The crisis in Russia almost destroyed us, so we have learned how to be more careful

Interview with JGL’s director

AUTHOR:  Gordana Grgas

Mislav Vučić, Chief Executive Officer and Member of the Board of Directors of Jadran galenski laboratorij (JGL), closely monitors world politics and crises, ready for a quick reaction, especially in the big United States of America-European Union-Russia triangle, because every shock in this area affects the movement of the ruble. Hundreds of millions of dollars in revenue of this pharmaceutical company based in Rijeka come from the volatile Russian market, and caution is particularly needed since the introduction of economic sanctions against Moscow due to the conflict in Ukraine and the annexation of Crimea in 2014. At that time, more than half of JGL’s sales came from Russia and the company’s foundations were quite shaken. Only now can it be said that the company has stabilized, even though at the same time it is facing fierce competition on this market.

JGL Group, including the pharmaceutical business and the chain of 33 Pablo pharmacies, had a total revenue of HRK 930 million last year, and sales revenues in the first six months of this year have grown significantly as well, says Vučić. He joined the company, whose chairman of the board of directors and the largest shareholder is Ivo Usmiani, in December last year from the position of general manager at Teva Romania.

As he says, due to the jumps in value of the ruble, he always has a backup scenario or two "in his sleeve”, and every quarter he does the financial planning from scratch. While discussing this in his Zagreb office, he assiduously draws charts of the exchange rate movements and oil prices in the last nine months, and at one point, he even outlines different approaches to sales on the domestic and Russian markets, which he generously provided to us in the end as a "cheat sheet”.

Vučić, who has gained his business experience in a number of pharmaceutical companies, from Pliva through Sandoz to Teva, feels quite good at his new job. When asked why he decided to work for Jadran galenski laboratorij, he says the key word was – challenge. "When I looked at Jadran galenski laboratorij from the outside, it seemed to me like a wonderful domestic success story. There are few industrial companies that have emerged since Croatia’s declaration of independence, and JGL today is about the same size as Belupo,” he says. On the other hand, there are a number of serious business tasks before him that could be boiled down to a continuation of growth and increase in profitability of the company. However, he does not seem nervous; it is obvious that he estimates that he is on his way to increase the value of the company. "After 20 years of experience in the pharmaceutical industry, having graduated from one of the top three business schools in Europe, this is an interesting business case I need to solve. It is a combination of challenges and a wonderful business story,” Vučić explains his business approach. He has not given any interviews until now. He has devoted himself to getting thoroughly familiar with the company whose Pharma Valley factory dominates the entrance to Rijeka, its brands (most of the revenue, 32 percent, still comes from Aqua Maris), and all of its strengths and weaknesses, until he could boast about good semi-annual business results and a nearly halved ratio of net debt and operating profit. As the company states in its business report, they have also managed to exhaust the stock they had with customers in Russia. They entered this market in 1998.

Almost 40 percent of your pharmaceutical business under JGL Pharma comes from Russia. What is the current state of affairs, how do you deal with the exchange rate of the ruble and sanctions that are in effect?

- We have a marketing and sales company in Russia employing 200 people. The sanctions have an impact on the Russian economy, and consequently on the purchasing power, but I cannot say that we are currently experiencing any direct difficulties in Russia because of them. JGL has been doing business there for 20 years and this is not the first crisis; it is a standard emerging market. At present, there is a marked volatility of the ruble, and this is actually more a consequence of political risk than an economic one. Looking at the Russian macroeconomic data and oil prices, the ruble would have to be significantly stronger than it is now. We will see how this develops.

Our business in Russia amounts to about HRK 300 million per year. In recent years, we have significantly improved the management of claims and exposure to ruble, and this year, we have timely optimized our internal costs while the exchange rate was still in line with our expectations. To illustrate what we are facing: in the first quarter, the euro/ruble exchange rate ranged from 69 to 71, and in April, there was a major jump to almost 80 when the crisis began in Syria. Then the euro/ruble dropped again to 72-73, only to make a new jump in August, when the US Congress started pressuring President Donald Trump over new sanctions against Russia, and it still remains at those levels... Now we’ll see what happens, if it will go down. To sum up, the weakening of the ruble will have an impact on JGL’s results, but it is far from the difficult situation from four years ago.

That’s why you sold part of the business in Russia in 2016.

- Yes. When a 10-year distribution agreement expired on several of our brands, we sold them to the Hungarian company Egis Pharmaceuticals, but production remained in our plants. But that was not the core of our business in Russia. We needed the revenue from this as a financial injection after two challenging years due to the crisis in Russia and Ukraine.

We have now reduced our debts by HRK 240 million in comparison to 2014. Last year, we repaid the HRK 70 million in bonds issued in 2015, and a little under HRK 130 million remains. We also closed a loan early from the European Bank for Reconstruction and Development worth HRK 33 million using the company’s own liquidity.

You decided against hedging because of the ruble?

- We spent a few million HRK per year on hedging, but it was too expensive for us. After all, hedging would imply that we bet on how some political situations develop, and that is difficult to predict. We are just a small fish trying to swim in global waters.

You boasted in the financial report about the significant total sales growth, and that export makes 80 percent of your revenue. Which markets were the most successful?

- Results excluding one-time revenues and the cost of sale of several brands in Russia show that we grew 27 percent in the first half of the year. The main drivers of this growth are Croatia, Russia and Ukraine, but all of our key brands - Aqua Maris, Meralys, Dramina and Vizol S. - are growing. We are doing well even in Belarus where we started from scratch three years ago, and Kazakhstan, where we have 38 employees, is also a significant market. We are particularly pleased because we have experienced a 19 percent growth in the second quarter, outside the flu and cold season, which shows that our new allergy products are doing well on the market. In general, we operate in extremely competitive markets where we are fighting with 5 to 25 competitors. The fact we can do 80 percent of our business outside of Croatia shows our strength and flexibility.

How much do you invest in research and development?

- We currently have 12 projects in internal development. We invest about 5.5 percent of total revenues in the development of our own products, which is at the level of average investments in our sector.

What is the trend like in Croatia?

- Excellent. The domestic market now brings 22 percent of revenue. We are seeing particularly good results in the segment of over-the-counter drugs and dietary supplements – we are growing twice as fast as the market. In Croatia, revenues are about HRK 140 million per year, 70 percent of which comes from prescription drugs.

What are the deadlines for payments by the Croatian Health Insurance Fund (HZZO)?

- We have to give credit to HZZO. Payment deadlines in the pharmacy segment this year have been considerably reduced compared to previous years, and they are about 100 days. A few years ago, when I was working at Teva, I remember that the Croatian part of the business had the longest payment deadlines in the world. We do not do a lot of business with hospitals so I cannot comment on that part.

What do you expect from the Ukrainian market?

- When the 2014 conflict broke out, the market collapsed and the value of the pharmaceutical market dropped by 60 percent. Some pharmaceutical companies have left, but we decided to stay, and this has proven to be a good decision. At present, we employ 40 people there, and that market is now the fastest growing market percentage-wise. We expect about HRK 40 million in revenue in Ukraine this year.

How much do you work for other companies in the pharmaceutical sector, in the B2B segment?

- At present, about 11 percent of our total business in pharmaceuticals comes from B2B. Sometimes we produce brands for others, and sometimes they take our brands and sell them on markets where we are not directly present. During the first half of 2018, we signed 15 new contracts in total, and agreed on cooperation to open 17 new markets in the strategic regions - EU, ASEAN and MENA. Until the end of 2018, this segment will also be intensively involved in negotiating the opening of the China market for Aqua Maris with three potential partners, as well as analysing new markets in East and West Africa.

The construction of the impressive Pharma Valley factory in Rijeka was a large investment of around HRK 360 million. Are its capacities full? How many people work there?

- We employ 440 people in Croatia, and most of them work in the facility. This factory has brought a lot of benefits because before that, Jadran galenski laboratorij operated in several locations. It has been built to meet all European and Russian quality standards, so it has brought us new businesses in the B2B segment and some new technologies that we did not have before. There is still some idle capacity, but this is normal, there is room for development.

What is your plan for the future? It seems that you are aiming towards reducing risks, i.e. your dependency on Russia.

- Yes, this is our plan, but not by reducing our business in Russia, but by increasing revenues in other markets, especially in the region of Central and Eastern Europe where we are not so present now. It would be nice to make a good deal in America, but that’s not easy, even though last year’s agreement on the recognition of quality standards between the US and some European Union countries, including Croatia, opens up new perspectives. This is also a huge recognition of HALMED. We have registered several products there previously, but this is de facto a business we would have to start from scratch.

The text was published in the printed edition of Globus magazine (12 October 2018), and the online edition of the Jutarnji List newspaper (21 October 2018).

PHOTO: Boris Kovačev/CROPIX

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