Zentiva's chief financial officer, Petr Sulc, sees immense growth potential in Turkey's drugs market. Though valuations of pharma deals rose to record highs in the last years, when Zentiva wants to assess valuation levels it always measures them in light of how it managed to pursue its strategy rather than looking at them out of context, Sulc told Portfolio.hu in an interview in Prague. The CFO is convinced that consolidation in the pharma industry will continue, adding that Zentiva has no artificial obstacles or barriers against takeover. Portfolio.hu: Valuations of pharmaceutical deals have hit all time highs in the last years. Do you think the valuations of these transactions have been reasonable? How do you assess the consolidation of the pharmaceutical industry in the CEE region?
Petr Sulc: Technically speaking, yes, valuations are relatively high but we have seen correction on the markets in the last weeks. Nevertheless it is a good question what is reasonable. In our philosophy valuation is reasonable if it brings further value to our shareholders and if it fulfills our business criteria. So we are not buying companies just because their price is right or because an opportunity arises. We only want to buy in order to continue our business concept and our strategy via acquisitions which is mainly focus on the following:
- primary care physicians: our mission is to target primary care physicians with better therapies in the form of generic versions of modern, original drugs with high sales potential;
- products: we want to buy companies whose products pipeline fits into Zentiva's portfolio and strategy;
- market: to reach people that are able to help us in further developing this business concept and strategy in order to achieve further growth.
These are our criteria to assess when we consider the price of our acquisitions.
P.: Eczacibasi, your recently acquired Turkish company fulfills these criteria?
P. S.: It definitely does. The acquisition of Eczacibasi fulfills all of the aforementioned aspects. Also, it has huge growth potential since the Turkish market will be one of the fastest growing markets over the next few years and it is supposed to become the 10th largest market in the world in 2010 - according to IMS projections.
We believe that the Turkish government aims to ensure the most efficient ways of treatment possible for patients. But today in Turkey lots of medicines and treatments are restricted to a small group of specialists, which means that it is available only for a small group of patients. In general treatment you find a lot of untreated and under-treated patients but the financial sources for better service are limited. This situation offers a great potential for generic pharmaceutical companies that bring treatments at affordable prices for both governments and patients.
The concept of primary care (also known as family doctors or general practitioners) is developing in Turkey and there are test runs in several cities. Today most Turkish patients go directly to specialists (they decide themselves where to go) or go to pharmacies to buy drugs without visiting a doctor beforehand. People don't need prescription for most drugs in Turkey, which is not the most efficient spending practice existing. That's why the Turkish government decided to implement the system of family doctors, which we can help with our experience.
Eczacibasi also boasts a great portfolio and pipeline and many of the products produced in Turkey could be distributed in our other CEE markets (some of them already registered in CEE countries). Its production units have GMP (Good Manufacturing Practice) standards, which are required by big original and generics pharmaceutical partners. Eczacibasi also has internationally experienced local management team, so some of the Turkish managers have been invited to corporate level to help us in the coordination of the group.
P.: How much do you think revenue and cost synergies will amount to?
P. S.: We don't want to publish such details because very often it can be misleading for our investors. We would like to increase the group's net profit margin diluted by the lower margins achieved today by Eczacibasi, back to the level of around 15%, which we believe can be achieved in 3 years. This means that the profit growth will be higher than it was in the past years and then it will be organic. We expect slightly higher organic growth in Turkey than the market.
The sources of synergies will come form:
- cross sales;
- R&D cooperation;
- stronger purchasing power because of the bigger producing capacity;
- improving the efficiency of production.
P.: In which markets would Zentiva like to have acquisitions in the following years? Analysts expect that the next step will be Ukraine or Bulgaria...
P. S.: As we are a listed company I can't talk about any projects before they are published but our general approach is the same: growing both organically and via partnerships or acquisitions. Our target markets are primarily the CEE markets where the expected growth of primary care can be utilized with our business concept. We can mention here both Ukraine Bulgaria and other CEE markets.
P.: What was the reason for Zentiva's weak Czech performance in the second quarter which led to a profit warning?
P. S.: Our domestic market has been somewhat turbulent because of the drug market reforms last year and this year, which I guess will continue in the near future. So the uncertainty will linger on to some extent, as patients will be forced to pay more for their medicines, which will negatively effect volumes. I think the general market movements are both unpredictable and unfavorable for us, but these are not Czech-specific factors, they exist on nearly all Central European markets (see Hungarian drug market reforms, DLO problems in Russia, etc.). Nevertheless these markets have high growth potential in the longer term and will grow faster than Western Europe. Domestic market turbulences, however, affect Zentiva less now than in the past since our dependence of the Czech market has been reduced from 60% in 2003 to 35% in 2006.
P.: What kind of additional reforms do you expect from the Czech government?
P. S.: The implementation of fix co-payment of visiting doctors, hospitals and for drugs had been already announced. However, the possible change of the reimbursement system is not easy to assess since there is not yet any proposal of the implementation of the new regulations. Nevertheless, the increasing co-payment of patients (which in fact is the lowest in the region) is inevitable.
The general trend in the CEE region is to focus on generic substitution and sooner or later doctors won't decide on the brand and the producer of the medicine, only on the molecule and treatment they want to use. The decision about the brand and the producer will be made at the insurance companies (like in Germany) or in the pharmacies. This trend provides big opportunity for big generic producers since pharmacies don't need to store many brands of the same molecule and if prices are relatively similar, the biggest producer's product will be the most widely known and thus the most effectively sold.
P.: What did cause the Slovakian revenue growth in the past quarters?
P. S.: That was a relatively normal market development after the downturn two years ago, which was triggered by the healthcare reform in Slovakia. But revenues growth in Slovak koruna was not so significant as in our reporting currency (CZK) in he second quarter since the SKK appreciated against the Czech koruna.
P.: What do you expect in the Russian and the CIS markets in 2007 and 2008?
P. S.: We are newcomers to Russia since we started business in this country in 2003. So we have a completely different position than Hungarian pharma players that traditionally have very strong presence in Russia market. The DLO was very positive for us in the last two years and it was positive also for the sector as a whole because of the modernization of drugs used in Russia.
Our exposure to the DLO was the highest in the beginning of 2006 with 35-40% of total Russian sales, which declined dramatically and now are below 10%. In was due to our efforts focusing on the transfer of patients from the DLO to the commercial market which easier for us than the originator players. Thus we can benefit from the Russian market in case of the end of the DLO.
P.: Do you have problems with receivables in the Russian market?
P. S.: We have no problems but receivables are top priority for us. Thanks to our local management we are collecting money in an acceptable way. We are focusing intensively on receivables collection, in which we were relatively successful in the first half of the year. This was the result of our efforts to transfer patients from the DLO to the commercial market.
P.: Were Romanian inventory provisions and write-offs only one-off items in the second quarter? What was the reason for these items?
P. S.: The reason was product changes, which also caused some write-offs in 2006 connected to portfolio modernization in 2005. In the second quarter, the reason for one-off items was similar but it stemmed from normal business development. In Romania we will certainly see more turbulences in the market because of portfolio changes and payment disciplines, which is a bigger risk than in Russia.
P.: Richter follows somewhat different strategy in Romania buying some pharmacy chains. Do you intend to follow the same strategy?
P. S.: We don't have any pharmacies in Romania and we are not planning to buy any of them, as we remain focused on our core strategy in Romania, as well. We are not involved in distribution chains or pharmacies in any of our core markets since we have specialized partners that operate in distribution. We have no experience in this line of business. Slovakopharma, which we bought in 2003, was involved in the distribution business but was not efficient in this operation.
P.: Turning to the Hungarian market... Why did you enter the Hungarian market only after drug market regulations have changed?
| Petr Sulc, CFO |
Mr. Sulc, born on 26 April, 1967, joined the Company in 2001 as Financial Director. He is a member of Zentiva’s Board of Directors. He worked as financial analyst at AGA S/A in Brazil (1995 - 1997), later at AGA GAS s.r.o. in the Czech Republic where he was in the position of Financial Director and Managing Director. In 2000 he was appointed Regional Financial Controller for Western Europe at Linde Gas AG where he stayed until the point of joining the Company in 2001. Has a degree in economics from the University of Economics in Prague (1990) and a degree in law from Charles University, Faculty of Law (1991). |
The Hungarian market was well protected and was very difficult to enter because of the strong position of local players that had very good relationship with the different governments. In general it's always easier to enter a market in times when these barriers are weaker than normally and when there is market turbulence. The opportunity presented itself for us when Sanofi was willing to sell its Hungarian generic business. They also offered some of their operations in other countries but the only interesting business was in Hungary, because of the relatively strong portfolio and generic promotion sales force (40 people). By bringing new portfolio from Zentiva we hope we will be able to use the sales force a little bit more efficiently.
P.: Do you hedge Turkish and other foreign markets' FX risk?
P. S.: Before our Turkish acquisition, FX risk was not so eminent because it was relatively well distributed among countries and we had significant imbalances only in Romania's lei and the Russian ruble. The most vulnerable currency is the US dollar, which is not so important for us and our euro exposure is balanced by the Polish zloty. Nevertheless, Turkey will be a serious issue for us and we will hegde the lira.
P.: What are the main advantages of Sanofi's 25% stake in Zentiva for you?
P. S.: It was the best possible scenario that Warburg Pincus sold its Zentiva stake to Sanofi. There were also different scenarios to sell it to other financial funds, which would have been negative for us, because the priorities of such owner could have been different in building value.
However, there are no synergies in the original and generic pharma businesses and I believe this was the reason Sanofi invested in Zentiva (like a financial investor) instead of building its own generic division. Sanofi wanted to have some exposure to generic business because of its growth potential. But mixing original and generic businesses was never successful in the past for any pharma companies. That's why Novartis's Sandoz, for example, is completely independent.
Sanofi's stake in Zentiva confirms that our strategy is not so bad and we have good growth potential. There are some tangible effects too, for example the market entry into Hungary or buying some license in other countries. However the so-called soft effects are more important for us. In general, it opens doors and it adds reliability for us since "the big bear" is behind us so we look a little bit stronger. This fact helped us also in the Eczacibasi acquisition in some soft points.
P.: How would you imagine the pharmaceutical landscape of the CEE region in 5 years' time? Do you expect similar consolidation or consolidation efforts as in the oil industry?
P. S.: That's a very good question. I think the consolidation will continue in the pharma industry and we are willing to participate in that. We have no artificial obstacles or barriers against takeover, but we would definitely like to be active in the future in the fields of business combinations, partnerships or acquisitions.
Szabolcs Barát 
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