Krka's Revenue Flat on Currency Depreciation in Export Markets During Q3

The Krka group, one of the largest producers of generic pharmaceuticals in Central and Eastern Europe (CEE), has announced its results for the first three quarters. The group's revenue in the period was flat compared with the equivalent period of 2008, at 689.9 million euro (US$1.02 billion). Data on Krka's sales denominated in local currencies in export markets, as well as data on sales volume, suggest that actual sales growth in this period was around 10% year-on-year (y/y); however, the depreciation of local currencies against the euro means that this is not reflected in the company's full results, reported in euro. Krka's net profit in the period fell by 2.6% y/y to 108.3 million euro, while there was an increase of 3.2% y/y in the cost of sales, and a rise of 4.9% in research and development (R&D) expenses.

Currency Depreciation Forces Down Reported Revenue

Krka reports that its main foreign-exchange risk in the period under review was due to the volatility of the Croatian kuna, Russian rouble, Romanian lei, U.S. dollar, Polish zloty, Serbian dinar, Ukrainian hryvnia, and Hungarian forint. Considering that Poland, Russia, and Croatia are such important markets for Krka, the effects of this depreciation cannot be underestimated in terms of the overall picture of the company's results in the third quarter of 2009.

Central Europe, Western Europe, and Overseas Markets Drive Krka's Business in Q3

Breaking down Krka's results by region, Central Europe remained the most important region for the group in terms of revenues, and it recorded an increase of 7% y/y in revenues in this region, reaching 201.4 million euro. The importance of the Western European and Overseas region increased for Krka in this period, and it achieved an increase in sales of 9.8% here, with the total reaching 169 million euro. Contrastingly, sales in the Eastern Europe region fell by 11.3%, to 146.2 million euro, and there was also a slight drop of 3.9% y/y in revenues in the South-East Europe region, to 146.2 million. Domestic sales in Slovenia grew steadily, by 2% y/y, to reach 79.2 million euro.

Europe and Central Asia Are Priority Markets—Continued Independence Is Strategic Aim

Krka announced its development strategy for 2010–14 at the same time as its results for the first three quarters. The strategy prioritises Europe and Asia as the group's main regions of strategic focus. It also emphasises the goal of strengthening the group's competitiveness in Western Europe, with the establishment of marketing companies in the region. Krka reiterates its strategic aim of remaining independent, and it also states its intention to grow through acquisitions of local pharmaceutical companies in certain markets, although the specific markets are not noted.

Prescription Pharmaceuticals Still Most Important Area

Krka's most important product area remains prescription pharmaceuticals, and its revenue from the sales of these reached 581 million euro in the period under review, an increase of 2% y/y. Contrastingly, revenues from over-the-counter products declined by 15% y/y in the third quarter, to 57.8 million euro, which Krka accounted for as the result of the challenging macroeconomic environment in its larger markets.

Cardiovascular drugs represented a very important therapeutic area in terms of Krka's sales, with cardiovascular generics Enap (enalapril), Atoris (atorvastatin), and Zyllt (clopidogrel) among the company's largest-selling products in the first three quarters.

Outlook and Implications

Considering the severity of the recession in many of Krka's main markets, the company's results for the period are quite respectable, and are more or less in line with those from the first half of the year (see Slovenia: 3 August 2009: Krka Reports Flat H1 Results, Announces Launch of Generic Viagra). The cost-containment policies introduced by governments in many of Krka's key markets in Central Europe and South-East Europe have meant that Krka has been required to increase the volume of its sales, in order to compensate for the lower value of its sales.