Investing in Poland's Pharmaceutical Sector

Transcription

1 We are there to protect your health Annual Report 2007

2 Financial Highlights for change 2007/2006 Sales revenue PLNm 3, , , % EBITDA PLNm % Operating profit PLNm % Net profit (attributable to parent undertaking s shareholders) PLNm % PLNm Balancesheet total Equity (parent undertaking) PLNm 1, , % 16.1% EPS P/E PLN % 0.7 ROE % Stock Highlights ( ) change 2007/2006 No. of shares 12,361,263 12,450,967 12,588, % Last trading day price PLN % 52week high PLN % 52week low PLN % Earnings per share PLN % Dividend per share * PLN % Market capitalisation PLNm ,121, % * paid during the financial year

3 We build shareholder value PGF stock performance on the WSE 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 PLN points CAGR for earnings per share: 52.8% * * in 2000 oneoff amortisation of goodwill was made with regard to companies acquired during the market consolidation; the amount of the oneoff charge was PLN 163.7m PGF codes in online news services: WSE:

4 Growth from a firm foundation Market capitalisation (PLNm) 1,200 1,000 1, Net profit (attributable to parent undertaking s shareholders) * * in 2000 oneoff amortisation of goodwill was made with regard to companies acquired during the market consolidation; the amount of the oneoff charge was PLN 163.7m Tenth straight year of growth in sales Sales revenue (PLNm) 5,000 4,000 3,000 2,907 3,082 3,158 3,490 3,639, ,008 4,411 2,000 1, ,

5 POLSKA GRUPA FARMACEUTYCZNA Business makes sense only when it serves to satisfy people s needs. That belief prompted the establishment of Polska Grupa Farmeceutyczna the first Polish pharmaceuticals distributor with an international presence. In Poland, Lithuania and Great Britain we deliver medicines to thousands of pharmacies and millions of patients. Every day we work on developing new ideas how to reduce pharmaceutical prices and contribute to improving healthcare. I CARE FOR MY HEALTH PROGRAMME We have networked almost two thousand pharmacies to offer patients uniformly high standards of care. Together we form a part of Europe s largest patient care initiative. For us health means a lot more than an opposite of illness. We equip people with knowledge on how to protect their loved ones. TRADITIONAL AND MODERN The depth of our knowledge stems from the experience of pharmacists, who for generations have been the first source of information on medicinal products. Hundreds of hours of discussions about patients needs led to the creation of a vision, which PGF has remained faithful to ever since. We have learned how to care for health from the best pharmacists. POLAND EUROPE FUTURE Drawing on international standards, we look for inspiration both in Poland and abroad. Currently, we are one of the largest players in Central and Eastern Europe and a pillar of the Polish economy. Our team is more than six thousand strong. We are there to protect your health. PGF Annual Report

6 Financial Highlights for change 2007/2006 Sales revenue PLNm 3, , , % EBITDA PLNm % Operating profit PLNm % Net profit (attributable to parent undertaking s shareholders) PLNm % PLNm Balancesheet total Equity (parent undertaking) PLNm 1, , % 16.1% EPS P/E PLN % 0.7 ROE % Stock Highlights ( ) change 2007/2006 No. of shares 12,361,263 12,450,967 12,588, % Last trading day price PLN % 52week high PLN % 52week low PLN % Earnings per share PLN % Dividend per share * PLN % Market capitalisation PLNm ,121, % * paid during the financial year

7 We build shareholder value PGF stock performance on the WSE 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 PLN points CAGR for earnings per share: 52.8% * * in 2000 oneoff amortisation of goodwill was made with regard to companies acquired during the market consolidation; the amount of the oneoff charge was PLN 163.7m PGF codes in online news services: WSE:

8 Growth from a firm foundation Market capitalisation (PLNm) 1,200 1,000 1, Net profit (attributable to parent undertaking s shareholders) * * in 2000 oneoff amortisation of goodwill was made with regard to companies acquired during the market consolidation; the amount of the oneoff charge was PLN 163.7m Tenth straight year of growth in sales Sales revenue (PLNm) 5,000 4,000 3,000 2,907 3,082 3,158 3,490 3,639, ,008 4,411 2,000 1, ,

9 current footprint prospective markets for PGF in Central Europe We are eager to deliver medicinal products wherever there is a need to do so more efficiently, costeffectively and safely

10 > Contents Description of the PGF Group PGF s History 18 Years of Growth Letter to the Shareholders Management Board of PGF Supervisory Board of PGF Corporate Governance Rules Key Events in PGF on the Stock Exchange PGF Group Directors Report PGF Group s Strategy Legal Environment Market Environment PGF s Market Position Financial Performance in 2007 Risk Management Quality Assurance Policy PGF as a Corporate Citizen Employees Wholesale Distribution Market Market Developments in 2007 Services to Pharmacies Logistics Support for Drug Producers Retail Distribution Market Market Developments in 2007 I Care for My Health Pharmacies Hospital Distribution Market Hospital Market in 2007 Services to Hospitals Auditor s Opinion Financial Statements Key Financial Dates Contact Details

11 > Description of the PGF Group Parent Undertaking Polska Grupa Farmaceutyczna Łódź PGF Łódź Branch Katowice PGF Katowice Branch Gdańsk PGF Sp. z o.o. Szczecin PGF Sp. z o.o. Łomża PGF Sp. z o.o. Distribution to pharmacies Tarnowiec PGF Sp. z o.o. Dywity PGF Cefarm Sp. z o.o. Warszawa PGF Sp. z o.o. Bydgoszcz PGF Bydgoszcz S.A. Wrocław PGF Sp. z o.o. Lublin PGF Cefarm Lublin Sp. z o.o. Poznań PGF Cefarm Poznań Sp. z o.o. Kraków PGF Cefarm Kraków Sp. z o.o. Rzeszów Hurtownia Aptekarz Sp. z o.o. Distribution to hospitals Wrocław PGF Urtica Sp. z o.o. PGF wholesale companies Other business Laboratorium Galenowe Olsztyn Sp. z o.o. NDS DEPO Sp. z o.o. Bez Recepty Sp. z o.o. Daruma Sp. z o.o. FarmSerwis Sp. z o.o. Associated companies Pharmena Sp. z o.o. Retail and foreign operations Central European Pharmaceutical Distribution United Kingdom DOZ UK Limited Lithuania UAB Nacionaline farmacijos grupe Poland DOZ S.A. Lithuania Limedika UAB Lithuania Gintarine Vaistine UAB Lithuania Łódź Norfos DOZ Vaistine S.A. UAB Retail regions Lublin PZF Cefarm Lublin S.A. Łódź PZF Cefarm Łódź Sp. z o.o. Wrocław PF Apexim S.A. Kraków PZF Cefarm Kraków S.A. Bydgoszcz Apteki Cefarm Sp. z o.o. 4 PGF Annual Report 2007

12 > Description of the PGF Group Description of the PGF Group Polska Grupa Farmaceutyczna is the largest distributor of pharmaceuticals in Poland and one of the leaders in the Lithuanian market. The Company was founded 18 years ago (it first operated under the name of Medicines until 1997). The main shareholders of the Company are Jacek Szwajcowski and Zbigniew Molenda, the founders and members of the Management Board, and Poland s largest pension funds. In 1998, PGF was the first Polish pharmaceutical company to be listed on the Warsaw Stock Exchange; The Company used the proceeds from the offering to commence consolidation of the pharmaceutical wholesale market. Ever since, PGF has been the leader of the pharmaceuticals market in Poland. Medicinal products are delivered to pharmacies by PGF subsidiaries operating across Poland and Lithuania. Thus, the Group is capable of reaching any pharmacy in a matter of hours, regardless of the distance. Drugs are delivered to patients also through 1,700 orangecoloured I Care for My Health Pharmacies, which form one of Europe s largest pharmacy partnership programmes. Over five million Poles use the services of the networked pharmacies. The PGF Group Companies comprising the PGF Group are independent organisations established and operating pursuant to the provisions of the Commercial Companies Code. PGF s direct or indirect interests in the share capital of the Group members varies, but in the vast majority of cases, PGF holds the entire share capital of the subsidiaries. In 2007, the number of PGF Group members exceeded 100. Almost all of them operate pharmaceutical warehouses or pharmacies. The core of the Group is formed by regional companies headquartered in major cities. All these organisations use the PGF acronym as they form a single marketing platform. The Group s support companies are: FarmSerwis Sp. z o. o. (receivables management) DOZ S.A. (marketing services), Bez Recepty Sp. z o.o. (publisher), NDS DEPO Sp. z o.o., DARUMA Sp. z o.o., (assets and property management), Laboratorium Galenowe Olsztyn Sp. z o.o. (production of pharmaceuticals). Additionally, PGF holds majority interests in a number of foreign companies. The major ones are Central European Pharmaceutical Distribution of the Netherlands, DOZ UK Limited of the UK and two Lithuanian companies: Limedika UAB and Gintarine Grupe UAB. PGF on International Markets Polska Grupa Farmaceutyczna is the first Polish distributor to enter foreign markets. The Group is present in Poland and Lithuania, across all sectors of the market: wholesale, retail and hospitals. In 2007, PGF launched the first two I Care for My Health Pharmacies in the United Kingdom. The PGF Group s strategic objective is to achieve the leading position in Central Europe. The PGF Brand The PGF brand fosters the image of a transparent, ambitious and innovative organisation. The crowning of the Group s efforts in 2007 was the Business Superbrand prize awarded to PGF for being one of the strongest and most recognisable business brands on the Polish market. The ranking was held by The Superbrands Ltd., an organisation present in 70 countries worldwide. PGF s strong market image was also confirmed by its position in the Image Profile ranking published by the monthly Manager Magazine. In 2007, PGF was listed as one of the top hundred most reputable enterprises according to Polish managers. The Group further strengthened its position as a leading Polish enterprise when it received the first Diamond to the Golden Statuette of the Polish Business Leader, granted by Business Centre Club. PGF Annual Report

13 > PGF s History 18 Years of Growth PGF s History 18 Years of Growth Medicines established Listing on the WSE Consolidation of the industry With the change of the political system and the advent of the freemarket economy, transformation of the pharmaceuticals market begins. Jacek Szwajcowski establishes Medicines, a pharmaceutical wholesale business. Medicines is the first company in the industry to launch an IT enterprise management system. Medicines is the first pharmaceutical company to be listed on the Warsaw Stock Exchange. PGF uses the proceeds from the offering and bank loans to consolidate the pharmaceuticals distribution market. Launch of Lider 2001 programme to restructure the Group following a series of mergers and acquisitions development in central Poland countrywide development, mergers and acquisitions Acquisition of pharmaceutical wholesalers: Eskulap and Medicines Jasło Merger with Carbo S.A. of Katowice and Cefarm B of Opole Polska Grupa Farmaceutyczna, Poland s largest pharmaceutical wholesaler, established. Merger with Urtica S.A. and Biomedic S.A.; acquisition of Cefarm Bydgoszcz PGF becomes the leader in sales to hospitals, and launches its first own pharmacies. Merger with Cefarm Poznań; acquisition of Cefarm Olsztyn and Cefarm Lublin After three years of M&A activities, PGF s sales revenue increases tenfold. innovativeness transparency 6 PGF Annual Report 2007

14 > History of PGF continued development patient care Launch of I Care for My Health programme Beginning of international expansion The I Care for My Health programme is established; it develops into one of the largest partnership schemes for pharmacies in Europe. PGF voted 2001 Listed Company of the Year in Poland PGF is the first listed company in Poland to broadcast a General Shareholders Meeting live over the Internet. PGF introduces an innovative sales model based on an online pharmacy and a network of 1,700 pharmacies participating in the I Care for My Health programme. PGF becomes the first Polish distributor of pharmaceuticals to enter international markets countrywide development, acquisitions, the I Care for My Health programme foreign investments Launch of I Care for My Health pharmacies in the UK. Acquisition of Cefarm Kraków Acquisition of Cefarm Łódź and Apteki Polskie pharmacy chains Acquisition of Limedika, a Lithuanian pharmaceutical wholesaler, and Gintarine Vaistine, a chain of pharmacies. Acquisition of Aptekarz wholesaler of Rzeszów From a small Łódźbased company to the leader of the Polish market about to conquer international markets PGF Annual Report

15 > Letter to the Shareholders Jacek Szwajcowski President of the Management Board of PGF 8 PGF Annual Report 2007

16 > Letter to the Shareholders Ladies and Gentlemen, In 2007, Polska Grupa Farmaceutyczna achieved the highest revenue and net profit in 18 years. The Company s sales reached the historic record of PLN 4.4bn. However, we do remember that for the shareholders sales without profit generate no value and therefore, in line with the Management Board s declarations, the Group yet again achieved a double digit net profit growth with the record value of PLN 73.7m. I would like to thank PGF s entire team for this result. It is thanks to the everyday work of thousands of people that we can fulfil our mission and develop continuously. Ten years of development In 2008, we celebrate the 10th anniversary of our presence on the Warsaw Stock Exchange. I can assert with all certainty that we have used this decade to the full. Since our debut, we have been following the same development strategy, knowing that in low profitability sectors continuous growth is possible only if the scale of activities is constantly increased and the efficiency always improved. Our goal is to deliver top quality services to patients and pharmacies alike. We wish to make our contribution, wherever needed, to the improvement of healthcare quality and guarantee that patients have an unhindered access to modern medication. Within the last few years we have proved that we can efficiently manage the assets that have been entrusted to us and make decisions yielding effects in a long term. Since PGF debuted on the Stock Exchange, our revenue has increased almost 16fold, with net profit s CAGR of 24.9%. We have been gradually investing the raised capital, allocating, on the whole, half a billion złoty to this purpose. The figures attest to the efficiency of our strategy. Consistent strategy and innovative solutions I am particularly pleased to say that more than once during the last decade we initiated changes which helped overcome the stereotypical perception of a distributor s role in the healthcare system. Allow me to mention that PGF was the sector s first company to be listed on the Warsaw Stock Exchange. Subsequently, we started the consolidation of the wholesale market, assuming that only a countrywide company stands a chance of reducing the prices of pharmaceuticals and simultaneously increasing shareholder value. In 2001, we redefined our market approach yet again, introducing an innovative business model aimed at offering multifaceted support to developing independent pharmacies. In seven years, the programme has enabled us to build one of Europe s largest groups of partner pharmacies. With time, it has become clear that international expansion should be the next stage in our development. PGF Annual Report

17 > Letter to the Shareholders A breakthrough year The year 2007 proved to be particularly important for our development. We became Poland s first distributor of pharmaceuticals to operate internationally. In July, the Group incorporated one of Lithuania s major distributors and five months later we opened our first pharmacies in London. These experiences are to prepare Polska Grupa Farmaceutyczna for the implementation of the next stage in our strategy. We see major potential for growth in Central Europe where the distribution market remains unconsolidated. We hope to achieve a leading position in the region in just over a decade. Last year saw one more important development: completion of the next stage in the consolidation of the sector in Poland. With the shareholders approval, Aptekarz, a Rzeszówbased company and one of the local market leaders, joined PGF. This transaction initiated our cooperation with a few hundred new pharmacies in southern Poland. With patients good in mind With the patients good in mind, last year we launched the health portal. The new Internet platform is a part of the I Care for My Health programme. Our goal is to support patients by offering reliable and understandable information on health not only in pharmacies, but also at home, via the Internet. A budget online pharmacy is a part of the portal. The prices of pharmaceuticals on offer are lower thanks to cost optimization and the use of the distribution potential offered by the I Care for My Health outlets. Additionally, it is the first Polish portal to introduce a unique distribution model which allows patients to collect their Internet order at the pharmacy without having to bear the delivery costs. As a result, we can offer the lowest prices on the market. At the end of the year we launched yet another project for patients. On the initiative of the pharmacies networked within the I Care for My Health scheme, we established the first Polish foundation offering assistance to patients who cannot afford to buy medication. According to a research, this is one of Poland s major social problems. After all, effective treatment is hardly possible if the patient cannot afford to buy the necessary medication. We are hoping to help as many patients as possible, although we are well aware that the I Care for My Health Foundation is just a drop in the see of needs. 10 PGF Annual Report 2007

18 > Letter to the Shareholders The future When assessing the Company s strategy, it is important to reflect upon the development trends in the sector. With respect to the society s basic needs, we are a part of an exceptional market. According to global forecasts, within the next few years, sales of pharmaceuticals will see a stable growth of a few percent. Our society is being reshaped by demographic, epidemiological and economic changes. The diseases that afflict wealthy societies begin to plague also the inhabitants of developing countries. Bearing these trends in mind, we can get better prepared for the changes facing Central Europe. In the coming years, the Polish pharmaceuticals markets will be influenced by three factors. The structure of public spending on healthcare will be changing with the economic growth. This has to be taken into account especially in the context of low refunds for the purchase of medication in Poland. On the other hand, the society, enjoying larger incomes, will be more eager to invest in health. We will also experience changes to the society s demographic structure, which will inevitably entail increased spending on healthcare. According to forecasts, in a few years time every fifth Pole will be over 60 years old. We want to face these challenges because, as one of the partners of the healthcare system, we have become coresponsible for the quality of the services delivered and the care for patients health. The coming year will pose another important challenge for the PGF Group. We have set ourselves three ambitious goals. We wish to enter at least two new foreign markets, maintain our leading position on the Polish pharmaceuticals market and seek market niches for the distribution of pharmaceuticals in Poland and Europe. In 2008, we also wish to further invest in the I Care for My Health programme. Our model of a large, wellorganised sales network, based on experienced, independent pharmacies has proved effective in Poland, and so we would like to develop it in other European countries. I would like to extend my sincere thanks to all those who have contributed to the success of Polska Grupa Farmaceutyczna so far. I am truly optimistic about the future and convinced that the foundations of PGF we have built are a sound base on which to build the Company s future value. We have become an ambitious, innovative and effective organization and we are set on fulfilling our mission. We are here to protect your health. Jacek Szwajcowski President of the Management Board of PGF PGF Annual Report

19 > Management Board of Polska Grupa Farmaceutyczna Jacek Szwajcowski Founder President of the Management Board of PGF Zbigniew Molenda Founder VicePresident Procurement and Distribution Corporate Communication, Human Resources, Public Affairs, Corporate Audit, IT Supplies and Procurement Policy, Logistics, Quality, Asset Management 12 PGF Annual Report 2007

20 > Management Board of Polska Grupa Farmaceutyczna Anna Biendara VicePresident Finance Member of the Menagement Board since 1994 Ignacy Przystalski VicePresident Sales and Marketing Member of the Menagement Board since 2005 Jacek Dauenhauer VicePresident Financial Strategy and Development Member of the Menagement Board since 2007 Consolidation and Reporting, Finance, Accounting, Budgeting and Controlling Marketing, Sales to Pharmacies, Internet Sales International Activities, Financial Strategies and Acquisitions, Investor Relations PGF Annual Report

21 > Supervisory Board of Polska Grupa Farmaceutyczna Supervisory Board of PGF Jerzy Leszczyński Chairman of the Supervisory Board Hubert Janiszewski Deputy Chairman of the Supervisory Board Jan Kalinka Member of the Supervisory Board Piotr Stefańczyk Member of the Supervisory Board Maria Wiśniewska Member of the Supervisory Board Audit Committee Piotr Stefańczyk Jan Kalinka Appointment and Remuneration Committee Hubert Janiszewski Maria Wiśniewska 14 PGF Annual Report 2007

22 > Corporate Governance Rules Capital market participants expect the listed companies to ensure easy access to information and equal treatment of all shareholders. Very good communication with analysts, investors and media should guarantee the transparency of actions taken by the governing bodies of a company and facilitate understanding of the adopted style of managing the company value. Corporate Governance Polska Grupa Farmaceutyczna complies with all the corporate governance rules proposed by the Warsaw Stock Exchange and provided for in Best Practices in Public Companies, as amended from time to time. The full text of the statement on the application of corporate governance rules at the Company is presented on its web site ( General Shareholders Meeting The General Shareholders Meeting of PGF is the Company s most important governing body which exercises the owners authority to make the key decisions. The General Shareholders Meeting is customarily held each year in June. The General Shareholders Meeting review and approve the Directors Report on the Company s activities and the financial statements. The General Shareholders Meeting also decides on the distribution of profit and sets the dividend payment date. At the General Shareholders Meeting the shareholders grant approval to members of the Company s governing bodies assessing their performance of duties, appoint members of the Supervisory Board, and make the key decisions concerning the Company s assets. The operation of the General Shareholders Meeting is governed by the Rules of Procedure for the General Shareholders Meeting, which comply with the provisions of the Polish Commercial Companies Code and corporate governance principles. Supervisory Board The Supervisory Board is the Company s most important controlling body. The Supervisory Board is composed of five members who form two committees: Audit Committee and Appoitnment and Remuneration Committee. The majority of the members of the Supervisory Board meet the criteria of independent supervisory board members. One of the main responsibilities of the Audit Committee is to propose Supervisory Board resolutions regarding assessment of the Company s financial statements and appointment of auditors. The Appointment and Remuneration Committee proposes resolutions regarding changes in the composition of the Management Board and remuneration of the Management Board members. Management Board The Management Board of PGF is composed of five members who manage the Company s business and represent it in relations with third parties. The Management Board s objective is to build the Company value in a longterm. The responsibilities of the Management Board include all the decisions concerning PGF s operations which had not been reserved for the other governing bodies of the Company under applicable laws or the Company s Articles of Association. The Management Board operates pursuant to applicable laws, and in particular pursuant to the Polish Commercial Companies Code. The Rules of Procedure for the Management Board are adopted by the Management Board and approved by the Supervisory Board. Highest Corporate Governance Standards Since the floatation of its shares in 1998, the PGF Group has pursued a transparent information policy and complied with the international corporate governance standards. In 2001, analysts, investment advisers and brokers awarded PGF the title of the 2001 Best Listed Company. In subsequent years (2004, 2005), the Institutional Investor Chapter ranked Polska Grupa Farmaceutyczna among the twelve Most Trusted Companies applying the highest corporate governance standards. In 2007, the journalists of Gazeta Giełdy Parkiet nominated PGF for the Company with the Highest Corporate Governance Standards award. PGF Annual Report

23 > Key Events in 2007 Key Events in 2007 April Advertisement of Pharmacies and Online Sale of Drugs Permitted Amendments to the Polish Pharmaceutical Law ennacted in spring permit the advertisement of pharmacies. The Polish parliament also agrees to the sale of drugs on the Internet. Poland is another European country, after the Netherlands, the UK, Germany and Switzerland, to permit the distribution of dugs via the Internet. June Decision on Profit Distribution The General Shareholders Meeting approves the nonconsolidated and consolidated financial statements of PGF for 2006 and grants approval to members of the Management Board and Supervisory Board for the performance of their duties. The shareholders decide to pay out dividend for the fifth consecutive year. The dividend of PLN 2.4 per share is paid out on July 17th. Like in the previous years, the meeting of the PGF shareholders is broadcast on the Internet. August Market Rewards PGF s Strategy The price of PGF shares reaches its alltime high. Investors pay PLN per share and the market capitalisation of the Group is at a record level of over PLN 1.5bn. With the Needy in Mind FUNDACJA dbam o zdrowie (I Care for My Health Foundation) is established. It is the first organisation in Poland whose primary objective is to provide support to the people who cannot afford to buy drugs. September Pharmacies Appear on Billboards The first campaign promoting pharmacies in Poland is launched. Largeformat advertisements of the orangecoloured I Care for My Health Pharmacies appear in major cities with the slogans: Take care of your health we take care of the prices and You get more when you buy from us. 16 PGF Annual Report 2007

24 November Patients Have the Right to Know The portal is launched with the aim to support medical treatment processes and become the largest repository of healthrelated information in Poland. A lowcost internet pharmacy based on a new business model is a part of the portal. Orders are placed online and the ordered products are collected at one of 1,700 I Care for My Health Pharmacies. It is the most costeffective method of distribution of drugs in Poland where the prices may be reduced due to online ordering and elimination of logistics costs. December Sale of Real Property Three months after the Company moved to its new offices, PGF s old warehouse in Poznań is sold for PLN 32.4m (VAT inclusive). Capital Raising Issue of mediumterm bonds with a total value of PLN 191m, maturing on December 28th PGF Annual Report

25 > Key Events in 2007 PGF s Investments in 2007 July PGF to Sell Drugs in Lithuania Polska Grupa Farmaceutyczna becomes the first Polish pharmaceutical company with an international presence. The Company acquires a majority interest in Limediki, the third largest Lithuanian pharmaceutical wholesaler with an 18% market share, for EUR 22.5m, which also covers the purchase of the Gintarine Vaistine chain of pharmacies, and becomes one of the largest Polish investors in Lithuania. Apexim Joins PGF Apexim, an operator of a network of pharmacies, joins the PGF Group for the price of PLN 27.4m. The constantly growing I Care for My Health network already comprises 1,700 pharmacies providing their services to over five million Polish customers. Warehouse in Poznań Poland s most technologically advanced pharmaceuticals warehouse is constructed in Poznań. The automated line for drugs handling facilitates filling of pharmacies orders in record short times. The cost of construction and equipment of the new warehouse was PLN 22m. 18 PGF Annual Report 2007

26 > Kalendarium 2007 August Drug Market Leader The shareholders of Hurtownia Aptekarz of Rzeszów decide to join PGF. The Group strengthens its leading position on the Polish drug market. The transaction involves acquisition by PGF of the new shares issued by the Rzeszówbased company for the price of PLN 26.3m, representing 51% of its share capital, and the purchase of shares from the existing shareholders. Aptekarz is one of the strongest pharmaceutical wholesalers in southeastern Poland, with the client base of nearly 500 pharmacies. December First Pharmacies in the UK DOZ UK LIMITED, a subsidiary of PGF, opens its first pharmacy in London. The pharmacy s employees are bilingual, which is to ensure that the appropriate pharmaceutical service is provided to both British and Polish customers living in the UK. It is estimated that over the last several years 600 thousand people left Poland and subsequently formally registered their stay in the UK. PGF Annual Report

27 PGF on the Stock Exchange > we are not afraid of challenges We are there to protect your health 20 PGF Annual Report 2007

28 > PGF on the Stock Exchange The shares of Medicines S.A. (the Company s former name) were admitted to public trading by the Securities and Exchange Commission on September 4th The first listing of the shares on the Warsaw Stock Exchange took place on February 17th The shares are traded on the main market of the WSE in the continuous trading system. In 2007, the PGF shares were included in the swig80 index. Since March 2008, the PGF shares have been a part of the mwig40 index. Shareholder Structure The Company s shareholder structure has been stable for years. The PGF shares are popular among investors due to the longterm investment horizon and the stability of the pharmaceutical industry, which is relatively resilient to economic cycles. Polish pension funds, holding 32% of the shares, are the largest investor in the Company. The second largest group of shareholders are foreign institutions (120 entities from 27 countries) and the founding shareholders, each with roughly 23% of shares in the portfolio. Another 10% of the shares are held by the Polish investment funds, 8% by retail investors, and the remaining 4% by other Polish institutions. PGF s shareholders include investors from 28 countries. Shareholder Structure Founding shareholders* Retail shareholders 7.67% 23.57% Domestic institutions 4.17% Investment funds (TFI) 9.60% Shareholder structure Foreign institutions 22.97% *including KIPF Sp. z o.o., a 100% subsidiary controlled by the founding shareholders 32.01% Free Float Free Float and Its Structure Around 76% of the shares are in free float. However, the actual free float is lower due to the fact that pension funds and a substantial number of foreign investors are longterm investors who do not trade in the shares on a daily basis. The remaining 23 countries 26.8% Poland 45.8% Retail shareholders 10.0% Germany 1.1% France 1.2% Austria 4.0% USA 11.1% as at the dividend record date (June 29th 2007) PGF Annual Report

29 > PGF on the Stock Exchange Vote Structure at the General Shareholders Meeting Pension funds (OFE) 20.48% Vote Structure at the General Shareholders Meeting The vote structure at the General Shareholders Meeting does not fully correspond to PGF s shareholder structure as some of the shares are preference shares conferring five votes per share. Hence, PGF remains under the control of two founders, Mr Jacek Szwajcowski and Mr Zbigniew Molenda, holding jointly almost 51% of the total vote at the General Shareholders Meeting. Founding shareholders* 50.64% Domestic institutions 2.67% * including KIPF Sp. z o.o., a 100% subsidiary controlled by the founding sharehold as at the dividend record date (June 29th 2007) 5.38% Foreign institutions 14,69% Investmenet funds (TFI) 6.14% Retail shareholders Shareholders Holding Over 5% of the Total Vote at the General Shareholders Meeting Name No. of shares held % of share capital No. of votes held % of total vote at GM Jacek Szwajcowski 1,275, % 5,942, % Zbigniew Molenda 681, % 3,014, % KIPF Sp. z o.o. 919, % 919, % ING OFE 989, % 989, % Julius Bear Investment Management LLC 1,111, % 1,111, % Jacek Szwajcowski Founder, President of the Management Board since the Company s establishment Zbigniew Molenda Founder, VicePresident of the Management Board since the Company s establishment ING OFE A leading Polish pension funds Julius Baer Investment Management LLC A financial assets management company, member of the Julius Baer Group, a leading Swiss private banking and asset management group. KIPF Sp. z o.o. A company fully owned by Jacek Szwajcowski and Zbigniew Molenda 22 PGF Annual Report 2007

30 > > PGF on the Stock Exchange PGF Shares Present a Compelling LongTerm Investment Opportunity PGF Stock Performance in January 2007 February 2007 March 2007 April 2007 May 2007 June 2007 July 2007 August 2007 September 2007 October 2007 NovemberDecember PLN Source: WSE Stock Performance In 2007, the performance of the PGF shares on the Warsaw Stock Exchange closely mirrored the behaviour of the rest of the market: an upward trend continued through the first half of 2007 to reverse dramatically in the second half of the year the same scenario on stock exchanges throughout the world, including the WSE, when the news about the subprime mortgage crisis in the United States first broke. On June 24th 2007, the price of the Company shares had climbed to PLN 125.4, hitting its alltime high. At the last trading session in 2007, the stock price was PLN 89.1, up by 12.07% relative to the price on the last trading day of The WIG index rose by 10.39% over the period. PGF Annual Report

31 > PGF on the Stock Exchange PGF Reaches the Market Capitalisation of PLN 1bn for the First Time Ever in 2007 Stock Highlights ( ) /2006 growth No. of shares 12, 361, , 450, , 588, % Last trading day price PLN % 52week high PLN % 52week low PLN % Earnings per share PLN % Dividend per share* PLN % Market capitalisation PLNm , % *paid during the financial year Market Capitalisation (PLNm) 1,200 1, Source: WSE Selected Data on 2007 Transactions in PGF Shares Average trading volume shares Average number of transactions per day 39 Share in the WIG index turnover 0.18% Total turnover PLN 812.7m Since its stockexchange debut, the Company generated a return of 197%, including the dividend paid 24 PGF Annual Report 2007

32 > PGF on the Stock Exchange > / Dividend PGF na Giełdzie Policy PGF regularly posts positive cash flows from its operations, which not only enables the Company to reinvest the generated resources but also to pay dividends. The profit distribution policy followed by the Company reflects its attempts to exploit shareholders equity as efficiently as possible. PGF has shared its profits with shareholders for five years now. Total dividends paid out in amounted to PLN 124m. Dividend Policy On June 13th 2007, the General Shareholders Meeting of PGF S.A. passed a resolution to appropriate a portion of the 2006 profit, in the amount of PLN 30, thousand, to dividend payments, with the dividend record day set on June 29th 2007, and the dividend payment day July 17th Dividend per share was PLN Dividend Paid in Communication with Analysts and Investors An open line of communication with market participants makes it easier for the Company to showcase its achievements and share future development plans. Every year, representatives of the Management Board take part in at least four regular meetings with journalists and stockexchange analysts in order to comment in detail on the Company s current standing. 15, PLNm Throughout 2007, PGF s representatives participated in several dozen meetings with investors and conferences held in London and New York, during which the Company s strategy and business were presented. On a similar note, the Management Board s representatives followed the established tradition of attending the annual WallStreet Conference organised by the Polish Retail Investors Association. Dividend Per Share in In 2003, PGF became the first listed company in Poland to provide live coverage of its General Shareholders Meeting via the Internet. Ever since, the Group has been broadcasting the sessions online every year. Last year, the disclosure policy pursued by the Company was recognised by journalists of the Gazeta Giełdy Parkiet daily, who named PGF as a nominee for the Corporate Governance Excellence Award PLN PGF Annual Report

33 PGF Group Directors Report > We look into the future with confidence We are there to protect your health 26 PGF Annual Report 2007

34 > Directors Report / PGF Group s Strategy Longterm objectives can be achieved only with a clear strategy. PGF s future growth is based on the following three pillars: organic growth in the healthcare sector, M&A strategy in Central Europe, and diversification of the support services offered to business partners in all market segments. PGF Group s Strategy Organic Growth in the Healthcare Sector The pharmaceuticals industry has been acclaimed by some experts as the sector of the future. The increasing length of human life results in growing medical needs. A growing number of people suffer from chronic conditions, which increases the longterm demand for treatment, while new and previously unknown diseases, urbanisation and increased mobility contribute to the spreading of new pathogens around the world. At the same time, the development of new drugs, people s growing wealth and their increasing attention to health issues will create in the following years growing needs resulting in the expansion of the drug market. PGF s goal is to flexibly adjust to those needs and build the Company value by improving the quality of healthcare services in all of its markets. For 18 years, i.e. since the inception, the goal of Polska Grupa Farmaceutyczna has been to set the direction of development of the pharmaceutical distribution market. In a lowmargin industry, increasing the scale of operations is the only way to generate funds for new investments while reducing drug prices. Consequently, the Company implements the strategy of continuously increasing its sales. At the same time, the Company s second fundamental task is to efficiently manage company value. In other words, to be able to operate effectively, the Company has to reduce the cost of each of its internal processes. M&A Strategy in Central Europe The Company increases its sales not only through organic growth, but also through the continued consolidation of the distribution market. Consequently, the Company has maintained its leading position in the highly competitive pharmaceuticals market in Poland. Today, the Company s experienced staff are very well prepared for the next phase of development international operations. In Europe, further market consolidation should be expected and the trend will be ever more dominant also in the countries of Central and Eastern Europe, which are characterised by poorly developed structure and a substantial growth potential. In the years to come, the PGF Group will seek interesting acquisition targets in each of the 16 countries of Central Europe. We are particularly interested in the acquisition of companies from the top three of each market. As part of the second pillar of its international development, the Company intends to search for market niches, which will facilitate dynamic development in the promising segments of the healthcare sector. We made first steps towards international expansion in 2007 by opening two I Care for My Health Pharmacies in Great Britain and launching operations in Lithuania. The Group intends to expand its position in the foreign markets by acquiring pharmaceutical distributors in at least two other countries by the end of Central European Pharmaceutical Distribution, a newly created company, will be responsible for the implementation of the international expansion plans. PGF Annual Report

35 > Directors Report / PGF Group s Strategy Platform of Cooperation Between PGF and Its Business Partners The pharmaceuticals market is constantly changing. A company that wants to be successful has to anticipate the direction of future changes. Pursuant to its development strategy, Polska Grupa Farmaceutyczna constantly expands the range of support services offered to pharmacies, hospitals and drug producers. We first built a support model for individual pharmacies under the I Care for My Health loyalty programme, which subsequently evolved into the largest partnership retail network in Poland. The economic growth of each pharmacy covered by the programme contributes to the development of the PGF Group. The next step in the Company s development is to add new elements to the existing system. We want to strengthen our business partners and facilitate their economic development. The solutions proposed by PGF are intended to simplify and modernise the relations between all players in the sector, from the drug manufacturer, through pharmacies and hospitals, to patients. Thanks to the services offered by us, our partners will be able to grow more quickly and safely and patients will receive not only drugs, but also the highest quality service. Objectives for 2008 We expect the drug market to grow at the rate of 4% 7% in With such growth estimates, PGF s financial plan assumes that the value of sales will exceed PLN 5bn and the twodigit growth of net profit will be maintained. The Group s objective is not only to increase revenue, but also to conduct sales based on strict profitability criteria. The scale of PGF s operations is already large enough to require reorganisation and separation of the overall structure into the wholesale and retail divisions. By the end of 2008, the Group will spin off a new entity, which will take over the management of the pharmaceutical distributors in selected European countries. The existing companies of the PGF Group operating in the retail Polish market (DOZ S.A.) and Group s all foreign subsidiaries companies operating abroad will be incorporated into a new structure. By doing so, we want to streamline the management processes and raise new funds for investments in Central Europe. In 2008, the Group also plans new investments aimed at reducing its operating costs. PGF intends to open a new warehouse in Bydgoszcz and modernise its distribution centre in Kraków, where some orders will be processed automatically. Next year, we also plan to start construction of a new warehouse in Kaunas, to handle orders from the entire territory of Lithuania. In the near future, the market will undergo dramatic changes, therefore our goal is to flexibly adjust to the needs of customers. 28 PGF Annual Report 2007

36 By the end of 2008, Astra Zeneca Polska will probably have made the decision on the launch of a direct distribution model in Poland. PGF is one of four companies considered as the providers of logistics services. We also intend to substantially strengthen our position in the Internet in The online sales segment is expected to grow dynamically over the next few years. The Group s objective is to strengthen its position in that market segment by developing of the platform and its Internet pharmacy. PGF s goal is to build company value by improving the quality of healthcare services in all of its markets. Jacek Szwajcowski President of PGF PGF Annual Report

37 > Directors Report / Legal Environment Trading in pharmaceuticals, as an activity especially important from the point of view of health and social security, is heavily regulated. In 2007, three important changes were introduced in PGF s legal environment of PGF. Laws regulating mailorder drug sales, pharmacy advertisement and drug discount system were enacted. Legal Environment in Poland Pharmaceutical Law PGF Group s operations are regulated mainly by the Polish Pharmaceutical Law, which together with its secondary legislation provide the legal framework for such activities as trading in therapeutic products, define the terms and conditions to be met to obtain approvals and to operate a pharmacy or pharmaceutical wholesale business, and lay down the rules governing advertisement of therapeutic products and pharmacies. In accordance with the applicable laws, the operation of a pharmacy or pharmaceutical wholesale business requires an approval of the Provincial Pharmaceutical Inspector (in the case of a pharmacy) or the Chief Pharmaceutical Inspector (in the case of a pharmaceutical wholesale business). State Drug Subsidies Approximately 50% of all drugs sold in pharmacies are subsidised by the state. Therefore, the official decision issued by way of a regulation by the Minister of Health specifying the drugs and medical products financed from public funds, their maximum prices and the level of subsidies is an important factor affecting the performance of pharmaceutical wholesale businesses and pharmacies. The legal act which regulates the state s policy of subsidising drugs is the law on healthcare services financed from public funds. The law, together with its secondary legislation, specifies the list of drugs and medical products financed from public funds, the price limits and the rules of reimbursement. The secondary legislation specifies for which drugs available in pharmacies patients should pay a lumpsum price, and for which patients will have to pay a certain percentage of the price (the regulations also set the maximum price which may be charged by pharmacies). With respect to unlisted drugs, pharmacies may set their prices without any restrictions. 30 PGF Annual Report 2007

38 > Directors Report Legal Environment in Lithuania Changes in the Regulatory Environment in 2007 On May 1st 2007, an act amending the Pharmaceutical Law came into force. The key provisions affecting the operations of the PGF Group were the regulations permitting advertisement of pharmacies provided it is not connected with the advertisement of drugs reimbursed from public funds. The amendment also regulates the segment of mailorder and online drug sales, permitting such activity in Poland with respect to OTC drugs. On September 29th 2007, an act amending the law on healthcare services financed from public funds came into force. The amendment was aimed at harmonising the Polish regulations with the European Union law. The new act also contains provisions regulating discounts that may be offered on drugs. Republic of Lithuania s Law on Pharmaceutical Activities The Republic of Lithuania s Law on Pharmaceutical Activities is a binding legal act which regulates all aspects of activities involving trade in medicinal products. It is worth noting that the limited body of secondary legislation is conducive to promoting competition and keeping prices relatively low. In Lithuania, no regulations are in place which would restrict the number of pharmacies a single entity can own. The Law on Pharmaceutical Activities sets forth the following: Rules governing the issuance of authorisations to operate a pharmacy or engage in wholesale of pharmaceutical products Rules governing the distribution of pharmaceutical products on the market, including rules for their promotion and marketing Ruthorisation of pharmaceutical activity Manufacturing and imports of pharmaceutical products, including relevant manufacturing and import authorisations Rules governing pharmacies operations Rules governing the disclosure of information on medicinal products and advertising thereof Rules governing supervision and control exercised by competent authorities Rules governing the pricing of subsidised medicines, setting caps on wholesale and retail prices of medicinal products. The Act refers the reader to the official gazette, in which a list of subsidised medicines and medicinal products is published every year. PGF Annual Report