DEFINITIONS  |  GLOSSARY  |  PROXY  |  DOWNLOADS
Body Shop [3 images] New Clicks Holdings Limited [logo]
HOME
COMMENTARY
GOVERNANCE CORPORATE CITIZENSHIP FINANCIALS STATUTORY SHAREHOLDER INFORMATION

Commentary

New United Pharmaceutical Distributors (UPD)


Introduction

UPD is the largest full-line pharmaceutical wholesaler in the country and supplies retail pharmacies, private hospitals, dispensing doctors and retail health stores. The business forms a strategic element of the New Clicks healthcare strategy as it provides the distribution capability for the group's integrated channel to the healthcare market.

Review of the year

UPD has continued its strong growth of recent years, increasing sales 33.3% to R3.0 billion, which was driven mainly by a strong growth in pharmacy sales. UPD has enjoyed increasing levels of support from independent retail pharmacies that have switched their business from single channel distributors, while turnover from Clicks continues to grow as the group's pharmacy integration process gathers momentum. Sales to dispensing doctors has declined over the past year following the introduction of more stringent licensing legislation.

In line with expectations, trading margins were negatively impacted by the lower logistics fees which came into effect in August 2004 following the introduction of single exit pricing. However, the increased sales volumes have more than compensated for this lower margin.

Costs were well managed to 6.6% of turnover (2004: 8.3%), which allowed the benefit of the increased volumes to boost profitability.

Operating profit grew 17.8% from R75.6 million to R89.1 million, with UPD contributing 25% of the group's profits.

UPD was awarded the contract by the Life Healthcare private hospital group (formerly Afrox Hospital Group) to channel all their purchases through UPD. The contract, which will generate an estimated R350 million in turnover, was finalised in August 2005 and the benefits will be reflected in the new financial year.

This strategic alignment with a hospital group supports UPD's belief that there are administrative and logistical synergies for pharmacy when purchases are channelled through a full-line wholesaler.

Financial highlights and statistics

  20052004
SalesR'm3 045.92 284.9
Sales growth%33.38.0
Operating profit before interestR'm89.175.6
InventoryR'm292.0210.3
Inventory turn  10.410.9
Property, plant and equipmentR'm72.872.2
Trade debtorsR'm316.2240.7
Trade debtors' days  28.926.0
Full-time permanent employees  507519

Strategy

UPD has been successful in attracting high volume sales contracts and will continue to pursue volume growth as it attempts to capitalise on the consolidation which is expected to occur in the wholesale pharmaceutical distribution sector.

Value-added services are proving to be a differentiator in the regulated environment in which UPD operates. These services include the training of pharmacists and pharmacy assistants on supplier products, disease state management training, product categorisation in pharmacy to promote supplier product sales as well as the marketing of supplier products through the UPD call centre. Based on these value-added services, UPD will be seeking to negotiate increased logistics fees from suppliers in the year ahead.

The business faces several challenges on the legislative front and at the time of this report was awaiting the outcome of the revised pricing regulations from the Department of Health following the ruling by the Constitutional Court in September 2005. It is widely expected that distribution fees will be capped in the near future. In submissions to the Department of Health, UPD has argued for this logistics fee to be split between fine and bulk distribution.

The role of wholesalers also needs to be clarified by the Department of Health, as several quasi-wholesalers have entered the market over the past year which has negatively impacted legitimate wholesalers like UPD.

Retail pharmacy forms a major component of UPD's business and the revised dispensing fee needs to be set at an appropriate level to sustain and ensure the long-term survival of the retail pharmacy industry.

The Link Investment Trust (LIT), which has 194 independent franchisees, is managed by UPD and this facilitates a close working relationship between the distribution arm of the group and the retail pharmacies in the franchise. New Clicks holds a 56% interest in LIT.

Prospects

The high volume, lower margin model is currently delivering positive results for UPD and the group. The focus on private hospital business, together with increased sales from independent pharmacies, should result in continued strong sales and market share growth in the year ahead. Despite the uncertain regulatory environment, UPD is well-positioned for strong profit growth.


Lynda van Niekerk

Lynda van Niekerk – Chief Executive (34) B Com (Acc) (Hons), CA (SA)

Three years' service with the New Clicks group.

Lynda completed her articles and was an audit manager at KPMG before a brief working stint abroad. She joined UPD in January 1999 as a projects accountant and was promoted to financial director in August of the same year. Lynda was appointed chief executive of UPD in August 2005.