Pharmacy Chain 36.6 announces 2007 financial results

JULY 11, 2008, MOSCOW – OAO Pharmacy Chain 36.6 [RTS:APTK; MICEX:RU14APTK1007] the leading Russian pharmaceutical retailer announces audited 2007 financial results prepared in accordance with the International Financial Reporting Standards (IFRS).

Highlights

• Y-o-Y in 2007 Group’s consolidated sales increased by 64,7% and reached US$ 871,1 million
• Sales in the retail unit grew by 74% and reached US$ 673,4 million, sales of the production unit, Veropharm, reached US$ 139,5 million (annual growth 39%), sales of other non-core businesses (including EMC) grew by 37,9% and reached US$ 58,2 million.
• Consolidated Gross profit increased by 51,3% to reach US$ 277,5 million, 31,9% of consolidated revenues.
• Consolidated EBITDA of the Group declined to -US$ 7,0 million;
• Consolidated Net loss amounted to -US$ 99,4 million

The results are driven primarily by performance of the retail and production units of the Group:

Commenting on the 2007 results Jere Calmes, President of OAO Pharmacy Chain 36.6 and General Director of the Managing Company, stressed:

“Even with the strong performance of the Group’s manufacturing unit, Veropharm, our 2007 financial results are disappointing.  The negative trends registered in our Gross Profit Margin, SG&A, EBITDA, and Net Profit are primarily attributed to the poor performance of our retail unit and have become the central focus of management’s activity.  In 2008 we have already started the process of stabilizing our financial situation, focusing the business on a turnaround of its Moscow Operations, executing a direct-to-manufacturer purchasing strategy, ramping-up our private label initiative, and strengthening the management team.  We understand 2008 will be a year to rebuild confidence, significantly improve operational performance, and set the foundation for profitable future growth”.

Retail sales and gross profit

Sales in the pharmacy retail chain totaled US$ 673,4 million, representing a 74,3% growth as compared with 2006. The sales in the pharmacies opened or acquired before 01.01.07 (786 pharmacies) reached US$ 582,2 million, which is 86,5% of total sales and a 51,5% increase year on year.  The sales in the pharmacies opened or acquired after 01.01.07 (439 pharmacies) amounted US$ 61,9 million, which is 9,2% of total sales.

The like-for-like sales growth of pharmacies opened or acquired before January 1, 2006  amounted to 20,2%.

The gross margin in the retail segment decreased to 25,4% from 29,1% in 2006 due to rapid regional expansion, ERP-related pricing issues in the Moscow region, consolidation of logistical operations in Yekaterinburg and increased competition.

The company is undertaking several actions to improve gross margin in the future:

• Stabilizing prices in the Moscow region;
• Continue development of proprietary supply chain and directly source from manufacturers. As of the end of the year the Company’s logistics system included 13 distribution centers which covered 4% of overall retail sales;
• Further expand the Private Label line (currently over 500 SKUs with average gross margin in excess of 60%. By the end of 2007 Pharmacy Chain 36.6 private label line sales reached 2% of the retail revenue;
• Continuous review of acquired companies for reformatting and rebranding opportunities in order to improve profitability.

SG&A

The Group’s general and administrative expenses increased to 34,7% of sales compared to 32,2% in 2006. In the retail segment SG&A increased Y-o-Y from 31,7% to 34,7% of revenues driven primarily by increases in payroll, rent, professional services and logistics.

In Q4 2007 the Group has posted charges related to reclassification of certain costs treatment and adjusting clearing accounts payable and receivable balances, which jointly affected SG&A cost by US$ 19,3 million.

Financial costs

The Group’s financial expenses increased to USD 36.9 million including interest expense in the amount of US$ 27,8 million, bank charges – US$ 1,2 million, US$ 9,4 million of equity participation premium (as described below) and US$ 1,5 million interest income.

In March 2007 the company established an SPV, aimed at raising investments in the pharmaceutical retail market. Under the existing arrangements the company controls 51% of the SPV with the right to buy-out stakes of other existing shareholders. In 2007 the expense relating to that option amounted to US$ 5,7 million. The Investors’ success fee related to US$ 85 million investment amounted to US$ 3,6 million. The respective total of US$ 9,4 million was additionally charged to financial costs in Q4 2007.

Foreign currency exchange loss amounted to USD 4,3 million mostly due to Euro denominated borrowings. The management is working to minimize its FX exposure by reducing the share of non-Rouble borrowings.

The total charge of US$ 2,2 million was made to the 2007 Group’s P/L in relation to equity-linked motivation programs for the top management of Pharmacy Chain 36.6 and Veropharm.

Investment and debt

In 2007 Pharmacy Chain 36.6 conducted a successful secondary offering of ordinary company shares (1,5 million shares) and raised USD 114 million.

The Group invested a total of US$ 126,6 million including US$ 87,4 million in retail development, US$ 6,4 million in  modernization of Veropharm’s production facilities and US$ 32,8 million was invested in real estate acquisitions. Major investments in the retail segment consisted of US$ 20,6 million in opening of new pharmacies, US$ 1,9 million in re-branding and US$ 64,9 million in acquisition of regional pharmacy chains. Throughout 2007, Pharmacy Chain 36.6 acquired 26 pharmacy chains with a total of 293 pharmacies, organically opened 166 pharmacies and re-branded 45 pharmacies.

In 2007, the total Group’s financial debt as of the end of 2007 reached US$ 292,0 million, including debt of Veropharm US$ 20,2 million.

(PDF, 105,64 ÊÁ)

Press-release

(MP3, 20MB) Audio-conference

(PDF, 52,81 ÊÁ)	Official comments on Pharmacy Chain 36.6 FY2007 audited results by Jere Calmes, President at Pharmacy Chain 36.6, CEO of the Management Company
(PDF, 33,12 ÊÁ)	Official comments on Pharmacy Chain 36.6 FY2007 audited results by Dmitry Anisimov, Chief Financial Officer at Pharmacy Chain 36.6