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, %
N/A
0.9%
0.6%
2010
-2,937
-71.2%
Net debt
2008
Net profit
2009
2009
Net debt/EBITDA
2010
Net profit margin
note: Net debt/EbiTDA for 2010 was -1.1
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
+11.2%
-4.5%
2010
2008
2009
Source: Company data
+15.4%
+26.6%
2010
2008
2009
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
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
2009
Number of pharmacies
2010
2010/2009
Change
in traffic , %
2009/2008
Regions with a presence
in Russia
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
2009
2010
2008
Sales,
m packs
15
2009
2010
Own brands
as share of sales, %
2008
Licensed
Own brands
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%
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
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
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
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
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
2008
2009
Sales by volume, m packs
Average price per pack, RUR
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
Share
by number of brands
Share
of sales
35.6% Pharmacy chains
22.8% Pharmacies
11.8% Government-funded sector
Cosmetics
NMP
FPP
10.5% Wholesale shipments
6.8% Rigla
6.3% NMRP
5.9% Strategic pharmacy chains
0.3% Other
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, %
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
%
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%
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
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
0
2009
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
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
Parapharma
ОТС
Rx
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
Owned
Long-term lease
Short-term lease
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
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
• 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
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
Government-funded market
INN generics
Substances
NMPR
Own brands
INN generics
Own brands
Others
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
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
17,267.2
Sotex is continuing to develop its own
new products. In 2010 it registered:
• Eralfon 3,000 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
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
• 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
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
increasing the capitalization/value
of the Retail segment we must meet
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
• ROE
• Liquidity
• 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.
increasing the capitalization/value of
the Production segment we must meet
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
• Revenue
• ROE
• Share of own brands in gross income
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
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
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
Distribution
Production
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
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
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
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
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
(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
(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
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
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: t_prokopov@protek.ru
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: p_belyaeva@protek.ru
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

PROTEK GROUP

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