Grindex, a Riga-based pharmaceutical manufacturer and distributor that makes 30 percent of its sales in Russia, is blaming that country's budgetary crisis for a half-million lat (about $834,000) drop in turnover during the first half of 1998.
Valdis Jakobsons, Grindex executive council chairman, said the company will lose another 300,000 to 400,000 lats this year to an 18 percent value added tax (VAT) imposed by the Latvian government on exported medicines.
"VAT has increased the price of Latvian products abroad by almost 20 percent," Jakobsons told reporters early in August. "It is hard to compete abroad and especially in Russia, with Russia's added tariffs."
Russia has announced a hike in customs duty from 10 to 20 percent. It is further anticipated that all medicines will be financed from the Russian budget.
A decrease in demand for certain products in Russia and unfinished construction upgrades have given 500 out of 600 Grindex employees three weeks' additional vacation time this summer. Grindex will give employees affected by the labor reduction half pay during the extra time off.
An increase in Grindex pharmaceuticals going across sales counters in 1997 allowed the company to post 1997 profits of 605,000 lats on a turnover of 8.8 million lats, beating 1996 margins by about 25 percent, but the first half of 1998 has been disappointing, Jakobsons said.
The target turnover for 1998 is 11.4 million lats, to yield a 1.2 million lat profit. So far this year, company accountants have come up with a turnover of goods worth only 4.6 million lats and 302,000 lats in profits.
Although he couldn't predict how performance for the first half of the year would affect the year-end report, Jakobsons said that the company is currently pulling up its socks and making moves that will bring it closer to its targets. One is to work through a pharmaceuticals trade association to get relief from the VAT.
Within the company, Grindex will strive to develop new products and to find new customers for its 150 products. It has invested 1 million lats in expansion, and sales have increased in Belarus and Grindex's other Central European markets, Jakobsons said.
Grindex has also taken a marketing partner. Grindex bought a 55 percent stake in 50-year- old Tallinn Pharmaceuticals. The two companies will form a joint trading company, Grindex Pharm, exclusively to market products made by both to increase the combine's market share. Jakobsons expects Grindex Pharm to begin operation by the end of the year.
"We are already doing what many other companies are doing all over the world-increasing management and production efficiency and consolidating resources," Jakobsons said. The resulting holding company will comprise several other producers and possibly a wholesaler, he said.
Some stock analysts are saying, based on shares values, Grindex paid too much for its Tallinn stake. Grindex paid 3.86 lats per share for more than 2 million Tallinn Pharmaceutical shares that had a nominal value of 0.42 lats.
In August, Tallinn Pharmaceutical shares dipped to 0.72 lats. The company's financial director, Ainars Bundulis, said that Grindex could lose 6.5 million lats, but half-year reports do not need to address long-term investments.
Inveks brokerage company stock analyst Natalija Jemeca said that it is a good practice for companies listed on the stock exchange, as is Grindex, to keep shareholders informed on company finances.
"Public stock companies should on a monthly basis carry out revaluation of the long-term investments and publicly announce big changes in their assets if such have taken place in the period under review," Jemeca said.
But in addition to forming the Grindex Pharm marketing firm, Grindex stands to gain by more efficient market divisions, Jakobsons said.
The company is helping Tallinn Pharmaceutical to upgrade its production and management practices to raise its market share in ampules, lotions and ointments, chief among the Tallinn company's 40 products. Meanwhile, Grindex will stop manufacturing some products already made in Tallinn.
Grindex already has made cooperative agreements with pharmaceutical companies in Sweden, Japan, the United States and the UK. An alliance with U.S. manufacturer Johnson & Johnson allows Grindex to market Tylenol, a pain reliever.
Grindex signed a market-division agreement in 1996 with Ilsanta, an Icelandic-Swedish-Lithuanian joint venture that Jakobsons said has resulted in lower marketing costs for both companies.
The Lithuanian Council on Competition said that the pact violates competition laws, boosting the costs of injected medicines to hospitals and patients denied the opportunity to buy cheaper Latvian medicines. The council hit Ilsanta with a fine of 20,000 litas ($5,000).
Grindex was not fined, and has done nothing wrong, Jakobsons said, and the price of the injectables cannot be controlled by either of the companies.
"There are enough competitors from other companies that it would be impossible for any one of them to set the price," Jakobsons said. "Hospitals in Lithuania are so poor, that no one can set high prices because there is no money to pay high prices.
Jakobsons told reporters that Grindex's Baltic market share is 5 percent in Latvia, 2-3 percent in Lithuania and 1.5 percent in Estonia.
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