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Procurement, Production and Quality Management

International network for procurement of active ingredients and auxiliary materials

Under flexibility and cost aspects, the Group has generally abstained from manufacturing any active ingredients or auxiliary materials necessary for pharmaceutical production, but utilizes an international network of raw materials suppliers. The STADA focuses – particularly for the procurement of active pharmaceutical ingredients – on low-priced suppliers from low-cost countries with a focus on Asia. The Group, however, does not generally rule out future cooperations in the area of active pharmaceutical ingredient production, with the goal of achieving greater vertical integration.

In the framework of “STADA – build the future” in financial year 2012, the Group continued the centralization and internationalization of the procurement of active ingredients and auxiliary materials as well as of the procurement of bulk and finished goods with the goal of optimizing stock levels in the financial year 2012. After a procurement office in Shanghai, the People’s Republic of China, commenced full operations in 2012, STADA also decided to open an additional procurement office planned to commence activities in mid 2013 in Mumbai, India, in the financial year. In consideration of the continuous cost optimization, both China and India have become important resource countries for low-cost active ingredient procurement for the Group.

If STADA products are produced in the context of contract manufacturing, the Group is dependent on global developments with respect to purchase prices for the necessary raw and auxiliary materials and on the prices negotiated with contract manufacturers, which may fluctuate significantly depending on the product. In order to reduce the risk of market-related margin losses due to falling selling prices, STADA involves suppliers where possible in this market price risk. This occurs, for example, by using price escalation clauses in which procurement prices are linked to current selling prices, subsequent negotiations or the agreement of special procurement prices for special sales volumes, such as volumes that that are put out to tender by public health insurance organizations in the context of discount agreements.

As a result of new EU regulations, as of July 2, 2013 increased documentation and information requirements will be placed on pre-suppliers of pharmaceutical ingredients, in particular also from non EU countries, which require greater involvement of national and/or local authorities in the third countries. Meanwhile in the third countries, there is in fact the overall willingness to act in accordance to the new EU regulations; however, it remains questionable as to whether the corresponding necessary national activities of third countries everywhere will be implemented to a sufficient extent by the effective date of the guideline of July 2, 2013. The Group nevertheless assumes, from today’s perspective, that as a result of measures introduced by STADA as well as ongoing efforts from the entire industry at both the EU and national level, no significant delivery bottlenecks for active ingredient procurement will arise for the STADA Group as a result of the new regulations, even if individual delivery bottlenecks and an increased procurement expenditure cannot yet be ruled out from today’s perspective.

Continuous optimization in the area of supply chain

In the area of Supply Chain, needs planning, which was originally decentrally organized, was centralized with a so-called hub structure in financial year 2012. Each centralized location was selected according to what was most logical in consideration of synergy and cost aspects. In total, three hubs were installed at the Bad Vilbel, Vrsac and Moscow locations where supply chain management is carried out for the Group’s top products selected according to specified criteria. In this context, individual local units provide internally billed, Grouprelevant services. As a result of the corresponding pooling of respective services, the Group creates cost synergies that then lead to cost savings. This project commenced in August 2011, was continuously expanded in 2012 and is being continued in the financial year 2013.

Supply chain and pharmaceutical production with high flexibility and continuous cost optimization

With a view to the comprehensive product portfolio of more than 900 active pharmaceutical ingredients and over 15,000 product packagings sold by the Group, each different in terms of its active ingredient and/or quantity of the active ingredient and/or dosage form and/or package size, STADA also makes use of an international network of internal and external resources for the supply chain and pharmaceutical production.

In consideration of the significant potential to reduce costs in the area of production, the further concentration of production processes into fewer locations was continued in 2012 – in particular in Serbia, Bosnia-Herzegovina, Russia and Vietnam. This applies both to the gradual assumption of production volumes from contract manufacturing as well as to shifting production volumes within Group-owned plants. The objective is, on the one hand, to benefit from the structural cost advantages of these locations and, on the other hand, to reduce unit costs of respective products by improving capacities.

As evaluated at the beginning of the “STADA – build the future” project, the sale of plants that render significant production volumes in the context of the concentration process was successfully concluded in 2012. Following the sale of the Dutch packaging unit in Etten-Leur back in 2010, the financial year 2012 saw the disposal of both the Irish factory¹⁾ in Clonmel as well as the two Russian production facilities²⁾ in Moscow and Ryazanskaya obl. Overall, STADA was thereby able to reach a significant goal of “STADA – build the future” the Group-wide cost efficiency program scheduled to run from 2010 to the end of 2013 ahead of schedule, because with the sale of the two Russian production facilities the number of employees from the year 2010 was then reduced by approx. 10% (corresponding to approx. 800 full-time jobs) within financial year 2012 and not, as planned, by the end of 2013. The respective burdens³⁾ were less than the expenses originally planned in the scope of the program for the sale of both the Irish as well as the Russian production facilities.

In the course of the disposal of the two Russian production facilities, the purchaser assumed the contractual obligation for a further up to approx. 212 full-time positions, which initially remained with local STADA subsidiaries at the locations of both sold production sites in order to secure the ongoing production and product transfers. This ensured that each affected person would be offered employment at previous conditions when laid off by the local STADA subsidiaries after completion of the transfers at the latest. In the first quarter of 2013, a further approx. 195 of these approx. 212 full-time positions had already been transferred to the buyer. For the outstanding personnel reduction, STADA expected in 2012 additional possible one-time burdens of an amount up to EUR 2 million; following the further personnel reduction that took place in the first quarter of 2013 additional one-time burdens of just up to EUR 0.2 million are now expected. However, STADA anticipates in this connection a total amount of EUR 0.1 million from today’s perspective.

The Group extended process optimization programs at the production sites in Serbia and Bosnia-Herzegovina where utilization has increased markedly which led to immediate improvements in capacity and thereby results with the partial achievement of full utilization of individual production stages. Investments were also made or introduced to adjust the varying capacities of individual process stages of pharmaceutical production to the respective capacities of individual locations.

In 2011, the Group – initially in Germany – began to optimize the controlling instruments for the analysis of cost of sales. In the financial year 2012, the Group continued this optimization at the Hemofarm Group’s locations in Vrsac, Sabac, Dubovac and Banja Luka. As a result of the measure, STADA has achieved greater precision in the determination of production costs which, in turn, increases the efficiency of controlling and optimization processes.

Furthermore, STADA started with the development of new IT programs in Serbian locations in 2012, which will foster improved networking between procurement and production planning in the Group.

Additional potential efficiencies continue to be achieved with increased utilization of uniform SAP software. At the same time, the roll-out of the SAP software, which STADA initiated in the German Group headquarters in 2007, was continued in the financial year 2012 and from today’s perspective should be fully completed by 2014.

Following the completed sale of the Irish production facility in Clonmel in 2012 as well as the two Russian production facilities in Moscow and Ryazanskaya obl., the Group had pharmaceutical production locations at the following locations as of March 1, 2013:

• Market region Germany
  • Bad Vilbel (Germany)
  • Pfaffenhofen (Germany)⁴⁾
• Market region CIS / Eastern Europe
  • Banja Luka (Bosnia-Herzegovina)
  • Dubovac (Serbia)
  • Nizhny Novgorod (Russia)
  • Obninsk (Russia)
  • Podgorica (Montenegro)
  • Sabac (Serbia)
  • Vrsac (Serbia)
• Market region Asia & Pacific
  • Beijing⁵⁾ (China)
  • Hoc Mon District⁵⁾⁶⁾ (Greater Ho Chi Minh City)⁶⁾ (Vietnam)
  • Binh Duong Branch⁶⁾ (Greater Ho Chi Minh City)⁶⁾ (Vietnam)
  • Tuy Hoa⁵⁾⁷⁾ (Vietnam)

As a result of the control of the Vietnamese subsidiary Pymepharco achieved on January 1, 2013, the number of Group production sites increased in the first quarter of 2013 by the above-mentioned production site in Tuy Hoa. This production facility is actually predominately focused on products for the Vietnamese market and, as a result, will not initially be integrated into the central production controlling for products with Group significance; however, looking to the EU certification received in the first quarter of 2013 for a section of this facility, the technical potential of this production facility makes gradual Group integration seem fundamentally possible.

STADA makes adequate annual investments to ensure that all Group-owned production facilities are maintained at the level required by legal stipulations and technical production considerations. For the expansion and renewal of production sites and facilities the Group invested a total of EUR 12.6 million in 2012 (previous year: EUR 13.6 million).

Highest safety and quality requirements

As a health care company, STADA has always put the highest priority on product quality and safety. In addition to finished products, this premise also applies to the raw materials the Group processes, the services and working conditions.

In the scope of comprehensive audits that take place regularly, Group Quality Management examines the quality standards established by the Group, which in part go clearly beyond the provisions required by law, in the Group’s own production sites as well as in the facilities of suppliers and contract manufacturers.

From the external side, the STADA Group’s production facilities are also regularly inspected by the nationally responsible regulatory authorities. Within the EU, the regulatory authorities carry out these inspections every two to three years. In addition to inspection by national authorities outside the EU, STADA also orders so-called EU-GMP compliance inspections in order to receive extensions of the required EU import authorizations valid for three years each. The authorities responsible for STADA generally check whether the inspected production facilities correspond to the EU’s GMP standards in the course of these inspections. Overall, 15 inspections were successfully completed in third countries throughout the Group from 2010 to 2012. This included successfully completed inspections at the production facilities Hemofarm A.D., Vrsac, Serbia, Hemofarm Banja Luka d.o.o., Banja Luka, Bosnia-Herzegovina, Hemofarm d.o.o., Sabac, Serbia, Hemomont d.o.o., Podgorica, Montenegro, LCC Hemofarm, Obninsk, Russia, Nizhpharm J.S.C., Nizhny Novgorod, Russia, and STADA Vietnam J.V. Co., Ltd., Ho Chi Minh City, Vietnam.

Since the Group strives to secure, also in countries outside of the EU, EU quality standards for drugs, which often go beyond local requirements, the Group-owned production facilities not located in the EU in Banja Luka, the greater Ho Chi Minh City area (Binh Duong Branch), Nizhny Novgorod, Obninsk, Podgorica, Sabac and Vrsac are set up for the production of certain pharmaceutical dosage forms for EU countries and are therefore authorized by the responsible EU regulatory authorities for delivery to the EU according to the above-mentioned inspections. The production facility in Tuy Hoa was also successfully inspected for EU-GMP conformity in 2012. In January 2013, STADA received as a result the import certificate for the import of medications into the European economic zone.

In addition to legal provisions, STADA holds international certifications in accordance with external quality management systems. Therefore, at numerous production sites, the Group not only focuses on good manufacturing practice standards (GMP standards), but also on the relevant ISO standards. At several locations, the Group holds various ISO certificates such as ISO-9001:2008 and ISO-14001:2004.

Moreover, the Group’s quality management also has proactive procedures in place for the event that individual quality problems appear despite all the preventative and controlling measures.

In the course of the implementation of “STADA – build the future”, the Group has increasingly positioned itself as more centralized, international and cost-effective also in the area of quality management and continued further optimization processes in the financial year 2012. In 2011, STADA commissioned a newly built laboratory building in Timisoara, Romania, which enables the Group to carry out laboratory tests itself for the release of products, which were previously awarded to external entities, at this low-cost location. In addition to cost aspects, the location was selected according to two considerations. First of all, Timisoara is located within the EU meaning that EU-wide quality control audits are possible from there. Second, Timisoara is very close to STADA’s important production location in Vrsac, Serbia, and the new laboratory is well suited, also in consideration of logistics, to carrying process controlling for products manufactured in Vrsac. In light of the successful start of this project, STADA began the second construction stage in financial year 2012. Following the planned completion of the overall project in 2014, the Group expects capacities to double there.

1)	See the Company’s ad hoc release of February 6, 2012.
2)	See the Company’s ad hoc release of August 7, 2012 and the Company’s ad hoc updates of August 15, 2012 and September 25, 2012.
3)	The one-time burden in the amount of EUR 17.1 million before taxes or EUR 16.4 million after taxes for the sale of the Irish production facility was reported as a one-time special effect of EUR 16.8 million before taxes or EUR 16.2 million after taxes in the first quarter of 2012 as well as a further EUR 0.3 million before taxes or EUR 0.2 million after taxes at year’s end. The one-time burden in the amount of EUR 8.4 million before taxes or EUR 8.0 million after taxes for the sale of the two Russian production facilities was reported as a one-time special effect in the third quarter of 2012.
4)	The relevant rental and service contracts for this location were extended in the fourth quarter of 2012 until December 31, 2024.
5)	A production unit which is not integrated and consolidated in the Group, solely aimed at the local market demand.
6)	Both production sites are operated within the framework of a 50:50 joint venture with a local partner.
7)	Since January 1, 2013.