Clicks and UPD both occupy market-leading positions in South Africa and their operating margins rank in the upper quartile of global drugstores and pharmaceutical wholesalers.
UPD maintained its market-leading positions in both the pharmaceutical wholesale and bulk distribution markets as the business gained market share, secured new distribution clients and reported ongoing excellent control of inventory and costs.
Turnover increased by 8.4% and UPD maintained its operating margin at 2.7% despite the low increase of 1.26% in the regulated single exit price (SEP) of medicines, compared to 7.5% in the previous year.
“Clicks remains UPD’s largest single customer, accounting for 54.5% of wholesale turnover”
UPD’s total managed turnover, combining fine wholesale turnover with the turnover managed on behalf of bulk distribution clients, increased by 8.9% to R17.9 billion.
Wholesale turnover increased by 8.2% with inflation slowing to 2.9% for the year compared to 5.8% in the previous year. UPD’s solid growth resulted in its wholesale market share increasing from 25.6% to 26.0%.
Sales to Clicks pharmacies increased by 13.1% and Clicks remains UPD’s largest single customer, accounting for 54.5% of wholesale turnover.
Sales to private hospital groups, including Life Healthcare, Mediclinic and Netcare, showed muted growth of 4.1%.
UPD services approximately 1 200 independent pharmacies and sales to this channel grew by 1.4% and accounted for 14.9% of turnover. This was driven by pharmacy groups, particularly Link, demonstrating the benefits of brand affiliation and economies of scale in tough market conditions.
In addition to the ongoing margin pressure from the faster growth in lower-priced generics, UPD also encountered headwinds from the lower incidence of colds and flu in the second half of the year. Sales of generic medication increased by 13.2% and now account for 69% of wholesale turnover volume.
As UPD has a high fixed cost base management continuously seeks ways to off-set margin pressure by extracting efficiencies across all aspects of the operations, including inventory management, labour productivity and transport optimisation.
UPD owns its five distribution centres located in Gauteng (Lea Glen), Cape Town, Durban, Bloemfontein and Port Elizabeth. Distribution capacity has been increased by approximately 30% following the expansion of the Cape Town distribution centre, which was completed in February 2018 at a cost of R30 million and the reorganisation of the Lea Glen facility. All the distribution centres are ISO9001:2015 certified. UPD won a gold award at the 2018 logistics achiever awards which recognises excellence in supply chain and logistics.
“UPD gained three new distribution contracts and at year-end managed a portfolio of 23 distribution clients”
Product availability, which is core to offering superior range and service to customers, averaged 95% for the year while on-time deliveries were 99%.
Through its distribution business UPD offers local and international, generic and originator pharma manufacturers an efficient and cost-effective supply chain solution. UPD gained three new distribution contracts and at year-end managed a portfolio of 23 distribution clients.
UPD aims to increase wholesale market share to 26.5% through the growth of the Clicks pharmacy channel, benefiting from the planned opening of 30 to 35 new pharmacies in Clicks, and maintain volumes from the private hospital groups.
The business aims to pursue new distribution contracts and one new contract commenced in the first quarter of the 2019 financial year.
Capital expenditure of R77 million has been committed for warehouse equipment and information technology in the year ahead.
The medium-term target for UPD’s operating margin has been increased from the current 2.2% – 2.7% to a range of 2.5% – 3.0% which management believes is a sustainable margin owing to the growth in the bulk distribution business.