summer news letter back up - james dudleyjames-dudley.co.uk/media/1055/july-2012.pdf · the news...

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The News Letter of James Dudley Management

Walgreens announced it is to acquire 45% of Alliance Boots, Europe’s largest pharmaceutical channel manger, with an option to buy the remaining 55% in the future.

Walgreens is the largest drugstore operator in the USA with fiscal 2011 sales of $73 billion and in turnover terms is the 10th largest retailer in the world. The Alliance Boots acquisition would make the combined group the third largest global retailer with well over $100 billion sales and buying clout to match. The goal is to exceed $130 billion turnover by 2016.

Figure 1: Top 10 Global Retailers – Based on Total Group Revenues

Source: Deloitte 2012

Walgreens will invest approximately $6.7 billion in cash and stock (comprised of $4.0 billion in cash and 83.4 million shares) in exchange for a 45% equity ownership stake in Alliance Boots. Walgreens will have the option to proceed to a full combination by acquiring the remaining 55% of Alliance Boots in approximately three years’ time. Walgreens initial investment and option excludes the Alliance Boots minority interest in Galenica, the Swiss healthcare group.(Analysis page 4)

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Russian Duma Ratifies World Trade Agreement

10th July - Russia’s State Duma voted 238 to 208 to pass the billto ratify the agreement for Russia to join the World Trade Organization. The upper house still needs to endorse the decision and Russia has until 23rd July to inform the WTO. Joining is expected to impact the healthcare industry especially in areas such as intellectual property and duties. (Continued page 5)

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Walgreen’s and Alliance Boots - Game-changing Scale and Capabilities

Summer 2012

New Expanded 2012 Edition -

OTC DISTRIBUTION IN EUROPEEntering a New Era An in-depth strategic 19 country study of Europe’s Major Markets and the Russian Federation

New 2012 edition of Only Report MAIL ORDER & INTERNET PHARMACY IN EUROPESharing the Multi-channel Experience A Study of Mail Order and Internet Pharmacy in 17 European Countries plus key Learnings and case Studies from the USA

Walgreen Co. announced 5th July that it has entered into an agreement to purchase 144 stores of a regional pharmacy chain in the USA. (See page 3)

Alliance Boots announced it has acquired a further 1,508,462, or approximately 14.1%, of shares in Andreae-Noris Zahn AG (“ANZAG”) - Germany’s third largest pharmaceutical wholesaler. (See page 5)

Picture Business WireAlliance Boots’ Executive Chairman Stefano Pessina (left) and Walgreens President and CEO Greg Wasson

www.james-dudley.co.uk

medotceurope.com Summer 2012

© medotceurope.com 2012 James Dudley Management 2

Penta Acquires Domov Zdravia in Slovak Republic

The acquisition of the retail pharmacy chain Domov Zdraviaby CEE financial group Penta Investments was approved by the Antimonopoly Office of the Slovak Republic force on 30th

April 2012.

Penta operates Dr Max pharmacies in Poland and Czech Republic and has a chain of 136 pharmacies in Slovakia. The acquisition of Domov Zdravia will add a network of 40 pharmacies in 30 cities to its Slovakian retail pharmacy estateincluding two based in Tesco hypermarkets.

Figure 2: Number of Pharmacies in the Slovak Republic

2000 2003 2006 20092012

forecastNumber of Pharmacies 1,031 1,069 1,523 1,721 1,894Inhabitants per Pharmacy 5,240 5,033 3,539 3,136 2,852

Source: James Dudley - OTC Distribution in Europe 2012 edition

German Expert Commitee – 26th June Meet -Limits on OTC Analgesics, New Switch Proposals and No to Non-prescription Ipratropium bromide

At its meeting at the end of June the Committee of Experts for Prescription which advises the Federal Ministry of Health (BMG) put its support behind a proposal to limit OTC sales of certain analgesics to four days supply. Drugs under scrutiny include acetylsalicylic acid (ASA), diclofenac, ibuprofen and naproxen.

Based on maximum daily doses the maximum package contents for self-medication acetylsalicylic acid 500 milligramswould be 24 tablets, diclofenac 12 tablets, ibuprofen 24 tablets of 200 mg and 12 tablets of 400 mg. Naproxen 250 mg maximum package contents would also be 12 tablets.However the proposal excludes acetylsalicylic acid for cardiovascular use.

Federal Institute for Drugs and Medical Devices is the Federal authority under the jurisdiction of the BMG is responsible for drug and medical device registration has had concerns about analgesic usage in Germany for some time.

Rules for paracetamol remain unchanged despite pressures to reverse-switch the active to prescription only status.

The expert committee also proposed a raft of to prescription-to-non-prescription switches which included ibuprofen combinations with pseudoephedrine as a treatment for acute

sinus conditions in conjunction with other cold and flu symptoms such as fever and pain; racecadotril for acute treatment of diarrhea; sumatriptan nasal sprays for relieving migraines; benzydamine for oral use in the mouth and throat, as well as datura leaves and seeds for use in homoeopathic tinctures.

Increasing the range of non-prescription nicotine-replacement therapies (NRT) up to a maximum daily dose of 64mg was also recommended.

A proposed prescription-to-non-prescription switch of ipratropium bromide nasal sprays, including in combination with xylometazoline was rejected.

Labeling Restrictions Threaten Homeopathic Self-care Brands in the Netherlands

Vogel and VSM homeopathic brands could be driven from the shelves of pharmacies and drugstores in the Netherlands if regulations to prohibit claims and usages on in-pack leaflets and packaging are introduced by Health Minister Edith Schippers. This is according to Netherlands Homeopathy (KVHN) and trade association Neprofarm.

Minister Schippers wants the action of homeopathic medicines scientifically proven. If not, product claims and indications should not remain on the packaging or leaflet.

Homeopathic self-care medicines are popular in the Netherlands. 4.5 million packages a year are purchased according to IMS Health. It is estimated that a homeopathic medicine is available in three-quarters of Dutch households.

The Royal Netherlands Homeopathy (KVHN) and trade association Neprofarm have mounted a PR campaign aimed at heading off new labeling rules for homeopathic medicines.

Schlecker Looking for Buyer for Mail Order Arm

Unsold the branches of the Schlecker drugstore chain have now closed in Germany. The troubled druggist chain went into adminstration earlier in the year. However, the administrators are still trying to find a buyer for Schlecker‘s mail order pharmacy Vitalsana.

The mail order business mainly served as a ‘pick up’partner for the Schlecker druggist chain. In line with the other druggst chains in Germany mail order pharmacies play a role inproviding retail healthcare services at instore ‘pick up’ points for retail groups which are not licensed to sell registered medicines in their own right.

The bidding process is expected to be complete by the middle of July.



Russian Parliament Threat to OTC Advertising

In May Liberal Democratic Party deputies submitted a bill banning the advertising of medicines to the State Duma. The Association of Russian Pharmaceutical Manufacturers (ARPM) has made known its opposition to this initiative.

At the AESGP annual meeting in Nice in June, Victor Dmitriev, the Director-General ARPM, said advertising of medicines and dietary supplements in Russia was far from ideal. That it requires adjustments and more accurate and responsible regulation.

“I am confident that the joint work of legislators and experts will update the regulatory framework governing the advertising of medicines and dietary supplements and will satisfy both the state and business - and most importantly -patients, "- Dmitriev concluded. .

Celesio to Divest Czech Operations

Celesio is to divest its underperforming retail pharmacy and wholesale operations in the Czech Republic.

The divestment is part of the company’s ongoing restructuring programme which also includes the sale of its DocMorris mail-order business, its logistics business Movianto and marketing company Pharmexx.

Late last year Celesio announced that it planned to close 16 of its DocMorris Apotek pharmacies in Sweden and then a month later the company said it was to cull 12 underperforming Lloydspharma pharmacies in Belgium.

Celesio’s operations in the Czech Republic are its retail pharmacy chain Lloyds s.r.o. and its wholesaling business Gehe. Lloyds s.r.o.is a subsidiary of Lloydspharmacy in the UK. Lloyds currently has around 49 retail outlets in the Czech Republic having already disposed of a number of outlets in recent years.

Figure 3: Czech Pharmacy Wholesaler Market Share 2011


Gehe is the smallest of the main full line pharmaceutical wholesalers and operates three offices in the Czech Republic in Prague, Brünn and Ostrau. Celesio has around 13% of the Czech wholesaler market. The divestments form part of Celesio’s turnaround plan which was announced in 2011.

Overall, Celesio’s total first-quarter sales were up by 2.5% to €5.64 billion.

Adjusted for portfolio and currency effects, the increase was just 0.1%. Results for the first three months of 2012 Celesio’s retail and mail-order pharmacy operations were encouraging with the Patient and Consumer Solutions division– reporting a sales increase of 6.9% to €854 million.

Higher sales and gross profit, coupled with cost-cutting measures at Lloydspharmacy contributed to a 24.0% rise in the Patient and Consumer Solutions division’s earnings before interest, tax, depreciation and amortization (EBITDA) to €60.5 million.

Walgreen acquires Regional US Drug Chain

Walgreen Co. announced 5th July that it has entered into an agreement to purchase 144 stores of a regional chain of drugstores in the USA from Stephen L. LaFrance Holdings, Inc. and members of the LaFrance family.

The chain currently operates under the USA Drug, Super D Drug, May’s Drug, Med-X and Drug Warehouse banners and is located in Arkansas, Kansas, Mississippi, Missouri, New Jersey, Oklahoma and Tennessee. Walgreen’s is expected to pay approximately $438 million subject to adjustment in certain circumstances. The chain recorded sales of $825 million in 2011.

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Walgreens and Alliance Boots - Analysis

Walgreens’ is the largest drugstore chain in the US and commands some 19% share of the retail pharmacy market and 20.1% of prescriptions in 2011. The retailer serves nearly 6 million customers a day. Walgreens generated sales of $73 billion in the 12 months to 31 May 2012 through over 8,000 drugstores represented in all 50 states, the District of Columbia and Puerto Rico.

Prescription drugs make up 65% of net sales, while non-prescription drugs represent 10% of net sales. General merchandise makes up the balance.

Figure 4: Walgreens’ Sales Mix % $ Turnover 2011

Source: James Dudley – Mail Order and Internet Pharmacy in Europe 2012 edition – Sharing the Multi-channel Experience

Alliance Boots is the largest pharmaceutical wholesaling and retailing group in Europe with tentacles extending into Russia, Middle East, Asia and China.

87% of the Groups retailing activity stems from the United Kingdom with Eire, Netherlands and Norway accounting for just over 10%. The balance is made up from Thailand and Lithuania and franchising investments in the Middle East.

France, Germany and the United Kingdom represent 70% of the pharmaceutical wholesaling business.

Figure 5: Alliance Boots % Sales by Country 2011/12

Source: From Analysis of Alliance Boots Annual Report 2011/12 - Graph James Dudley Management

Put together Walgreens and Alliance Boots will have massive supply chain and procurement advantages; a very attractive and profitable product and business portfolio (Walgreens, Duane Reade, Boots and Alliance Healthcare), as well as internationalhealth and beauty product brands (No7, Botanics and Boots Laboratories). The two businesses will have diversified and robust profit pools across the U.S., Europe and key emerging markets as well as a unique platform for growth in these markets.

Walgreens expects combined synergies across both companies to be between $100 million and $150 million in the first year and $1 billion by the end of 2016. The most significant short-term and long-term opportunities according to Walgreens are:

Procurement of prescription drugs and branded products;harnessing private label brands and developing opportunities for enhancing revenues through Beauty and Wellness Solutions and own brands.

Both companies are leaders in multi-channel strategies by combining traditional retailing with e-commerce and mobile technologies. With Walgreens claiming that multi-channel shoppers are three times more valuable than single channel shoppers there is ample scope for marketing expertise and technology sharing. Also Alliance Boots has a world class loyalty program. Walgreens look to rolling this out globally later in 2012.

Subject to a cautionary note about forward statements Walgreens is looking for long term sales and profit growth that delivers IRR of more than 20% by 2016 with sales revenue topping $130 billion.

Figure 6: Walgreens –Alliance Boots Goals for 2016*1

Revenue >$130 billion

Lifo EBIT $8.5 -9 billion

LIFO Provision & Transaction Amortization

~ $0.5 billion

Synergies $1 billion

Operating Cashflow ~ $7 billion

Net Debt (Excluding leases)** ~ $11 billion

Projected Shares Outstanding ~1.1 billion shares***

Target Dividend Payout 30% - 35%

Source: Walgreens – Alliance Boots Investor Presentation 19th June 2012

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*All figures assume constant currency and exercise of option **Net debt defined as balance sheet debt less cash ***Projected shares outstanding assumes no share repurchase



Russia Duma Ratifies World Trade Agreement

With a €1.5 trillion economy, the Russian Federation is the world's ninth largest and will become the WTO's 156th member by the beginning of September. Russia had been negotiating its entry for the last 18 years but the final documents enabling Russia’s membership of the WTO were signed in Geneva in December last year.

The Federation has a population of 142 million people. While the country spends around €20 billion on pharmaceutical products (€12 billion at manufacturers’ selling prices), 68% of purchases are privately funded. Even so, given the size of population there is considerable scope to expand the healthcare sector.

Foreign made pharmaceuticals represent some 30% of volume but 78% of value. Since 2008 the Russian Federation has adopted a programme to become self-sufficient in pharmaceutical production and R&D. To this end has offered incentives for manufacturing projects to both domestic and foreign companies.

Figure 6: Russia Manufacturers’ Pharmaceutical Sales € billions by Sector 2009 to 2012 (Manufacturers’ selling prices)

Source: Russian MoH, IMS Health

Russia’s 29,000 pharmacies had a combined turnover of €19.7 billion in 2011 yet only 32% of this was from prescription business. While pharmacies have the monopoly for OTC medicines in Russia, the category accounts for under a fifth of turnover.

Figure 7: Russian Retail Pharmacy Market % share by Category 2011


WTO Agreement on Trade-Related Intellectual Property Rights (“TRIPs”) forms part of its WTO accession commitment and prohibits unauthorized third parties from using the data of pre-clinical and clinical trials of medicines submitted by applicants for the state registration of the medicines for six years. In order to comply the Russian government adopted TRIPs legislation into Russian law in 2010.

On WTO accession, Russian tariffs on imported medicines are expected to fall from 15% to between 5% and 6%, while tariffs on pharmaceutical ingredients will be cut to between 2% and 3%.

Lloyds Launches Online Prescription Service for Hormone Replacement Therapy

Picture: James Dudley Management

At the end of May Lloydspharmacy (Celesio), in the United Kingdom, launched a service which allows women to renew their hormone replacement therapy (HRT) prescriptions without the need to visit their GP.

Through Lloydspharmacy Online Doctor patients can access an online consultation with a fully-qualified GP based in the United Kingdom. Patients can also order the most commonly prescribed HRT tablets and patches if appropriate.

The HRT service is an extension of the online doctor women’s clinic which also includes contraception and cystitis treatments.

Patients who have already been prescribed HRT treatments by their regular GP can visit the Lloydspharmacy Online Doctor website www.onlinedoctor.lloydspharmacy.com and select ‘Women’s Health’, where there is an option for the HRT service. Patients are then asked to a fill in a short online medical questionnaire relating to their current HRT treatment.

The patient will be asked to make a payment and select whether they would like to collect the medication from their local Lloydspharmacy or have it delivered. The service is specifically designed for existing patients and not for new patients to HRT.



Alliance Boots Increases Stake in ANZAG

Alliance Boots announced that, through its subsidiary Alliance Healthcare Deutschland Holdings 1 GmbH, it has acquired a further 1,508,462, or approximately 14.1%, of shares in Andreae-Noris Zahn AG (“ANZAG”) - Germany’s third largest pharmaceutical wholesaler.

The company originally gained a controlling stake in Anzag in 2010. Alliance Boots will begin a squeeze out process to obtain the remaining 4% of shares.

Anzag is the third largest pharmaceutical wholesaler in Germany behind Phoenix and Gehe (Celesio). With 25 regional branches the wholesaler has the densest delivery network of all pharmaceutical wholesalers in Germany. As a further business unit Anzag operates the pharmacy cooperative Vivesco, with around 1,100 pharmacies as partners.

Spain Hikes VAT

The Spanish government has announced plans to raise the standard VAT rate from 18% to 21%. The increase is part of new austerity measures forced on the Spanish Government to meet additional borrowing commitments. Theimplementation date has yet to be announced but International VAT Services suggest it may be as soon as Monday 16th July.

The reduced VAT rate will also rise from 8% to 10% and consequently VAT for medical devices, dietary products and food supplements should rise by the same amount. Cosmetics attract the full rate VAT and will rise from 18% to 21%. There will be no change to the super reduced VAT rate of 4% which is the rate charged on all medicines.

Download Executive Summary and Table of Contents www.james-dudley.co.uk

MAIL ORDER AND INTERNET PHARMACY IN EUROPE NEW EXPANDED 2012 EDITION SHARING THE MULTI-CHANNEL EXPERIENCE

This is the second edition of the only strategic marketing report describing the emerging trends for mail order and Internet pharmacies in Europe’s main markets together with comparisons to developments in the USA.

This is an important report that not only explores the development of an emerging channel it shows how the channel has evolved in a conservative regulatory environment. Mail order and Internet Pharmacy in Europe describes how leading retailers are integrating online technologies using PCs, Tablets, Notebooks and Mobile Apps into the creation of a powerful multi-channel pharmacy experience.

This expanded 2012 edition covers 17 CountriesAustria, Belgium, Czech Republic, Finland, Denmark, France, Germany, Hungary, Italy, Netherlands, Norway, Poland, Slovak Republic, Spain, Sweden, Switzerland, the United Kingdom and draws on comparisons and case studies from the USA.

“This essential 17 country study has identified new and important trends in a rapidly growing channel as well as many of the ethical and economic issues that pharmaceutical manufacturers and other healthcare suppliers need to address”

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