PROTEK GROUP
Transcription
PROTEK GROUP
PROTEK GROUP PRODUCTION DISTRIBUTION RETAIL PROTEK GROUP OF COMPANIES contents 1. THE COMPANY TODAY 1.1 The Company Today 4 5 1.2 Message From The Chairman Of The Board 10 1.3 Message From The President 12 1.4 Protek Group 2010 Highlights And Events After The Reporting Period 14 2. market OVERview 2.1 The Russian Pharmaceutical Market 3. about the company 3.1 Market Position And Operating Results By Segment 18 19 38 39 4. DEVELOPMENT STRATEGY 64 5. CAPITAL EXPENDITURE AND INVESTMENT 70 5.1 Investment In Individual Market Segments 71 5.2 Development Of IT Infrastructure 74 6. HUMAN RESOURCES MANAGEMENT 78 7. SOCIAL RESPONSIBILITY 82 7.1 Social Policy And Philanthropy 83 7.2 Occupational Health And Safety 86 7.3 Environmental Protection 87 8. CONSOLIDATED FINANCIAL STATEMENTS 88 8.1 Independent Auditor’s Report 89 8.2 Consolidated financial statements 90 9. GLOSSARY 94 10. DISCLAIMER 96 Contacts 98 THE COMPANY TODAY 1.1 The Company Today 1.2 Message From The Chairman Of The Board 1.3 Message From The President 1.4 Protek Group 2010 Highlights And Events After The Reporting Period 2 Market Review 1.1 THE COMPANY TODAY Protek Group is one of the largest pharmaceutical companies in Russia. The Group has a diversified business structure with operations in all key segments of the pharmaceutical industry: pharmaceutical manufacturing, distribution of pharmaceuticals and health and beauty products, and retail sales. The Group has a workforce of more than 12,400. Protek Group is built around a balanced, vertically-integrated business model, enabling it to leverage added value at all stages of the Production-Distribution-Retail chain. OJSC Protek has been the flagship company of the Group since 2002 and consolidates ownership of shares in its subsidiaries and affiliates. Protek Group’s mission: “Our goal is to cater to our customers’ health and beauty. We cherish the economic, social and ethical values of society, and faithfully meet our obligations to customers, partners and the government, setting high standards of doing business.” The Group’s business model is focused on increasing competitiveness and strength of the Group’s overall business, as well as maximizing the value of every company in individual market segments. Protek Group adheres to the latest standards in financial management. Important elements in raising the investment appeal of our business include preparing corporate accounts according to International Financial Reporting Standards (IFRS), undergoing international audits, pursuing a balanced credit and finance policy, and implementing the Oracle E-Business Suite ERP solution in all of our business segments. KEY GROUP COMPANIES BY MARKET SEGMENT Market position * I Share in segment, % * 18.8% II IV 2.44% 3.64% CV Protek, a national distributor of pharmaceutical and health and beauty products ** Rigla, a national pharmacy chain *** Sotex PharmFirm, a pharmaceutical manufacturer **** * Market positions and market shares of Protek Group companies in the corresponding segments of the Russian pharmaceutical market according to data from Pharmexpert MRC and DSM Group for 2010 ** CV Protek was ranked first in 2010 in an overall ranking of pharmaceutical distributors published by DSM Group *** According to a ranking of Russia’s largest pharmacy chains by sales published by Pharmexpert MRC **** According to company data based on Pharmexpert MRC data, by wholesale sales THE COMPANY TODAY 5 annual report 2010 6 GrOuP FiNANCiAL iNDiCATOrS SALES, SALES STRUCTURE BY BUSINESS SEGMENTS IN 2010* m RUR 99,841 91,581 77,514 84.4% Distribution 11.2% Retail 2008 4.4% Production +9.0% +18.1% 2009 2010 Source: iFrS accounts * Calculated as the sum of each segment revenue (does not include unallocated revenues and eliminations) CONSOLIDATED EBITDA, NET PROFIT, NET DEBT, m RUR m RUR m RUR 5,837 6,639 3,274 1.9 3.6% 6.4% 2,115 3,478 0.4 2,670 +67.8% 2010 +663.2% 4.5% 942 2008 -54.3% 429 2.7% 2008 EBITDA 2009 EBITDA margin, % Source: iFrS accounts N/A 0.9% 0.6% 2010 -2,937 -71.2% Net debt 2008 Net profit Source: iFrS accounts 2009 2009 Net debt/EBITDA 2010 Net profit margin note: Net debt/EbiTDA for 2010 was -1.1 Source: iFrS accounts GrOuP OPErATiNG rESuLTS tHe CoMpanY toDaY 7 DiSTribuTiON CV Protek, the largest Russian national distributor of pharmaceuticals and health and beauty products, is the Group’s main profit center. CV Protek, which has been working in the Russian pharmaceutical market since 1990, distributes products in all 83 regions of the country and had more than 158,700 square meters of warehouse space at the end of 2010. SALES, SALES, SALES PER SQUARE METER OF WAREHOUSE CAPACITY, m RUR m packs 000 RUR 90,644 83,121 952 896 494.8 69,256 390.8 +9.1% +20.0% 2008 571.0 856 2009 Source: iFrS accounts +11.2% -4.5% 2010 2008 2009 Source: Company data +15.4% +26.6% 2010 2008 2009 Source: Company data 2010 annual report 2010 8 NUMBER OF TRANSACTIONS, rETAiL rigla Pharmacy Chain had 648 pharmacies in 27 regions of Russia at the end of 2010. The company is developing two main formats: Rigla pharmacies with an open layout of products and wide selection of parapharmaceuticals and the Bud Zdorov! (Be Healthy!) chain of discount pharmacies with behind-the-counter display and competitive prices. m 45,355 44,052 42,945 +2.6% -5.3% 2009 2008 2010 Source: Company data NUMBER OF PHARMACIES SALES, LIKE-FOR-LIKE SALES m RUR 12,005 11,256 10,311 +21.0% 648 534 521 +5.7% 28 +6.7% +9.2% +127 +24.4% -13 -2.4% 26 -1.3% 27 +3.4% -4.5% -12.7% 2008 2009 L-f-L change in sales, % 2010 2008 Source: iFrS accounts 2009 Number of pharmacies Source: Company data 2010 2010/2009 Change in traffic , % 2009/2008 Regions with a presence in Russia Source: Company data Change in avg sale/transaction , % PrODuCTiON 9 SALES OF THE PRODUCTION SEGMENT, SALES OF PHARMFIRMA SOTEX COMPANY IN MLN PACKS AND SHARE OF OWN BRANDS IN SALES OF THE PRODUCTION SEGMENT m RUR tHe CoMpanY toDaY The core of the Production segment is Sotex PharmFirm, whose plant in the Sergiyevo-Posad district of Moscow Region is one of the most technologically advanced pharmaceutical enterprises in Russia. The plant makes ampoules of INN generic injection solutions, manufactures pharmaceuticals under license and produces its own brands. COMPANY PRODUCT STRUCTURE by number of items 4,771 88 19.7 16.2 3,484 13.3 2,938 16.0% 11.0% +36.9% 8 35 15 67 29 28 45 +21.8% +18.6% 80 36 -32.5% 24 3.6% 2008 Source: iFrS accounts 2009 2010 2008 Sales, m packs Source: Company data 15 2009 2010 Own brands as share of sales, % 2008 Licensed Own brands Source: Company data 2009 2010 INN generics 1.2 MESSAGE FROM THE CHAIRMAN OF THE BOARD annual report 2010 10 DEAR SHAREHOLDERS AND INVESTORS, PARTNERS AND COLLEAGUES, Last year was a special one for us, as Protek Group acquired a new status by becoming a public company. The company carried out an IPO on April 27, 2010 on the Russian exchanges MICEX and RTS. This milestone is a planned phase in the Group’s development and the result of the strategy pursued by management. As you know, our company’s policy has always been aimed at increasing transparency and disclosure, applying best corporate practices and implementing the latest effective solutions and technologies. The IPO raised about $400 million with the sale of 20.2% of shares in the company. As we announced during the IPO, the money raised will help Protek implement its strategy to strengthen the Group’s positions in the key segments of the pharmaceutical market – production, distribution and retail. Becoming a public company signifies a transition to a higher and more responsible level of doing business, both within the company and outside of it. We hope that for our suppliers, customers and partners Protek Group has become an even more reliable and predictable company, collaboration with which offers new opportunities for growth while minimizing many conventional Russian risks. Last year was also a difficult one for the Russian pharmaceutical market. Major government regulatory initiatives led to structural changes in the whole market. It became more competitive, with stiffer price competition. This ultimately reduced the profitability of the pharma market, particularly its distribution sector. The Group’s core company, CV Protek, found itself in this situation along with many other distributors. The main regulatory changes of last year included the imposition on April 1, 2010 of government regulation of prices for pharmaceuticals included in the Essential Pharmaceutical List. The government imposed regulation of markups throughout the product chain, from the producer price to the retail price at pharmacies. This move reduced the profitability of all players on the pharmaceutical market. Another important development was the Federal Law On Circulation of Pharmaceuticals, which went into effect on September 1, 2010. The law regulates in greater detail the relations involved in the circulation of pharmaceuticals, including development, manufacturing, preclinical and clinical trials, and sales. Significantly, it also requires Russian pharmaceutical manufacturers to make the transition to European GMP quality standards by January 1, 2014. Market factors continue to affect the pharmaceutical industry in 2011. Tax changes went into effect on January 1, 2011 that require pharmacies to switch from paying the unified tax on imputed income to taxation under the general system. In addition, Russian companies saw their insurance contribution payments jump to 34% of payroll. All of these factors have a significant impact on our business, and our objective is to not only overcome them but to improve the performance of the Group’s business model by harnessing all of our internal resources and taking advantage of market opportunities. We are confident that in today’s tougher market environment Protek Group has all the necessary resources, developed infrastructure and potential to continue growing and increasing its capitalization. We intend to continue to improve the Group’s vertically integrated business model, as the most stable and balanced in the current conditions. The balance of the model is maintained by having assets in each of the three market segments that hold leading positions and conduct business according to the latest international standards. The distribution division, CV Protek, is successfully meeting the objective of maintaining its market lead, with the largest market share among national distributors. The profitability of the distribution segment is expected to increase through tight control of operating expenses. Efforts are also underway to generate more revenue by improving the quality of management, and working more effectively with the customer base and product selection. We are intent on creating a competitive product and are already offering a whole package of services, including product promotion, logistics, customs processing and IT support. In the retail segment, the core of which is the Rigla pharmacy chain, we are aiming for the lead in terms of business performance. In light of the recent legislative changes, our retail segment has the strongest model. We have well-developed infrastructure and a competitive strategy that meets the needs of our customers. The company launched a new discount chain under the Bud Zdorov! brand in 2010, opening pharmacies with a behind-the-counter format that offer consumers a broad selection of pharmaceuticals at affordable prices. The new chain’s growth, both organic and by acquisition of existing pharmacy chains, is being constantly monitored for operating performance. As for the company’s production segment, led by Sotex PharmFirm, we believe that in the future it will be key to our profitability and investment appeal. We aim to become one of Russia’s three largest pharmaceutical manufacturers, and expect that in the foreseeable future the growth of this segment of the Protek Group will far outstrip growth in distribution and retail, both in terms of revenue and profitability. Sotex is currently moving to expand the portfolio of its own branded generics with improved application properties, as well as licensed manufacturing of the pharmaceuticals of foreign manufacturers. We are developing a portfolio of pharmaceuticals under our own brands in such socially important medical fields as oncology, nephrology, cardiology and rheumatology. Sotex’s growth gives Protek Group a prominent role in programs of national significance. These include the federal special program Pharma 2020, programs aimed at import-substitution, and establishment of pharma clusters (involvement in Severny cluster). The company continued to develop its corporate governance system last year. OJSC Protek’s Board of Directors represents the interests of shareholders at key Group companies, which ensures unified standards of strategic planning, coordination of plans among segments and transparency in the decision making process. Two of the five members of the Board are independent directors who are actively involved in the current operations of the Group. The Board also has three smoothly functioning committees: for audit, strategic planning and incentives. The company annually publishes financial statements in accordance with international standards. The company has been preparing accounts to IFRS for six years already, and undergoes both independent and internal financial audits. When publishing financial statements, management holds a direct dialog with the investment community and we are always open with shareholders and partners. I am confident that financial transparency, a balanced policy of investing in the development of the business and availability of internal resources will enable the Group to continue to grow and increase its value. Vadim Yakunin Chairman of the Board, OJSC Protek кОмпания tHe CoMpanY сеГОДня toDaY 11 1.3 MESSAGE FROM THE PRESIDENT annual report 2010 12 DEAR PARTNERS AND COLLEAGUES, Protek Group’s results in 2010 were defined by general business growth amid a much more difficult market environment. Protek Group’s audited consolidated revenue grew by 9.0% compared to 2009 and reached 99.841 billion rubles (about $3.3 billion). The Group’s growth outpaced the market, which grew by 5.5% in 2010, according to DSM Group. The structure of Group revenue saw a shift away from the Distribution and Retail segments in favour of the Production sector, which grew to 4.4% of total revenue from 3.6% a year earlier. Protek Group’s EBITDA fell by 54.3% to 2.671 billion rubles (about $88 million) in 2010. The financial performance of individual segments of the Group’s business differed dramatically in 2010: • The Production segment had the strongest growth in sales – 36.9% – and achieved a fairly high EBITDA margin of 17.6%, though this was down from 20.1% a year earlier. • The Distribution segment suffered the steepest drop in EBITDA margin, to 1.3% from 5.2% in 2009. Given that this segment accounts for 84.4% of the Group’s total revenue, this had a major adverse impact on the overall margins of the Group, the EBITDA margin of which fell to 2.7% from 6.4%. • The Retail segment demonstrated the slowest growth in 2010 – 6.7% compared to 2009 – but the EBITDA margin remained far higher than in the Distribution segment, despite dropping to 5.4% from 7.1% a year earlier. The decline in margins in the reporting year was due to major regulatory changes in the sector, particularly restrictions on markups in the distribution and retail segments. In 2011, external factors also continue to affect the market in general and the Group in particular. New tax amendments went into effect on January 1, 2011 that will require pharmacies to switch from paying the unified tax on imputed income to the general system of taxation. As a result, all the regional companies in the Retail segment have lost the right to use the unified imputed income tax regime and have switched to the general taxation system. Furthermore, payroll contributions were raised from 26% to 34% (and for the companies, which used unifed imputed income tax – from 14% to 34%) of payroll at the beginning of 2011. We are taking these factors into account and are working hard to achieve the Group’s performance targets for the current year. Our main goal is to increase Protek Group’s capitalization by growing the value of each individual business segment. We believe the fastest business growth is possible in the production and retail segments. The Group’s Production segment is already demonstrating strong margins. We believe that aggressive development of this business will make a major contribution to the Group’s investment appeal. The Russian pharmaceutical market is currently going through a time of rapid change. The industry is in a phase of development, evolving into a strategic sector of the economy. We believe that taking timely advantage of market opportunities is a must for the Group’s future productive development. Despite the heavier tax burden, we expect that legislative changes of this year will in the future not be as drastic as last year. A relatively stable external environment for doing business makes it possible to focus on internal business processes and improve their efficiency. Vadim Muzyayev President, OJSC Protek КОМПАНИЯ THE COMPANY СЕГОДНЯ TODAY 13 1.4 PROTEK GROUP HIGHLIGHTS OF 2010 AND EVENTS AFTER REPORTING PERIOD annual report 2010 14 JANUARY 2010 Sotex begins exporting pharmaceuticals Sotex, a pharmaceutical manufacturer that is part of the Protek Group, began exporting pharmaceuticals to Macedonia in January 2010. Sotex was able to develop its export business in Macedonia after the company and its products received positive reviews from a delegation from the Macedonian Health Ministry’s Bureau for Medicines in October 2008. The Bureau audit confirmed that the company’s manufacturing facilities meet national quality standards. MARCH 2010 Sotex places 5th in ranking of Russian pharmaceutical manufacturers Sotex was ranked fifth in an overall ranking of Russian pharmaceutical manufacturers in 2009, compiled by Pharmexpert MRC. The company ranked in sixth place by gross production volume. APRIL 2010 Rigla named Pharmacy Chain of the year Rigla won the most prestigious industry award, the Platinum Ounce. The Expert Council of the national awards for pharmaceutical professionals named Rigla the winner in the Pharmacy Chain category. Protek completes IPO Protek raised about $400 million, before commissions, in an initial public offering that valued the company at $1,845 billion. The company’s common shares, placed at a price of $3.50 each, were included in the B Quotation List and accepted for trading on the RTS exchange, as well as accepted for trading without listing procedures on MICEX. The company plans to use the funds raised in the IPO to finance the development of its retail and production segments. Rigla acquires TC Toko chain in Samara Region The TC Toko chain includes eight pharmacies in the city of Novokuibyshevsk and one in Samara. The outlets, which are located along major city thoroughfares, have both open and behind-the-counter product display and floor area of 60 to 150 square meters. MAY 2010 Rigla launches new pharmacy brand Protek Group wins auction for Novaya Apteka chain Retailer Rigla launched a new strategic project – the Bud Zdorov! (Be Healthy!) discount pharmacy chain. The chain’s distinctive features are competitive prices, behind-the-counter format, relatively small footprint and regular availability of a broad selection, including rare and high-price pharmaceuticals. Protek Group won an auction for the right to acquire 100% of shares in LLC Novaya Apteka, a pharmacy chain with ten outlets in the city of Yaroslavl. The auction was held by the city’s municipal property department. JUNE 2010 Rigla opens first store for mothers and infants Rigla launched a new project: a chain of stores for mothers and infants under the Mal Mala Menshe brand. The new chain will sell products for mothers and babies that do not require a license for pharmaceutical activities, such as baby food, toys, cosmetics, clothing for newborns and feeding accessories. JULY 2010 Rigla begins opening pharmacies at local grocery stores Rigla launched a program to open pharmacy outlets at grocery stores that are part of the Magnolia chain. Under the partnership, Magnolia leases space in its stores to Rigla. The program is aimed at combining the traffic of both chains. AUGUST 2010 First Rigla pharmacies open in St. Petersburg The Rigla chain opened the first two pharmacies under the Rigla brand in St. Petersburg. The outlets were opened at the largest shopping centers in the city and region: Mega Dybenko and Mega Parnas. Protek Group acquires Biopharm chain Protek Group won a tender for the right to acquire 100% of shares in OJSC Biopharm, a chain of ten pharmacies in Yaroslavl. The tender was held by the city’s municipal property department. The acquisition increased to 48 the number of pharmacies operated by the Group in Yaroslavl Region. Rigla opens “pharmacy of the future” The Company closed a deal to acquire Panacea, a chain of 20 pharmacies, including seven outlets in St. Petersburg and 13 in the Leningrad Region town of Sosnovy Bor. The Rigla chain opened the largest pharmacy in Moscow, equipped with the world’s first Vichy Laboratories spa treatment salon. The “pharmacy of the future” is a two-storey pharmacy and consultation center located in the center of the Russian capital, at 42/20 Ulitsa Zemlyanoi Val. The store covers more than 500 square meters. The store also has an innovative training center for beauty care consultants. Rigla moves up in retail rankings The Rigla pharmacy chain placed 53rd in the Top 100 Retail Chains ranking compiled for 2009 by business journal Finans, moving up ten places compared to the previous year. The main criterion for the ranking is revenue. Protek Group ranks 51st among Russia’s biggest companies Protek Group placed 51st for 2009 in an annual ranking of Russia’s 500 Largest Companies compiled by business journal Finans, moving up ten places from the previous year. The main criterion was sales volume. NOVEMBER 2010 Protek Group signs strategic partnership agreement with ChemRar High Tech Center Protek Group and ChemRar High Tech Center signed a memorandum on strategic partnership in the area of innovative pharmaceutics. One of the priorities of the partnership will be to create an innovative medical-pharmaceutical cluster around the Moscow Institute of Physics and Technology (MIPT), and develop research, production and marketing potential by harnessing the expertise and competitive advantages of both companies. Protek Group acquires 51% of Zhivika Companies Protek Group acquired 26% share in Zhivika Companies (based in Yekaterinburg and the Sverdlovsk Region). The contract has been signed by the parties on November, 15 2010 and then the Group began consolidating financial results of the Zhivika Companies. The Group initially acquired a 25% share in each company in 2008 (as part of the acquisition of LLC ASB-Centre that held these shares). Thus the Group owns 51% share in Zhivika Companies. Zhivika Companies has 56 pharmacies in Yekaterinburg and is the leading pharmaceutical retailer in the region. DECEMBER 2010 Protek Group anchor member and founder of Severny biopharmaceutical cluster based at MIPT The main objective of the cluster is to create and support an effective research – clinical trials – production chain. Combining the resources of the participants in the cluster will make it possible to support a complete development cycle for innovative pharmaceuticals, from development of molecules to clinical trials, development of manufacturing technology and market launch of the pharmaceutical. Transservice Customs Warehouse launches electronic pharmaceutical declarations Protek Group’s Transservice Customs Warehouse, which provides customs processing services for pharmaceutical products, processed the first declaration for pharmaceuticals in its electronic declaration system. Electronic declaration will accelerate customs processing, increase the efficiency of imports, and reduce operating costs and the labor intensiveness of customs processing. Rigla chain launches new website The Rigla pharmacy chain launched a new website that includes a full catalog of its products and interactive maps of store locations. The aim of the website was to provide an Internet resource offering maximum convenience and information for customers. With this in mind, we developed two main functions for the site: an intuitive product catalog and store search with various options. Protek celebrates 20 years Protek celebrated its 20th anniversary on November 21, 2010 among colleagues and partners. The celebrations were held at the Bolshoi Theater in Moscow. Protek upgrades server platforms CV Protek completed the process of upgrading its server platforms based on IBM systems. The new IT infrastructure supports high productivity of key business applications to keep pace with the growth of the distributor’s business. 15 THE COMPANY TODAY Protek Group acquires Panacea pharmacy chain annual report 2010 16 Rigla chain completes major phase of computerization Spargo Technologies, a unit of the Protek Group that provides IT services for pharmaceutical market participants, completed a major phase in switching 115 Rigla pharmacies in Moscow and the Moscow Region to the new ePharma2 software platform. A total of 250 Rigla pharmacies in 12 regions of Russia have been successfully computerized to date, and efforts continue to computerize remaining stores. Sotex launches pharmaceutical exports to Turkmenistan Rigla expands corporate pharmaceutical insurance business Sotex PharmFirm registered several products in Turkmenistan in December 2010. Among the first pharmaceuticals slated for export to Turkmenistan will be the company’s own brands: Cereton® (choline alfascerate), Eralfon® (epoetin alpha), Amelotex® (meloxicam) and CompligamB® (multivitamins). The Rigla pharmacy chain’s partner in the area of corporate pharmaceutical insurance is Sogaz Insurance Group, one of Russia’s largest insurers. The companies signed an agreement and servicing of clients began in December 2010. 2011 (events after reporting period) Igor Filatov appointed general director of CV Protek The Board of Directors of OJSC Protek on February 1, 2011 appointed Igor Filatov as general director of CV Protek. Mr. Filatov previously held the post of deputy general director for strategic development at the company. OJSC Protek shares accepted for trading in RTS B Quotation List OJSC Protek’s shares were accepted for trading in the RTS B Quotation List on February 21, 2011. The Company’s shares were transferred from the exchange’s V Quotation List to the B Quotation List by decision of the RTS chief executive, according to the rules for accepting securities for trading. MARCH 2011 Rigla expands market share The Rigla pharmacy chain was ranked second in Pharmexpert MRC’s ranking of Russia’s Top 10 pharmacy chains in 2010, with a market share of 2.44%, up from 2.28% in 2009. Rigla was one of the few pharmacy chains in the Top 10 that managed to expand market share in 2010, while most other chains in the Top 10 saw their market share shrink. CV Protek and IBM launch new data storage system CV Protek, in collaboration with IBM, launched a new data storage system that will improve the reliability of client services for partners of the pharmaceutical distributor. Protek plans to use the IBM XIV storage system to test and operate all key business applications at the company. APRIL 2011 Protek Group optimizes structure of Retail segment The Group is optimizing the structure of its Retail segment, merging subsidiaries in the segment with LLC Rigla (Moscow). The restructuring is intended to simplify the management of regional pharmacies and optimize operating expenses by reducing the number of legal entities and standardizing business processes. MAY 2011 Two Group companies win most prestigious pharma industry award The Expert Council of the Platinum Ounce awards for pharmaceutical industry professionals named Rigla the best pharmacy chain in 2010, and Sotex’s Eralfon biotech pharmaceutical won in the category for Breakthrough of the Year. 17 THE COMPANY TODAY FEBRUARY 2011 MArkET OVErViEw 2.1 The Russian Pharmaceutical Market 3 About The Company 2.1 The Russian pharmaceutical market DSM Group estimates. The ranking of pharmaceutical makers with a presence in Russia is dominated by foreign companies: there is only one Russian pharmaceutical manufacturer – PharmStandard – among the Top 20 leading players in the Russian pharma market. 19 MARKET REVIEW The Russian pharmaceutical market was one of the ten largest in the world by retail sales of finished pharmaceutical products (FPP) in 2010, moving up to the 8th place1 from the 11th place1 in 2009. The market grew by 11.0%1 in dollar terms and 5.5% in ruble terms (Source: DSM Group annual report Pharmaceutical Market 2010).2 The principle players in the product distribution system in the pharma market are distributors. This is due to the country’s huge area. The distribution sector is currently highly concentrated and is typically seeing moderate growth amid shrinking margins due to new government regulations. The pharmaceutical market’s share of Russian GDP in 2010–2011 exceeds its pre-crisis level, and is expected to grow further by the end of 2011. The Russian government’s determination to reverse negative demographic trends in the country guarantees that there will be more government funding for healthcare, increasing the potential for further growth of the Russian pharmaceutical market. The retail sector of the Russian market is represented by an extremely large number of players. Consolidation in the sector, which gained momentum in the period before 2011, could stall due to major changes in tax legislation. The Russian pharmaceutical market depends on imports, with 76.5%2 of pharmacuticals by value consumed in the country, manufactured abroad, Size of Russian retail FPP market compared to other countries in 2010, $ bn 250 25% 224.5 +23% +20% 200 20% 15% 150 +11% 10% 85.7 100 5% 50 0 +3% +3% +3% 34.6 0% 32.2 27.9 +2% 19.3 17.5 16.1 Canada Brazil Russia -4% USA Japan Germany Size of market in 2010, bn USD China 15.7 -4% France 14.3 13.6 Spain UK -4% Italy 0 -5% Growth in 2010, % Source: IMS Health, DSM Group 1 IMS Health, DSM Group; size of Russian pharmaceutical market in 2010 according to DSM Group, retail FPP market = commercial FPP segment + NMRP; other markets according to IMS Health 2 DSM Group annual report Pharmaceutical Market 2010 ANNUAL REPORT 2010 20 KEY INDICATORS OF RUSSIAN PHARMACEUTICAL MARKET 2000 3 510 1 800 65.2% 47 600 200 <1.0% 650 29.3% Market volume, bn USD (in ultimate consumer prices) Number of distributors Market share of Top 10 distributors Number of pharmacies Number of pharmacy chains Market share of Top 10 pharmacy chains Number of domestic manufacturers Market share of Top 10 manufacturers ** * Growth of Top 10 share in 2000–2010, percentage points. ** All manufacturers selling their products in the Russian pharma market, both domestic and foreign. Source: DSM Group, Pharmexpert MRC PHARMACEUTICAL MARKET AS A SHARE OF RUSSIAN GDP 1.6% 1.4% 2006 1.3% 1.3% 2007 2008 2009 * Size of pharmaceutical market estimated taking into account parapharmaceuticals, in retail prices. Source: DSM Group 1.5% 2010 2009 11 600 1 120 85.0% 65 000 600 15.1% 1 025 33.0% 2010 16 100 1 100 91.0% 64 900 610 14.9% 1 148 31.8% Growth, % 2000–2010 CAGR +16.5% -4.8% +25.8% * +3.1% +11.8% > +14.0% * +5.9% +2.5% * The Russian pharmaceutical market is commonly divided into four key segments (in descending order of size): • Commercial FPP (finished pharmaceutical product) sector • Commercial parapharmaceutical (nonmedicinal products) sector • NMRP (additional pharmaceutical coverage) government-funded FPP sector • Government-funded FPP sector – hospital market The graph below shows the growth of the pharmaceutical market in 2006–2010, and the forecast for 2011 by key market segment. In the period from 2006 to 2010, the commercial market segments demonstrated the strongest average annual growth, of 16.5% and 16.9%. The hospital market also showed double-digit growth of 11.3%, while the FRP/NMRP sector lagged with a growth rate of 5.7%. Consumer demand for health and beauty products is growing as the Russian economy recovers from the 2008 global financial crisis. GROWTH OF RUSSIAN PHARMACEUTICAL MARKET BY KEY SEGMENTS IN 2006–2010 in ultimate consumer prices, bn RUR Overall market +5.5% +12.0% 746.3 666.6 632.1 534.4 386.4 +9.3% +10.0% +1.1% Hospital market 11.3% (CAGR, 2006–2010) +5.4% 426.7 +6.0% FRP/NMRP 5.7% (CAGR, 2006–2010) +13.5% Commercial FPP market 16.9% (CAGR, 2006–2010) Commercial parapharma market 16.5% (CAGR, 2006–2010) +2.0% 2006 2007 2008 2009 * DSM Group estimate, April 2011 Source: updated data DSM Group, annual report Pharmaceutical Market 2010 +15.0% 2010 21 MarKet reVIeW STruCTurE OF ruSSiAN PHArMACEuTiCAL MArkET, FOrECAST FOr 2011 2011* THE INDEX OF CONSUMER PRICES IN RUSSIA IN 2010 annual report 2010 22 In 2010, pharmaceutical prices stagnated for the first time ever in the history of the Russian pharmaceutical market, dropping by 0.7%. This was one of the most important results of changes in government regulation of the market, which will be discussed in greater detail below. It is worth noting that pharmaceutical prices stagnated in 2010 amid fairly high inflation across all key categories of goods and services in the Russian consumer market. 12.9% 8.8% 8.1% 6.5% 5.0% 0.7% Consumer price index Food goods Services Nonfood goods Gasoline Pharmaceuticals Sources: Federal Statistics Service of russia, updated data of DSM Group annual report Pharmaceutical Market 2010 The Russian market is characterized by fairly low average prices per pack compared to the markets in developed countries. However, this indicator on the Russian market has been rising annually due to growing demand for the latest, more effective and expensive pharmaceuticals. This is typical for both the government-funded and commercial segments of the market. AVERAGE PRICE PER PACK ON RUSSIAN PHARMACEUTICAL MARKET, RUR 60.4 57.4 44.0 39.4 33.8 In future, the increase in average price per pack will mean higher margins for market players, above all pharma distributors, as in order to maintain previous cash flow distributors will need to provide logistics and shipping for a smaller amount of goods by volume. +16.6% 2006 Source: DSM Group +11.7% 2007 +30.5% 2008 +5.1% 2009 2010 FACTOrS CONTribuTiNG TO APPEAL OF ruSSiAN PHArMACEuTiCAL MArkET Level of per capita pharmaceutical consumption: the gap between the Russian market and developed markets is already narrowing and this trend will continue into the foreseeable future. Per capita consumption of pharma products in Russia amounted to $113 in 2010, and the gap between consumption in Russia and developed countries shrank considerably. The expected further contraction of this gap is a major factor pointing to the future growth of the Russian market. It should be noted that one of the Russian government’s objectives is to bring pharmaceutical consumption in the country up to average European levels. Therefore, per capita consumption could triple over the next decade. It is also worth noting that per capita consumption of pharma products in developed countries fell steeply, including by 6.8% in Japan, 25.4% in the United States and 37.4% in Italy. This contrasted sharply with the growth of per capita consumption in countries with rapidly growing economies. With a population of 141.8 million as of July 2010, Russia ranks ninth in the world. Average life expectancy in Russia is forecast to rise to 68.9 years by 2012, and to 72 years by 2020, according to the long-term socioeconomic development strategy to 2020 that the Russian Economic Development Ministry released in 2008. FPP CONSUMPTION PER CAPITA IN 2010, $ 25.6% 731 671 590 -6.8% -7.2% 0.0% 440 412 -9.5% 332 -4.1% 265 -25.4% 226 -26.9% -25.8% -26.1% 113 93 -37.4% USA Japan Canada France Pharmaceutical consumption per capita in 2010, USD Change 2010/2009, % Source: MS Health, DSM Group Germany Spain Italy 25 UK Russia Brazil China MarKet reVIeW In terms of per capita consumption of pharmaceutical products, Russia shot up to the 9th place in 2010 from the 19th place a year earlier. Among BRIC countries, Russia has the highest per capita consumption rate. 23 annual report 2010 24 Life expectancy at birth (both sexes) Forecast to 2050, CAGR 2015–2050 years 74.9 Russia Russia 79.3 China 73.3 India 79.9 0.34% 0.24% Brazil 62.3 South Africa 0.20% China India Brazil 0.28% South Africa 0.47% 83.3 USA 0.12% USA 84.1 UK 87.2 Japan UK 0.14% 0.12% Japan 84.4 Germany Germany 0.14% France 0.14% 86.0 France 75.5 World World 82.8 More developed countries More developed countries 74.3 Less developed countries Least developed countries 40 50 60 2045–2050 1990–1995 2010–2015 1950–1955 70 Source: World Population Prospects: The 2008 Revision Population Database 0.17% Less developed countries 68.5 30 0.26% 0.30% Least developed countries 80 90 0.48% 0% 0.2% CAGR 2015–2050 0.4% 0.6% Share of population aged 60+ 25 Forecast to 2050 MARKET REVIEW (both sexes) Forecast growth in 2010–2050, percentage 31.7 Russia Russia 31.1 China India 29.3 Brazil 12.1 19.1 Brazil 14.2 South Africa 18.8 China 19.6 India 13.6 South Africa 6.9 27.4 USA 9.2 USA 28.8 UK UK 44.2 Japan 39.5 Germany 32.6 21.9 32.6 More developed countries 13.5 9.4 10.9 10.8 Less developed countries 11.1 10 Germany More developed countries 20.2 0 13.7 World World Least developed countries Japan France France Less developed countries 6.1 11.6 Least developed countries 20 2045–2050 1990–1995 2010–2015 1950–1955 30 Source: World Population Prospects: The 2008 Revision Population Database 40 50 5.9 0 10.0 Growth 2010–2050 20.0 Implementation of the Strategy for the Development of the Pharmaceutical industry to 2020, adopted in 2009: the Russian government is prepared to help finance the modernization of the domestic pharmaceutical industry, and promote its competitiveness by harmonizing Russian standards for development and manufacture of pharmaceuticals with international standards The government has already demonstrated its ability to channel substantial budget funding into healthcare. Over the past six years, government funding has grown by an annual average of 29.0%, which far outstrips growth in consumer spending. As a result, the share of government spending in total spending on healthcare in Russia has grown from 50.9% to 72.6% over this period. CONSOLIDATED HEALTHCARE SPENDING IN RUSSIA IN 2004–2010, 645.0 595.0 630.0 1,707.3 2007 1,653.0 437.0 2006 1,548.5 2005 1,385.7 2004 962.2 384.0 505.0 bn RUR 797.1 Key expected results of the Strategy include: 1. Growth in the share of Russian-made products in the domestic market to 50% in value terms by 2020 2. Change in the selection of pharmaceuticals sold in Russia, including growth in the share of innovative pharmaceuticals to 60% by value 3. Pharmaceutical security for Russia in terms of the Essential Pharmaceuticals List 4. Stimulation of production of pharmaceutical substances in Russia on a scale needed to support the manufacture of 50% of finished pharmaceutical products by value, including at least 85% of those on the list of strategic pharmaceuticals Expected increase in average life expectancy in Russia from the current 68 years to 75 years by 2050 (the growth rate of 0.28% is close to the world average) will increase the number of pharmaceutical consumers in the country. 370.3 357.0 annual report 2010 26 2008 2009 2010 Consumer spending (official & unofficial spending on medical care, pharmaceuticals). 10.4% growth (CAGR, 2004–2010) Russian consolidated budget spending. 29.0% growth (CAGR, 2004–2010) Source: russian Finance Ministry, Public Healthcare Development institute The proportion of the population older than 60 years in Russia is expected to grow rapidly, from 18.1% in 2010 to 31.7% in 2050. The rate of population aging in the country (+13.6 percentage points) is expected to keep pace with that in developed countries, and this long-term factor will also increase the number of pharmaceutical consumers. ADDiTiONAL PHArMACEuTiCAL COVErAGE GOVErNMENT PrOGrAMS Since January 1, 2008, Russia has had two subprograms for additional pharmaceutical coverage: essential pharmaceutical coverage (NMRP) and the subprogram for seven high-cost pharmaceuticals (VZN). A total of RUR 88.4 billion was spent on pharmaceutical purchases for entitlement recipients in 2010. Centralized procurement under NMRP and VZN has proven its effectiveness and has saved budget funds. Free pharmaceuticals were provided to 4.2 million people in the country, according to preliminary figures. In general, the government has ambitious goals to fundamentally restructure the system of healthcare and medical insurance in Russia. The reforms are intended to modernize infrastructure and institute a shift to modern standards of medical care, among other things. Future reforms will be backed by funding. In two years of reform, about RUR 460 bn in funding has been allocated for computerization, renovation and modernization of medical facilities, higher wages for healthcare workers, standardization of medical services and other needs. The introduction of pharmaceutical insurance in Russia should dramatically increase the attractiveness of the Russian pharma market. In the long term, pharmaceutical insurance will increase turnover in the Russian market by 30–40% (if the government assumes 100% coverage for pharmaceuticals included in the program), Cegedim estimates. An example of a country with a successfully functioning pharmaceuticals reimbursement system is Germany, where insured patients are reimbursed up to 80% of the cost of pharmaceuticals. The legislative introduction in Russia of new pharmaceutical insurance plans to partially transfer pharmaceutical costs from consumers to the insurer as represented by the government through insurance companies will help increase access to modern pharmaceuticals for broader segments of the Russian population, which in the medium term could contribute to the growth of the Russian pharma market in general. 27 MarKet reVIeW Protek Group has a strong presence in the manufacturing segment of the Russian pharma market. Sotex PharmFirm is one of the Top 5 domestic pharmaceutical manufacturers and the fastest-growing segment of the Group’s business. The company supports Protek Group’s active involvement in Russian programs of national significance. These include the federal special program Pharma 2020, import substitution, implementation of state-of-the-art manufacturing technologies, involvement in the creation of pharmaceutical clusters (Severny cluster), and the development and adoption in Russia of a national version of GMP standards. annual report 2010 28 Structural changes in the Russian pharmaceutical market The commercial market accounts for almost four fifths of the Russian pharma market. Sales in the commercial FPP market grew by just 6% in 2010, the lowest figure in the past decade. The slow growth was due to weak demand, particularly compared to the spike in demand at the end of 2009, as well as to the imposition of government regulation of the Essential Pharmaceuticals List. The market should perform better in 2011, as indicated by the growth in pharmaceutical consumption by volume. Price inflation for pharmaceuticals is forecast to be 8%. DSM Group reckons that the commercial FPP market will grow by about 13.5% in 2011. The hospital segment of the market is gaining importance, and demonstrated the strongest growth, amounting to 9.3%, according to DSM Group. This is one of the most stable segments of the market. Government regulation of prices introduced in 2010 not only resulted in a slight reduction of selection, but also led distributors and pharmacies to begin purchasing and selling more expensive pharmaceuticals, as well as expand their non-EDL selection. However, government regulation of prices for the most essential pharmaceuticals has clearly been beneficial in terms of social stability. Structure of Russian pharmaceutical market by nonprescription (OTC) and prescription (Rx) pharmaceuticals The OTC segment of the market, which is less subject to price regulation, has been slowly growing in recent years – from 35.4% to 39.5% in 2006–2010. Russian manufacturers lose market share in 2010 The Russian government’s efforts to develop the domestic pharmaceutical manufacturing industry could help reduce Russian companies’ technological lag behind foreign competitors. The average price per pack for Russian-made pharmaceuticals is 6 times lower than for imported pharmaceuticals: RUR 25 compared to RUR 150 in 2010, DSM Group estimates. However, domestic pharmaceuticals dominate on pharmacy shelves by volume, with a share of 64.5%. Structure of Russian pharmaceutical market by key segments in 2006–2010 in ultimate consumer prices 10.4% 10.8% 10.0% 8.9% 9.2% 8.6% 16.8% 11.8% 12.4% 12.1% 12.1% 11.3% 58.7% 60.6% 60.9% 61.8% 18.5% 18.9% 18.3% 17.7% 18.2% 2007 2008 2009 2010 2011* 56.3% 16.6% 2006 59.0% Government-funded – hospital segment Government-funded market – FRP Commercial market – FPP Commercial market – parapharma * DSM Group estimate, April 2011 Source: DSM Group, April 2011 The main trend in the retail market in 2010 was a decline in prices for EDL pharmaceuticals following the introduction of government price regulation. As a result, prices have dropped for many pharmaceuticals on this list. Prices for EDL pharmaceuticals fell by 4.7% in 2010, according to DSM Group. Prices for non-EDL pharmaceuticals, on the other hand, did not fall. There was some increase in prices for inexpensive pharmaceuticals not on the EDL, as retailers tried to offset losses from the reduction of prices for EDL pharmaceuticals. 29.4% 28.2% 28.6% 12.6% 12.0% 89.3 27.0% 13.3% 90.9 200.5 12.8 Under RUR 50 Under amendments to the Law On Circulation of Pharmaceuticals in Russia, manufacturers of pharmaceuticals on the EDL can raise prices if prices have increased for the raw materials used to make them. Therefore, prices can be expected to go up in 2011 for EDL pharmaceuticals (moderately and under the control of the government) and for pharmaceuticals not on the list (slightly more than for the EDL category). 930.0 199.7 RUR 50–150 RUR 150–300 RUR 300–500 Over RUR 500 2009 2010 Weighted average price per pack, RUR * sales given in purchase prices of pharmacies, including VAT Source: DSM Group annual report Pharmaceutical Market 2010 Markups outside the EDL selection have topped the threshold of 30%, which is considered acceptable for the normal operation of a pharmacy in Russia today. Changes in retail markup on main groups of pharmacy products (%)* 36.9 37.1 35.7 35.1 30.2 30.1 29.2 28.5 28.8 29.7 30.3 30.2 30.2 29.9 30.0 29.3 29.6 29.4 29.1 28.9 29.7 29.6 29.9 28.8 29.0 28.8 35.9 35.4 28.4 28.3 28.0 2009 2010 25.8 Q1 2009 Q2 2009 Q3 2009 * Retailers offset losses on EDL selection in other segments Source: Pharmexpert, February 2011 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 EDL Non-EDL BAA Cosmetics 17.4% 897.2 378.7 382.1 13.0 16.6% 15.0% 29 MARKET REVIEW Structure of commercial FPP market by price segment* Commercial retail sector The number of entitlement recipients participating in the VZN program will probably increase in 2011 due to improved diagnostics and higher survival rates among patients receiving high-tech pharmaceutical therapy. The share of cheaper local pharmaceuticals in purchases under this program will grow, which will prevent an increase in the average price in this program. Given that healthcare spending is set to grow in 2011, the trends seen in 2010 can be expected to continue. Purchases of high-cost pharmaceuticals will grow; purchases of local pharmaceuticals will likely increase, which will curb price growth in the hospital sector; and hospital purchases of certain groups of pharmaceuticals will continue to decline, but this will be offset by growth of purchases in other sectors of the pharma market. COMPARISON OF SALES OF IMPORTED AND DOMESTIC FPP* GOVErNMENT PHArMACEuTiCAL COVErAGE PrOGrAMS Since January 1, 2008, Russia has had two subprograms for additional pharmaceutical coverage: • essential pharmaceutical coverage (NMRP) • the subprogram for seven high-cost pharmaceuticals (VZN) A total of RUR 88.4 billion was spent on pharmaceutical purchases for entitlement recipients in 2010. Centralized procurement under reimbursement and VZN programs has proven its effectiveness and has saved budget funds. Free pharmaceuticals were provided to 4.2 million people in the country, according to preliminary figures. The main trends in the pharmaceutical coverage market in 2010 were: • a decrease in the number of participants in the NMRP program • the average prescription price rose 11% to RUR 840 • an increase in the number of participants in the VZN program • a reduction in average price for pharmaceuticals sold under the VZN program due to price curbs and more purchases of cheaper local pharmaceuticals HOSPiTAL SECTOr 237,032 (76.5%) 1,496 (34.5%) 2009 2010 2009 By value, m RUR 2,876 (64.6%) 4,453 1,576 (35.4%) 4,339 2,843 (65.5%) 72,892 (23.5%) 70,305 (24.2%) 290,247 309,924 219,942 (75.8%) annual report 2010 30 Domestic Imported 2010 By volume, m packs * Sales states in purchase prices of pharmacies including VAT Source: DSM Group, Monthly retail Audit of russian Pharmaceutical Market The hospital sector demonstrated the following trends in 2010: • lower procurement prices • substitution of imports with local pharmaceuticals (in certain ATC groups) • increase in purchases of high-cost pharmaceuticals for treatment of serious diseases (anticancer pharmaceuticals, new generations of antibiotics, immunosuppressants, diagnostic substances, etc.), resulting in a substantial increase in average price in the sector • decrease in purchases of relatively inexpensive pharmaceuticals offset by growth in their sales in other market sectors Regulation of Russian pharmaceutical market In the Russian pharmaceutical market, certain methods of regulation have always been applied, but the reforms carried out in the area of pharmaceutical coverage in the past year have been some of the most significant of the last few years. Therefore, 2010 can easily be called the year of government regulation in the pharma market. The measures that were adopted were aimed at modernizing the healthcare system, increasing market transparency, boosting the share of domestic pharmaceuticals and stimulating Russian pharmaceutical manufacturing. The measures were carried out simultaneously in several areas and will set the tone for the development of the sector in the coming decade. Price restrictions for EDL The first important step was the introduction of price restrictions as of April 1, 2010 on the selection of pharmaceuticals on the Essential Pharmaceuticals List (EDL), which includes about 500 items, or equivalent to 30–40% of the pharmaceutical market. The new rules impose regulation of producer prices and maximum markups for distributors and retailers. The baseline for markups is the factory-gate price of the manufacturer, which must be registered in advance and fixed for the year. The caps on retail and wholesale markups are set at the regional level. In order to partially offset the decline in profits in this segment, in September 2010 the government eliminated regulation of wholesale and retail markups on prices for pharmaceuticals not on the EDL and for medical products. Federal Law On Circulation of Pharmaceuticals The second factor that had a major impact on all levels of the pharmaceutical market in 2010 was the introduction of the Federal Law On Circulation of Pharmaceuticals. The law was passed on April 12 and went into effect on September 1, 2010, with the exception of provisions requiring that manufacturers meet GMP standards, which are supposed to take effect on January 1, 2014. The new law regulates, in greater detail than the Law On Pharmaceuticals in effect since 1998, the relations pertaining to the circulation of pharmaceuticals, including development, manufacture, preclinical and clinical trials, evaluation, government registration, import, export and sale of pharmaceuticals. Provisions regulating government registration of pharmaceuticals are grouped in separate chapters, and the procedure for evaluation of pharmaceuticals and the maximum timeframe for the registration process are clearly defined. A large section of the law is dedicated to clinical trials, setting out requirements for organizations that can participate in such trials. The rights and standard rules for the mandatory life and health insurance of patients participating in clinical trials are defined for the first time at the legislative level. The law sets out standards regulating the manufacture, packaging and labeling of pharmaceuticals. It defines in detail the procedure for importing and exporting pharmaceuticals, and other pharmaceutical activities, including primarily post-production circulation and sale of pharmaceuticals. Special chapters regulate pricing for pharmaceuticals; the reasons and procedure for destroying pharmaceuticals; pharmaceutical safety monitoring; and reporting of information on pharmaceuticals. The law clarifies the powers of the Russian government in regard to regulating the circulation of pharmaceuticals. Federal Law On Mandatory Medical Insurance in the Russian Federation The Federal Law On Mandatory Medical Insurance in the Russian Federation was passed in November 2010 and went into effect on January 1, 2011. Under the new version of the law, the patient has the right to choose the insurance company, medical facility and doctor, and the pharmaceuticals used in treatment are included in the insurance coverage. MARKET REVIEW The pharmaceutical market is a socially important sector, so it is subject to government regulation in most countries. Regulation and oversight, usually, applies to caps on markups on certain types of pharmaceutical products; relations between market participants and insurance companies; government procurements; as well as the process of manufacturing and distributing pharmaceuticals. Developed countries established the main principles of regulation about 20–30 years ago, and had seen a trend toward deregulation in recent years. However, in the wake of the global financial crisis many governments have become more vigorous in restricting prices in an effort to shield the public from the adverse effects of economic shocks. 31 annual report 2010 32 In light of this, the selection and amount of pharmaceuticals procured for public healthcare could increase dramatically. The growth in the share of government procurements will heighten attention toward the transparency of tenders and the automation of this process. Introduction of electronic tenders in governmentfunded segment The practice of holding electronic tenders has been introduced in the governmentfunded segment of the market, which has increased the number of market players and, consequently, ramped up price competition and reduced markups. There are plans to pass a law on holding electronic tenders according to the “lot – one INN” system, as well as introduce a system of electronic tenders through a restricted number of electronic platforms. Other changes The government in 2010 decided to expand additional pharmaceutical coverage programs, and a number of regional programs were adopted to modernize healthcare. All these programs call for increased government spending on pharmaceutical coverage in the healthcare system and will eventually increase consumption and, consequently, spur the growth of the Russian pharmaceutical market. Measures aimed at developing the pharmaceutical industry A number of long-term programs aimed at developing Russia’s pharmaceutical industry have been implemented at the government level in recent years. All these programs call for major government investment. The Pharma 2020 strategy for the development of the pharmaceutical industry in the period to 2020 was adopted in 2008 and continues to be implemented. One of the expected results of this strategy is that the share of Russian-made pharma products in total domestic consumption will grow to at least 50% in value terms by the year 2020. Investment in the Pharma 2020 strategy will amount to RUR 177.62 billion (in February 2009 prices) over ten years. This will include RUR 35.22 billion in funding for advanced training and infrastructure; RUR 36.00 billion for the transition to GMP, and RUR 106.40 billion for development of pharmaceuticals. In 2010, the government adopted a special federal program “Support for the Russian Pharmaceutical Industry”, the funding for which will be spent on construction of new and modernization of existing enterprises, and implementation of GMP standards. There are plans to invest $5.675 billion under this program. A program has been developed to create pharmaceutical clusters that will evolve into research and manufacturing centers. These programs are expected to dramatically increase the market share of domestic pharmaceuticals, and improve their quality and compliance with modern standards, while reducing government spending on pharmaceutical coverage programs by reducing the reliance on imported pharmaceuticals. Changes in taxation New tax amendments went into effect on January 1, 2011 that will require pharmacies to switch from paying the unified tax on imputed income to the general system of taxation. Furthermore, payroll payments increased for Russian enterprises (from 26% to 34% and for businesses, including pharmacy networks, that previously used unified imputed income tax – from 14% to 34%). The measures adopted to regulate and develop Russia’s pharmaceutical market should have a positive impact in the long term. Despite the substantial reduction of profitability that market participants suffered in 2010 as a result of new rules and regulations, and the continued impact of these changes in 2011, the Company does not see potential factors that could be compared to the changes of 2010 in terms of their impact on the market. A positive result of the measures that have been implemented is increased market transparency and the expected reduction of secondary distribution. This could give national distributors an opportunity to service government procurements at the regional level. The imposition of restrictions on markups for EDL pharmaceuticals reduces overall margins for all market players. The main phase of adaptation to the new market conditions has already passed, and this process is now absolutely predictable. It is happening throughout the world and market players are taking it in stride. FACTOrS CONSTrAiNiNG MArkET GrOwTH The main factors affecting the market’s growth in 2010 included the imposition of government regulation of prices for EDL pharmaceuticals and the implementation of the Law On Circulation of Pharmaceuticals. The first measure had the most impact on the distribution chain, reducing the profitability of the wholesale and retail business, reinforcing the downward trend in the number of wholesale market players, increasing the proportion of nonmedicinal products in the selection of wholesale and retail vendors, and pushing up prices for unregulated pharmaceuticals. The implementation of these requirements in 2010 led to lost income, congestion of warehouses and a subsequent reduction of markups in the distribution segment and tougher competition in all sectors of the distribution system. Changes in tax legislation could have a negative impact on the development of the market. The new regulations could lead to the closure of the least financially stable pharmacies, which could increase the level of market concentration in the retail sector and have an adverse effect on the quality and availability of pharmaceutical supplies, particularly in remote population places. The second measure primarily impacted pharmaceutical makers, who had to make changes to packaging and labeling of products. Last year was a period during which the government played a leading role in terms of regulation of the pharmaceutical market. The system of government regulation in the domestic pharma market has taken on a more permanent form. In these market conditions, vertically integrated market players, capable of earning a profit at all stages of the industry’s value-added chain, have the strongest model for sustainable growth. Another key condition for maintaining and strengthening market positions is to have a well-thought-out business strategy in each segment of the pharma market and increasing competitiveness. 33 MarKet reVIeW FACTOrS PrOMOTiNG MArkET GrOwTH annual report 2010 34 Competition on the pharmaceutical market The distribution segment is the most consolidated sector compared to similar indicators in the retail and manufacturing sectors. There was noticeable consolidation among smaller distributors outside the Top 5: while the market share of the Top 5 rose to 72% in 2010 from 70% a year earlier, the combined market share of the bottom half of the Top 10 grew to 19% from 15%. In this capital intensive segment, market players must be particularly capable of achieving economies of scale. The substantial reduction of margins last year considerably increases the barriers to entry of new competitors into this segment, which benefits the market leaders. MARKET REVIEW 35 Concentration in segments of Russian pharmaceutical market: share of Top 10 companies 91.0% 85.0% 73.0% 58.0% 49.1% 46.5% 48.9% 45.0% 14.0% 2006 2007 2008 2009 Distribution(1) 2010 2006 49.4% 47.8% 17.0% 18.0% 15.0% 15.1% 2007 2008 Retail1) 2009 2010 2006 2007 2008 2009 Production(2) Source: (1) DSM Group annual report Pharmaceutical Market 2010 (2) Pharmaexpert MRC project Monitoring of Retail Sales, Hospital Purchases and Pharmaceutical under Reimbursement Program in Russia, market share of domestic companies 2010 annual report 2010 36 Top 5 distributors The pharmaceutical market is currently seeing a reduction in the number of wholesalers. While before the departure of wholesalers from the market was due primarily to stiffer competition and the growing market power of major national distributors and unprofitability of small wholesale businesses, now the reduction in the number of wholesalers is also due to substantial changes in legislation governing the circulation of pharmaceuticals. These trends in the Russian market point to a dramatic reduction in the number of wholesale companies over the next two to three years. Pharmexpert MRC forecasts that the number of distributors will drop to 600–700 by 2012 from about 1,100 at present. This is happening largely at the expense of small distributors. The number of pharmaceutical wholesalers is also shrinking due to continued consolidation (mergers and acquisitions), which was in large part spurred by the crisis. Top 5 distributors on FPP market, 2010 18.8% 18.0% 13.9% 12.0% 9.9% Protek Source: DSM Group SIA Katren ROSTA Alliance Healthcare Top 10 retailers 37 MARKET REVIEW Rigla was one of the few chains in the Top 10 that managed to increase market share in 2010, while many other market players saw their market share shrink. Top 10 Russian pharmacy chains by share of commercial retail pharmaceutical market by value in 2010 3.16 2.53 2.28 2.44 1.83 1.70 1.65 1.42 1.11 0.74 0.73 Pharmacies 36,6 2009 Rigla 2010 Pharmakor Implozia * и ** Pharmimpex 0.94 А5 0.92 0.83 Doctor Stoletov 0.95 0.81 0.91 Vita ** 0.81 Raduga 0.75 0.76 Samson-Pharma * Including pharmacies operating under franchise agreement ** Analyst estimate Source: Pharmaexpert MRC Top 10 manufacturers Top 10 domestic pharmaceutical manufacturers by share of Russian pharmaceutical market in 2010 20.50 18.30 5.97 PharmStandard 2009 6.69 Stada Arzneimittel AG 2010 3.66 3.68 3.10 3.64 3.09 3.60 3.04 2.75 2.64 2.76 2.41 2.38 2.45 2.07 Valenta Sotex Veropharm Biotek Materia Medica Pharm-Centr AkrikhinPharma Microgen Source: Pharmaexpert MRC AbOuT THE COMPANY 3.1 Market position and operating results by segment 4 Development Strategy 3.1 MARKET POSITION AND OPERATING RESULTS BY SEGMENT KEY PARAMETERS OF PROTEK GROUP BUSINESS SEGMENTS Size of circle reflects segment's share in total sales of Protek Group, % (2010) 4.4% 40.0 35.0 30.0 ABOUT THE COMPANY Protek Group sales growth in segment, % (2010) 45.0 39 Share of Top 10 players in corresponding segment of Russian pharma market (concentration), % (2010) 25.0 20.0 10.0 11.2% 5.0 Distribution 84.4% Retail 0 Production 0 20.0 40.0 60.0 80.0 100.0 120.0 3.1.1 PROTEK GROUP POSITION IN DISTRIBUTION SEGMENT The Group’s key company in the segment is OJSC CV Protek, founded in 1990. CV Protek is a national distributor with a presence in all 83 regions of Russia. The company has 41 branches and 44 regional representative offices, and had 42,864 delivery points (clients receiving shipments) throughout Russia in 2010. Key change at company in 2010: completion of full-scale launch of new interregional logistics structure. CV Protek is the largest Russian distributor of pharmaceutical and health and beauty products. Ranking in 2010 Distributor Market share, 2010 1 PROTEK 18.8% 2 SIA 18.0% 3 Katren 13.9% 4 ROSTA 12.0% 5 Alliance Healthcare 9.9% 6 R-Pharm 6.4% 7 Oriola 4.3% 8 Puls 2.5% 9 Biotek 2.5% 10 Imperia-Pharma 2.5% Source: updated data of DSM Group, annual report Pharmaceutical Market 2010 annual report 2010 40 iMPOrTANCE OF DiSTribuTiON SEGMENT FOr PrOTEk GrOuP SCOPE OF DiSTribuTiON SEGMENT’S OPErATiONS Largest segment of Protek Group by turnover CV Protek works with 860 leading pharmaceutical manufacturers from 46 countries. All products are bought directly from the manufacturer, which rules out the risk for customers of acquiring counterfeit products. Thanks to its wellestablished partnership relations, Protek can regularly ship up to 15,000 assorted pharmaceuticals, parapharmaceutical products and medical products. The Distribution division’s many years of profitable operations have won it a reputation as the leader in Russia’s pharmaceutical market and made it possible to launch and finance the process of the Group’s vertical integration, with entry into the retail and manufacturing segments. An infrastructure asset of both the Protek Group and the Russian pharmaceutical market in general As it developed, CV Protek shaped the Russian distribution market. This segment and its leading positions give the Group its current opportunities for synergy. This is the core of the three necessary components that together support the Group’s balanced, synergy-based business model. Balance presupposes that each component become a leading performer in its segment of the pharma market, while collaboration among them is always based on market principles. The distributor’s ability to provide regular access to a wide range of products is one of the key incentives for pharmacies and medical facilities to continue working with the company. The company’s customer base covers all segments of the pharma market: individual pharmacies, pharmacy chains and wholesalers. In the hospital and governmentfunded markets, the company supplies pharmaceuticals to medical facilities and works under the VZN and NMRP pharmaceutical coverage programs. The company has a total of about 19,200 customers, including pharmacies and medical facilities. CV Protek is a seven-time winner of the highest professional award in the Russian pharmaceutical market, the Platinum Ounce, in the category of Best Pharmaceutical Distributor, and has also won other awards in the areas of pharmaceuticals, information technology, logistics, human resources management and philanthropy. CV Protek had 158,700 square meters of warehouse space as of the end of 2010, 5.5% less than a year earlier as the company continued to modernize its logistics system. The company’s central logistics facility is the TST Transservice customs warehouse terminal in the town of Pushkino, 15 km northeast of Moscow along the Yaroslavl highway. The terminal has an area of 56,800 square meters with more than 50,000 pallet spaces. TST Transservice has one of Russia’s highest performance, automated facilities for processing retail orders, capable of picking up to 450,000 items, or about 6,000 orders per day. SALES STRUCTURE BY BUSINESS SEGMENTS This business segment is the springboard for the accelerated growth of the retail and production segments. The marketing capabilities of these segments are built in large part on the information and IT infrastructure of the Group’s distribution division. The opportunity to exchange highly skilled managers and specialists is very important, and Group employees take advantage of opportunities to build a horizontal career in the segments. Protek Group Distributor in 2010: • supplied 72% of turnover of rigla retail chain • handled 47% of sales by manufacturer Sotex 2009 2010 84.9% Distribution 84.4% Distribution 11.5% Retail 11.2% Retail 3.6% Production 4.4% Production rEFErENCE: CV Protek’s market share in the distribution segment of russia’s pharma market is estimated at 18.8% CV PROTEK LOGISTICS SYSTEM IN 2011–2012 ABOUT THE COMPANY 41 Murmansk Kaliningrad SAINT PETERSBURG Petrozavodsk Arkhangelsk Pskov Tver Yaroslavl Syktyvkar MOSCOW Kaluga Ivanovo Bryansk Vladimir Orel Tula Kirov Ryazan N.Novgorod Kursk Lipetsk Saransk Yoshkar-Ola Tambov Belgorod Izhevsk Cheboksary Surgut Perm VORONESH Penza KAZAN Naberezhnye Chelny Ulyanovsk YEKATERINBURG SAMARA Saratov ROSTOV-ON-DON Tyumen Ufa Volgograd Chelyabinsk Kurgan Krasnodar Orenburg Sochi Omsk Smolensk Stavropol Tomsk Khabarovsk Kemerovo NOVOSIBIRSK Astrakhan Novokuznetsk Vladikavkaz Branches with full warehouses RTP Branches with depot warehouses Logistics centers Barnaul Biysk Krasnoyarsk Abakan Chita Irkutsk Kyzyl Vladivostok CV PROTEK’S LARGEST SUPPLIERS OF PHARMACEUTICALS № Name of Supplier 1 SANOFI-AVENTIS 2 GEDEON RICHTER 3 TEVA PHARMACEUTICAL INDUSTRIES LTD 4 PHARMSTANDARD 5 A.MENARINI PHARMACEUTICAL INDUSTRY'S GROUP LTD 6 NYCOMED 7 GlaxoSmithKline Trading 8 NOVARTIS PHARMA 9 SERVIER 10 BAYER SCHERING Share of Top 10 35.3% № Name of Supplier 11 R-Pharm 12 Sandoz 13 PFIZER 14 SOTEX PHARMFIRM JSC 15 NIZHPHARM 16 SOLVAY PHARMACEUTICALS B.V. 17 KRKA 18 EGIS 19 ZENTIVA A.S. 20 Otechestvennye Lekarstva Share of Top 20 52.2% Source: Company data annual report 2010 42 Structure of pharmaceutical purchases (2010) Reform of CV Protek logistics system for transition to interregional logistics structure The essence of reform 65.4% Russian divisions of foreign manufacturers 21.8% Russian plants 12.8% Direct imports Source: Company data In order to efficiently manage sales and rationally utilize the logistics system, the company carried out the following measures in 2008–2009: • Established six regional areas (regional divisions): Central, Moscow, Volga, South, Urals and East. Customers in each area are served from central regional warehouses, as shown in the map above of CV Protek’s logistics system in 2011–2012 • Established transfer depot warehouses to support traffic in regions that are far from central regional warehouses Results of reform • Sustaining the company’s rate of growth while reducing requirements for warehouse space and warehouse personnel: the company’s warehouse area and workforce shrank by 10.4% and 11.9% respectively in 2008–2010, while turnover grew by more than 31.8% over the same period • Improving company management with implementation of standard IT solutions throughout the company, providing online access to information on warehouse inventory and out-of-stocks • Improving customer satisfaction: –– Reduction of order picking mistakes from 0.14% to 0.12% of shipped items –– Reduction of average order preparation time • Improving per unit efficiency indicators of warehouse operations ABOUT THE COMPANY 43 ORGANIZATION OF CV PROTEK LOGISTICS SYSTEM Location of central regional warehouse Regions served (incl. region of warehouse location) Moscow 12 Samara 4 Kazan 5 Novosibirsk 2 Voronezh 3 Yekaterinburg 4 Rostov 1 St. Petersburg 3 Source: Company data NUMBER OF BRANCH WAREHOUSES, DEPOT WAREHOUSES Indicator Number of branches Of which with warehouses Number of depot warehouses Warehouse area, total, ‘000 square meters Of which % owned Source: Company data 2008 2009 2010 41 41 41 37 30 28 23 34 34 177.2 168.0 158.7 64% 68% 76% ANNUAL REPORT 2010 44 REVENUE PER SQUARE METER OF WAREHOUSE CAPACITY, '000 RUR LABOR PRODUCTIVITY GROWTH, m RUR SALES BY VOLUME GROW 11.2% IN 2010 AS AVERAGE PRICE PER PACK FALLS 2.2% 98.6 571.0 494.8 952.3 895.5 19.9 856.3 390.8 14.1 13.5 9.4 15.4% 26.6% 2008 78.3 29.8 28.5 96.3 2009 Source: Company data 2010 2008 2009 2010 Revenue (m RUR) per worker +49.5% 2008 to 2010 Revenue (m RUR) per company employee (total) +50.2% 2008 to 2010 Source: Company data 2008 2009 Sales by volume, m packs Average price per pack, RUR Source: Company data 2010 The structure of CV Protek’s turnover, as the market leader, is very similar to the structure of the Russian pharmaceutical market in general. The commercial sector accounted for 77.7% of CV Protek turnover in 2010, compared to an average of 78.6% for the industry as a whole. The Distribution segment operated in a difficult market environment in 2010. The distribution market faced overstocking and stiffer price competition as a result of government regulatory changes in the industry and the consequent, significant adjustment of manufacturers’ distribution policies. These trends were exacerbated by a decline in demand due to the absence of the traditional seasonality and weak consumer demand. Structure of company sales by segment of pharmaceutical market, % 7.0% 6.3% 6.4% 15.0% 14.8% 15.9% 78.0% 78.9% 77.7% 2008 2009 2010 Adjusting to the demands of the market, the company is expanding its selection with an emphasis on care cosmetics and parapharmaceuticals. The proportion of care cosmetics and other nonmedicinal items in the company’s pricelist grew to 31.6% in 2010 from 25.6% in 2008. Direct sales generate 89.5% of CV Protek’s revenue, confirming its status as a national company capable of ensuring delivery to final points of sale, such as pharmacies and medical facilities. By direct sales, CV Protek is the market leader with a share of 19.06%, according to Pharmexpert MRC. Markups in the distribution segment were squeezed due to the implementation of new rules imposing maximum distributor markups on pharmaceuticals and stiffer competition. The biggest reduction in Comparison of product structure by contribution to financial results, % the average markup in 2010 was in the EDL (Essential Pharmaceuticals List) sector, to 7.9% from 15.8% in 2009. Despite the growth of the share of EDL pharmaceuticals in the company’s pricelist – up 2.7 percentage points in terms of their share of the whole pharmaceutical selection – the non-EDL segment, that is, pharmaceuticals not subject to government price regulation, is growing as a share of revenue. A whole range of related services is being developed within the context of the distribution business to meet the needs of market players: customs processing, logistics, information products for the pharma market, and product marketing and promotion. Structure of CV Protek sales by key client groups, 2010, % 3.5% 31.6% 28.3% 7.6% 88.9% 40.1% NMRP Government-funded market Commercial market Source: Company data Share by number of brands Share of sales 35.6% Pharmacy chains 22.8% Pharmacies 11.8% Government-funded sector Cosmetics NMP FPP Source: Company data 10.5% Wholesale shipments 6.8% Rigla 6.3% NMRP 5.9% Strategic pharmacy chains 0.3% Other Source: Company data 45 about the company Distribution segment operating results in 2010 46 AVERAGE MARKUP IN EDL/NON-EDL SEGMENTS, % ANNUAL REPORT 2010 15.8% 13.2% 13.0% 11.3% 7.9% 2008 7.7% 2010 2009 Markup on EDL, % Markup on non-EDL, % Source: Company data Share of Distribution segment revenue, 2010 98.7% 1.3% 100% Type of revenue Distribution Additional services to pharma market participants Total SALES STRUCTURE: EDL/NON-EDL SEGMENTS SHARE OF EDL ITEMS IN TOTAL PRICELIST AND OF PHARMACEUTICALS, units, % 40.6% 46.9% 45.5% 41.1% 53.1% 54.5% 58.9% 17.0% 43.3% 17.3% 2009 2010 2008 2009 non-EDL 2010 % of total number EDL Source: Company data Source: Company data % of pharmaceuticals Growth 2010/2009 (%) +8.8% +33.0% +9.1% Measures to eliminate/mitigate weaknesses/threats identified by SWOT analysis: 1. Transition to fixed prices in ruble equivalent. 2. Decline large bonuses when working with manufacturers, build optimal inventories, planning primarily with a view to the expected size of the market in a given period. 3. Presence of a developed infrastructure, technological base and the scale of the Distribution segment business will allow the company to comply with GDP (Good Distribution Practice) standards in case respective legislation initiatives are adopted. And the compliance of the business with the minimal authorized capital stock requirements for distribution market participants as well. 4. Continual search for and implementation of new inter-segment (synergy) sources of additional revenue and increasing the overall profitability of the Group. SWOT ANALYSIS OF COMPANY POSITION IN DISTRIBUTION SEGMENT Leadership in distribution sector; scale of business, with a presence in all 83 Russian regions and working with 860 suppliers from 46 countries; difficult to duplicate the company’s competitive advantage, which is based on the largest amount of accumulated investment in the market. STrENGTHS Very high financial strength, minimal use of borrowing, substantially fewer financial constraints for further business growth compared to competitors. Advantages of Protek Group synergies: • greater financial strength of the Group and its individual segments • greater agility and speed in reacting to market changes • easy access to the expertise of colleagues in each market segment • business decision making that balances interests at the Group level • participation in projects of the Group companies • elimination of duplication, availability of a range of top quality expertise and services from the parent company. Public company: financial transparency (audited financial statements to IFRS since 2006) and higher level of trust from Russian and foreign partners and customers. Automated, state-of-the-art warehouse facilities with a total area of more than 158,700 square meters (76.5% owned); the facility in Pushkino has one of the longest automated order lines in Eastern Europe. Guarantee for origin of product, exclusion of “gray schemes” and associated risks. Innovation, continual enhancement of automation. Leader in the range of merchandise (up to 15,000 assorted items), including parapharmaceuticals. w Leadership in customer service: • integrated service solutions: a broad range of key and additional services, supported by surplus logistics capacity • we offer manufacturers the broad scope of the Russian market, with the option of promotional marketing • a highly professional sales division that supports the promotion of pharmaceuticals, along with the use of electronic systems; the company has developed one of the best online order systems in the market, ePharma2. wEAkNESSES Low margins in the segment in the medium term due to tighter government regulation and, consequently, stiffer competition. O Recovery of the Russian pharmaceutical market: • household purchasing power (potential growth in size of average shipments to customers) • growth of government spending on pharmaceutical programs • shift to consumption of more expensive and more effective pharmaceuticals (increase in average pack price, growth of operating and logistical efficiency) OPPOrTuNiTiES Improvement of logistics system. Possible accession to WTO will spur foreign and domestic manufacturers’ interest in working with a national distributor in the area of product promotion (gaining quick and broad access to the Russian market). Increased effectiveness of selection with the inclusion of higher-margin products in the pricelist. T Volatility of the dollar and euro exchange rates against the ruble (purchase prices in foreign currency, sales in the Russian market in rubles). Domestic and foreign competitors copying the company’s vertically-integrated business model, dilution of the uniqueness of the company’s market solutions. THrEATS Continued policy of manufacturers to even out the proportion of shipments through individual distributors when working in the Russian market. Continued practice by foreign manufacturers of overloading the product distribution system in an effort to meet sales targets that far exceed the rate of growth of the Russian market. about tHe CoMpanY S 47 ANNUAL REPORT 2010 48 3.1.2 PROTEK GROUP POSITION IN RETAIL SEGMENT The Group’s key company in the segment is Rigla Pharmacy Chain, founded in 2001. Rigla is a national chain and one of the leading retailers in the Russian pharmaceutical market. The chain had 648 pharmacies in 27 regions of Russia at the end of 2010, including 56 pharmacies of the Zhivika chain, of which Protek Group owns 51%. The chain’s outlets had a combined floor area of 89,400 square meters at the end of 2010. The company is the second largest pharmacy chain by sales in the commercial segment of the Russian pharma market. Rigla brand outlets operate under a modern pharmacy format, with open display of products and a uniform, high standard of service. Stores carry a selection of about 18,000 products, including an extensive line of parapharmaceutical products, and offer a range of additional services. Rigla is also developing a chain of discount pharmacies under the Bud Zdorov! (Be Healthy!) brand, which offers competitive prices and regularly carries a broad selection of products, including rare and high-cost pharmaceuticals. These pharmacies have a small footprint and display products behind the counter. The first Bud Zdorov! outlet opened in Moscow in April 2010, and by the end of 2010 there were already 57 outlets operating under this brand. The strategy for the expansion of the discount chain is being implemented by reformatting regional chains that are managed by Rigla but operate under local brands. Investment in conversion is estimated to be minimal, as the pharmacies that are being rebranded under the Bud Zdorov! name usually have a similar format and floor area. The conversion process usually involves revamping displays and the internal layout and does not require replacing shop equipment. Only shops with a behind-the-counter format are being rebranded under the new brand. The rebranding is being done selectively, depending on the particulars of local markets, and the decision to convert a pharmacy to the discounter model is made only on the basis of a balanced analysis of the competitive environment and purchasing power. If a feasibility study shows that lowering prices will help resolve the issue of local competition, increase traffic and raise profitability, then the shop is rebranded. Rigla has been voted best pharmacy chain for three consecutive years – 2008, 2009 and 2010 – by the expert council of the most prestigious pharmaceutical industry award, the Platinum Ounce. In the Pharmacy Chain award category companies are evaluated by criteria such as business efficiency, strength of brand, success of marketing policy, product selection and social impact. The company is developing its two main brands – Rigla and Bud Zdorov! – with equal vigor. In an environment of heavy competition, multiple formats will give the chain more flexibility in handling competition on local markets and meet the needs of a broader range of customers. Ranking in 2010 Pharmacy chain Share of commercial market segment in 2010, % 1 36.6 Pharmacies 2.53% 2 Rigla 2.44% 3 Pharmakor* 1.70% 4 Implozia* and ** 1.42% 5 Pharmaimpex 1.11% 6 А5 0.94% 7 Doctor Stoletov 0.83% 8 Vita** 0.81% 9 Raduga 0.81% 10 Samson-Pharma 0.76% * Including pharmacies operating under franchise agreements ** Analyst estimate Source: Pharmexpert MRC MAP OF COMPANY’S REGIONAL PRESENCE IN RUSSIAN RETAIL MARKET Kaliningrad region 2 Saint Petersburg 3 Leningrad region 4 Tver region 5 Yaroslavl region 6 Komi 7 Krasnoyarsk region 8 Moscow region 9 Moscow 10 Tula region 11 Vladimir region 12 Ryazan region 13 Nizhny Novgorod region 14 Chuvashia 15 Perm region 16 Sverdlovsk region 17 Khanty-Mansi region 18 Voronezh region 19 Tatarstan 20 Krasnodar region 21 Rostov region 22 Volgograd region 23 Saratov region 24 Samara region 25 Bashkortostan 26 Zabaykalsky region 27 Kiev 49 about tHe CoMpanY 1 1 2 3 4 8 11 27 5 6 9 7 10 12 13 17 14 18 23 20 21 15 19 24 22 key changes at the company in 2010: 1. launched active development of a new business line, opening discount pharmacies with a behind-the-counter format on a large scale under the Bud Zdorov! brand in line with market trends 2. launched project to sell a line of private label products in nonmedicinal categories Launch of rigla brand product line 16 25 26 making this project very effective and promising. In the future, this will create substantial opportunities to boost the performance and profitability of Rigla, CV Protek and Protek Group as a whole. PRIVATE LABEL GROWTH, 2010 8% 7% 6% 5% 4% 3% PL share of sales 2% Source: Company data December November October September August PL share of transactions July 0% June PL share of gross income May 1% April The company launched a project in 2010 to sell products under its own Rigla brand. The private label (PL) line is sold both through Rigla’s own retail chain and through the distribution network of CV Protek to other retailers in the pharmacy market. There were 56 PL products on the market at the end of 2010 and the company aims to bring this figure up to 350 in 2011, generating 4% of sales and 8% of gross profit from PL sales. The markup on PL products is several times higher than on outside brands, annual report 2010 50 iMPOrTANCE OF rETAiL SEGMENT FOr PrOTEk GrOuP Second largest segment of Protek Group by sales The strategic partnership with national pharma distributor CV Protek gives chain customers throughout Russia equal access to high quality, certified pharmaceuticals and health and beauty products. A leading national retail chain strengthens Protek Group’s integrated offering of services to domestic and foreign manufacturers. The chain allows for rapid retail promotion of pharmaceuticals on the Russian market, and prompt feedback and marketing information on the preferences of various categories of customers. A Protek Group asset that makes it possible to leverage added value in the pharmacy segment of the market The second of the three necessary components that together support the Group’s balanced, synergy-based business model. Balance presupposes that each component become a leading performer in its segment of the pharma market, while collaboration among them is always based on market principles. Rigla retail chain in 2010: • largest client of distribution division, with a 6.8% share of turnover • important distribution channel for products manufactured by Sotex, with a 1.17% share of sales SALES STRUCTURE BY BUSINESS SEGMENTS, % STRUCTURE OF PHARMACY CHAIN IN 2010 57.0% 73.6% 43.0% 26.4% By number of outlets 2009 By share of sales 2010 84.9% Distribution 84.4% Distribution 11.5% Retail 11.2% Retail 3.6% Production 4.4% Production Other regions Moscow & Moscow region Source: Company data rEFErENCE The chain’s share of the russian retail pharmaceutical market is estimated at 2.44% Brand Rigla Bud Zdorov! Target price segment of market Health and beauty stores Give the company a presence in the higher price segment of the market, offer more demanding consumers a broader selection of products and a variety of additional services Discount pharmacies The most effective economic model for extensive regional expansion (behind-the-counter format = low costs) Ensures growth of sales in packs (the main requirement for manufacturers, resource for increasing revenue from manufacturers) Type of product display, location Open City center street level, shopping centers Behind-the-counter Greater location possibilities, particularly locations with less traffic in cities and in smaller population centers Predominant regions Russia’s largest cities The company’s main brand for expansion in Russia’s regions NUMBER OF PHARMACIES IN REGIONS WITH A PRESENCE 28 27 106 534 59 54 521 6 2008 2.4% 13 2008 24.4% 127 2009 2010 -19 -35 2010 Organic growth Number of pharmacies, total M&A Regions with a presence in Russia Store closures Source: Company data 0 2009 Source: Company data Expansion in 2010 was driven by the acquisition of five new chains. The company closed 38 pharmacies due to poor performance and the dissolution of lease agreements. The Rigla chain carries about 18,000 assorted pharmaceutical and parapharmaceutical products. 26 648 51 The pharmacy chain is growing more rapidly outside of Moscow through mergers and acquisitions. The proportion of regional pharmacies grew to 73.6% of the total number in 2010 from 68% in 2008. The proportion of regional pharmacies amounted to 57% of the company’s total sales in 2010. BREAKDOWN OF PHARMACY CHAIN GROWTH 102 SCOPE OF RETAIL SEGMENT’S OPERATIONS ABOUT THE COMPANY RIGLA PHARMACY CHAIN: KEY FORMATS -38 Rigla pharmacies are visited by 44 million customers per year, and the average sale per transaction is 264 RUR not including VAT. In July 2010, Rigla became a partner of the leading loyalty program Svyaznoy Club, and issued a co-branded loyalty card. About 65,000 Rigla – Svyaznoy Club cards were issued in April 2011, and the average sale per card transaction is 646 RUR. The proportion of behind-the-counter pharmacies in the chain grew to 46.6% of the total number of outlets in 2010 from 37.8% in 2008 as the company pursues a multi-format strategy to become more competitive in local markets. The company began to implement this strategy with the opening of its first Bud Zdorov! discount pharmacy in April 2010, and will be wagering on it for the foreseeable future. One of the main distinctive features of the Bud Zdorov! business model is the traditional behind-the-counter format in a comparatively small retail space. annual report 2010 52 Company’s main property requirements when selecting specific locations for pharmacies The company has high demands for properties, both when selecting a premises for new pharmacies (both acquisition and leasing) and in its analysis of existing pharmacies in preparation for M&A transactions. Location is perhaps the most important factor for the effective performance of a pharmacy. The ideal property for a pharmacy should meet a number of conditions: • Recommended types of buildings: shopping centers, office buildings, nonresidential premises (ground floor or addition); solid-cast or brick buildings; additions to residential buildings and other urban buildings • Recommended location near: grocery stores, chain supermarkets, mobile phone shops, stores selling consumer goods from well-known brands, medical facilities and centers, beauty salons, and leisure facilities such as cafes, restaurants, clubs, theaters and cinemas • Requirements for the geographical characteristics of a property depend on its location: city center, center of a residential area, new residential development or shopping center; the main requirement is foot and vehicle traffic • Compliance of premises to required sizes and other technical requirements. Structure of pharmacy chain by format and brand by format by brand 57 202 191 302 332 330 346 2008 2009 2010 282 233 345 252 288 246 2008 2009 2010 Open display Rigla Behind-the-counter display Other Source: Company data Bud Zdorov! about the company 53 Product structure Structure of pharmaceutical sales by price category in 2010 Product structure in 2010 5.0% 30.7% 30.0% 39.0% 41.0% 60.1% 14.0% 40.9% 41.6% >500 RUR 58.0% 21.2% 100-500 RUR 40.0% 7.0% 5.0% by sales 50-100 RUR 18.7% 28.4% 19.4% by number of items (SKU) by sales by gross profit <50 RUR by number of packs Source: Company data Parapharma ОТС Rx Source: Company data annual report 2010 54 Retail segment operating results in 2010 The share of prescription pharmaceuticals (Rx) by number of items in the chain’s selection shrank by 2.3% to 18.7% in the period from 2008 to 2010, but their share of sales and gross profits grew by respectively 3.4% and 1.3%. The share of parapharmaceutical products reached 60.1% of total chain products in 2010. This segment’s contribution to sales decreased by 2.3% in 2008–2010, but its share of gross profit grew by 1.2%, pointing to the attractive margins on products in this category. In the structure of occupied floor area, the proportion of area owned by the chain grew to 25.8% in 2010 from 20.2% in 2008, and the share of area occupied under shortterm lease shrank to 24.1% from 27.9%. STRUCTURE OF OCCUPIED AREA, '000 sq m 44.8 43.5 38.2 23.4 22.9 23.1 21.5 17.4 16.9 2008 24.0 23.6 21.3 +1.7 +10.8 2010 2009 2008 2010 2009 Source: Company data Owned Long-term lease Short-term lease Source: Company data In terms of Like-for-Like (LFL) indicators, in 2010 the 3.4% increase in the average sale per transaction could not fully offset a 4.5% drop in the number of transactions, resulting in a 1.3% decline in sales. GROWTH OF LIKE-FOR-LIKE OPERATING INDICATORS 2008/2007 18.8% 21.8% 21.6% 19.4% 20.7% 21.0% 2009/2008 13.6% 12.3% 2010/2009 10.2% 7.3% 5.7% 4.4% 3.4% 3.4% 1.5% -1.2% -1.4% -1.3% -2.7% -4.4% -5.5% -9.5% -10.1% -4.5% -7.0% -12.7% -15.0% 1 2 1 LFL sales – Moscow 2 LFL sales – Regions 3 LFL sales – Total Source: Company data 3 4 5 6 4 No. of LFL transactions – Moscow 5 No. of LFL transactions – Regions 6 No. of LFL transactions – Total 7 8 55 about tHe CoMpanY SALES PER SQUARE METER OF RETAIL SPACE, '000 RUR 9 7 Avg sale/transaction LFL – Moscow 8 Avg sale/transaction LFL – Regions 9 Avg sale/transaction LFL – Total annual report 2010 56 SWOT ANALYSIS OF COMPANY POSITION IN RETAIL SEGMENT S Second largest player in Russia’s retail pharmaceutical market, scale of business creates potential to increase revenue from manufacturers Advantages of Protek Group synergies: • procurement of product from distributor on very favorable terms, with privileges of a major client • access to marketing information for the distribution and production segments (planning of regional expansion, fine-tuning of product selection) • access to scarce products at reasonable prices, guaranteed supply of seasonally in-demand products • favorable logistics conditions from CV Protek for distribution of private label brands • expansion in the regions with launch pads in the form of local branches of CV Protek STrENGHTS • availability of qualified personnel • business decision making that balances interests at the Group level • participation in projects of the Group companies • elimination of duplication, availability of a range of top quality expertise and services from the parent company Multi-format: development of the Bud Zdorov! discount chain alongside the Rigla brand The company offers manufacturers the broad scope of the Russian market, quick delivery of pharmaceuticals in all regions where the chain has a presence Implementation of the latest international standards: • merchandise planning • centralized management of the chain’s business processes w wEAkNESSES Due to its large size, the chain falls under new tax regulations that subject it to the general tax regime O Modernization of Russia’s healthcare system, funding at the state and regional levels Gradual recovery of consumer demand to pre-crisis levels Reduced competition in the retail pharmaceutical market as the number of players decreases due to tax changes Rapid organic expansion of the chain Participation in privatization auctions for municipal pharmacy chains Launch of private label brands across the market; only parapharmaceutical products under the Rigla brand Product promotion and merchandising services for manufacturers Boosting profits by promoting pharmaceuticals in clusters OPPOrTuNiTiES Launch of online sales Increasing customer loyalty by: • partnering with Russia’s largest loyalty program, Svyaznoy Club (the leader in Russia with 12 million cards issued) • in-house magazine Sezony Zdorovya (Seasons of Health), which breaks even thanks to manufacturer advertising and has a circulation of 200,000 issues Continued unfavorable taxation system for the pharmacy business in 2011 and in the future: a higher tax burden due to pharmacies having to switch from paying the unified tax on imputed income to the general system of taxation, as well as from paying the unified social tax (14% of payroll) to paying insurance contributions (34% of payroll) Reduction of spending by transitioning to a branch system, reducing the number of legal entities and standardizing business processes Accelerated launch of new pharmacies with mobile training teams that train staff on site Automation of business processes to boost sales performance: • utilization of an Oracle ERP solution for business analysis and comprehensive information support for business management • migration of pharmacies to ePharma2 (in addition to the 250 computerized in 2010) • implementation of Docs Vision, a system to monitor implementation of instructions T Mergers and acquisitions in the period to 2014 will be difficult as changes in taxation have dramatically reduced the appeal of potential M&A targets due to reduced profitability of pharmacies Development of additional services such as active cosmetics studios, children’s studios, phyto bars, and VivaLaVit express skin and hair diagnostics clinics THrEATS Previously acquired assets not achieving expected operating performance, condition of assets could turn out to be worse than assessed upon acquisition Possible deterioration of market conditions for opening new pharmacies: rapid growth of rent for attractive locations, higher wage expectations Inability to achieve overall positive financial result with higher markups on non-EDL products, cosmetics and biologically active additives (inability to raise markup due to stiff competition) ABOUT THE COMPANY 57 MEASURES TO ELIMINATE/ MITIGATE WEAKNESSES/THREATS IDENTIFIED BY SWOT ANALYSIS 1. Accelerate opening of new pharmacies in the discount format 2. Tight control over operating efficiency of pharmacies in the course of all business processes 3. Continually search for and implement new inter-segment means of generating additional revenue and increasing the overall profitability of the Group 4. Increasing of customer loyalty 5. Work more actively with manufacturers on marketing contracts to promote products ANNUAL REPORT 2010 58 3.1.3 PROTEK GROUP’S POSITION IN THE PRODUCTION SEGMENT The key company in the segment is Sotex PharmFirm, which was founded in 1999. Sotex PharmFirm is a rapidly growing pharmaceutical manufacturer. The Sotex plant in the Sergiyevo-Posad district of the Moscow Region is one of the most technologically advanced and innovative pharmaceutical enterprises in Russia, manufacturing pharmaceuticals in accordance with GMP EU guidelines for the manufacture and quality control of pharmaceuticals. The company is currently focused on producing its own brands, as well as working with foreign companies in the area of licensed manufacturing of pharmaceuticals. Sotex marketed 28 of its own brands in 2010 and their sales totaled RUR 758.6 million. They accounted for 15.9% of sales in the production segment and 33% of gross profit. The plant is outfitted with equipment from leading world manufacturers. Sotex annually conducts a technical audit of its production facilities together with foreign partners representing leading world pharma companies such as Nycomed, Bayer, Sanofi-Aventis and Orion. SOTEX – HIGHLIGHTS OF 2010 • The company took the 4th place in the domestic manufacturers rating in 2010 by sales volume. Its market share amounted to 3.64%. • Substantial growth of own brands as a share of company sales • Regional service of business units Neurology, Rheumatology and Government Sales grows from 90 to 148 people • The company’s own biotech brand, Eralfon is named Breakthrough of the Year at the prestigious Platinum Ounce pharmaceutical industry awards; • Sotex own brands Amelotex and Eralfon win Prescription of the Year award • The company’s new products: Neurox (sales of RUR 36.61 million in 2010), Amelotex tab. (sales of RUR 9.69 million in 2010), Eralfon, 4000 ME (sales of RUR 18.41 million in 2010), Tsereton, caps. (sales of RUR 5.38 million in 2010) Ranking in 2010 Manufacturer The company’s product portfolio included 67 pharmaceuticals as of December 31, 2010, including 28 own brands. Pharmaceuticals used in cardiology, rheumatology, neurology, oncology and nephrology, as well as pharmaceuticals for general hospital applications make up the largest share of output. As its portfolio develops, the company is expanding the share of own brand products, the number of which has rose from eight to 28 in the period from 2008 to 2010. Own brands’ contribution to production segment sales grew: from 3.6% to 15.9% by value. Market share in 2010 1 Pharmstandard 2 Stada Arzneimittel AG 18.30% 6.69% 3 Valenta 3.68% 4 Sotex 3.64% 5 Veropharm 3.60% 6 Biotek 2.75% 7 Materia Medica 2.64% 8 Pharm Center 2.41% 9 Akrihin Pharma 2.38% 10 Mikrogen NPO 2.07% Source: Pharmexpert MRC REFERENCE: Sotex’s market share among Russian pharmaceutical manufacturers is estimated at 3.64%. The production segment of Protek Group is the smallest by sales, but it had the strongest sales growth – 36.9 % – in 2010. Sotex has great potential for growth. International pharma manufacturers are interested in localizing production and working with a strong local partner (licensed manufacturing, supply of substances for local production of branded generics). Sotex has available production capacity (about 40 % of the plant’s installed capacity). Sotex gives Protek Group an active role in Russian programs of national significance: • Pharma 2020 strategy (Sotex is developing in the context of this strategy) • Import substitution, transfer to Russia of latest pharmaceutical technologies (90 technologies have already been transferred) • Development of pharma clusters (participation in Severny pharma cluster) as one of the “anchor” project partners, • Development and adoption of GMP standards in Russia A Protek Group asset that makes it possible to leverage added value in the manufacturing segment of the market. The production segment is the first component of the Protek Group’s balanced business model concept. Each of the Group’s companies ranks in the Top 5 in market segments, while collaboration among them is always based on market reasonability principles. Sotex PharmFirm in 2010: • 14th largest supplier (1.8 % of purchases) of distribution division CV Protek • accounted for 0.42 % of purchases by Rigla pharmacy chain Sotex PharmFirm own brands will be the driving force behind the future growth of the company’s revenues and market share. Products in this category, which are showing the strongest growth and highest profitability (the gross margin exceeds 65%), will enable the company to expand its share of the highly competitive Russian market, in large part thanks to import substitution of pharmaceuticals from Western manufacturers. The company’s biggest successes in this area have been with the products Eralfon and Amelotex, which have won market shares of 11.7% (rubles)/12.7% (packs) and 10.4% (rubles)/15% (packs), respectively, according to Pharmexpert estimates. The company has a presence in all segments of the pharma market, particularly the retail commercial market, which accounts for 69.70% of sales, and the NMRP sector, where it is represented by the pharmaceuticals Eralfon and Epocrin. Sales structure by business segments, % 2009 The company’s portfolio is developing in three directions: 1. Manufacture and promotion of own brand pharmaceuticals 2. Licensed manufacturing (brands and branded generics of leading world companies) 3. Manufacture of high quality INN generics 2010 84.9% Distribution 84.4% Distribution 11.5% Retail 11.2% Retail 3.6% Production 4.4% Production 59 about the company Importance of Production segment for Protek Group annual report 2010 60 Sotex sales structure, '000 packs 19,685.0 1.6% 28.8% 13,335.0 7.5% 16,241.3 12.5% 2,938.1 13.6% 0.7% 3.6% 17.9% 14.2% 29.4% 69.6% 63.2% Segment sales structure, m RUR 73.9% 3,484.3 1.6% Sotex sales structure by market segment 4,771.5 21.1% 2.6% 11.3% 15.9% 19.3% 15.0% 18.0% 19.6% 63.6% 49.8% 46.9% 2008 2009 2010 5.5% 10.0% 84.4% 2008 2008 2009 2010 14.2% 8.4% 77.4% 2009 9.2% 69.7% 2010 Commercial market Licensed manufacturing Licensed manufacturing Government-funded market INN generics Substances NMPR Own brands INN generics Source: Company data Own brands Source: Company data Others Source: Company data Sotex product structure by number of items Sotex production structure by form of output, m RUR by number of packs, ‘000 units 88 8 35 80 28 29 15 45 2008 36 2009 24 2010 Licensed manufacturing INN generics 21,295.4 67 15 1,924.7 1,515.6 1,437.4 15.9% 24.2% 84.1% 2008 75.8% 2009 16.0% 14,095.6 24.6% 25.9% 84.0% 75.4% 2010 2008 24.8% 74.1% 75.2% 2009 2010 Solid form Solid form Ampoule & syringe form Ampoule & syringe form Own brands Source: Company data 17,267.2 Source: Company data Source: Company data Sotex is continuing to develop its own new products. In 2010 it registered: • Eralfon 3,000 IU No. 6; • Eralfon 5,000 IU No. 6; • Eralfon 20,000 IU No. 6; • Eralfon 40,000 IU No.1 and No. 6; • Idrinol (injection) • Likferr 100 . Two of the company’s products – Eralfon and Amelotex – received the Prescription of the Year award based on sales figures, and Eralfon won the Platinum Ounce pharma industry award for Breakthrough of the Year. THE COMPANY’S PROMOTED PORTFOLIOS, SALES (m RUR; growth, %) Brand portfolio Product form EPO 547% 56 40% 438 181% 213 121% 125 -28% 317 91% 2008 EPO Rheumatology Neurology Source: Company data 408 2009 290 29% 407 48% 604 2010 2009 Sales, m RUR 2010 Sales, m RUR Growth, % 408.0 603.9 48.0% Epocrin Injection 222.8 250.3 12.3% Eralfon Injection 185.2 353.6 90.9% 316.7 407.2 28.6% Rheumatology 132% The company sells a considerable portion of its products through national distributors Protek, Katren and Alliance Healthcare, which are followed by interregional companies participating in pharmaceutical coverage programs with Eralfon and Epocrin. CV Protek’s large share is due to the development of joint projects involving manufacturing and promotion of certain products on the market. Dolomin Injection 7.1 7.7 9.4% Synocrom Injection 104.7 120.8 15.4% Structum Capsule 195.7 238.8 22.1% Flamax Injection 0.0 26.6 100.0% 124.6 289.8 132.5% 74.1 112.3 51.7% 0.0 9.7 100.0% Neurology Amelotex Injection Tablet Compligam B Injection 0.9 20.2 2,039.1% Neirox Injection 0.0 36.7 100.0% Cereton Injection 49.6 105.5 112.5% 61 ABOUT THE COMPANY The strongest growth in 2010 was in sales of Neurology and EPO products. The company carried out a substantial reform of its Regional Service in 2010 and launched new products, which fuelled rapid growth in sales: 90.9% for Eralfon, 100% for Flamax, 51.7% for Amelotex and 112% for Cereton compared to 2009 in rubles. annual report 2010 62 SWOT ANALYSIS OF COMPANY POSITION IN PRODUCTION SEGMENT S Sotex PharmFirm is one of Russia’s Top 5 pharmaceutical manufacturers Extensive experience of working directly with major foreign pharma manufacturers unique for the Russian market The company, which works in licensed manufacturing, is also bringing its own products to market, unlike many Russian manufacturers, who do only contract production and make inexpensive INN generics Sotex PharmFirm company produces pharmaceuticals under its own brands at its own as well as contracted facilities Advantages of Protek Group synergies: • promotion of Sotex products through a loyal distributor and sales through chain pharmacies under special marketing campaigns and promotions, making it easier to bring new products to market and develop current ones • optimization of inventory at warehouses in Russia’s regions, faster turnover of inventory • meetings of divisional sales staff, exchange of marketing information, coordination of market plans • correct price positioning of Sotex products in CV Protek’s pricelist • migration of skilled employees within the Protek Group of companies and their professional development • decision making that takes into account the balance of interests at the Group level • participation in projects of the Group companies • elimination of duplication, availability of a range of top quality expertise and services from the parent company STrENGTHS Development of own brands: 28 of the 67 pharmaceuticals in the portfolio are own brands; the company’s strategy calls for expanding the number of brands in three ways: 1. organic growth by bringing our own products to market 2. acquisition of promising outside product developments 3. launch of joint projects with Russian and foreign industry partners The latest equipment made in Germany, Italy, Belgium, and France; ability to offer new forms in which to produce pharmaceuticals, such as in pre-filled syringes with needle protection devices Compliance with GMP EU standards; annual technical audit of the plant by world pharma manufacturers; GMP compliance confirmed by auditors from SanofiAventis, Nycomed, and other partners Fine-tuning of marketing functions, traditionally strong at the company. Another very important development in the company’s operations in 2010 was the expansion and restructuring of the regional service. The service now has departments divided by therapeutic field, each focused on promoting several key pharmaceuticals in their field: • neurology • rheumatology • government sales • in 2011 we are establishing a cardiology field A pipeline of a number of pharmaceuticals in the registration and development stage, including highstrength pharmaceuticals Our own well-developed biotech R&D platform, Protein Contour; creation of intangible assets in the form of patents, trademarks and brands A pipeline of biotech products Participation in development of federal legislation for a Russian version of GMP standards, involvement in a temporary working group of market associations: ARFPA (Association of Russian Manufacturers) and the Union of Professional Pharmaceutical Organizations Capability to supply, if necessary, up to 100% of the requirements of the Russian market for certain types of pharmaceuticals (for example, Epoetin Alpha, used in nephrology and oncology) Low staff turnover, accumulation of expertise at the company (apprenticeship system, balanced incentives system, unique opportunities for professional development) Each field has its own regional representation. Promotion includes direct work with the medical community in all segments of the market w Concentration of the portfolio in the Rx segment and consequently restricted resources for promoting the portfolio Industry leading experience in development of domestic full-cycle pharmaceutical products (bupivacaine, which has received marketing authorization, has been included in the Russian list of 57 strategic pharmaceuticals) wEAkNESSES The life cycle of most of the company’s own products is in its initial phases and requires investment in promotion. This is because the formation and development of the portfolio is continuing Absence of full-cycle production of solid forms: capsules and tablets O Government regulation to promote the development of domestic manufacturers, adoption of measures to curb net imports Active involvement in government initiatives on import substitution with our own modern generics, which have new application properties; the ability to compete with foreign manufacturers in the segment of original pharmaceuticals Growing exports The establishment of the EurAsEC Customs Union harmonizes the rules of member countries – Russia, Belarus and Kazakhstan – in the area of pharmaceutical supplies. Rules will be simplified for registration of pharmaceuticals, mutual recognition of pharmaceuticals will be initiated, companies will have a broader market due to price advantages over western suppliers Possible accession to WTO will spur foreign companies’ interest in working with a strong national manufacturer in the area of licensed production, as well as supplying pharma substances for local production of branded generics Reduced competition from domestic companies with obsolete technology and equipment following the adoption of GMP standards, planned for 2014 T Weak Russian legislation in the area of protecting intellectual property rights Volatility of the dollar and euro exchange rates against the ruble (purchase prices for substances are in foreign currency, while the manufactured pharmaceuticals are sold in the Russian market for rubles) THrEATS Russian companies A decline in CV Protek’s influence in distribution channels and restrictions on the use of this resource An increase in production costs Continued uncertainty about the criteria for defining a domestic pharmaceutical Unclear government position on granting a 15% preference to Russian pharmaceutical manufacturers Delay in introduction of GMP rules in Russia. Continued uncertainty about training of industry professionals in Russia, where educational standards do not meet market requirements. Foreign companies might decide to independently build modern plants in Russia, without partnering with MEASurES TO ELiMiNATE/MiTiGATE wEAkNESSES/THrEATS iDENTiFiED bY SwOT ANALYSiS 1. Sotex is developing its product portfolio within the context of current therapeutic fields, focusing on products that can complement the current portfolio and expand the cluster, including OTC pharmaceuticals. 2. The company’s participation in government programs, including NMRP, has secured a substantial share for these products in the company’s sales. Sotex is adjusting the development of portfolios in order to balance their impact on profits. 3. Contract facilities for production of solid forms provide an opportunity to roll out production relatively quickly and secure a guaranteed amount of product. Developing this area of business will make it possible to remove production barriers for the manufacture of pharmaceuticals in new forms and more effectively manage production costs. about tHe CoMpanY Increasing the share of production of high-margin branded generics, potential to include them in government programs related to the launch of insured medicine in the country and provision of government funding. The company’s goal is to generate about 50–60% of revenue from its own production under its own brands 63 OPPOrTuNiTiES DEVELOPMENT STrATEGY 5 Capital Expenditures And Investment rOLE OF DiSTribuTiON SEGMENT The Distribution segment provides partners and clients with distribution, logistics, information and consulting services based on the latest marketing and IT solutions in the health and beauty market throughout Russia. GOALS FOr 2011–2015 The main goal for 2011–2015 is to increase the profitability of our business, sustaining sales growth that, at the very least, keeps pace with the market by expanding our share of the commercial market and securing our leading positions on the government-funded market, and maintaining the stability and continuity of business activities. In order to achieve the goal of increasing the capitalization/value of the Distribution segment we must meet the following long-term objectives: 1. Assure the necessary growth of key financial and business indicators to achieve the required level of capitalization in key segments by maintaining CV Protek’s share of the commercial and government-funded FPP markets, and by expanding market share in the parapharma sector 2. Increase the profitability of operations by implementing a set of measures to increase the profitability of the active customer base, improve management of the most profitable merchandise and develop additional billable services for customers and suppliers 3. Increase inventory turnover by implementing a set of measures with suppliers to balance purchasing and sales plans, and improve the efficiency of merchandise management 4. Boost labor productivity 5. Ensure product competitiveness by providing a competitive selection of services to suppliers and consumers, and by developing areas of business that support sustained profitability Mission: CV Protek is a national company that caters to the health of the nation by providing health and beauty products and services. We promote high standards of doing business and innovative technologies, creating new opportunities for the development of employees, partners, colleagues and investors. The selection of services for suppliers includes: • Marketing support for products (planning, bringing new products onto the Russian market, product promotion, advertising, sales promotions) • Information support for sales of the suppliers' products in Russia • Product storage at warehouses • Customs processing and freight storage The selection of services for customers includes: • Providing products with the required level of service and product availability • Provision of credit to customers • Installation and support of software products that support the full cycle of pharmacy operations – product orders, inventory management, pricing, accounting • Training and professional development of customers’ employees • Participation of pharmacies in promo actions of suppliers • Fine-tuning of the Company’s product to meet the needs of customers (selection, prices, service, sales model) 6. Diversification – develop areas of business that reduce the risks of operating in the Russian pharma distribution market, pursuing and developing a portfolio in related markets, such as logistics services 7. Increase revenue and improve risk management by implementing measures to increase returns on existing fixed assets, developing a system to manage risks and the soundness of our business, and developing measures to ensure strict compliance with legislation Performance indicators for strategy implementation: • ROE • EVA (economic value added) • Liquidity • Share of operating expenses in sales • Inventory turnover • Efficiency of real estate utilization (utilization of production facilities, management of excess space) • LLC Rigla’s share of total purchases • Growth of sales revenue 65 DeVelopMent StrateGY DEVELOPMENT STrATEGY FOr PrOTEk GrOuP’S DiSTribuTiON SEGMENT annual report 2010 66 Development strategy for Protek Group’s Retail segment Role of Retail segment Goals for 2011–2015 The potential in boosting the value of the Retail business lies in expanding market share through organic growth, mergers and acquisitions, integration with the Distribution division and improving efficiency. The main goals for 2011–2015 are to recover gross income lost due to tax amendments, boost profitability, spur sales growth to outpace the market, retain leading market positions, and ensure the stability and continuity of business operations. The Retail business division provides a guaranteed distribution channel and is building potential to become the main generator of Protek Group profits in the future. О кОмпании 67 In order to achieve the goal of increasing the capitalization/value of the Retail segment we must meet the following long-term objectives: 1. Expand market share and win a leading position by sales in the Russian retail pharma market 2. Support growth of transactions at L-f-L pharmacies by improving competitiveness 3. Increase the competitiveness of the pharmacy chain by simultaneously developing two formats and brands that meet the needs of a broader range of consumers: • Rigla pharmacies – open display of products, high standards of service, broad selection, including parapharma products, and average market prices • Bud Zdorov! pharmacies – behindthe-counter format, competitive prices and broad selection, predominantly pharmaceuticals 4. Replace our own loyalty program with the more economical Svyaznoy Club coalition loyalty program, the largest in Russia by customer coverage, with 45 member retail chains in various sectors 5. Expand the proportion of private label sales; develop and launch independent PL brands (not under the Rigla brand) to increase the share of PL sales at Rigla and Bud Zdorov! stores; launch sales of independent PL brands across the whole market through CV Protek 6. Increase revenue from manufacturers of pharmaceuticals and parapharma products by expanding the number and improving the quality of promotional and marketing services at Rigla and Bud Zdorov! outlets; increase the number of marketing agreements with manufacturers Mission: Rigla is an affordable national health and beauty retail chain that makes shopping easy and convenient. annual report 2010 68 7. Cut costs in the existing business: reduce labor costs by outsourcing noncore, auxiliary functions and boosting labor productivity by automating key business processes at pharmacies; reduce property leasing expenses by subleasing (or leasing) excess space at retail outlets for development of business projects that are compatible with the retail pharmaceuticals business 8. Effective organic growth in the regions 9. Effective mergers and acquisitions Performance indicators for strategy implementation: • ROE • EVA (economic value added) • Liquidity • Share of operating expenses in sales • Absence of unprofitable (lossmaking) pharmacies • Ratio of sales per square meter of retail or total space • Growth in the number of transactions chain-wide and L-f-L • Growth in average sale per transaction chain-wide and L-f-L • Ratio of office to production personnel • Net profitability • Rate of revenue growth chain-wide and L-f-L DEVELOPMENT STrATEGY FOr PrOTEk GrOuP’S PrODuCTiON SEGMENT rOLE OF PrODuCTiON SEGMENT The Production segment is the driver behind the growth of Protek Group’s value. It is seen by the Group’s parent company as the most profitable business segment, with unqualified potential for growth. The main role of the Production segment is to build a portfolio of profitable and popular products, including its own products (manufactured and/ or independently marketed) and not own (jointly managed) products in the most profitable and rapidly growing segments of the Russian pharmaceutical market, as well as enter the international market with its own brands. Mission: We work so you can be healthy! О компании 69 Goals for 2011–2015 The main goals for 2011–2015 are to increase efficiency while expanding market share, growing the share of own brands in gross income and ensuring the stability and continuity of business operations. In order to achieve the goal of increasing the capitalization/value of the Production segment we must meet the following long-term objectives: 1. Maintain a rank of second-third in cumulative industry rankings of local producers 2. Assure the necessary growth of key financial and business indicators to achieve the required level of capitalization/value 3. Build a portfolio of own brands with high value added in promising market segments 4. Expand the selection of biotech products, as well as other innovative products through contract manufacturing at other facilities, including abroad 5. Expand the share of OTC pharmaceuticals in our portfolio in order to diversify risks in light of tighter government regulation of the government-funded market 6. Expand the company’s portfolio through mergers and acquisitions 7. Expand the geographic presence of the Production segment in the CIS and Eastern Europe Performance indicators for strategy implementation: • Revenue • ROE • EVA (economic value added) • Share of own brands in gross income • Share of operating expenses in sales CAPiTAL EXPENDiTurE AND iNVESTMENT 5.1 Investment In Individual Market Segments 5.2 Development Of IT Infrastructure 6 Human Resources Management 5.1 INVESTMENT IN INDIVIDUAL MARKET SEGMENTS GROUP CAPITAL EXPENDITURE IN 2010, (m RUR, net of VAT) Group capital expenditure (1) CAPITAL EXPENDITURES AND INVESTMENT 71 2010 Distribution 650.8 Retail 1,042.7 Production 46.7 Group total 1,740.2 (1) Capital expenditure represents additions to noncurrent assets, other than financial instruments and deferred tax assets according to IFRS STRUCTURE OF GROUP CAPITAL EXPENDITURE IN 2010 The Group’s capital expenditure totaled RUR 1.74 billion in 2010. The Company’s investment priorities in 2010 were: • Acquisition of equity shares in companies to expand its business and the value of the Group, including: Acquired company Дистрибуция Purchase consideration(1) LLC TC Toko Розница 68.0 OJSC Novaya Apteka 112.0 LLC Panaceya 117.5 OJSC Biofarm Производство 130.0 Zhivika Companies 294.7 Total 722.2 (2) (1) Cost of acquisition in m RUR (2) Including a 26% share in 2010 for RUR 145 million and 25% share in 2008, the fair value of which was RUR 150 million on the date of acquisition 60% Retail 37% Distribution 3% Production • Investment in technology, modernization, acquisition and construction of fixed assets and acquisition of intangible assets: – Modernization of the conveyor at the central warehouse in Pushkino – All-round automation of the Urals Logistics Distribution Center – Organic opening of pharmacy outlets, including in the Moscow region and at regional companies (Syktyvkar, Ryazan, Yaroslavl and others) – Continuation of construction of an office and warehouse complex in Khabarovsk – Development of customs infrastructure annual report 2010 72 Primary areas of investment in 2011 In order to sustain growth, Protek Group proposes to invest in the following key areas in 2011: • Working capital to support sustainable growth of operating profit • Acquisition of equity shares in other companies and shares in joint ventures in order to expand the scale of our business and increase the value of the Group • Financial market instruments in order to create reserves of liquidity and accumulate for future long-term investment • Limited financial investments in the form of credit extended to Group customers with the aim of expanding business with them • Limited investment in non-commodity working capital • Capital expenditure related to renewal of depreciated fixed assets, intangible assets and major repairs of fixed assets CAPITAL EXPENDITURES AND INVESTMENT 73 • Capital expenditure to acquire new fixed assets, intangible assets and major repairs to fixed assets related to development and expansion of Protek Group’s business Investment in 2011 will be financed with the following sources: • Retained earnings of the Group • Depreciation charges • Intergroup loans • Short-term and long-term bank loans • Investment (targeted) long-term bank credit facilities • Proceeds from share issue Protek Group also intends to consider major long-term financial investments related to: • Acquisition of equity shares in other companies and shares in joint ventures in order to expand the scale of our business and increase the value of the Group • Short-term financial investments in financial market instruments in order to create reserves of liquidity and accumulate for future long-term investment • Acquisition of intangible assets and investment in technologies that have strong potential to increase the Group’s productivity and value • The Group will consider depreciation charges, gain on disposal of fixed assets and insurance proceeds as sources for updating fixed assets • The limit for capital expenditure on renewal of fixed assets in 2011 will be up to 70% of the Group’s depreciation reserve 5.2 DEVELOPMENT OF IT INFRASTRUCTURE ANNUAL REPORT 2010 74 Protek Group companies implement and use the latest IT solutions in their day-to-day operations in order to efficiently manage business processes and work with suppliers and pharmacies. DEVELOPMENT OF IT INFRASTRUCTURE IN DISTRIBUTION The following IT services for Group partners and clients have been implemented and are available online: • REPORTING – makes it possible to track the movement of products across CV Protek’s distribution units, including client details. • OFFER NEW ITEM – CV Protek clients can propose a new product item for our pricelist by filling in a webform. This service allows clients to track the review process for the proposed item, and filling in the webform makes it possible to obtain accurate and full information for correct entry into reference guides. • EZAKAZ – Up to 80% of all pharmacy orders are currently generated with the aid of the electronic order system. The system allows customers to quickly obtain information about the selection of products at the Company’s warehouses and place an order in real time. КАПИТАЛЬНЫЕ ВЛОЖЕНИЯ И ИНВЕСТИЦИИ 75 • DELIVERY TRACKING –Using this system makes it possible to automate the business processes involved in coordinating delivery of goods from the supplier’s warehouse to CV Protek’s warehouse. • TRADING PLATFORM – This service allows participation in tenders held by CV Protek for supply of pharmaceuticals and health products. • E-PHARMA – The specialized software solution ePharma2 helps us improve the quality of our pharmacy business and sets the stage for its further development. The Company in 2010 further integrated its electronic customer relationship management system with external electronic systems, thereby enhancing its competitiveness. The Company continued to introduce an ERP solution at regional branches, successfully implementing it at 24 of our 28 regional warehouses. We completed a project to roll out a pipeline system at our F-14 logistics center managed by Oracle E-Business Suite. We also successfully completed the installation of the Directum electronic document management solution in 2010; In addition, the Central Warehouse implemented the ARKM-2 (automated modernized complex) project managed by Stock software, which significantly increased warehouse capacity. In 2011, the Company plans to make changes in the segment’s information system to improve the reliability of OEBS. The changes will be made in two phases and affect the middle component of OEBS. In the first phase four virtual servers will be added to reduce the load on the existing eight servers and another four virtual servers will be added in the second phase, after which the whole load will gradually migrate to the new virtual servers and the old servers will be retired. annual report 2010 76 Development of IT infrastructure in Retail The Retail segment actively uses our proprietary ePharma2 solution, which was developed by Protek Group subsidiary Spargo Technologies and is the best software product for full automation of pharmacies available in Russia. This solution was used in 2009–2010 to implement active sales technologies for pharmacists and dispensers. In 2011, the Company plans to complete the unification of pharmacy application software on the basis of the ePharma2 solution. The unification of application software and implementing the features of the ePharma2 solution will enhance the efficiency of the Rigla pharmacy chain with: • Unified content management • Unified mechanisms for flexible pricing • Unified mechanisms for managing selection and inventory • Lower expenses on development and implementation of key business processes • Competitive advantages gained through rapid implementation of innovations in customer service CAPITAL EXPENDITURES AND INVESTMENT 77 DEVELOPMENT OF IT INFRASTRUCTURE IN PRODUCTION In 2010, the Company developed a CRM solution to manage the activities of regional medical representatives and integrated it with the ERP system. This made it possible to: • Cut costs on entering information • Improve the quality of regional HR management • Bring a new level of quality to relations with counterparties (pharmacy chains, healthcare facilities, distributors, etc.) Furthermore, the integration with the Company’s ERP system expanded the system’s HR and payroll functions (based on 1C: HRM), enabling us to eliminate duplication of business processes and information flows (in different IT systems), centralize data transfer to the Pension Fund of Russia and Federal Tax Service, and boost productivity despite the higher workload due to the substantial increase in staff. The Company’s main achievement in 2010 was the validation of the process of production system in accordance with GAMP (Good Automated Manufacturing Practice) standards, which confirmed the reliability of IT systems, accuracy of accounting data and, most importantly, compliance with the GMP standards applied to IT systems in the global pharmaceutical industry. In 2011, the Company intends to further develop its ERP system by computerizing business processes involved in comprehensive planning and budgeting, and develop the analytical reporting system. We also plan to expand the capabilities of the IT system to support accounting of automobile transport costs in the regional division in light of the expansion of the vehicle fleet, as well as modernize the system for providing access to Company information resources to employees in remote locations. There is also a great deal of work to be done to computerize documents circulation processes and integrate them with existing systems and eventually migrate to a paperless electronic document system. HuMAN rESOurCES MANAGEMENT 7 Social Responsibility The Company’s employment and social policy is based on the principles of fairness and transparency at all levels, from hiring, adaptation, support for the work process, training and career development to dismissal. Viewing human capital as a strategic resource, the Company’s employment policy is aimed at maximizing the potential of human resources to meet strategic objectives. Protek Group’s human resources management is based on 20 years of experience in the pharmaceutical market, a clearly articulated employment and social policy and a corporate culture based on values and principles set out in the Corporate Code of Conduct, by which all Group employees govern their actions. The priorities of the Company’s employment policy are recruitment of high performance employees and workforce stabilization. The main principles of the Group’s employment policy: • Use of employee selection and development resources • Fair employee compensation • Cultivation of ownership and sharing of success • Development of employee potential • Promotion of healthy lifestyles, including organization of recreational activities for employees • Social responsibility to employees COrPOrATE CuLTurE Protek Group has a strong corporate culture that is a reflection of its many years of productive development, a kind of embodiment of the sum collective experience, both professional and emotional, acquired by the Company over 20 years. This experience is distilled into values, traditions and principles and is the foundation of our corporate culture. The Company values its reputation as a responsible employer who respects the interests of its employees, partners, customers and society in general. In order to maintain its strong business reputation, the Company is committed to doing business in an environment of fair competition and being at the forefront of everything new and progressive, both in The Company’s values are leadership, transparency, customer service, professionalism, efficiency, teamwork, compassion, healthy staff morale, health and security, innovation, and development. 79 HuMan reSourCeS ManaGeMent EMPLOYMENT POLiCY annual report 2010 80 the industry and the development of the country. Our high standards of service are also governed by principles articulated in the Code, including guarantees of high quality of services and products, fulfillment of all contractual obligations, constructive dialog and respect towards resources, and opportunity to select solutions to criticism or complaints from partners and customers. Building the management team and talent pool Protek Group is a vertically integrated company with operations in all key segments of the pharmaceutical market, but historically its core and principal unit is the distribution division. This division is the main steward of our values and the talent foundry for the manufacturing and retail segments. The Group believes in cultivating its management team from among its own employees. A mentoring approach to management at all levels makes it possible to promptly identify employees with management potential, provide them with opportunities for additional training and include them in the talent pool. When establishing new divisions or filling a management vacancy, the Company first considers candidates from this pool. Staff rotation Size of workforce In order to better exchange information, expand the outlook of managers, give them an opportunity to gain experience and expertise we have a system of horizontal staff rotation between companies that are part of the Group. The core of the management teams of the production and retail divisions is made up of veterans of CV Protek, the Group’s distribution division, with a strong knowledge of the market, high sense of loyalty and commitment to the Company’s basic values, corporate culture and other traditions. The Group had 12,370 employees in 2010, 2% more than in 2009 but 7% fewer than in 2008. Employee training Achieving and maintaining the position of market leader is only possible by continually striving for new knowledge and methods. Company employees are actively involved in continuous learning, attend various professional courses and training seminars, and have the opportunity to attend internal trainings. Some 266 employees from the Distribution segment and 637 employees from the Production segment underwent training in 2010. In the Retail segment, 146 employees in Moscow and the Moscow Region underwent training in 2010 for mandatory confirmation of their pharmacist certification. Structure of employee compensation The compensation package for Protek Group employees differs depending on region, business segment and position. Wages consist of a fixed portion and premium (bonus), which is calculated on the basis of cumulative key performance indicators. The package also includes supplementary health insurance, subsidies for meals and other compensation. The total amount of compensation is consistent with and even somewhat exceeds the level of wages in the industry. The Group also commonly uses other incentives, such as souvenirs, corporate events for employees and their family members, gifts to employees and their children for national holidays, and holiday packages for employees’ children. In the interests of maternity and child welfare, the Company adheres to labor legislation, making all payments to expectant and new mothers under Federal Law No. 212. УПРАВЛЕНИЕ ЧЕЛОВЕЧЕСКИМ КАПИТАЛОМ 81 NUMBER OF EMPLOYEES AVERAGE WAGE BY PROTEK GROUP SEGMENT, ‘000 RUR 51 13 300 12 100 12 370 42 42 38 2009 2010 2008 Retail Source: Company data Distribution Production Source: Company data 26 24 20 2008 39 38 2009 2010 SOCiAL rESPONSibiLiTY 7.1 Social policy and philanthropy 7.2 Occupational health and safety 7.3 Environmental protection 8 Consolidated Financial Statement 7.1 SOCIAL POLICY AND PHILANTHROPY While fulfilling its socioeconomic role, the company always puts an emphasis on social projects and philanthropy, helps organize and sponsor professional events, contributes to the development of medical science, provides regular support to the country’s leading hospitals, and provides funding for humanitarian aid to orphanages, foster homes, veterans, and the disabled. Protek is a member of Russian and international professional associations and regularly comes forward with initiatives for open markets and the establishment of high standards of business conduct. For many years Protek Group companies have deservedly won prestigious industry awards and competitions. In its professional and public activities the Company adheres to high ethical principles, which are articulated in the Code of Corporate Ethics. The Company also subscribes to the idea of social responsibility in business, as defined by the following criteria: • Production and distribution of quality products and services • Creation of jobs, building high morale among employees and improving the company’s appeal as an employer • Strict observance of the law • Building honest relations with all stakeholders, taking into consideration economic, ethical and social values and public standards • Participation in government and public projects • Contribution to establishing decent living standards for Russian citizens and local community development projects through partnership programs • Informing the public, adhering to a policy of disclosure • Implementation of a broad range of socially important projects in the fundamental sciences, healthcare, education, and sport • Active participation in philanthropic activities The Company also pursues an effective and humane policy in the area of employment, and does not support any political parties or movements. The Company nurtures its reputation and adheres to principles of honest communication with the public and the media. 83 SoCIal reSponSIbIlItY Working in such a socially important industry as pharmaceuticals presupposes a high degree of responsibility, not only to partners and clients, but to the public in general. Protek is a member of Russian and international professional associations and regularly comes forward with initiatives for open markets and the establishment of high standards of business conduct. For many years Protek Group companies have deservedly won prestigious industry awards and competitions. Company representatives participate as experts in the work of industry and professional associations and organizations on issues concerning the development of healthcare and the pharmaceutical sector. ANNUAL REPORT 2010 84 PHILANTHROPY Involvement in charitable, humanitarian and social programs has always been one of the most important aspects of the Group’s activities, alongside its core business. In order to realize these goals Protek Group in 1997 established a charitable foundation that provided aid with medicines and pharmaceuticals. In 2006, due to the rapid expansion of the Group’s social activities, the Protek Charity Fund (the Fund) incorporated other areas of the Group’s philanthropic work as well. The Fund is currently working in the following main areas: • Projects to provide medicine to people who are most in need of social security: the Healthy People and Way of Charity programs and the Veterans Aid initiative • Support for science, education and fundamental research promoting the implementation of new technologies The Group’s charitable work is conducted with the active involvement of our partner pharmaceutical manufacturers. PROTEK CHARITY FUND IN 2010 The Fund’s main goal in 2010 was to provide humanitarian assistance under the Healthy People program, as well as implement the Fundamental Oncology Research Support program with the Blokhin Cancer Research Center. Under the program, there have been distributed 30.6 million rubles worth of pharmaceuticals to medical facilities in Moscow and other regions of Russia. A total of 240 medical facilities and nonprofit organizations received aid. One of the Fund’s chief objectives today is to foster an atmosphere of social responsibility in business. It therefore focuses on long-term charitable programs in such important areas of public life as science, education, and promotion of health and healthy lifestyles. TOP 20 PROGRAM PARTICIPANTS – CV PROTEK SUPPLIERS AND PARTNERS IN 2010, BY TOTAL VALUE OF PHARMACEUTICALS PROVIDED № Manufacturer № Manufacturer 1 Servier 11 Lupin Laboratories Ltd 2 Belupo 12 Pliva 3 Eli Lilly 13 Kodak 4 KRKA 14 Altayvitaminy 5 Gedeon Richter 15 Johnson & Johnson/Lifescan 6 Lilly France S.A.S. 16 Hemofarm 7 Novartis Pharma 17 Pfizer 8 Sanofi-Winthrop Industrie 18 Merck Sharp & Dohme 9 Biokhimik 19 ZiO-Zdorovie ZAO 10 Lek d.d. 20 Nycomed Austria GmbH Rigla also works regularly with three orphanages, distributing children’s goods, toys and gifts with support from its partners. WAY OF CHARITY PROGRAM VETERANS AID INITIATIVE The charitable program led by Protek Group subsidiary Sotex, Way of Charity, is an integral part of the life of the Group. This program covers an extensive range of charitable and sponsorship initiatives, including aid to childcare, healthcare and educational institutions. The program distributes pharmaceuticals and equipment, and provides material aid to orphans and the disabled. The Group is also involved in charitable initiatives for veterans and pensioners in an effort to improve their lives, offering a measure of warmth and happiness. The Rigla pharmacy chain launched the Veterans Aid campaign, offering a 10% discount on pharmaceuticals at all of its outlets. The initiative is ongoing and the discount applies to the chain’s whole range of products. Plastic discount cards, guaranteeing a discount, were issued ahead of the 65th anniversary of Victory Day in 2010, and can be obtained at any chain outlet with a veteran’s identification. УПРАВЛЕНИЕ ЧЕЛОВЕЧЕСКИМ КАПИТАЛОМ 85 7.2 OCCUPATIONAL HEALTH AND SAFETY annual report 2010 86 The main goal of occupational health and safety policy is to further improve working conditions that promote productivity, safety, and high product quality and production standards. This in turn maintains the health and motivation of employees, building the foundation of a decent and stable future for the Company’s entire workforce. The occupational health and safety management policy is implemented by: • Continual implementation of measures to identify, assess and manage occupational risks • Stressing systematic training, implementation practices, exchange of information and involvement of all employees in occupational health and safety management • Compliance with current legislation and regulations • Provision of the necessary resources and equipment The Group’s spending on occupational health and safety measures rose by 8% to 5 million rubles in 2010, including by 25% in the Retail segment, 7% in Distribution and 2% in Production. The growth in spending was primarily due to higher prices for certified special clothing, footwear and other personal protection gear, as well as training and OHS standards testing of Group managers and specialists at outside training centers. The Company in 2010 conducted an assessment of working conditions at 260 workplaces at the Pushkino office and warehouse complex. The assessment was used to develop an action plan to improve working conditions at the Company and make them healthier. The Company also conducted regular medical examinations of 480 employees working in harmful and hazardous conditions. The number of work accidents across the whole Group decreased to two in the reporting year from three in 2009. The number of accidents in the Distribution segment dropped to one from two, while in the Production and Retail segments there was no change from the previous year. 4,654 3,587 500 800 1,623 5,042 1,000 1,661 972 SPENDING ON OCCUPATIONAL HEALTH AND SAFETY, ‘000 RUR 4,654 5,042 WORK ACCIDENT STATISTICS, people 2,115 2,231 2,381 2008 2009 2010 3 Retail Production 3,587 500 800 1,623 1,000 1,661 972 2,231 2,381 2008 2009 2010 Source: Company data Production Distribution 1 1 2,115 Retail Distribution 2 1 1 0 0 0 2008 2009 2010 note:Розница Production segment: there were no work accidents between 2008 and 2010 Производство Дистрибуция 7.3 ENVIRONMENTAL PROTECTION 87 In the area of waste management the Company: • Collects, stores and tracks the movement and safe storage of waste • Transfers all types of waste, determined by waste generation limits, to licensed organizations for subsequent disposal, processing or storage • Annually conducts an audit of the production process, preparing technical and statistical reports and developing action plans to reduce waste disposal facilities’ negative impact on the environment; audit data are regularly submitted to the Federal Environmental Monitoring Service SOCIAL RESPONSIBILITY The Group is fully aware of its role in preserving the environment for future generations and is making every effort to minimize its negative impact, complying with all the necessary requirements of Russian environmental legislation. In the area of air quality the Company: • Regularly monitors for compliance with maximum allowable levels of atmospheric emissions of pollutants from stationary sources • Reports regularly to the Federal Environmental Monitoring Service on actual atmospheric emissions of pollutants from stationary and mobile sources for the reporting period • Implements a program to reduce atmospheric emissions from mobile sources by converting them to a more environmentally friendly fuel – gas OJSC PROTEK ENERGY CONSUMPTION 2008 2009 2010 Volume m RUR Volume m RUR Volume m RUR Heat (‘000 Gcal) 59.0 0.05 57.0 0.048 57.0 0.057 Electricity (‘000 kWh) 88.6 0.2 88.9 0.22 88.7 0.26 CONSOLiDATED FiNANCiAL STATEMENTS International Financial Reporting Standards Сonsolidated Financial Statements for the year ended 31 December 2010 and Independent Auditor’s Report 8.1 Independent Auditor’s Report 8.2 Consolidated financial statements 9 Glossary 8.1 INDEPENDENT AUDITOR’S REPORT To the Shareholders and Board of Directors of Open Joint-Stock Company Protek: 1. We have audited the accompanying consolidated financial statements of Open Joint-Stock Company Protek and its subsidiaries (the “Group”) which comprise the consolidated statement of financial position as of 31 December 2010 and the consolidated statements of comprehensive income, cash flows and changes in equity for the year then ended and a summary of significant accounting policies and other explanatory notes. MANAGEMENT'S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS 2. Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. AUDITOR'S RESPONSIBILITY OPINION 3. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. 6. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2010, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. 4. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 5. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 25 April 2011 Moscow, Russian Federation ZAO PricewaterhouseCoopers Audit, White Square Office Center, 10 Butyrsky Val, Moscow, Russia, 125047 Telephone +7(495) 9676000, Fax +7(495) 9676001, www.pwc.ru CONSOLIDATED FINANCIAL STATEMENT 89 OJSC PROTEK CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS OF 31 DECEMBER 2010 (IN THOUSANDS OF RUSSIAN RUBLES, UNLESS OTHERWISE STATED) ANNUAL REPORT 2010 90 Notes 31 December 2010 31 December 2009 3 4 5 3,073,432 158,216 12,490,356 40,936 18,637,827 115,957 34,516,724 1,062,154 306,788 12,643,742 68,649 18,825,408 145,618 33,052,359 7 7,875,254 137,525 7,615,079 65,843 Other intangible assets Goodwill Investments in associates 8 9 10 626,175 4,485,724 7 548,535 3,956,490 146,069 Long-term loans receivable from related parties 20 ASSETS Current assets Cash and cash equivalents Short-term loans receivable Trade and other receivables Income tax receivable Inventories Other current assets Total current assets Non-current assets Property, plant and equipment Advances paid for property, plant and equipment 6 Other non-current assets Total non-current assets Total assets LIABILITIES AND EQUITY Current liabilities Short-term borrowings Trade and other payables Deferred consideration for acquisition of subsidiaries from a related party Current income tax payable Total current liabilities Non-current liabilities Long-term borrowings Deferred income tax liability Total non-current liabilities Total liabilities Equity Share capital Currency translation reserve Share premium Treasury shares Retained earnings Equity attributable to the Company’s equity holders Non-controlling interest Total equity Total liabilities and equity 11 12 20 - 15,815 12,207 40,797 13,136,892 47,653,616 12,388,628 45,440,987 118,308 27,962,459 9,282 3,144,747 29,089,155 70,400 21,804 28,111,853 18,579 32,322,881 11 17,625 32,308 19 178,157 195,782 28,307,635 319,231 351,539 32,674,420 13 5,271 3,771 5,793,821 (85,007) 13,482,852 4,700 3,766 23,799 12,645,727 19,200,708 145,273 19,345,981 47,653,616 12,677,992 88,575 12,766,567 45,440,987 13 OJSC PROTEK CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2010 (IN THOUSANDS OF RUSSIAN RUBLES, UNLESS OTHERWISE STATED) Year ended 31 December 2009 91,580,958 (76,140,125) 15,440,833 (6,503,593) (3,965,793) 78,888 5,050,335 10 10,372 6,609 20 82,826 (123,258) (222,031) 1,729,133 (59,741) 86,406 (777,712) 94,585 1,799,059 (1,516,861) 1,388,283 (446,606) 941,677 (2,533,220) 611,061 4,277,382 (1,003,468) 3,273,914 Other comprehensive income/(loss) Total comprehensive income for the year 5 941,682 (28) 3,273,886 Profit is attributable to: The Company’s equity holders Non-controlling interest Profit for the year 922,196 19,481 941,677 3,262,017 11,897 3,273,914 Total comprehensive income is attributable to: The Company’s equity holders 922,201 3,261,989 Non-controlling interest Total comprehensive income for the year 19,481 941,682 11,897 3,273,886 1.83 7.09 Sales Cost of sales Gross profit Distribution and selling expenses General and administrative expenses IPO expenses Other operating (expenses)/ income, net Operating profit Share of post-tax profit of associate Unwinding of discounting of deferred consideration for acquisition of subsidiaries from a related party Interest income Provision for impairment of investments Interest expense Gain on redemption of bonds Foreign exchange gains Foreign exchange losses Compensation of foreign exchange losses Profit before income tax Income tax expense Profit for the year Earnings per ordinary share for profit attributable to the equity holders of the Company, basic and diluted (in RUR per share) 14 15 16 17 21 18 4 11 2.25 19 22 91 CONSOLIDATED FINANCIAL STATEMENT Year ended 31 December 2010 99,840,831 (87,033,537) 12,807,294 (7,131,043) (3,739,568) (476,450) (32,131) 1,428,102 Notes OJSC PROTEK CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2010 (IN THOUSANDS OF RUSSIAN ROUBLES, UNLESS OTHERWISE STATED) Notes ANNUAL REPORT 2010 92 Cash flows from operating activities Profit for the year Adjustments: Depreciation of property, plant and equipment Amortisation of other intangible assets (Reversal)/provision for impairment of inventories Provision for impairment of trade, FRP and other receivables Gain on disposal of property, plant and equipment Loss on disposal of subsidiaries Gain on redemption of bonds Share of post-tax profit of associate Gain on settlement of deferred consideration for acquisition of subsidiaries from a related party Interest expense Unwinding of discounting of deferred consideration for acquisition of subsidiaries from a related party Interest income Impairment of investments Unrealised foreign exchange loss/(gain) Income tax expense 941,677 3,273,914 682,477 83,428 (103,415) 261,414 (13,179) (10,372) 701,741 84,479 43,009 2,765 (10,650) 440 (94,585) (6,609) 20 222,031 (78,529) 777,712 20 (82,826) 123,258 9,649 446,606 59,741 (86,406) (20,115) 1,003,468 2,560,748 (132,333) 455,280 (1,381,675) 5,650,375 206,806 (4,033,555) 5,545,137 1,502,020 (238,772) (556,741) 7,368,763 (818,305) (838,104) 706,507 5,712,354 (880,018) 61,381 (684,147) (536,185) 114,268 (160,754) 24,502 97,311 2,318 241,754 (80,594) (1,217,493) 10 23,270 199,743 (87,392) (447,040) 12,338,372 (15,481,367) (8,717) (45,592) 5,804,575 (85,007) 2,522,264 2,011,278 1,062,154 3,073,432 7,390,835 (2,536,602) (9,425,806) (861,485) (8,011) 24,499 (5,416,570) (151,256) 1,213,410 1,062,154 7 8 16, 18 18 18 11 10 4 19 Operating profit before working capital changes Change in trade and other receivables and other current assets Change in inventories Change in trade and other payables Cash generated from operations Interest paid Income tax paid Net cash from operating activities Cash flows from investing activities Purchases of property, plant and equipment and intangible assets Proceeds from sale of property, plant and equipment Acquisition of subsidiaries, net of cash acquired Proceeds from disposal of subsidiaries and non-controlling interest of subsidiary, net of cash disposed Interest received Dividends received from associate Repayment of loans Loans issued Net cash used in investing activities Cash flows from financing activities Proceeds from borrowings Redemption of bonds Repayment of borrowings Dividends paid to the Company’s equity holders Dividends paid to non-controlling interest holders Costs directly attributable to the equity transaction Proceeds from share issue Acquisitions of treasury shares Net cash from/(used in) financing activities Net increase/( decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Year ended Year ended 31 December 2010 31 December 2009 11 13 3 3 OJSC PROTEK CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2010 (IN THOUSANDS OF RUSSIAN ROUBLES, UNLESS OTHERWISE STATED) Attributable to equity holders of the Company Currency translation reserve 3,794 - Retained earnings 10,133,835 - Total 10,141,629 24,499 Noncontrolling Total interest equity 84,689 10,226,318 24,499 - (28) 3,766 - 3,262,017 (750,125) 12,645,727 - 3,261,989 (750,125) 12,677,992 5,804,575 11,897 3,273,886 (8,011) (758,136) 88,575 12,766,567 - 5,804,575 Share Treasury premium shares - 23,799 4,700 23,799 571 5,804,004 - (33,982) - - (33,981) (67,963) - (67,963) - - (85,007) - - (85,007) - (85,007) - - - 5 - 922,196 - 922,201 - 19,481 (8,717) 941,682 (8,717) - - - - - - 62,342 62,342 - - - - 27,734 ,27,734 (3,232) 24,502 - - - - (78,824) (78,824) (13,176) (92,000) 5,271 5,793,821 (85,007) 3,771 13,482,852 19,200,708 145,273 19,345,981 CONSOLIDATED FINANCIAL STATEMENT Balance at 1 January 2009 Share issue (Note 13) Total comprehensive income for 2009 Dividends declared (Note 13) Balance at 31 December 2009 Share issue (Note 13) Costs directly attributable to the equity transaction Acquisitions of treasury shares Total comprehensive income for 2010 Dividends declared Non-controlling interest arising from business combination (Note 9) Disposal of non-controlling interest of subsidiary (Note 9) Acquisition of non-controlling interest from related party (Note 20) Balance at 31 December 2010 Share capital 4,000 700 93 9. GLOSSARY annual report 2010 94 OTC Over-the-counter, i.e. sold without a prescription RХ Prescription, i.e. sold only with prescription from a doctor BAA Biologically active additives FPP Finished pharmaceutical product NMP Non-medicinal product Hospital segment The segment of the pharmaceutical market that caters to medical facilities Government pharmaceutical registration Legally defined procedure for including a pharmaceutical in the government register of pharmaceuticals; the sale and use of a pharmaceutical in the country without registration is prohibited Government-funded/budget FPP sector Market segment of government purchases of finished pharmaceutical products FRP Additional pharmaceutical coverage: pharmaceuticals purchased under a government program of additional pharmaceutical coverage and eligible for reimbursement Generic A pharmaceutical product that is comparable to the patented (original) pharmaceutical and put on the market upon expiration of the patent on the original; there are branded generics, which have a registered trademark, and INN generics, which are produced under international nonproprietary names Out of stock Absence of the required product (pharmaceutical) at a pharmacy (medical facility) High-cost pharmaceuticals Finished pharmaceutical products costing more than 500 rubles per pack EDL/ZhNVLP (before 2010, ZhNVLS) Essential Pharmaceuticals List, which includes about 500 items; it is approved annually by the Russian government and is intended to ensure fixed producer prices and fixed markups at all stages of the product distribution chain for the given year Commercial FPP sector Segment of market for finished pharmaceutical products that are sold through pharmacies directly to retail consumers Pharmaceutical coverage benefits Government-funded coverage for entitlement recipients of pharmaceuticals included in EDL INN International nonproprietary names for pharmaceutical substances are the official, standard nonproprietary or generic names for pharmaceutical substances recommended by the World Health Organization; a substance can only have one INN. INN are in the public domain and are recognized throughout the world NMRP Essential pharmaceutical coverage for certain categories of the population OMS Mandatory medical insurance Parapharmaceutical product Products that are also sold at pharmacies in addition to pharmaceuticals and medical products, that are intended for prevention, treatment of illness, alleviation or care for parts of the body. These products include cosmetics not intended for decorative purposes, care cosmetics, hygiene products, patient care products and mineral water, among others Commercial pharmaceutical market Pharmaceutical sales in the retail market, i.e. at pharmacies and pharmacy chains Pharmaceutical substance A substance of biological, biotechnological, mineral or chemical origin that is pharmacologically active and is intended for manufacture of pharmaceuticals and determines their effectiveness Pharmacist A specialist with a post secondary pharmaceutical education, the point of contact with customers at a pharmacy who selects, dispenses and sells pharmaceuticals and associated products Original pharmaceutical (brand) A pharmaceutical with proven efficacy that was previously unknown and marketed for the first time by the company that developed it or the patent holder. The patent is valid for a limited duration, after which other companies have the right to manufacture this pharmaceutical under different names ATC The Anatomical Therapeutic Chemical classification system is used for classification of pharmaceuticals, dividing them into different groups according to the organ or system on which they act and/or their therapeutic and chemical characteristics ARPM, founded in 2002, includes the leading Russian pharmaceutical companies, which account for more than 80% of the pharmaceuticals manufactured in the country, about 45% of pharmaceutical exports, and more than 75% of the domestic pharmaceuticals included in the NMRP essential pharmaceutical coverage program. Pharmacy Guild Nonprofit partnership that promotes the development of the pharmacy industry Union of Professional Pharmaceutical Organizations (SPFO) SPFO, registered in May 2002, includes the largest Russian and foreign distributors and manufacturers of pharmaceutical products, who account for more than 50% of the pharmaceuticals distributed in the market. SoyuzPharma The SoyuzPharma Association of Pharmacy Institutions is a nonprofit organization founded on the initiative of Moscow pharmacies on March 16, 2001. It currently includes 368 pharmacy organizations with 1,900 retail outlets in 25 regions of Russia. Customs Union Belarus, Kazakhstan and Russia formed a customs union under a treaty signed on October 6, 2007 that calls for a common customs area to eliminate customs duties and economic restrictions, with the exception of special protective, antidumping and compensation measures; a unified customs tariff and other standardized measures for regulating trade in goods with third countries are applied within the Customs Union. Chamber of Commerce and Industry of the Russian Federation (CCI RF) A nongovernmental, nonprofit organization that operates under the Law on Chambers of Commerce and Industry in the Russian Federation and the Chamber’s Charter. It represents the interests of small, medium and large businesses in all sectors: manufacturing, domestic and foreign trade, agriculture, the financial system and services. The Chamber promotes the growth of the Russian economy and its integration into the global economy, and the creation of a favorable business climate. 95 glossary Association of Russian Pharmaceutical Manufacturers (ARPM) 10. DISCLAIMER annual report 2010 96 This Annual Report may contain statements that are or could be considered “forward-looking statements” as defined by U.S. federal securities laws and, consequently, these statements fall under provisions of these laws that provide release from liability for acts committed in good faith. Examples of such statements include, but are not limited to, forecasts, projections, strategies, plans, targets, expectations, estimates, intentions and beliefs of the Company, including in regard to acquisitions, sales of goods or services, operating results, financial position, liquidity, prospects and dividend policy; statements concerning future production and business operations; other statements that do not strictly apply to events (facts), both past and present; and assumptions on which such statements are based. Forward-looking statements are inherently subject to risks and uncertainties, both general and specific, as well as risks that these statements will not be realized. In addition to other factors, forwardlooking statements are based on many assumptions concerning the current and future strategy of the Company, as well as the circumstances in which the Company will be conducting business in the future. The Company cautions that certain important factors could result in the Company’s assumptions being incorrect and could cause actual results to differ materially from the forecasts, projections, strategies, plans targets, expectations, estimates, intentions and beliefs of the Company expressed in these forward-looking statements Such factors include: • changes in political, social, legal or economic conditions in Russia as a whole or in regions of Russia where the Company conducts business, including changes in the level of spending on and demand for some or all of the Company’s goods • growth of market share of competitors, reduction of prices by competitors, unforeseen actions by competitors that could affect market share, growth of expenses or hinder the growth of the Company • ability to conduct mergers, acquisitions, transfer of companies and shares, both present and future, and achieve integration and expected benefits from joint operations and/or synergies • level of spending on market research, promotion of goods and innovation by the Company and its competitors • ability of the Company to protect its rights to intellectual property • changes in legislation and regulations, changes in the policies of the Russian government and regional authorities, including taxation • changes in the cost of resources and labor • renewal of rights to distribution of goods and contracts on favorable terms following their expiration • technological changes that could affect distribution of goods This list of factors is not comprehensive. Readers of this Annual Report should carefully review these factors and other uncertainties and events that apply particularly to the political, economic, social and legal environment in which the Company conducts its business. These forward-looking statements are only relevant as of the date of this Annual Report, and the Company does not assume any obligation to update or revise any of them. Readers should not place undue reliance on forward-looking statements. The Company is not making any assertions, assurances or forecasts that the expected results specified in such forward-looking statements will be achieved. Such statements represent, in each case, only one possible case scenario and should be viewed as the more probable or standard case scenarios. In this Annual Report the Company uses analytical information from marketing agencies that is current on the date when the information was requested and/or when this Annual Report was prepared, as a result of which certain information may differ from information provided earlier or previously published by the Company. This Annual Report is not a solicitation or an offering of any securities. In some jurisdictions the use of information contained in this Annual Report may be restricted or prohibited, either completely or to certain economic groups, such as persons who are not qualified investors. The reader should therefore inform themselves about any such restrictions and act accordingly. 97 disclaimer • changes on the financial and securities markets, including significant fluctuations in interest rates and currency exchange rates, that could affect the Company’s access to financial resources, increase the cost of financing or affect the Company’s financial results • changes in reporting standards, applied policies and practices • availability of qualified personnel, including accounting personnel • ability to determine other risks related to the Company’s operations and avoid risks based on the above factors CONTACTS annual report 2010 98 Company website: http://www.protek-group.ru CV Protek website: http://www.protek.ru LLC Rigla website: http://www.rigla.ru CJSC Sotex PharmFirm website: http://www.sotex.ru Company mailing address: 2 Ulitsa Chermyanskaya, Moscow 127282 Company Tel: +7 (495) 730-78-28 Contacts for shareholders and investors: Timofey Prokopov Vice President for Finance and Investment, OJSC Protek Tel: +7 (495) 737-35-51 E-mail: [email protected] Contacts for the media and the public Polina Belyaeva Head of Public Relations Tel/fax: +7 (495) 737-35-00, ext. 34-55 E-mail: [email protected] The Company’s Auditor to Russian standards LLC Baker Tilly Rusaudit Address: 95 Prospekt Mira, Moscow 129085 Тel: +7 (495) 788-0906 Fax: +7 (495) 247-2488 The Company’s Auditor to international standards ZAO PricewaterhouseCoopers Audit Address: Belaya Ploshchad Business Center, 10 Ulitsa Butyrsky Val, Moscow 125047 Tel: +7 (495) 967-6000 Fax: +7 (495) 967-6001 Registrar OJSC R.O.S.T. Registrar Address: Korp. 13, 18 Ulitsa Stromynka, Moscow FSFR of Russia License №10-000-1-00264, issued December 3, 2002 with no expiration date Website: http://www.rrost.com
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