OREANDA-NEWS. Pharmstandard OJSC (LSE: PHST IL, RTS: PHST RU) (further “Pharmstandard” or the “Company”) releases its unaudited financial results for the six months ended June 30, 2014.

On April 1, 2014 OTCPharm PJSC (further “OTCPharm”), OTC business that was spun-off from Pharmstandard OJSC, started independent operating activities.

As of Q2 2014 OTCPharm sales are no longer included into Pharmstandard sales and will be recognized in OTCPharm statements.

H1 2014 Key Financial Highlights:

Consolidated revenue reached RUR 17,205 million (+1.8%);

Gross profit reached RUR 9,135 million (+18%) with gross profit margin of 53%;

EBITDA of the Company reached RUR 5,645 million (+26%) with EBITDA margin of 33%;

Net profit reached RUR 3,603 million (+5.5%) with net profit margin of 21%.

H1 2013 key highlights and developments

Acquisition of a 20% stake in Biocad Holding Ltd. On May 21, 2014 OJSC Pharmstandard and Millhouse LLC announced plans to acquire stakes (individually) in Biocad Holding Ltd., the main shareholder in Russian biotechnological company CJSC Biocad (“Biocad”). Biocad specializes in the development, production and promotion of original and generic drugs in the following therapeutic categories: urology, gynecology, dermatovenerology, oncology, hematology, autoimmune and infectious diseases.

The deal was finalized on July, 24. Under the terms of the deal, Pharmstandard acquired 20% of Biocad Holding, while a Millhouse-affiliated entity will purchased a further 50% stake.

H1 2014 Financial Results

Consolidated Revenue

In the first half of 2014 (“H1 2014”), Pharmstandard revenue reached RUR 17,205 million demonstrating RUR 302 million or +1.8% y/y growth compared to RUR 16,903 million generated in the first half of 2013 (“H1 2013”).

This revenue includes the sale of remainder finished products to OTCPharm in the sum of RUR 2,334 million, and the sale of remainder raw materials to OTCPharm in the sum of RUR 1,261 million.

H1 2014 Pharmstandard sales, excluding third party products (“TPP”), reached RUR 12,003 million demonstrating RUR 1,002 million or +9% y/y growth compared to RUR 11,001 million in H1 2013.

Pharmaceutical products accounted for 93% in H1 2014 consolidated revenue of the Company, with 21% attributed to sale of raw materials and finished products to OTCPharm OJSC, 1.7% attributed to contract manufacturing income, 4.1% attributed to agency fees, and 1.7% attributed to medical equipment.

Pharmaceutical Products

H1 2014 total revenue from pharmaceutical sales, inclusive of the finished products and raw materials sale to OTCPharm, decreased by RUR 48 million (‑0.3% y/y) down to RUR 15,922 million vs RUR 15,970 million in H1 2013, with organic sales (incisive of the finished products and raw materials sale to OTCPharm) accounting for 42% in the pharmaceutical sales mix, TTP for 33%, and other sales for 25%, including the sale of remainder finished products and raw materials to OTCPharm for RUR 2,334 million and RUR 1,261 million respectively.

Organic pharmaceutical sales amounted to RUR 6,674 million (-30% y/y) in H1 2014 vs RUR 9,558 million in H1 2013, with over-the-counter (ОТС) product sales accounting for 23%, and organic prescription product (Rx) accounting for 19% in organic pharmaceutical mix.

Organic prescription product (Rx) sales grew by RUR 115 million (+4% y/y) to reach RUR 3,037 million in H1 2014. The key growth drivers were Phosphoglive®, Combilipen® and Biosulin®.

With the spin-off of OTCPharm, organic over-the-counter (ОТС) product sales decreased by RUR 2,998 million (‑45% y/y) and went down to RUR 3,637 million.

H1 2014 TPP sales went down to RUR 5,202 million (-12%) (vs RUR 5,902 million in H1 2013).

H1 2014 sales results include the sale of remainder finished products and raw materials to OTCPharm OJSC, and agency fees for realization of OTCPharm owned brands and contract manufacturing for the said company.

Up to 2014, the Company's subsidiaries have been providing the services involving manufacturing of certain products from raw materials owned by the Company's customers. Since 2014, the income from contract manufacturing, primarily related to the contract manufacturing for OTCPharm, is accounted in the Company's revenue (previously it was accounted as other income and expense), expenses related to contract manufacturing are reflected in cost of sales (previously these were accounted as other income and expense). Similarly, since 2014, agency fees are accounted by the Company in revenue as a regular income. For the purposes of comparative analysis, the prior year figures were restated accordingly; however, such changes in the portfolio structure of the Group companies have no effect on the overall financial statements of the Company.

Contract Manufacturing

H1 2014 contract manufacturing revenue reached RUR 287 million vs RUR 53 million in H1 2013. The increase in contract manufacturing revenue is driven by the spin-off of OTCPharm and services on product manufacturing from customer-owned raw materials provided to OTCPharm.

Agency Fees

As at H1 2014, agency fee revenue reached RUR 712 million demonstrating RUR 297 million or +72% y/y growth compared to H1 2013. The increase in agency fee income is a result of the spin-off and the overall increase in shipments of the products distributed under agency contracts.

Sale of Remained Raw Materials and Finished Products

The sale of remainder finished products to OTCPharm OJSC amounted to RUR 2,334 million, and the sale of remainder raw materials to OTCPharm OJSC amounted to RUR 1,261 million.

Medical Equipment

As of H1 2014, medical equipment sales showed a 39% y/y decline vs H1 2013 and went down to RUR 284 million.

Cost of Sales

In H1 2014, the Company's cost of sales declined by RUR 1,109 million or -12% y/y to RUR 8,070 million from RUR 9,179 million in H1 2013. Generally, cost of sales, as percent of sales, declined from 54% in H1 2013 to 47% in H1 2014. The decline is driven by contract manufacturing for OTCPharm, agency fees, and decrease of low margin products in third party products segment (“TPP”).

“Raw materials” and “Cost of third party products” - the main expenditure items in cost of sales structure - account for 81% of total cost of sales in H1 2014.

A decline in cost of sales in TPP segment by RUR 1,429 million (-29%), from RUR 4,939 million in H1 2013 to RUR 3,510 million in H1 2014, is attributed to the sales structure changes, including the reduction of low margin Reduksin sales which fell RUR 937 million (-65%).

In H1 2014, cost of sales in contract manufacturing increased by RUR 178 million compared to H1 2013 and reached RUR 217 million.

Cost of sales, excluding TPP segment, grew by RUR 319 million (+7.5%), from RUR 4,241 million in H1 2013 to RUR 4,560 million in H1 2014, where raw materials expenditure increased by RUR 311 million (+12% y/y).

Gross Profit

The Company's gross profit rose by RUR 1,412 million (+18%), from RUR 772.5 million in H1 2013 to RUR 9,135.5 million in H1 2014. Gross profit margin increased from 46% in H1 2013 to 53% in H1 2014. This is attributed to:

TPP segment gross profit increase by RUR 729 million (+76%), from RUR 963 million in H1 2013 to RUR 1,693 million in H1 2014;

Increase in agency fees and contract manufacturing by RUR 531 million (+113%), from RUR 468 million in H1 2013 to RUR 999 million in H1 2014;

Sale of remainder raw materials and finished products to OTCPharm for RUR 3,595 million. Gross profit margin attributed to such sale reached 55%.

Operating Expenses

The Company's operating expenses in absolute terms increased by RUR 215 million (+6%), from RUR 3,560 million in H1 2013 to RUR 3,775 million in H1 2014. As percent of sales, this indicator increased to 22% as at H1 2014 compared to 21% as at H1 2013.

Selling and Distribution Costs (S&D)

The Company's S&D costs increased by RUR 115 million (+4%) and reached RUR 2,775 million in H1 2014 compared to RUR 2,660 million in H1 2013. As percent of sales, this indicator remained at the level of 16%.

As of Q2 2014, the Company does not incur advertising, promotion and marketing function expenses related to the spinned-off branded business (OTCPharm).

General and Administrative Expenses (G&A)

As at H1 2014, the Company's overall G&A expenses increased by RUR 100 million (+11%) and reached RUR 999 million compared to RUR 899.5 million in H1 2013. G&A expenses accounted for 5.8% in H1 2014 total sales vs 5.3% in H1 2013.

This is primarily driven by:

Increase of legal, advisory and auditing services expenses by RUR 50 million (+142%);

Increase in pay-roll expenditure by RUR 29 million (+5%) resulting from the wage indexation for the Group companies' administrative personnel.

Operating Income

As at H1 2014, the Company showed increase of its consolidated operating income (revenue, cost of sale, operating expenses) by RUR 1,197 million (+29% y/y) up to RUR 5,361 million vs RUR 4,164 million in H1 2013.

The increase in operating income is driven by:

Increase in TPP operating income by RUR 660 million up to RUR 1,241 million in H1 2014 from RUR 581 million in H1 2013 due to the reduction in cost of sales in TPP segment;

Increase of agency fees and contract manufacturing by RUR 531 million from RUR 468 million in H1 2013 up to RUR 999 million in H1 2014.

The Company's operating income as percent of total sales reached 31% in H1 2014 from 25% in H1 2013.

Other Income / Expense

As at H1 2014, the Company showed a loss of RUR 371 million in its other income vs RUR 27 million inH1 2013. This change in other income (expense) is attributed to foreign currency fluctuations: as at H1 2014, the Company sustained a loss of RUR 377 million, while for the same period of 2013 it generated a revenue of RUR 214 million.

EBITDA

In H1 2014, the Company's EBITDA[1] reached RUR 5,645 million showing an increase by RUR 1,152 million (+26%) y/y compared to RUR 4,493 million inH1 2013. EBITDA growth is attributed to:

EBITDA growth in TPP segment by RUR 667 million (+112%) up to RUR 1,262 million in H1 2014 compared to RUR 596 million in H1 2013. EBITDA margin increased to 24% from 10% in H1 2013;

Increase of agency fees and contract manufacturing by RUR 531 million.

Financial Income / Expense

As at H1 2014, the Company's financial income reached RUR 182 million compared to RUR 222 million in H1 2013. A decline is driven by the reduction of cash on bank deposits and interest income on short-term loans.