

Mk. Cap. (RONm) 221.16 Cash earnings per sh 0.003 0.013 0.016 0.016 P/Sales (x) 3.2 3.0 2.7 2.5

Free float (%) 47.8 EPS 0.018 0.012 0.013 0.013 P/B (x) 1.6 1.5 1.4 1.2

Performance (%) 1m 3m 12m BVPS 0.124 0.136 0.148 0.162 EV/EBITDA (x) 10.1 9.1 8.1 7.2

Ordinary shares 8.0 10.4 -0.5 Gross Dividend 0.0 0.0 0.0 0.0 EV/EBIT (x) 13.4 11.8 10.6 9.4

Rel. to BET -0.6 -2.6 4.2 Payout(%) 0.0 0.0 0.0 0.0 Dividend yield (%) 0.0 0.0 0.0 0.0

Net debt/equity (%) -27.5 -27.6 -29.7 -31.5 ROIC/WACC (%) na 0.9 0.8 0.8

Romania

Initiation of Coverage

December 2010


19/28

Biofarm

19 December 2010

Company anatomy – business overview

Shareholding as of November 2010 EBIT and EBITDA margins 2003 – 2014e

22.52%

16.63%

12%1.05%

47.59%

SIF Olt enia

SIF Banat Crisana

SIF Moldova

AVAS

Others

15.0%

17.0%

19.0%

21.0%

23.0%

25.0%

27.0%

29.0%

31.0%

33.0%

35.0%

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

e

2 0 1 1 e

2 0 1 2

e

2 0 1 3

e

2 0 1 4

e

EBIT margin EBITDA margin

Source: BSE, BRD GSG Source: Biofarm, BRD GSG estimations

Market shares Cough, Cold, High Fever Remedies Romania2009

Market shares Digestive Remedies Romania 2009

12.6%

12.4%

10.1%

8.6%

7.4%7.2%

6.6%

35.2%

Reckit t Benckiser Romania

Europharm

Glaxo Smit hKline

Bristol-Myers Squibb

International

Urgo Laboratoir es

Biofarm

Krka Romania

Others

12.5%

10.8%

6.6%

6.2%

6.0%

6.0%5.8%

46.2%

Biofarm

Zentiva

Boehringer Ingelheim Romania

Europharm

Pharco Pharma Impex'93

Berlin-Chemie AG Romania

Solvay

Others

Source: Euromonitor International Source: Euromonitor International

BIO vs. BET share price performance

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

D e c - 0 9

J a n - 1 0

F e b - 1 0

M a r - 1 0

A p r - 1 0

M a y - 1 0

J u n - 1 0

J u l - 1 0

A u g - 1 0

S e p - 1 0

O c t - 1 0

N o v - 1 0

D e c - 1 0

BIO rebased BET rebased

Source: BSE. BRD GSG


20/28

SIF2

December 2010

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

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

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

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

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 (Russia-

CIS). 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

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

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

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.

Key drivers on the short and medium run are the consumer orientation to cheaper products which are

Biofarm’s 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 Biofarm’s main sales area.

Summary valuation

We valued Biofarm using a two stages DCF model. We explicitly forecast FCFF for the period 2010-2014based on company’s 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).

Short run drivers: consumer

orientation to cheaper

products and exports

diversification…

…and long run drivers: health

expenditure convergence to

European average and

increase consumption of

preventive drugs


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Biofarm

21 December 2010

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.

Issuer’s 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;

- Biofarm’s 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.


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SIF2

December 2010

Company overview

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

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

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

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 changedhands several times during 1997-2007 and currently the company is controlled by three of the five closed-

end 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

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 company’s 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

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.

Thus in 2009 Biofarm’s 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.

Traditional generics

producer with more

than 80 years

experience

First local producer of

soft gelatin capsules and

third local producer of

liquid substances

Although it lost ground

before international

competitors…


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Biofarm

23 December 2010

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).

Also one of Biofarm’s competitive advantages especially in current market environment characterized by

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

imported products. The company’s management initiated an aggressive marketing campaign via media

publicity spots and increased sales force focused on promoting traditional Biofarm’ brands as efficient and

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

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 aren’t billed separately, the company’s

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

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

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

on real estate market after obtaining the ownership certificate. Thus in the EGSM from 24 April 2010,

Biofarm shareholders approved company’s 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 company’s 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.

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 company’s position on Eastern markets such as Ukraine, Russia and Moldova. Although

the export margins are lower than domestic margins according to company’s 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.

...Biofarm has leading

or top ten positions on

digestive remedies,

cough, cold, high fever

remedies and vitamins

and nutritive

supplements

Major investment

project: company’s

relocation to industrial

area

……and export

developments plans

to Russia – CIS

area


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SIF2

December 2010

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 company’s performance was draggeddown 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 2008-

2009 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 9M’10 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

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.

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

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

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

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.

Solid sales growth

but lagging behind

market rally, still

better performance

during recession

compared to

Antibiotice

Strong operative

performance

Bottom line and

cash flow affected

by losses from

shares portfolio


25/28


26/28

SIF2

December 2010

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 2.6-

2.7% 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% WACC-1% WACC WACC+1% WACC+2

1.5% 0,1737 0,1692 0,1648 0,1606 0,15

2% 0,1804 0,1755 0,1709 0,1665 0,16

2.5% 0,1878 0,1827 0,1779 0,1732 0,16

3% 0,1962 0,1908 0,1857 0,1808 0,17

3.5% 0,2058 0,2001 0,1946 0,1894 0,18


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

Source: Reuters, BRDGSG estimations

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 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

Laboratorios

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

Biofarm BIOF.BX 51.49 17.3 16.2 9.1 8.1 11.8 10.6 3.0 2.7

Premium/Discount 37.2% 37.9% 23.7% 30.5% 4.1% 30.4% 107.8% 108.3%


27/28

BIO

Pharma(Romania) Price (16/12/2010) 12m target

BIOFARM HOLD RON 0.202 RON 0.199Valuation* (RON m) 2008 2009 2010e 2011e 2012e 2013e 2014e

Average nb of shares (diluted) 1046,0 1094,9 1094,9 1094,9 1094,9 1094,9 1094,9

Share price 0,211 0,202 0,202 0,202 0,202 0,202 0,202

EV 185,9 183,8 180,0 172,9 165,3 150,2 135,0

P/E adjusted (x) NA 11,3 17,3 16,2 15,1 13,8 12,5

Price/cash flow (x) 13,7 79,4 15,2 12,9 12,7 11,0 10,9

EV/EBITDA (x) 10,0 10,1 9,1 8,1 7,2 6,0 5,0

EV/EBIT (x) 12,8 13,4 11,8 10,6 9,4 7,9 6,4

Price/book value (x) 1,7 1,6 1,5 1,4 1,2 1,1 1,0

P/Sales (x) 3,3 3,2 3,0 2,7 2,5 2,4 2,2

Dividend yield 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0%

Per share data (RON)

EPS -0.019 0.018 0.012 0.013 0.013 0.015 0.016

CFO 0.015 0.003 0.013 0.016 0.016 0.018 0.019

Book value 0.124 0.124 0.136 0.148 0.162 0.176 0.193

Dividend 0.000 0.000 0.000 0.000 0.000 0.000 0.000

Income statement (RON m)

Total Operating revenues 66.4 68.7 74.5 80.5 86.9 93.8 101.3EBITDA 18.6 18.3 19.7 21.3 23.0 24.9 26.9Depreciation, depletion and amort. -4.1 -4.5 -4.5 -5.0 -5.5 -5.8 -5.8EBIT 14.5 13.7 15.2 16.3 17.5 19.0 21.0Net interest income 1.7 2.9 0.0 0.0 0.0 0.0 0.0EBT -18.9 22.6 15.2 16.3 17.5 19.0 21.0Corporate tax -2.4 -3.0 -2.4 -2.6 -2.8 -3.0 -3.4

Reported net income -21.3 19.6 12.8 13.7 14.7 16.0 17.7

Cash flow statement (RON m)

Net profit -21.3 19.6 12.8 13.7 14.7 16.0 17.7Depreciation, depletion and amort. 4.1 4.5 4.5 5.0 5.5 5.8 5.8Change in working capital 0.6 -11.9 -3.4 -1.9 -3.1 -2.1 -3.5Cash flow from operating activities 16.1 2.8 14.6 17.1 17.4 20.0 20.3Net capital expenditure -4.4 -1.9 -10.0 -9.9 -9.8 -5.0 -5.0Cash fl

2010.12.17-pharma sector report - initiating coverage.pdf

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