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How is STADA positioned strategically?

Strategic focus on markets with long-term growth potential

The increasingly international orientation of business activities at STADA Arzneimittel AG and STADA’s Group companies are focused on the health care market, in particular the pharmaceutical market. For years, these markets have recorded a growing demand worldwide; also for the years to come, external analysts forecast further growth of these markets. The constant growth trends in the markets will be, in particular, medical progress increasing life expectancy in industrial countries and global population growth.

Core segments Generics and Branded Products

In the health care and pharmaceutical market, STADA concentrates on the development and marketing of products with active ingredients – generally active pharmaceutical ingredients – which are free from commercial property rights, particularly patents. Due to cost and risk aspects, STADA deliberately does not carry out any research into new active pharmaceutical ingredients.

In accordance with this strategic alignment, Generics and Branded Products are the Group’s two core segments:

• Products for which the focus of sales and marketing is on a low pricing and/or on a cross-product and active-ingredient marketing concept are, in the scope of the Group’s segmentation, part of the core segment Generics;
• Products for which the specific product characteristics and in particular also the brand name of the respective product are at the forefront of marketing are part of the core segment Branded Products.

Non-core activities comprise businesses and equity interests in fields outside the two core segments at STADA. These non-core activities are aimed at supplementing and supporting the Group’s business in the core segments.

Challenging conditions

Inherently linked to the historical and projected continuous growth of the markets in which STADA is active are also challenging conditions.¹⁾

The good growth opportunities thus attract intense competition. In addition, these markets are strongly characterized by regulatory influences. Because it is one of the central tasks of each country to provide as many of its citizens as possible with access to health care at acceptable cost. Therefore, the continuous increase in demand in the health care and pharmaceutical market leads to constant cost pressure in nearly all national health care systems, regularly entailing cost saving state regulation.

The health care policy interventions in local regulatory framework conditions that must always be expected thus have a particularly strong effect on generics. Such interventions can have a curbing effect if, for example, a state regulates direct price reductions, but they can also have a stimulating effect if, for example, stronger regulatory incentives for the prescription of low-price generics are given in a national health care system.

In addition to these industry-specific challenges, STADA also faces general business risks.

Flexible and lean operative alignment

STADA’s strategic response to this structural environment lies in a lean and above all flexible operative alignment. Rapid change in response to altering conditions with, at the same time, high cost sensitivity are decisive success factors for STADA, characterizing therefore the operative alignment in all of the Group’s functional areas.

International sales infrastructure

An essential factor for success of STADA’s business model is the international sales network which includes numerous nationally focused sales companies which are thus close to the market and are supported and monitored by central Group functions. Through its local sales presence in the individual national markets, which due to the different health care systems differ strongly, the Group is capable to take advantage of the respective structural growth potential for its own growth. In order to rapidly adapt to the frequent variations in structural conditions of the respective national health care markets, STADA’s local sales companies have a high level of sales autonomy. In individual national markets, STADA thereby also relies on sales companies which operate parallel to one another or focus on specific market segments if the respective market structures require this to take optimal advantage of the potential. 

Continuous portfolio expansion

The continuous expansion of its product portfolio – visible in form of the high annual number of product launches within the Group – is a central success factor for STADA. In view of costs and regulatory requirements, the objective of the Group’s development activities that are based on many years of experience – also including the use of external development partners – is to provide the sales companies with a product portfolio that is always up to date. This applies in particular to generics for which the launch of new products promptly after expiration of the commercial property rights is one of the central operative success factors. For several years already, STADA has been selectively increasing the in-house development of important active pharmaceutical ingredients to reduce supply commitments, which are frequently associated with the use of external development partners, and thereby to optimize the procurement and production costs. 

Continuous cost optimization

Particularly of its larger core segment Generics, STADA has a price-sensitive business model. Therefore, an important success factor of the Group is the continuous cost optimization. Within the framework of this ongoing cost optimization, one focus continues to be cost of sales. For reasons of flexibility and cost, STADA does not normally carry out its own production of raw or auxiliary materials, utilizing instead a worldwide network of raw materials suppliers.

STADA has recourse to a flexible, international network of internal and external resources in the area of pharmaceutical production²⁾. Here particularly the production facilities acquired and expanded over the last few years in the low-cost countries have made their corresponding contribution. Within the framework of the production strategy, the large production sites in South East Europe, Russia and Vietnam play a special role, as STADA – in view of the continuous cost optimization – is increasingly transferring production activities into these cost effective Group-owned production facilities. Due to the contracts that already exist, however, these are longer-term processes. With a view to the continuous cost optimization in the area of cost of sales, the Group will also continue these comprehensive transfer processes in the future.

In 2009, the Group – with the involvement of external advisors – initiated the “STADA – build the future” project aiming to strengthen the mid and long-term earnings potential. In financial year 2010, STADA began the consistent implementation of this Group-wide project, which aims for a reduction of complex Group structures, more efficient centralized control of Group companies as well as an acceleration of the continuous cost optimization with a focus on the fields of cost of sales/production locations as well as organizational, reporting and personnel structures.

In this context, the Group carried out a comprehensive reform of internal reporting lines in 2010. The reporting structure, previously mainly locally aligned, was changed to a primarily functional organizational structure for the areas of Finance as well as Production and Development and Procurement. In the reporting year, STADA centralized and streamlined previous service functions of the subsidiaries, such as product development, pharmaceutical approval, production, purchasing and procurement, quality management, information technology, strategic planning and finance under the uniform operational leadership of the Group.

The centralization of the service functions, which also requires a new, accelerated reporting system, integrates the capacities and expertise of the subsidiaries more efficiently into the Group. At the same time, the STADA sales companies in the individual national markets remain decentrally organized, so that they continue to be responsible for their local sales. However, the individual corporate areas of the respective subsidiaries report directly to global line managers, who in their corporate function, are responsible for and control all processes and functions related to their area in the STADA Group, regardless of location or subsidiary. Due to this organization, the individual subsidiaries now have more direct access to the Group’s financial, personnel and knowledge-related resources.

In the view of the Executive Board, STADA can use this central organizational structure to best counteract the challenges related to frequent regulation, continuous cost pressure and increasing importance of economies of scale effects, as this structure combines the advantages of flexible and local sales units i.e. operating independently in their respective markets with a central and therefore efficient organization in the operating area. This leads in turn to higher level of transparency and further cost optimization.

The sale or abandonment of production facilities and outsourcing individual functional areas to third-party providers will also contribute to the continuous necessary adjustment of the organizational, reporting and personnel structures to economic requirements in the context of the "STADA - build the future" project. This will also result, in the short and mid-term, in significant staff reductions in all Company divisions and regions, which, including outsourcing and sales, involves approx. 800 full-time positions and thus approx. 10% of the personnel level in the Group as of the beginning of financial year 2010. The focus of the staff reductions will be outside of Germany.

The implementation of “STADA – build the future“ is expected to be completed in 2013. The Group expects positive effects on earnings as a result of the project for EBITDA adjusted for one-time special effects and the correspondingly adjusted net income to a significant extent from the current financial year 2011 and mainly in 2012. By 2013, from today’s perspective, project-related investments of a total of approx. EUR 20 million as well as project-related expenditure for special write-offs, personnel expenses and consultancy services of a total of approx. EUR 50 million are expected (each including the past financial year 2010). The Group will recognize each of these project-related costs as a one-time special effect according to progression of the project. In the case of the sale of production facilities in Ireland and Russia, currently evaluated in the context of “STADA – build the future”, a significant expense in the low net double-digit million area would be expected for 2011.

STADA transferred the Dutch packaging unit in Etten-Leur in 2010. According to the contracts agreed, the Group can draw on the capacities of the transferred unit for a transitional period at fixed costs to a variable extent determined by STADA. In the context of the transfer, the 113 employees were also transferred to the acquiring company. In addition, the Group implemented a restructuring of the sales of branded products in Italy in 2010, which led to a reduction of the relevant sales force. Measures in the context of the “STADA – build the future” project led to total expenses in the amount of EUR 16.2 million before taxes in 2010.

STADA sold a small chemical plant in Serbia in the first quarter of 2011, as these activities do not belong to the Group’s core business. The Group introduced a functional consolidation of all German activities in the area of product development and quality management at the Bad Vilbel location. In this context, STADA negotiated with the Works Council a balancing of interests and social compensation plan for 15 employees at the Laichingen location.

STADA initiated in the second quarter of 2011 the evaluation of a possible sale of the Irish production facility, which is expected to be completed by the end of the year. In addition, the evaluation of the sale of two Russian production facilities was also initiated in the second quarter. The successive transfer of the production volumes of these three production facilities to other STADA-owned production facilities, which has also already been initiated, will improve the utilization there and thus lower unit costs of the respective products in the medium term. If the respective facilities are sold, a significant expense in the low net double-digit million area is, however, initially to be anticipated, as expected and already announced in the context of the publication of the “STADA – build the future” project in 2010.

In addition, in the course of further implementing the Group-wide cost efficiency program, STADA continued to restructure the sales model for the Russian market, in the process of which the number of local employees was reduced due to an increased concentration of sales activities there. Furthermore, the Serbian STADA subgroup remained a focus for measures to improve earnings in the context of the “STADA – build the future” project, which also include a further optimization in the number of employees there over the coming years.

In the first half year of 2011, the expenses in the context of the “STADA – build the future” project amounted to a total of EUR 5.5 million before taxes.

Cost optimization potential can also be expected in the sales area. For fully developed national sales companies, the continuous expansion of the current product portfolio is frequently possible without the additional need for sales capacities. This is associated with cost-reducing economy of scale effects. Furthermore, it is regularly assessed whether in case of changed demand mechanisms for Group products the sales capacity can be modified, adapted or reduced in the individual markets.

STADA Group’s long-term targets taking into account the “STADA – build the future” project

On June 7, 2010, in the second quarter of 2010, the STADA Executive Board adopted the long-term growth targets for the Group.³⁾ According to these targets, STADA aims, in five years, i.e. in financial year 2014, to achieve EBITDA in the amount of approx. EUR 430 million. EBITDA of EUR 280.1 million was achieved in financial year 2009 – the last full financial year before publication of these long-term targets. From this, STADA calculates a value of approx. EUR 215 million for net income achievable in 2014. Net income of EUR100.4 million was achieved in 2009. From today’s perspective, Group sales are expected to reach approx. EUR 2.15 billion in 2014. Group sales of EUR 1.57 billion were achieved in 2009. This growth forecast by STADA is based on the following assumptions and framework conditions:

• predominantly organic growth
• no significant disposals with an effect on sales and earnings
• forward projection of current currency relations and the current interest rate level
• without consideration of one-time special effects
• forward projection of current regulatory conditions in the markets relevant for STADA
• range of the forecast plus/minus 5%

Accelerated acquisition policy

In addition to STADA’s organic growth, the Group’s acquisition policy is the basis of the sustainable and successful growth course. STADA can thereby rely on its many years of experience in selecting suitable acquisition objects as well as in integrating acquired products and companies into existing business activities.

With a view to the continued concentration of processes in the industry, the Executive Board intends to complement the Group’s organic growth with further external growth impulses. Against this backdrop, STADA is again pursuing an accelerated approach to acquisition. The Group will focus on the one hand on the regional expansion of business activities with concentration on high-growth emerging markets. On the other hand, the expansion and internationalization of the Branded Products core segment, which is generally characterized by better margins and less regulatory intervention than the generics area, should be even further expanded. Additionally, the Executive Board still does not rule out cooperations with significant capital investments.

Despite the accelerated approach to acquisition, the criteria of STADA’s acquisition policy remain strict and geared towards profitability and appropriateness of the purchase price. For larger projects such as acquisitions or cooperations with capital investments, appropriate capital measures continue to be imaginable in the future if the burden on the equity-to-assets ratio from such acquisitions or cooperations is too high.

In the second quarter of 2011, STADA signed contracts for the purchase of the British branded product Cetraben^® in the second quarter of 2011.⁴⁾ The sellers were various companies and a private individual. The purchase price amounts to GBP 30 million (approx. EUR 34.6 million). STADA used cash on hand to finance the acquisition.

Since 2006, the British STADA subsidiary Genus Pharmaceuticals has sold, under the Cetraben^® brand, a moisturizing cream and bath essence in the therapeutic area of dermatology for the treatment of skin eczema and dry skin as a licensed product in the UK. On completion of the contractually agreed purchase, these previously in-licensed products will be transferred to the ownership of Genus Pharmaceuticals. In 2010, Genus Pharmaceuticals generated sales of GBP 7.5 million (approx. EUR 8.7 million) with these high-margin and seasonally independent products and thus achieved sales growth of 27% compared to 2009.

Between 2006 and 2010, Genus Pharmaceuticals generated average annual growth rates of 30% with these products. After the purchase, the Company, from today’s perspective, sees good chances of maintaining this strong growth at a similar level. The planned introduction of further products under the Cetraben^® brand name is also expected to contribute to this.

The acquisition of the Cetraben^® branded products secures both products, whose license agreement would have expired at the end of 2012, for the product portfolio of Genus Pharmaceuticals in the long term. In addition, the profitability of Genus Pharmaceuticals will be considerably improved as a result of the license payments previously in the amount of 15% of net sales, which will no longer be applicable in the future.

In the context of the acquisition, STADA acquired the brands, the approvals, the product pipeline and the domain names for Europe and a large number of Eastern European countries including Russia as well as joint ownership of the dossier. The STADA Group therefore also has the opportunity to internationalize the Cetraben^® products and thus develop additional growth impulses for both products. Furthermore, the acquisition will allow STADA to further expand its expertise in the area of dermatology.

In addition, in the second quarter of 2011, STADA used the contractually agreed option to increase the shareholding in the Vietnamese pharmaceutical company Pymepharco Joint Stock Company – the business activities of which include the production and sale of pharmaceutical products as well as import activities for the Vietnamese health and pharmaceutical market – from 23.7% to the maximum amount of 49% in order to benefit even more from the growth opportunities in Vietnam in the future. The purchase price for this investment amounts to a total of EUR 25.2 million, of which EUR 15.1 million was paid in the second quarter of 2011.

Furthermore, in the second quarter of 2011, STADA and Grünenthal GmbH, a globally active research pharmaceuticals company located in Aachen, Germany, agreed to negotiate exclusively on the purchase of a branded product portfolio including the associated sales structures for numerous national markets in Central and Eastern Europe as well as in the Middle East.⁵⁾ In the third quarter of 2011, both negotiating partners signed the respective contracts.⁶⁾

The purchase price for the branded product portfolio including sales structures and various pipeline products amounts to a total of approx. EUR 360 million in cash. The products, which include, among others, the branded products Tramal^®, Zaldiar^®, Transtec^® and Palexia^® in the relevant countries, are for the most part prescription drugs and positioned primarily in the pain area of indication. Expected sales in the current financial year 2011 for the existing product package in the respective markets amounts to approx. EUR 68.6 million. The expected EBITDA in the same period should be approx. EUR 25.6 million. Both values do not yet consider the sales and earnings of the licensed product Palexia^® from the acquired product pipeline, which will be gradually introduced in the contract area in the next two years and from which thereafter an additional annual sales contribution of EUR 20 to EUR 25 million is expected.

The acquired product portfolio consists of over 14 own and licensed brands for Central and Eastern Europe as well as the Middle East. The products are currently sold in the contract area in Poland (approx. 30% share of sales), Russia (approx. 20% share of sales), Czech Republic, Slovakia, Slovenia, Romania, Bosnia, Serbia, Croatia, Latvia, Estonia, Ukraine, Hungary, Saudi Arabia, Kuwait, Lebanon, Jordan, the United Arab Emirates, Egypt, Yemen, Oman, Bahrain and Qatar and are each generally market leader in the relevant area of indication. With the purchase, STADA also takes over all legal sales units in these markets, along with the approximately 240 employees – thereof about 70% sales representatives – as well as the brand names and existing licenses. Grünenthal will itself continue to market the products in all other markets outside of the contract area under the same brand names. In addition, STADA has acquired all rights to these products for the national markets of the contract area in which the products acquired have not yet been introduced.

The purchase does not include any production facilities. For a contractually agreed period, Grünenthal will continue to manufacture the products for STADA, insofar as these are not licensed products. For the licensed products, STADA seeks a long term entry into the existing license and supply contracts. If, contrary to expectations, this is not possible, an appropriate reduction in the purchase price is called for.

The acquisition requires the approval of the responsible anti-trust authorities, so that the implementation of the transaction and the consolidation of product sales is expected for the current fourth quarter. Payment of the purchase price will be made at the time of completion of the acquisition.

STADA will use cash on hand and existing free credit lines to finance the acquisition. STADA currently reviews – also with regard to interest expenses – the renewed use of promissory notes as an alternative to a considered further corporate bond, and does not see, due to existing offers, any difficulties in agreeing a long-term refinancing in a significant amount in the current fourth quarter.

With the acquisition, the STADA Group strengthens its presence in Central and Eastern Europe, one of the largest growth regions in the world, and further expands its basis in the Middle East and thus its international presence overall. Moreover, STADA opens up new strategic distribution channels for appropriate products from the comprehensive Group portfolio which in future can also be marketed as branded products via the acquired sales structures in the respective markets in Central and Eastern Europe as well as the Middle East.

In addition, STADA resolved in the second quarter of the current financial year to enter into concrete negotiations with the shareholders of Spirig Pharma AG, a Swiss pharmaceuticals company based in Egerkingen, on the acquisition of Spirig’s generics business in Switzerland.⁷⁾ In the current fourth quarter, both negotiating partners signed the respective contract.⁸⁾

The purchase price for this generics business amounts to a total of approx. CHF 97 million (applying the exchange rate of the date of the signing of the contract, approx. EUR 78 million) and also includes the right to continue marketing the purchased products under the Spirig umbrella brand. The acquired portfolio includes 56 prescription (RX) and 15 non-prescription (OTC) and discretionary prescription (OTX) products. With regard to the acquired products, STADA estimates the current annual sales volume to be approx. CHF 42 million (applying the exchange rate of the date of the signing of the contract, approx. EUR 34 million) and EBIDTA, adjusted to the business structure being spun off, to be approx. CHF 9.5 million (applying the exchange rate of the date of the signing of the contract, approx. EUR 7.7 million). The acquisition under consideration does not include any production facilities.

The transaction is subject to usual completion conditions as well as the condition that Spirig hive off the target business to an independent business unit. The purchase is srived to be completed in the first quarter of 2012. Payment of the purchase price will be made at the time of completion. STADA will use cash on hand and existing free credit lines to finance the acquisition.

In the third quarter of 2011, STADA and Gedeon Richter signed two separate license and collaboration agreements for the development and marketing of two biosimilar products for the two monoclonal antibodies Rituximab and Trastuzumab.⁹⁾ STADA, as is known, has done preparatory work for a biosimilar for the biopharmaceutical active ingredient Trastuzumab, which, however, was stopped at the end of 2010 because STADA made the strategic decision to pursue the lower-cost approach of an in-licensing. The stage of development that STADA had reached up until that point was acquired by Richter as part of a contract concluded for a low single-digit million euro figure, in order to thus accelerate the ongoing own development for a Trastuzumab biosimilar. The earnings before taxes of EUR 1.8 million thereby achieved were recorded as a relieving one-time special effect.

In the fourth quarter of 2011, STADA purchased a 20% share in the French company AELIA in order to further strengthen its sales presence in the French market, which STADA will include as an associated company using the equity method in the consolidated financial statements for the first time in the fourth quarter of 2011. The purchase price amounted to EUR 1.0 million.

1)	For a comprehensive presentation of the risks for the Group anticipated by the Executive Board from today’s perspective: see “Risk Report” in the Annual Report 2010.
2)	Pharmaceutical production: Conversion of pharmaceutical substances into a dosage form and its packaging into a finished pharmaceutical product, e.g. tablet.
3)	See the Company’s ad hoc release of June 7, 2010.
4)	See the Company’s corporate news of May 26, 2011.
5)	See the Company’s ad hoc release of May 12, 2011.
6)	See the Company’s ad hoc update of July 22, 2011.
7)	See the Company’s ad hoc release of May 19, 2011.
8)	See the Company’s ad hoc update of November 9, 2011.
9)	See the Company’s corporate news of August 30, 2011.