Press room

Krka returns positive half-year operating results

Otočec, 3 August 2006 – At today’s press conference at Otočec Castle, the Krka Management Board presented its operating results for the first half year, which it discussed at a session yesterday, and which were assessed as very successful by the Supervisory Board. Jože Colarič, the President of Krka’s Management Board and CEO, announced that both the Krka Group and the Krka Company had performed very well. The Krka Group generated sales worth SIT 82.3 billion (25% growth on last year), the operating profit was SIT 19 billion (45%), net profit was SIT 12.4 billion (23%), with the expenses including additional provisions of SIT 4 billion formed due to lawsuits in course.

Sales

In the first half of this year, the Krka Company and Group operated according to their plans and exceeded last year’s half-year sales figures. The Krka Group, with sales of SIT 82.3 billion, exceeded last year's half-year sales by 25%, while the Krka Company generated SIT 72.7 billion in sales, a 23% growth. Group sales were SIT 9.6 billion or 13% higher than sales by the Krka Company. The higher sales of the Group are largely due to sales by the subsidiaries Terme Krka and Krka-Polska, which generate the highest proportion of sales revenue of all the subsidiaries in the Krka Group.

Structure of Krka Group sales by region in the first half year of 2006

Sales outside Slovenia continue to increase in importance, and the proportion of exports in overall sales is already 85%. Region East Europe recorded the highest growth in sales compared to the same period last year, as well as the highest proportion of sales in overall sales by the Krka Company and Group, followed by Central Europe in the proportion of sales, while Western Europe and Overseas Market was second in terms of sales growth. The leading market in Region East Europe is the Russian Federation, which is Krka largest individual market, and where sales of SIT 17.6 billion were achieved in the first six months of this year, or 44% more than the same period last year. In Slovenia sales remained at the same level in the first six months last year.

Structure of Krka Group sales by product group in the first half year of 2006

In the first half of 2006 sales of prescription pharmaceuticals generated SIT 67.1 billion, which exceeds last year’s half-year sales by 28%. Of Krka’s larger prescription pharmaceuticals markets, the highest growth in the first half of the year was achieved in Hungary (by 103%), Romania (66%), Russian Federation (45%), Poland (41%) and Ukraine (20%), while it is also worth mentioning high sales growth on some of Krka’s smaller markets such as Serbia (75 %), Uzbekistan and Lithuania (both at 44%) and in Bulgaria (39 %). The leading prescription pharmaceuticals are Enap^®, Vasilip^®, Atoris^®, Lanzul^®, Tenox^®, Fromilid^®, Lorista^®, Nolicin^®, Coryol^®, Asentra^® and Zalasta^®. Half of them are relatively new, having being launched after 2000.

In the first half of the year we achieved sales of self-medication products worth SIT 7.9 billion, a 15% growth on compared to the same period last year. Regional highlights included East Europe (SIT 4.3 billion, a 34% growth) and South-East Europe (SIT 1.8 billion, a 27% growth). The highest sales were achieved with the products Bilobil^®, Pikovit^®, Duovit^®, Septolete^® and Panzynorm^®, which recorded the highest growth at 126%.

In the first half of 2006, cosmetic products generated sales of SIT 1.3 billion, exceeding last year’s sales figures by 19%. Looked at region by region, positive sales trends compared to last year were achieved in the regions of South East Europe (22 %), East Europe (44 %) and Central Europe (15 %).

Sales of animal health products in the first half totalled SIT 2.8 million, up 20% on the same period last year. Sales in Central Europe contributed most the growth, with sales there up by 42%.

Sales of health and tourism services reached SIT 3.1 billion in the first six months of 2006, which is 13% more than the same period last year. They now represent 4% of the Group's overall sales. The total number of overnight stays was 161,633 an increase of 8% on the first half of last year, while the proportion of foreign guests increased by two percentage points to 30%.

Operating result

The Krka Group recorded an operating profit of SIT 19 billion, which is 45% higher than for the first half of 2005. The pre-tax profit increased by 37% to SIT 18.3 billion. The Krka Group’s net profit was SIT 12.4 billion and increased by 23%, whereas the Krka company recorded a net profit of SIT 12.7 billion, an increase of SIT 2.6 billion or 26% in comparison to the previous year'.

All the Krka Group’s key operating indicators were in line with its strategic guidelines and objectives for this year, and were better than in the first half of 2005. The net profit margin (ROS) for the Krka Group was 15.1%, the return on assets 12.8%, the return on equity 12.8%, operating profit margin 23.1%, and EBITDA to sales 30.2%.

Research and development

The first half of 2006 was marked by an increase in the number of new development projects, with the aim being to ensure the continue competitiveness of the Krka product portfolio. At present research and development work at Krka includes around 100 projects in various developmental phases and across a wide range of fields.

In the first half of 2006, we acquired the first market authorisation for seven new products in 14 different strengths. We also acquired 315 market authorisations for a whole range of products across a number of different markets. A market authorisation was obtained for Prenessa^® (perindopril), a cardiological product, while a new product was added to the cardiovascular range when Valsacor^® gained market authorisation in Slovenia, with the active ingredient valsartan. The first market authorisation for new strengths of Lorista^® in Slovenia consolidated the brand as a key product for treatment of cardiovascular disease. We successfully concluded the MRP for Losartan^® 50mg tablets and Losartan/hydrochlorothiazide tablets, expanding the registration of the product to some western European markets. Obtaining market authorisation for the product Zyllt^® (clopidogrel) in Russia was an important national registration. Krka range of products to treat the central nervous system expanded with the acquisition of market authorisation in Slovenia for the product Zolsana^® with the active ingredient zolpidem. Another important achievement in the marketing of products for the central nervous system was obtaining the market authorisation for the Zalasta^® (olanzapine) tablet in Croatia. The range of products to treat benign prostatic hyperplasia was expanded at the end of last year with market authorisations being obtained for Tanyz^® (tamsulosin) and the new product Finpros^® with the active ingredient finasteride.

In the self-medication product group we obtained new market authorisations for Norya^® (probiotic bacteria) in the capsule form in Poland, the Czech Republic, Slovakia, Croatia, Russia and Ukraine and for the product Minart^® with the active ingredient glucozamine in the strength 1500mg effervescent tablets in Romania. Important results were also achieved in the animal health field. On western European markets, we were the first generic producer to obtain market authorisation and launch an enrofloxacin product, which is used to treat infections in farm animals. Krka’s biocide range was developed with the notification of Ecocid^® for human and veterinary medicine in Slovenia and the Czech Republic.

This year submitted patent applications for 10 new products have been submitted, and on the basis of prioritised applications from 2005 also submitted eight international patent applications. In 2006 Krka registered 18 trademarks in Slovenia, one in Hungary and submitted 18 applications for international registration.

Krka’s investment in research and development again ranked it as an important European company, in 38th and the only Slovenian company from the field of pharmaceuticals and biotechnology (according to last European Commission publication: The 2005 EU Industrial R&D Investment Scoreboard).

Investments

In the first half of 2006, the Krka Group allocated SIT 10 billion to investment, with SIT 8.1 billion by the controlling company, and SIT 1.9 billion by subsidiaries. At present the Group is implementing over 25 projects mainly relating to the production of final products and raw materials and the modernisation of infrastructure to provide high quality support for the business functions of the entire group. Most of the projects are taking place in Slovenia.

In September 2006 we anticipate the start of test production in the new Sinteza 4 active pharmaceutical production plant, the largest investment project this year in terms of both technological complexity and financial commitment. The plant will be used for the production of pharmaceutical ingredients, which can then be incorporated into our own pharmaceutical products. Work on the plant is in the final phase. In June a technical review was successfully passed, and a SIQ (Slovenian Institute of Quality and Metrology) inspection is underway. Once the permit is issued we will start with test operations.

Construction is now in course for a plant that will double pellet production capacity, as well as the modernisation of the capsule production and packaging plant, and work has also started on a new injection production plant that will be connected to the existing facilities. In the third phase of the Notol project we will increase the packaging facility, which will allow six new packaging lines to be added.

In the field of information technology there are projects ongoing to introduce an information system that will update the reporting system for existing information systems; a project to improve the entire process from planning sales requirements to detailed production scheduling; a project for the euro changeover; and the introduction of the SAP information system module for salary calculation and work time records.

At the Terme Krka company renovation works took place in the Hotel Krka at Šmarješke Toplice and the overhaul of the heating system connection between the hot water well shaft and the hotel, while the Krka Farma Zagreb subsidiary is upgrading its central energy control system which will also direct control from Novo mesto.

Employees

Given its ambitious sales plans for 2006, Krka has accelerated its staff recruitment, especially in the fields of marketing and sales, and research and development. In the first half of the year the number of employees in Slovenia increased by 31, while in companies and representative offices abroad we engaged 233 new employees over that period, mainly with a university degree. At the end of June, the Krka Group had 5489 employees, which was 5% more than at the end of 2005, while the Krka Company employed 4083, or 3% more than at the end of last year. More than half of employees in the Krka Group have at least a university or other further education qualification.

At present 144 Krka employees are involved in specialist, master's and doctoral studies, while a total of 380 employees have been involved in part-time studies alongside their work. There are also 56 scholarships, mainly in collaboration with the faculties of pharmacy and chemistry, and 123 workers are currently in the process of training to acquire new vocational qualifications.

Share trading and shareholding

At the end of June 2006 Krka had 54,026 shareholders, which is 0.7% more than at the end of 2005. The total number of shareholders increased primarily through more domestic individuals and international investors whose ownership share increased by over one percentage point to just over 7%. In the first half of 2006 the ownership share of investment companies and funds fell by 3 percentage points, while the ownership share of other shareholder groups did not change significantly.

The Krka share price increased most in April and then in May reached its highest value of SIT 159,670. On 30 June 2006 the share price totalled SIT 145,643. The average daily trading in company shares on the Ljubljana Stock Exchange in the first half of 2006 was SIT 267 billion, and the market capitalisation on 30 June 2006 was SIT 516 billion.

Social responsibility

Krka takes great care to meet environmental standards and legislation through responsible work and large-scale investment in environmental protection, ensuring a safe working environment and co-existence with its neighbours. The separated waste collection system has increased the quantity of useful waste ensures continual and safe release of hazardous waste, which is included in the national packaging treatment system (SLOPAK), purification appliances are fitted on all sources of air pollution (filters, air filtration systems, biofilters on waste water treatment plants), while new plant is fitted with modern air cleaning systems which will further reduce the already low air pollution levels. Pollution of the Krka river is also being reduced – in 2005 the outflow load from the waste treatment plant was reduced by 37%, and by a further 15% in the first half of this year.

Krka shows its responsibility to the community through partnerships based on respect and by providing financial assistance for a range of activities. As Krka's primary mission is enabling people to live a healthy life, it works hard to help in both medical and humanitarian fields, with both financial and material contributions. This year assistance was offered for purchase of an ambulance for the Ljutomer Health Centre, in south-eastern Slovenia, and an ultrasound device for the Novo mesto Health Centre. Krka was also the general sponsor for World Heart Day, and during a visit for over 700 members of the Slovenian Society for Cardiovascular Health it made a donation of two defibrillators. In cooperation with the Arterial Hypertension Department of the major hospital in Ljubljana, a campaign was prepared to measure the blood pressure of passers-by in nine towns across Slovenia. Funds have also been donated to education, science, sport and culture. Some of the actions that are worthy of note include Krka being the main sponsor at the start of this year of the premiere of the Sergey Prokofiev opera The Love of Three Oranges in a co-production between the Cankarjev Dom cultural and congress centre and the Slovene National Theatre Opera and Ballet.