Operational Review

Despite multiple challenges UPD maintained its operating margin at 2.5% by driving efficiencies and through good cost management.

Vikash Singh, Managing director

24.1%

market share

R15.2bn

total managed turnover

98.5%

on-time deliveries

UPD produced a creditable performance in a tough year and grew reported turnover by 6.1% in a pharmaceutical market which has shown minimal volume growth.

The regulated single exit price (SEP) medicine increase of 4.8% in 2016 was lower than the previous year’s 7.5%.

UPD continues to face ongoing margin pressure from the faster growth in lower priced generics, which now account for 48.2% (2015: 45.7%) of medicines.

Despite these multiple challenges UPD maintained its operating margin at 2.5% by driving efficiencies and through good cost management.

Total managed turnover, combining fine wholesaling turnover with the turnover managed on behalf of bulk distribution agency clients, was constant at R15.2 billion as there was no net increase in distribution business.

UPD maintains its market-leading positions in both the pharmaceutical wholesale and bulk distribution markets.

Fine wholesale turnover	% increase	% contribution
Clicks	13.5	44.9
Hospitals	4.2	31.8
Independent pharmacy	(9.4)	16.4
Other channels	(6.4)	6.9
Fine wholesale turnover	4.6	100.0

Fine wholesale turnover grew by 4.6%. Clicks remains UPD’s largest single customer, with sales to Clicks pharmacies increasing by 13.5% and accounting for 44.9% of fine wholesale turnover.

Sales to the private hospital groups, including Life Healthcare, Mediclinic and Netcare, grew by 4.2% and contributed 31.8% of turnover.

UPD services approximately 1 200 independent pharmacies and sales to this channel contracted by 9.4% but still account for 16.4% of turnover.

The new distribution centre in Port Elizabeth was completed shortly after year-end at a cost of R27 million. UPD owns its five distribution centres located in Gauteng (Lea Glen), Cape Town, Durban, Bloemfontein and Port Elizabeth.

Product availability, which is core to offering superior range and service to customers, was 96.5% and UPD maintained on-time deliveries at 98.5%.

Through its distribution business UPD offers local and international, generic and originator pharma manufacturers an efficient and cost-effective supply chain solution.

Outlook for 2017

In the year ahead UPD aims to increase wholesale market share through the growth of the Clicks pharmacy channel, benefiting from the planned opening of 30 to 35 new pharmacies in Clicks. At the same time management plans to increase Clicks’ buying levels from UPD to 98.5% from the current 98.3%. UPD is also aiming to maintain volumes from the private hospitals, its other core customer group.

The proposed SEP increase for 2017 at 5.7% is higher than the level for 2016, with the first instalment of this increase of 2.9% granted in October 2016.

The increasing penetration of generics is expected to continue to place pressure on the margin and as UPD has a high fixed cost base the business is constantly focused on improving efficiencies. UPD’s independent pharmacy business is also likely to remain under pressure.

Capital expenditure of R47 million has been committed for warehousing and infrastructure, including the expansion of the Cape Town distribution facility which is expected to be completed by the end of the 2017 financial year.

The business will tender for new agency distribution contracts as it is currently only utilising approximately 70% of its warehouse capacity.

In the current environment UPD will focus on becoming more efficient and maintaining its high levels of service to distribution agency clients. This will enable the business to make progress towards achieving its long-term strategic objective of growing market share in both fine wholesale and bulk distribution to 30%.

Vikash Singh
Managing director

Performance against objectives in 2016 and plans for 2017

Plans and targets for 2016	Achieved in 2016	Plans and targets for 2017
Growing private wholesale pharmaceutical market share to 30%
Increase market share to 26%	Market share 24.1%	Increase market share to 24.5%

Maintain volume of business with private hospital groups	Sales to hospital groups increased 4.2% with volumes growing at 2.2%	Maintain volume of business with private hospital groups

Increase Clicks’ buying levels from UPD to 98%	Clicks’ buying levels from UPD at 98.3%	Increase Clicks’ buying levels from UPD to 98.5%
Growing pharmaceutical distribution market share to 30%
Tender for additional agency distribution contracts	No new major agency distribution contracts secured	Tender for new agency distribution contracts
Ensuring effective pharmaceutical quality management
Maintain licences	Licences maintained	Maintain licences

Continuous improvement in quality standards and implement electronic quality management system	Electronic quality management system implemented	Extend cold chain capabilities
Driving operational excellence and cost reduction
Maintain on-time deliveries of 98%	98.5% on-time deliveries	Target 98.5% on-time deliveries

Reduce labour and transport costs	Labour and transport costs below inflation at 3.1% and 5.0% growth respectively	Reduce labour and transport costs
Maintaining a motivated and skilled work force
Maintain employee turnover at 14%	Employee turnover 13.2% (2015: 14%)	Target employee turnover of 14%

Compliance training for all employees	Trained 1 600 employees, including casual labour	Compliance training for all employees, including administrative staff

Improve quality of talent and succession process	Recruited eight middle managers for executive learnership programme	Implement pharmacy assistants learnerships Recruit graduates for operations and supply chain management