Description

Pliva (PLVD – London) is a highly-misunderstood pharmaceuticals business that is trading at one of the lowest multiples in the industry despite 15-20% growth prospects for the next 3 years.

The company is based out of Croatia, but a majority of their profits come from the licensing of Zithromax, one of the world’s best selling antibiotics, to Pfizer. Zithromax is patent protected in the US through 2005 and beyond in most other parts of the world where it is being sold. Pliva also manufactures and distributes the drug under the name Sumamed in Central and Eastern Europe (CEE).

The company has been effectively redeploying its strong cash flow by selectively acquiring generic drug businesses in Western Europe, where it has HUGE competitive cost advantages (low cost labor and R&D costs vs. Western European and American pharmas).

The company has a strong balance sheet and has guided to FREE CASH FLOW of $200 million in 2002. Based on today’s closing stock price of $13.85, the company trades at 6.4x projected 2002 FCF, despite guiding to 15-20% annual EPS growth through 2005.

The company can be broken up in 3 distinct businesses:

-- Zithromax – Pliva receives a royalty of 9% of revenues on worldwide sales of Zithromax through a licensing agreement with Pfizer. This is 100% margin business that is patent protected through 2005 in the US and comes off patent between 2005-2012 in various Western European and Asian countries where it is distributed. The market values Pliva as though it is a “one-trick horse.” Zithromax is a cash cow that provides substantial downside protection on the stock through 2005.

-- Pharmaceuticals Business – The company has been using the cash from Zithromax to acquire and develop a strong generics business. The company is growing very rapidly in Russia, Poland and other CEE countries and recently made a large acquisition in Germany and a small one in Denmark at very attractive multiples (approx. 3-4x EBIT). The company has filed a number of new generic drug approvals for and anticipates bringing 50+ new drugs into their pipeline through 2005. Management believes they can grow the generics business at 15% (conservatively) over the next few years, absent acquisitions. Further acquisitions would increase distribution disproportionately versus development/manufacturing costs. Non-Zithromax business (Sumamed and generics) produced $230 mm of revenues in 2001 and had a 20% EBIT margin, which will go up after they enter the much more lucrative Western European markets. The company enjoys a few major advantages over its competitors: 1) Companies not domiciled in the EU can begin developing generic drugs before they come off patent. Therefore, Pliva (Croatian-based) can be first to the market when drugs fall off patent. 2) Labor in Croatia comes at a fraction of the cost of researchers in Western Europe and the United States. Management and equity analysts confirm that Pliva’s R&D budget should be multiplied by 3-5x as a far comparison versus its Western competitors.

-- Proprietary drugs – The company has a number of new drugs it is attempting to develop through its proprietary research. Three drugs (anti-inflammatory peptide for ulcerative colitis, a thromboprotein drug, and an oral anti-fungal drug) are in various stages of Phase II testing, which they hope to complete in the next 12 months. Obviously, none of this upside is priced into the stock.

Financials:

2002 Revenues: $727 million
2002 EBIT: $216 million
2002 EPS: $1.66

Stock Price: $13.85
Shares Outstanding: 93 million
Equity value: 1,288 million

Net Debt: $150 million
Enterprise Value: $1,438 million

EV/2002 EBIT: 6.7x
2002 P/E: 8.3x

We have met with management on several occasions and are impressed with their knowledge of the industry and ability to communicate their story to the investment community.

Catalysts:
- Lowest multiple in the industry and a FCF multiple of less than 7x
- Development of the generics business through new product introductions and strategic acquisitions
- Positive news flow out of the proprietary drug effort
- Possible listing in the US (see Dr. Reddy, an Indian pharma that listed in the US and now trades at 30x)

Catalyst

- Lowest multiple in the industry and a FCF multiple of less than 7x
- Development of the generics business through new product introductions and strategic acquisitions
- Positive news flow out of the proprietary drug effort
- Possible listing in the US (see Dr. Reddy, an Indian pharma that listed in the US and now trades at 30x)