Drugs of choice in CEE

By bne IntelliNews May 8, 2009

bne -

Few doubt we are still in for some rocky times ahead, but as equity markets tend to lead an economic recovery, the signs of life in emerging Europe's stock markets has prompted investors to cast around for good sectors to put their money into. Central and Eastern Europe's pharmaceutical industry is arguably one.

While the tempo of economic growth, one of the big drivers of the pharmaceutical market, will of course be slower over the coming year, all other factors - in particular, the ageing populations and broader availability of modern therapies - are still strongly present. "Consequently, despite the slowing economic growth, the CEE pharmaceutical markets are poised to rise, narrowing the gap in healthcare and drug spending between the CEE region and the EU15 average in the long run," Erste Bank says in a recent research report.

In general, the region's drug companies have healthy balance sheets with cash on hand, growth prospects are good, merger and acquisitions are happening, and the specialty of the region - generic drugs - are proving to be welcome additions to the business portfolios of original drug manufacturers as savings by western health providers become an imperative. All of this should bode well for pharmaceutical stocks over the next few months.

Although the privatization of some of the larger state drug companies are likely to be put on hold by governments due to the low valuations, most companies have sufficient resources to cover their regular investment activities and even make small acquisitions from their internal cash flows. Given their good credentials, most drug companies could even tap the financial markets for funds to expand.

"Given their healthy fundamentals and outlook, which is largely unscathed by the financial crisis, pharmaceutical companies should keep their firm positions in investment portfolios," says Erste. "While the general economic outlook is still gloomy and market participants have to digest steady news flow on downgrading and slashing of economic growth forecasts, we believe that the impact on the pharmaceutical business should be rather limited."

Results for the first quarter, scheduled for the week of May 11, should give the first real glimpse into how these companies are coping since the markets went into freefall in the autumn of 2008 and how their management view the prospects for 2009 - something they were loath to provide at the beginning of the year with everything so in flux.

The main challenge comes from the weaker local currencies and the lid this is putting on sales growth, particularly in countries that have suffered the sharpest falls like Ukraine and Russia. However, drug-exporting countries like Hungary are benefiting from their weaker currencies, as Western European importers seek to cut costs. As such, Erste recommends Hungarian pharmaceutical companies, Richter and Egis, which "should see sound top-line growth, as well as bolstered profitability margins in the coming periods."

Slovenia's Krka lacks the substantial currency cushion that will be enjoyed by its Hungarian rivals in 2009, but the company's long-term export-driven story should remain intact. "Backed by its strong innovation drive (with an above-average share of newly launched products), the company will be able to deliver sound top line growth and defend its regional leadership in terms of profitability margins," says Erste.

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