Consolidation moves eastwards: while the merger of Hungarian firm Gedeon Richter and Polish firm Polpharma--both leading players in the pharmaceutical market in Central and Eastern Europe--demonstrates that the era of consolidation is not yet over, the focus is now moving eastwards and the markets of Romania, Ukraine and Russia are offering some interesting opportunities.

In the pharmaceuticals market of Central and Eastern Europe (estimated at 23bnl [pounds sterling], I companies with regional coverage achieve competitive advantage. This is the conclusion of Business Strategies of Pharma Makers from Central and Eastern Europe 2007, the latest report from research and consulting firm PMR. The strategies of the leaders in this part of Europe--Gedeon Richter, Krka, Zentiva, Polpharma and Sanitas--have focused on development in many of the region's markets. This is not only a source of additional revenues, but also a method to balance impaired domestic sales results.

Strategically, the takeover of Polpharma by Gedeon Richter was intended, partly, to compensate for a drop in domestic sales (from HUF 57.lbn in 2005 to HUF 54.8bn in 2006). Thanks to the takeover of the Russian firm Akrihin, controlled by Polpharma, Richter will strengthen its position in the immense Russian pharmaceuticals market. At the moment, Russia and the countries of the former Soviet Union generate almost 40% of the company's sales, while revenues on the domestic Hungarian market produce almost half of it. This transaction will also enhance the international position of Polpharma, for whom domestic sales constitute as much as 87% of total sales--the highest among the companies analysed.

For the majority of the leading players from Central and Eastern Europe, foreign rather than domestic markets are the most significant regarding the value of sales. This may offer guidance for other companies under intensifying competitive pressure regarding the direction of their development.

"New" Europe: attractive markets for takeovers

The acquisition wave is continuing to move deeper into the East, to countries with less-developed markets but with high growth potential such as Ukraine, Turkey, Russia, Romania and Bulgaria, which at the same time have relatively low penetration rate by foreign investors. These countries are already becoming objects of interest, both for international giants and regional leaders.

Among the 15 pharmaceutical markets of the region analysed in the report, the pharmaceuticals markets of Romania, Russia and Ukraine seem particularly attractive'. In terms of size, the Russian market is the largest (one-third of the total value of the Central and Eastern European market), but all three have experienced extremely intensive growth for several years. In 2006, the medicine markets in Russia and Ukraine increased their value by approximately one-third, while the Romanian market grew by 20%. Thanks to this, they are much more attractive than the "mature" markets of Central and Eastern Europe such as Poland, the Czech Republic and Hungary which, for several years, have observed a slowing growth rate. All three of these countries have large development potential due to their populations (140m in Russia, 46m in Ukraine and 22m in Romania) and the dynamic growth of purchasing power of their populations. In the mid- and long-term perspective this makes them extremely attractive for potential investors. Therefore, it is worth becoming interested in them now to be one step ahead of the competition.

Antibiotice and LaborMed in Romania, Darnitsa in Ukraine

The takeover of a local company provides the best opportunity for rapid entry into a given market, immediately granting the new owner a more or less significant share. Such is the case on the Romanian market is with Antibiotice, the last Romanian state-owned pharmaceutical company, which is currently being privatized. The company has ambitious development plans including launching 40 new products to the market over the next five years.

Several Indian companies (Shreya Lifesciences, Lupin and Dr Reddy's Laboratories) as well as a Greek entity (Alapis) are already interested in the Romanian company LaborMed, which is one of the largest domestic producers of cardiologic medicines. The company noted a 47% growth in sales in the first half of 2007, and has approximately 80 products in its portfolio, sold both on the local market and in the countries of the former Soviet Union.

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The Ukrainian company Darnitsa, the largest local medicine producer, is also investing intensively in development--more than likely as a result of future sales prospects. Unofficial information demonstrates that the current owner of the company is considering this. In October, the company sold 10% of its shares on the Frankfurt stock exchange, and a subsequent 10% portion to a strategic investor. The funds raised will be assigned to production development and implementation of GMP (Good Manufacturing Practices) standards.

The East European market is a challenging, yet enticing prospect, for many companies looking for acquisitions. How the market develops will be viewed with interest by the pharmaceutical industry worldwide.

(1) The list of countries analysed in the report as Central and Eastern European countries includes Belarus, Bulgaria, Croatia, the Czech Republic, Lithuania, Latvia, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Ukraine and Hungary.

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Potential takeover targets in Central and Eastern Europe, 2007

Company                      Country of Origin

Antibiotice                      Romania
LaborMed                         Romania
Biofarm                          Romania
Pharmatendant                    Russia
Ctechesityvnnye Lekarstiva       Russia
Pharma-Centr                     Russia
Damitsa                          Ukraine
Airterium                        Ukraine
Fanmak                           Ukraine
Borisovsky Plant                 Belarus
Belmedpreparaty                  Belarus

Split of domestic and international sales (%) for regional leaders
on the pharmaceuticals market in Central and Eastern Europe, 2006

                Domestic   International

Gedeon Richter     21            79
Krka              16            54
Zentiva           37            63
Polpharma         87            13
Sanitas            9            91

Note: Table made from bar graph.

CEE market value by country, 2006

Estonia           1%
Serbia            1%
Belarus           1%
Latvia            1%
Slovenia          2%
Lithuania         2%
Slovakia          2%
Croatia           3%
Bulgaria          3%
Ukraine           5%
Romania           7%
Hungary           7%
Czech Republic   10%
Poland           22%
Russia           33%

Note: Table made from pie graph.