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Actavis Performance Falls Short of Expectations Actavis’s 4Q results failed to live up to Research’s expectations. Total after-tax profit amoun- ted to EUR 14.6 million (m), while we had forecast EUR 17.1 m. The deviation is explained by a considerably lower EBITDA margin and write-offs resulting from impairment tests. Actavis’s total 4Q income was in line with predictions. Total income from operations was EUR 111.9 m (our forecast was EUR 111 m) with organic YoY growth 4.8%. The income break- down, however, did not accord with our expectations and to some degree explains the lower valuation but discount rate, currency exch. rate contribution margin. Third-party sales (Actavis products marketed under other trademarks) were lower than anticipated, while own-brand sales increased more than predicted. Total third-party sales in Q4 were EUR 33.4 m, as compared with EUR 33.8 m in Q3. The practically unchanged sales figures for the two quarters come as a surprise in view of the fact that, when Q3 results were announced, management maintained that orders had been late in the 3rd quarter and as a result third-party sales could be expected to increase in the 4th quarter. When the annual results were announced, however, it was stated that growth on the German market had slowed and price pressure from public authorities had increased. This had resulted, for instance, in inventory reductions by Actavis’s customers and lower sales than anticipated. It was also mentioned that sales in Q1 of this year would likely be less than previously expected for the same reasons. A sales breakdown of leading individual products to third parties shows that the antidepressant Citalopram remains the top seller, although its sales fell substantially in Q4. Citalopram has long been Actavis’s best-selling pharmaceutical, but other products, including the cardiovascular drug Ramipril and the antidepressant Paroxetine, now look likely to take over the lead. Landsbanki’s holding in Actavis is 1.7% Guðmunda Ósk Kristjánsd.+354 410-7384 The text is a translation of the Icelandic version of Landsbanki Research publication, 12M Price/earnings ratio dated 22 February 2005. No revisions have Actavis launched a total of nine new pharmaceuticals in 2004, one of them, Quinapril HCT launched on the market this year, (tablets containing the diuretic hydrochlorothiadizine), in Q4. Figures are not given for sales Actavis was first to market with five of Quinapril HCT in the quarter. Of the nine pharmaceuticals it launched on the market this year, Actavis was first to market with five of them, which must be regarded as a good showing. Organic growth in third-party sales was negative by 5.6% in Q4 (as compared to Q4 of 2003) but for the year as a whole it was 24%. Highest selling third-party products in 2004, MEUR Own-brand sales in Bulgaria should grow in 2005 Organic growth in own-brand sales was limited, or 3%, in Q4, while for the year as a whole organic growth of own brand sales was 0.2%. Own-brand sales appear to be picking up after being practically paralysed for the first nine months of 2004, in part due to an 18-month delay by the Bulgarian authorities in producing a new Reimbursement List. The list has now been published and is expected to boost the company’s sales in Bulgaria this year. Own-brand and third-party sales in 2004, MEUR EBITDA falls considerably short of expectations EBITDA for the quarter was EUR 26.1 m, or the equivalent of 23.4% of turnover, whereas our forecast was for EUR 30.0 m and an EBITDA margin of 27%. Of the individual expense items, sales and marketing expenses are the biggest surprise (18% of turnover) and considerably higher than for the previous year. This item goes a long way towards explaining why EBITDA turnover) and considerably higher fell so far short of expectations, since at the same time both the cost of goods sold (COGS) and overhead and management cost as a percentage of turnover have been dropping. When the company’s results were presented, the Q4 increase in sales and marketing cost was attributed to increased marketing efforts in Turkey and Russia. Actavis’s management expect that this year individual expense items will comprise a similar percentage of turnover as they did in 2004. We can thus expect sales and marketing costs somewhat lower than those of Q4 At the end of the year, increased Another explanation for the disappointing EBITDA margin is the increased discounts discounts were introduced in Turkey introduced in Turkey at the instigation of the national authorities. This resulted in a EUR 2 m at the instigation of the national drop in the company’s EBITDA for the quarter. In addition, inventory in Denmark had to be written down by around EUR 1 m, due to stiff price competition there. The Danish subsidiary has returned a At the presentation meeting it was pointed out that due to this competition, pharmaceutical prices in Denmark are among the lowest in the world. It was also pointed out that the Danish contributes only a small portion of subsidiary has returned a loss for the past two years, but it contributes only a small portion of the group’s income (3.6% of third-party sales). Quarterly income from operations and EBITDA margin, MEUR All depreciation figures were higher Generally speaking, all depreciation items (developmental cost, fixed assets and impairment test) were higher than we had anticipated. The biggest factor here, however, is a EUR 3 m impairment expense for goodwill resulting from the acquisition of the subsidiary Actavis Nordic in Denmark. Actavis has had impairment tests carried out on all goodwill in the firm´s consolidation accounts, as provided for under new financial reporting standards. The outcome was that only the Danish company’s goodwill appeared to be under book value. Financial items were minor for the quarter (EUR -0.5 m), as exchange rate gains amounted to EUR 6.8 m. By comparison, the exchange rate loss was EUR 3.4 m for the first nine months of 2004. Exchange rate differentials developed primarily in Iceland, Turkey and Serbia. The effective income tax rate for the Pre-tax profit in Q4 was EUR 15.4 m, while after-tax profit was EUR 16.4 m. The positive income tax contribution of EUR 1.0 m is the result of favourable tax legislation in connection although it fluctuated substantially with investment in Malta. The effective income tax rate for the year as a whole was 14.6%, although it fluctuated substantially during the year After allowing for minority interest, Actavis’s net Q4 profit was EUR 14.6 m. Working capital from operations amounted to EUR 14.7 m in Q4 and net cash from operations was EUR 22 m. Cash and cash equivalents dropped by EUR 7.4 m during 2004, primarily due to increased receivables and the extension of settlement deadlines in Turkey. Fako sold its receivables before Actavis took over the company's operations and thus cash had to be tied up in operations. The resulting increase amounted to EUR 34 m in 2004, which means that if this is disregarded cash and cash equivalents would have increased by EUR 27 m during the year. In addition, Fako extended its deadline for settlement of sales to comply with the terms generally practiced on the market. 2005 – a year of slower growth, continuing high investment At the end of 2004, registrations for 24 pharmaceuticals were in progress and an additional 45 under development for the European and US markets. Around 30 pharmaceuticals were also being developed for markets where Actavis sells its own-brand products outside the EU. The company has concluded two applications for marketing authorisations for the US market and the first income from this market is expected in 2006. As far as third-party sales are concerned, in 2005 Actavis intends to place 14 new products on the market, with the most important products to be launched in the 2nd and 3rd quarters. Actavis’s seasonal fluctuations will therefore not follow their “traditional” pattern, since we products on the market this year, can expect the highest income in Q2 and Q3. According to company management, good growth of third-party sales is expected in 2005 but considerably less than in 2004 (24%). launched in the 2nd and 3rd quarters Since there was little growth in own-brand sales in 2004, we can expect the main markets to pick up this year and show acceptable growth. Investment will continue to be high in 2005. Last year total investment in fixed assets and capitalised development cost amounted to EUR 60.4 m. An estimated EUR 3-5 m is likely to go to a laboratory at the Bulgarian plant, a developmental plant in Iceland is close to comple-tion and, in addition, the company obliged itself to invest EUR 11 m over the next four years in Serbia following its purchase of Zdravlje. At the beginning of February, Actavis announced its acquisition of the Indian pharmaceutical research company Lotus, subject to due diligence. The notes to the annual financial statements explain that if the acquisition goes ahead, the price will amount to over EUR 19 m, in addition to other directly related expenses. As far as capitalised development costs are concerned, these can be expected to increase substantially YoY, in part due to developmental work for the US market. The product devel- substantially YoY, in part due to opment process for the US market is in many ways similar to the European process, but there are aspects such as absorption tests which must be carried out, which are very expensive (30- 35% of total development cost). Investment will therefore clearly continue to be high in 2005, tying up more capital than otherwise. At the presentational meeting it was stated, however, that in 2006 investment would begin to decrease proportionally, other things being equal. Research’s most recent valuation of Actavis was updated following its Q3 results on 10 EBITDA margin and investment this November 2004. The valuation was ISK 103 billion, corresponding to a share price of 37.1. The results now give cause to review the main assumptions of this valuation. Income growth, at least for 2005, will be reviewed, together with the company’s EBITDA margin and 2005 investment. Such a review will clearly lower the valuation. At the time of writing (22 February 2005, at 15:15) the market price of Actavis’s shares is ISK 37.8, after a drop of 6.5% so far today. We recommend underweighting its shares in well- The contents and form of this document were produced by employees of Landsbanki Research and are based on information available to the public when the valuation was compiled. Assessment of this information reflects the views of Research’s employees on the valuation date. which may change without notice. Neither Landsbanki Íslands hf. nor its personnel can be held responsible for transactions based on the information and opinions expressed here. Attention should be drawn to the fact that Landsbanki Íslands hf. may. at any time. have direct or indirect interests at stake in individual companies. either on its own behalf or through its subsidiaries or customers. for instance as an investor. creditor or service provider. Nonetheless. all valuations are prepared independently by Landsbanki Research and in accordance with the Bank’s rules on separation of activities accessible on the Landsbanki website. Landsbanki Research reiterates that investment in securities naturally involves risk and potential investors are advised to seek the advice of more than one party before taking any decisions. INSIGHT - company performance 4. Actavis. Q4 of 2004 Telephone: 410-4000 Landsbanki Research. Hafnarstræti 5. 101 Reykjavík Telefax: 410-3006 Use of this material is unrestricted. we request that the source be quoted. greining@landsbanki.is www.landsbanki.is

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