environment/market risks and opportunities
Economic risks and opportunities
We strive to offer patients the best possible care through our market, the pharmaceuticals and healthcare market. By their very nature, segments focused on healthcare are less sensitive to economic cycles. Demand for otc medicines, cosmetics or care products does however dip as soon as there is an economic downturn. At times like this, we need to create incentives to buy - for example, modern new shop concepts.
Regulatory risks and opportunities
Pharmaceutical markets are subject to all kinds of government intervention which affect the financing of healthcare systems in particular and therefore also the compensation schemes for service providers. However, demographic change is driving demand for healthcare, pharmaceuticals, care and medical services – demand that, until recently, was fairly comfortably met by a complex healthcare system. As a result, numerous governments – including Germany, France, Portugal and Slovenia in 2012 – are intervening in compensation struc- tures to make up for, or at least reduce, the higher spending associated with growing demand. We feel the effects of this intervention directly. It affects the development of our business and earnings and is the largest single risk for Celesio. Our ongoing and flexible cost management is one of the measures in place to help compensate for burdens of this kind and reduce this risk. Our new
strategy is another, including our renewed focus on our core business and a more centralised approach. Our decision to focus on markets like Brazil is part of this strategy (see our strategic cornerstones on ➞ page 71).
Specific market risks and opportunities
Risks relating to changes in the healthcare market are particularly critical to our success. These include:
•
Mergers of pharmaceutical manufacturersThese could weaken our bargaining power when negotiating conditions and discounts, negatively influencing revenue and profitability. In the Manufac- turer Solutions division, mergers between pharmaceutical manufacturers could cause us to lose or gain contracts. The geographical diversification of our business helps minimise this risk.
•
Exclusive wholesale distribution models.Examples include direct-to-pharmacy (dtp) supply by the manufacturer or the reduced wholesale model. Pharmaceutical manufacturers applying the reduced wholesale model work exclusively with a few selected wholesalers. Given our strong market position in wholesale, however, we will generally apply exclusive sales models as we believe that the opportunities of devel- oping in this direction outweigh the risks.
•
Tougher competition in logistics.Conventional logistics companies are increasingly looking for market niches, including entry to the pharmaceutical distribution business. Our experience, reputation, specialisation and the efforts to develop new services – such as individual warehouses for customers – help us keep this risk in check, however.
•
Removal of pharmacy-only statusRisks could arise if certain non-prescription medicines become exempt from mandatory sale in a pharmacy, meaning that they could be sold at grocery stores or petrol stations as well. We counter this risk by positioning the pharmacy as the correct sales channel for pharmaceuticals. We also invest in further training for pharmacists to improve the quality of advice further and thereby improve our own position compared to competitors.
corporate strategy risks and opportunities.
Optimising our portfolio is one element of our strategy, including divestiture projects in line with our recent strategic changes. They come into play when disposing of a unit is a more promising prospect than continuing operations. These kinds of decisions are always associated with risks, not least those relating to employing and tying up capital. That is why acquisition and investment plans, including potential risks, are examined in a due diligence process and analysed in terms of return on risks. Corporate M&A and Market Intelligence is responsible for preparing complex acquisition projects, performing detailed market and competition analyses in advance. For individual aspects, it gathers input from the respective specialist departments, all of which comment on the plan from their perspective. There is a clearly defined review and authorisation process even for smaller acquisitions, such as individual pharmacies, using local resources and expertise on the market and competition. After completion of a transaction, the acquisition is integrated into the group based on a detailed schedule and action plan as well as clearly defined areas of responsibility. Risks can arise from acquisitions when the business acquired is integrated into the group. Furthermore, changes in the market or environmental conditions could block or hinder original targets, despite extensive due diligence and market analyses. We therefore conduct annual impairment tests, which can lead to an adjustment of goodwill. Most of these points also apply to potential divestiture projects. A detailed examination is carried out in advance, with external support if required, so that all opportunities and risks associated with the measure can be taken into consideration appropriately. Given that the market and environment can, at times, change rapidly, original planning assumptions and targets are liable to yield unexpected results. We are also exposed to risks arising from interests companies in which our responsibility for the company is shared or limited.
operating business risks
A complex infrastructure consisting of suppliers, transport, storage and dispensing processes, qualified personnel and high-performance it is neces- sary in order to guarantee the safety and quality of the pharmaceuticals supply in all countries. Regardless of the fact that a complex structure of this kind is automatically associated with greater risk, our operating business is also exposed to the following highly specific risks:
•
Interruption of operating businessWe have developed comprehensive contingency plans for each of the divi- sions to safeguard operating business and the supply of pharmaceuticals even in the event of unforeseen circumstances. For example, if a wholesale branch were temporarily unable to operate, customer supply would quickly be secured via neighbouring or regional branches. We also have insurance policies to cover business interruptions.
•
Counterfeit pharmaceuticalsWe have implemented quality control mechanisms to ensure that only prod- ucts from a validated source of procurement can be distributed. To minimise the risks of counterfeit medicines getting into the distribution chain and reaching patients, we began our »Fight the fakes« programme in 2007. This comprises quality control processes, internal communication measures and dedicated training for employees working in the relevant fields. All of the components of the program are refined on an ongoing basis.
•
Dispensing errorsWe minimise the risk of dispensing errors through regular training for our pharmacists and pharmaceutical technicians.
•
Incorrect handling of medicines in the logistics chain.There are many products, such as insulin or vaccinations, that have to be stored and transported at a certain temperature. If the cold chain is broken, products have to be destroyed and we may also have to contend with damage to our reputation and lost revenue. We have virtually eliminated this risk by optimising our process through preventative measures such as round-the-clock temperature monitoring at warehouses and insulated transport containers.
financial risks
Currency risks
As a company with international operations, currency risks are highly signifi- cant for us. We take a systematic approach to minimising these, divided into transaction risks and translation risks:
•
Transaction risks arise as a result of changes in the value of future cash inflows from purchases and sales denominated in foreign currency. This risk is low at Celesio because our subsidiaries conduct almost all business within a single currency zone. If transaction risks arise as a result of international supply relationships, we usually hedge these in full, e.g. by means of forward exchange transactions.•
Translation risks result from the conversion into euro of income generated outside of the euro zone as well as from the conversion of items in the financial statements. At Celesio, this is particularly relevant for the consolidation of subsidiaries. As a rule, we do not use derivatives to hedge against translation risks. The risk from translating items of the financial statements is reduced by using natural hedging. This means that we refinance our subsidiaries in local currency; funds thus originate and are appropriated in the same currency.•
Owing to the large share in earnings contributed by our business in the uk,the largest currency risk is in pound sterling. Other currencies of signifi- cance to us are the Norwegian krone and the Brazilian real. The inclusion of the Brazilian real following the acquisition of Panpharma and Oncoprod improved our currency portfolio significantly.
Risk of default on receivables
Thanks to our highly diversified customer structure in the Pharmacy Solu- tions division as well as government or equivalent payers in the Patient and Consumer Solutions division, risks from payment defaults are lower than for companies that operate in other industries. To mitigate any remaining risk of default, we have a strict receivables management system in place, which involves rolling payment pattern checks and comprehensive credit assess- ments. In general, the financial situation of the pharmacies being supplied or of the government payer also depends on the development of the economy. If the economy remains weak over a prolonged period, there could be a general increase in receivables outstanding, coupled with a decrease in the quality of individual receivables. Non-recourse factoring in the uk and Norway reduced our risk of default on receivables in the reporting period.
Liquidity and financing risks
The aim of our systematic liquidity management is to ensure that Celesio is always in a position to meet its obligations and to afford the company both short and long-term financial flexibility. To this end, we maintain a balanced maturity profile for our financial liabilities, work with a broad base of fixed income inves- tors and carefully selected international banks and make use of a number of financing sources. Despite the ripple effect of the financial crisis, we managed to reduce our dependence on bank financing in 2011 by issuing a convertible bond. We carefully manage our maturity profile to avoid high repayments in individual years. Examples of how we optimise our liquidity requirements include cash pooling and strict management of net working capital, both of which facilitate our efforts to avoid liquidity and financing risks.
Interest rate risks
Changes in market interest rates affect future interest payments on liabili- ties with a floating rate of interest. We therefore primarily employ long-term fixed interest agreements or interest caps. We also enter into interest swaps to exchange interest obligations with other market players for a fixed term
Counterparty risks from derivatives
We enter into derivatives for hedging purposes. Were the counterparty to default on a transaction of this kind, there is a risk that we would have to restore current items to the market at less favourable conditions (replacement risk). We maintain the counterparty risk at a low level by only selecting lending banks with a defined minimum rating as trading partners and by monitoring the market values of individual derivatives.
Measurement risks
Fluctuations on the international financial and capital markets can cause volatility in security prices. As a result, the measurement of investments held to cover pension obligations could be subject to change.