Krka ranks among the world's best companies

Development, new investment, business expansion, dividends

Photo: Krka archives

March 2012

The changes in the business environment have also affected the pharmaceutical industry. Their impact is reflected in the limited resources available, namely extended payment deadlines, and even more so in the downward pressure on drug prices. This presents a challenge for the industry, which according to them is under control.

Given the current trends, the generic pharmaceutical industry will continue to grow; as a result, they are optimistic, their work is carried out even more efficiently, and they continue to invest in development, and sales and marketing activities.

Last year, Krka Group sales were worth EUR 1.076 billion and the company expects to report similar growth this year.

In 2012, Krka Group is planning a 6% growth in sales, amounting to EUR 1,134 million. It will continue to focus its attention on the European and Central Asian markets, with more than 90% of its sales coming from outside Slovenia. In 2012, the company expects to increase its headcount, both in Slovenia and abroad, by 5%.

As was the case this year, next year will also be investment-driven. The Russian Federation, where one plant is already in place, will get a new production-distribution centre worth EUR 135 million – construction is envisaged to be completed in 2013, which will consolidate Krka's status as an important local producer on the Russian market, which currently generates 18% of the company's total sales. The preparatory works underway for the construction of another production facility at the company's Novo mesto headquarters began in autumn; the new plant, Notol 2, will produce solid oral dosage forms and have a target capacity of 4.5 billion end products per annum. The ongoing investment in the Krka subsidiary, Farma GRS, established together with its partners in a project strengthening the pharmaceutical industry, is worth EUR 45 million. Furthermore, the consents required for the construction of an API production plant, Sinteza 1, at a location in Krško have already been acquired.  The company also plans to invest in some small projects to increase its production capacities.  This involves strategic investments, which will continue in 2012 and for which substantial resources will be allocated; the planned investment value for 2012 amounts to EUR 200 million.

What is the profit sharing strategy? It is the stable growth of dividends with the investments required to further enhance business operations, in accordance with the business strategy adopted.

Company sales have increased the most in the countries of Western Europe (23.6% share); the sales growth recorded in South-East Europe (13.6% share) was 6%, in Eastern Europe 8% and in the largest Russian market 2%, achieving a 26.5% sales share.

Jože Colarič, the President of the Management Board and Chief Executive of Krka d.d. Photo: Krka archives

Expectations from the state or the new government: a stimulating business environment

"We anticipate a stimulating business environment, without administrative barriers, which would definitely contribute to economic growth. We expect the new government to operate within a realistic budgetary framework, and, in particular, to simplify the administrative procedures relating to, for example, environmental and spatial issues, and to accelerate the acquisition of relevant documentation. We also expect the government to introduce the reforms and activities necessary to increase the competitiveness of the Slovenian economy, and to improve key areas of development in Slovenia in general," said Jože Colarič, the President of the Management Board and Chief Executive of Krka d.d.

The construction of the facility in Moscow – Krka's largest investment thus far

Krka's largest investment abroad is the ongoing construction of a modern production and distribution centre in Russia, the Krka Rus 2. Its location is in the immediate vicinity of existing production capacities. The investment, which is already in full swing, is worth EUR 135 million and includes the construction of a logistics centre and a new solid dosage forms production plant. The flexible and modular construction of its production facilities will progress in several phases, in accordance with the requirements imposed by the market. The plant's capacity, consolidating Krka's status as a domestic pharmaceutical producer, will be 1.8 billion tablets and capsules per year.  The project is currently in the construction phase (e.g. the erection of steel structures and the installation of the façade). Production is planned to be underway in the new plant by 2013 and will provide jobs to over 100 people.

Russia is one of the BRIC economies, an emerging market group which is expected to continue its economic growth in the years to come. In terms of territory and operational methods, the Russian market is the closest of this group to Slovenia, and one of Krka's key markets. Krka is familiar with this market and its customers are familiar with Krka and its wide range of products, which are modern, effective and safe.  Owing to its long-term and successful business operations, Krka enjoys a considerable reputation. Its efficient marketing and sales network stretches from Vladivostok to Kaliningrad.

The existing Krka-Rus plant produces thirty percent of the products sold by the Krka Group to Russia.  The new investment in the Krka Rus 2 plant will substantially increase production capacities. This decision was taken because of the development dynamics and continued growth in the Russian pharmaceutical market, and because of the strategic direction of the Russian government, which puts the pharmaceutical industry among its development priorities by 2020. The majority of products intended for the Russian market will be produced in Slovenia in the future.

Krka's share price has been relatively low recently and Krka certainly is an attractive takeover target. Are there any fears of a hostile takeover?

Jože Colarič: For the last seven years, I have been saying that Krka is one of the most desirable brides in the generic pharmaceutical business, but it is also true that there are almost no hostile takeovers in our industry. On the other hand, we need to bear in mind that the state owns over 27% of Krka, which is a very important detail relating to takeovers or the so-called "poison pill".

Admittedly, it is true that state owners are threatened by the withdrawal of voting rights, as a result of which we pay particular care of our methods of operation.  Our strategy clearly states that Krka must maintain its independence. This is possible only by achieving good results, with proper organisation and development.

We expect that, in the forthcoming period, there will be considerable pressure on our EBITDA margin, but each year we plan for a healthy increase in sales and below the line profit. Since the situation can change yearly, monthly, weekly, daily or even hourly, this strategy is not a fixed commitment; we are known for being quick and flexible. By being responsive, we will further increase our sales and penetrate new markets in the medium-term, and, consequently, provide for an appropriate result or net profit.  It is difficult to predict how much today, but we have always met our targets in the past.
Krka started out with nine employees in 1954, but now employs a thousand times that number. The total number of employees, including those who work through agencies, amounts to over 9,600, half of whom work in Slovenia and half abroad. This year, we will increase our headcount by 5%.

Text by Vesna Žarkovič, Sinfo, February 2012 

Photo: Krka archives