UPD business review

Management is confident that UPD is on track to recover in the 2024 financial year.

UPD increased total managed turnover across the pharmaceutical wholesale and bulk distribution businesses by 4.8% to R32.1 billion after encountering several headwinds during the year. This included operational challenges during the new systems implementation in three of its distribution centres, the lower increase in the regulated single exit price (SEP) of medicines and declining demand from independent pharmacies.

After a difficult first six months, UPD reported improved turnover and profitability in the second half of the year. Distribution turnover grew by 1.5% (2022: decline of 2.6%) and the operating margin strengthened to 2.8% for the year. While the margin is down from 3.3% in 2022 due to the combined impact of load shedding, higher insurance costs, the low SEP increase and labour inefficiencies, the margin is within management’s medium-term target range.

Performance against objectives

Wholesale turnover by channel

UPD’s wholesale turnover, which excludes bulk distribution and preferred supplier contracts, increased by 3.5%.

Clicks remains UPD’s largest single customer and increased sales by 6.6%, accounting for 52.3% of wholesale turnover. Sales to private hospitals grew by 5.7% in value and now comprise 39.7% of sales. Pleasingly volume growth was higher at 10.8% due to a shift in case and product mix.

The continued consolidation of the independent pharmacy market, together with stricter credit risk management by UPD, contributed to sales in this channel declining by 19.7%. UPD currently services approximately 1 100 (2022: over 1 200) independent pharmacies.

The operational challenges experienced by UPD during its systems transition resulted in lost sales opportunities to Clicks and private hospitals which contributed to wholesale market share declining from 28.8% to 28.0% (source IQVIA).

UPD faced mounting cost pressures from the low SEP increase and the faster growth in lower priced generic medicines, with sales of generics increasing by 5.3% and now accounting for 73% of wholesale turnover volume.

Product availability, which is core to offering superior range and service to customers, averaged 95.5% (2022: 93.8%) for the year, while on-time deliveries were at 91.9% (2022: 94.5%).

At year end UPD had 30 bulk distribution clients and has rationalised the portfolio to focus on profitable contracts and ensure that the business has capacity to support the acquisition of new customers.

UPD owns distribution centres located in Gauteng (Roodepoort), Cape Town, Durban, Bloemfontein and Port Elizabeth. All the distribution centres are ISO9001:2015 certified. Owing to the increasing scale and size of the third-party distribution business, additional distribution warehouse facilities are rented in Gauteng and Cape Town.

Growth plans for 2024

Management is confident that UPD is on track to recover in the 2024 financial year.

UPD aims to regain wholesale market share to 30% through the growth of the Clicks pharmacy channel, supported by the opening of 40 to 50 pharmacies, each year, and growing volumes to the private hospital groups. Purchasing compliance levels from Clicks and the private hospitals will continue to normalise following the completion of the systems implementation.

Capital expenditure of R77 million has been committed for warehouse equipment and information technology in the year ahead. This includes the completion of the roll out of the new system to the remaining distribution facilities.

The new system went live at UPD’s Gauteng distribution centre in September 2023 and the system is now stable and expected to generate further operational efficiencies in the new year.