Material sustainability issues

Implications

In March 2011 the Department of Health (DoH) published draft regulations to cap the maximum logistics fees that can be earned by pharmaceutical wholesalers. The proposals were opened for industry comment. While the group welcomes the DoH’s intention to regulate logistics fees and supports the construct of the regulations, the proposed fee levels are not viable and at this low level would dilute UPD’s margin and erode profit.

Mitigation plans

• Management has constructively engaged with the DoH
  and made a formal submission in response to the draft regulations
• The group is confident that a fair solution will be reached
• Regardless of the outcome of this engagement, the capping of fees will accelerate the much-needed consolidation of the pharmaceutical supply chain. As the market leader this is expected to benefit UPD
• At the date of this report there was no finality on these regulations

Implications

The group is the largest employer of pharmacists in the private sector and employs over 420 permanent and over
1 700 locum pharmacists in Clicks, UPD and Clicks Direct Medicines. The shortage of healthcare professionals is an industry challenge, with South Africa having approximately half of the required pharmacists based on World Health Organisation standards. The shortage of pharmacists could limit the growth of Clicks and increase costs.

Mitigation plans

• The group recognises the need for a sustainable increase in the number of graduates from pharmacy schools and is working closely with universities to increase capacity
• 80 bursaries to be granted for trainee pharmacists for 2012
• Plan to increase the number of pharmacy interns employed in the group to 60 in 2012
• In-house Pharmacy Healthcare Academy trained 408 learners in the past financial year
• An employee share ownership scheme was introduced this year to attract and retain scarce skills, with a higher allocation to pharmacists. Any pharmacist joining the group during the next three years can participate in the share scheme
• Pharmacist turnover rate has declined to 23%, although the vacancy factor remains high

Implications

The prevailing low inflationary environment in the South African retail sector could negatively impact profitability as volume increases are required to maintain revenue growth. This also creates pressure to remain price competitive. Cost growth ahead of inflation could limit opportunities to enhance margin. In addition, no increase was granted in the single exit price (SEP) of medicines in 2011 and no increase is expected in 2012.

Mitigation plans

• Focus on growing sales volumes
• Ongoing review of expenses and cost structures across all businesses
• Review pace of store refurbishments and pharmacy
  roll-out in Clicks

Implications

Aggressive expansion by corporate pharmacy competitors could increase the shortage of pharmacists as well as negatively affect sales and market share growth in Clicks.

Mitigation plans

• Clicks has the largest retail pharmacy footprint in SA with a market share of 15.4%
• Continued opening of pharmacies, with 30 – 40 planned for 2012
• Ultimately plan to open dispensaries in all Clicks stores (currently 283 out of 400 stores)
• Ongoing improvement in pricing, product offer and customer service
• Continued aggressive promotions strategy to entrench Clicks as a value retailer

Implications

An inability to attract and retain people in key positions across the group could ultimately compromise service delivery.

Mitigation plans

• Total rewards remuneration strategy across the group ensures market competitiveness in terms of cash and benefits
• Annual survey introduced to measure and track employee perceptions
• Employee share ownership scheme introduced as a means of incentivising and retaining staff

Implications

Non-compliance with group policies and processes could impact on shrinkage, cash losses, dispensing errors and sales.

Mitigation plans

• Comprehensive control self-assessment process followed in each business unit
• Shrinkage actively monitored and audit processes entrenched within business units
• Customer service excellence programme and Pharmacy Blueprint in Clicks to improve standardisation, customer interface and adherence to policies, procedures and processes

Implications

Clicks needs to secure additional retail space to meet the aggressive store opening target and increase the store footprint to 500 by 2014. Dispensing licences need to be granted for these premises to enable Clicks to ultimately offer a dispensary in every store.

Mitigation plans

• Property strategy developed in conjunction with market research capability to ensure suitable sites are identified and evaluated
• Once Clicks reaches its target of 500 stores the brand will still only have a presence in approximately half of the retail centres in the country, providing scope to extend the chain beyond 500 stores in the longer term
• Regular meetings are held with the DoH to expedite the granting of licences and to respond speedily to cases where licence applications have been rejected
• Programme to acquire independent pharmacies and attract pharmacists to join Clicks, and consider buying and converting their premises if appropriate. A total of 102 independent pharmacies have been acquired by Clicks since 2007

Implications

Private label scheduled medicines and front shop products present a major growth opportunity for Clicks and already account for 18.2% of sales. The failure to secure quality products which meet regulatory requirements at the appropriate margin could negatively impact both profitability and reputation.

Mitigation plans

• Dedicated department created in Clicks to focus on quality front shop private label products
• Unicorn business established to source scheduled private label medicines and ensure regulatory compliance

Implications

Sanction by the Pharmacy Council or Medicines Control Council for non-compliance could result in fines, penalties or restrictions being imposed on trading, as well as reputational damage.

Mitigation plans

• Pharmacy practice compliance reviews are conducted by professional services team in Clicks
• Monitoring by group legal compliance officer
• Insurance cover for professional risk of dispensing errors
• Supplier contracts reviewed by in-house legal department for compliance

Implications

Interrupted access to IT systems means that while stores will continue to trade, they will not be able to process certain transactions, including electronic fund transfers or medical aid authorisations.

Mitigation plans

• Manual in-store procedures cover short periods of interruption
• Network monitoring tool and dedicated IT call centre in place to improve reaction times to systems interruptions
• Disaster recovery and business continuity plans to cover IT systems interruptions are regularly reviewed and tested