Химия и фармацевтические продукты

A survey by the Polish research group PMR (www.pmrpublications.com) indicates that Ukraine`s pharmaceutical market will witness a growth by up to 25% per year to reach a value of USD 5.7 bln in 2010. The survey was published on mid. October.

Indeed, over the last five years, the country's drug market has demonstrated stable growth of between 25% and 30% per year. In 1H2008 alone, it even registered a whopping increase of 42% in annual terms to USD 1.6 bln, compared to USD 2.6 bln for the entire year of 2007.

Currently, Ukraine's drug market ranks second, after Russia, in value terms among the countries of the CIS. Its growth hinged on the country's WTO membership since early 2008 and the implementation of a reliable drug reimbursement scheme and obligatory medical insurance.

PMR analyst Monika Stefanczyk underlines that despite various obstacles to pharmaceutical companies on the Ukrainian market – i.e. low drug consumption, outdated healthcare system, bureaucracy, and an unstable political situation – the outlook on the country's drug market development is positive. This market is seen to be of great growth potential, since it is relatively small despite a sizeable population (46 mln), compared with Poland which has fewer (38 mln) inhabitants but three times more pharmaceutical sales than Ukraine in 2007.

It is anticipated that recent trends on the international pharmaceutical market will influence Ukraine, with world producers now under pressure over low generics’ prices, and especially those produced by Indian competitors. On the other hand, Indian manufacturers have become concerned about competition from their European and Chinese peers, which in turn may lead to heightened interest on the part of foreign companies in Ukraine and other CIS pharmaceutical markets.

Our view: We see that the common pharmaceutical market trends provided by Stefanczyk matches reality, however the actual numbers are a bit overestimated. The understanding of the market size in 2007 provided by different consulting agencies like RMBC and Business&Credit varies deeply. Market size varies from USD 2.06 to 2.6 bln. Consulting agencies have different methodologies on how to value the market. We believe that the actual 2007 market size was USD 2.2 bln, while the 1H2008 results constitute USD 1.35-1.40 bln. We expect the 2010 market size to be about USD 4 bln.

The market grew 21% CAGR between 2004 and 2007 and increased by 42% YoY in 1H2008. On the other hand, such significant growth was driven by different factors, with some of them, such as inflation or currency instability, not contributing to the real value of the market. In volume terms, the market grew only by 5-7% to 680 thsd units in 1H2008.

The key real factors driving the pharmaceutical market are increased government spending, the country’s aging population, and low level of per capita consumption. The share of the hospital segment increased from 13% to 17% in 1H2008. Ukraine’s per capita level of consumption (USD 48 in 2007) is far lower that witnessed in Eastern Europe, which constitutes USD 200-250 on average.

The tough competition forces European and Asian drug manufacturers to expand into new underdeveloped markets with high growth potential, as is described above. We see that Ukrainian pharmaceutical market, in addition to the assets of local drugs manufacturers, are far more attractive considering long-term development strategies. CIS markets remain critical for long-term growth. We expect that interest in Ukrainian assets will continue to grow, which will lead to the number of M&A deals, especially after the implementation of GMP standards. Small producers lacking financial resources to complete modernization will be forced to leave the market or to sell their assets to international pharma companies.

The top 5 largest domestic producers – Kyivmedpreparat [KMED UZ, BUY], Farmak [FARM UZ, HOLD], Darnitsa [4SI1 GR, SELL], the Zdorovie Group, and the Borschahovskiy Chemical-Pharmaceutical Plant – are already almost GMP compliant. They are trying to warm interest towards their assets through the early implementation GMP standards. Market prices for pharmaceutical assets are not yet formed; however we see the first steps towards the Ukrainian pharma market’s restructurization. The Borschahovskiy Chemical Pharmaceutical Plant is one of the largest drug manufacturers, with a 2.09% market share in value terms and 4.3% in volume terms, is currently offering investors the opportunity to buy a major 69% stake in its company for USD 144 mln. The largest producers understand that their assets are very valuable in the eyes of foreign competitors in this attractive and fast growing pharma market.

Also see Sokrat’s news “Pharma Imports Rise 45.6% for Jan-Sep: NEGATIVE” from yesterday’s daily. To gain an overall better understanding of the pharmaceutical market in Ukraine, see our 42-page report report “Ukrainian Pharmaceuticals: A forward look at GMP implementation” of October 23, 2008.

In September, the amount of pharmaceuticals imported into Ukraine increased by 46% or USD 75 mln YoY. As well, imports increased by 21% MoM.

From January to September 2008, pharmaceutical imports increased by 45.6% YoY or USD 551 mln to reach the level of USD 1758 mln.

Our view: We see that the share of local producers continues to decrease in value terms. According to the results for 1H2008, the market share of domestic pharmaceutical producers constituted 22%, while this figure was 1.4% higher in January 2007.

We see different factors behind such a significant increase in imports. In 2007, Ukraine entered the WTO, which opened a wide avenue for importers, as import tax barriers were then lowered. Currently in order to resist the current financial crisis, many drugstores and wholesalers increased prices for drugs by as much as 50-80%. High inflation and currency instability are yet other factors that contribute to the price for drugs. We believe that the overall financial results for the 2008 pharma market will be around USD 3 bln, which is about 300 mln higher than estimated in our previous forecasts. The market is growing in value terms, while it remains stable in terms of volume.

However, we believe that the market share had of local pharmaceutical producers will become stable in 2009. Under the conditions of this financial crisis, customers will be more likely to purchase Ukrainian-made drugs, which are, on average, seven times cheaper than imported ones.

In July-September, the Kyivmedpreparat company, increased its net revenue by 23.41% or UAH 37.394 mln to UAH 197.105 mln, compared July-September 2007. Kyivmedpreparat, as Ukraine’s largest producer of antibiotics, ended 3Q2008 with a net profit of UAH 19.719 mln.

Kyivmedpreparat ended 2007 with a net profit of UAH 26.668 mln, having increased its net revenue by 21.2% or UAH 40.734 mln to UAH 233.287 mln, compared to 2006.

Kyivmedpreparat [KMED UZ, BUY], the leading antibiotics pharmaceutical producer in Ukraine and a member of the Arterium Corporation, decided to increase its share capital by UAH 100 mln, up to the level of UAH 200.1 mln. The share subscription is scheduled to take place in the period December 9-25, 2008.

Dragon Capital, a minority shareholder in Kyivmedpreparat, has voted against the additional shares’ issuance. According to Dragon Capital’s announcement on December 31, 2007, last year’s share issuance contravened the law in that it violated minority shareholders rights during the share subscription and the current decision to hold an additional share issuance was taken by shareholders who own fake shares. Currently, there are three active cases concerning Kyivmedpreparat’s share issuance before local courts for review.

Our view: The company’s great 3Q2008 results leads us to confirm our forecast for Kyivmedpreparat’s annual results. We recommend BUYing shares in Kyivmedpreparat, with a two month target price of USD 37.8 and current upside of 41%.

We believe that the Ukrainian pharmaceutical industry remains stable under the current condition of the credit crunch. Consumers will most likely purchase Ukrainian made drugs due to the fact that their prices are, on average, seven times lower than those for imported products.

We are not sure whether the additional share issuance will take place during the period December 9-25, 2008; however, considering Kyivmedpreparat’s plan for GMP modernization in 2009, we believe that this is still the right step for the company to attract the resources required for such modernization. This is a viable option for KMED, since bank loans have become extremely expensive in the backdrop of the current financial crisis. We believe that the company will be able to implement GMP modernization at a level up to 80% in 2009.

For a more detailed analysis of Kyivmedpreparat and to gain an overall better understanding of the pharmaceutical market in Ukraine, see our 42-page report report “Ukrainian Pharmaceuticals: A forward look at GMP implementation” of October 2008. For more information, please contact the Head of International Sales, Constantine Lisnychyy at +38 050 310 0819 or lisnychyy@sokrat.kiev.ua

For the period January-September 2008, the Closed Joint Stock Company “Borshchagivskiy Chemical Pharmaceutical Plant” (BCPP) increased its net income by 64.2% YoY to UAH 17.3 mln. Net Sales increased by 26.7% YoY, up to UAH 212 mln. According to results from 3Q2008 along, BCPP posted a net income of UAH 3.13 mln. In comparison, the same period in 2007 saw the company post a 0.04 net loss. The company’s long-term liabilities are UAH 28.9 mln.

BCPP was founded more that 110 years ago. Currently, the factory has more that 100 drugs in its production portfolio. The company ranks in tenth place on the Ukrainian pharmaceutical market, with a 2.09% market share.

Our view: We believe that BCPP decided to disclose strong results for 3Q2008 considering the current 69% share block offering. BCPP announced its intention to sell up to 69% of its common shares on October 28, 2008. The estimated price per share in this sellout deal will be equal to USD 20,191.28 in its UAH equivalent. Taking into account the total number of shares that are outstanding (there are 10,351), a package size equaling 69% of the company’s stock, this translates to a value of USD 144.21 mln. Following this announcement, those shareholders wishing to exercise their preemptive rights for purchase of the share block must, within 30 days from the date of announcement, file the corresponding documents to the company’s Board of Directors.

Given the vast potential of the domestic market for pharmaceuticals, the aforementioned share block should be viewed as an attractive option for strategic investors. We believe that the quoted USD 144.21 mln price fairly represents the value of the share block that has been offered.

Additionally, BCPP still has a low ratio of debt financing, which makes it more attractive for potential bidders in terms of the current expensiveness of credit resources.

The Kyiv-based Credit Rating agency has affirmed the uaBBB long-term credit rating for the issue of “A” series bonds by Kyivmedpreparat [KMED UZ, BUY], the largest antibiotics plant in Ukraine. As the agency reported, this bond issuance is equal to UAH 30 mln in value.

The uaBBB rating reflects the risk of default in case of unfavorable economic circumstances.

Factors constraining this particular credit rating include: the dependency of the national pharmaceutical industry on state regulatory policy; intense competition on the market; the fact that most of the issuer's property has been pledged as guarantees for bank loans received; the issuer's asset balance constitutes 39% with long-term investments (as of June 30, 2008).

This agency previously assigned the uaBBB rating to this credit rating on September 28, 2007.

The Open Joint Stock Company Kyivmedpreparat specializes in the production of antibiotics and other pharmaceuticals. Together with Galichpharm, Kyivmedpreparat is part of the Arterium Corporation, a leader among Ukrainian pharmaceutical producers in terms of sales (with a 3.32% market share). KMED products account for about 61% of Arterium’s sales. It was the first company on the market in terms of prescription sales to hospitals, commencing in 2007.

Our view: We see the fact that the Credit Rating agency affirmed the long-term credit rating as uaBBB for the issuance of “A” series bonds as further evidence of the stability of Kyivmedpreparat and the overall pharmaceutical sector even under the conditions of the current crisis.

Sokrat does not anticipate that Kyivmedpreparat’s sales will drop. Moreover, we expect the demand for local drugs to increase as far as the price for drugs made locally in Ukraine are estimated to be seven times cheaper than that for their respective imported equivalents. We expect that KMED will end up 2008 with an overall net sales of USD 63 mln. The factory operates three production lines that allow it to produce about 80 drugs; moreover, all lines are GMP certified,which will significantly benefit the company after 2009. The other strong fundamental for market stability is the inelastic demand for drugs and significant market growth potential based on the difference between Ukrainian (USD 48) and Eastern European (USD 200-250) levels of per capita consumption. We expect the gross margin to be 41% and net margin to increase to 12% in 2008-2009, which is driven by GMP standards compliance.

We recommend BUYing shares in Kyivmedpreparat, with a two month target price of USD 37.8 and current upside of 41%. KMED plans to issue 4 mln shares in the period Dec 9-25.