Leadership review from our chairman and ceo

  CLIFFORD RAPHIRI CLIFFORD RAPHIRI
Chairman		   ANDREW HALL ANDREW HALL
Chief executive officer

As each year commences, we are inspired to move the business forward for the benefit of the users of our products, our shareholders, our employees, our customers, the communities in which we operate and associated stakeholders. It is common cause that Adcock Ingram has been in remedial mode for at least the past two years. It is therefore with a sense of pride and pleasure that we communicate the satisfying progress made this past year, not only on economic and operational matters but especially on customer service levels and customer relationship management. In review, this has been an excellent year and the positive results are confirmation of the strategic path chosen for the business.

CHANGES TO THE BOARD

The start of the year saw various changes to the Board with the appointment of Clifford Raphiri as the Company’s non-executive Chairman. Former chairman, Brian Joffe, assumed the role of Deputy Chairman. The Group also saw the departure of the previous Chief Executive Officer (CEO), Kevin Wakeford and the appointment of Andy Hall, to this position. Dorette Neethling, the Group Finance Executive was appointed as Chief Financial Officer and as firm evidence of the Company’s commitment to its Transformation strategic imperative, Basadi Letsoalo was appointed as Executive Director: Human Capital and Transformation. We are grateful to Brian and Kevin for the vision and leadership they provided in implementing the restructuring and placing the business on a solid foundation, now well-positioned for its next phase of growth.

INDUSTRY

Providing affordable and accessible healthcare to all citizens of South Africa remains a key strategic initiative of the Government. The pharmaceutical industry is therefore a key stakeholder of the National Department of Health, and at Adcock Ingram we take our responsibility of providing affordable, safe and effective medicine seriously.

The annual adjudication of the single exit price remains a concern, as annually determined increases have failed to cover the cost increases faced by the industry, particularly the cost of importing active ingredients and medicines in finished form. This controlled pricing environment has made our task of maintaining margins extremely difficult. On a positive note, the three-year extension of the Schedule 0 exemption, which allows products in this scheduling category to be subject to free pricing, is welcomed.

The continuing delay in the registration of new medicines continues to be a hindrance that will hopefully be addressed with the launch of the South African Health Products Regulatory Authority (SAHPRA) during 2017. In the interim, the Medicines Control Council (MCC) recently announced an initiative to implement measures to reduce the backlog. A spirit of cooperation between the MCC and industry is evident in these efforts, which we trust will produce positive results in the near future.

The Consumer and OTC divisions are dealing well with regulatory issues that affect their businesses, including the regulation of complementary medicines and the regulations implemented to improve the control of codeine-containing medicines.

PERFORMANCE

Our aim during the past year was to give attention to the investments in the rest of Africa and India, while consolidating our position in South Africa by continuing to focus on customers, products and service.

A comprehensive review of the infrastructure and operations of the foreign enterprises was undertaken, specifically for the purpose of evaluating the feasibility and future commercial prospects. This resulted in the Company’s decision to exit the Indian pharmaceutical sales and marketing business, as it did not meet Company’s current investment criteria. An agreement was signed with Samara Capital Partners Fund II Limited, an India-focused private equity firm, for the disposal of the entire shareholding. The Foreign Investment Promotion Board in India has approved the transaction, subject to certain conditions which the parties are evaluating.

The drug regulatory arm of the Indian business will remain as an essential support function to the Group’s operations in South Africa. Adcock Ingram remains fully committed to the joint-venture manufacturing facility in Bangalore, with Medreich, now owned by a Japanese partner, Meiji Seika.

The Group also concluded an agreement with Dannex Limited regarding the Ayrton business in Ghana. Dannex is a Ghanaian company very familiar with the local environment, and will acquire a controlling stake in the business while Adcock Ingram will retain 25,1%. The deal is subject to certain regulatory approvals from the Ghana Stock Exchange and Securities and Exchange Commission.

The Group’s persistent focus on customers, services and products led to market share gains across all four commercial divisions.

According to IMS, the total private market grew by 6.7% in value but only 0.4% in volume on a 12-month moving annual total basis to 30 June 2016. Adcock Ingram’s growth in value and volume is reflected at 11.0% and 3.6% respectively, adding credibility to the efforts of the sales and marketing teams, and is reflective of the Group’s resilient and well-diversified portfolio. Adcock Ingram’s market share by value and volume has grown to 9.0% (June 2015: 8.6%) and 21.4% (June 2015: 20.1%) respectively. This in-market effort led to growth in sales and trading profit in every division, culminating in the generation of R941 million of cash from operations this year, and reducing net debt over the two-year period since the restructuring, from R1,082 million to R217 million.

GOVERNANCE, ETHICS AND RISK

The Board recognises that a corporate culture which promotes ethical behaviour supported by honest and open communication with all stakeholders is integral to good governance. Ethical behaviour, fairness, accountability and transparency are essential to building stakeholder confidence in the Group. We actively pursue transformation and ensure employment practices which maximise the potential of our employees. Further, we accept responsibility for the sustainability and environmental issues associated with this business.

In performing its functions, the internal audit team provides assurance to the Board, regarding the effectiveness of the Group’s network of governance, risk management and internal control processes and systems.

The Board is satisfied that the executive team in each division is constantly aware of risks and actively seeks ways in which to overcome and influence controllable risks and minimise the impact of uncontrollable risks. A summarised overview of Risk Management is featured.

FACILITIES

Manufacturing is key to our business, and differentiates us as one of only a few local pharmaceutical manufacturers in South Africa. The upgrade of the Group’s facilities receives ongoing attention, whether it be to meet regulatory requirements or entails expansion and modernisation.

In the high-volume liquids facility in Clayville, throughput continues to increase and we are satisfied with the progress in that regard. The effervescent plant is struggling to meet demand for Citro-Soda and vita-thion, so we are in the process of procuring a high-speed automated sachet packing machine for that area. Reliable and consistent supply of ophthalmic products and other steriles from certain third party manufacturers remains an issue. The Group has therefore decided to embark on a three-phase project to build an ophthalmic facility within the Clayville factory, and we expect the first phase to be fully implemented in two years.

The Wadeville tabletting facility is still running well below capacity but we have seen improvements in the current year in the ARV business. The liquids, creams and ointments facility is operating at or near capacity and we intend to invest an additional R40 million in that part of the factory over the next three years, to address regulatory changes and improve flexibility.

As always, our Critical Care facility in Aeroton is well utilised and continues to operate at full capacity in almost all areas.

TRANSFORMATION

In the face of the revised B-BBEE codes we were pleased to have achieved a rating of Level 4 for the current period.

Our people are encouraged to try in every way possible, to live transformation in the Company, and to strive towards improving our performance in this important area, through making meaningful change.

We are dedicated to this imperative for the local business and continue to score well in the areas of Preferential procurement, Skills development, Enterprise development and CSI. We need to give greater attention to Employment equity and Management control and are scaling up plans to improve against these measures.

Adcock Ingram’s owner-driver scheme, was developed to give promising candidates ownership of a business, while realising the Company’s commitment to support enterprise supplier development. Eight more vehicles were recently added to the fleets of the owner-drivers that are based in Johannesburg, Cape Town and Durban, bringing the total number of vehicles to 52, under the control of 19 entrepreneurs.

In line with our commitment to be involved with the communities in which we operate and to undertake sustainable initiatives, we have continued to support our flagship projects, and also supported various smaller community initiatives nominated by employees.

We once again funded a week of surgical interventions organised by the Smile Foundation at the Tygerberg Hospital, which gave 43 children the opportunity to have life changing surgery to repair facial deformities. Our continuing support for the Leratong Hospital in Krugersdorp, contributed to the refurbishment of certain wards. One of our most gratifying initiatives has been our work to distribute containers of water to drought stricken areas of the country. It has been most rewarding to see employees volunteering over weekends, to deliver the much-needed water.

WAY FORWARD

We are now in a position, with reduced distraction from non-core business interests, to focus on the necessary growth investment required for the local business. We will continue to concentrate on investment in our brands, striving for excellence in customer relationships and the improvement of service levels within the operating divisions.

The Group is focused on searching for appropriate acquisitions to bolster our non-regulated portfolio, building mutually beneficial partnerships and innovating within our current product portfolio.

We are building partnerships – especially building on the successes we have had this year with various multinationals. We strive for greater innovation, where we have a number of launches planned for 2017 and continue to explore new customer channels such as exports and the informal sector.

APPRECIATION

We thank all those who have contributed to the business in any way during the year, especially our customers, suppliers, partners and employees. We will continue to deliver on our promise of ‘Adding value to life’.