Moscow, April 30, 2015 - Pharmstandard JSC (LSE: PHST IL, RTS: PHST RU) (hereinafter referred to as Pharmstandard and/or the Company) announces 2014 audited financial results according to the IFRS.
Key Financial Indicators of 2014:
Consolidated revenue amounted to RUB 41,223 m (-28%);
Gross profitability amounted to 44.2% as compared to 42.9% in 2013;
EBITDA[1] of the Company amounted to RUB 14,873 m, with EBITDA margin reaching 36.1% vs 29.2% in 2013;
Net income amounted RUB 11,095 m, with the net income margin growth by 6%, up to 26.9%;
Net cash[2] of the Group grew by 11% and amounted RUB 10,877 m.
2014 Financial Results
Company revenue
According to the results of 2014, Pharmstandard consolidated revenue amounted to RUB 41,223 m. A decrease of RUB 15,833 m vs 2013 was driven by the spin-off of the Group's branded OTC business into a newly founded standalone legal entity OTCPharm PJSC and the decrease in TPP segment sales.
Pharmaceutical sales in 2014 decreased by 40.3% down to RUB 32,772 m vs RUB 54,859 m for the similar period in 2013.
The revenue structure underwent significant changes in 2014: the share of pharmaceutical sales in the total revenue of the Company for 2014 accounted for 79% (vs 98% in 2013).
Pharmaceutical products
The structure of pharmaceutical sales of the Company was as follows: organic sales accounted for 38%, TPPs for 58%, and APIs for 4%.
Organic sales of pharmaceutical products amounted to RUB 13,748 m in 2014 with the decrease by 44% vs RUB 24,408 m in 2013. The decrease was driven by the spin-off of the OTC business into a separate legal entity OTCPharm PJSC. In the structure of organic sales, 44% accounted for by OTC products and 56% by Rx products.
Organic prescription product (Rx) sales in 2014 grew by RUB 155 m (+2% YoY) to reach RUB 6.931 m. The key growth drivers were Phosphoglive (+17.3%), Octolipen (+21.8%), and Artrozan (+23.4%).
Organic over-the-counter (ОТС) product sales in 2014 went down to RUB 5,548 m and demonstrated a 66% YoY decline resulting from the transfer of the majority of the OTC product portfolio to OTCPharm PJSC. Thermopsol, Andripal, Ferrohematogen, and Validol were the growth leaders in Pharmstandard Group's product portfolio.
Pharmstandard revenue in 2014 in the TPP segment sales amounted to RUB 19,025 m showing a decrease by RUB 11,426 m (‑or 38% YoY) vs RUB 30,451 m in 2013. The decline in sales was associated with the expiration of Velcade and Mabthera patent protection and the launch of alternative generics TPP sales were performed within the scope of governmental procurements under auctions and commercial sales. Velcade and Mabthera sales were performed within the scope of governmental procurements. TPP commercial segment sales in 2014 decreased by 4% vs 2013 and amounted to RUB 6,831 m. The decline in sales was mainly associated with the decrease in Reduxin sales by RUB 1,158 m.
Sales of other products and APIs grew in 2014 by RUB 95 m (+8% YoY vs 2013) to reach RUB 1,269 m in 2014 vs RUB 1,174 m in 2013.
Sale of finished product and raw material balances attributable to OTCPharm PJSC. In 2014, finished product and raw material balances were sold to OTCPharm PJSC as part of the spin-off of the Group's branded OTC business. Total revenue under these transactions amounted to RUB 3,998 m
Contract manufacturing
2014 contract manufacturing revenue reached RUB 1,504 m and added up RUB 1,393 m vs 2013. The revenue growth in contact manufacturing is attributable to toll material manufacturing, including for OTCPharm PJSC.
Agency fees
In 2014, agency fee income rose to RUB 1,829 m (+76% YoY vs 2013). The increase in agency fee income primarily relates to the distribution agency contracts for OTCPharm PJSC's products.
Medical equipment
The volume of medical equipment sales increased by RUB 72 m (+7% YoY) to reach RUB 1,120 m vs RUB 1,048 m in 2013.
Cost of sales (COS)
In 2014, COS decreased by RUB 9,578 m (-29% YoY vs 2013) and amounted to RUB 23,007 m as compared to RUB 32,585 m in 2013. The decline in COS in absolute terms is attributed to a general decline in sales.
As a result of a downturn in sales, the COS structure has changed as follows:
1) Cost of raw materials in absolute terms declined from RUB 6,516 m in 2013 to RUB 6,150 m in 2014 (-5.6% YoY). The cost reduction is referred to the branded OTC business spin-off into the structure of OTCPharm PJSC.
2) TPP Costs decreased by RUB 9,592 m in absolute terms - from RUB 23,163 m in 2013 to RUB 13,571 m in 2014 as a result of a decline in TPP sales.
3) Manufacturing overheads increased from RUB 1,575 m in 2013 to RUB 2,040 m in 2014 driven by a substantial increase of contract manufacturing services.
4) Depreciation and amortization decreased from RUB 789 m in 2013 to RUB 747 m in 2014.
5) Direct Labour Costs declined from RUB 542 m in 2013 to RUB 499 in 2014 (‑7.9% YoY) due to manufacturing cutback.
Organic pharmaceutical products
In 2014, organic COS in absolute terms decreased by RUB 990 m vs 2013 and amounted to RUB 7,651 m amid a 27.3% YoY reduction in total organic sales.
This organic COS decline was primarily driven by:
1) a ‑16% YoY reduction in Raw Materials costs from RUB 5,796 m in 2013 to RUB 4,888 m in 2014;
2) a -24% YoY reduction in Direct Labour Costs from RUB 532 m in 2013 to RUB 403 m in 2014 due to manufacturing cutbacks.
Third party products
TPP COS decreased by RUB 9,592 m from RUB 23,163 m in 2013 to RUB 13,571 m in 2014 (-41% YoY) due to the overall downturn in TPP sales (-38% YoY), not least because of the expiration of Velcade and Mabthera patent protection and the decline in Rebif and Reduxin sales.
Contract manufacturing
In 2014, COGS in contract manufacturing grew by RUB 1,008 m vs 2013 reaching RUB 1,083 m mainly driven by the concluded contracts for product manufacturing for OTCPharm PJSC.
Medical equipment
COGS in medical equipment segment slightly decreased compared to 2013 (-1% YoY) and reached RUB 702 m amid a 6.9% YoY increase in the segment sales.
Gross profit
As of 2014, the Company's gross profit declined by -25.6% YoY down to RUB 18,216 m from RUB 24,472 m in 2013. This YoY decline in gross profit is primarily attributed to a 27.7% decline in sales. Gross profit margin increased to 44.2% in 2014 vs 42.9% in 2013. Profit margin growth was influenced by the structural changes in sales and increased profitability in TPP segment.
In 2014, Pharmstandard Group's gross profit (net of OTCPharm product sales) rose to RUB 14,853 m vs RUB 14,767 m in 2013 (approximately, +1% YoY). Group's gross profit margin also increased to 42.8% in 2014 from 34.3% in 2013. Profit margin growth was driven by increased profitability in TPP segment (due to changes in sales mix) and increased share of high margin contract manufacturing and agency fee income in the Company's revenue structure.
Selling and distribution costs (S&D)
Selling and distribution costs (S&D) include expenses mainly related to product advertising and promotion.
In absolute terms selling and distribution costs showed a 33.3% YoY decline (-RUB 2,060 m) from RUB 6,194 m in 2013 to RUB 4,134 m in 2014. S&D costs include direct costs attributed to OTCPharm products, which amounted to RUB 1,182 m in 2014.
The decrease in sales, following the spin-off of OTCPharm PJSC, impacted S&D costs attributable to advertising and promotion which went down from RUB 3,537 m in 2013 to RUB 1,573 m in 2014 (-55.5% YoY), given that direct costs attributable to OTCPharm product advertising and promotion account for the major share of 2014 S&D costs.
Other commercial expenses (transportation and insurance, quality control and finished product certification, communications, travel, rental, stationary and office supplies, etc.) decreased from RUB 1,086 m in 2013 to RUB 1,057 m in 2014 (‑2.7% YoY).
General and administrative expenses (G&A)
General and administrative expenses (G&A) include administrative personnel payroll expenses, information and consultancy service fees, and other expenses. The Company's overall general and administrative expenses increased by RUB 370 m (+19.2% YoY) from RUB 1,930 m in 2013 up to RUB 2,300 m in 2014. As of 2014, G&A share in total sales reached 5.6% vs 3.4% in 2013.
This YoY growth was mainly driven by:
1) increase in payroll expenses from RUB 1,278 m in 2013 to RUB 1,404 m in 2014 (+9.8% YoY) resulting mainly from administrative personnel wage indexation in the Group's operating companies;
2) increase in information and consultancy costs from RUB 116 m in 2013 to RUB 306 m in 2014 (+164% YoY) associated with increased number of M&A transactions (including the acquisition of a stake in Biocad) and the resulting consultancy costs growth; as well as with SAP software deployment and maintenance.
Net other income[3]
In 2014, net other income and expense increased by RUB 2,794 m to reach RUB 2,146 m. This change in net other income was primarily associated with the FX difference gain of RUB 1,641 m generated due to the efficient liquidity management and decrease in fines and penalties assessed to RUB 130 m in 2014 as compared to RUB 411 m in 2013.
Financial income and expense
Financial income to a large extent consists of gains from short-term financial instruments, interest income from bank deposits and interest income from loans provided, including to related parties. In 2014, financial income grew by RUB 33 m (+12% YoY) and reached RUB 323 m vs RUB 290 m in 2013.
Financial expenses are mostly connected with interest payments under debt raised. In 2014, financial expenses grew by RUB 305 m reaching RUB 432 m vs RUB 127 m in 2013 (+241% YoY).
EBITDA
EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) equals to the amount of earnings before deduction of tax, interest, and D&A assessed. In 2014, EBITDA demonstrated a -11% YoY decline from RUB 16,652 m in 2013 to RUB 14,873 m in 2014, with EBITDA margin reaching 36.1% vs 29.2% in 2013. A 6.9% increase in EBITDA margin was driven by the decreased COGS and S&D share in revenues, and other income, specifically FX difference gain.
Income tax expense
Accrued income tax for 2014 was RUB 2,724 m vs RUB 3,942 m in 2013 with effective tax rate of 19.7% in 2014 vs 24.9% in 2013. Higher tax rate in 2013 mostly referred to tax effect recognition with respect to the Company's shares disposal in exchange to Bever acquisition.
Net income
The Company's net income decreased by ‑7% YoY from RUB 11,920 m in 2013 to RUB 11,095 m in 2014. Net income margin demonstrated a 6.0% growth and reached 26.9% in 2014 vs 20.9% in 2013.
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