Matthew Day in Warsaw -

Over the past few months, the directors of the Polish pharmaceutical firm Bioton may have wished their firm produced Valium. Life has become rather stressful for one of Europe's biggest producers of human insulin and the calming effects of Valium, or some other soothing drug, might have been rather welcome.

The root cause for Bioton's stress lies in its attempts to gain control of Ukrainian insulin producer Indar, which generates annual sales of about $30m. As part of an expansion strategy aimed at widening the Bioton group, which comprises a number of companies worldwide, the firm had hoped to lift the 29% stake it already holds in Indar to a controlling 60%.

Earlier this year, all appeared to be going well and it looked as though the state-controlled Indar would soon be nestling under the Bioton wing. But in March, and in circumstances that still remain murky, the Ukrainian state lost control of the stake that Bioton had intended to buy.

In a statement, Bioton said that instead of going to it, the stake, which had been owned by another state-owned pharmaceutical company Derzmedprom, had instead been transferred to Gerist Invest, a British company registered only last year, which has so far kept a resolutely low profile. "The stake slipped out of Ukraine's control and was taken over by the British company in a mysterious way," Bioton's chief executive, Adam Wilczega, explained in a television interview. He has also gone as far as saying that the Ukrainian state was "defrauded" by a company "of which we know nothing about," adding that Bioton had suspended its attempt to take over Indar until the matter was settled, and that it might even sell its 29% stake.

Wilczega is not the only one, apparently, who has suspicions over how Gerist managed to gain control of the stake. The Ukrainian authorities launched an investigation into the acquisition, but it has so far come to no conclusion.

Then events took another bizarre turn on August 11. Gerist called an emergency general meeting at Indar, but its representatives failed to turn up, scuppering the meeting before it had even started. Although the no-show has prolonged the impasse over Indar's future, it did at least quell rumours circulating in Ukraine that Gerist, which, according to the whispers, may be a front for a foreign pharmaceutical company, had earmarked it for closure as a way of removing the competition.

A good market to be in

But as long as the dispute over Indar rumbles on, Bioton's expansion plans have been left in the lurch. This is unwelcome for several reasons. To begin with, the Ukrainian pharmaceutical market is expanding fast, which means there is good profits to be made and Bioton is missing out. According to the Russian market research company RMBC, pharmacists' sales soared by 32% last year, while a second-quarter report by Business Monitor International (BMI) forecasts the pharmaceutical market will grow by over 12% in 2008 – although BMI highlights the "apparently secret transfer of state owned shares from insulin-maker Indar" as a possible of example of "corruption" that could undermine the market.

At the same time, government regulations have pushed Ukrainian pharmaceutical producers towards foreign investors. Kyiv has introduced a development programme for the sector that forces produces to modernise their manufacturing procedures in order to make them comply with the international "Good Manufacturing Practice" (GMP) licence. To get the GMP, firms have to invest, and to raise the cash to do this many of them have looked for a foreign investor. This eagerness to welcome outside investment has provided a timely opportunity for foreign pharmaceutical firms looking to get a toehold on a flourishing market, so Bioton's failure to get control of Indar represents a chance gone begging.

To compound Bioton's woes, other Central European pharmaceutical manufacturers have successfully entered the Ukrainian market, not only eager to exploit eastern markets, but to escape their own increasingly competitive markets. A report from market-insight company Polish Market Review into the Central European pharmaceutical sector found that a move east "doesn't only mean an additional revenue source, but it is a way companies balance worse results achieved on domestic, more mature markets." On top of this, Bioton posted a second-quarter loss of €4.7m, despite sales increasing by 42% over the same period last year, owing, the company said, to the weak dollar.

So just where does Bioton go from now in Ukraine? Wilczega has spoken of a "Plan B" under which the firm's attempt to buy into the Ukrainian market is replaced by a sales drive in the country to promote Bioton's own products and that they wanted to prepare this option "as fast as possible". But so far the plan has yet to take shape, leaving a cloud over both it and the murky goings on at Indar.

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