Pliva's transition to generics proves painful

Completing the sale of its proprietary business in Q4, Pliva divested its AWD production plant in Dresden to the Menarini Group and sold its macrolides research institute in Zagreb to GlaxoSmithKline, occurring an asset impairment which, along with the associated restructuring costs, set the company back by $74m.

Making matters worse, revenue was also down from $325.7m to $263.6m, reflecting the 71 per cent drop in royalties to $18m and lower sales of azithromycin, whose US patent expired in November.

Coming to the rescue were $23m from the divestment of VoSpire, a drug for the relief of bronchospasm, a $24.6m decrease in operating costs and a $10m drop in tax payments.

But these could only cushion the plunge in net profit of $61.2m and made little difference to the company's results for the year.

Ravaged by $122.6m in restructuring charges and $76.5m in lost sales from the discontinued operations, net profits for the full 2005 dived from $127.5m last year to a loss of $75.1m.

Total revenue for the year however was up 5.9 per cent to 1,197.1m thanks, not surprisingly, to strong sales in Pliva's Generics division, which were up 13 per cent to $771m, representing 79 per cent of total continuing operations sales.

Looking on the other hand at the proprietary drugs that Pliva is continuing to sell, where revenue was down 7.9 per cent to $185m, it is easy to see why the company is now repositioning itself away from this market.

The firm also has bitter memories from its incontinence drug Sanctura, whose failure to turn a profit in the US forced the company to divest it last May.

Nevertheless, Pliva, Eastern Europe's largest drugs maker by sales, said it has decided to retain its remaining profitable proprietary products, including Custodial, Nystatin and Urecholine, as they do not require the support of a dedicated sales team.

With the divestment of its proprietary business now behind it, Pliva hopes it can concentrate on generics, as 2006 is set to be an equally hard year.

This is because the strong decline in royalty income which crept up in Q4 of 2005 will continue as the patent of azithromycin will expire in Western European markets this April and in Japan in November.

Thus, proprietary R&D costs savings and an anticipated 15 per cent sales growth in its Generics division will hardly be able to offset the decline in royalties and an expected 40 per cent drop in the sales of bulk azithromycin, leading, according to the company, to earnings before interest, taxes, depreciation and amortisation (EBITDA) for 2006 of around $180m, less than the $190.9m it was in 2005.

Pliva believes it has learned from its past mistakes and hopes its future will be brighter - it is undoubtedly generic.