Adcock Ingram Integrated Report 2018

ANDREW HALL Chief Executive Officer Leadership review from our Chairman and CEO INTRODUCTION With another successful financial year behind us, we are pleased to present the Company’s 2018 Integrated Report to stakeholders. Despite a multitude of challenging factors, our financial results are testament to the fact that the business is progressing at a balanced pace. Our commitment and promise are very much evident through the efforts of all divisions, who are focused on living up to our values and ethos of ‘Adding value to life’. Heart-warming initiatives include the launch of the“Shoes for Africa”project with Netcare (page 41) as well as the introduction of the new Claria peritoneal dialysis machine by our Hospital business (page 31 ) which both added value to the lives of the people we serve. Through humble beginnings that date back to 1890, starting off as a community pharmacy in Krugersdorp, Adcock Ingram celebrated ten years of being a relisted company on the Johannesburg Stock Exchange (JSE) on 25 August 2018. Today the Company has a market capitalisation of over R10 billion. ENVIRONMENT After an uncertain economic start to 2017, the economy saw positive growth of 1.3% during 2017. This situation changed in 2018, as the economy contracted by 2.6% in the first quarter and shrank by 0.7% in the second quarter of the year. This has put South Africa in a technical recession, the country’s first since the 2008/9 global financial crisis and an undeniable indication that the economy and consumer are under stress. South Africa’s consumer inflation increased to 4.6% in June 2018 after having reached a seven-year low of 3.8% in March 2018. The 1% increase in the Value Added Tax (VAT) rate, which came into effect on 1 April 2018, coupled with the recent increase in fuel-related levies and the weakness of the Rand, and high levels of unemployment, will continue to have an adverse impact on consumer spending. The Company operated in a weak economic and uncertain political climate for much of the past financial year. We embrace the renewed sense of optimismwhich followed the leadership change in South Africa. With the general election coming up in 2019, we expect that the uncertainty surrounding the outcome will continue to have an impact on business and consumer confidence. The current economic climate, with the country now in technical recession, is of concern to us, but we remain confident in our broad range of quality affordable medicines. INDUSTRY OVERVIEW The pharmaceutical industry is multifaceted and with those dynamics, we experience our fair share of complexities as an organisation. This includes keeping abreast of regulatory shifts in the healthcare space and making the necessary adjustments throughout the business when those changes are effected. The recent transition from the Medicines Control Council (MCC) to the South African Health Products Regulatory Agency (SAHPRA) has been welcomed by key role-players within the industry. There was a cautious sense of optimism that this changeover would reduce medicine approval times and alleviate the backlog of thousands of registration applications. SAHPRA is however experiencing significant operational challenges of its own which have led to a virtual standstill in regulatory submissions, an extremely worrying matter for Adcock Ingram and the industry as a whole. The National Health Insurance (NHI) Bill, Medical Schemes Amendment Bill and Health Market Inquiry Report have all recently been issued. Adcock Ingram has made its comments through the various industry bodies in which it participates. The NHI Bill was published in the Government Gazette on 21 June 2018. This Bill paves the way for the Health Department to set up an NHI fund that will purchase healthcare services on behalf of the nation in line with the government’s vision of introducing universal healthcare. Adcock Ingram is supportive of any initiative which enhances access of medicines to the public, within an environment that ensures the sustainability of the local pharmaceutical manufacturing industry. As a Company that operates in both the regulated and non-regulated space, the determination of the annual single exit price (SEP) increase by Government is a challenging uncertainty. The lowest SEP increase in a decade, of 1.26%, needs to be seen in the context of growing costs including a 20% decline in the value of the currency in mid-to-late 2018 (which impacts the cost of the imported active pharmaceutical ingredients and finished goods which are not locally available), as well as utility and wage increases well ahead of inflation. This poses a number of challenges to Adcock Ingram and the industry, including the sustainability of the local manufacturers. Adcock Ingram is engaging constructively with the National Department of Health through the Pricing Committee on whether any short-term relief on SEP will be available. CLIFFORD RAPHIRI Chairman ADCOCK INGRAM  Integrated Report 2018 16 OUR PERFORMANCE