OPERATIONAL REVIEW

34%
increase in sales from UPD to Clicks

Vikesh Ramsunder
Managing Director

UPD is the countryís only national full-range pharmaceutical wholesaler and provides the distribution capability for the Clicks Groupís integrated healthcare strategy.

Review of the year

UPD continued to focus on its strategic customer groups of Clicks, the private hospital groups and Link pharmacies and these core customers collectively accounted for 82% of wholesale sales, compared to 76% in the previous year. These customer groups are supported by UPD’s small but growing export business.

Sales from UPD to Clicks increased by 34% owing to the strong growth in the pharmacy business. Clicks is now UPD’s single largest customer. UPD supplies the majority of pharmaceutical product to the Life Healthcare and Medi-Clinic private hospitals and sales to hospital groups increased by 8%.

The business continues to shift towards scheduled medicines and away from front shop products, with scheduled medicines now accounting for 91% of sales.

UPD targets independent community pharmacies through the Link buying group which currently has 247 member pharmacies. Sales to Link pharmacies grew by 39% this year and close to 80% of Link members are now achieving the required compliance levels. Value-adding services are provided to Link pharmacies to create increased loyalty to UPD, including training, front shop marketing support, merchandising, category management and product development.

Export sales grew 21% through UPD’s Botswana-based pharmaceutical wholesaler, Kalahari Medical Distributors. Growth in the export and SADC countries was slower than anticipated due to several regulatory and product supply constraints.

Third party distribution agency business is a strategic focus area for UPD. Notional distribution turnover, being the value distributed on behalf of clients, increased by 39% to R553 million. Two new agency distribution contracts were secured during the year and UPD has been aggressively marketing this offer to attract large distribution contracts from pharmaceutical manufacturers.

247
Link pharmacies

UPD continued to drive efficiencies and wholesale expenses declined from 4.4% to 4.2% of sales. A stock-less front shop model was adopted in UPD’s three smaller branches and product was cross-docked from the two main distribution centres in Gauteng and Cape Town. Improved ordering methodologies contributed to the 27% increase in the average value per order placed with UPD. This has led to an 11% decline in the number of orders. Headcount reduced by 8%.

UPD has maintained its leadership in the combined private pharmaceutical wholesale and distribution market and remains the only national full-line wholesaler.

Market share (%)* 2010 2009
Private pharmaceutical market (value) 23.7 23.6
Private pharmaceutical market (volume) 20.5 20.6
* Per IMS (August 2010)    

Sustainability

Delivery routes will be optimised through the introduction of scanning technology which will improve control over deliveries and further reduce travel, while fleet vehicle specifications will be reassessed to reduce emissions and optimise fuel usage. A carbon disclosure project will be implemented to measure the manufacturing, packaging and supply chain environmental impact of suppliers. A project has commenced to reduce electricity usage at all UPD facilities and to address waste disposal, effluent and air quality.

Strategy and focus for 2011

UPD plans to return product availability levels to 95% (2010: 89%) after experiencing supply challenges in the past year. A new planning system has been implemented and the commercial department restructured, which should improve planning capability and enhance customer focus.

The Link Pharmacy business has been reorganised to add value to members. Front shop purchases will be channelled through the Clicks distribution centres to expand the range of products available to Link members.

UPD will continue to grow the export business, with a particular focus on Botswana.

Third party distribution remains a major revenue opportunity and UPD will continue to market the supply chain benefits and cost efficiencies which the business can deliver to pharmaceutical manufacturers.

Management confirms that a sustainable operating margin is between 2.7% and 3%. This targeted margin does not include any trading benefit from an annual increase in the single exit price of medicines or growth in the distribution agency business.

operational review