OREANDA-NEWS. Pharmstandard OJSC (LSE: PHST IL, RTS: PHST RU) reports 2012 audited Financial Results in compliance with IFRS and 1Q 2013 Sales Results.

2012 key financial highlights:

Consolidated revenue reached RUR 51,392 million (+20.5%);

Gross profit reached RUR18,904 million (+18.7 %), gross profit margin: 36.8%;

EBITDA reached RUR13,504 million (+13.2%), EBITDA margin: 26.3%;

Net profit reached RUR9,964 million (+12.8%), Net Profit Margin: 19.4%.

2012 Financial Results

Consolidated sales

Pharmstandard OJSC (“Pharmstandard” or the “Company”) sales reached RUR51,392 million in 2012 showing a substantial growth of 20.5% (RUR8,736 million) compared to 2011 sales of RUR42,654 million.

Pharmaceuticals account for 97.4% of the total sales with the remaining 2.6% covered by medical equipment.

All further data is quoted excluding synergy effects from acquisition of Bioprocess Group[1] and LEKKO CJSC, except when stated otherwise

Pharmaceutical products

In 2012, pharmaceutical product sales reached RUR49,290 million (+17.7%) demonstrating RUR7,400 million y/y growth vs RUR41,890 million in the previous year, with 41.5% (RUR20,463 million) accounting for organic products, 57.4% (RUR28,279 million) for TPPs and 1.1% (RUR548 million) for substances.

Organic pharmaceutical sales in 2012 grew up to RUR20,463 million (+ 3.5%)/RUR686 million) with OTC products accounting for 72.3% (RUR14,793.6 million) and RX products – for 27.7% (RUR5,669 million).

OTC sales reached RUR14,794 million (-4.5%) with an annual decline of RUR704 million mainly attributed to lower Arbidol® sales in 1Q 2012. to In 2012, the Company launched 6 new OTC products, i.e. Next®, Maxycold® (tablets), Cyclovita®, Neosmectin® (new flavour powder), Codelac® Neo (drops), Codelac® Neo (syrup) and Bromhexine (alcohol-free syrup). Aggregated revenue from these new products reached RUR70 million.

RX sales reached RUR5,669 million (+32.5%) with y/y growth of RUR1,390 million in 2012. The Company’s three top 10 products showed substantial above market y/y growth of over 25%: Phosphogliv® – 26% growth (vs hepatoprotector and lipotrope market average growth of only 18%); Combilipen® - 32% growth (vs 24.3% in the Vitamin B1 combinations market); Biosulin® - 27% (on the back of 5.5% general decline of the insulin market). The Company launched two new products in 2012: Akorta® (Rosuvastatin) and Glimepiride® (diabetes mellitus treatment) (4 mg tablets). Aggregate sales for the new Rx products amounted to RUR16.6 million.

2012 TPP sales reached RUR28,279 million implying +30.2% (RUR6,553 million) growth vs 2011. TPP substantial growth was driven by significantly increased government contract supplies reaching RUR22,075 million (+30%). Velcade® (98.7%) and Prezista® (46.9%) produced with Johnson & Johnson turned out to be the main drivers of growth. Commercial segment of TPP business reached RUR6,204 million (+18.9%).

Medical Equipment

Medical equipment sales increased up to RUR1 330 million (+74.1%/RUR566 million) in 2012 vs RUR764 million in 2011. Medical equipment segment growth was driven by product mix expansion and more active participation in tender based procurement process through Pharmstandard-Medtechnika LLC.

COGS

In 2012, COGS grew by RUR5,513 (+20.6%) y/y and amounted to RUR32,241 million vs RUR26,728 million in 2011. In general, COGS as percentage of sales went up to 63.2% in 2012 from 62.7% in 2011

Raw materials and TPP costs being the COGS components jointly accounted for 92% of total COGS. COGS growth was mainly driven by TPP purchase costs (up RUR4,621 million (+25%) – from RUR18,323 million in 2011 to RUR22,944 million in 2012) which directly resulted from 30% sales growth in this product segment.

Gross Profit

The Company's gross profit grew by RUR2,469 (+15.5%) from RUR15,926 million in 2011 up to RUR18,395 million in 2012. As percentage of sales total gross profit decreased from 37.3% in 2011 to 36.3% in 2012 due to increased shares of TPPs and medical equipment in the Company’s sales structure.

Operating Expenses

In absolute terms operating expenses showed RUR1,645 million (+34%) growth – from RUR4,838 million in 2011 to RUR6,483 million in 2012. As percentage of sales operating expenses increased to 12.7% in 2012 vs 11.5% in 2011.

This growth is explained by sufficient growth of sales and distribution expenses due to increased portfolio of promoted products, enhanced marketing in the second half of 2012 and increase of S&D expenses in the TPP segment.

Sales and Distribution Expenses (S&D)

S&D expenses grew by RUR1,394 million (+38%) up to RUR5,036 million in 2012 vs RUR3,642 million in 2011 with percentage of sales of 9.9% vs 8.5%, respectively. S&D expenses were RUR 3,642.1 million in 2011 accounting for 9% of sales.

Organic product sales and marketing expenses (without TPPs) equaled to RUR4,441 million or 21% of the segment sales in 2012 compared to RUR3,221 or 16.0% in 2011.

Major part of this cost item is accounted for by media support of high margin branded organic OTC products actively promoted through media advertising. These are the following drugs: Next®, Codelac® Broncho, Arbidol®, Afobasol®, Complivit® and Acipol®.

General and Administrative Expenses (G&A)

General and administrative expenses (G&A) increased in 2012 by RUR251 (+21%) up to RUR1,448 million vs RUR1,196 million in 2011. G&A share in the total sales is 2.9% in 2012.

G&A expenses in the organic segment (without TPP) changed in 2012 by RUR181 million y/y and reached RUR917 million or 4.5% of the total sales for the segment. The growth was primarily driven by labor expenses (RUR126 million): +6.3% increase in administrative headcount and higher social security system contributions due to regulatory changes.

Operating income

Consolidated operating income (sales, COGS, operating expenses) demonstrated RUR809 million growth as of 2012 up to RUR11,896 million vs RUR11,087 million in 2011 (+7,2% relative change). Operating income as percentage of sales was 24% in 2012 vs 26% in 2011.

Major part of operating income was generated by organic sales.

Operating income in the organic product segment reached RUR7,256 million as of 2012 with operating income margin staying high at 35.1%. Operating income decline of RUR1,045 million in 2012 was driven by higher investments to support the Company’s key brands and launch new products as well as regulatory restrictions on codeine based drugs mitigated through new product launches.

Other income and other expenses

The Company’s other income reached RUR426 million in 2012 vs RUR295 million in 2011.

Other revenues were generated by the following non-core items: agency fees of RUR341 million on third party contracts (2011: RUR144 million) and reversal of fixed asset and intangible asset impairment losses of RUR48 million (2011: RUR7 million).

Other expenses in 2012 amounted to RUR212 million vs RUR333 million in 2011. Key other expenses items: other taxes and penalties RUR81 million and FX difference expense of RUR36 million vs FX gain of RUR9 million in 2011.

EBITDA

EBITDA demonstrated RUR1,149 million (+9.6%) y/y growth up to RUR13,078 million with EBITDA margin of 25,8%.

EBITDA in the organic segment (excluding TPP) was RUR8,321 million with EBITDA margin of 39.6%.

Minor margins decline is accounted for the above mentioned operating expense growth due to own brands promotion.

Financial income and expense

Financial expenses went down by RUR9.8 million (-23%) from RUR43 million in 2011 to RUR33 million in 2012, mainly as a result of December 2006 syndicated loan redemption in December 2011.

Financial income amounted to RUR126 million in 2012 vs RUR232 million in 2011. The change of RUR106 million can be explained by a higher proportion of financial instruments such as bank deposits and loans, denominated in U.S. dollars that have a lower interest rate compared to financial instruments denominated in Russian rubles that have a much smaller currency risk in terms of volatility of the Russian ruble

Net Income and Minority Stake

The Company’s net income rose by RUR829 (+9%) to RUR9,662 million compared to RUR8,833 million in 2011. Net income margin in 2012 was 19%.

Parent company shareholder return as of 2012 reached RUR9,607 million vs RUR8 781 million in 2011.

Minority stake reached RUR55 million vs RUR52 million in 2011.

EPS as of 2012 increased by 14%[2] to reach RUR276.7[3] vs RUR242.07 a year earlier.