Pharmaceutical Wholesalers

BRE Bank Securities

Update

6 March 2006

Pharmaceutical Wholesalers

Pharmaceutical Wholesalers

Poland

P/E 2006*

12.5

P/E 2007*

11.1

EV/EBITDA 2006*

9.7

EV/EBITDA 2007*

8.7

BRE Bank Securities

The small are still undervalued The thesis that the price war between distributors is over, is slowly proving right. Wholesalers have already felt it as they start to report lower margins. However, the market is now tending toward stronger non-price competition. Distributors took advantage of the 7.4% market growth to varying degrees. Torfarm made the most of the boom, recording a 13.2% boost in revenues. Farmacol stood out in terms of profitability. In our opinion, the net profit margins achieved in 2005 will be difficult to repeat, as they were mostly brought about by one-time events. Consolidation of the Polish market will remain a key focus over the next few quarters. The entry of an international investor may be delayed by a few years.

*average for analysed companies

Sector Description

According to IMS Health, in 2005, the pharmaceutical market, calculated in net producer prices, increased by 7.4%. The change of the refund list in February, contributed to this fact. The biggest dynamics was reported in the first 4 months of the year. This result was achieved mainly thanks to bigger sales of antibiotics and refunded medicines, and OTC drugs toward the end of the year. IMS forecasts a 6.2% growth rate for PGF (HOLD, target price: PLN 69.7) PGF, which leads the way in market share size, generated a profit slightly the market for this year.

below our expectations. Restructuring at its acquirees Apteki Polskie and Cefarm Łódź is taking a long time, but it is already bringing results. We expect that the company's financial standing will be driven by improvement in the profitability of the retail segment. After updating our forecast, we estimate the price of one PGF share at PLN 69.7 and recommend to hold the stock.

Important Dates PGF 24.04 - 2005 report 15.05 - 1Q report

Farmacol (HOLD, target price: PLN 48.1) Farmacol achieves the highest margin in the sector while growing above the market rate. This is mostly owed to the profitable pharmacy segment. We think that, as Farmacol's organic growth slows down, it will take over an industry company to secure further growth for itself. After an update, we value Farmacol's stock at PLN 48.1. Relative to the current market price, we see no growth potential for the stock, and recommend to hold Farmacol.

Farmacol 15.05 - 1Q report 11.08 - 2Q report Torfarm 07.04 - 2005 report 05.05 - 1Q report Prosper 15.05 - 1Q report 11.08 - 2005 and 2Q'06 report

PGF, Farmacol, Torfarm and Propser vs. WIG 150 140 130 120 110 100 90 80 70 60 50 05-02-22

PGF

Farmacol

Torfarm

Prosper

05-06-20

05-10-16

06-02-11

Torfarm (ACCUMULATE, target price: PLN 49.4) In 2005, Torfarm achieved an impressive 13.2-percent increase in sales, accompanied by growth in its gross sales margin. But the additional costs entailed in the continuation of the MAS scheme drove down its operating profitability. Because ca. PLN 3m of Torfarm's total costs were nonrecurring items, we project that net profit will grow at a two-digit rate in 2006. We raise the price of the company's stock slightly from our last estimate, to PLN 49.4. In light of the appreciation, we downgrade our recommendation from buy to accumulate. Prosper (ACCUMULATE, target price: PLN 17.3) Prosper's 2005 financial figures were better than we had expected, mainly owing to the profit it recorded under its other operating activities. Sales profit was in line with our expectations. Considering that Prosper may recover a portion of its accounts receivable also this year, we raise our profit forecast for 2006. The raised forecast estimates and slight decrease in the riskfree rate had a negligible impact on the valuation increase to PLN 17.3. In light of the stock's appreciation since our last report, we downgrade our recommendation from buy to accumulate.

Krzysztof Radojewski (48 22) 697 47 01 [email protected] www.dibre.com.pl BRE Bank Securities 6 March 2006 does not rule out offering brokerage services to an issuer of securities being the subject of a recommendation. Information concerning a conflict of interest arising in connection with issuing a recommendation (should such a conflict exist) is located on the final page of this report.

Pharmaceutical Wholesalers

BRE Bank Securities

Valuation and Recommendation DCF Valuation After an update of our DCF valuations, the most considerable change emerged in the price estimate for PGF. This was mainly due to the higher-than-expected EBITDA margin ratio achieved through restructuring of Apteki Polskie and Cefarm Łódź. Valuation changes in case of the other companies are not as big. Torfarm's price estimate increased slightly after an update of the risk-free rate. Detailes of the DCF calculations are shown further in the report.

DCF valuation changes current valuation

previous valuation difference

PGF

65.5

57.3

14%

Farmacol

44.2

40.7

9%

Torfarm

50.1

48.9

2%

Prosper

17.5

16.4

4%

Source: BRE Bank Securities

Comparative valuation ratios The table below sets out the valuation ratios for Polish and international wholesale drug companies. As we reported before, Farmacol and PGF are priced at a premium to Prosper and Torfarm, most probably owing to their market positioning and the fact that the latter two wholesalers do not run their own pharmacies, and therefore earn lower margins.

Comparative valuation ratios P/E

EV/EBITDA 2007

2006

EBITDA margin

Price

2006

2007

2006

2007

Farmacol

48.0

15.7

8.6

2.9%

3.0%

Torfarm

44.5

10.2

8.9

9.1

8.1

1.0%

1.0%

PGF

71.5

14.7

13.0

11.7

10.4

2.4%

2.4%

Prosper

15.1

9.4

8.5

7.3

7.0

1.3%

1.2%

15.7

14.2

11.7

10.4

2.9%

3.0%

9.4

8.5

7.3

7.0

1.0%

1.0%

12.4

10.9

9.5

8.4

1.8%

1.8%

POLISH PEERS

Maximum Minimum Median

14.2

9.9

INTERNATIONAL PEERS Alliance Unichem

9.0

14.8

13.3

11.6

10.7

3.6%

3.7%

Andreae Noris

41.6

17.1

16.6

9.4

9.1

1.7%

1.7%

Celesio

75.8

15.0

13.5

10.1

9.3

3.9%

4.0%

OPG Groep

73.3

13.3

12.4

9.6

8.9

5.5%

5.6%

United Drug

3.9

17.2

15.4

12.9

11.7

4.1%

4.6%

251.0

17.3

14.3

12.2

10.5

6.2%

7.6%

Galenica Maximum

17.3

16.6

12.9

11.7

6.2%

7.6%

Minimum

13.3

12.4

9.4

8.9

1.7%

1.7%

Median

16.0

13.9

10.9

9.9

4.0%

4.3%

Source: BRE Bank Securities, Bloomberg

Comparative valuation The peer group against which we measured the estimated price of PGF and Farmacol is comprised of international companies operating in the drug wholesale industry. We assumed a 30% discount when determining the implied price of Torfarm and Prosper by comparison to peers. Note, however, that the discount rate we applied is rather arbitrary. For comparison's sake, we also show the results of valuation at a 20% discount.

6 March 2006

1

Pharmaceutical Wholesalers

BRE Bank Securities Comparative valuation of PGF and Farmacol P/E

EV/EBITDA

2006 16.0

13.9

10.9

9.9

4.0%

4.3%

48.5

48.9

47.2

48.2

49.9

2.9%

3.0%

median for international companies Farmacol (implied price)

2007

2006

EBITDA margin

Price

2007

2006

2007

Farmacol (9M implied price)

52.0

52.4

50.5

51.6

53.4

2.9%

3.0%

PGF (implied price)

69.0

78.2

76.6

59.6

61.7

2.4%

2.4%

PGF (9M implied price)

73.9

83.8

82.1

63.8

66.1

2.4%

2.4%

Source: Bloomberg, BRE Bank Securities

Comparative valuation of Prosper and Torfarm (30% discount) P/E Price

EV/EBITDA

EBITDA margin

2006

2007

2006

2007

2006

2007

median for international companies

16.0

13.9

10.9

9.9

4.0%

4.3%

30% discount

11.2

9.7

7.6

6.9

4.0%

4.3% 1.0%

Torfarm (implied price)

45.4

48.9

48.8

41.8

42.1

1.0%

Torfarm (9M implied price)

48.7

52.5

52.4

44.9

45.2

1.0%

1.0%

Prosper (implied price)

16.3

18.0

17.4

15.4

14.3

1.3%

1.2%

Prosper (9M implied price)

17.5

19.4

18.7

16.6

15.3

1.3%

1.2%

Source: Bloomberg, BRE Bank Securities

Comparative valuation of Prosper and Torfarm (20% discount) P/E Price median for international companies 20% discount

EV/EBITDA

EBITDA margin

2006

2007

2006

2007

2006

2007

16.0

13.9

10.9

9.9

4.0%

4.3%

12.8

11.1

8.7

7.9

4.0%

4.3%

Torfarm (implied price)

52.4

55.9

55.8

48.8

49.1

1.0%

1.0%

Torfarm (9M implied price)

56.3

60.0

59.9

52.4

52.8

1.0%

1.0%

Prosper (implied price)

19.3

20.6

19.9

19.1

17.8

1.3%

1.2%

Prosper (9M implied price)

20.8

22.1

21.3

20.5

19.1

1.3%

1.2%

Source: Bloomberg, BRE Bank Securities

Final valuation and recommendation We calculated the final value of PGF and Farmacol as the arithmetic mean of the values obtained via DCF valuation and by comparison to their international peers, and determined the value of Prosper and Torfarm in the same way, but applying a 30% discount to thir international peers.

Final Valuation and Recommendation DCF Valuation

Comparative Valuation

Target Price

Price

PGF

65.5

73.9

69.7

71.5

Difference Recommendation -2%

Farmacol

44.2

52.0

48.1

48.3

0%

Hold

Torfarm

50.1

48.7

49.4

44.5

11%

Accumulate

Prosper

17.0

17.5

17.3

15.1

14%

Accumulate

Hold

Source: BRE Bank Securities, Bloomberg

6 March 2006

2

Pharmaceutical Wholesalers

BRE Bank Securities

Polish drug market Drug market rose 7.4% in 2005.

The drug market grew 7.4% in 2005 IMS Health estimates that pharmaceutical sales in net producer prices in 2005 amounted to PLN 14.24 bn, rising 7.4% from the preceding year. The hospital segment reported an 11% growth, and the pharmacy segment gained 7.2%. OTC drug sales were below average, at 8%.

Polish Drug Market By Segment in 2005 12% Rx pharmacies

20%

OTC pharmacies

68%

Hospitals

Source: IMS Health

Key market drivers last year included the changes introduced at the beginning of the year in the reimbursable drug listing, growing demand from hospitals after they had improved their financial standing, and promotional campaigns held by pharmacies (such as the "one-penny remedy" campaign).

Good 2006 outlook IMS Heath projects growth rate will remain steady throughout 2006.

IMS Health is expecting the growth dynamics to remain high at 6.2%. The market climate will largely depend on the State's drug reimbursement agenda. The policy seems to be heading toward making drugs more accessible to patients. The ensuing changes on the State's part, and their impact on the market will be twofold: 1. First, new, innovative medications will be included in the reimbursable drug list. The last such a major change took place in December 2003. The change may bring margins down in a short term, but, in a long term, it will be an extra growth impulse for the market. The Health Ministry is also working on making the rules of drug inclusion in the reimbursable list more transparent. 2. Second, old generics will be replaced with new ones. This year, patents for several popular imported drugs will expire, which means that we can expect their generic counterparts to appear on the market. This should also boost drug sales.

Distribution of forces and market consolidation The market is waiting for sector consolidation.

60% of the market is controlled by the four largest players of the drug distribution market. Last year, consolidation processes in the sector slowed down, mainly due to the lack of interesting takeover targets. Acquisition negotiations are protracted. Wholesalers are still working on streamlining their respective sales organisations. It is difficult to estimate the potential benefits coming from a merger of two or more wholesalers, so, the major players are concentrating on consolidation of the retail sector. PGF's example best demonstrates the problems entailed in acquiring unprofitable companies (Cefarm Łódź). Farmacol, on the other hand, is an example of how, in the long term, consolidation of retail can bring added value to a wholesaler. Smaller wholesalers, such as Prosper and Torfarm, which do not run their own pharmacies, earn much lower margins than the key players, and there are no signs of this trend ever changing. Torfarm has modified its growth strategy in the recent months, shifting focus to wholesale consolidation. In our opinion, the consolidation processes will first concentrate in the retail sector. The EuroApteka chain of pharmacies has been put up for sale (59 outlets). Our estimates show that EuroApteka pharmacies generate high sales (an average of PLN 230,000 per month), though at the expense of profitability (aggressive price cuts, attractive outlet locations). Acquisition of the EuroApteka chain involves some risks, as evidenced by PGF's earlier takeover of Apteki Polskie and Cefarm Łódź. Hence the caution with which wholesalers are considering the sale offer.

6 March 2006

3

Pharmaceutical Wholesalers

BRE Bank Securities Polish drug market by segment in 2005

PGF

Four major players control around 60% of the market.

18%

20%

Farm acol

5%

Pros per Torfarm

8%

17% 13%

10%

10%

Apofarm Orfe Hurtap

Source: the wholesalers

Risk Factors Regulations remain a risk factor.

We see a potential threat to the pharmaceutical market in the amendments scheduled to be introduced in the legal regulations, which will directly impact drug distributors and pharmacies. The changes may have twofold consequences: markups on prescription drugs may either be lowered, or made more rigid (currently, a ceiling value is established for markups), with the former carrying more risk. Markups were last lowered in November 2003 (a cut by 1 ppt down to 8.91%). The Price Act provides that official prices and markups are determined taking into account the interests of consumers, manufacturers and distributors. On the other hand, however, the Act contains a provision allowing for markup reduction by at least 10% if the Monetary Policy Council cuts interest rates by more than 30% against the rate prevailing on the date the Act entered into force. In October 2003, the rediscount rate and reference rate were 5.75% and 5.25% respectively. Our calculations show that markups can be lowered to 8% if the interest rates fall below 4.025% and 3.675% respectively. On the other hand, it is difficult to imagine that markups could fall below their current levels. Such a fall would certainly affect the financial standing of the smaller businesses, though its other consequence would be that the weaker players would be ousted from the market, speeding up the consolidation process.

6 March 2006

4

Pharmaceutical Wholesalers

BRE Bank Securities

PGF 2005 figures demonstrate improvement in the pharmacy segment.

2005 financial results PGF's 2005 results are in line with the management's preliminary earning guidance. Compared to our forecast, only the operating profit was PLN 10.9 m higher than we had projected, mainly owing to improved returns on sales. PGF's financial figures show that the highest improvement in profitability was recorded in the pharmacy segment of its operations. This was brought about by the successful restructuring of Apteki Polskie and Cefarm Łódź.

PGF's consolidated 2005 figures (PLN m)

4Q2005

4Q2004

change

2005

2004

change

2006

2005

change

Revenue

1008.7

940.0

7.3%

3891.5

3639.4

6.9%

4117.4

3891.5

5.8%

102.4

99.4

3.0%

375.0

363.4

3.2%

396.7

375.0

5.8%

10.15%

10.58%

-

9.64%

9.99%

-

9.64%

9.64%

-

EBITDA

26.6

10.5

153.4%

91.2

80.7

13.1%

97.1

91.2

6.5%

Margin

2.6%

1.1%

-

2.3%

2.2%

-

2.4%

2.3%

-

Gross profit on sales Gross sales margin

EBIT

26.6

10.5

153.4%

74.4

67.7

9.9%

80.8

74.4

8.5%

Gross profit

24.5

10.1

142.0%

71.1

64.4

10.5%

78.6

71.1

10.5%

Net profit

16.7

6.5

157.7%

52.1

47.7

9.2%

61.4

52.1

18.0%

Source: PGF, BRE Bank Securities

Forecast assumptions We project improvement in retail operations.

In 2005, PGF's retail segment generated PLN 3.1m in operating profit, mainly constituted by the PLN 6m gains on other operating activities (provision reversals). In sales terms, the retail segment recorded a loss of ca. PLN 2.8m. It is evident that, despite the restructuring efforts, that segment is still not very profitable. However, the improvement from the preceding year is a good sign. A breakdown by segments shows the impact of the retail segment on total sales. We estimate that retail still has a considerable growth potential. Increasing sales at pharmacies will be a time-consuming effort, which, however, should result in profitability improvement across the PGF group in the long term. In our forecast, we assume a dynamic sales growth in 2006 and 2007, mainly due to the low base this year. The growth rate should slow down in the subsequent years. We also project an improvement in the retail segment's operating profitability, which, ultimately, should reach 3%, which is twice the profitability of the wholesale segment. We expect that the wholesale segment will retain its current margin (adjusted for one-time items).

Model assumptions by segment (PLN m) TOTAL WHOLESALE change EBIT on wholesale EBIT margin on wholesale TOTAL RETAIL change pharmacy outlets average monthly sales per outlet EBIT on retail EBIT margin on retail TOTAL SALES

2004 3553.2

2005 3780.8

2006F 3994.1

2007F 4201.0

2008F 4398.7

2009F 4607.2

2010F 4821.3 4.65%

-

6.40%

5.64%

5.18%

4.70%

4.74%

73.0

73.0

72.0

75.7

79.3

83.0

86.9

2.06%

1.93%

1.80%

1.80%

1.80%

1.80%

1.80%

341.8

477.2

587.1

675.1

742.7

816.9

890.5

-

39.62%

23.02%

15.00%

10.00%

10.00%

9.00%

300

300

300

300

300

300

130

163

188

206

227

247

-13.6

3.1

8.8

13.5

18.6

24.5

26.7

-4.0%

0.7%

1.5%

2.0%

2.5%

3.0%

3.0%

3639.4

3891.5

4117.4

4342.8

4554.6

4778.7

5008.2

6.93%

5.81%

5.47%

4.88%

4.92%

4.80%

67.7

74.4

80.8

89.2

97.8

107.5

113.6

1.9%

2.0%

2.0%

2.1%

2.2%

2.3%

2.4%

change TOTAL EBIT total EBIT margin Source: PGF, BRE Bank Securities

6 March 2006

5

Pharmaceutical Wholesalers

BRE Bank Securities Growth prospects PGF can grow both organically and through acquisitions.

In our opinion, PGF's growth potential lies in development of the retail segment of its operations. A smoothly functioning retail chain generates steady revenues, enhances financial liquidity, facilitates new product testing, and drives up the retail margin. According to our estimates, the pharmacy segment has a considerable potential to increase sales and reduce costs. This is a time-consuming effort, but one which should bring significant added value to PGF. PGF's management did not rule out further acquisitions, including pharmacy chains. From the point of view of PGF, a wholesaler with country-wide reach and a 23% market share, it seems reasonable to expand its own retail chain, for all the reasons listed above. The acquisition could be financed with proceeds from a property sale-and-lease back deal. The deal could bring in approximately PLN 100m – enough to take over a chain of several dozen pharmacies. Until the acquisition takes place, PGF's retail segment still has potential for organic growth.

DCF Model (PLN m) (PLN m) revenue

2006F 4 117

2007F 4 343

2008F 4 555

2009F 4 779

2010F 5 008

2011F 5 250

2012F 5 506

2013F 5 776

2014F 6 061

2015F 6 363

change

5.8%

5.5%

4.9%

4.9%

4.8%

4.8%

4.9%

4.9%

4.9%

5.0%

EBIT margin EBIT

2.0% 80.8

2.1% 89.2

2.1% 97.8

2.3% 107.5

2.3% 113.6

2.3% 120.1

2.3% 127.0

2.3% 134.3

2.3% 142.2

2.4% 150.6

tax rate

20%

20%

20%

20%

20%

20%

20%

20%

20%

20%

tax

16.2

17.8

19.6

21.5

22.7

24.0

25.4

26.9

28.4

30.1

NOPLAT

64.6

71.4

78.3

86.0

90.9

96.1

101.6

107.5

113.8

120.5

16

16

16

15

15

15

15

15

15

16

11

11

12

12

13

13

14

15

16

16

-11.3

-10.4

-10.5

-10.2

-11.4

-12.0

-12.7

-13.4

-14.1

-13.4

59.1

65.8

71.7

79.0

81.9

85.7

89.8

94.3

99.1

107.1

amortisation and depreciation investments in PP&E and intangible assets change in working capital FCF risk-free rate

4.6%

4.6%

4.6%

4.6%

4.6%

4.6%

4.6%

4.6%

4.6%

5.6%

risk premium

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

cost of capital

9.6%

9.6%

9.6%

9.6%

9.6%

9.6%

9.6%

9.6%

9.6%

10.6%

credit risk premium

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

cost of debt

6.1%

6.1%

6.1%

6.1%

6.1%

6.1%

6.1%

6.1%

6.1%

7.1%

beta

debt / EV

30%

30%

30%

30%

30%

30%

30%

30%

30%

30%

WACC

8.6% 0.92

8.6% 0.85

8.6% 0.78

8.6% 0.72

8.6% 0.66

8.6% 0.61

8.6% 0.56

8.6% 0.52

8.6% 0.48

9.6% 0.44

54.4

55.9

56.1

56.9

54.3

52.4

50.6

48.9

47.4

46.7

discount factor DCF DCF total

523.5

terminal value growth

1.0%

discounted terminal value (PLN m)

551.9

net debt (PLN m)

305.1

enterprise value (PLN m)

770.3

number of shares (millions)

12.6

price (PLN)

61.2

target price (PLN)

65.5

Source: PGF, BRE Bank Securities

6 March 2006

6

Pharmaceutical Wholesalers

BRE Bank Securities

WACC

Model sensitivity to WACC and FCF growth after 2015 FCF growth 1.0% 1.5%

0.0%

0.5%

7.6%

72.3

76.3

81.1

86.6

2.0%

8.6%

65.5

68.7

72.3

76.3

81.1

9.6%

60.2

62.7

65.5

68.7

72.3

10.6%

55.9

57.9

60.2

62.7

65.5

11.6%

52.3

54.0

55.9

57.9

60.2

93.0

Source: BRE Bank Securities

Income Statement (PLN '000) 2003 3568.7

2004 3639.4

2005 3891.5

2006F 4117.4

2007F 4342.8

2008F 4554.6

-3214.3

-3286.2

-3516.5

-3720.6

-3928.7

-4120.3

354.3

353.2

375.0

396.7

414.1

434.3

Gross profit margin on sales

9.93%

9.71%

9.64%

9.64%

9.54%

9.54%

Cost of sales

-165.6

-206.7

-223.4

-224.8

-231.0

-239.8

General administrative expenses

-69.7

-81.3

-87.6

-91.1

-93.9

-96.7

Profit (loss) on sales

119.1

65.2

63.9

80.8

89.2

97.8

3.34%

1.79%

1.64%

1.96%

2.05%

2.15%

Net sales Cost of goods sold Gross sales profit (loss)

Profit margin on sales EBITDA EBITDA margin EBIT EBIT margin

90.1

87.5

91.2

97.1

105.2

113.5

2.52%

2.41%

2.34%

2.36%

2.42%

2.49%

73.4

67.7

74.4

80.8

89.2

97.8

2.06%

1.86%

1.91%

1.96%

2.05%

2.15%

Financial income

36.7

30.2

29.2

23.4

24.6

25.9

Financial expense

-45.3

-33.5

-32.5

-25.6

-25.0

-24.5

Gross profit (loss) Tax

64.7

64.4

71.1

78.6

88.7

99.2

-26.5

-16.6

-17.8

-15.7

-17.7

-19.8

Net profit (loss)

36.8

47.7

52.1

61.4

69.3

77.5

Net profit margin

1.03%

1.31%

1.34%

1.49%

1.60%

1.70%

2003 201.7

2004 378.1

2005 404.3

2006F 398.5

2007F 393.7

2008F 389.7

Balance Sheet (PLN '000) Fixed assets Intangible assets Property, plant and equipment Long-term investments Current assets

5.6

21.2

22.6

22.6

22.6

22.6

178.2

223.8

220.9

215.2

210.4

206.4

13.6

14.4

39.3

39.3

39.3

39.3

1053.7

993.5

1028.5

1107.6

1192.0

1277.4

Inventories

409.4

484.3

502.4

531.5

560.6

588.0

Short-term receivables

593.4

423.9

422.0

446.5

471.0

493.9

Short-term investments

16.0

41.6

65.4

65.4

65.4

65.4

Cash

34.9

43.6

38.6

64.1

94.9

130.0

1.9

1.7

2.6

2.6

2.6

2.6

1257.3

1373.2

1435.3

1508.7

1588.3

1669.7

164.5

230.1

257.5

252.5

297.3

347.1

1047.5

1139.5

1169.9

1200.9

1234.1

1263.9

long-term loans

117.8

294.0

289.5

279.5

269.5

259.5

short-term loans

51.5

56.8

89.7

89.7

89.7

89.7

799.4

718.2

729.9

772.3

815.5

855.3

9.7

14.7

14.7

14.7

14.7

14.7

39.2

33.8

20.8

19.4

19.4

19.4

Short-term prepayments Total assets Equity Liabilities:

trade creditors taxes payable other Accruals Total liabilities and shareholders' equity

6 March 2006

7.3

3.7

7.9

7.9

7.9

7.9

1257.3

1373.2

1435.3

1508.7

1588.3

1669.7

7

Pharmaceutical Wholesalers

BRE Bank Securities Cash Flow Statement (PLN '000) Cash flows from operating activities Net profit (loss)

2003 170.1 36.8

2004 59.8 47.8

2005 75.4 53.3

2006F 89.6 62.9

2007F 76.6 71.0

2008F 84.5 79.4 15.7

Amortisation and depreciation

16.6

12.9

16.8

16.3

16.0

Share of profits (dividends)

12.7

15.9

16.4

16.4

0.0

0.0

116.6

-0.9

-5.8

-11.3

-10.4

-10.5

-5.7

-10.8

-0.7

5.2

0.0

0.0

Inflows

-12.5 47.1

-157.8 61.5

-51.6 84.9

-10.6 0.0

-11.2 0.0

-11.7 0.0

Outflows

Working capital changes Other adjustments Cash flows from investing activities

-59.6

-219.3

-136.5

-10.6

-11.2

-11.7

Purchases of intangible assets and PP&E

21.4

6.7

23.7

0.0

0.0

0.0

Divestments of property and intangible assets

-1.2

0.0

0.0

0.0

0.0

0.0

-28.1

-162.8

-104.8

0.0

0.0

0.0

Financial assets Other capital expenditure Cash flows from financing activities Inflows Net inflows from share issue

0.0

-0.2

-0.3

0.0

0.0

0.0

-145.5 322.3

108.3 393.8

-28.8 348.1

-53.6 0.3

-34.6 0.0

-37.7 0.0

2.0

1.2

0.3

0.3

0.0

0.0

137.6

390.6

347.8

0.0

0.0

0.0

Outflows

-467.8

-285.5

-376.9

-53.9

-34.6

-37.7

Dividends

-12.2

-24.5

-27.1

-20.8

-24.6

-27.7

-159.3

-237.7

-320.9

-10.0

-10.0

-10.0

-15.0

-17.9

-23.0

-23.0

0.0

0.0

4.3

1.9

0.0

0.0

0.0

0.0

Loans

Loan payments Interest Other Net cash flows

12.1

10.4

-4.9

25.4

30.9

35.1

Cash at the beginning of period

22.8

33.2

43.6

38.6

64.1

94.9

Cash at the end of period

34.9

43.6

38.6

64.1

94.9

130.0

6 March 2006

8

Pharmaceutical Wholesalers

BRE Bank Securities

Farmacol Farmacol reported above expectations.

2005 financial results In 2005, Farmacol generated revenues at PLN 3.05bn (+9.7% yoy), recording growth above the overall pharmacy market (+7.4% yoy), and reported a net profit of PLN 68.6m (+18.7% yoy). While revenues were on a par with our expectations, EBIT and net profit exceeded our projections (+PLN 7.4m, +PLN 5.7m respectively). This was thanks to the higher-thanexpected return on sales and higher gains from financing activities.

Farmacol's consolidated 2005 figures (PLN m)

4Q2005

4Q2004

change

2005

2004

change

2006

2005

change

Revenue

813.5

741.6

9.7%

3053.9

2784.3

9.7%

3268.4

3053.9

7.0%

80.6

60.9

32.4%

263.2

238.2

10.5%

277.8

263.2

5.6%

9.91%

8.21%

-

8.62%

8.56%

-

8.50%

8.62%

-

EBITDA

31.6

23.7

33.6%

91.2

78.9

15.6%

94.8

91.2

3.9%

margin

3.9%

3.2%

-

3.0%

2.8%

-

2.9%

3.0%

-

gross profit on sales gross sales margin

EBIT

32.1

20.4

57.8%

80.7

65.1

24.0%

84.3

80.7

4.5%

gross profit

34.8

25.7

35.5%

91.3

77.0

18.5%

91.3

91.3

0.1%

net profit

26.3

20.3

29.8%

68.6

57.8

18.7%

70.4

68.6

2.6%

Source: Farmacol, BRE Bank Securities

End-of-year bonuses Farmacol discloses discounts, bonuses, premiums, and other manufacturer allowances, under marketing services. That is why, when analysing its financial figures by segment, one can be misled to thinking that the company generates most of its profits from operations other than its core business of wholesale and retail sales of drugs. Hence, the profit items should be analysed as aggregate amounts. Additional end-of-year bonuses contributed to an improvement in Farmacol's sales profitability, however, at the expense of inventories, which were relatively higher. Maintenance of that trend in the following years may prove difficult.

Growth prospects We see growth potential in acquisitions.

6 March 2006

Considering the share of one-time items in Farmacol's profit figures, we revised our EBITDA return forecast slightly downward. Taking into account the current development stage of Farmacol, whose retail segment of operations is mostly profitable, we cannot expect much improvement in that field in the future. It seems that PGF has better capacity to cut costs in its retail segment. In our opinion, the key determinant of Farmacol's growth will be acquisitions. It cannot expect to continue growing at the current high rate only through organic growth. Farmacol is currently negotiating with potential acquirees. The management say that if no acquisitions take place by the end of the second quarter 2006, the 2005 profit will be distributed to shareholders.

9

Pharmaceutical Wholesalers

BRE Bank Securities DCF Model (PLN m) (PLN m) revenue

2006F 3 268

2007F 3 463

2008F 3 635

2009F 3 816

2010F 4 006

2011F 4 166

2012F 4 332

2013F 4 505

2014F 4 684

2015F 4 871

change

7.0%

6.0%

5.0%

5.0%

5.0%

4.0%

4.0%

4.0%

4.0%

4.0%

EBIT margin EBIT

2.6% 84.3

2.6% 91.7

2.7% 98.5

2.7% 103.8

2.7% 109.4

2.7% 114.0

2.7% 118.8

2.7% 123.7

2.7% 128.8

2.8% 134.4

tax rate

20%

20%

20%

20%

20%

20%

20%

20%

20%

20%

tax

16.9

18.3

19.7

20.8

21.9

22.8

23.8

24.7

25.8

26.9

NOPLAT

67.5

73.3

78.8

83.1

87.5

91.2

95.0

99.0

103.0

107.5

10

10

11

11

11

11

11

11

12

12

amortisation and depreciation investments in PP&E and intangible assets change in working capital FCF

10

11

11

12

12

13

13

14

14

12

-13.1

-9.9

-9.0

-10.0

-10.8

-9.1

-9.7

-10.2

-10.7

-11.1

54.8

63.3

69.2

72.1

75.2

80.3

83.3

86.4

89.8

96.4

risk-free rate

4.6%

4.6%

4.6%

4.6%

4.6%

4.6%

4.6%

4.6%

4.6%

5.6%

risk premium

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

cost of capital

9.6%

9.6%

9.6%

9.6%

9.6%

9.6%

9.6%

9.6%

9.6%

10.6%

credit risk premium

1.2%

1.2%

1.2%

1.2%

1.2%

1.2%

1.2%

1.2%

1.2%

1.2%

cost of debt

5.8%

5.8%

5.8%

5.8%

5.8%

5.8%

5.8%

5.8%

5.8%

6.8%

beta

debt / EV WACC discount factor DCF DCF total

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

9.6% 0.91

9.6% 0.83

9.6% 0.76

9.6% 0.69

9.6% 0.63

9.6% 0.58

9.6% 0.53

9.6% 0.48

9.6% 0.44

10.6% 0.40

50.0

52.7

52.6

50.0

47.6

46.3

43.8

41.5

39.3

38.2

462.0

terminal value growth

1.0%

discounted terminal value (PLN m)

401.9 -101.5

net debt (PLN m)

965.4

enterprise value (PLN m) number of shares (millions)

23.4

price (PLN)

41.3

target price (PLN)

44.2

Source: Farmacol, BRE Bank Securities

WACC

Model sensitivity to WACC and FCF growth after 2015 FCF growth 1.0% 1.5%

0.0%

0.5%

8.6%

46.5

47.9

49.5

51.3

2.0% 53.3

9.6%

44.2

45.3

46.5

47.9

49.5

10.6%

42.3

43.2

44.2

45.3

46.5

11.6%

40.7

41.5

42.3

43.2

44.2

12.6%

39.4

40.0

40.7

41.5

42.3

Source: BRE Bank Securities

6 March 2006

10

Pharmaceutical Wholesalers

BRE Bank Securities Income Statement (PLN '000) Net sales Cost of goods sold Gross sales profit (loss) gross profit margin on sales Cost of sales General administrative expenses Profit (loss) on sales profit margin on sales EBITDA EBITDA margin EBIT

2003 2718.8

2004 2784.3

2005 3053.9

2006F 3268.4

2007F 3463.2

2008F 3635.4

-2444.1

-2546.1

-2790.7

-2990.6

-3168.8

-3326.4

274.6

238.2

263.2

277.8

294.4

309.0

10.10%

8.56%

8.62%

8.50%

8.50%

8.50%

-173.2

-144.5

-154.6

-153.5

-163.3

-169.6

-36.0

-30.6

-37.3

-40.0

-42.3

-44.4

65.4

63.2

71.2

84.3

88.8

95.0

2.40%

2.27%

2.33%

2.58%

2.56%

2.61%

72.2

78.9

91.2

94.8

102.2

109.1

2.66%

2.83%

2.99%

2.90%

2.95%

3.00%

58.5

65.1

80.7

84.3

91.7

98.5

2.15%

2.34%

2.64%

2.58%

2.65%

2.71%

Financial income

14.3

17.2

13.6

9.0

10.8

12.9

Financial expense

-8.9

-5.2

-3.1

-2.0

-2.0

-2.0

Gross profit (loss)

60.7

77.0

91.3

91.3

100.5

109.5

EBIT margin

tax

-18.3

-14.6

-18.7

-18.3

-20.1

-21.9

Net profit (loss)

39.0

57.8

68.6

70.4

78.4

86.2

net profit margin

1.44%

2.08%

2.25%

2.16%

2.27%

2.37%

2003 185.7

2004 185.3

2005 174.9

2006F 173.4

2007F 173.5

2008F 174.1

Balance Sheet (PLN '000) Fixed assets intangible assets Property, plant and equipment Long-term investments

0.8

0.2

0.2

0.2

0.2

0.2

105.8

114.0

100.0

99.5

99.6

100.2

13.2

9.8

7.5

7.5

7.5

7.5

Current Assets

679.1

776.2

902.3

1007.7

1114.4

1221.6

inventories

274.2

362.4

428.2

462.4

490.1

514.7

Short-term receivables

358.1

338.3

386.4

413.5

438.2

460.0

Short-term investments

11.3

22.9

30.3

30.3

30.3

30.3

Cash

35.5

52.6

57.4

101.5

155.8

216.7

2.1

4.7

10.1

10.1

10.1

10.1 1405.8

Short-term prepayments Total assets

866.9

966.2

1087.2

1191.2

1298.1

Equity

258.5

317.6

387.2

443.9

508.2

578.7

Liabilities:

547.4

584.2

662.5

707.1

747.7

783.6

0.0

0.0

0.0

0.0

0.0

0.0

long-term loans short-term loans trade creditors taxes payable

18.9

19.6

0.0

0.0

0.0

0.0

510.6

539.4

635.8

680.5

721.1

756.9

6.9

6.6

0.0

0.0

0.0

0.0

other

16.4

9.4

24.4

24.4

24.4

24.4

Accruals

27.4

27.8

5.0

5.0

5.0

5.0

866.9

966.2

1087.2

1191.2

1298.1

1405.8

Total liabilities and shareholders' equity

6 March 2006

11

Pharmaceutical Wholesalers

BRE Bank Securities

Cash Flow Statement (PLN '000) Cash flows from operating activities

2003

2004

2005

2006F

2007F

2008F

70.0

61.4

-12.0

67.8

79.0

87.7

Net profit (loss)

40.1

57.8

68.6

70.4

78.4

86.2

Amortisation and depreciation

13.6

13.8

10.5

10.5

10.5

10.5

Share of profits (dividends)

2.4

-0.2

-1.3

0.0

0.0

0.0

Working capital changes

16.2

-10.2

-91.1

-13.1

-9.9

-9.0

Other adjustments

-0.2

0.0

-0.5

1.0

0.0

0.0

-42.9

-14.1

3.2

-10.0

-10.6

-11.1

Cash flows from investing activities Inflows

12.5

32.5

48.0

0.0

0.0

0.0

Outflows

-55.4

0.0

0.0

0.0

0.0

0.0

Purchases of intangible assets and PP&E

-43.8

-21.6

-29.3

0.0

0.0

0.0

6.4

3.5

24.7

0.0

0.0

0.0

-43.8

-21.6

-29.3

0.0

0.0

0.0

0.0

-18.7

-2.2

0.0

0.0

0.0

-13.9

-19.7

13.2

-13.7

-14.1

-15.7

Divestments of property and intangible assets Financial assets Other capital expenditure Cash flows from financing activities Inflows

49.3

6.3

28.3

0.0

0.0

0.0

Net inflows from share issue

15.6

0.0

0.0

0.0

0.0

0.0

Loans Outflows Dividends Loan payments Interest

33.2

4.8

27.7

0.0

0.0

0.0

-63.2

-26.0

-15.0

-13.7

-14.1

-15.7 -15.7

0.0

-0.6

0.0

-13.7

-14.1

-58.1

-21.4

-11.8

0.0

0.0

0.0

-3.6

-2.0

0.0

0.0

0.0

0.0

other

-0.1

-1.0

-1.3

0.0

0.0

0.0

Net cash flows

13.2

27.6

4.5

44.1

54.3

60.9

Cash at the beginning of period

22.3

25.0

53.0

57.4

101.5

155.8

Cash at the end of period

35.5

52.6

57.4

101.5

155.8

216.7

6 March 2006

12

Pharmaceutical Wholesalers

BRE Bank Securities

Prosper A positive surprise thanks to provision reversals.

2005 financial results Prosper reported its 2005 sales at PLN 1.71bn (+4.9% yoy) and net profit at PLN 10.9m (vs. a PLN 31.9m loss in 2004). Operating profit and net profit were better than we had forecasted (+PLN 4.4m, +PLN 1.6m respectively), mainly owing to the gains recognised under other operating activities (+PLN 4.8m). We think that the good results were owed to the fact that some of the receivables written off last year in accordance with stringent ageing rules, were then recovered. Other financial figures were in line with our expectations. Signs of the company's good standing include its gross sales margin (revised), which declined only slightly, and cost control.

Prosper's consolidated 2005 figures (PLN m)

4Q2005

4Q2004

change

2005

2004

change

2006

2005

change

Revenue

444.0

417.2

6.4%

1714.6

1635.2

4.9%

1820.1

1714.6

6.2%

Gross profit on sales

24.2

30.6

-20.9%

108.6

112.4

-3.4%

117.2

108.6

7.9%

Gross sales margin

5.5%

7.3%

-

6.3%

6.9%

-

6.4%

6.3%

-

9.5

4.7

102.3%

25.5

-25.7

-

23.0

25.5

-9.8%

EBITDA Margin

2.1%

1.1%

-

1.5%

-1.6%

-

1.3%

1.5%

-

EBIT

7.9

2.2

254.7%

19.6

-34.6

-

17.1

19.6

-12.7%

Gross profit

7.2

2.4

198.6%

15.9

-38.7

-

13.6

15.9

-14.3%

Net profit

4.3

2.0

112.3%

10.9

-31.9

-

11.0

10.9

1.2%

Source: Prosper, BRE Bank Securities

Forecast Update Prosper's reported figures were better than our expectations, owing to non-recurring items (recovery of some of the accounts receivable against which provisions were previously recognised). Prosper may recover a further portion of its receivables in 2006. Taking that into account, we slightly raise our 2006 net profit forecast for Prosper to PLN 11m (from PLN 10.5m). The forecast update does not impact the valuation.

6 March 2006

13

Pharmaceutical Wholesalers

BRE Bank Securities DCF Model (PLN m) (PLN m)

2006F

2007F

2008F

2009F

2010F

2011F

2012F

2013F

2014F

2015F

revenue

1 820

1 929

2 026

2 127

2 212

2 301

2 393

2 488

2 588

2 691

change

6.2%

6.0%

5.0%

5.0%

4.0%

4.0%

4.0%

4.0%

4.0%

4.0%

0.94% 17.1

0.95% 18.3

0.95% 19.3

0.95% 20.2

0.95% 21.0

0.95% 21.9

0.95% 22.7

0.95% 23.6

0.95% 24.6

0.95% 25.6

19%

19%

19%

19%

19%

19%

19%

19%

19%

19%

3.3

3.5

3.7

3.8

4.0

4.2

4.3

4.5

4.7

4.9

13.9

14.9

15.6

16.4

17.0

17.7

18.4

19.2

19.9

20.7

amortisation and depreciation

5.9

5.8

5.6

5.5

5.4

5.3

5.2

5.1

5.0

4.8

investments in PP&E and intangible assets

4.1

4.2

4.2

4.3

4.4

4.5

4.6

4.7

4.8

4.8

-7.6

-5.2

-5.2

-4.6

-4.8

-4.0

-4.2

-4.3

-4.5

-4.7

8.1

11.3

11.8

13.0

13.3

14.5

14.9

15.2

15.6

16.0

EBIT margin EBIT tax rate tax NOPLAT

change in working capital FCF risk-free rate

4.6%

4.6%

4.6%

4.6%

4.6%

4.6%

4.6%

4.6%

4.6%

5.6%

risk premium

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0 10.6%

beta cost of equity

9.6%

9.6%

9.6%

9.6%

9.6%

9.6%

9.6%

9.6%

9.6%

credit risk premium

1.2%

1.2%

1.2%

1.2%

1.2%

1.2%

1.2%

1.2%

1.2%

1.2%

cost of debt

5.8%

5.8%

5.8%

5.8%

5.8%

5.8%

5.8%

5.8%

5.8%

6.8%

debt / EV

35%

31%

31%

31%

31%

31%

31%

31%

31%

31%

WACC

7.9% 0.93

8.1% 0.86

8.1% 0.79

8.1% 0.73

8.1% 0.68

8.1% 0.63

8.1% 0.58

8.1% 0.54

8.1% 0.50

9.0% 0.46

7.5

9.7

9.4

9.6

9.0

9.1

8.6

8.2

7.8

7.3

discount factor DCF DCF total

86.1

discounted terminal value (PLN m)

92.0

terminal value growth net debt (PLN m)

1.0% 69.0

enterprise value (PLN m)

109.1 6.9

number of shares (millions) price (PLN)

15.9

target price (PLN)

17.0

Source: Prosper, BRE Bank Securities

WACC

Model sensitivity to WACC and FCF growth after 2015 0.0%

FCF growth 0.5% 1.0% 1.5%

2.0%

8.0%

17.0

18.1

19.2

20.6

22.2

8.5%

16.1

17.0

18.1

19.2

20.6

9.0%

15.3

16.1

17.0

18.1

19.2

9.5%

14.6

15.3

16.1

17.0

18.1

10.0%

13.9

14.6

15.3

16.1

17.0

Source: BRE Bank Securities

6 March 2006

14

Pharmaceutical Wholesalers

BRE Bank Securities Consolidated Income Statement (PLN '000) Net sales

2003 1589.3

2004 1635.3

2005F 1714.6

2006F 1820.1

2007F 1929.3

2008F 2025.7

Cost of goods sold

1470.5

1522.8

1606.0

1702.9

1805.0

1895.3

Gross sales profit (loss)

118.8

112.5

108.6

117.2

124.2

130.5

gross profit margin on sales

6.4%

7.5%

6.9%

6.3%

6.4%

6.4%

Cost of sales

70.3

69.4

69.1

73.4

77.8

81.6

General administrative expenses

25.0

26.4

24.7

26.2

27.8

29.2

Profit (loss) on sales

23.5

16.8

14.8

17.7

18.7

19.7

profit margin on sales

1.5%

1.0%

0.9%

1.0%

1.0%

1.0%

EBITDA EBITDA margin EBIT EBIT margin

24.3

-29.7

25.5

23.0

24.1

24.9

1.5%

-1.8%

1.5%

1.3%

1.2%

1.2%

15.7

-34.6

19.6

17.1

18.3

19.3

1.0%

-2.1%

1.1%

0.9%

1.0%

1.0%

Financial income

5.0

6.9

2.5

1.7

1.7

1.7

Financial expense

10.2

7.9

6.2

5.2

4.9

4.6

-3.0

-3.0

0.0

0.0

0.0

0.0

Gross profit (loss)

7.5

-38.7

15.9

13.6

15.1

16.3

tax

3.9

-6.8

4.9

2.6

2.9

3.1

Minority profits (losses)

0.2

0.0

0.2

0.0

0.0

0.0

Goodwill on consolidation

Net profit (loss)

3.4

-31.9

10.9

11.0

12.3

13.2

net profit margin

0.21%

-1.95%

0.63%

0.61%

0.64%

0.65%

Consolidated Balance Sheet (PLN '000) 2003

2004

2005F

2006F

2007F

2008F

ASSETS Fixed assets

482.3 43.8

457.0 64.4

492.7 64.5

513.7 62.7

541.0 61.1

567.0 59.7

Current Assets

438.5

392.6

428.2

451.0

479.9

507.3

inventories

116.0

140.9

156.0

157.5

167.0

175.3

Short-term receivables

308.0

240.0

258.4

268.2

284.0

297.9

Short-term investments

12.1

8.4

10.7

22.2

25.9

30.9

Short-term prepayments

2.5

3.3

3.1

3.1

3.1

3.1

LIABILITIES AND SHAREHOLDERS' EQUITY

482.3

457.0

492.7

513.7

541.0

567.0

Equity

110.6

85.1

95.7

106.7

119.0

132.2

Liabilities and reserves:

371.7

371.9

397.0

407.0

422.1

434.8

Reserves

1.0

0.0

0.0

0.0

0.0

0.0

Long-term liabilities

12.2

17.3

11.5

11.5

11.5

11.5

Short-term liabilities

357.1

354.6

385.5

395.5

410.6

423.3

1.4

0.0

0.0

0.0

0.0

0.0

Accruals

6 March 2006

15

Pharmaceutical Wholesalers

BRE Bank Securities Consolidated Cash Flow Statement (PLN '000) Cash flows from operating activities Net profit (loss) Total adjustments Amortisation and depreciation

2003

2004

2005F

2006F

2007F

2008F

24.2

26.2

18.3

20.3

12.9

14.3 13.2

3.4

-31.9

10.9

11.0

12.3

20.8

58.1

7.4

9.3

0.6

1.1

8.6

4.9

5.8

5.9

5.8

5.6

Increase/decrease in provisions

-0.5

0.1

1.1

0.0

0.0

0.0

Increase/decrease in inventories

-1.8

-24.9

-15.1

-1.5

-9.5

-8.3

Increase/decrease in receivables

-16.4

73.4

-16.4

-15.2

-15.8

-13.9

25.8

-0.6

26.6

15.0

20.1

17.7

0.9

-8.2

3.3

0.0

0.0

0.0

-2.8

-16.0

-8.1

-4.1

-4.2

-4.2

Increase/decrease in short-term receivables excl. loans Increase/decrease in prepayments and accruals Cash flows from investing activities Inflows Outflows Cash flows from financing activities Inflows

4.1

7.9

10.8

0.0

0.0

0.0

-6.9

-23.9

-18.9

-4.1

-4.2

-4.2

-20.2

-11.4

-7.9

-5.0

-5.0

-5.0

2.4

6.6

9.6

0.0

0.0

0.0

-22.6

-18.1

-17.5

-5.0

-5.0

-5.0

Total net cash flows

1.2

-1.2

2.3

11.3

3.7

5.1

Cash at the beginning of period

8.7

9.6

8.4

10.9

22.2

25.9

Cash at the end of period

9.9

8.4

10.9

22.2

25.9

30.9

Outflows

6 March 2006

16

Pharmaceutical Wholesalers

BRE Bank Securities

Torfarm DCF Model (PLN m) (PLN m)

2006F

2007F

2008F

2009F

2010F

2011F

2012F

2013F

2014F

2015F

revenue

1 554

1 694

1 813

1 921

1 998

2 078

2 161

2 248

2 338

2 431

change

10.0%

9.0%

7.0%

6.0%

4.0%

4.0%

4.0%

4.0%

4.0%

4.0%

EBIT

0.8% 11.8

0.8% 14.0

0.9% 15.7

0.9% 17.3

0.9% 18.3

0.9% 19.4

0.9% 20.5

1.0% 21.7

1.0% 22.9

1.0% 24.2

tax rate

19%

19%

19%

19%

19%

19%

19%

19%

19%

19%

EBIT margin

tax

2.2

2.7

3.0

3.3

3.5

3.7

3.9

4.1

4.3

4.6

NOPLAT

9.5

11.3

12.7

14.0

14.9

15.7

16.6

17.6

18.5

19.6

amortisation and depreciation

3.7

3.3

3.5

3.7

3.4

2.9

2.9

3.0

2.6

3.3

investments in PP&E and intangible assets

3.8

3.8

3.9

4.0

4.1

4.1

4.2

4.3

4.4

3.3

-4.0

-3.5

-3.4

-3.5

-3.1

-3.5

-3.7

-3.9

-1.9

-1.9

5.5

7.3

8.9

10.3

11.1

11.0

11.6

12.3

14.9

17.6

risk-free rate

4.6%

4.6%

4.6%

4.6%

4.6%

4.6%

4.6%

4.6%

4.6%

5.6%

risk premium

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

cost of equity

9.6%

9.6%

9.6%

9.6%

9.6%

9.6%

9.6%

9.6%

9.6%

10.6%

credit risk premium

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

cost of debt

6.1%

6.1%

6.1%

6.1%

6.1%

6.1%

6.1%

6.1%

6.1%

7.1%

debt / EV

10%

10%

10%

10%

10%

10%

10%

10%

10%

10%

WACC

9.1% 0.92

9.1% 0.84

9.1% 0.77

9.1% 0.70

9.1% 0.65

9.1% 0.59

9.1% 0.54

9.1% 0.50

9.1% 0.46

10.1% 0.41

5.0

6.1

6.9

7.2

7.2

6.5

6.3

6.1

6.8

7.3

change in working capital FCF

beta

discount factor DCF DCF total

65.5

terminal value growth

1.0%

discounted terminal value (PLN m)

80.8 20.0

net debt (PLN m)

126.3

enterprise value (PLN m)

2.7

number of shares (millions) price (PLN)

46.7

Target Price (9M) (PLN)

50.1

Source: Prosper, BRE Bank Securities

WACC

Model sensitivity to WACC and FCF growth after 2015 0.0%

FCF growth 0.5% 1.0% 1.5%

2.0%

9.1%

50.1

52.1

54.4

57.0

59.9

9.6%

48.3

50.1

52.1

54.4

57.0

10.1%

46.6

48.3

50.1

52.1

54.4

10.6%

45.1

46.6

48.3

50.1

52.1

11.1%

43.8

45.1

46.6

48.3

50.1

Source: BRE Bank Securities

6 March 2006

17

Pharmaceutical Wholesalers

BRE Bank Securities Income Statement (PLN '000) 2004 1248.7

2005F 1412.9

2006F 1554.2

2007F 1694.1

2008F 1812.7

-1174.5

-1326.6

-1459.2

-1590.5

-1701.9

74.2

86.4

95.0

103.6

110.8

5.94%

6.11%

6.11%

6.11%

6.11%

Cost of sales

-17.5

-17.8

-18.2

-18.5

-18.9

General administrative expenses

-49.0

-62.5

-66.8

-72.8

-77.9

Net sales Cost of goods sold Gross sales profit (loss) Gross profit margin on sales

Profit (loss) on sales profit margin on sales EBITDA EBITDA margin EBIT

7.6

6.1

10.1

12.3

14.0

0.61%

0.43%

0.65%

0.72%

0.78%

9.3

11.5

15.5

17.3

19.3

0.74%

0.81%

1.00%

1.02%

1.06%

6.8

7.7

11.8

14.0

15.7

0.54%

0.55%

0.76%

0.82%

0.87%

Financial income

13.3

12.0

5.6

5.6

5.6

Financial expense

-8.3

-7.7

-2.8

-2.8

-2.8

Gross profit (loss)

11.9

12.0

14.5

16.7

18.5

Tax

-2.7

-2.2

-2.8

-3.2

-3.5

Net profit (loss)

9.2

9.8

11.8

13.5

15.0

Net profit margin

0.73%

0.69%

0.76%

0.80%

0.83%

2004 35.2

2005F 41.8

2006F 41.9

2007F 42.0

2008F 41.8

0.2

0.6

0.1

0.1

0.0

Property, plant and equipment

22.5

32.6

33.1

33.3

33.2

Long-term investments

11.2

8.4

8.4

8.4

8.4

281.8

329.4

366.8

407.5

445.8

EBIT margin

Balance Sheet (PLN '000) Fixed assets Intangible assets

Current Assets Inventories

122.1

142.0

157.2

171.6

183.7

Short-term receivables

133.9

165.3

181.5

197.9

212.4

Short-term investments

21.0

20.3

14.7

14.7

14.7

Cash

4.9

5.6

13.4

23.2

35.0

Short-term prepayments

1.8

1.8

1.8

1.8

1.8

318.8

371.2

410.5

451.3

489.3

Total assets Equity Liabilities:

67.4

74.5

86.3

99.8

114.8

250.0

295.5

323.0

350.2

373.3

long-term loans

15.7

0.0

0.0

0.0

0.0

short-term loans

8.2

17.7

17.7

17.7

17.7

trade creditors

222.5

275.1

302.6

329.8

352.9

taxes payable

0.0

0.0

0.0

0.0

0.0

other

0.6

0.0

0.0

0.0

0.0

Accruals Total liabilities and shareholders' equity

6 March 2006

1.3

1.2

1.2

1.2

1.2

318.8

371.2

410.5

451.3

489.3

18

Pharmaceutical Wholesalers

BRE Bank Securities Cash Flow Statement (PLN '000) Cash flows from operating activities

2004

2005F

2006F

2007F

2008F

0.0

13.2

11.5

13.4

15.1

Net profit (loss)

9.2

9.8

11.8

13.5

15.0

Amortisation and depreciation

2.5

3.8

3.7

3.3

3.5

-3.0

-4.0

0.0

0.0

0.0

-11.7

-0.3

-4.0

-3.5

-3.4

0.0

1.5

0.0

0.0

0.0

-13.3

-4.2

-3.8

-3.5

-3.3

Share of profits (dividends) Working capital changes Other adjustments Cash flows from investing activities Inflows

36.6

40.5

0.0

0.0

0.0

-49.9

-44.7

-3.8

-3.5

-3.3

Purchases of intangible assets and PP&E

-3.4

-4.6

0.0

0.0

0.0

Divestments of property and intangible assets

36.6

0.1

0.0

0.0

0.0

Outflows

Financial assets

-3.4

-4.6

0.0

0.0

0.0

-31.8

-25.6

-1.5

-1.5

-1.5

12.6

-8.3

0.0

0.0

0.0

Inflows

32.6

37.5

0.0

0.0

0.0

Net inflows from share issue

31.1

0.0

0.0

0.0

0.0 0.0

Other capital expenditure Cash flows from financing activities

Loans

0.0

0.0

0.0

0.0

-20.0

-45.8

0.0

0.0

0.0

0.0

-2.7

0.0

0.0

0.0

Loan payments

-3.7

-39.8

0.0

0.0

0.0

Interest

-3.2

-3.3

0.0

0.0

0.0

Outflows Dividends

other

0.0

-0.1

0.0

0.0

0.0

-0.7

0.7

7.7

9.9

11.8

Cash at the beginning of period

5.6

4.9

5.6

13.4

23.2

Cash at the end of period

4.9

5.6

13.4

23.2

35.0

Net cash flows

6 March 2006

19

Pharmaceutical Wholesalers

BRE Bank Securities Institutional Sales and Research Department:

Sales and Trading:

Tomasz Mazurczak tel. (+48 22) 697 47 35 Director [email protected] Strategic Analysis

Grzegorz Domagała tel. (+48 22) 697 48 03 Deputy Director [email protected]

Salesmen: Analysts: Michał Marczak tel. (+48 22) 697 47 38 Deputy Director [email protected] Telco, mining, metals, media, hotels Marta Jeżewska tel. (+48 22) 697 47 37 [email protected] Banks Andrzej Lis tel. (+48 22) 697 47 42 [email protected] IT Krzysztof Radojewski tel. (+48 22) 697 47 01 [email protected] Pharmaceuticals, construction, utilities Jacek Borawski tel. (+48 22) 697 48 88 [email protected] Technical analysis Przemysław Smoliński tel. (+48 22) 697 49 64 [email protected] Technical analysis

6 March 2006

Michał Skowroński tel. (+48 22) 697 49 68 [email protected] Marzena Łempicka tel. (+48 22) 697 48 95 [email protected]

Traders: Emil Onyszczuk tel. (+48 22) 697 49 63 [email protected] Grzegorz Stępien tel. (+48 22) 697 48 62 [email protected] Joanna Niedziela tel. (+48 22) 697 48 54 [email protected] Aleksander Mazur tel. (+48 22) 697 48 69 [email protected] Michał Świtakowski tel. (+48 22) 697 48 16 [email protected] Dom Inwestycyjny BRE Banku S.A. ul. Wspólna 47/49 00-950 Warszawa www.dibre.com.pl

20

BRE Bank Securities

Pharmaceutical Wholesalers

List of abbreviations and ratios contained in the report: EV – net debt + market value EBIT – Earnings Before Interest and Taxes EBITDA – EBIT + Depreciation and Amortisation P/CE – price to earnings with amortisation MC/S – market capitalisation to sales EBIT/EV – operating profit to economic value P/E – (Price/Earnings) – price divided by annual net profit per share ROE – (Return on Equity) – annual net profit divided by average equity P/BV – (Price/Book Value) – price divided by book value per share Net debt – credits + debt papers + interest bearing loans – cash and cash equivalents EBITDA margin – EBITDA/Sales Recommendations of BRE Bank Securities A recommendation is valid for a period of 6-9 months, unless a subsequent recommendation is issued within this period. Expected returns from individual recommendations are as follows: BUY – we expect that the rate of return from an investment will be at least 15% ACCUMULATE – we expect that the rate of return from an investment will range from 5% to 15% HOLD – we expect that the rate of return from an investment will range from –5% to +5% REDUCE – we expect that the rate of return from an investment will range from -5% to -15% SELL – we expect that an investment will bear a loss greater than 15% Recommendations are updated at least once every nine months. This document has been created and published by BRE Bank Securities S.A. The present report expresses the knowledge as well as opinions of the authors on day the report was prepared. The opinions and estimates contained herein constitute our best judgement at this date and time, and are subject to change without notice. The present report was prepared observing principles of methodological correctness and objectivity, on the basis of sources available to the public, which BRE Bank Securities S.A. considers reliable, including information published by issuers, shares of which are subject to recommendations. However, BRE Bank Securities S.A., in no case, guarantees the accuracy and completeness of the report, in particular should sources on the basis of which the report was prepared prove to be inaccurate, incomplete or not fully consistent with the facts. This report is for information purposes, it is not intended to be and should not be construed as a recommendation, offer or solicitation to acquire, or dispose of, any of the securities mentioned in this report. BRE Bank Securities S.A. bears no responsibility for investment decisions taken on the basis of the present report or for any damages incurred as a result of investment decisions taken on the basis of the present report. Recommendations are based on essential data from the entire history of a company being the subject of a recommendation, with particular emphasis on the period since the previous recommendation. Investing in shares is connected with a number of risks including, but not limited to, the macroeconomic situation of the country, changes in legal regulations as well as changes on commodity markets. Full elimination of these risks is virtually impossible. It is possible that BRE Bank Securities S.A. renders, will render or in the past has rendered services for companies and other entities mentioned in the present report. The present report was not transferred to the issuers prior to its publication. BRE Bank Securities S.A. serves as an animator in relation to the shares of Torfarm. BRE Bank Securities S.A. receives remuneration from Torfarm for services rendered. BRE Bank Securities S.A., its shareholders and employees may hold long or short positions in the issuer's shares or other financial instruments related to the issuer's shares. BRE Bank Securities S.A., its affiliates and/or clients may conduct or may have conducted transactions for their own account or for account of another with respect to the financial instruments mentioned in this report or related investments before the recipient has received this report. Copying or publishing the present report, in full or in part, or disseminating in any way information contained in the present report requires the prior written agreement of BRE Bank Securities S.A. Recommendations are addressed to all Clients of BRE Bank Securities S.A. This report is not for distribution to third parties. Individuals who did not participate in the preparation of this recommendation, but had or could have had access to the recommendation prior to its publication, are employees of BRE Bank Securities S.A. authorised to access the premises in which recommendations are prepared, other than the analysts mentioned as the authors of the present recommendation. Strong and weak points of valuation methods used in recommendations: DCF – acknowledged as the most methodologically correct method of valuation; it is based in discounting financial flows generated by a company; its weak point is the significant susceptibility to a change of forecast assumptions in the model. Comparative – based on a comparison of valuation multipliers of companies from a given sector; simple in construction, reflects the current state of the market; weak points include substantial variability (fluctuations together with market indices) as well as difficulty in the selection of the group of comparable companies.

6 March 2006

21

Pharmaceutical Wholesalers

BRE Bank Securities Previous recommendations issued for PGF Recommendation Date issued Price on day of recommendation WIG on day of recommendation

Hold 2005-05-16 51.90

Hold 2005-09-06 55.00

25662.59

31706.86

Previous recommendations issued for Farmacol Recommendation Date issued Price on day of recommendation WIG on day of recommendation

Accumulate 2005-09-06 35.20 31706.86

Previous recommendations issued for Prosper Recommendation Date issued Price on day of recommendation WIG on day of recommendation

Buy 2006-01-25 12.00 38906.01

Previous recommendations issued for Torfarm Recommendation Date issued Price on day of recommendation WIG on day of recommendation

6 March 2006

Accumulate 2005-09-06 39.40

Buy 2006-02-16 39.10

31706.86

38109.01

22