Founded in 1954 as a state-owned company, Krka, which is based in Novo Mesto/Slovenia, is among the world’s leading producers and developers of generic pharmaceuticals. In its own and leased production and R&D facilities in Slovenia, Croatia, Germany, Poland, the Russian Federation and China, the company employs c. 11,500 people. Generic medicines are original medicines, which have never had a patent protection or whose patent protection has expired. Both contain the same active pharmaceutical ingredients and are equivalent in terms of quality. So-called Super Generics are generics with an added value compared to their original drugs e.g. with improved pharmacokinetics, delivery or therapeutic effects. Their significant advantages are a shorter development (3-4 years vs. 12 years) and much lower costs (c. USD 50m vs. USD >1bn).
Krka distributes 800 pharmaceutical products and 600 formulations based on 250 APIs. It operates in the following business segments: Prescription & non-prescription pharmaceuticals targeting e.g. the areas cardiovascular diseases, central nervous system, gastrointestinal system, pain, infections, digestion, oncology and urinary tract (83.7% and 8.8% of total sales in 2021 respectively); Animal Health products (5.2%); and, through 100% subsidiary Terme Krka d.o.o, Health resort & tourist services (2.3%). Krka’s products, which are sold exclusively under the company’s own brands, are distributed in >70 countries worldwide. In 2021, 94% of total sales stemmed from outside Slovenia, thereof 35.1% from the East Europe region (former CIS region incl. Russia & Ukraine), 22.5% from Central Europe (mainly Poland, Czechia, Hungary and Lithuania), 19.5% from West Europe (e.g. Germany), 13.4% from South-East Europe (mainly Croatia, Romania and Bulgaria) and 3.4% from other markets in Africa, the Middle East and Asia.
Krka spends 9.9% of its yearly sales on R&D – is mainly related to oncology and autoimmune diseases, thus two of the largest segments of the global Pharma market – compared to 9.7% in case of its listed regional peer, Hungarian Gedeon Richter. It has c. 170 products in the pipeline in different R&D phases and has received/submitted patents for more than 210 innovations.
Krka, which has been listed since 1997, can be traded on the stock exchanges in Ljubljana, Warsaw and Frankfurt. The company has paid out a dividend in each of the last 11 years and since 2012 its DPS has increased at a CAGR of 13.8%. Only in 2017, the DPS was slightly lower y-o-y.
Krka’s largest shareholders are entities associated with the Slovenian state, which own in total 26.7% of the company’s shares and 35.7% of its votes. According to marketscreener.com, the company has both US-based and Western European investment funds as shareholders. The Norwegian sovereign wealth fund holds a stake of c. 0.8%. Treasury shares make up 5.5% of all shares outstanding.
Management’s 5-year guidance foresees a sales CAGR of at least 5% and an EBITDA margin of min. 25%.
In 2021, Krka, which before the pandemic grew at a 5y CAGR of 4.6%, produced c. 16bn (+2% y-o-y) pills and generated revenues of EUR 1.57bn (+2% y-o-y). With 18% and 9% respectively, the regions Slovenia and Other overseas countries reported the highest growth y-o-y. In 2021, the company introduced 16 new products. Drugs related to cardiovascular diseases accounted for >50% of all prescription drug sales.
Despite serious COVID-19-related shortages of materials and transport issues, between January and December 2021 Krka’s EBITDA reached EUR 463.6m (-7.7% y-o-y; 29.6% margin) and net income EUR 309.2m (+6.3%; 19.7% margin) respectively. While operating cash flow amounted to EUR 386.1m (2020: EUR 360.8m), free cash flow equalled EUR 13.5m (EUR 251.2m). In 2021, Krka generated a ROCE of 13.7% compared to 12.1% at Gedeon Richter.
For the first nine months of 2022, Krka reported revenues of EUR 1.24bn (+5.6% y-o-y). In Ukraine, where the company is the No 2 provider of generics, sales declined by -14% y-o-y, but in Russia, where it is No 4, they grew by 5%. In 9M/22, EBITDA reached EUR 314.2m (-10.9% y-o-y; 25.3% margin) and net income EUR 300.9m (+25%; 24.2% margin) respectively. The main factors, which affected profitability, were 9.6% higher CoGS y-o-y, 21% higher marketing & distribution expenses and a EUR 113.6m higher net financial result, which was positively affected by FX effects. At the end of September, the company’s net gearing amounted to -15.4% compared to 1% in case of Gedeon Richter.
Summary & conclusion
In our opinion, Krka is one of the best companies in Eastern Europe, a leading global player in a growing, non-cyclical sector and can be considered a dividend aristocrat in CEE. The generics segment is highly promising as governments and healthcare institutions in many countries are cutting back on their healthcare expenses and encouraging the use of relatively cheap generic products.
In our view, only a few CEE-based companies have such a history of earnings and dividend growth as Krka. Since its IPO, the company’s market capitalization has increased 18 times. As negatives, we consider the significant share of revenues from the CIS region (especially Russia) as well as the low share ownership of the company’s Management and Supervisory Board, which at the end of December 2021 equalled 0.12%.
While Krka seems fairly valued at present – its current EV/EBITDA 2023E multiple equals 5.8x compared to a 6y average of 5.9x – its stock is highly interesting in the long run, in our view. Currently, the dividend yield for 2022E and 2023E equals 5.9% and 6.4% respectively. The company has a long-term dividend policy, which foresees the payout of min. 50% of its net profit.