OPERATIONAL REVIEW
UPD
Review of the year
UPD experienced a tough year as turnover and profitability were negatively impacted as no single exit price (SEP) increase was granted by the Department of Health (DoH) for 2011. UPD increased wholesale turnover by 4.2%, as price inflation declined to 3.3%.
Performance was also impacted by the changing product mix, with sales of lower-value generic medicines growing at a faster rate than originator products. UPD’s sales of scheduled medicines increased by 5.7%, with generics growing by 14.6% and originators by 2.7%. This changing mix trend is likely to continue irrespective of future SEP increases.
Operating profit was 19.4% lower as the results for the previous year included a stock gain of R26 million from the SEP increase which was not repeated in the current year. The 9.3% decline in UPD’s front shop sales, owing to the continued contraction of independent pharmacy, also placed pressure on the margin.
Despite the challenges encountered during the year, UPD increased its share of the combined private wholesale and distribution market and remains the country’s only national full-range wholesaler.
Clicks continues to be the driver of growth for UPD, with sales to Clicks in-store dispensaries and Clicks Direct Medicines increasing by 29.1% owing to the strong growth in the pharmacy business. Clicks remains UPD’s largest single customer. UPD supplies the majority of pharmaceutical product to the Life Healthcare and Medi-Clinic private hospitals. Sales to hospital groups accounted for 28% of turnover in UPD and increased by 3.5% over the previous year.
UPD targets independent pharmacies through the Link buying group which currently has 252 member pharmacies. Value-added services are provided to Link pharmacies to create increased loyalty to UPD, including training, front shop marketing support, merchandising, category management and product development. Sales to Link pharmacies accounted for 17.3% of UPD’s turnover and increased marginally over 2010.
Sales to other independent pharmacies declined by 32.6% as this sector continues to contract, with a further 80 pharmacies closing during the year.
Export sales declined by 9.1% as UPD’s application for an export licence was declined. The decision has been challenged and an appeal lodged with the Medicines Control Council. The export business has therefore been reliant on sales from UPD’s Botswana-based pharmaceutical wholesaler, Kalahari Medical Distributors.
Third-party distribution agency business remains a strategic focus. UPD has been aggressively marketing its capability to offer pharmaceutical manufacturers an efficient and cost-effective one-stop supply chain solution. UPD managed contracts with notional distribution turnover (being the value distributed on behalf of clients) of around R600 million in the past year.
UPD supports the DoH’s proposals for a transparent pricing mechanism through the capping of logistics fees and would welcome the urgent resolution of this issue. This regulation is expected to result in consolidation of the pharmaceutical wholesale market which will ultimately benefit UPD.
| Market share (%)* | 2011 | 2010 |
|---|---|---|
| Total private pharmaceutical market (value) | 23.1 | 22.7 |
| * IMS |
Strategic focus areas for 2012
Following the extensive changes in the UPD leadership team over the past year, including the restructuring of the sales, buying and planning functions, the new management team has a clearly defined strategy and focus areas for 2012.
UPD’s priority is to drive wholesale turnover and margin growth by improving the quality of its front shop ranges and pricing, as well as product availability. No SEP increase is expected for 2012.
Management continues to focus on enhancing loyalty with Link pharmacies and is targeting to increase Link’s buying compliance with UPD from the current level of 55% to 60%.
UPD also plans to broaden its range of oncology products and to develop an oncology business through the courier pharmacy service, Clicks Direct Medicines.
Building a distribution agency business is a major revenue opportunity and UPD will focus on securing additional distribution agency contracts. In the second half of the financial year UPD was awarded contracts with notional turnover of a further R600 million to commence in the new financial year, which will double the distribution agency business by the end of the 2012 calendar year.
UPD’s medium-term operating margin target for the wholesale business has been revised to 2.5% to 3.0% (previously 2.7% to 3.0%), with the targeted margin not including any trading benefit from SEP increases.
Clicks Group Limited