Review of the year

UPD forms a critical element of the New Clicks healthcare strategy, providing the distribution capability for the group’s integrated channel to market. The business continues to make an increasing contribution to group profitability, growing to 29.1% from 27.1% in 2005.

Lynda van Niekerk
Managing director

B Comm (Acc) Hons, CA (SA)
Four years’ service
with New Clicks group
Previously financial
director of UPD
Appointed managing director
in 2005

Sales to hospital groups quadruple in the year

Turnover grows
while expenses only rise 

    2006   2005  
Turnover R’m 3 863.1   3 045.9  
Turnover growth % 26.8   33.3  
Operating profit R’m 114.8   89.7  
Inventory R’m 297.2   290.3  
Inventory turn   13.0   10.5  
Trade debtors R’m 568.2   316.2  
Trade debtors’ days   44.5   28.9  
Full-time permanent employees   507   507  

Regulatory challenges continued to impact both the retail and wholesale pharmaceutical industries over the past year. The delays in finalising the dispensing fee regulations created further uncertainty for UPD’s retail pharmacy customers. The wholesale industry experienced continued downward pressure on margins as suppliers reduced logistics fees in anticipation of the introduction of fee capping.

One response by community pharmacy to the dispensing fee regulations has been the proliferation of quasi-wholesalers. These are essentially retail buying groups which continue to be licensed and therefore negatively affect turnover of genuine wholesalers. The group has been engaging constructively with the Department of Health on these regulatory issues and this is covered in further detail in the Chief Executive’s Report.

The 26.8% turnover growth in UPD was driven by a 30% increase in sales to Clicks as pharmacy volumes increased and further dispensaries were opened. Sales to hospital groups quadrupled as a result of UPD being awarded two private hospital supply contracts. The Life Healthcare contract commenced from the start of the financial year, while the Disamed/Medi-Clinic contract was secured in March 2006. These contracts collectively accounted for sales of more than R700 million.

Private hospital sales have already grown to 20% of UPD’s total sales, with independent pharmacies accounting for 55%, Clicks 15% and dispensing doctors and retail health stores making up the balance.

UPD’s total income was impacted by a change in the product mix with higher volumes of ethical or scheduled product being sold.

Expenses were well managed to 5.3% of sales despite higher transportation costs as a result of increased volumes and the impact of the fuel price hikes during the year. UPD contained costs by optimising its infrastructure and warehouses, while personnel costs were restricted through the efficient management of the staff mix.

UPD operates an innovative black empowerment programme where the majority of its distribution is outsourced to self-employed drivers from disadvantaged backgrounds operating their own vehicles. These owner/drivers account for 80% of UPD’s total distribution volumes.

Strategic focus

Turnover growth is expected to slow down in the year ahead following the anniversary of the hospital supply contracts. UPD’s focus will therefore be on improving its return on assets.

This will be achieved through continued improvement in operating efficiencies. A key enabler is the R45 million investment in the automation of the ethical warehouse at UPD’s head office in Lea Glen, Gauteng, which is scheduled for completion in April 2007. Operating efficiency will be enhanced by replacing the current manual inventory picking process, resulting in time savings, fewer errors and ensuring a more compliant process. The security around ethical product will also be heightened as all manual interventions will be eliminated.

UPD is actively seeking to grow and diversify its income base by attracting new distribution contracts. The Musica distribution has already been moved to UPD and the business is tendering for third-party distribution contracts.

Efficiencies will be further enhanced by optimising synergies within the group in areas such as transport utilisation, buying and pricing.

UPD aims to add value to community pharmacy through the rejuvenation and development of its banner group, Multicare. UPD will provide independent pharmacies with the tools to improve their businesses, including training to pharmacists and pharmacy assistants, front shop marketing support, category management and business skills development. This will enable these pharmacies to be more competitive, particularly in the new dispensing fee regime, and increase levels of loyalty to UPD.