Protek Group Announces 3Q and 9M 2011 Operational Results

OREANDA-NEWS. November 3, 2011. Protek Group (PRTK: RTS, MICEX), one of the major pharmaceutical companies in Russia operating in all segments of the pharmaceutical market (production, distribution and retail sales), has announced its operating results for Q3-2011 and 9M 2011.

Group Operating Highlights by segment, Q3-2011:

The consolidated unaudited revenue of the Group for Q3-20111 increased by 3.4% y-o-y reaching RUB 27,283 mln.

The Group’s consolidated unaudited revenue for 9M 2011 increased by 4.1% y-o-y reaching RUB 74,794 mln. The Group’s revenue growth was facilitated by its success in the Retail Sales Segment (17.3%) and the Production Segment (6.4%).

Distribution Segment:

The key company in the segment is CV Protek.

Distribution Segment Operating Highlights, Q3-2011:

The Q3-2011 revenue of the Distribution Segment increased by 0.1% y-o-y reaching RUB 24,273 mln. Sales growth in the commercial segment reached 8%, with the state-funded segment decreasing by 29.6%, including a 50.7% fall in the NMRP segment and a 26.1% dip in the hospital segment. The Distribution Segment makes up 84.4% of the Group’s total revenue2.

The implementation of steps aimed at increasing profitability and average package price was the key performance driver in Q3-2011. Sales of packages decreased by 15.4%. The volume reduction was mainly due to the commercial market conditions (-15%), while the average package price increased by 18% across all segments of the Company.

Distribution Segment Operating Highlights, 9M 2011:

The 9M 2011 revenue of the Distribution Segment increased by 0.5% y-o-y reaching RUB 65,749 mln. The Distribution Segment makes up 82.7% of the Group’s total revenue.

Sales growth in the commercial segment reached 7.4%. It is a core area within Distribution, accounting for over 80% of its quarterly total revenue in 2011. In 9M 2011, the commercial segment grew q-o-q.

In 9M 2011, the growth of the commercial segment contribution to the Distribution Segment was balanced by a 23.2% decrease in the budget-funded segment, including hospital and NMRP segments. The decrease was driven, in part, by changes in state-funded market regulations and the economic feasibility of operating in this market.

The number of clients remained almost flat in 9M 2011 y-o-y (a 0.2% increase) constituting approximately 17,800 customers.

In the reporting period the Company implemented steps aimed at increasing profitability within the product range. Consequently, the average package price grew by 13% from RUB 94 to RUB 106. Following measures to increase the efficiency of the product range, the number of price list items decreased by approximately 6% to 14,000 items.

Retail Sales Segment

The key company in the segment is Rigla.

The total number of retail outlets as of September 30, 2011 stood at 663 pharmacies.

In Q3-2011, 14 pharmacies were organically opened and 6 pharmacies were closed. In 9M 2011, 43 pharmacies were organically opened and 28 pharmacies were closed due to inconsistent performance and lease terminations.

Retail Sales Segment Operating Highlights, Q3-2011:

The Q3-2011 revenue of the Retail Sales Segment increased by 12.9% reaching RUB 3,199 mln. The growth was accredited to the increase in ticket numbers (7.7%) and average ticket amount (4.8%). The Retail Sales Segment made up 11.1% of the Group’s total revenue2. The growth in the comparable revenue bases (including VAT) amounted to 20.1%.

Retail Sales Segment Operating Highlights, 9M 2011:

The 9M 2011 revenue of the Retail Sales Segment increased by 17.3% reaching RUB 9,948 mln against RUB 8,480 mln in 9M 2010. The upward trend of the Retail Sales Segment revenue in 9M 2011 is higher than that seen in the commercial market segment (13.9%), and the growth in comparable revenue bases (including VAT) amounted to 24.5%.

Like-for-Like (L-f-L) Salesі

L-f-L pharmacies revenue decreased by 1.2% y-o-y. The growth in comparable revenue bases (including VAT) amounted to 5.6%. Traffic dropped by 6.6%, which was largely offset by the 5.7% growth in average tickets against Q3-2010.

L-f-L pharmacies revenue decrease by 0.6% in 9M-2011. The growth in comparable revenue bases (including VAT) reached 6.5%. A 5.0% decrease in tickets was largely offset by a 4.6% increase in the average ticket price.

The revenue dynamics of the segment for the reporting periods was affected by tax changes effective as of 1 January 2011, with the uniform tax on imputed income being replaced with the general taxation system which pharmacies are now subject to. VAT is no longer deemed part of revenues. In addition, payroll withholdings rose to 34%.

In 9M 2011, the Company implemented a number of strategic initiatives with a view to cutting operating costs, improving profitability and enhancing the competitive edge. Over this period, “Bud Zdorov!” (Bless You!) discount chain managed by Rigla expanded significantly to include 94 outlets as of September 30, 2011 vs. 77 outlets as of June 30, 2011. The “Bud Zdorov!” chain expansion is the result of both existing pharmacies being harmonised and new ones being organically opened. The share of “Bud Zdorov!” pharmacies amounts to 10.3% of the segment revenue as of September 30, 2011. Going forward, the Company intends to continue expanding the discount chain as part of its competitive business model in today’s market environment.

Over the reporting periods, the Company significantly expanded the number of own-brand products, especially in Q3-2011 when 6 proprietary brands were introduced. In Q3-2011, the number of own-brand products more than doubled vs. Q2-2011 and amounted to 216 items vs. 92 in Q2 2011. As of September 30 2011, the share of own-brand products stands at 2.1% of revenue and 4.9% of gross profit.

In 9M 2011, the optimisation programme for the Retail Sales Segment structure and the affiliation of subsidiaries to Rigla (Moscow) was implemented to simplify the regional pharmacies management system (by reducing the number of legal entities and consolidating business processes) and to optimise operational expenditures.

To enhance profitability in 9M 2011, the pharmacy chain increased the number of sales promotion contracts with manufacturers.

Production Segment

The key company in the segment is Sotex.

Production Segment Operating Highlights, Q3-2011:

The Q3-2011 revenue of the Production Segment (the key company — Sotex) increased by 18.8% y-o-y reaching RUB 1,275 mln. The Production Segment makes up 4.4% of the Group’s total revenueІ.

The volume trend in packages increased by 82.7% reaching 4.6 mln packages in Q3-2011, resulting from higher sales volumes of licensed and own-brand products (Amelotex, Neurox). The revenue share of own brands reached 21.5%. The revenue from own brands rose by a solid 66.3% in Q3-2011 vs. Q3 2010.

In Q3-2011, the Group strengthened its Production Segment through the acquisition of 100% stake in AnviLab’s business and assets, including such prominent pharmaceutical brands as Antigrippin-Maximum, Hepaguard, Influnet, etc. as well as the ANVI Lab trademark. The deal helps greatly to expand the product portfolio of the Production Segment and offers an opportunity to embark on a new OTC business.

Production Segment Operating Highlights, 9M 2011:

Over the reporting period, revenue increased by 6.4% while the sales volume in packages dropped by 14.2%. These results can be attributed to the changes made in the sales structure: promotion of own brands along with decrease in licensed products sales. As of 9M 2011, the Company operates 36 own brands vs. 29 as of September 30, 2010. New private labels were launched over the reporting period such as Likferr100, Eralfon 40,000 IE, Eralfon 20,000 IE, Idrinol (injections), BlokkoS, etc. BlokkoS is on the State List of Strategic Drugs to be manufactured in Russia.

Vadim Muzyayev, President of Protek Group, comments on Q3-2011 and 9M 2011 operating results:

“During this nine month period, we were engaged in the implementation of the chosen strategy incorporating the following Group’s segment areas: the enhancement of operational performance in Distribution, the increase of competitiveness and reduction of operational costs in Retail Sales, and the expansion of own brand portfolio and access to new markets in Production, as shown in the Group’s basic results.

The main contributors to the Group's revenues in 9M 2011 were the following segments: Production (6.4%) and Retail Sales (17.3%). Apart from that, I would like to highlight the positive results in the Production Segment: during the reporting periods, we have continued to implement strategies of developing our portfolio of own high-margin brands, which we believe will have an effect on the Group's financial performance and put the segment in the lead by profitability. An important step in the segment development was accessing the OTC market segment by acquiring AnviLab’s business and assets as well as the rights to prominent pharmaceutical brands such as Antigrippin-Max, Hepaguard, Influnet, among others.

On the positive side, the Retail Segment follows the revenue growth trend outpacing the market throughout 2011. We consider this to be of significant importance given the tax burden increase earlier this year.

Our key Distribution Segment continues to increase its operating efficiency, cut costs and support operating profitability. In 9M 2011, as a result of consistent improvement of the product range efficiency we have managed to increase the average package price.

Going forward, we will continue to enhance efficiency of operations across all segments of the Group while strengthening prospective businesses and developing new ones.”