Central Europe Sales Help Krka Maintain Growth in 2009, Higher Investment to Dent Profits in 2010

Slovenian generics giant Krka has announced its full, unaudited, consolidated results for 2009, which show a slight increase in revenue and profit in comparison with its estimates from January (see Slovenia: 22 January 2010: Krka's Preliminary Results Show 6% Increase in Net Profit in 2009). The Krka group's revenue edged up 0.33% year-on-year (y/y) in 2009 to 953.04 billion euro (US$1.295 billion), while its net profit increased by 14.41% y/y to reach 173.69 million euro. The group's research and development (R&D) expenses increased by 2.95% y/y to 87.25 million euro, while distribution and administration expenses, as well as cost of sales, increased considerably, by 17.73% y/y and 12.70% y/y respectively. The group's operating income (as calculated by IHS Global Insight) was down by 42.06% y/y, at 132.21 million euro. The double-figure rise in net income is explained as the result of an increase in "other" operating income, of an unspecified nature, which reached 102.79 million euro in 2009, compared with 8.62 million euro in 2008, and also by a decrease in financial costs in 2009, of 65.65% y/y.

Central Europe Continues to Be Krka's Most Important Region in Sales Terms

Krka's most important region in sales terms continued to be Central Europe, where the group recorded a steady 6% y/y increase in sales in 2009 to 267.7 million euro, which represented 28% of its overall sales. Eastern Europe was its second region in terms of sales, although in this region, the group recorded a 3% y/y decline in sales to 225.7 million euro, while the region maintained the same share of Krka's overall sales as in 2008 (see Slovenia: 23 April 2009: CEE Generics Giant Krka Records 17.3% Profit Rise in 2008). A significant change from the previous year was the 5% y/y decline in sales in the south-east Europe region, where the Krka group's sales in 2009 reached 128.5 million euro; nevertheless, it managed to increase its sales of products and services in its home market of Slovenia by 2% y/y, to 106.0 million euro.

During the course of 2009, Krka successfully completed the centralised procedure marketing authorisation application process for European Union countries for two products containing the active pharmaceutical ingredient clopidogrel (a blood-thinning drug), and also for its branded erectile dysfunction product Vizarsin, a generic version of the Pfizer (U.S.) blockbuster Viagra (sildenafil). In the Russian Federation—Krka's largest single market—the group acquired marketing authorisations for 13 products in 40 different forms. Meanwhile, in the over-the-counter (OTC) market, Krka also expanded its range of marketed products during 2009, obtaining marketing authorisations for 8 new products; OTC products represented 9% of Krka's overall sales in 2009, with total sales of these products reaching 89.6 million euro.

Investment to Double, Profit Predicted to Dip in 2010

In 2009, Krka's investment totalled 91.1 million euro, and many projects that had been scheduled to take place during the year were postponed until 2010, in view of the global financial crisis. Planned investment for 2010 is 176 million euro, which will mostly be accounted for by the modernisation and expansion of production facilities. Krka is predicting a 6% y/y increase in revenue in 2010, to slightly over 1 billion euro, whereas it is predicting a decline in net profit, to159 million euro.

Outlook and Implications

Excluding the "other operating income" that boosted Krka's net income in 2009 by 11.4% y/y, the company's financial performance in 2009 was more or less flat in comparison with the previous year, and on an operating level, it was significantly worse. This can be explained by a deterioration in the operating conditions for pharmaceutical companies on many of Krka's key markets, both in terms of the difficult economic situations of individual countries, and the increasingly tough regulatory environments for pharmaceutical companies in these markets. In these circumstances, costs of sales increase, along with administrative expenses, which are the main factors behind Krka's considerable decline in operating income (down 42% y/y as calculated by IHS Global Insight) in 2009.

Turning to 2010, Krka is ramping up its investments, although this is related to the deferred investments from 2009, postponed due to the global financial crisis. With its Russian production facility having recently obtained Good Manufacturing Practice status, Krka looks well placed to benefit from the dynamically expanding pharmaceutical market in the Russian Federation, particularly in view of the Russian authorities' preference for companies that have local manufacturing bases. Additionally, Krka is also looking to make new acquisitions, with a new acquisition before the end of 2010 a possibility (see Slovenia: 25 January 2010: Krka Plans Acquisitions of Small and Medium-Sized Competitors and Investment Boost).