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International sales activities

Serbia

In Serbia, sales decreased in financial year 2010 by 8% applying the exchange rates of the previous year. In euro, the Group recorded a decrease in sales of 16% to EUR 99.1 million (previous year: EUR 118.6 million).

The primary reason for this development was the deliberate avoidance from the second quarter of 2010 by the Serbian sales force of further sales possible in the double-digit million euro area accumulated for financial year 2010, in order to reduce the default risk on receivables for the Group in view of the ongoing liquidity problems on the part of Serbian wholesalers.

Despite this, STADA had to carry out value adjustments on receivables from local wholesalers in Serbia in 2010. Due to liquidity problems on the part of Serbian wholesalers, the Group recognized earnings-burdening one-time special effects in 2010 in the total amount of EUR 34.2 million before taxes. By far the most significant individual case concerned trade accounts receivable due to STADA’s Serbian subsidiary Hemofarm A.D. from the Serbian wholesaler group Velefarm, in which Hemofarm – in addition to a participation of the Serbian state – holds a minority interest. In order to sustainably secure these receivables, a restructuring plan between Hemofarm and Velefarm was signed on September 28, 2010 for the Velefarm liabilities with respect to Hemofarm that, among other things, provides for the appointment of a Chief Restructuring Officer at Velefarm. The restructuring plan is intended to enable Velefarm to pay the outstanding receivables due to Hemofarm on a gradual basis over several years.

In addition, under new management, Hemofarm modified the local distribution model with the goal of improving the risk profile with respect to wholesalers and customers. In the context of a special project, Hemofarm’s cost structure is being rapidly adjusted to the changed environmental conditions, in the context of which specific measures may considerably exceed the optimizations already planned in the context of “STADA – build the future”.

The Serbian STADA subsidiary continued to be the local market leader in the Serbian pharmaceutical market with a market share of approx. 27.0% (previous year: approx. 27.8%).¹⁾ STADA generated sales of EUR 67.7 million with generics in Serbia in 2010 (previous year: EUR 91.1 million). Generics thus contributed 68% (previous year: 77%) to sales in Serbia. Sales of branded products in Serbia amounted to EUR 7.6 million (previous year: EUR 9.0 million) in financial year 2010. They thus had a 8% share of STADA’s sales in Serbia (previous year: 8%).

The operating profitability – i.e. not including the burdening effects primarily of value adjustments on receivables from Serbian wholesalers – of the subgroup²⁾ managed from Serbia including foreign activities, despite the deliberate avoidance of sales, was still at about Group average in 2010.

In Serbia, local sales increased in the first nine months of 2011 in comparison to the extraordinarily low level of the previous year as expected. Applying the exchange rates of the previous year, sales increased by 36%. In euro, sales increased by 37% to EUR 72.2 million (1-9/2010: EUR 52.7 million).

STADA’s sales achieved by generics in the Serbian market rose by 57% to EUR 57.9 million in the first nine months of 2011 (1-9/2010: EUR 36.9 million). Generics thus contributed 80% (1-9/2010: 70%) to STADA’s Serbian sales. Sales of branded products in Serbia recorded growth of 98% in the first three quarters of 2011 to EUR 9.1 million (1-9/2010: EUR 4.6 million). Branded products thereby contributed a share of 13% (1-9/2010: 9%) to STADA’s sales in the Serbian market.

The Serbian subgroup faces technical problems in part of the Serbian production for injection substances which is primarily used for contract manufacturing. In this context, Hemofarm, together with the respective customers, decided to discontinue the distribution of several batches in various European markets as well as the US market in the third quarter of 2011. Due to this decision an extraordinary burden on earnings of EUR 1.4 million before taxes was incurred in the third quarter of 2011. Until the technical problems are completely solved, commercial production will remain discontinued in the respective production line.

In an extraordinary meeting of the Executive Board on September 21, 2011 following a Supervisory Board meeting of the Serbian subsidiary Hemofarm on the previous day, the STADA Executive Board came to the assessment that outstanding receivables due to Hemofarm from various Serbian pharmaceutical wholesalers are potentially, to a significant extent, not recoverable. In connection with this increased risk of default, the Executive Board decided to carry out corresponding impairments and unscheduled depreciation in the amount of EUR 96.9 million before taxes which were reported in the third quarter of 2011 as burdening one-time special effects in the Group. The resulting burden on earnings after taxes was EUR 87.2 million. The liquidity situation at STADA was not significantly burdened from this step because the impairments and depreciation had, for the most part, no effect on cash (see the Company’s ad hoc release of September 21, 2011).

At the meeting of the Hemofarm Supervisory Board, the Serbian management, against the backdrop of a once again worsening global financial and economic crisis, presented its assessment on the impact of the financial and economic crisis on the Serbian economy, on increasing liquidity bottlenecks at the Serbian National Health Care Fund (RZZO) and at various Serbian pharmaceutical wholesalers as well as on the tightening of the application of the Serbian insolvency regulations in 2012. The STADA Executive Board was thus compelled to impair all unsecured receivables as well as the majority of the secured receivables due to Hemofarm from various Serbian pharmaceutical wholesalers with a suspected restricted liquidity situation. In addition, the Executive Board decided to write down the carrying amount for existing minority stakes of Hemofarm in various Serbian pharmaceutical wholesalers (19.65% in Velefarm A.D., Belgrade, and 15% in Vetfarm A.D., Belgrade) to EUR 1.00 respectively. This resulted, as a portion of the burdening one-time special effects, in unscheduled depreciation in the total amount of EUR 3.7 million.

Hemofarm and STADA, in discussions with all local market participants and with the Serbian state, continue to actively seek sustainable solutions for an improvement in the liquidity situation in the Serbian pharmaceutical market and thus also for the servicing of the outstanding Hemofarm receivables. If, as a result, the now extensive write-downs on outstanding receivables due to Hemofarm from Serbian pharmaceutical wholesalers be served to a better extent than anticipated, STADA will report such receipt of payments successively in the respective reporting period as earnings improving one-time special effects.

STADA also assumes that its own operating business in Serbia is fundamentally stable and that it offers further growth opportunities. The inventories of Hemofarm products in local pharmaceutical wholesalers were reduced to a low level as a result of targeted distribution control, so that the currently strong sales growth in the Serbian business is based on stable demand of Hemofarm products in the Serbian market. In consideration of stable demand for Hemofarm products in the Serbian market, the Group continues to expect a sales increase in the local currency in Serbia for financial year 2011 and the following years.

The operating profitability – i.e. not including the burdening effects primarily of impairments – of the subgroup Hemofarm, managed in Serbia, should be slightly above Group average in 2011. This subgroup is still a focus for measures to improve earnings in the context of “STADA – build the future”, which should contribute to further cost savings in the operational business and will result in a further optimization in the number of employees there over the coming years.

The extensive value adjustments in Serbia in the third quarter of 2011 gave reason to examine the value of goodwill in the Hemofarm Group throughout the year. The respective impairment test as of September 30, 2011 on the basis of the current sales and earnings prognoses of the local Serbian management revealed no necessity for an impairment on goodwill for the subgroup Hemofarm.

The financial and earnings situation of this subgroup will continue to be largely characterized by the further development of the liquidity situation of the wholesalers and distribution partners in the Serbian market. In addition, the sales and earnings contributions of STADA’s Serbian subgroup will continue to predominantly depend on the currency relation of the Serbian dinar, in which this subgroup consolidates all results, to the euro.

1)	STADA estimate based on IMS Health data at ex-factory prices.
2)	The subgroup managed from Serbia includes Serbia along with other countries mainly in the CEE area and parts of the STADA business in the Russian Federation as well as their export activities.