Co-creating change 2014 Annual Report Krka Group highlights Revenues and earnings before interest, tax, depreciation and amortisation (EBITDA) 1,400 1,200 In EUR million 1,201 1,000 1,192 1,143 1,076 1,010 800 950 953 781 600 668 554 400 375 322 299 200 290 282 234 229 183 150 0 119 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Revenues EBITDA Share of new products* in Krka Group sales 50 In % 49.4 48.5 48.2 47.2 46.8 46.3 46.0 45.8 40 45.6 43.4 30 20 10 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 * New products accounted for almost 50% of total sales in 2014. New products are products launched in a particular market in the past five years. Profit for the year and market capitalisation 180 4,500 174 160 173 4,000 171 166 163 160 140 156 3,500 Profit in EUR million 120 133 3,000 100 112 2,500 97 80 2,000 Market capitalisation in EUR million 60 1,500 40 1,000 20 500 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Profit for the year Market capitalisation at year-end When comparing operating results, please take into account that in 2014 the Krka Group reversed EUR 38,950 thousand of provisions, which increased other operating revenues. It also allocated new provisions for lawsuits in the amount of EUR 20,031 thousand, which increased the costs of sales. Please find further information under Provisions in the Financial Report. Financial highlights of the Krka Group's performance In EUR thousand 2014 2013 2012 2011 2010 Revenues 1,191,614 1,200,827 1,143,301 1,075,627 1,010,021 EBIT1 276,953 227,588 192,308 211,561 208,134 EBITDA 374,535 321,732 282,276 298,747 289,855 Profit for the year 166,161 172,766 159,839 162,735 170,918 Non-current assets (year-end) 1,008,830 973,954 926,000 863,865 848,847 Current assets (year-end) 786,915 785,930 700,748 670,162 639,357 Equity (year-end) 1,351,899 1,332,611 1,240,521 1,139,754 1,053,327 Non-current liabilities (year-end) 125,421 128,833 145,362 155,092 202,709 Current liabilities (year-end) 318,425 298,440 240,865 239,181 232,168 R&D expenses 108,370 97,235 101,102 92,932 90,924 Investments 173,721 157,268 153,288 109,713 115,449 RATIOS 2014 2013 2012 2011 2010 EBIT margin 23.2% 19.0% 16.8% 19.7% 20.6% EBITDA margin 31.4% 26.8% 24.7% 27.8% 28.7% Profit margin (ROS) 13.9% 14.4% 14.0% 15.1% 16.9% ROE2 12.4% 13.4% 13.4% 14.8% 17.3% ROA3 9.3% 10.2% 10.1% 10.8% 12.1% Liabilities/Equity 0.328 0.321 0.311 0.346 0.413 R&D expenses/Revenues 9.1% 8.1% 8.8% 8.6% 9.0% Number of employees 2014 2013 2012 2011 2010 Year-end 10,499 10,048 9,461 8,948 8,569 Average 10,284 9,783 9,197 8,789 8,328 SHARE INFORMATION 2014 2013 2012 2011 2010 Total number of shares issued 32,793,448 35,426,120 35,426,120 35,426,120 35,426,120 Earnings per share in EUR4 5.07 5.24 4.80 4.85 5.06 Dividend per share in EUR 2.10 1.61 1.50 1.40 1.10 Closing price on LJSE at end of period in EUR 59.60 60.00 50.00 52.90 62.95 Price/Earnings ratio (P/E) 11.75 11.46 10.41 10.91 12.44 Book value in EUR5 41.22 37.62 35.02 32.17 29.73 Price/Book value (P/B) 1.45 1.60 1.43 1.64 2.12 Market capitalisation in EUR thousand (31 December) 1,954,490 2,125,567 1,771,306 1,874,042 2,230,074 Krka Group highlights I Financial highlights of the Krka performanceGroup's EXCHANGE RATES 2014 2013 2012 2011 2010 USD (average) 1.329 1.328 1.285 1.392 1.326 USD (31 December) 1.214 1.379 1.319 1.294 1.328 1 The difference between operating income and expense 2 Profit for the year/Average shareholders' equity in the year 3 Profit for the year/Average total assets in the year 4 Profit for the year attributable to equity holders of the parent/Average number of shares issued in the year exclusive of treasury shares 5 Equity as at 31 Dec./Total number of shares issued When comparing operating results, please take into account that in 2014 the Krka Group reversed EUR 38,995 thousand of provisions, which increased other operating revenues. It also allocated new provisions for lawsuits in the amount of EUR 20,031 thousand, which increased the costs of sales. Please find further information under Provisions in the Financial Report. We are well prepared to face business challenges. During the last decade, we have scaled many heights. In the Krka Group, we increased sales and EBITDA almost threefold, investments into research and development more than threefold, while the number of employees has more than doubled. We have invested almost EUR 1.3 billion in production capacities, while paying dividends every year and maintaining financial stability. The responsiveness with which we overcome less predictable business conditions originates from our business model. The results of many research and development projects give us new business opportunities. With our own production of active pharmaceutical ingredients and finished products, and our own marketing and sales network, we ensure that we can adapt quickly to changes. Our success is the result of clear strategies and development guidelines, and our commitment to Krka's values: speed and flexibility, partnership and trust, and creativity and efficiency. Krka Group highlights Financial highlights of the Krka Group's performance Co-creating change With propulsive development and major adjustments in our business operations, we keep up with market demands for high-quality, safe and effective generic medicines. Research and development is supported by smart investment in knowledge, state-of-the-art equipment and new laboratories. A qualified team allows us to develop the most technically challenging projects. The Krka Group in 2014 EUR 1.2 billion in sales revenue EUR EUR 166.2 108.4 million in research and million in net profit development EUR 173.7 10,499 million in investments employees The entire Krka company is characterised by a drive for In addition to products, we also develop raw ingredients, development and efficiency. With our own production a process which, in addition to development specialists and capacities, we manage costs, and ensure the quality, safety sales and marketing professionals, also involves purchasing, and efficacy of raw materials and finished products. the production of raw ingredients and final products and quality management. >> For detailed information, please refer to chapters: Krka Group business model, Marketing and sales, Research and development, Investments and Responsibility to employees Contents INTRODUCTION BUSINESS REPORT 6 Statement by the President of the Management Board 20 Corporate Governance Statement 8 2014 Report of the Supervisory Board 27 Corporate Governance Code Compliance Statement 13 ID Card of the Krka Group 28 Krka Group Development Strategy 14 Krka Group Business Model 31 Macroeconomic Forecast for 2015 15 Profile of the Krka Group 33 Risk Management 16 Overview of Significant Events and Awards in 2014 41 Investor and Share Information 17 Events After the Accounting Period 44 Business Operations Analysis 49 Marketing and Sales 73 Research and Development 78 Product Supply 80 Investments 82 Integrated Management System and Quality 2 SUSTAINABLE DEVELOPMENT FINANCIAL REPORT 90 Responsibility to Employees 115 Introduction to the Financial Statements 96 Responsibility to Investors 115 Statement of Compliance 97 Responsibility to Customers 116 Consolidated Financial Statements of the Krka Group 100 Social Corporate Responsibility 164 Financial Statements of Krka, d. d., Novo mesto 102 Responsibility to our Natural Environment 212 Enclosure 1 108 Krka's Sustainable Development Indicators for 2014 214 Acknowledgement of the 2014 Annual Report and Its Integral Parts 3 From a local pharmaceutical company to one of the leading global pharmaceutical companies Krka's business model: an innovative and vertically integrated generic pharmaceutical company Management of the entire process and production from active pharmaceutical ingredients to finished products Effective marketing and sales network Flexible production system Focused research and development At Krka, we develop medicines from raw pharmaceutical ingredients to finished products and obtain marketing authorisations in several markets. The results of our development projects are protected by patents. We manufacture medicines according to our own procedures in nearly all pharmaceutical forms for the treatment of various illnesses. We use the latest technologies to manufacture solid, semi-solid and liquid pharmaceutical products. Quality, safety and efficacy are proven by means of various analyses and studies. 2014 Annual Report | Introduction >> Business Report >> Sustainable Development >> Financial Report Statement by the President of the Management Board Jože Colarič, President of the Management Board and Chief Executive Dear Shareholders, Business Partners and Employees, The last business year was quite demanding and presented affordable products. In 2014, we sold EUR 1.192 billion worth many challenges for all areas of our operations. In addition of products and services, which was almost the same as in to economic instability, price reductions of pharmaceutical 2013.