A comparative Analysis of Financial Statements for

Zentiva SA and Antibiotice Iasi

1. General presentation

Zentiva Zentiva N.V. is an international pharmaceutical company that develops,

manufactures and markets modern branded generic pharmaceutical products. It is a market leader in
the Czech Republic, Turkey, Romania, Poland, Slovakia and Russia and grows dynamically in
Bulgaria, the Ukraine and the Baltic countries.
Zentiva SA is part of the Zentiva Group and it had a market share of 16% in volume and
5.7% in value in Romania in 2007. The Romanian branch came into being by taking over the
Sicomed company (created as ‘Intreprinderea de Medicamente Bucuresti’ (“IMB”), in 1962). On
the 24th of january 2006 the company changed its name from Sicomed SA to Zentiva SA. The main
activity of the company consists in producing and selling various products and medicines for human
use.

Antibiotice Iasi Having over 50 years of experience in the Romanian industry,

Antibiotice Iasi is currently the 9th largest national producer of pharmaceuticals, with a market
share of 2,8 % in value (the Cegedim raport - november 2008). Also, Antibiotice Iasi is one of the
most important Romanian exporters of medical products, with its products being distributed in over
40 countries. By 2008, the company has realised over 45 international partnerships, and is also
planning to continue to expand to new markets in Europe, the USA, Africa, Asia and the CSI states.

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Shareholders:

Antibiotice Iasi shareholder 2007

AVAS

37%
SIF OLTENIA
53%

Alti actionari
10%

Zentiva shareholder 2007

VENOMA HOLDINGS
10% LIMITED

16%
ZENTIVA NV

50% Alte persoane juridice

24% Persoane fizice

One can observe that while Antibiotice is a Romanian company in the field of
pharmaceuticals that is currently undergoing a privatisation process, Zentiva SA is a branch of the
Dutch producer Zentiva, resulted from taking over Sicomed SA.
As for the field of activity of the two companies, one can observe it is very similar. As such,
according to their CAEN code, Zentiva is involved in ‘The manufacturing of pharmaceutical
products’ (CAEN class: 2442) and Antibiotice Iasi is involved in ‘The manufacturing of primary
pharmaceutical products’ (CAEN class: 2441) . A further analysis of the field of activity shows that

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Antibiotice Iasi holds a portfolio of over 120 drugs from 11 therapeutical classes for human use,
about 10 products for veterinary use , active compounds (Nistalina) and bioferilizers. It is also
involved in the production of thermal energy, compressed air, internal and external transportation
using its own fleet of motor vehicles. Zentiva has more than 280 products released on the market in
550 different pharmaceutical forms of presentation. Of these approximately 170 are prescription
drugs and 100 are available as over the counter products and suppliments.

2. Structure of the financial statements

For both companies the financial statements are drawn-up in accordance with Order no.
1752/2005 of the Romanian Ministry for Public Finance. They include the balance sheet,
explanatory notes, the profit and loss account, the statement of cash flows, the statement of changes
in equity, the auditor’s report as well as a report by the Board of Directors.
Both profit and loss accounts are presented under the ‘by nature’ format. As for the the
statement of cash flows it is drawn-up using the indirect method in the case of Zentiva and using the
direct method for Antibiotice Iasi. Regarding the statement of changes in equity, the IAS1
Presentation of financial statements, allows companies to choose the appropriate format that best
explains particular modifications within each item of equity. As such, Zentiva SA has chosen to
present this document in the form of a table while Antibiotice Iasi chose to explain each item it
considered important individually. Both of the auditor’s reports state that the financial statements
were drawn-up correctly in accordance with the OMFP no 1752/2005. However for Antibiotice Iasi
S.A. the auditor underlined some aspects of the financial statements that were not dealt with
appropriately.
As for the explanatory notes to the balance sheet, Zentiva’s documents presents 14 notes
while Antibiotice has only 12 regarding various items from the balance sheet. As such Antibiotice
Iasi presents provisions in note 11, an element not found in Zentiva’s notes. Zentiva on the other
hand shows a more detailed presentation of the cash at bank (note11), of the debts owed to credit
institutions (note 12) as well as of stocks (note 14) in its notes.

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 3. Elements of the financial statements –analysis
3.1.Intangible assets
Regarding set-up and development costs, both companies have registered no amounts for
either 2006 or 2007. However, Zentiva mentions a budged for research and development of 3.2
millions for 2007. Since the results of this activity were probably not certain enough and the costs
didn’t pass in the development stage, they did not appear in the balance sheet and were only present
in the profit and loss account.
As for concessions, patents, licenses, trademarks and similar rights and assets for Zentiva
they have been reduced by 29,25%(from 221.694 to 156.836) while in the case of Antibiotice Iasi
this item has known an increase of 37,20% (from 883.311 to 1.212.667). This underlines the fact
that while Antibiotice continues to invest in creating new products, Zentiva has sold some of its
concessions, patents, licenses etc or having passed about 5 years, the information has become public
and the items were removed from the balance sheet. The company seems to not have invested in
obtaining new licenses and patents which would underline the poor results of 2007 and a tendency
to invest less in innovation and new products. Both competitors have licenses for software
programmes and have chosen to depreciate them over a period of 3 years (Antibiotice Iasi) and 1-3
years (Zentiva) using the straight-line method. As for intangible assets in progress they are similar
in value for 2007 - about 460.000 for Zentiva and 500.000 for Antibiotice Iasi and probably consist
in licenses or patents for different medication or substances that are in the process of being
approved.
The presence of concessions, patents, licenses etc for different products and substances is
rather usual for the pharmaceuticals market where the discovery and production of such products is
essential in order to successfully develop as a producer. Investments in research and development
are also quite important in this field.

3.2 Conversion to domestic currency

Zentiva converts the balance sheet items expressed in foreign currency (bank deposit,
receivables and loans) into domestic currency at the exchange rate given by BNR at the end of the
financial year. The differences resulting from this rate and the exchange rate at witch the items were
initially registered are shown under financial revenues or expenses. The transactions in a foreign
currency are transformed into RON using the exchange rate at the time of the transaction.

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 Exchange rate 31 December 2006 31 December 2007
Euro/Ron 3,3817 3,6102
Usd/ Ron 2,5676 2,4564

In the profit and loss account, foreign exchange gains (losses), account 765 (665), are not
presented in an individual manner, but are included in other financial revenues (expenses), for both
companies.
Zentiva Antibiotice Iasi
31 December 31 December 31 December 31 December
2006 2007 2006 2007
Other financial revenues 12 132 007 8 250 729 4 318 996 1 652 232
Other financial expenses 28 585 762 9 093 877 1 259 763 4 3889 672

The profit and loss account of Antibiotice Iasi shows the effects of the variation of the
exchange rate on cash and cash equivalent as a distinct item, unlike Zentiva. As such we find that
for 2006 there are revenues resulting from the change in the exchange rate that amount to 306 044
RON, a rather small amount compared to the total financial revenues of 1 652 232 or to the total
cash flow of 2 775 105 RON. Taking into account the depreciation of the national currency in
regards to the euro as well as the fact that the revenues from the financial activities have lessened
for both companies, we can conclude that the revenues from the change in the exchange rate have a
small weight in the total financial revenues. Also, it is possible that the appreciation of the RON in
relation to the dollar could have had some influence, but this would have only been so in the case of
large transactions in dollars.
The rise in expenses for Antibiotice Iasi can be explained by the depreciation of the RON in
relation to the euro while the fall in expenses for Zentiva can be linked either to the appreciation of
the RON relating to the dollar or by a small impact of the exchange rate on the company.

3.3. Fixed assets

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 The fixed assets for Zentiva decreased from 2006 to 2007 with 3, 7%, because of equipment
depreciation (63 thousand reported to 80 thousand initial value in 2007). Regarding Antibiotice Iasi,
the fixed assets increased with 53, 3 % due to land revaluation and fixtures and fittings, equipment
and building purchases.
For buildings, both companies use the straight-line method of depreciation. In the case of
equipment and fixtures and fittings, as well as motor vehicles, Zentiva uses reducing balance
method (larger amounts are depreciated in the first years, becoming smaller as we go further down
the useful life ), while Antibiotice Iasi uses the accelerated method (about 50% in the first year and
the rest is depreciated using the straight-line method). Since the depreciation method should mirror
the pattern in which the asset’s economic benefits are consumed by the enterprise, this would
suggest that in the case of both companies most of the benefits are gained at the beginning of the
useful life.
Furthermore, by analyzing the useful life considered by the 2 companies, we notice that it is
consistently shorter for Antibiotice Iasi, underlining a more frequent renewal of technologies.

Useful economic life

Antibiotice Iasi Zentiva (own evaluation)

(HG 2139/2004)
fixtures and fittings 6-10 5-15
motor vehicles 4-6 5
equipment 8-12 5-20
buildings 32-48 30-50

As far as land is concerned, for Antibiotice Iasi the reevaluation gave an increase of 45
million from 2006 to 2007 (a 157% increase in value), while Zentiva’s land was impaired by 10%.
In the case of Antibiotice Iasi, the financial assets consist in a very small sum of 8198,
constant over the 2 years. On the other hand, Zentiva gave long term loans to its associate Pallady
Business Park, the balance decreasing from 178 thousand in 2006 to 54 thousand in 2007. In spite
of this tendency, the absolute amount in 2007 is still more than 6 times larger than that for
Antibiotice Iasi.
Stocks have risen in the case of Antibiotice Iasi by 18,65% (from 18.333.107 to 21.753.839)
and have decreased by 9,84% for Zentiva (from 38.733685 to 34.919.212 -still higher in absolute

6
value than for Antibiotice Iasi). As for the method of assigning costs to stocks Antibiotice Iasi uses
the AWC, and Zentiva does not mention the method. Zentiva also mentions the amounts of
provisions made for depreciated stocks and for slow moving and obsolete stocks (5.215.170 for
2007). In fact Zentiva usually holds the stocks until sale for a larger period of time than Antibiotice
Iasi. (see point 4.2).
Debtors have decresed by 16,44% for Zentiva and have risen by 14,76% for Antibiotice Iasi.
For both companies this item is mostly comprised of trade debtors (98,9% of all debtors for
Antibiotice Iasi and 96,90% for Zentiva ). As for the provisions created for debtors they amount to
3.868.241 in 2007 for Zentiva . In the case of Antibiotice Iasi they have already registered an
impairment of 10.289.938 for 2007 which would suggest that the loss is rather certain in this case.

3.4. Geographical sectors

Regarding the geographical sectors, Zentiva underlines (note 10) the detailed revenues from
sales on the internal and external markets (Europe, USA, The Middle East, South America and The
Far East). The external sales amount to less than 1% of the total sales in 2006, with a slightly larger
percentage for 2007. The fields of activity are as follows: sale of goods (85%) and inter-company
services. They are mentioned in the explanatory notes. The revenues however are presented as a
whole in the profit and loss account and in the balance sheet.
In the case of Antibiotice Iasi the financial documents also show the revenues from both the
external (8%, a much larger percentage than in the case of Zentiva), without mentioning the exact
geographical areas. The fields of activity are presented in the explanatory notes without underlining
their actual percentages. They are the manufacturing of pharmaceutical goods, the production of
thermal energy, compressed air and the rendering of services

3.5. Personnel
The financial documents show the detailed costs with the personnel as follows:
Antibiotice Iasi 2006 2007
Value Percentage in the total Value Percentage in the total
personnel expenses personnel expenses

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Salaries 33 117 176 76% 42 421916 77%
Social security 10 265 150 24% 12 427 301 23%
contributions

Zentiva 2006 2007

Value Percentage in the total Value Percentage in the total
personnel expenses personnel expenses
Salaries 36 388 869 78% 40 106 422 80%
Social security 10 016 558 22% 10 560 206 20%
contributions

One can notice the similarities in the percentages for the two companies which would
suggest similar policies in this area.
The average number of employees has remained relatively constant for Antibiotice Iasi:
1556 in 2006 and 1565 in 2007. Note 8 details the salaries of the different classes of employees
(with/without higher education, managers, workers in manufacturing workers, tesa personnel). The
documents for Zentiva underline the various benefits received by employees but don’t show the
average salary for each class of worker or their percentages. The number of employees has fallen
from 1012 in 2006 to 821 in 2007.
For Zentiva the actual payments with the personnel are also shown, thus a comparison with
the registered expenses is possible.

2006 2007
Registerd expenses 46 405 427 50 666 628
Payments 42 986 957 54 254 522

In both years, the company has had debts regarding the payment of salaries. In 2006 the
payment was less than the expenses (approximately 4000) the difference being carried forward in
2007 when the payment exceeded the expenses for the year.
As for the means of taxation, since both companies activate in Romania, the same rules
apply: 16% earnings tax (health fund, pension fund, revenues, contribution to unemployment).

3.6. Earnings Tax

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 Romania uses the fixed 16% earnings tax for all businesses. As for the two companies the
tax has been reduced with 70,71% for Zentiva ( from 16.261.685 to 4.762.317 RON)- as a result of
the decrease in profit and with 28,93% for Antibiotice Iasi (from 6.234.414 to 4.430.343 RON) .
In the case of Zentiva by analysing the Cash Flow we can observe a payment of 11.463.469
for 2006 and 9.134.492 for 2007. The latter is larger than the profits actually owed for 2007 and
most probably also comprises a sum that was still owed for 2006. This also underlines the abrupt
fall in profits for 2007 for this company.

3.7. Contingencies and post balance sheet events

As for other contingencies one can mention the subventions received by both companies
amounting to about 150.000 for Zentiva, (relatively constant in the two years) and to 8.500.000 for
Antibiotice Iasi (relatively constant in the two years). Also, in the case of dividends, while in 2007
Antibiotice Iasi has distributed dividends amounting to 0, 0305 lei each (though they also proposed
to use the dividends for financing purposes they were actually given in October 2008), Zentiva has
not distributed any dividends since 1999 in order to finance an investment program. As for
provisions in the case of Antibiotice Iasi they have been reduced from 3.494.019 to 2.400.000
during the year, representing the employees’ participation to profit. Zentiva has reduced the
beginning balance for provisions of 12.287.503 to 433.322. This is a result of transferring the
earnings tax postponed at 31 December 2005 (11.375.064) to the retained earnings in accordance
with OMF 1752/2005.
Concerning the non-deductible expenses and the non-taxable income they are mentioned in
note 10 for Zentiva and are quite significant, especially the expenses (80.000 for 2006 and 40.000
for 2007).Antibiotice Iasi however does not show details about this item in note 10 but the
information in the balance sheet suggests their presence.
Even though the two companies are regulated by the same accounting standards (order
1752/2005), the information in the financial statements and especially in the explanatory notes is
not always similar. Note 6 for example detailing the accounting policies are, in the case of
Antibiotice Iasi, comprised mostly of a summary of the general accounting theory with little use to
interested parties.

4. Financial indicators

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 4.1. Rentability ratios

Indicators Formula Antibiotice Iasi Zentiva

2006 2007 2006 2007

Return on Investment = Financial leverage =1,40218042 =1,357720514 =1,348033685 =1,229840048

(Rata rentabilitatii multiplier * Return * 0,1234 * 0,1140 *0,1257 *0,0329
financiare ) on Capital Employed =0,1817 =0,1598 =0,1695 =0,0405

Financial leverage = Capital Employed/ =260636948/ =345290781/ =330639543 =320875839

multiplier Equity 177059654= 246249761 = /245275431 /260908595
(Multiplicatorul 1,4072 1,4021 =1,3480 =1,2298
levierului )
Return on Capital Asset turnover * =0,7507682 =0,6644128 * =0,7322071 =0,6045848
Employed, Return on Profit margin *0,16444 0,17159 *0,17179 *0,05456
Assets (Rata =0,1234 =0,1140 =0,1257 =0,0329
rentabilitatii
generale /capitalului
utilizat)
Profit margin, Return =Net profit before =32176704 =39366079/ =41588869 =10584563
on Revenues (Marja interest and taxes/ /195677945 229415602= / 242096618 / 193996640
profitului ) Turnover =0,16444 0,17159 =0,17179 =0,05456

Asset turnover =Turnover/ Capital =195677945 =229415602/ =242096618 =193996640

(Rotatia activelor Employed / 260636948= 345290781 /330639543 /320875809
totale) 0,7507 =0,6644 =0,7322 =0,6045

The asset turnover is a little higher for Antibiotice Iasi in both years than for his competitor,
twhich means that they manage to generate a higher turnover using the assets.
The asset turnover depends inversely on the employed capital (total assets), therefore it is
affected by the depreciation method. Zentiva uses the reducing balance method, which gives a
higher level of depreciation in the beginning of the useful life, which then decreases, while
Antibiotice Iasi has chosen the accelerated method (the result being an amount of 50% of
depreciation at the beginning of the useful life, the remaining sum being depreciated by using the
straight-line method). The total amount of depreciation is relatively similar for the 2 competitors
(both the absolute value as well as the percentage of the total fixed assets). This is so because the
fixed assets are at the begging of their useful life for both companies.

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 The profit margin was relatively the same for 2006, but for 2007 Zentiva’s profit (both net
profit and profit before interest and tax) decreased severely from about 23 million RON to 4 million
RON, the result being a very low profit margin.
The return on capital employed confirms the fact that in 2006, the companies had similar
situations, but in 2007, Zentiva was not efficient at all - the return on assets fell from 12 % to 3 %.
The financial leverage multiplier shows that for Antibiotice Iasi the difference between the
capital employed and the equity is bigger than for Zentiva, leading to a greater impact of assets
from attracted sources on the profit.
The return on investment is a measure for the activity’s efficiency. Like the others
indicators, it shows that Antibiotice Iasi performed better than Zentiva overall, and especially in
2007, when Zentiva had problems and poor gain.

As for the reasons behind the very poor performance of Zentiva in 2007, they are not
sufficiently underlined in the financial statements. However, by observing various articles in the
media we found that in the final trimester of 2007 Mariana Wencz, the former country manager
resigned as a result of the very low performance of the company and was replaced by Jozef Belcik.
Among the factors considered responsible for the results in 2007 there was the lack of financial
discipline - payments were made with a delay of over 280 days, which, in accordance with the
international accounting standards required the creation of certain additional provisions. The
situation was improved in the last trimester of 2007 when the delays were reduced to about 150
days which was considered to be ‘an acceptable standard for Romania’. However in countries like
Hungary, Poland and Bulgaria payments are made within 15-90 days. Moreover, the level of stocks
was considered rather high in the case of Zentiva and there were also some problems regarding both
the supply and the distribution chains that were not as efficient as they should have been. The
company’s general strategy which was focused on increasing the market share for the company
rather than on increasing or maintaining the profit level was also blamed.

4.2. Asset turnover ratios

Indicator Formula Antibiotice Iasi Zentiva
2006 2007 2006 2007
Stock =Cost of sales / = 95664297 / =92653012/ 26 = 110316346/ = 105151318/
turnover(viteza de Medium stock 24592418 = 3,9 112019 = 3,6 42105475,57 36766195,1

11
rotatie a stocurilor) ori ori =2,62 = 2,86
Duration (Durata = (Average == 24592418 / = 26112019/ =42105475,57/ = 36766195,1 /
unei rotatii /Numar stock / Cost of 95664297 *365 92653012* 110316346 105151318* 365
de zile de stocare) sold goods) * = 94 zile 365= 102 zile *365 = 139 zile = 128 zile
365
Debtors turnover = Average =115821939/ = 134 006 874 / = 44303681094/ =47335180160/
(Viteza de rotatie a debtors 195677945*365 229415602*365 220966184= 193996640 =
creantelor – clienti) balance = 216 zile = 213 zile 183 zile 244 zile
/Turnover*365
Creditors turnover = Average = (20614556/ = (25 121 836/ 111 zile 109 zile
(Viteza de rotatie a creditors balance 129 032 696)* 172 309 515) *
datoriilor- / Purchase of 365 = 58 zile 365 = 53 zile
furnizori) goods*365

The stock turnover decreased slightly for Antibiotice from 3,9 to 3,6 because even though
the expenses for the operating activity diminished, the average stock rose by 2 million in 2007. In
the case of Zentiva the stock turnover rose slightly from 2,62 to 2,86 , but it is still lower than for
Antibiotice. The reason behind this rise is the reduction in the average stock which was much more
significant than the reduction in the cost of sales.
Zentiva sold the stocks faster in 2007 then in 2006 (from 139 to 128 days), while for
Antibiotice Iasi the situation is the other way round. But in both years, Antibiotice Iasi holds the
stocks until sale fewer days then Zentiva. The reduction in the average stock for Zentiva from 42 to
36 million was the reason behind the positive evolution in 2007 and it probably came about from
the changes applied by the new management in the last trimester of 2007. The medium stock rose
by 2 million for Antibiotice causing an increase in the duration but it is still significantly smaller
than for Zentiva. While Antibiotice Iasi uses the AWC, Zentiva does not mention the method.
The increasing debtors’ turnover for Zentiva means that they are using commercial credit. In
2006, it cashes faster than Antibiotice Iasi (who is constant over the period), but next year, it relaxes
the sales conditions and it cashes with a delay of another 30 days. A reason for the rather high
values for both companies is the fact that the delay of payments for the pharmaceuticals market in
Romania is very high compared to other countries. Zentiva was particularly affected since the
increase in trade debtors was accompanied by a lower turnover, probably as a result of a smaller
production for 2007.

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 The creditors’ turnover remains almost constant for the 2 companies during the 2 years, but
Antibiotice Iasi pays its debts two times faster than Zentiva. In fact the poor results for 2007 in the
case of Zentiva were explained among other factors by problems with the supply chain.
Both companies pay their suppliers much faster than they cash their debts, probably because
one big client is the National Insurance House.

4.3 Profit margin analysis

Indicator Formula Antibiotice Iasi Zentiva

2006 2007 2006 2007
The weight of =Other = 22850232/ = 17073544/ =69654780/ =457838/ 193996640=
other revenues in revenues 195677945= 229415602= 242096618= 0,002360
the turnover /Turnover 0,11677 0,07442 0,28771
The weight of the = = 95664297/ = 92653012/ =110316346/ =105151318/
cost of sold goods Cost of sold 195677945= 229415602= 242096618= 193996640=
in the turnover goods 0,48888 0,40386 0,45567 0,54202
/Turnover
The weight of the = Distribution = 32325523+ =65211150+ =144150741/ =80066759/
distribution and and 36322029/ 46547922/ 242096618= 193996640=
administration administration 195677945= 229415602= 0,59542 0,41272
costs in the costs 0,35081 0,48714
turnover /Turnover
The weight of the = Income tax = 6234414/ =4430343 =16261685/ =4762317/
income tax in the /Turnover 195677945= /229415602= 242096618= 193996640=
turnover 0,31860 0,01931 0,06170 0,02454

The weight of other revenues in the turnover has decreased for both companies. While in the
case of Antibiotice Iasi this was solely due to a decrease in the total value of these revenues (since
the turnover showed a certain increase), for Zentiva we can observe both a decrease in the revenues
and in the turnover, further underlining the rather poor performance of 2007. In any case the weight
of other revenues in the turnover is all in all not very significant for either player.
As for the weight of the cost of sold goods in the turnover it has decreased slightly for
Antibiotice by 17,39% as a result of both a decrease in costs and an increase in turnover. This
would suggest a much more efficient supply. For Zentiva this indicator has increased by 18,95%

13
because the decrease in the cost of the sales was less significant than the decrease in turnover,
suggesting some problems with the supply activity.
In the case of Zentiva we can observe the lack of distribution costs. This is a result of the
fact that the entire distribution activity for this company is realized by the Bucharest subsidiary of
Zentiva International, a part of the Zentiva Group, that operates as a distributor for the Romanian
market since April 2006. There was also a slight decrease in administration costs which resulted in
a decrease in the weight of the distribution and administration costs in the turnover. The indicator
increased for Antibiotice due to a doubling of the distribution costs as well as an increase in
administration costs that surpasses the increase in the turnover. This shows that the distribution for
antibiotic needs to be improved.
The weight of the income tax in the turnover lessened for both companies but the decrease
was much more significant for Antibiotice Iasi.

4.4. Risk analysis ratios

Indicator Formula Antibiotice Iasi Zentiva
2006 2007 2006 2007
Current ratio =Current assets / =153 595 074/68 =180 770 363/84 = 242875777 =236422194
(Rata lichiditatii Current liabilities1 662 036= 2.2 281 534=2.2 / 70851718 =3,4 /59154380 =4
curente)
Acid test (Rata = (Currents assets- = (153 595 074- =(180 770 363 =(242875777 =(236422194
lichiditatii Stocks) / Current 18 333 107) /68 -21 753 839) /84 -38733685) / -34919221)/
imediate) liabilities 662 036 = 2 281 534 = 1.9 70851718= 2,9 59154380= 3,4
Total liabilities / Total assets =71174407 / = 88088591/ =72309908 / =59382464/
260388295 344868042 330382691= 320494190 =
=27,33% = 25,54% 21,88% 18,52%

Gearing ratio =Total liabilities/ = 71174407 / =88088591/ = 72309908 / =59382464 /

(Rata Equity*100 177059654*100 = 246249761*100= 245275431= 260908595=
indatorarii) =40,19 =35,77 =29,48 =22,75
Long term liabilities/ Equity = 2547890 / = 3807056 / =850268/ =223554/
177059654 = 246249762= 245275431 260908595
14,39% 15,46% =0,34% =0,085%

1
Calculated using current net liabilities and current assets minus accrued expenses

14
 The current ratio is used to measure the firms’ liquidity situation. It gives information about
the defrayal of current debts by current assets. The ratio should always be above 1 or the firm does
not have enough assets to meet its liabilities and is therefore technically insolvent. However, a
figure close to 1 would be a little close for the firm as they would only just be able to meet their
liabilities. Therefore a figure between 1.5 and 2 is generally considered to be desirable. Still, if the
ratio is any bigger than 2 then the firm may be tying up too much of their money in a form that is
not earning enough.

Thus Antibiotice Iasi respects this rule, having a constant current ratio of 2.2 as a result of
the increase of both current assets and current liabilities. Zentiva has a ratio of about 4 suggesting
that it is not using the money at its disposal very efficiently and should consider alternative
investments. The ratio increases from 2006 to 2007 (from 3.4 to 4) because of a large decrease in
the current liabilities that overshadows the decrease in current assets.

The acid test ratio is very similar to the current ratio, but it represents a more stringent test
of liquidity (it excludes stocks since it can be argued that they cannot be converted to cash quickly).
Its results are similar with the current ratio but slightly better for both companies.

The next ratio (Total liabilities / Total assets) shows the firm’s ability to cover its debts by using
the assets at its disposal. It decreases for both companies in 2007 but is somewhat smaller for
Zentiva. The indicator should not be too large so as to suggest the inability to pay back its loans but
it also shouldn’t be too small since it would mean that the company isn’t fructifying all the
opportunities at its disposal. The ratio suggests that Zentiva should attract more financial resources
and involve itself in more business opportunities.

The gearing ratio is a measure of financial leverage, demonstrating the degree to which a
firm's activities are funded by owner's funds versus creditor's funds. A company with a high gearing
ratio (high leverage) is more vulnerable to downturns in the business cycle because the
company must continue to service its debt regardless of how bad sales are. The ratios obtained
would suggest that the slightly riskier company is Antibiotice Iasi. However the ratio is relevant
when compared to ratios of companies in the same industry and there is not too much information
available for the Romanian market.

15
 The final ratio (Long term liabilities/ Equity) is a variation of the traditional gearing ratio
(debt-to-equity ratio). It computes the proportion of a company's long-term debt to its equity. By
using this ratio, investors can identify the amount of leverage utilized by a specific company and
compare it to others to help analyze the company's risk exposure. Generally, companies that finance
a greater portion of their capital via debt are considered riskier than those with lower leverage
ratios. By observing this ratio we can see that from this perspective Antibiotice Iasi is much riskier
than Zentiva. However the long term liabilities for Zentiva are unusually low and have registered a
significant decrease in 2007 since a postponed tax from 2005 was now registered under retained
earnings in accordance with OMF 1752/2005. The ratio is rather too small for Zentiva who should
consider drawing more resources from long term loans.

4.5. Exchange rate ratios

4.5.1 PER

Indicator Antibiotice Iasi Zentiva

2006 2007 2006 2007
PER 35,8 33,27 29,63 114,57
EPS 0,022 0,0306 0,055 0,01

The evolution of the net profit has a

Ne t profit
significant impact on both the PER and
35000000 the EPS. As such the abrupt fall in profit
30000000
for Zentiva of 81,54% from 23.074.860 to
25000000
4.258.101 shall have a disturbing effect on
20000000

15000000
the two indicators. Antibiotice Iasi
10000000 however, has obtained an increase of
5000000 Zentiva 36,14 % in the net profit (from 23.839.146
0
A ntibiotice Iasi to 32.456.007) which will have a positive
2006 A ntibiotice Iasi
2007
Zentiva
impact on the PER and EPS. As for the

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reasons behind the significant drop in profits for Zentiva such as the lack of financial discipline, the
high level of stocks and so on, they were explained in more detail at point 4.1
PER is considered to show a healthy financial situation if it is somewhere between 20-40 in
which case the price of the stock correctly reflects the value of the company taking into account the
earnings it brought in that year. As such in the case of Antibiotice Iasi the 7,06% decrease from
35,8 to 33,27 in PER shows a healthy evolution while for Zentiva the very high PER of 114,57 for
2007 shows the large fall in net profit for that year. In this case the price no longer mirrors the
earnings correctly for 2007.
As for the EPS they have risen by 39% for Antibiotice Iasi but have decreased five times in
the case of Zentiva due to the very small earnings obtained for 2007.

4.5.2. Price to book value ratio

NV=0,1 RON/share (Antibiotice Iasi)

NV=0,1 RON/share (Zentiva)

Book value

Antibiotice Iasi Zentiva

2006 2007 2006 2007
Share capital 45.489.729 45.489.729 41.696.115 41.696.115
Reserves 121.467.445 171.570.794 172.320.746 195.395.603
Ahare capital - - 9.863.684 9.863.684
Accumulated 33.941.626 31.033.556 49.755.661 13.953.193
profits(for the year +
repored)
TOTAL EQUITY 200.898.800 248.094.079 223.880.545 260.908.595
Number of shares 454.897.291 454.897.291 416.961.150 416.961.150
Book value per 0,441635516 0,545384824 0,536933824 0,625738381
share

Antibiotice Iasi Zentiva

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 2006 2007 2006 2007
Share price(at the 1,7200 2,0500 1.62 1,1457
end of the year)

Share price/ Book 3,853433665 3,758813795 3,017131586 1,83095689

value

In theory, a stock's tangible book value per share represents the amount of money an
investor would receive for each share if a company were to cease operations and liquidate all of its
assets at the value recorded on the company's accounting books. As a rule of thumb, stocks that
trade at higher price to book value ratios have the potential to leave investors with greater share
price losses than those that trade at lower ratios, since the tangible book value per share can
reasonably be viewed as about the lowest price a stock could realistically be expected to trade at.
This shows that investing in Antibiotice Iasi is somewhat riskier than investing in Zentiva,
but of course the benefits are higher. The larger share price for Antibiotice and its tendency to rise
mirrors the favourable evolution of the company, while the trend is exactly opposite for its
competitor. The ratio has decreased for both companies showing a lowering of the risk level but the
decrease is more significant for Zentiva.
5. The influence of national and international factors

In order to analyze the general economical climate in Romania one can take into account
various indicators. As such the rate of inflation has dropped significantly from 9% in 2005 to 4.8%
in 2007. Ever since 2005 the monetary and the financial markets have been influenced favourably
by the acceleration in growth and by the fall of inflation, a trend which has continued in 2007 as
well. Also in real terms in 2007 the national currency has depreciated in relation to the euro by 7%
from 3.38 RON/EURO in 2006 to 3.61 RON/EURO in 2007. This change was conducive to
exports.

18
As for the Romanian pharmaceuticals market, it has shown a rise in the consumption of
pharmaceutical products from 1335 million Euros in 2006 to 1600 million Euros in 2007.

Furthermore the global financial crisis shall undoubtedly have an effect on the market in the future.
This shall probably be felt mostly in the area of over the counter products. In the case of Zentiva
this would suggest a rather large impact since the weight of OTC drugs in the total goods was about
50% in both 2006 and 2007.

6. The investment decision

As for recommending one of the companies as a better investment

decision, we consider Antibiotice Iasi to be the better choice for a
number of reasons.

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 First of all by analyzing various financial indicators (some of which are represented in the
graphs below), one can observe that for the majority of them both the evolution from 2006 to 2007
and the absolute value for 2007 is significantly better for Antibiotice Iasi.

Finan cial le ve r ag e m u ltip lie r Re tu r n o n In ve s tm e n t

1,45
20,00%
1,4
1,35 15,00%
1,3
1,25 10,00%
1,2
5,00%
1,15
1,1
0,00%
2006
2007 2006 An tib io tice Ia s i
2007
Ze n tiva

A s s e t tur no ve r Re turn on Capital Em ploye d

14,00%
0,8
0,7 12,00%
0,6 10,00%
0,5 8,00%
0,4
6,00%
0,3
4,00%
0,2
2,00%
0,1
0 0,00%

2006 2006
2007 2007

20
 Profit m argint

20,00%

15,00%

10,00%

5,00%

0,00%
2006
2007

Secondly the large decrease in the net profit for Zentiva (81,54% from 23.074.860 to
4.258.101) as well as the fact that the company has not distributed dividends neither from 1999 to
2006 (in order to finance an investment program) nor in 2007 due to the very low earnings for the
year suggests that Antibiotice Iasi is a better choice to invest in. We may also look at the Zentiva’s
turnover that has known a fall of more than 20%.
Furthermore in the case of Antibiotice Iasi the company’s investments in research and
development and in the modernization of various technologies and work spaces have turned it into a
profitable, dynamic company with a healthy economic growth. This is also shown by the fact that in
the last 7 years, the net profit has reached a value of 32 millions, 5 times larger than in 2001. As for
the evolution in the average share price it is 13 times larger now than 7 years ago.
Of course one should also take into account the fact that 53% of Antibiotice Iasi is owned by
AVAS and that even though the privatization process has begun it has encountered some problems,
but the new investors may bring new resources, technologies and markets. Also some indicators
such as the gearing ratio suggest that it is slightly riskier, but the expected return is also higher.
The financial crisis under way is also an element that should be taken into account when
deciding to invest but we believe that the pharmaceuticals market shall not be as affected as other
sectors and will manage to recover.

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