Operational Review

UPD operating board (left to right): Sanjeeth Baliraj – Finance and Administration, Marietjie Rothman – Human Resources, Vikesh Ramsunder – Managing Director, Chris Nursey – Information Technology, Rachel Wrigglesworth – Commercial, Vikash Singh – Distribution.

Review of the year

UPD produced a strong turnaround in performance for the 2012 financial year which resulted in the business increasing its share of the combined private pharmaceutical market from 23.1% to 24.3%.

Wholesale turnover increased by 11.1% with price inflation averaging only 0.1% for the year, despite an increase of a maximum of 2.1% in the single exit price (SEP) of medicines in the second half of the year.

UPD experienced strong growth in its third-party distribution agency business which offers pharmaceutical manufacturers an efficient and cost-effective one-stop supply chain solution.

Ten new distribution agency contracts were awarded to UPD during the year and this trebled the notional turnover (the value distributed on behalf of clients) of the distribution business to R1.7 billion.

UPD was appointed as the preferred supply chain partner to Aspen Pharmacare, the country’s largest pharmaceutical manufacturer, in February 2012.

Scheduled medicines remain the main driver of growth in UPD and sales increased by 11.5%. Lower-value generic medicines continue to grow at a faster rate than originator products. In the past year generic sales grew by 23.1%. Originator products grew by 4.7%.

Front shop sales were 6.2% higher, mainly due to improved ranges. Product availability increased to 93%, which is core to UPD’s customer proposition of offering superior range and service.

Clicks is UPD’s largest single customer, with sales to Clicks in-store dispensaries and Clicks Direct Medicines increasing by 9.2%. Sales to the private hospital groups, including Life Healthcare, Mediclinic and Netcare, grew by 11.2%.

Sales to the buying group of Link pharmacies declined by 7.6% as the Link membership reduced from 252 to 242 due to members not meeting the required buying compliance thresholds. Sales to other independent pharmacies increased by 5.1%. Despite the contraction of this sector in recent years, UPD still services over 1 400 independent pharmacies.

UPD supports the Department of Health’s plans to cap 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. Refer to the Chief Executive’s Report for further detail on the group’s response to proposed healthcare regulations.

Market share (%)* 2012 2011
Total private pharmaceutical market (value) 24.3 23.1

* IMS

Focus areas for 2013

UPD will continue to drive wholesale turnover to gain market share by growing volumes of business with Clicks, private hospital groups and independent pharmacies. The business also aims to increase buying loyalty of Link pharmacies.

A key focus will be on maintaining high levels of service to distribution agency clients.

Management expects to increase distribution agency turnover to R3.3 billion in the new financial year.

The growth in the distribution business has filled the existing capacity within UPD. A further R24 million is being invested to expand distribution infrastructure capacity by 50%, while R32 million will be spent on automation.

UPD’s medium-term operating margin target has been revised to 2.2% to 2.7% (previously 2.5% to 3.0%) to reflect the increasing impact of genericisation on UPD’s turnover. The targeted margin does not include any trading benefit from SEP increases.