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AGM Annexure 1 Analysis of Shareholders Shareholders' Diary Definitions

 

UPD

Review of the year

UPD’s business model was repositioned this year to focus on loyal and profitable customers and to improve operating efficiencies to ensure sustained competitive advantage.

The strategy included the introduction of a minimum order value of R2 500 and the rationalisation of delivery routes. The impact of the repositioning is reflected in the increase in sales to UPD’s core customer groups of Clicks, Clicks Direct Medicines, hospitals and Link pharmacies which collectively accounted for 76% of wholesale sales, compared to 65% in the previous year.

Sales from UPD to Clicks increased by 39% owing to the strong growth in its pharmacy business. UPD supplies the majority of pharmaceutical products to the Life Healthcare and Medi-Clinic private hospitals and sales to these private hospitals increased by 9%.

The repositioning has understandably impacted market share which declined from 26.4% to 23.6%, although UPD remains the market leader and the only national wholesaler.

The introduction of the minimum order value resulted in a 71% increase in the average value per order placed with UPD. At the same time this led to a 31% decline in the number of orders and a reduction of 4.9 million kilometres in deliveries. Headcount reduced by 11%.

UPD has expanded its offering to attract more third party distribution agency business. To develop this capability R30 million was invested in making distribution facilities in Johannesburg and Cape Town compliant to pharmaceutical industry standards. This included the upgrading of the receiving and dispatching facilities, increasing cold chain capacity and extending air-conditioning.

UPD targets independent community pharmacies through the Link buying group which currently has 230 pharmacy members. Sales to Link pharmacies grew by 20% in the second half of the year as a result of these pharmacies buying an increasing proportion of their products from UPD. Value-adding services are provided to Link pharmacies to create increased loyalty to UPD, including training, front shop health marketing support and product development. The Link private label range was relaunched during the year and extended to 100 products.

Export sales in UPD grew 40% following the acquisition of Kalahari Medical Distributors, a pharmaceutical wholesaler in Botswana in the previous financial year.

The group’s acquisition of Direct Medicines added a new revenue stream for UPD as 95% of medication dispatched to patients across the country through the courier pharmacy is supplied by UPD.

Market share (%)	2009	2008
Total private pharmaceutical market (value)*	23.6	26.4
Total private pharmaceutical market (volume)*	20.6	23.8
*Per IMS

Focus for 2010

UPD will maintain the focus on its core customer groups and expand revenue opportunities in the year ahead, while continuing to drive efficiencies in the wholesale business.

Third party distribution is a key strategic focus. Following the upgrading of the distribution facilities, UPD is now positioned to tender for multinational contracts to expand its existing R300 million distribution agency business.

UPD will also capitalise on opportunities to grow export sales both in Botswana and other SADC countries.

Management aims to enhance the loyalty of Link pharmacies to buy from UPD and is targeting a 60% purchasing loyalty level, while making the benefits of Link membership more attractive.

On the legislative front UPD will continue to engage with government and the regulators on issues relating to logistics fees, licensing of wholesalers, National Health Insurance and other industry issues likely to impact on UPD.

While UPD’s operating margin for the past financial year was 3.4%, management believes that a more sustainable wholesale margin is between 2.7% and 3%. This targeted margin does not factor in any trading benefit from an increase in the single exit price of medicines or the business gaining significant third party distribution contracts in the forthcoming financial year.