Pelion's activities

Throughout Europe, Poland included, the pharmaceutical industry is subject extensive regulations. It is the regulators of particular markets that decide on the level of reimbursement of drugs, their prices and available volumes. Especially today, when savings opportunities are commonly searched for, the pressure on reimbursement is strongly felt. In Poland, this pressure has resulted in the enactment of the new Drugs Reimbursement Act.

Thanks to its geographical diversification and presence in all areas of pharmaceutical distribution, the Pelion Group managed to mitigate the negative effects of the new regulations. In H1 2012, the Group’s sales rose 2.4% year on year. However, the increase did not translate into higher net profit, which was PLN 10.9m after the first six months of 2012 – 50% down year on year.

Net margin dropped substantially in H1 2012 (to 0.3%, i.e. less than PLN 0.05 of profit on sale of an average medicinal product) after a regulation forcing lower margins on refunded drugs came into force. The Group’s results were additionally affected by costs of harmonising its operations with the new regulations, including costs related to termination of the loyalty programme, legal opinions and the restructuring efforts in the retail and wholesale segments.

The Group, however, took measures that enabled it to find itself in the new environment and adjust its services to the changing needs of the market and the customers.

New market reality
 

In the half year since the implementation of the new act prices of refunded drugs, and consequently the level of reimbursement, fell. Unfortunately, this passed higher costs of an average refunded medicinal product onto the patients. The act has also adversely affected the general condition of the Polish pharmaceutical industry, in particular of pharmacies. While it deprived pharmacies of a considerable portion of margins on refunded drugs, the ban on advertising rendered it impossible to compensate for the losses by enhancing sales on other products, such as OTC pharmaceuticals, hygiene products or medical equipment. At the same time, the ban on advertising pharmacies is not accompanied by a ban on advertising pharmaceuticals. As a result, manufacturers of pharmaceuticals, as well as stores, beauty shops and service stations may advertise medicinal products. It is only pharmacies that, having been excluded from the group of firms operating based on the principles of sound competition, are not allowed to promote their merchandise. Under these circumstances, the sale of products other than refunded drugs is transferred to non-pharmacy stores. According to our estimates, this may lead to a 10% decline in pharmacies' trading volumes.

 

In the current environment, achieving the primary objective, which is to provide patients with the best access to medicines, poses a significant challenge to the Group.

“The tough market conditions require us to take bold steps which, as we hope, will help us overcome the difficulties. We cannot afford to keep on running non-profitable pharmacies. Therefore, the Group decided to optimise its operations - as part of the process 34 pharmacies have been closed or sold to date. However, the hardest decision was that concerning employment restructuring,” says Jacek Szwajcowski, CEO and President of the Pelion Management Board.

By the end of July 2012, the Group laid off 173 employees and further 186 positions are to be closed. The remuneration of employees at DOZ S.A., an operator of the network of own pharmacies in Poland, has also been cut.

In the other business lines (wholesale to pharmacies, sale to hospitals, services to manufacturers), the Group has focused on minimising collection risk, maintaining highest possible margins and adjusting the offering to the current needs of the market and the customers. However, a further reduction of statutory margins on refunded drugs is expected in the wholesale segment (by 1pp as of January 1st 2013 and by another 1pp as of January 1st 2014), as a result of which the PLN margin on the pharmaceuticals will fall by 14%. This necessitates further search for savings also in the wholesale segment.

“Making drugs accessible requires that their sales be profitable. Having lost a considerable portion of the margin on refunded drugs, pharmacies should be able to compensate for the loss by selling other products, as it is the case in other European countries. On the one hand, such solutions curb government spending on pharmaceuticals, while on the other, they ensure patients have appropriate access to drugs,” emphasises Jacek Szwajcowski.

Irrespective of the legislative changes, the volume of medicinal products required by patients remains the same. It is the government that decides how much patients spend on the drugs. The growing costs of medicines incurred by patients show that depressing wholesale and pharmacy margins on refunded drugs is not the right way to reduce the cost of medicines as distribution margins constitute an insignificant part of the their price. All these factors combined with the ban on advertising pharmacies are the reasons behind the closing of further pharmacies. Consequently, patients’ access to drugs is also affected.

The table below presents the H1 2012 financial highlights, along with year-on-year comparative data:

	H1 2012	H1 2011	Change*
Revenue (PLNm)	3,322.3	3,245.3	+2.4%
EBITDA (PLNm)	57.6	62.2	-7.5%
EBITDA margin (%)	1.7%	1.9%	-0.2ppt
Operating profit (PLNm)	38.2	46.7	-18.1%
Operating margin (%)	1.1%	1.4%	-0.3ppt
Net profit attributable to owners of the parent (PLNm)	10.9	22.4	-51.4%
Net margin (%)	0.3%	0.7%	-0.4ppt
Earnings per share (PLN)	0.91	1.84	-50.5%