More Stars of the Greek Economy

In my previous article, I had definied Pharmathen as a corporate 'star' of Greece and asked whether there were other 'stars' like that. A reader provided my with the links to 6 other companies and I will make quick summaries on each of then.

ELPEN
Their website is not as smooth sailing as Pharmathen's. Certainly, there is much less financial information about the company. They have a link to the 2013 financial statements but there is no content to be found. Thus, I opened the 2012 financial statements. And then, all there was were a condensed P+L statement and balance sheet. Everything quite a few steps behind Pharmathen in terms of impact.

In the headline, Elpen describes itself as "The Leading Greek Pharmaceutical Company". Well, maybe the leading one but certainly not the largest one. Pharmathen, for one, is larger with its sales of 178 MEUR when Elpen (in 2012) had sales of 115 MEUR. Elpen posted a profit before tax of 4 MEUR, a 4% return on sales, or much lower than the 12% of Pharmathen. Most importantly, Elpen includes in revenues an extraordinary item of 7 MEUR as 'income from prior years' provisions'. Impossible to say what this might be but without it, for sure, Elpen would have posted a loss. The year before, they had paid out virtually all their profits as dividends. In 2012, it looks like they retained all earnings. Perhaps someone told them that they shouldn't drain the company. Of total assets of 138 MEUR, 12 MEUR are 'other formation expenses' and 5 MEUR are 'interests in affiliated undertakings'. There is no way of telling how much those assets are really worth. What stands out, though, is that they are sitting on 40 MEUR of cash plus, get this, 11 MEUR of Greek sovereign bonds. That was not a good investment for them because they already had to write-off 5 MEUR of that. Elpen's net worth of 40 MEUR is very satisfactory but one has to remember that they have 17 MEUR of assets whose value cannot be determined. They are stretching suppliers' credit to the limit with 61 MEUR of trade accounts payable. That would smack of payment terms of 180 days. Why does a company which has so much cash pay its suppliers so slowly? Holding money back from suppliers to invest it in the money market is not really elegant.

So what is the bottom line on Elpen? Not a bright star, perhaps not even a star but an okay company. I would have to get a feel for management (interestingly, there is nothing in the website about management) and the overall management culture. There are quite a few questions to ask about their financial statements, particularly the question whether there is a hang for creative accounting and/or financial maneuvers.

VIANEX
To begin with, their website is available in 6 languages which makes for an impressive start. The company's founder and CEO sees the company 'at the top' which is not as bragging as Elpin. Moreover, they understand that 'to reach the top you need to try' and that 'you need vision, dedication an faith'. After all of this, I am already in good spirits about the company. They have been around for 90 years which is Pharmathen and Elpin combined. And it seems family through and through. That's a plus, too! So much family through and through that they don't even reveal any financial information about themselves. If the company's financials are as impressive as the information which it provides about its activities, then the financials must be extraordinary. My guess is that the financials are probably extraordinary.

GALENICA
One cannot blame the company for going overboard with telling beautiful stories about themselves. Their website is rather ordinary, if not to say boring. However, this doesn't strike me as a weakness but rather as intended understatement. Again, family-owned and so private that there is no information whatsoever about management or about financial statements. If I had to guess, I would guess that this is a very conservative company with very conservative financial statements.

PHARMAZAC
This is a comparatively young company (1986) and with sales of 30 MEUR and 70 employees, a relatively small company. There is nothing eye-catching in their website and certainly no financial information. Normally, I tend to quickly develop a 'feel' for a company. Here I have no 'feel' at all. Normally, I become a little confused when I cannot develop a 'feel' for a company.

PHARMANEL
They are just over 20 years old so they cannot be too large. My 'feel' is that, here, a group of like-minded, dynamic people got together and said 'let's start someting'. One gets a sense of dynamism. More I cannot say about this company.


SUMMARY
I cannot tell why my reader sent me only health/pharma companies. Perhaps he works in the health/pharma industry himself or perhaps the health/pharma industry is the best of all industries in Greece. Either way, one gets the impression that there is something happening in the Greek pharma industry. Which makes me wonder whether pharma could not become a core industry of the country.

Pharmathen is the clear star hovering about the others. Elpen should worry a bit less about pretending to be as good as Pharmathen and focus more on providing solid information about themselves. Perhaps there is an issue with management culture. The others seems to be smaller companies but they cannot be zombies because if they were zombies in the pharma industry, they wouldn't have survived 5 years of recession as a pharma company (they would have been taken over by others or disappeared).

Looking for Non-Zombies in Greece? Here Is One!

A friend of mine told me that her sister, a young chemical PhD, started a job with a company by the name of Pharmathen recently. So I looked up Pharmathen's website. What a surprise!

Founded in 1969, Pharmathen 'is focused on the development and marketing of pharmaceuticals, with a strong position in generics. With 3 state of the art research laboratories and 2 manufacturing units, Pharmathen is a completely vertically integrated company and its activities extend from the development of pharmaceutical products up to their distribution. The company’s human resources include more than 800 people who work in the sectors of Research & Development (R&D), production and distribution of drugs to more than 85 countries worldwide'.

The website has a separate section on Corporate Social Responsibility (CSR): 'It is important that our employees know about our commitment to social corporate responsibility, understand their responsibilities and keep up to date with our progress. Therefore we instantly inform our personnel regarding CSR practices at Pharmathen via emails, intranet services and our monthly newsletter. Through all these means they participate in CSR practices as they recognize that CSR is not only an enterprising issue but a personal issue'.

It soon got even better! Pharmathen also has a Vision and a Mission! The vision is 'to elevate the quality of people’s lives globally by providing novel and affordable pharmaceutical products. We aspire to be one of the best healthcare companies in the world, sustaining our impressive growth rates, securing customer preference and providing leading pharmaceutical innovations and solutions'. And the mission is 'to aim to be one of Europe’s leading Research & Development companies. Already one of the fastest growing generic companies in Europe, we aim to provide innovative, distinctive products and services that improve the lives of patients worldwide and satisfy customer needs. We will achieve this by employing the most advanced technologies available, by constantly enhancing our product portfolio and expanding our international presence'.

At this point, I became a bit suspicious. Websites, vision and mission statements fall into the category of softs facts; of 'stories', as investment bankers call it. It's easy to put together beautiful stories. It was about time that I looked at the hard facts, Pharmathen's financial statements for 2013.

Group sales were 178 MEUR, 10% higher than in 2012. Wait! Wasn't the Greek economy in recession during 2013? Well, 131 MEUR of total sales came from international operations (Pharmathen has a presence in over 80 countries!) but sales in Greece also increased by 6% (in a declining market!). A total of 22 MEUR was spent on R&D, which is about 12% of sales! Now, pharmaceutical companies have no choice but to spend a lot on R&D and 12% may be normal in the industry but one could compare the 12% to the 3% which the EU sets itself as a goal for R&D spending, which goal it always misses.

After paying for all of its expenses, Pharmathen posted a profit before taxes of 21 MEUR, or 12% of sales. That is a very high profitability! And since Pharmathen intends to be a good corporate citizen, they paid income taxes of 4 MEUR.

Pharmathen posted a net worth of 100 MEUR. With total assets of 204 MEUR, Pharmathen was financing almost half of its assets with net worth, an extremely high ratio. This, however, should be qualified a bit since Pharmathen posted goodwill of 41 MEUR among its assets. Such goodwill represents the excess which was paid over book value when acquiring companies. Where such companies are very profitable, such goodwill is justified. Still, even without goodwill, Pharmathen was still financing 36% of its assets with net worth! Pharmathen follows a policy of retaining a large portion of its profits in the company instead of paying it out as dividends. Thus, retained earnings of 42 MEUR account for almost half of net worth.

Finally, the most important 'Greek subject' --- debt. Pharmathen owed 68 MEUR to banks. Is that high? Well, that depends on how much debt a company can service. Pharmathen posted a free cash flow of 27 MEUR and interest expense was 7 MEUR. Put differently, free cash flow covered the interest expense by close to 4:1. Short-term debt was 38 MEUR of the total debt. When considering that Pharmathen had 54 MEUR of short-term trade receivables, one knows what short-term debt was financing. Not to mention the fact that the company also had a cash position of 18 MEUR. Current assets of 122 MEUR covered current liabilities of 74 MEUR 1,7 times. There is no worry to be had about Pharmathen's short-term debt service capacity. And the long-term debt of 29 MEUR contributed to the financing of property, plant and equipment of 38 MEUR. In short, there is no worry to be had about Pharmathen's indebtedness.

Pharmathen employed 867 people (up from 800 two years earlier), 577 of which have university degrees, and research scientists exceed 150. 49% of the employees are women and women account for 26% of management positions.

Below are some of the rankings which Pharmathen claims:

* among the top 50 most profitable companies in Greece
* among the top 100 largest Greek companies
* among the top 50 largest pharma R&D companies in the EU
* among the largest exporting companies in Greece
* among the "True Leaders" in Greece based on credibility

It took me a while to digest the above information. When I saw such a company during my active years in banking, I would hurry to the phone to make an appointment for a business development call. Before seeing the rankings, I would have expected Pharmathen to rank as No. 1 in Greece in all categories. But Pharmathen says it is 'among the top 50' or 'among the top 100'. Well, this can only mean that there are a lot of other non-zombies in the Greek economy. In fact, I would call them stars.

Who are the other stars? Why does one hear so little about them?

Getting Bored With Politics? Let's Have a Bank Run!

Back in 2002, the then CEO of Deutsche Bank, Rolf Breuer, was asked in an interview about the fledgling German media giant Kirch. His subtle answer was: "Everything one can hear and read about this is that the financial sector is no longer prepared to make debt or equity capital available". Kirch collapsed soon thereafter. This has been described as the most expensive sentence in financial history: 12 years later, Deutsche agreed to pay the Kirch heirs about 1 BEUR for damages. Deutsche has announced that they will attempt to recover part of that from Mr. Breuer personally.

PM Samaras is obviously not a banker. Verbal subtleties are not his strength. Instead, he tells the public straightforwardly that if SYRIZA came to power, all Greek banks would be left without money. And to make sure that the message got across, his parliamentary spokesman, Adonis Georgiadis, repeated it the next day.

Wow! Greeks are always good for surprises but the fact that the head of government of a country would publicly announce a bank run must be unique in the world. One wonders who will pay for damages incurred and whether Mr. Samaras will be held personally liable! Sorry, the answer to that question is obvious: the Greek people will pay and Mr. Samaras will claim that he would have saved Greece if only SYRIZA had not come to power. The only thing which is certain is that Mr. Samaras' sentence will replace Mr. Beuer's sentence as the most expensive one in financial history if a bank run does occur. It will cost more than just one billion.

So where do we go from here? Do we expect Mr. Samaras to correct himself and say something like "Sorry, I didn't mean it that way. Of course there won't be a bank run if SYRIZA comes to power. Feel free to vote for SYRIZA!"? Doesn't sound like a good strategy for political survival. Or would it be better if Mr. Tsipras came out to say "Have no fears! There won't be a bank run if we come to power!" That would be like the CEO of Lehman's announcing a few days before bankruptcy that Lehman was solid as a rock. People would wonder why he needs to say that.

Until recently, Greece and its politics had appeared so stable that it got a bit boring. I remember making a statement not too long ago that I thought Mr. Tsipras' heyday was behind him. Since the EU elections, the tables have turned. We are back to the old situation where everybody knows for sure that "the next 3 or 6 months will determine the future of Greece".

Mr. Tsipras goes a step further. Not only the future of Greece will be determined when SYRIZA comes to power but the future of the EU altogether. SYRIZA will show the EU the new path towards prosperity. Well, he doesn't face the risk of being sued for damages for saying that.

Was all of that really necessary? This is the question which Mr. Samaras should ask himself all the time and hopefully he will learn from the answer he gives himself.

Growth and Social Cohesion: Challenges for Greece and Beyond

Here is the video of a 1:28 h panel discussion on the above subject which took place at the LSE. Below is a summary of the key points made by Horst Reichenbach, head of the EU Task Force for Greece.

Access to credit: this is currently the major impediment for growth in the private sector.
Foreign investment: more focus is required on making Greece more attractive for foreign investors (structural reforms). 
Competitiveness: has improved significantly in terms of unit production costs (wages/salaries). What is missing is an increase in productivity (particularly in sectors where Greece has competitive advantages).
Social cohesion: critical! Unemployment will not come down quickly, thus, an overhaul of social cohesion systems is required.
Politics: sustained political stability is essential for Greece's turn-around; the condition 'sine qua non'.
Troika: Greece needs to assume ownership (rather: take it back from the Troika) of reform effort ("Greeks need to take their own fate into their own hands").
Financing: before year-end, clarity needs to be established whether Greece needs new financing from the EU. If yes, there will be the issue of a further adjustment program ("which clearly is not popular among Greeks").
Debt relief: the EU has promised debt relief and has reaffirmed its promise earlier in the year. A decision is likely to be reached befor the end of the year.
Technical support from the EU: will continue to be necessary.

ADDENDUM BY REICHENBACH
"I think Europe has shown quite a lot of understanding that the situation from now on has to change and that if there isn't growth, not only the future of Greece will suffer but also the repayment of the debt will become impossible or at least very much more difficult. Therefore, very practical hands-on support of a different type is required. First of all, the need for more social cohesion in Greece is enormous. There is no social welfare system in Greece. It's the only European country where there is no social welfare system. Unemployed who are long-term unemployed for more than one year don't get any support from social insurance or the state directly and more than 2 million, perhaps moving towards 3 million, do not have any access to health service other than emergencies in the hospitals. So this is really a dramatic situation in which the activities of extreme parties can prosper by offering part of the solutions to these problems and if Greece is not, as a state, and in solidarity with Europe, is not able to address these problems head-on, there will be a very difficult situation".

Did Scotland Avoid Becoming Another Greece?

In a recent article, Prof. Paul Krugman compared the Scottish drive for independence while maintaining the pound to the EU's drive for the Euro as a common currency. Here is an extract: 

"The obvious parallel is the push for the Euro; in pursuit of the political vision of European unity, leaders waved away the obvious economic problems. I don’t know how many times I encountered arguments along the lines of “You Americans are only raising these objections because you don’t want a competitor to the dollar”, which wasn’t the point at all. And sure enough, the Euro has turned into one of the great economic disasters of history, dealing a devastating blow to the very cause of European unity it was supposed to serve. It so happens that some of the economic issues involving Scottish independence are the same: Euro enthusiasts insisted that there would be no problem in creating a unified currency without a unified government, the SNP is insisting that there is no problem with maintaining a unified currency while breaking up the United Kingdom. But there is even less excuse this time around, since we have the Euro experience to enlighten us".

Well, the Euro experience has definitely enlightened us!

Greek Media - Corruption, Clientelism and Censorship

I have come across this "first in a series of articles which chronicle the long history of corruption, lawlessness and censorship in Greece's media and journalism landscapes" (quote from the author of the article). To an uninformed outsider like myself, this is interesting reading which is why I publish it without comment from my part. 

Corruption,Clientelism and Censorship in Greece's Media Landscape

Greek Tax Revenues

According to ELSTAT, total tax revenues for 2013 were 83 BEUR (page 18 of this Economic Bulletin). Since the state records revenues on a cash basis (instead of an accrual basis), these are not all taxes due but only that portion which was actually collected. Interesting questions pop up when comparing this figure to the data compiled in this Macropolis article.

At December 31, 2013, after the state had collected the above 83 BEUR, there were still another 61 BEUR in taxes due to the state but not paid by the respective tax payers. This is referred to as 'legacy'. Put differently, had the state been able to collect all of the 'legacy' in 2013, tax revenues would almost have been twice as high as they actually were.

The word 'legacy' suggests that there was a one-time problem in the past which may or may not be cured going forward but since it is a one-time problem, it will not become greater. This is not the case here. Instead, from January-August of 2014, taxes due but not collected were 9 BEUR. Thus, the 'legacy' of 61 BEUR at December 31, 2013 became a 'legacy' of 70 BEUR by the end of August. Over 1 BEUR per month on average was the amount of taxes due but not paid so far this year.

Of the 2013 'legacy' of 61 BEUR, roughly 1 BEUR could be collected during the first half of 2014. That looks like a lot of money but it represents a collection rate of only 1,6%. The government hopes to collect another 1 BEUR of the 2013 'legacy' in the second half of 2014 which will bring the annual collection rate to 3,2%. At the same time, at least 12 BEUR will be added as 'new legacy' during 2014.

This has the characteristics of moving one step forward while retreating two steps at the same time: 2 BEUR of old debt is collected while 12 BEUR becomes new 'old debt' as the year goes on. On a net basis, 'legacy' will increase by 10 BEUR during 2014.

When debtors don't pay their obligations, there are always two questions to be asked: is it their unwillingness to pay or is it their inability to pay?

When tax payers could pay their taxes but are unwilling to do so, the full force of the judicial and executive should come down upon them. When tax payers don't pay their taxes because they are unable to pay, no judicial or executive is strong enough to make them pay. That would be like attempting to draw water from a dried-out well.

Who are those culprits who don't pay the taxes due? It can't be the receivers of wages/salaries or pensions because there the income taxes are withheld at the source. My understanding is that this group accounts for roughly one-half of the Greek tax subjects.

I can only guess that the culprits are those who have tax obligations as a result of deemed/assessed income or tax obligations stemming from non-income items (real estate, etc.). Here, again, the question is whether they are true culprits due to unwillingness to pay or whether they are victims due to inability to pay.

I read all the time how inefficient the Greek tax collection system is but, then, I often hear stories from friends where I have to marvel about the efficiency of the Greek tax collection system. One of my friends who is 59 and has been without official income for over 2 years inherited a small house in Litochoro. The authorities have now required him to produce evidence that the house was built before 1955, otherwise it would be deemed as an illegal construction and all sorts of penalties would become due. There is a court document on record where his grandfather swore under oath during the 1950s that he had owned the house since 1940. That, however, is not good enough. The authorities want an official record and my friend doesn't know how he can produce one. He fears the penalties might exceed what the house is worth today. Add to that the taxes he has to pay on income which he doesn't have but which he is deemed to have because he owns a car and the apartment where he and his family of 3 live and you can understand that the man fears to soon be financially wiped out.

Or my sister-in-law, a grammar school teacher with low income, who was presented an aerial photograph showing that her balcony in central Thessaloniki exceeded the approved limits. She had not made any changes to the balcony since she bought the apartment but that is irrelevant; she has to pay. Now, that is quite an efficient tax collection system as far as I am concerned!

And those very same tax authorities have trouble discovering swimming pools in Athens, to use that famous example? To identify the owners of anonymous corporations which own luxury real estate, yachts, etc.?

I am all for chasing past-due taxes from subjects who have the ability but not the willingness to pay. When it comes to tax subjects who have no ability to pay, one has to wonder how those tax obligations came into existence in the first place. It serves the state no purpose to build up 'legacy' when there is no hope of ever collecting that 'legacy'. More importantly, it is simply immoral to tell financially insolvent tax subjects that their tax liabilities keep going up.  If I were one of the latter, I wouldn't give a damn about a possible bank run. I would vote for SYRIZA if they promise to help me get out of my bind.