annual report 2008 · care sector on european markets, specifically focusing on central and eastern...

PGF Annual Report 2008 1

Annual Report 2008

We are there to protect your health

2 PGF Annual Report 2008

Financial highlights for 2005-2008

2008/20072005 2006 2007 2008

Sales revenue

EBITDA

Operating profit

Net profit

Net profit attributable to equity holders of the parent

Balance-sheet total

Equity

P/E

PLNm

PLNm

PLNm

PLNm

PLNm

PLNm

PLNm

x

3,890.7

92.5

75.5

54.3

52.6

1,445.4

257.4

14.2

4,007.6

108.4

87.0

63.0

62.5

1,490.4

291.2

15.8

4,410.5

113.7

93.0

73.7

74.4

2,011.7

406.6

15.1

5,095.8

109.6

83.5

51.5

52.1

2,242.5

444.4

6.6

16%

-4%

-10%

-30%

-30%

11%

9%

-56%

2005 2006 2007 2008

Stock highlights for 2005-2008

2008/2007

x

PLN

PLN

PLN

PLN

PLN

PLNm

No. of shares

Last trading day price

52-week high

52-week low

EPS

Dividend per share*

Market capitalisation

12,361,263

60.7

63.5

47.7

4.3

2.2

750

12,450,967

79.5

90.0

71.8

5.0

2.4

990

12,588,240

89.1

125.4

70.3

5.9

2.4*

1,122

12,528,713

27.3

93.3

23.0

4.2

0.0**

342

*dividend paid out: PLN 2.40 per share + buy back (PLN 2.43 per share in total)**planned buy back value: PLN 3.89 per share; actual buy back value: PLN 0.58 per share

0%

-69%

-26%

-67%

-30%

-100%

-70%


5000

4000

3000

2000

1000

0

Sales revenue (PLNm)

3158 3490 3639 3891 4008

44115096

2002 2003 2004 2005 2006 2007 2008

80

60

40

20

10

0

Net profit attributable to equity holders of the parent (PLNm)

22.636.6

47.052.6 52.1

62.574.4

2002 2003 2004 2005 2006 2007 2008

2002 2003 2004 2005 2006 2007 2008

4.16

5.915.02

4.263.84

2.991.84

14 PGF regional companies

(wholesale to pharmacies in Poland and logistics

services in direct distribution system)

Polska Grupa Farmaceutyczna

seRvices to PhARmAcies

wholesale distribution and logistics

PGF Urtica sp. z o.o.

(wholesale to hospitals in Poland)

14 PGF regional companies

(wholesale to hospitals)

PGF Urtica

seRvices to hosPitAls

wholesale distribution

ePRUF s.A.

(payroll systems for drug producers)

Farm-serwis sp. z o.o.

(financial services to pharmacies)

Bss s.A.

(financial and accounting services)

Pharma Partner

(services to producers)

NDs DePo s.A.

(real estate management)

Bez Recepty sp. z o.o.

(publishing)

other PGF Group companies

otheR heAlthcARe seRvices

DoZ s.A.

(operating company in Poland - operator of

the I Care for My Health chain of pharmacies)

UAB NFG

(operating company in Lithuania - operator

of the Gintarine Vaistine and the Norfos Vaistine chains of pharmacies)

DoZ UK ltd

(operating company in the UK - operator

of the I Care for My Health pharmacies in London)

central european Pharmaceutical

Distribution

seRvices FoR PAtieNts

retail sales and pharmaceutical care

Bussiness support solutions(support functions)

PGF Group

the PGF Group operates on the health care market in Poland and

Lithuania. Our core-business is wholesale and retail distribution

of pharmaceuticals.

We operate in the following four business segments:

• services for patients: retail sales and pharmaceutical care through

the chain of company-owned, franchised and partner pharmacies,

including a total of 2,300 outlets, which in Poland operates under the

name of „I Care for My Health” pharmacies and in Lithuania – under

the Gintarine Vaistine and Norfos Vaistine brands;

• services for pharmacies: a portfolio of 25 thousand pharmaceuticals

supplied to over 10,000 pharmacies from 14 warehouses operating

under the PGF brand in Poland and the Limedika brand in Lithuania;

• services for hospitals: pharmaceuticals supplies and financial

services under the Urtica and PGF brands;

• services for producers: logistics services (including direct dis-

tribution), financial services, call centre support and marketing

services.

Other activities include support functions for the business segments:

receivables management, property management, as well as financial

and accounting centre.

In 2008, the PGF Group’s revenue exceeded PLN 5bn. Our companies

employed almost 6.4 thousand persons. The PGF’s history dates

back to 1990. Our shares have been listed on the Warsaw Stock

Exchange since 1998. Since inception, the Company has been run

by its founders.

We strive to deliver medicinal products wherever there is a need to do so more efficiently, cost-

effectively and safely

current footprint prospective markets for PGF in Central Europe

> Spis treściDescription of the PGF GroupOur HistoryLetter to Shareholders Management BoardSupervisory BoardCorporate GovernanceKey Events in 2008

the PGF on the stock exchange

the PGF GroupDevelopment Strategy Legal EnvironmentMarket Environment

services for PatientsRetail Distribution MarketCentral European Pharmaceutical Distribution NV

services for PharmaciesServices for PharmaciesWholesale Market in 2008Logistics

services for hospitalsHospital Market in 2008Services for hospitals

services for Producers

other services

Additional informationRisk ManagementQuality Assurance PolicyEmployeesCorporate Social Responsibility

Financial Results Description for 2008Financial Data

Auditor’s OpinionKey Financial DatesFinancial Statement

contact Details

111416 20242526

28

34353638

4144 46

54555560

626364

66

68

7071737476

797986 8990

103


Descriptionof the PGF Group


Description of the PGF Group

the PGF Group

The PGF Group is a holding which operates in the health-care sector on European markets, specifically focusing on Central and Eastern Europe. The Group’s core business consists in the distribution of pharmaceuticals. The Group comprises over 130 companies operating as independ-ent organisations, whose majority shareholder (direct or indirect) is PGF S.A. – the Group’s parent undertaking.

The PGF Group’s four key business areas are:

• services for patients,

• services for pharmacies,

• services for hospitals,

• other healthcare services.

Services for patients mainly comprise retail sales of phar-maceuticals and dermocosmetics as well as provision of pharmaceutical care at pharmacies. In 2008, CEPD N.V. was established within the Group, a company whose business involves the development of retail pharmaceuti-cal distribution in CEE. CEPD N.V. conducts its activities through the chain of I Care For My Health pharmacies operating in Poland and the United Kingdom, as well as two chains of pharmacies in Lithuania: Gintarine Vaistine and Norfos Vaistine.

Services for pharmacies chiefly involve wholesale distri-bution of medicinal products and logistics services, and they comprised PGF’s first business area. These activities are conducted by PGF’s 14 regional companies located in Poland’s major cities.

> Description of the PGF Group

Services for hospitals, which mainly comprise the distribu-tion of medicines to medical centres, are provided both by PGF’s regional companies and PGF Urtica, a dedicated company.

The fourth business area comprises other healthcare serv-ices. There is a number of specialist companies within the Group, including Laboratorium Galenowe Olsztyn Sp. z o.o., which develops and produces pharmaceuticals, and Phar-mena S.A., which launches innovative dermocosmetics. In addition, Pharmena conducts wide-ranging scientific re-search in cooperation with a number of medical centres. In the USA and Canada it conducts advanced research into innovative medicine against arteriosclerosis.



There are also several support companies within the Group. They include: Business Support Solution S.A., (accoun-ting and legal services); Farm-Serwis Sp. z o.o. (financial services, central collection and monitoring of re-ceivables); NDS DEPO S.A. and Daruma Sp. z o.o. (real estate management); Pharma Partner Sp. z o.o.; ePRUF S.A. (operator of private label pharmacy cards) and Bez Recepty Sp. z o.o. (publishing).

The main shareholders of PGF S.A. (the Group’s parent un-dertaking) are its founders – Mr Jacek Szwajcowski (Presi-dent of the Management Board) and Mr Zbigniew Molenda (Vice-President of the Management Board). Significant blocks of shares are also held by Polish pension funds.

PGF on international markets

Polska Grupa Farmaceutyczna is the first Polish pharma-ceuticals distributor to operate internationally. The Group is present in Poland and Lithuania, across all sectors of the market: wholesale, retail and hospitals. In addition, PGF

runs two I Care for My Health pharmacies in the United Kingdom. Our strategic objective is to become the leader in Central Europe by consolidating the retail sector in the region. To this end, a holding company, CEPD N.V., was established in Amsterdam in 2008. CEPD N.V. manages all the Group’s retail distribution assets.

the PGF Brand

The PGF brand fosters our image of a transparent, ambi-tious and innovative organisation. The token of apprecia-tion of the Group’s efforts was the title Highly Reputed Company in Poland in 2008, awarded in the Commerce category in the ranking PremiumBrand – Listed Compa-nies. This title was granted in an independent ranking held among institutional investors by TNS OBOP and Dom Badawczy Maison. PGF’s strong market image was also confirmed by the title of Reliable Employer in the contest organised by the Media Partner Group. We were also among the 20 largest companies whose CSR activi-ties were found the most reliable – according to the CSR

PGF’s main shareholders are its founders, current President

and Vice Presedent



24/7 ranking prepared based on the surveys of Braun & Partners and PKPP Lewiatan. The Company We further strengthened our position as a leading Polish enterprise when we received the second Diamond to the Golden Statuette of the Polish Business Leader, granted by Busi-ness Centre Club.

PGF’s history

The Company was founded 19 years ago (initially we operated under the name Medicines until 1997). In the beginning, we were a local, wholesale distributor of pharmaceuticals.

In 1998, PGF shares were floated on the Warsaw Stock Exchange. The Company used the proceeds to finance rapid development and consolidation of the pharmaceu-ticals wholesale market. Ever since, PGF has been the leader of the pharmaceuticals market in Poland.

In 2001, we launched an innovative loyalty programme in which the PGF Group pharmacies, as well as the pharmacies operating under franchise or partner-ship agreements, were covered by a single brand – I Care for My Health. Currently the programme covers 1,900 pharmacies and is one of the largest pharmacy partnership programmes in Europe. Over five million Poles use the services of the orange-coloured I Care for My Health pharmacies.

In 2008, PGF was restructured and transformed into a holding of companies operating in various areas of the health care sector.

The PGF has been operating on the pharmaceutical

distribution market for 19 years


> Our History

With the change of political system and the advent of the free-market economy, transformation of the pharmaceuticals market begins. Jacek Szwajcowski establishes Medicines, a pharmaceutical wholesale business.

Merger with Urtica S.A. of Wrocław and Biomedic S.A. of Kielce; acquisition of Cefarm Bydgoszcz

Acquisition of pharma-ceutical wholesalers Eskulap of Łomża and Medicines-Jasło

Merger with CefarmPoznań; acquisition of Cefarm Olsztyn and Cefarm Lublin

Merger with Carbo S.A. of Katowice (wholesaler) and Cefarm B of Opole

PGF becomes the leader in sales

to hospitals, and launches its first

own pharmacies.

Polska GrupaFarmaceutyczna, Poland’s largest pharmaceutical

wholesaler, established.

medicinesestablished

consolidation of the industry

listing on the Wse launch of thei care for my health

programme

After three years of m&A activities,

PGF’s sales revenue increase

ten-fold.

Medicines shares are floated on the Warsaw Stock Exchange.

PGF uses the proceeds from the offering and bank loans to consolidate the pharmaceuticals distribution market.

Launch of Lider 2001 programme to restructure the Group following a series of mergers and acquisitions.

The I Care for My Health programme is established; it develops into one of the largest partnership schemes for pharmacies in Europe.

1990 1998 1999 2000 2001 2002 2003 2004 2007 2008 countrywide development, mergers and acquisitions

sales revenue (PlNm)

661

1779

29073082


Acquisition of Cefarm Łódź and Apteki Polskie chains

Acquisition of Cefarm Kraków

Launch of I Care for My Health pharmacies in the UK.

Acquisition of Limedika, a Lithuanian pharmaceutical wholesaler, and Gintarine Vaistine, a chain of pharmacies

Pharmena shares floated on the NewConnect market

The first direct distribution contract with AstraZeneca

Aquisition of Aptekarz, a wholesaler of Rzeszów

Restructuring and reorganisation

launch of international

expansion

PGF voted 2001 Listed Company of the Year in Poland

PGF is the first listed company in Poland to broadcast a General Shareholders Meeting live over the internet

Spin-off of the retail operations to a new holding company - CEPD N.V. of Amsterdam

PGF introduces an innovative sales model based on an on-line pharmacy and a chain of 1,700 pharmacies participating in the I Care for My Health programme

Introduction of the new wholesale policy - GRA (Product Group Discount System)

PGF enters international markets.

1990 1998 1999 2000 2001 2002 2003 2004 2007 2008 countrywide development, acquisitions, the i care for my health programme Foreign investments

31583490

3639

4411

5096

> Our History


Jacek szwajcowski

FounderCEO of PGF S.A.

> Letter to Shareholders


Dear Shareholders,

We have concluded another year of operations of Polska Grupa Farmaceutyczna S.A., which is discussed in the Annual Report. I would like to take this opportunity to share with you my assessment of the period and my views on our prospects.

The PGF Group is consistently expanding its operations. In 2008, the Group generated record sales revenue of over PLN 5bn, i.e. 15% more than in 2007. This should be considered an excel-lent performance, especially in view of the already noticeable economic hardships caused by the global financial crisis.

I would like to thank PGF’s entire team for this result. It is thanks to the everyday work and com-mitment of thousands of people that we can fulfil our mission and develop continuously.

times of challenge – opportunity for the best

I can assert that we used 2008 to the full. We have been continuously pursuing the same consistent development strategy, aware that in our business a strong market position can be maintained only by expanding the scale of activities and improving efficiency. By pursuing ap-propriate and responsible financial policy, we managed to avoid the greatest risks related to the turmoil on the capital and currency markets, seen in the second half of 2008.

In advance, we also made a number of difficult decisions concerning the restructuring of the Group, including workforce optimisation. I am convinced that PGF is well-prepared to operate in challenging times, although it is not groundless to expect that the pharmaceutical market will not be significantly affected by the global crisis.

An issue which is gaining particular importance is maintaining the ability to generate profits and positive cash flows. In 2008, our net profit dropped by 30%, but thanks to the measures taken in the area of current assets optimisation the Group recorded high cash flows provided by operating activities, which amounted to nearly PLN 140m. key priorities include boosting the business efficiency and maintaining financial liquidity at a high level.

Our goal is to deliver top quality services for patients and pharmacies alike. We wish to make our contribution, wherever needed, to the improvement of health care quality and guarantee that patients have an unhindered access to modern medication. Within the last few years we have proved that we can efficiently manage the assets that have been entrusted to us and make decisions yielding effects in a long term.



Time has proved that such a consistent strategy is effective. We are able to adjust to any changing conditions and – in the long term – take better advantage of them than our competi-tors. Challenging times are an opportunity for us – an opportunity for the best.

consistent strategy and innovative solutions

I am particularly proud of the fact that Polska Grupa Farmaceutyczna is considered a frequent initiator of significant changes on the market of pharmaceuticals distribution. I deeply believe that the efforts undertaken by the Group last year will have a strong, long-term impact on the per-ception of the role of a modern distribution company on the demanding health care market.

The most important decision in this area was the establishment, in March 2008, of Central European Pharmaceutical Distribution N.V., a subsidiary registered in Amsterdam. Its key task is to manage the retail segment and expansion in Central and Eastern Europe. We are already present in Lithuania and the UK, and if the situation on the financial markets improves, we are ready to continue our international expansion. In our view, the establishment and efficient management of a multinational retail chain will enable us to render entirely new services both to patients and to manufacturers of pharmaceuticals.

In addition, we are one of the few companies which won the tender for direct distribution of AstraZeneca products. This success proves that we can provide top quality services.

the patient is our priority

Operating in the health care sector, we are obliged to take special care of our customers. As we deliver products which often save lives and frequently contribute to regaining or maintain-ing health.

With the patients’ good in mind, we launched a health database and an on-line pharma-cy portal at www.doz.pl. The new Internet platform, which quickly became the top site on the Internet-based services market, is a part of the “I Care for My Health Pharmacies” scheme. There are more than 1,800 pharmacies across Poland participating in the scheme, including our best wholesale customers, i.e. independent pharmacies. Our goal is to support patients by offering reliable and understandable information on health to them not only in pharmacies, but also at home, via the Internet. The portal includes a budget pharmacy. Additionally, it is the first Polish portal to introduce the unique model which allows patients to pick up their Internet order for pharmaceutical products at low prices at the nearest pharmacy participating in the “I Care for My Health” scheme.



We also remember about those who are in the greatest need for help – people whose finan-cial status does not allow them to purchase pharmaceuticals. This is a social problem which cannot be solved easily, nevertheless, within our capacity we are trying to support such people. The Foundation ”I Care For My Health”, established in 2007 on the initiative of the “I Care for My Health” pharmacies, conducted numerous aid actions throughout 2008, help-ing thousands of people.

Plans for the future

When assessing our strategy, it is important to reflect upon the development patterns in the sector. Our society is being reshaped by demographic, epidemiological and eco-nomic changes. The diseases that afflict wealthy societies begin to also plague the developing countries. Bearing these trends in mind, we can get better prepared for the changes facing Central Europe.

In the coming years the Polish pharmaceutical market will be influenced by three strategic fac-tors. The structure of public spending on health care will be undergoing changes. This has to be taken into account especially in the context of low refunds for the purchase of medications in Poland. The society, becoming more aware of the health care issues and enjoying larger incomes, be it due to membership in the European Union, is more eager to invest in health. We will also experience changes to the society’s demographic structure, which inevitably entail increased spending on health care.

According to forecasts, in a few year’s time every fifth Pole will be over 60 years old. We want to face these challenges, because, as one of the partners of the health care system, we have be-come co-responsible for the quality of the services delivered and the care for patients’ health.

The coming year will pose another important challenge for the PGF Group. Our model of a large, well-organised sales network, based on experienced, independent pharmacies has proved effective in Poland, and so we would like to roll it out in other European countries.

I would like to extend my sincere thanks to all those who have contributed to the success of Polska Grupa Farmaceutyczna so far. I am truly optimistic about the future of the sector and the company, as I am convinced that the foundations of PGF we have created so far are a sound base on which to build the company’s future value. We have become an ambitious, innovative and effective organisation and we are set on fulfilling our mission. We are here to protect your health.

Jacek szwajcowskiCEO of PGF S.A.



I have been with Polska Grupa Farmaceutyczna since its establishment. Currently, I am Vice President responsible for Procurement and Distribution.

In 2008, in the sales division, we carried out projects vital for our strategic development. We signed a direct distribution agreement and significantly broadened the scope of services related to the operation of consign-ment warehouses, including logistic services for the Eu-ropean market. Thanks to cooperation with producers in Poland and abroad, we have the largest product offering on the market, and provide such services as warehousing and distribution. Through our extensive logistics network, comprising 14 regional warehouses, we reach 8,000 pharmacies, and the 24/7 shifts enable us to deliver an order to any of them within a few hours’ time.

Zbigniew molenda

Vice-PresidentProcurement and DistributionFounder

I am also responsible for asset administration and quality assurance within the Group. My scope of duties covers the implementation of quality procedures at our branches and wholesalers, conducting quality audits, as well as risk and crisis management.

Within the sales division, I also coordinate the research projects of Laboratorium Galenowe of Olsztyn, which apart from manufacturing simple galenic products offers analytical services for external customers.

Our main goals for 2009 are to optimise our logistic pro-cesses, streamline the real estate management process within the Group, dispose of further unused real estate holdings, and optimise the rules and procedures related to protection of assets.

> Management Board


> Management Board

I have worked for PGF for 17 years, and for 4 years now I have been a member of the Management Board. I am in charge of Wholesale and Marketing.

I manage our wholesale distribution activities (sales to pharmacies) via a network of 13 companies operating con-signment warehouses all over Poland.

My key responsibilities include supervision over these companies in terms of generated revenue, margins, cost optimisation, and, consequently, their financial performan-ce. I am also responsible for ensuring efficient communica-tion of the companies with customers (customer advisory,

telemarketing, transport and logistics) and for developing and implementing new sales strategies. One of my main tasks is also creating new sales tools and using them in the relations with producers, distributors and pharmacies, i.e.: CC, e-sales as an effective and cheap tool enabling us to offer low prices (eMedicines), e-fairs (efarmtargi), and the development of the online pharmacy.

In 2009, my main priority will be both expansion and im-provement of our new sales model. I hope that we will work out an excellent, partnership-based model of coope-ration with our customers – pharmacies, as well as with our suppliers.

ignacy Przystalski

Vice-PresidentSales and MarketingMember of the Management Board since 2005


Anna Biendara

Vice-PresidentFinanceMember of the Management Board since 1994

I have worked for the company since 1994. Since 1998, I have been a member of its Management Board and Vice President responsible for Finance.

I manage the Financial and Accounting Centre, which provides the financial, accounting, HR and payroll ser-vices for the members of the PGF Group. Currently, we support over 120 Group companies.

The main task of the Centre, accounting-wise, is the prep-aration of interim and annual financial statements. In 2008, for the first time we prepared the consolidated financial statements for the CEPD N.V. Group established in March 2008 following the reorganisation of the PGF Group. The Centre is also responsible for liquidity ma-nagement (us-ing advanced tools such as cash pooling in three different financial institutions). We handle over 400 bank accounts and several credit lines.

Our HR and payroll services cover several thousand em-ployees. The management reports (budgets and financial forecasts) prepared in the Centre help managers assess current and future situation of the companies and make operational decisions.

Thanks to our skilled personnel, the Centre provides top quality services. Several of our employees are qualified auditors, and over 60% out of the 300 staff are university graduates.

We are continually working on greater automation of the financial and accounting processes so as to improve and streamline the Centre’s operations.

In 2009, the Centre will continue to develop. We are plan-ning to provide our services to more companies and start preparing consolidated financial statements and ma-nagement reports for the foreign subsidiaries.

> Management Board


> Management Board

Jacek Dauenhauer

Vice-PresidentFinancial Strategy and DevelopmentMember of the Management Board since 2007

I have worked for PGF since 1998, and for two years now I have been Vice President responsible for Financial Stra-tegy and Development.

From the perspective of my position and the duties which it involves, I must admit that 2008 was a difficult time but we steered through it safely.

Last year we executed crucial development projects, the most important being the spin-off of the retail segment and creation of CEPD N.V. This project is fundamental for further development of the Group in terms of retail distri-bution in Poland and abroad. We also conducted other activities aimed at fostering the Group’s development, in-cluding acquisition and integration of Aptekarz Sp. z o.o. of Rzeszów. The escalation of the global financial crisis in the second half of 2008 created a new environment for the execution of our development strategy. The Group had

prepared well for operating under such circumstances, managing to avoid the main threats connected with rapid changes in the financial markets, such as the weakening of the Polish currency. This was possible thanks to our safe policy of financing the operations, which we have pursued for many years.

In 2009, both Polish and global economy will still have to tackle the effects of the crisis, that is why undertaking ap-propriate actions in the area of financial strategy and de-velopment will be especially important. In 2009, our main priority will therefore be ensuring safe development of the Group, with particular focus on adequate financial liquidity and stable sources of financing for the Group.


> Supervisory Board

supervisory Board of PGF

Jerzy Leszczyński Chairman

hubert Janiszewski Deputy Chairman

Jan Kalinka Member

Piotr Stefańczyk Member

Maria Pasło-Wiśniewska*Member

Cecylia Teresa Wiśniewska**Member

Audit committee

Piotr StefańczykJan Kalinka

Appointment and Remuneration committee

hubert JaniszewskiMaria Pasło-Wiśniewska*

*Ms Maria Pasło-Wiśniewska was a member of the Supervisory Bard from January 1st 2008 to April 1 2008.**Ms Cecylia Teresa Wiśniewska has been a member of the Supervisory Bard since May 26th 2008.


corporate Governance

In 2008, Polska Grupa Farmaceutyczna S.A. complied with the corporate governance rules set forth in The Best Prac-tices of WSE Listed Companies effective as of January 1st 2008. The Best Practices were reflected in the Company’s internal regulations and the practice of the Company’s operations, its governing bodies and their members. In 2008, there was one incidental violation of a corporate governance rule (Section II.1.4 of The Best Practices of WSE Listed Companies), which was disclosed by the Company in a current report. The violation was not inten-tional and its consequences were immediately eliminated. The full text of the statement on application of corporate governance rules at the Company is presented on its web site (www.pgf.com.pl).

General shareholders meeting

The General Shareholders Meeting of PGF is the Com-pany’s most important governing body which exercises the owners’ authority to make key decisions. The General Shareholders Meeting is customarily held each year in June. The General Shareholders Meeting review and ap-prove the Directors’ Report on the Company’s activities and the financial statements. The General Shareholders Meeting also decides on the distribution of profit and sets the dividend payment date. At the General Shareholders Meeting the shareholders grant approval to members of the Company’s governing bodies assessing their per-formance of duties, appoint members of the Supervisory Board, as well as make the key decisions concerning the Company’s assets. The operation of the General Share-holders Meeting is governed by the Rules of Procedure for the General Shareholders Meeting, which comply with the provisions of the Polish Commercial Companies Code and corporate governance principles.

supervisory Board

The Supervisory Board is the Company’s most important controlling body. The Supervisory Board is composed of five members who form two committees: Audit Commit-

tee and Appointment and Remuneration Committee. The majority of the members of the Supervisory Board meet the criteria of independent supervisory board members. One of the main responsibilities of the Audit Committee is to propose Supervisory Board resolutions regarding as-sessment of the Company’s financial statements and ap-pointment of auditors. The Appointment and Remunera-tion Committee proposes resolutions regarding changes in the composition of the Management Board and remu-neration of the Management Board members.

management Board

The Management Board of PGF is composed of five mem-bers who manage the Company’s business and represent it in relations with third parties. The Management Board’s objective is to build the Company value in a long-term. The responsibilities of the Management Board include all the decisions concerning PGF’s operations which had not been reserved for the other governing bodies of the Com-pany under applicable laws or the Company’s Articles of Association. The Management Board operates pursuant to applicable laws, and in particular pursuant to the Polish Commercial Companies Code. The Rules of Procedure for the Management Board are adopted by the Manage-ment Board and are approved by the Supervisory Board.

highest corporate governance standards

Since the floatation of its shares in 1998, the PGF Group has pursued a transparent disclosure policy and com-plied with the international corporate governance stand-ards. In 2001, analysts, investment advisers and brokers awarded PGF the title of the “Best Listed Company of 2001”. In subsequent years (2004 and 2005), the Institu-tional Investor Chapter ranked Polska Grupa Farmaceuty-czna among the twelve “Most Trusted Companies” apply-ing the highest corporate governance standards. In 2007, the journalists of Gazeta Giełdy Parkiet nominated PGF for the „Company with the Highest Corporate Governance Standards” award.

> Corporate Governance

capital market participants expect listed companies to ensure easy access to information and equal treatment of all shareholders. communication with analysts, investors and the media should guarantee the transparency of actions taken by the governing bodies of a company and facilitate understanding of the adopted management style.


> Key Events in 2008

Key events in 2008

January

Acquisition of a majority interest in hurtownia AptekarzAptekarz is one of the strongest pharmaceutical wholesa-lers in south-eastern Poland. The investment value was PLN 27.4m.

June

Private placement of PhARmeNA s.A. sharesThe associated undertaking of PGF issued shares through a private placement. The issue was nearly fully subscribed by financial institutions. The company raised PLN 13.6m of additional funds to finance further clinical research of an innovative drug against atherosclerosis in the United States and Canada.

July

Purchase of shares from the state treasuryPGF exercised its pre-emptive rights with respect to shares in government-owned companies: Cefarm Kraków and Cefarm Łódź. The transactions were executed with a view to streamlining the organisational and legal structure of the PGF Group. The total value of the investment was PLN 40.3m.

spin-off of the retail operations to cePD N.v.The Management and Supervisory Boards of Polska Grupa Farmaceutyczna made a decision to spin-off all operations connected with retail distribution of pharma-ceuticals to a separate company. In March 2008, Central European Pharmaceutical Distribution N.V. of Amsterdam was established, to which all assets and competences connected with pharmacy operations, both in Poland and abroad, were transferred three months later. CEPD N.V.’s main strategic goal is to develop an international pharma-ceuticals retail network, with particular focus on the coun-tries of Central and Eastern Europe.

Spin-off of the retail operations to CEPD N.V.


August

New warehouse in Bydgoszcz PGF transferred its Bydgoszcz warehouse to new fa-cilities. The relocation resulted in higher work efficiency, reduced warehouse service costs and shorter shipment preparation time. The new facility has storage space of 4,000m2. The project value was PLN 14.3m.

PHARMENA S.A. floated on the NewConnectPHARMENA made its debut on the parallel market of the WSE. At opening of trading, the stock price rose by 15.38%.

implementation of new sales policy (the GRA Product Group Discount system)PGF introduced a new system of sales of pharmaceuticals through pharmacies in Poland. The system is based on a mechanism whereby product discounts offered by produc-ers are transferred directly onto prices of the same products sold in pharmacies. Under the previous system, the discount offered to a pharmacy depended on its overall sales.

November

First direct distribution contractThe contract for provision of agency services as part of the AstraZeneca Direct-to-Pharmacy Model was award-ed. PGF will be an independent distributor performing the role of a logistics operator storing, distributing and selling medicines directly to pharmacies on behalf of the producer.

First direct distribution contract

> Key Events in 2008


PGFon the Stock Exchange


shareholder structure

Our shareholder base has been stable for years. The PGF shares are popular among investors due to the long-term investment horizon and the stability of the pharmaceutical industry, which is relatively resilient to economic cycles. Polish pension funds, holding 32% of the shares, are our largest investor group. The Compa-ny founders, holding 24%, are the second largest group of owners. Foreign institutions hold a considerable 23% interest. The fourth largest shareholder are other Polish institutions.

Free float

Around 76% of the shares are in free float. However, the actual free float is lower due to the fact that pension funds and a large number of foreign institutions are long-term investors who do not trade in the shares on a daily basis.

vote structure at the General shareholders meeting

The vote structure at the General Shareholders Meeting does not fully correspond to our shareholder structure as some of the shares are preference shares, each con-ferring rights to five votes. Hence, PGF remains under the control of two founders, Mr Jacek Szwajcowski and Mr Zbigniew Molenda, who jointly with KIPF Sp. z o.o., a company they control, hold nearly 51% of the total vote at the General Shareholders Meeting.

the shares of medicines s.A. (the company’s name at the time) were admitted to public trading by the securities and exchange commission on september 4th 1997. The first listing of the shares on the Warsaw Stock Exchange took place on February 17th 1998. the shares are traded on the main market of the Wse in the continuous trading system. During most of 2008, the PGF shares were included in the mWiG40 index; since December 19th, they have been a component of the sWiG80 index.

> PGF on the Stock Exchange

Shareholder structure

Company founders*

* Including KIPF Sp. z o.o., founding shareholders’ whollyowned subsidiary

Open-end pension funds

24% 32%

23%10%

4%

7%

Foreign institutionsTFI

Polish institutions

Others

As at December 31st 2008

Vote structure at the General Shareholders Meeting

* including KIPF Sp. z o.o., founding shareholders’ whollyowned subsidiary

As at December 31st 2008

Company founders*

50%

13%

Foreign institutions

7%Others

Other polish institutions

9%

20%

Open-end pension funds



Shareholders holding over 5% of the total vote at the General Shareholders Meeting

Number of shares

held

% of share capital

Number of votes

held

% of total vote

at GM

Name

Jacek Szwajcowski

Zbigniew Molenda

KIPF Sp. z o.o.

ING NN Polska OFE

Artio Global Management LLC

1,294,880

704,019

919,887

989,001

1,111,869

10.28%

5.59%

7.31%

7.85%

8.83%

5,961,680

3,037,219

919,887

989,001

1,111,869

30.29%

15.43%

4.67%

5.02%

5.65%

Jacek szwajcowski– Founder, President of the Management Board since the Company’s establishment Zbigniew molenda– Founder, Vice-President of the Management Board since the Company’s establishment KiPF sp. z o.o.– Company fully owned by Jacek Szwajcowski and Zbigniew Molenda

iNG oFe– A leading Polish pension funds

Artio Global management llc – Asset management company, a member of the Julius Baer Group, leading Swiss private banking and asset management group.

PGF codes in online news services:

Reuters:MDIC.WA

Bloomberg:PGF PW

Warsaw Stock Exchange:PGF



stock performance

PGF shares have not been immune to declines on stock exchanges all over the world in the wake of the unfol-ding financial crisis. In 2008, the performance of PGF shares on the Warsaw Stock Exchange closely followed

the rest of the market. A downward trend continued through the first half of 2008, subsiding only for a brief period; the-reafter, in the second half of the year, PGF stock price was dragged further down, close to the historical low.

PGF stock not immune to global recession

At the last trading session in 2008, the price was PLN 27.4, down by 70% relative to the price on the last trading day of 2007. In the opinion of the Management Board, such dra-

matic decline in the stock price was not supported by the Company’s economic situation as in this period the revenue expanded significantly while profitability stayed positive.

PGF stock performance since the first listing

PGF stock performance in 2008

PLN

PLN


selected data on 2008 transactions in PGF shares:

• Average trading volume – 10,134 shares

• Average number of transactions per day – 35

• share in the WiG index’ turnover – 0.09%

• total turnover – PlN 294.34m


1,200

1,000

800

600

400

200

0

Market capitalisation (PLNm)

395430

349443

350

511

730 750

990

342

1122

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: WSE

2005 2006 2007 2008

x

PLN

PLN

PLN

PLN

PLN

PLNm

Stock highlights (2005-2008)

2008/2007

No. of shares

Close on last trading day

52-week high

52-week low

Earnings per share

Dividend per share*

Market Capitalisation

12,361,263

60.7

63.5

47.7

4.3

2.2

750

12,450,967

79.5

90.0

71.8

5.0

2.4

990

12,588,240

89.1

125.4

70.3

5.9

2.4*

1,122

12,528,713

27.3

93.3

23.0

4.2

0.0**

342

0%

-69%

-26%

-67%

-30%

-100%

-70%

* Dividend paid out: PLN 2.40 per share + buy back (PLN 2.43 per share in total)** Planned buy back value: PLN 3.89 per share; actual buy back value: PLN 0.58 per share


PGF regularly posts positive cash flows from its operations, which not only enables the Company to invest the generated resources but also to pay dividends. The profit distri-bution policy followed by the Company reflects its attempts to exploit shareholders’ equity as efficiently as possible. PGF has shared its profits with shareholders for six years now.

> PGF na Giełdzie

share buy-back

PGF follows a policy of sharing its profits with sharehold-ers. In the preceding years, part of the profit was distrib-uted to the shareholders as dividend. However, in 2008, the profit distribution policy changed: on June 19th 2008, the General Shareholders Meeting adopted a resolution whereby part of the profit generated in 2007 was des-ignated for the buyback of Company shares. The Com-pany’s Management Board was authorised to buy back the shares in a number representing not more than 10% of all Company shares. Funds to be spent on the buyback were not to exceed PLN 49m. In 2008, 127,339 shares were bought back at the cost of PLN 7.3m.

communication with analysts and investors

An open line of communication with market participants helps the Company showcase its achievements and share future development plans. Every year, representa-tives of the Company’s Management Board take part in at least four regular meetings with journalists and equity analysts in order to comment in detail on the Company’s current standing.

Throughout 2008, PGF’s representatives participated in several dozen investor meetings and conferences held in Lon- don and New York, during which the Company’s strategy and business were presented. On a similar note, the Man-agement Board’s representatives followed the established tradition of attending the annual WallStreet Conference or-ganised by the Polish Retail Investors Association. In 2003, PGF became the first listed company in Poland to provide live coverage of its General Shareholders Meeting via the Internet. Ever since, the Group has been broadcasting the sessions online every year. Archive webcasts are available at www.pgf.com.pl. In 2007, the disclosure policy pursued by the Company was recognised by journalists of the Gazeta Giełdy Parkiet daily, who named PGF as a nominee for the Corporate Governance Excellence Award (Spółka o najwyższych standardach ładu korporacyjnego).

2002 2003 2004 2005 2006

12.2

24.5

27.129.8 30.2

30.00

25.00

20.00

15.00

10.00

0.50

0

PLNm

Dividend paid in 2002-2006

2002 2003 2004 2005 2006

1.00

2.002.20

2.40 2.40

3.00

2.50

2.00

1.50

1.00

0.50

0.00

Dividend per share in 2002-2006

PLN



PGF Group

Directors’ Report


> Directors’ Report / PGF Group’s strategy

PGF Group’s strategy

organic growth in the health care sector

The pharmaceutical industry is viewed as a defensive sector, which is less vulnerable to the impact of economic slowdown compared with other sectors of the economy. The aging population has growing medical needs. An increasingly larger number of people suffer from chronic conditions, which increases the long-term demand for treatment. New and previously unknown diseases, urbani-sation and increased mobility contribute to the spreading of new pathogens around the world. At the same time, the development of new drugs, people’s growing wealth and their increasing attention to health issues stimulate growth in the value of the drug market on an annual basis. Our goal is to flexibly adjust to the needs of the market’s participants and build value by improving the quality of health care services.

For 19 years, Polska Grupa Farmaceutyczna has set the direction of development of the pharmaceutical distri-bution market. In this low-margin industry, increasing the scale of operations is the only way to generate funds for new investments while reducing drug prices.

m&A strategy in central europe

We increase our sales not only through organic growth, but also through the continued consolidation of the dis-tribution market. Consequently, the Company reports above-average results in the highly competitive pharma-ceutical market in Poland and abroad. Today, our expe-rienced staff are prepared for the next phase of develop-ment – international operations.

The Group’s main strategic objective is to develop the network of retail sales of pharmaceuticals in Europe. To achieve this objective, in 2008 the holding company CEPD N.V. was incorporated in Amsterdam consolidating the PGF Group’s retail segment.

long-term objectives can be achieved only with a clear strategy. For many years, PGF has consistently strived to establish a platform for connecting all participants of the health care sector. From cooperation with producers to maintaining contacts with patients, we create and develop tools for process improvement. the main pillar of our strategy is the development of the “i care for my health” pharmacies.

In the coming years, CEPD is to focus on the following three core areas:

• Further development on its existing markets,

• International expansion into selected markets of Central and Eastern Europe,

• Leveraging of significant synergies offered by the economies of scale.

Platform for cooperation between PGFand business partners

The pharmaceutical market is constantly changing. Pursu-ant to its development strategy, Polska Grupa Farmaceu-tyczna expands the range of support services offered to the market participants. The solutions proposed by PGF are intended to simplify the relations between all players in the sector, from the drug producers, through pharmacies and hospitals, to patients. Thanks to the services offered by us, our partners will be able to grow more quickly and safely and patients will receive not only drugs, but also the highest quality service.

markets on which CEPD N.V. operatesfirst-choice marketssecond-choice markets


legal environment in Poland

Pharmaceutical law

PGF Group’s operations are regulated mainly by the Po-lish Pharmaceutical Law, which together with its secon-dary legislation provides the legal framework for such activities as:

• Admission of therapeutic products to trade,

• Manufacture and import of therapeutic products,

• Advertisement of therapeutic products,

• Trading in therapeutic products,

• Licensing of operations of pharmaceutical wholesa-lers and pharmacies,

• State Pharmaceutical Inspection’s supervision over compliance with the provisions of the Pharmaceutical Law.

State drug subsidies are regulated by the Act on Heal-thcare Services Financed from Public Funds, of August 27th 2004.

The rules for pricing certain therapeutic products are provided for the Price Act of July 5th 2001.

trade in drugs, as particularly important from the point of view of health and social security, is heavily regulated. in 2008, three important changes were introduced in the legal environment of PGF. New regulations concerning mail-order drug sales, pharmacy advertisement and drug discount systems were introduced.

> Directors’ Report / Legal environment

state drug subsidies

Approximately 50% of the value of all drugs sold in phar-macies are subsidised by the state. Therefore, the official decision issued by way of a regulation by the Minister of Health specifying the drugs and medical products finan-ced from public funds, their maximum prices and the level of subsidies is an important factor affecting the perfor-mance of companies operating pharmaceutical wholesa-le businesses and pharmacies.

The legal act which regulates the state’s policy of subsidi-sing drugs is the law on healthcare services financed from public funds. The law, together with its secondary legisla-tion, specifies the list of drugs and medicinal products financed from public funds, the price limits and the rules of reimbursement. The secondary legislation specifies for which drugs available in pharmacies patients should pay a lump-sum price, and for which patients will have to pay a certain percentage of the price (the regulations also set the maximum price which may be charged by pharma-cies). For drugs outside the list, pharmacies may freely set their prices.


• Rules governing the distribution of pharmaceutical products on the market, including rules for their pro-motion and marketing,

• Licensing of pharmaceutical activity,

• Manufacturing and imports of pharmaceutical pro-ducts, including licensing of manufacturing and im-port activities,

• Rules governing pharmacies’ operations,

• Rules governing the disclosure of information on medicinal products and advertising thereof,

• Rules governing supervision and control by compe-tent authorities,

• Rules governing the pricing of subsidised medi-cines, setting limits on wholesale and retail prices of medicinal products. The Act refers the reader to the official gazette Valstybes zinios, in which a list of subsidised medicines and medicinal products is pu-blished every year. In 2008, certain legal regulations were amended:

- 5% VAT on subsidised drugs will apply only until the end of June, with the general 19% VAT rate appli-cable thereafter,

- Effective from June 16th 2009, certain vitamin pro-ducts (food supplements) are no longer regarded as medicinal products and may be sold outside pharma-cies, as food products.

> Directors’ Report

changes in the regulatory environment in 2008

On May 2nd 2008, the Minister of Health’s regulation of March 14th 2008 concerning the conditions for mail-order sales of OTC therapeutic products came into force. The regulation stipulates strict conditions for the Internet-based sales of OTC therapeutic products.

On November 28th 2008, the Minister of Health’s regula-tion of November 21st 2008 concerning the advertisement of therapeutic products came into force. The regulation replaced the former legislation and introduced more strin-gent conditions governing advertisement of therapeutic products.

legal environment in lithuania

Republic of lithuania’s law on Pharmaceutical Activities

The Republic of Lithuania’s Law on Pharmaceutical Ac-tivities is a binding legal act which regulates all aspects of activities involving trade in medicinal products. In Li-thuania, no regulations are in place which would restrict the number of pharmacies a single entity can own. Nor are there any legal restrictions concerning the location and number of retail outlets. The Law on Pharmaceutical Activities sets forth the following:

• Rules governing the issuance of authorisations to operate a pharmacy or engage in wholesale of phar-maceutical products,


Pharmaceutical market in Poland

The Pharmaceuticals distribution can be divided into two segments: sales to pharmacies and sales to hospitals. The market size can be estimated based on three different cri-teria:

• Volume of pharmaceuticals sold by producers to wholesalers – value of the market in terms of net pro-ducer prices

• Volume of pharmaceuticals sold by the wholesaler to pharmacies and hospitals – value of the market in terms of wholesale prices

• Volume of pharmaceuticals sold by pharmacies to patients – value of the market in terms of retail pric-es.

Given the nature of its demand-supply mechanism, the pharmaceutical market remains relatively unaffected by economic cycles. In 2008, the value of drugs sold by pharmacies to patients rose by 11.4%, to PLN 24.1bn. The annual per capita expenditure on medicines in Po-land, however, still remains lower than in other European countries, the underlying causes being producer prices of medicines, lower than in most countries in Europe, and low subsidies. As experts predict, in the coming years the market’s value will grow by approximately 6% yearly. In Poland, the expected growth will be fuelled by the follow-ing factors:

companies operating in the pharmaceutical industry have a major role to play in the life of contemporary societies. Apart from pursuing business objectives, their mission is to improve the quality of healthcare and the quality of life.

> Directors’ Report / Market environment

20,000

10,000

0

20%

10%

0%

Polish drug market at net producer prices

2002 2003 2004 2005 2006 2007 2008PLNm

Source: IMS Health

value of Polish drug market at net producer prices (PLNm)

y-o-y change

20,000

10,000

0

10%

0%

Polish drug market at wholesale prices

2003 2004 2005 2006 2007 2008PLNm

Source: IMS Health

value of Polish drug market at wholesale prices (PLNm)

y-o-y change

30,000

20,000

10,000

0

10%

0%

Polish drug market at retail prices

2003 2004 2005 2006 2007 2008PLNm

Source: IMS Health

value of Polish drug market at retail prices (PLNm)

y-o-y change


> Directors’ Report

expansion of the over-60/65 groupThe proportion of people aged 60/65 or over directly trans-lates into the number of prescriptions written, and, con-sequently, plays a key role in shaping the pharmaceutical market’s dynamics. Expansion of this age group is one of the major factors propelling the global pharmaceutical market. In the coming years, one out of five Poles will be over 60, which will have a positive bearing on the develop-ment of the pharmaceutical market. A further expansion of this age group should be expected. In 2030, people in the post-retirement age will represent over 25% of Poland’s population (compared with 16.2% in 2008).

correlation with GDPPharmaceuticals distribution is a defensive industry, more resistant to economic deceleration than other sectors. The sales of pharmaceuticals is mainly based on sales of basic necessities, that is health- and life-saving prod-ucts. Given the current crisis, a decrease in the sales of OTC products and cosmetics is possible. Despite such developments, the pharmaceutical market is expected to grow at a rate significantly higher than in the case of other sectors of economy.

state’s reimbursement policyAlthough producer prices of pharmaceutical products sold in Poland are among the lowest in Europe, the share of drug purchase costs borne by patients ranks as one of the largest in the region. The reasons include low drug reimbursements which, in turn, are a symptom of a flawed healthcare system and insufficient health care expenditure from the state budget. In 2008, the value of reimburse-ments stood at PLN 7.47bn and was 14.58% higher than in 2007. However, the value of reimbursements does not cov-er total expenses on pharmaceutical products included in the list of reimbursed roducts. Polish patients cover over 60% of the value of reimbursed pharmaceuticals sold.

22%

20%

18%

16%

2007 2008 2009* 2010* 2015* 2020*

Forecast share of the over 60/65 group in the population of Poland

Source: Central Statistics Office* forecast

8,000

6,000

4,000

2,000

0

70%

68%

66%

64%

62%

60%

Drug reimbursements in Poland

2003 2004 2005 2006 2007 2008PLNm

Source: PharmaExpert

Value of reimbur-sements (PLNm)

Patients’ contribution to expenses on reimbursed drugs

2003 2004 2005 2006 2007 2008

GDP and Polish pharmacy market’s dynamics

Source: Central Statistics Office, World Bank, PharmaExpert

Pharmacy markets dynamics GDP dynamics

1.15

1.10

1.05

1.00

0.95

1.04

1.05

1.04 1.06

1.07

1.05

1.06

1.03

1.08 1.08

1.06

1.11

Pharmaceuticals distribution is a defensive industry


Pharmaceutical market in lithuania

The pharmaceutical market in the Baltic States is one of the most fast-paced in Europe. In 2008, Lithuania record-ed the record-high 8% growth of the market, to EUR 436m (net of sales to hospitals under public tenders). However, the evident crisis will threaten the growth in the coming years. The significant year-on-year decrease in GDP (by at least 10%) and sales of FMCG, forecast for 2009, will affect the performance of the pharmaceutical sector.

However, despite the substantial growth rates recorded every year, the consumption of pharmaceuticals remains low compared with the European average. During 2008, the average per capita drug expenditure went up to EUR 120 (from EUR 110 in 2007), and the value of the phar-maceutical market in Lithuania reached EUR 436m. The increase was driven mainly by stronger consumer pur-chasing power, increased refund amounts, and a modest share of generic drugs in the overall structure of medicinal products consumed. A factor of major importance was also a rise in the consumption of advanced, new genera-tion drugs marked by much higher prices. In the com-

> Directors’ Report / Market environment

ing years one can expect the government to take actions aimed at reducing the subsidies; the share of advanced drugs to decline; and the market to consolidate on the back of liquidity problems experienced by some of the chains. The following will remain to be the key drivers of market development in 2009:

• Forecast decline in GDP and growing unemploy-ment rates,

• Adverse tax regime – 5% VAT on drugs to be re-placed with the general 19% VAT,

• Lower market shares of OTC drugs.

Further market growth may be supported by:

• Limited sales of cheap drugs from the former CIS member states (expired registration, or non-compliance with the GMP standards),

• Opportunities offered by parallel imports,

• Increased life expectancy.


Servicesfor Patients


Maria Wiśniewska

President, CEPD N.V.

I am very pleased to address the Shareholders of Polska Grupa Farmaceutyczna S.A. for the first time as President of Central European Pharmaceutical Distribution N.V. (CEPD N.V.), the company responsible for development of distribution on the retail pharmaceutical market.

2008 was the first year when we implemented our new strat-egy of international expansion. First, we divided PGF S.A. into wholesale and retail segments. As a result, PGF S.A. will operate on the wholesale distribution market in Poland, whereas CEPD N.V. will operate on the pharmacy market in Poland and other Central and Eastern European countries.

CEPD N.V. is a holding company managing pharmacies in individual national markets via local operating companies. Already at the start of our operations, we gained presence on the Polish, Lithuanian and British markets by acquiring all pharmacy assets from PGF S.A.

After the successful division of PGF S.A., in July 2008 CEPD N.V. became responsible for managing the exis-ting chain of pharmacies and started the process of share capital increase to finance future expansion in foreign markets.

As we gained a better understanding of patients’ expec-tations, we started the internal restructuring of all our op-erating companies so that our pharmacies could quickly offer customers a high quality pharmaceutical service and a wide range of drugs and preparations at attractive prices. This will also help the long-term growth of share-holder value and create good development prospects for our employees.

> Services for Patients


The efforts initiated in July are already yielding measur-able financial results. Net profit on the retail business as at the end of 2008 was 207% higher than in 2007, and the position of our pharmacies on the local markets has been strengthened in every country in which we are present.

Last year CEPD N.V. prepared to increase its share capital by offering financial investors up to 49% of shares in the increased share capital. Discussions with investors began in late autumn, to later slow down due to the downturn on the financial markets. However, they are still continued and I hope that we will complete them successfully this year. This will enable us to finalise acquisitions and further ex-pand into selected European markets. Negotiations with

pharmacy owners are conducted in such as manner as to enable us to invest the proceeds from the share capital increase quickly and well.

Despite the crisis that affected a lot of industries, the pharmaceutical market has strong growth prospects. I believe that consistent implementation of our plans on our existing markets, as well as a carefully planned ex-pansion into new markets, will bring all our shareholders the expected growth.

Thank you all for the good work so far. I hope that equally good years are still to come!



Retail distribution market

Number of pharmacies

2008 was yet another year of growth of the number of phar-macies operating in Poland (up by 4.3% year on year). As a result, the Polish market remains among the European markets with the highest density of pharmacies ca. one pharmacy for around 2,800 persons. Such market condi-tions undoubtedly hinder effective business activity. In ad-dition to steadily growing competition, the Polish market is also witnessing consolidation processes, which, in a long term, will lead to improvement in the quality of services and lowering of prices of pharmaceuticals.

sales

In 2008, the pharmacy market saw the strongest sales growth in seven years. The value of the pharmaceuticals market rose by 11.4%, to PLN 24.1bn.

The main driver of the steep-increase was a steadily rising share of OTC products in total sales. The substantial, dou-ble-digit rise in the share of OTC and cosmetics sales has been observed for several years. From pharmacies’ per-spective, it is a positive trend as it leads directly to an increase in the average margin, which, in the case of OTC products, is determined by market forces. In response to changes in customer buying preferences, a growing number of phar-macies are being converted to self-service outlets.

Another reason for the high growth in sales was the low-base effect related to the weak growth of the market in 2007. This was mostly attributable to an industrial action of medical strike action by doctors in March-October 2007 and a reduction in drug prices and limits introduced in the amended list of subsidised drugs in March 2007.

> Services for Patients / Retail distribution market

14,000

13,000

12,000

11,000

Number of pharmacies in Poland

11,840 12,130

13,02013,360

12,490

2004 2005 2006 2007 2008


PGF’s sales structure

in 2008

Wholesale28%

Hospitals

15%

8%Lithuania + UK

Pre-wholesale7%

17%

company-owned I Care for My Health pharmacies

25%

franchised and partner I Care for My Health

pharmacies

2002 2003 2004 2005 2006 2007 2008 2009*

25,000

23,000

21,000

19,000

17,000

15,000

The Value of the Polish pharmaceutical market at retail prices (PLNm)

Source: PharmaExpert* forecast

15,996

17,00717,500

18,733

20,267

21,469

24,051

25,500


Pharmacy margins

Since 1997, the law regulating the official margins on reim-bursed drugs have been amended three times. The latest change was introduced in 2002. Unfortunately, the chang-es significantly reduced the overall pharmacy margin in the largest segment of sales to 24.1% in 2008 (at purchase prices, inclusive of VAT). One of the main reasons for the deteriorating economic situation of Polish pharmacies is that the official margin has not been increased since 2002. At the same time, pharmacies’ operating expenses have been rising steadily. Pharmacies pay higher rents and in-cur higher costs of debt service while facing strong pres-sures to increase payroll. Therefore, paradoxically, the fact that the official margin has not been raised for such a long time is the very reason why pharmacies now have limited ability to reduce prices for patients.

Structure of sales at Polish pharmacies (2008)

Sales of non-subsidised prescription drugs

20%

47%

Sales of subsidised prescription drugs 33%

Sales of OTC products, dietary supplements, dermocosmetics, etc.



Subsidised drugs account for 47% of total sales


> Services for Patients / Central European Pharmaceutical Distribution N.V.

central european Pharmaceutical Distribution N.v.

structure of cePD N.v.

Central European Pharmaceutical Distribution NV (CEPD NV) is a holding company registered in the Nether-lands. Its main strategic goal is to develop a retail phar-maceutical chain in Central and Eastern Europe (CEE). The holding operates through local subsidiaries responsi-ble for operational management in particular CEE countries.

As at the end of 2008, CEPD NV had operating subsidiaries in three European countries: Poland, Lithuania, and the UK. The holding’s structure also included CEPD Management Sp. z o.o., a company responsible for supporting CEPD NV in strategy implementation on the individual markets.

Modern holding structure

DoZ UK ltd. ... ... ...DoZ s.A. UAB NFG

cePD N.v.

cePD management sp. z o.o.

United KingdomPoland Lithuania Country 4 Country 5 ...

The Polish subsidiaries of CEPD NV operate based on a multi-channel distribution model. A typical example is DOZ S.A., the holding’s Polish operating subsidiary, which offers patients access to pharmaceuticals both through a chain of pharmacies operating under the joint loyalty scheme “I Care for My Health” (Dbam o zdrowie) and thro-

ugh an e-pharmacy, DOZ.PL. This model allows DOZ S.A. to effectively access all patients and offer them compe-titive prices combined with a high standard of service. In the coming years the model is to be implemented in the other CEE markets where CEPD NV’s subsidiaries already operate or will operate in future.

CEPD NV had operating subsidiaries in three European countries:

Poland, Lithuania, and the UK



cePD Nv’s market position

CEPD NV already enjoys the status of a market leader in the region in terms of the number of pharmacies oper-ated by the holding structure. Their aggregate number at the end of 2008 exceeded 2,300.

The pharmacies of DOZ S.A. account for the largest share in the number. Operating through a chain of over 1,900 pharmacies joined under the “I Care for My Health” loy-alty scheme, DOZ S.A. continues to be an undisputed leader on the Polish market. Its market share in terms of the number of pharmacies was approximately 14% at the end of 2008.

In Lithuania, CEPD NV has almost 400 pharmacies, in-cluding 182 company-owned pharmacies (operated under two brands: Gintarine Vaistines and Norfos Vaist-ines) and partnership pharmacies supplied by Limedika, a wholesale distributor owned by the holding company. In the retail segment, CEPD NV’s share is approximately 25%, making it the third largest player in the market. With a share of more than 19%, Limedika ranks second on the market of wholesale pharmaceutical distribution.

cePD Nv’s operations

PolAND – DoZ s.A.

DoZ s.A. as part of an international holdingThe pharmacies gathered in the “I Care for My Health” programme make up Poland’s largest chain of pharma-cies operating under a common loyalty scheme. The en-tire chain is operated by DOZ S.A., a subsidiary of CEPD NV. The pharmacies managed by DOZ S.A. serve a total of 5 million patients monthly, of whom almost 3 million participate in the “I Care for My Health” scheme. DOZ S.A. also operates Poland’s largest e-pharmacy: www.doz.pl. Through centralised chain management and uni-form standards, the company is able not only to achieve ambitious sales targets, but also to ensure that the pro-motional message gets through to a precisely defined target group.

Restructuring of the companyDOZ S.A.’s history dates back to 2006, when Polska Grupa Farmaceutyczna set up a company to develop a loyalty scheme. In 2008, after incorporation into international structures with a view to matching its operating capabili-ties with the requirements of a new strategy, the company underwent a deep restructuring process. Originally a loy-alty scheme operator, DOZ S.A. turned out to be the first business in Poland to offer comprehensive services in the area of pharmacy management and development.

The period from May to September 2008 was a time of setting up all the underlying structures of the company, from a centralised sales division, to the sales force to the franchise service development and Internet sales units. New HR officers embarked on the task of recruiting man-agement, IT, marketing and sales specialists, who will use their knowledge and experience to support the largest pharmacy chain in Poland in the coming years.

At the end of 2008 the number of pharmacies operated

by the holding exceeded 2,300


> Services for Patients / CEPD N.V.’s operations

Regional division of salesA strong sales force and a quality control team guarantee proper performance and fulfilment of contractual obliga-tions towards suppliers. The “I Care for My Health” chain encompasses all functions related to management of sales: from the pricing policy to advertising and market-ing to merchandising and quality control. The portfolio of pharmacies managed by DOZ S.A. has been divided into five sales regions. In each region, several micro-markets have been designated, managed by Micro-Market Man-agers. Each pharmacy is additionally assisted by the Support Division comprising marketing specialists, sales analysts, IT and HR specialists as well as operating man-agers. The team oversees the sales plan performance, the sales policy and HR management, coordinates sup-plies to pharmacies, and monitors the levels of all effi-ciency ratios of the pharmacies.

Pharmacy formatsEach pharmacy managed by DOZ S.A. has been as-signed one of four formats, based on such key criteria as the customer profile and location of the pharmacy. Once the format is selected, DOZ S.A. makes appropriate changes in the interior design, the presentation of prod-ucts and their categories, as well as in the marketing strat-egy. The main goal behind the selection of a format is to supply the pharmacies with appropriate product mix and adapt the pricing policy to the purchasing power of cus-tomers. The formats also serve the purpose of integrating the approach to pharmacy sales. Any analysis used in co-operation with producers is prepared taking into account customer segmentation, location of pharmacies and the turnover they generate. This system guarantees that the selected marketing tools are adequate in view of the as-sumed targets and the promotion strategy.

Each pharmacy has been assigned one of four formats

Pharmacy formats adapted to meet patients’ needs

cePD Nv

PRemiUm FAmily meDicAl locAl


>Services for Patients

1,900 I Care for My Health pharmacies already sell

pharmaceuticals to over five million customers


> Services for Patients / CEPD N.V.’s operations

FranchiseEconomic pressures and rising costs make a growing number of pharmacies look for help in professional man-agement of their business. The first sign of the trend was a year-on-year increase in the number of private pharma-cies participating in loyalty schemes. The second stage will involve strengthening the cooperation and supporting further business areas. At the end of 2008 and beginning of 2009, DOZ S.A. was the first pharmaceutical business in Poland to offer franchise cooperation consisting in the provision of professional services related to management of commercial relations, sales, marketing activities and cost control. The scope of services provided by DOZ S.A. is to ensure the franchisees full support to enhance their competitiveness, and consequently ensure higher busi-ness efficiency and quality of pharmaceutical care.

www.doz.plInternet sales of pharmaceuticals is one of the fastest growing segments of the pharmaceutical market. There are about 100 Internet pharmacies in Poland now, with DOZ.PL on top as the largest one. The website has ap-proximately one million monthly visits by approximately 680,000 unique users. The portal features an e-pharma-cy, which operates based on a model combining Inter-net sales with a nationwide pharmacy chain, which is a unique solution in Poland. The model enables custom-ers to place electronic orders and collect the ordered goods at one of the 1,900 pharmacies participating in the “I Care for My Health” programme. As there is no delivery charge, the portal offers the lowest prices on the market.

DOZ S.A. was Poland’s first pharmaceutical business

to offer franchise cooperation


lithuania – UAB NFG

UAB NFG - the lithuanian distribution arm of cePD NvIn 2007, the PGF Group made its first international invest-ment by acquiring a controlling interest (50% plus two shares) in a newly formed company named UAB Naciona-line Farmacijos Grupe (UAB NFG), the operator of distribu-tion companies on the Lithuanian market. The UAB NFG Group came to comprise:

• Limedika, pharmaceutical wholesale distributor,

• Gintarine Vaistine, a chain of company-owned phar-macies,

• Norfos Vaistine, a chain of company-owned phar-macies,

• Baltijos Vaistinu Grupe (BVG), a chain of partnership pharmacies.

In July 2008, PGF Group’s shareholding in UAB NFG was contributed to CEPD NV, thus creating the Lithuanian dis-tribution arm of Central European Pharmaceutical Distri-bution NV.

Restructuring initiatives in lithuania In 2008, the UAB NFG Group focused its efforts on:

• Streamlining the wholesale and retail structures; the activities of Rex Magnus, which discontinued its op-erations, were transferred to UAB Limedika;

• Reduction of operating costs; the support functions were centralised, the offices were moved from Viln-ius to Kaunas and combined with the departments already located there, which yielded substantial cost synergies and improvements in the Group manage-ment;

• Further development of the retail chain and concen-tration of market operations within Gintarine Vaistine and Norfos Vaistine. In 2008, the number of company-owned pharmacies rose from 163 to 182.

United Kingdom – DoZ UK

To provide for Polish patients and their families living in the United Kingdom, two “I Care for My Health” pharma-cies, managed by DOZ UK, were opened in London in 2008. Quick access to professional pharmaceutical care, ability to receive free-of-charge advice in the native lan-guage, plus a wide range of Polish products are all very convenient for Poles living abroad. Several hundred Polish families buy pharmaceuticals, medical products and cos-metics at the DOZ UK pharmacies in London.


Further development of the retail chains under the Gintarine Vaistine

and the Norfos Vaistine brands


cePD Nv’s strategy

development strategy outline

The main strategic goal of CEPD NV is to develop the retail chain of pharmaceutical sales in Europe. In the com-ing years the company plans to focus its efforts on three main areas:

• Further business development on CEPD NV’s existing markets,

• International expansion onto the CEE markets,

• Leveraging significant synergies offered by the econo-mies of scale.

To ensure effective implementation of CEPD NV’s stra-tegy, its shareholders decided to raise capital through an issue of new shares. The issue is intended as a private placement addressed to selected financial investors. New shareholders will be offered shares representing up to 45% of CEPD NV’s share capital. The preparations to the private placement started in July 2008, but in view of the adverse market conditions driven by the economic crisis CEPD NV shareholders chose to postpone the launch of the formal part of the process until the overall climate on the capital markets improves.

> Services for Patients / CEPD N.V.’s strategy

Further business development on cePD Nv’s existing markets

One of the strategic priorities of CEPD NV is significant strengthening of the competitive position on the existing markets. The company long-term plans envisage dyna-mic development of the sales network, both in Poland and Lithuania.

In Poland, the company plans to increase the number of pharmacies operating as part of the “I Care for My Health” scheme. In January 2009, private pharmacists were of-fered an opportunity to participate in a pharmaceutical franchise programme, the first such scheme in Poland. The franchise concept devised by DOZ S.A. assumes a flexible combination of private businesses with the ben-efits of scale stemming from operating within a large, well-organised pharmacy chain. The new offering is intended to further strengthen the partnership programme and even better meet the expectations of private pharmacists. Already at the pilot stage, talks with Polish entrepreneurs resulted in strong interest in the concept and the first few dozen pharmacies joined the DOZ franchise programme early in 2009.

A consistent development of the pharmacy chain is also a goal set by the Lithuanian operating subsidiary of CEPD NV. The coming years are to witness a higher number of pharmacies both within the Gintarine Viastines and Norfos Vaistines company-owned pharmacy chains and partnership pharmacies cooperating with Limedika, a wholesale distributor owned by CEPD NV.

Chain development in Europe


The strategy for business growth on the existing markets includes plans to further develop the Internet platform. New functionalities are added to the Polish health portal (www.doz.pl) on a regular basis. Also the range of pro-ducts offered by the pharmacy and the Internet store operating within the portal is being gradually expanded, which directly contributes to a strong sales growth through this distribution channel. The launch of an e-pharmacy in Lithuania is planned for the second half of 2009. The por-tal will be developed based on the best solutions already existing in the Polish portal.

expansion on the cee markets

The international expansion strategy devised by CEPD NV in 2008 assumes acquisition of businesses engaged in retail distribution of pharmaceuticals in the CEE region.

Following a detailed analysis, the company’s management board selected the largest and most promising pharma-ceutical markets in the region and took steps to identify potential acquisition targets in the CEE countries. The first choice countries include the Czech Republic, Slovakia, Romania, Serbia, Belarus and Ukraine. These are the mar-kets on which CEPD NV is actively seeking companies whose operating and financial profile meet pre-defined, rigid criteria. In the case of other CEE countries, CEPD NV thoroughly analyses any offers it receives, taking an opportunistic approach to potential acquisitions.

As part of its flexible approach to international expansion, the company considers mergers with other distributors in the region and creation of joint equity groups.

CEPD NV adjusts its international expansion strategy on an ongoing basis, by constantly monitoring the situation on the individual CEE markets and carefully following changes in macroeconomic conditions.

Significant synergies attributable to economies of scale

A consistent expansion of the distribution network helps to generate strong synergies following from economies of scale. CEPD NV’s intention is to maximise the benefits both in terms of revenue and costs.

CEPD NV’s strategy provides for a gradual, though sub-stantial, strengthening of the company’s bargaining posi-tion in the coming years. Additional synergies achievable in sales include achieving greater awareness of local pharmacy brands by introducing the elements of a joint, international concept.

On the cost side, the company plans to achieve measur-able savings directly attributable to the scale of business, namely cost optimisation achieved by introducing stand-ardised solutions related to support functions, a joint mar-keting programme and IT solutions or uniform standards for pharmacy reformatting.


The first choice countries include the Czech Republic, Slovakia, Romania,

Serbia, Belarus and Ukraine


Servicesfor Pharmacies


> Services for Pharmacies


in 2008

Wholesale28%

Hospitals

15%

8%Lithuania + UK

Pre-wholesale7%

We lower drug prices by reducing costs

services for pharmacies

We lower drug prices by reducing costs

In the traditional distribution model, the wholesaler buys drugs from the producer and sells them to pharmacies, hospitals and other wholesalers. For storage and trans-port of products, distributors receive payment in the form of a margin, which is to some extent regulated by the state (the margin on subsidised drugs). Market competition forces wholesalers to share their margin with pharmacies, which usually pass it to patients. In other words, wholesal-ers give up a portion of their profit, which results in lower drug prices. On the other hand, every company’s objective is to increase its value. As a result, in order to grow without increasing prices of drugs wholesalers have to increase the scale of their operations and offer a whole range of additional services addressed not only to pharmacies, but also to drug producers and hospitals.

PGF as the key supplier to private pharmacies

More than 500 employees of the sales and telemarketing departments are available to assist pharmacists practi-cally 24 hours a day. The Group’s offering comprises a wide range of over 25 thousand items, including not only drugs from all therapeutic groups, but also medical and rehabilitation equipment, herbs, dietary supplements and cosmetics. We guarantee access to all drugs registered in Poland. In other words, thanks to our flexibility, thousands of pharmacies may be assured that when needed we can delivery any product to the right place and at the right time. We deliver products to pharmacies even three times a day to enable our customers to provide patients with quick ac-cess to any drug. It is particularly important today, when pharmacies compete not only on price, but also on the range of available products. Only a few years ago a typical pharmacy cooperated with as many as up to six whole-salers. Today, almost 40% of all pharmacies are supplied by only one wholesaler and with time the proportion will continue to rise.

Drug distribution market in Poland

The wholesale distribution market in Poland is worth PLN 21.5bn. The five largest companies account for over 75% of total sales. In the last ten years, Polska Grupa Farmaceutyczna has been the largest company supply-ing drugs to Polish patients. In 2008, we recoded sales of PLN 5.1bn and net profit of PLN 52m.

Poland is the sixth largest pharmaceutical market in Europe. There are approximately 200 pharmaceutical wholesalers in the country, the majority of which have a local reach and frequently supply drugs to several pharmacies only. The largest market players include PGF, Farmacol, Torfarm, ACP Pharma and Prosper, which, collectively, command approximately 75% of the market. For several years the number of wholesalers has been on a decline. Consolida-tion of the drug distribution segment in both Poland and globally is prompted by market-driven mechanisms. Due to a low net margin on sales of pharmaceuticals (1–2.5%), only the increased scale of business can help leverage the synergies and lead to cost reductions.

Sales of pharmaceuticals are strongly seasonal. The larg-est turnover is always reported at the beginning and end of the year, which is linked to increased disease incidence in autumn and winter.

17%


25%

franchised and partner I Care for My Health

pharmacies


> Services for Pharmacies / Logistics

changes on the pharmaceutical distribution market in 2008

In the second half of 2008, PGF launched a new, inno-vative system of selling products to pharmacies, named GRA (Product Group Discount System). Our goal was to implement a simple, transparent sale system open to all market participants: producers, wholesalers, pharmacies, and finally patients.

Under the former “traditional” sales policy of wholesal-ers, its terms provided for discounts and payment terms which were uniform for all products or differentiated for two groups of pharmaceuticals: Rx and OTC. As a conse-quence, the commercial terms offered by the producers to the wholesalers were not reflected in the commercial terms offered to pharmacies. Discounts were averaged for the groups (Rx and OTC) or set for the entire offering regardless of product differentiation. On the one hand, such a policy was unfavourable for the wholesalers and rendered sales to some customers unprofitable. On the other hand, some producers (granting high discounts to wholesalers) in fact subsidised the products of those pro-ducers who offered less attractive commercial terms.

The product range offered by PGF comprises 25 thousand preparations sold on different commercial terms, with dif-ferent payment deadlines and margins. To maintain profit-ability on all products regardless of the level of the dis-count received from the producer, PGF has launched an advanced model of selling products to pharmacies. Under the new system, the amount of discounts for pharmacies depends on the arrangements with the producer. PGF’s of-fering has been divided into seven groups, called product discount groups (Grupy Rabatowo-Asortymentowe (GRA)). Products are assigned to appropriate groups, depending on the discount value. Thanks to its transparent commer-cial policy, PGF enables pharmacies to review prices on an ongoing basis and actively manage their margins. We also help pharmacies make informed selection of generics.

New wholesale policy

product A product B product C

Discount for the pharmacy depends on the discount for the wholesaler

discount for the pharmacy: Agreed discount granted by the wholesaler to the pharmacy

discount for the wholesaler: Agreed discount granted by the producer to the wholesaler

Traditional wholesale policy

product A product B product C

Fixed turnover-based discount for the pharmacy, e.g. 6%

discount for the pharmacy: Agreed discount granted by the wholesaler to the pharmacy

discount for the wholesaler: Agreed discount granted by the producer to the wholesaler

Innovative system of selling products to pharmacies



Distribution models

Our understanding of the needs of particular groups and flexible adjustment of the offering to the evolving situa-tion on the distribution market have allowed us to cre-ate a comprehensive portfolio of sales support services. Launching innovative solutions is one of our priorities.

The basic models for the distribution of pharmaceuticals are traditional distribution models relying on pharmaceu-tical warehouses in a Full Liner (full range of drugs and a multi-functional support for market participants) or Short Liner (narrow product range) versions.

Direct distribution

Under the direct distribution model, the producer remains the owner of pharmaceuticals throughout the entire dis-tribution process, until they are sold to pharmacies. A pharmaceutical wholesaler acts as a logistics operator. On behalf of the producer, the wholesaler stores, sells and delivers goods directly to pharmacies. Such a model in-creases the availability of pharmaceuticals to pharmacies and patients and helps maintain a high level of security and quality throughout the entire distribution channel. As part of direct distribution services, the PGF companies offer producers a wide range of related services, such as call center services, payment services and monitoring of receivables. Throughout 2008, we prepared for the provi-sion of services under the first contract for the operation of a direct distribution system for AstraZeneca.

The system will be launched in May 2009. The purpose of the system is to minimize the risks and maximize the sales of medicines manufactured by AstraZeneca. Under the project, PGF guarantees high standard of service to all pharmacies.

Pharmaceutical distribution model in Poland

Producer

Pre-wholesale

Wholesalers

Patients

Pharmacies hospitals

<1% 3%97%

10%90%

Source: IMS Health

Direct Distribution

Pharmacy

Patient

Producer

Logistics operator

Logistics operator

The first direct distribution contract with AstraZeneca


> Services for Pharmacies / Market position

Wholesale distribution market

In Lithuania, PGF supplies medicinal products to pharma-cies through Limedika. The company’s head office and logistics centre are located in Kaunas in central Lithuania. Limedika supplies medicines to over 70% of Lithuanian pharmacies. However, it finds it difficult to reach the remain-ing outlets due to their strong links with other wholesalers.

Approximately 95% of pharmaceuticals offered in Lithua-nia are imported. As opposed to Poland, in Lithuania drugs can be bought only at pharmacies. Worth EUR 380m, the wholesale segment is controlled by six largest wholesal-ers which jointly command nearly 90% of the market. VP Group is the market leader, with footholds in Poland, the Czech Republic, Estonia and Latvia. PGF ranks second, with an over 19-percent market share.

Development of the drug distribution market

Poland’s pharmaceutical distribution model is still being adjusted to the systems used in Western Europe. Until the end of 1990, the wholesale and retail trade in phar-maceuticals was under the state’s control; its exclusive participants were 17 state-owned Cefarm companies. In the initial years of the transformation, wholesale and retail operations were conducted separately, the only exception being privatised Cefarm companies, distributing drugs through their company-owned pharmacies. The year 1999 brought about a change: the first mergers of Ce-farm enterprises with countrywide wholesalers (Farmacol, PGF, Orfe) were carried out. As a result of vertical integra-tion, another model has been formed, where a wholesaler manages a chain of its own pharmacies. It is the model used by the majority of the largest wholesalers nowadays. The third distribution model is based on pharmaceutical wholesale businesses (drug wholesalers run by groups of pharmacies). However, this model has proven ineffec-tive as wholesalers were unable to create a successful management system.

Consequently, in 2006 all pharmaceutical wholesalers owned by pharmacies began looking for external inves-tors. The process reached its height in 2007 when the largest of them united in the Apofarm Group (Optima Ra-dix, Galenica Silfarm, Hurtownia Aptekarz, Multi Pharme) found strategic investors. PGF was joined by one of the largest companies, Rzeszów-based Hurtownia Aptekarz, which supplies pharmaceuticals to pharmacies in south-ern Poland.

The next phase of the wholesale market consolidation resulted in a number of acquisitions of large wholesal-ers with local reach, whose total share in the countrywide market is estimated at approximately 10%.

sales policy

Most pharmaceutical wholesalers operate under a uniform sales strategy. In a traditional approach, products are sold subject to uniform principles which are not dependent on the commercial terms. Some wholesalers also adopt an approach based on two two discount groups, OTC (prod-ucts with a higher discount) and RX (products with a lower discount). Applying uniform discount terms to products with different discount rates granted by the producer makes it difficult to manage sales by the wholesalers. Un-der this approach, wholesalers are forced to subsidise sales of products with low discount rates at the expense of the producers offering better commercial terms.

Consequently, wholesalers run the risk of subsidising some of the products, earning a negative margin on the products with low discount granted by the producers. So far, only Polska Grupa Farmaceutyczna has adopted a model where the actual discount depends on the terms offered by the drug producer.

Choice of the supplier is based on the range of offered products,

frequency of deliveries and the range of additional services



internet helps reduce prices of drugs

PGF is the only distributor of drugs in Poland to use the Internet to such an extent. The Group was the first com-pany in the sector to organise the Internet Pharmaceu-tical Trade Fair for pharmacies. The new sales channel facilitates cheap and effective promotion, saves time and offers lower costs of extending the offering to a large number of pharmacies.

We also operate Poland’s first online sales portal for pharmacies, www.emedicines.pl, which is a wholesale platform offering more than five thousand most popular therapeutic products. Everything on the emedicines por-tal is done online. Orders are generated and submitted by pharmacists themselves. We have managed to simplify the portal and its operation to reduce costs, which trans-lates into low prices of offered drugs. Pharmacies also have a 24/7 access to the current offering, thanks to which PGF is in constant contact with its customers.

We support our partners

PGF’s goal is to simplify and modernise the relations between producers, pharmacies and patients, to reduce operating costs, and to maximise shared profit. The value of such a model increases in line with the improvement of profitability of each pharmacy on which the economic strength of the system is based. Every day we work on a wide range of solutions facilitating development of our partners. Apart from delivering drugs, we also offer ad-ditional services to our customers. We support pharma-cies at each level of management. The services offered by PGF include training, assistance in fitting out premises, marketing programmes, organisation of national and re-gional pharmaceutical fairs, investment loans, and multi-level support under the I Care for My Health programme.


Distribution centres in Poland and Lithuania

GdańskDywity

Łomża

Warszawa

Lublin

Rzeszów

Kraków

Wrocław

Poznań

Szczecin

Bydgoszcz

Łódź

Kowno

Katowice

local warehousespurchase centres

logistics

logistics in the pharmaceutical industry

In the sectors where use-by dates of products are long and the retail outlets can store even 100% of the offered product range, the primary concern is to ensure that the outlets are fully stocked. In the pharmaceutical sector such an approach would be completely ineffective, as there are a lot of slow-moving products used in the treatment of a very narrow group of conditions. If all pharmacies were stocked with all the drugs offered by the wholesalers, two thirds of the products would pass their use-by date each year. Therefore, in the model applied in the pharmaceuti-cal sector pharmacies stock only the most popular drugs comprising 30% of the product range. The remaining products are stored in the distributor’s warehouse and are available at the customer’s request within a few hours. The full range of medicinal products and efficient service are among the key factors considered when selecting the wholesaler by pharmacies. The time in which the drug reaches the patient is determined by efficient logistics of the wholesaler. Modern warehouse facilities meeting the Good Distribution Practice requirements and the method of storage and transport of drugs show that the highest global standards are met in terms of quality and security of drug trading in Poland.

Each month the fleet of 450 vehicles delivering drugs to pharmacies make over 3m kilometres. this makes the optimisation of logistics costs at PGF one of the pillars of our effective management.

> Services for Pharmacies / Logistics



logistics at PGF

Today we are one of the largest suppliers of drugs in Po-land. Every day our delivery vehicles make over 1,500 trips to pharmacies filling almost 20 thousand orders. The warehouses of the PGF Group supplies mainly phar-macies and hospitals as well as smaller wholesalers. In our warehouses, with an area of over 70 thousand square meters, we store all pharmaceutical products available in Poland. Thanks to the convenient location of our 14 warehouses, we are able to deliver drugs to any outlet in Poland and Lithuania within a few hours, irrespective of the distance.

cost optimisation

One of our priorities is to reduce logistics costs. We try to optimise all the possible processes, from utilisation of the warehouse space to automation of the shipment prepara-tion process to frequency of deliveries made to pharma-cies. Overall, in the last eight years, the rationalisation of the transport operations has allowed the PGF Group to reduce the transport cost ratio by approx. 35%.

The automation of processes helps us deliver drugs more quickly, cheaply and safely. So far, we have modernised

one third of our warehouses, which in total account for over 40% of the Group’s sales. As a result, the efficiency of operations of the PGF warehouses have increased by 70% over the last eight years.

In May 2008, an automated drug-handling unit was added to the existing line at our warehouse in Kraków. Thanks to the full automation of the shipment preparation process of fast-moving products, we managed to improve efficiency ratios, reduce the risk of error and accelerate the order handling process in southern Poland.

In July 2008, a new PGF warehouse was opened in By-dgoszcz. The facility’s total space is 5,200 m2, including the warehouse section of 4,000 m2. By moving the warehouse from a multi-storey building to the new facility, we improved work efficiency, reduced warehouse operating costs and shortened the time required to prepare shipments.

The new warehouse meets the current requirements of the pharmaceutical regulator and the producers. Thanks to the process automation we are able to dispatch ship-ments in record-short times. Orders for the most popular products are prepared without any human assistance. We also managed to reduce the time required to prepare a delivery in the life saving mode to just a few minutes.

Every day our delivery vehicles make over 1,500 trips to pharmacies


Servicesfor Hospitals


hospital distribution market

hospital market in 2008

Last year, the value of the hospital market grew strongly, by nearly 17%, to PLN 2.2bn. The segment’s growth is closely linked with the amount of funding that the Nation-al Healthcare Fund is able to allocate to hospital care. Thanks to high collectibility of health insurance contribu-tions and higher employment figures, in 2008 the Nation-al Healthcare Fund was able to allocate to the segment PLN 24.9bn (including funds intended to go toward an increase in the medical staff’s salaries) – that is 32% more than a year earlier.

While the assiduous commercialisation of the independ-ent public health-care centres will make it possible to im-prove the financial standing of hospitals, this method of their transformation into non-public health-care centres requires their prior liquidation, as a consequence of which their outstanding debt (owed, for instance, to suppliers), become debt of the founding bodies, from which they will often have to be enforced in court, which entails some degree of liquidity risk. A potential growth driver of the hospital market may be the burgeoning sector of fully pri-vate hospitals, which – being better managed and more profitable than public establishments – frequently obtain partial or full financing from the National Healthcare Fund, which means that their patients do not have to pay for medical procedures or surgeries.

In-patient health-care services are not subject to any marked seasonal fluctuations; the first and fourth quarters see an increase of revenue from sales of medicines. The major problem confronting hospitals is the unresolved is-sue of debt and difficulties hospitals have with maintaining liquidity. The debt restructuring carried out four years ago led to a decrease in the value of the sector’s outstanding debts. Some hospitals which were released from debt are now falling into debt again, which is a consequence of:

• Introduction in mid-2008 of a new system of settle-

2,500

2,000

1,500

1,000

500

0

Value of the hospital market (PLNm)

13461593

18922210

1772

2004 2005 2006 2007 2008 PLNm

Source: IMS Health

ments with the National Healthcare Fund (the system is still being fine-tuned), based on the so-called Uniform Patient Groups, which assigns the same value to similar clinical problems and similar processes of their diagno-sis and treatment,

• Discontinuation of financing of the medical person-nel’s salaries with a separate funding stream (while medical doctors have upheld their salary demands) and the unfavourable foreign-exchange rates (the National Healthcare Fund does not have a policy of covering losses incurred by hospitals due to a weaker złoty).

The ageing Polish society will increasingly need health care both in hospitals and in long-term care facilities. The fu-ture growth of the market will be driven by increased public spending on health care, commercialisation of hospitals and the demographic changes. In summary, 2008 was a year good in terms of incremental revenues and collect-ibility of receivables.


in 2008

Wholesale28%

Hospitals

15%

8%Lithuania + UK

Pre-wholesale7%

17%


25%

franchised and partner I Care for My Health pharmacies

> Services for Hospitals


> Services for Hospitals / Hospital distribution market

Close cooperation with hospitals and sales to the most reliable customers

services to hospitals

Hospitals supplied by the PGF Group are served by our dedicated subsidiary PGF Urtica and regional wholesale companies. PGF Urtica has supplied medicines and me-dical products to in-patient health care institutions since 1991. Since its inception, the company has concentra-ted on this market segment. With a track record of over 18 years in the business, PGF Urtica is viewed as one of the most competitive, dynamic and flexible participants of the sector of pharmaceutical distribution to hospitals. In 2008, PGF sales to hospitals exceeded PLN 740m, which represents a 34% share in Poland’s hospital market.

Our sales to hospitals are carried out under public procu-rement contracts. This distribution channel accounted for the largest part of the Group’s revenue earned in 2008. During the year, the PGF Group prepared 2,470 tender bids; in 75% of the cases we were awarded contracts. The PGF Group has maintained a stable leading position in the in-patient health care market for many years, owing to its ability to flexibly respond to the changing market environ-ment, build long-term relationship with business partners and constantly adapt to the changing environment.

The strategy of addressing key needs of hospitals has re-sulted in the Group achieving a high position in in-patient healthcare services. The key success factors include:

• Access to the widest range of products available on the market. Full availability of pharmaceuticals from wa-rehouses and immediate delivery of medicines to any place in Poland

• Competitively priced product and service offering benefiting from economies of scale and a centralised procurement system used by the Group

• Specialised and adequately resourced logistics ne-twork ensuring supplies of pharmaceuticals on the best available terms, within just a few hours of placing an order

• Maintaining uninterrupted communication between the main warehouses with a view to ensuring full availa-bility of the offered products at all locations

• Offering the most cost effective means of liabilities funding which are not available to hospitals directly on the market.

support programmes

PGF Urtica initiated a risk assessment programme appli-cable to hospital sales as early as in 2000. In the subse-quent years, the programme was implemented by other PGF Group members. Operating in a difficult market envi-ronment, the PGF Group is required to apply a detailed approach to the evaluation of the liquidity risk faced by its business partners. Based on a proprietary risk asses-sment system and an associated system of credit limits, we manage the level of acceptable commercial risk. Any establishment which begins cooperation with the Group is first assessed by analysts based on several criteria, inclu-ding financial liquidity, profitability and growth strategy. As a result, the establishments are divided into risk groups and the terms of cooperation are determined based on the resulting classification. The evaluation system allows us to effectively manage sales and, at the same time, flexibly respond to any adverse changes in the financial standing of each of the cooperating entities.

Supported by a central debt enforcement system de-ployed in 2008, the on-going monitoring of receivables through two central units allows the PGF Group to eli-minate any threats of excessive increase in customers’ indebtedness as such threats arise. Information on de-faulting payers is immediately distributed not only to our subsidiaries but also to trade divisions. However, as we realise that health care institutions are faced with serio-


> Services for Hospitals

us challenges nowadays and that they need supplies on a continuous basis, PGF offers hospitals programmes which allow them to improve their financial liquidity. The Promissory Note Programme and the Credit Partner Pro-gramme, both credit schemes, provide a much better so-lution to problems than debt enforcement proceedings. Supported by the above programmes, PGF has no major

PGF offers hospitals programmes which allow them

to improve their financial liquidity

problems with bad debt, as it tries to resolve financial is-sues in cooperation with hospitals. A benefit for hospitals is that the hospital management is guaranteed continuity of drug supplies and has a clear view of cooperation. In 2008, the total amount of financing provided under the two programmes was PLN 126m.


> ??? / Polityka jakościServices for Drug Producers


> Services for Drug Producers

Drug producers are increasingly more willing to outsource non-core activities to external providers. therefore, in the coming years the pharmaceutical market and its distribution chain may undergo rapid changes. A modern drug distributor must adjust its operating model to meet customers’ expectations, not only in a single country but in international markets as well.

support for drug producers

Drug wholesalers are primarily required to ensure distribu-tion of products to as many recipients as possible, howe-ver, increasingly more often, the scope of their business encompasses a wide range of logistics, management, sales and trade marketing services. For a traditional drug wholesaler, a strategic objective is now to develop servi-ces guaranteeing more dynamic growth of its business partners.

Polska Grupa Farmaceutyczna S.A. cooperates with all pharmaceutical producers present in Poland and Lithu-ania. In addition to supply chain management and finan-cial and administration services, we also provides a vast array of sales support services. We cooperate with produ-cers and help them arrange promotional activities relating to their products, offering market research, telemarketing support and providing a team of customer assistants. Through 1,900 I Care for My Health pharmacies in Poland, we can provide a comprehensive range of marketing ser-vices relating to product market launches, including joint advertising campaigns, distribution of POS materials in pharmacies, direct mailing, merchandising and publica-tions for pharmacies and patients with a monthly circula-tion of over 80,000.

Direct distribution

2009 will see introduction of a new model of distribution on the Polish pharmaceutical market. In May 2009, we will launch the Direct Sales System for AstraZeneca Polska, the first solution of that kind in Poland. Selected distribu-tors will supply pharmaceuticals to pharmacies on behalf and for the account of the producer.

international cooperation

Drug producers will be among the first beneficiaries of PGF’s expansion to other Central European markets. Operating on several markets in the region, the Group

will be able to offer an even more comprehensive support to its customers. Centralised service, large-scale procu-rement, long-term contracts with guaranteed payment terms – these are just a few services from the full range of new opportunities. Flexible approach to producers’ needs and mutual development have been major pillars of PGF’s market success to date. This is why we will devote special attention to this segment of our business in future.

logistics services

PGF has modern warehouse facilities located in the lar-gest Polish cities.

call center

As part of PGF S.A. we have established the Call Center division which provides telesales and telemarketing servi-ces for producers.

The following services are offered:

• Product promotion,

• New product launches,

• Market research (gauging potential demand from pharmacies),

• Information and marketing activities (e.g. reaching pharmacies with information on new products laun-ches product removals from the market, launches of replacement products, etc.),

• Outsourcing of call center services (e.g. handling enquiries from customers (pharmacies) in connection with promotional activities carried out simultaneously in other media; support/ complementation of the cu-stomer existing call-center, e.g. if the customer has limited resources; replacing the customer’s call-cen-ter, etc.).


> Services for Drug Producers / Other activities

other activities

Within the PGF Group there are also special-purpose ve-hicles operating in the health care sector, as well as enti-ties providing support to core-business segments.

laboratorium Galenowe olsztyn sp. z o.o.

Laboratorium Galenowe Olsztyn holds a well-established position among manufacturers of pharmaceuticals and cosmetics. The company is one of the major manufac-turers of phytopharmaceuticals in Poland. It markets its products through the largest domestic pharmaceutical wholesalers. Laboratorium Galenowe Olsztyn manufac-tures preparations based on proven recipes with use of state-of-the-art manufacturing methods. It holds a permit for the manufacture of pharmaceutical products issued by the General Pharmaceutical Inspector. In January 2006, Laboratorium Galenowe Olsztyn obtained the GMP quali-ty certificate. Laboratorium Galenowe Olsztyn meets the requirements of the World Health Organisation.

PhARmeNA s.A.

PHARMENA S.A. was established as a result of a discove-ry by the scientists from the Łódź University of Technology of the possibility to use selected pyridinium salts in medici-ne. The company’s mission is to commercialise the disco-very. The said substances may be used in many branches of medicine. Currently, the company focuses on:

• Production of innovative dermocosmetics (since 2003), protected by patent rights on 15 key European markets,

• Research, conducted in the USA and Canada, into the application of selected pyridinium salts in medi-cine, e.g. to develop a drug that would be the most groundbreaking solution worldwide to help patients in their fight against atherosclerosis.

In order to conduct research into the use of selected py-ridinium salts for athero- and gastroprotection, in 2005 PHARMENA S.A. and two funds, Domain Partners and MVM Life Sciences, established PNAI, a special purpose vehicle in the USA (currently operating under the name of Cortria Corporation). PHARMENA S.A. granted a license to Cortria, while retaining the ownership right to the acti-ve substance MNA. The research project was named by Windhover, a major analytical agency, one of the Top 10 Most Promising Projects Worldwide for fighting off circu-latory system diseases. The value of the atheroprotection market is estimated at approx. USD 38-42bn per annum, and is believed to be the fastest growing pharmaceuti-cals segment worldwide. Since August 2008, PHARMENA S.A. shares have been listed on the New Connect market of the Warsaw Stock Exchange (WSE).

NDs Depo s.A.

NDS Depo sp. z o.o. was established in 2004 as a sub-sidiary of Polska Grupa Farmaceutyczna. The company develops and manages a countrywide network of com-mercial real estate leased out to pharmacies. In the imple-mentation of the long-term growth strategy and in order to raise funds for strategy execution, in 2008 NDS Depo S.A. was established and acquired 100% of shares in NDS Depo Sp. z o.o. from PGF S.A. NDS Depo S.A. intends to attract an external investor through issues of new shares and floatation on the WSE. The company’s Management Board plans expansion onto the CEE markets. Given the nature of the pharmaceutical market, focusing NDS Depo S.A.’s core business on cooperation with pharmacies gu-arantees stability and security to the company’s share-holders.


> Services for Drug Producers

Daruma sp. z o.o.

Daruma sp. z o.o. was established in 2004 to manage warehouse facilities owned by the Group but not used in the core business and held for sale.

Business support solution s.A.

Business Support Solution S.A. was established in 2008 as a result of the spin-off of the Group’s financial and ac-counting functions. The company will take over all assets and functions of the Financial and Accounting Centre operating within the PGF Group. The Centre provides fi-nancial and accounting services to the 122 subsidiaries of the Group, manages their liquidity and performs external audits. Business Support Solutions will also add legal se-rvices to the Financial and Accounting Centre’s offering.

Farm serwis sp. z o.o.

Farm Serwis sp. z o.o. was established in 2001. In the coming years, the company plans to continue to follow its core business, that is provision of financial services con-sisting in the trade in receivables and advancing loans to the PGF Group’s customers and subsidiaries. In 2008, the company was reorganised to become the Group’s central unit specialising in the management of credit limits, as well as monitoring and collecting receivables from phar-macies - the Group’s customers.

Pharma Partner sp. z o.o.

Pharma Partner sp. z o.o. was established in 2008 as a result of the spin-off of the Group’s service functions. The company provides logistics services, particularly distribu-tion and transport services. The Group’s experience and

capabilities enable Pharma Partner to offer high-quality warehousing and transport services meeting the require-ments of the Pharmaceutical Law, and to cater to the ne-eds of pharmaceutical producers and distributors.

ePRUF s.A.

ePRUF S.A. is an electronic platform for settlement of pharmaceutical services. The company, established in 2008, is the operator of private label cards. The solution has been developed with a view to supporting the pro-cess of co-financing the purchase of pharmaceuticals; such process involves patients and co-financing entities, whether the producer, insurer or a social welfare organisa-tion. The benefits are granted based on the unique identity cards assigned to customers – ePRUF cards, which may be used at selected pharmacies across the country. The ePRUF system guarantees that the benefits are used for predefined purposes, simplifies administration procedu-res, enhances control of the process, and limits room for abuse and error.

Urtica logistics

Urtica Logistics is a brand of PGF Urtica Sp. z o.o. Using PGF’s transport resources, Urtica Logistics offers com-prehensive logistics solutions for the pharmaceutical sec-tor. It specialises in the transport of medicines, medicinal products and dressing materials. The company provides its services to in-patient clinics, as well as pharmacies, out-patient clinics, private practices and pharmaceutical warehouses. Thanks to its logistics potential, Urtica Lo-gistics is bale to offer services to several tens of external customers, primarily producers.


SupplementaryInformation


Business risk is inherent in running any enterprise. identifying threats in the immediate environment and mitigating their impact on the company’s performance is the basic function of a risk management system.

> Supplementary Information / Risk management

Risk management

PGF’s internal audit and risk management system serves as a gauge of efficacy and a source of information on the quality of business processes. In order of importance, the Company’s attention is focused on identifying strategic risks, then financial and operational risks. The risk man-agement system covers the following areas:

• compliance/regulatory risk – arising from non-compliance with or violation of applicable regulations in the course of business

• operational risk – arising from customer attrition, de-mand fluctuations, competition risk, trade and contract risk, customer insolvency risk, supply chain risk, risk of losing lease rights, personnel-related risks, and risk as-sociated with the security and protection of assets

• Financial risk – connected with financing of opera-tions and securing financial stability, including the as-sessment of creditworthiness of counterparties, inter-est rate risk, foreign exchange risk and investment risk

• technology/it risk – including risk associated with the security and protection of data stored in IT systems

• Risk of abuse

• other types of risk, including risk related to busi-ness continuity, crisis management, reputation risk, and risk related to the lack of information flow.

Risk management within the PGF Group lies within the scope of responsibilities of the Management Board whose task is to identify potential threats and issue instructions to develop procedures aimed at mitigating the identified risk. Each unit implements a set of control procedures. The objective of the internal audit function is to monitor and audit the efficacy of risk management procedures based on the International Standards for the Professional Practice of Internal Auditing and standards developed by the Institute of Internal Auditors (IIA).

legal risk

A legal department has been formed at the PGF Group, consisting of several employees, which on an on-going ba-sis monitors changes in the existing laws and regulations.

The department prepares analyses and recommenda-tions for the Management Board. The Chairman of the PGF’s Supervisory Board, Mr Jerzy Leszczyński, a lawyer, is also responsible for the oversight of the Group’s opera-tions in terms of their compliance with the applicable laws. Mr Leszczyński joined us in 1994 and since then has held the position of the Chairman of the Supervisory Board.

operational risk

As part of its operational risk management framework, the PGF Group:

• Sets limits on sales to hospitals, observed across the entire Group, classifying hospitals to specific risk groups based on their financial performance,

• Sets limits on trade credits extended to pharma-cies, observed across the entire Group, based on a pre-defined algorithm,

• Monitors the structure and turnover of accounts re-ceivable, and efficiency of the collection procedures,

• Monitors daily sales and financial performance,

• Performs peer comparison and monitors the mar-ket environment in Poland and abroad on an ongoing basis.

No operational risk management department has been formed within the PGF Group. The operational risk categories are managed within the individual divisions and the relevant management reports are submitted on an on-going basis to the competent members of the Management Board.


> Supplementary Information / Risk management

Financial risk

Management of financial risk, which at PGF consists mainly of credit risk, liquidity risk, currency risk and inter-est rate risk, is coordinated at the PGF Head Office, where the procedures implemented and used across the Group are developed. The management of liquidity risk, currency risk and interest rate risk connected with financial instru-ments held and used, including derivatives, is carried out by the Head Office’s financial division under the perma-nent supervision of the Management Board. The Group manages its credit risk through a dedicated subsidiary.

credit risk is chiefly associated with trade receivables and loans. The Group’s credit risk concentration is rela-tively low due to distribution of credit exposures across a large customer base. Trade credit applications are first analysed by the Risk Committee and submitted for ap-proval by the Management Board. As part of its credit risk management framework, the PGF Group:

• Sets trade limits for business partners in accord-ance with the rules stipulated in the internal procedure followed by all of the Group’s companies, which define the cap of a given customer’s total liabilities towards the Group companies. In the event of a heightened risk exposure, security on assets is established,

• Monitors the level of current indebtedness and utili-sation of trade credit limits, using appropriate system tools to block deferred payment transactions if trade limits are exceeded. The system also prevents sale against deferred payment without a trade limit speci-fied within the system,

• Provides insurance cover of a portion of the trade receivables under an insurance agreement concluded with TU Euler Hermes. The upper limit of the insurance cover is determined based on credit reviews carried out by the insurer.

interest rate risk is related to the Group’s use of bank loans and issue of notes. A majority of these financial instruments bear interest at variable interest rates and expose PGF to the risk of changes in cash flows and increased financial expenses due to interest rate movements. As part of its risk management function, the Company partially hedges against the exposure by entering into hedging transac-tions, such as IRSs and options. The PGF Group uses Polish złoty-denominated financing, which bears interest at variable interest rates established in reference to WIBOR rates (bank loans and medium- and long-term notes). In the case of loans – interest rates remain unchanged within one-month or one-week periods, or vary daily (linked to WIBOR O/N, TN, SW or 1M). Since November 2007, the undertakings of Lithuania’s UAB Nacionaline Farmaci-jos Grupe have been consolidated with the PGF Group. Therefore, the consolidated balance sheet as at the end of 2008 presents loans and borrowings taken out by the UAB Group in currencies other than the złoty. These relate to liabilities denominated in EUR and LTL.

sensitivity analysis

The following is a sensitivity analysis, showing effects of potential interest rate changes on the financial per-formance.

As at the balance-sheet date, interest liabilities based on variable interest rates amounted to PLN 600.2m. An inter-est rate of 6.89% was used for calculations, representing an average cost of financing as at the balance-sheet date, weighted by credit limits.


> Supplementary Information / Quality assurance policy

Quality assurance policy

The quality assurance division continues the implementa-tion of quality assurance measures at the branches and distribution companies of the PGF Group, trying to meet the demands of the market and the changing legal require-ments. The Implementation of the quality assurance system leads to process optimisation and improvement of the ef-fectiveness of quality assurance measures. The implement-ed and documented quality assurance system serves as a guarantee of the reliability and credibility of PGF.

A uniform quality assurance system, compliant with the GDP (Good Distribution Practice) requirements, was im-plemented at the Group companies. The system com-prises the following elements:

• Oversight of documentation and records

• Quality audit system

• Quality assurance training system

• Acceptance, storage, release and transport of prod-ucts

• Trade in narcotics, psychotropic agents and precur-sors

• Complaint management

• Handling of the product suspension and withdrawal process

• Maintenance of the appropriate sanitary and techni-cal condition of warehouses.

The system also meets the GMP (Good Manufacturing Practice) requirements relating to the imports of therapeu-tic products.

We ensure compliance with the quality requirements of suppliers and customers. The PGF’s quality assurance division actively participates in the planned implementa-tion at PGF of the direct sales support system for Astra-Zeneca.

currency risk is related to purchases of goods for re-sale settled in foreign currencies. The proportion of the purchases settled in foreign currencies in relation to the aggregate value of all purchases of goods for resale made in each year is relatively low, i.e. about 1.4%, with 96.3% of the purchases settled in the euro. Transactions are hedged with forward contracts on a selective basis, depending on the currency market conditions.

liquidity risk is strictly connected with the PGF Group’s ability to meet the outstanding liabilities. As part of its liqu-idity risk management framework, the Group:

• Forecasts cash flows as part of the liquidity analysis,

• Monitors liquidity and secures financing by entering into loan agreements and maintaining credit lines.

To improve efficiency, the Group optimised its liquidity management process by centralising management func-tions in the parent undertaking. Surplus cash generated by the parent undertaking and subsidiary undertakings is invested and managed by at the Head Office level.

Surplus cash generated by the entities of the Group is net-ted off against the loans taken by the parent undertaking under the cash pooling system used by the Group.

Sensitivity analysis

Potential change in interest rates

Effect on interest expense incurred

in the reporting period

+/- 0.50p.p.

+/- 1.0p.p.

+/- 1.5p.p.

+/- PLN 3.00 m

+/- PLN 6.00 m

+/- PLN 9.00 m


> Supplementary Information / Employees

employees

employment at the PGF Group

In 2008, the average employment at the Group was 6,397. Blue-collar staff and white-collar staff accounted for 25% and 75% of the total workforce at PGF, respectively.

competence development programme

A competence development system is supported by the Human Resources Department. The areas crucial for PGF’s development primarily include sales training and skills development training in the fields of finance, IT tech-nologies and management.

improvement of the managerial staff’s qualifications

One of the objectives of the PGF Group’s HR policy is to ensure development of the organisation through training and promoting employees with high potential. The most outstanding individuals participate in MBA courses and managerial skill development programmes sponsored by PGF. Our objective is to promote the most outstanding individuals who feel connected with the PGF team and wish to continue their professional careers in the phar-maceutical business in future. Over 30% of the Group’s senior management staff who form PGF S.A.’s governing bodies have been promoted internally. One of the most significant achievements of PGF’s modern personnel and remuneration policy has been the implementation of an MBO incentive scheme for the CEPD management, DOZ S.A. and DOZ UK staff. Clearly defined objectives, performance-oriented measures and effective execution of tasks have been supported by an attractive system of salaries, which is an innovative solution in the pharmaceu-tical retail sector.

As a result of a series of acquisitions in the past years, the PGF Group has been developing dynamically, consistently increasing its headcount. in 2008, the PGF Group had a workforce of 6.4 thousand.

Litewski rynek dystrybucji farmaceutycznej – segment hurtowyLitewski rynek dystrybucji farmaceutycznej – segment hurtowy

Sales

53%

Logistics

23%

IT services

1%Finance and accounting

7%

Administration

16%

Employment structure by divisions

Litewski rynek dystrybucji farmaceutycznej – segment hurtowyLitewski rynek dystrybucji farmaceutycznej – segment hurtowy

up to 25 years

11%

26-35 years

36%36-45 years

23%

46-55 years

23%

more than 55 years

8%

Employment structure by age


> ???

stable team

HR policies are tailored towards supporting development of high-potential staff and cooperation with experienced professionals, who naturally become instructors for future leaders.

PGF – the largest employer for pharmacists in Poland

In Poland, Polska Grupa Farmaceutyczna is the largest em-ployer offering pharmacists a wide array of opportunities. These include employment at PGF-owned pharmacies, wholesale companies and our Head Office, including em-ployment at managerial posts. The majority of pharmacists employed at PGF are females, which has a strong bearing on the Group’s employment structure and HR policies. We strive to offer flexible employment terms to our staff, par-ticularly to young mothers, to make work easier for them.

Business Academy

2008 saw the launch of the Business Academy, a pro-gramme of training courses and management workshops designed for pharmacists and the sales staff. The pro-gramme served to improve the employees’ professional qualifications with respect to management of pharma-cies, relations with patients, professional pharmaceutical advice, consultative selling and merchandising. In 2008, a five-day Business Academy workshop was attended by 560 pharmacists and 66 sales staff.

voluntary work

PGF S.A. supports the idea of voluntary work and although it has not yet been covered by an official programme, the staff of PGF companies actively work for the benefit of lo-cal communities (primarily children from orphanages) and to promote environmental protection. The largest group of the staff are engaged in the activities of the I Care for My Health Foundation, established by PGF in 2007. The number of volunteers is growing every year.


> Supplementary Information / Corporate social responsibility

A vast number of corporations feel that they are under a moral obligation to respond to the problems of the modern world, such as poverty, illness or environmental pollution. in the name of social solidarity, more and more businesses support, or indeed initiate, various programmes designed to assist the needy without compromising their ability to generate profits for shareholders.

corporate social responsibility

Corporate social responsibility (CSR) is a concept where-by companies integrate social concerns into their busi-ness strategies on a voluntary basis. CSR embraces the responsibility of a business for the impact of its activi-ties on employees, suppliers, parties to a transaction and other business partners, local communities, the environ-ment and, last but not least, customers who are essential for its success.

Resolving global social problems have always fallen within the scope of governmental responsibilities. In modern days, however, it is impossible to tackle problems of so-cial, environmental, economic or political nature without the support offered by the business world. Nowadays, businesses are expected to embrace more responsibil-ity for the public sphere and the impact of their activities on the environment.

The practice of CRS should result from keen social aware-ness of entrepreneurs and their strong need to resolve es-sential social problems, such as insufficient environmental conservation, unemployment, poverty, social exclusion, or poor access to medicines.

i care for my health Foundation

The most serious social problem of ours is poor access to medicines. The cost of medicines in Poland is one of the highest in Europe. According to a report prepared by the World Health Organisation (WHO), Poles cover 64% of the medicine price. The remaining sum is refunded by the state. By WHO standards, access to medicines is deemed poor if patients have to cover over 50% of the price.

PGF decided that its CRS agenda would be to help those individuals who are unable to purchase medicines and continue efficient treatment due to their poor living and financial condition. To accomplish that objective, the I Care for My Health Foundation was established in August 2007. Since its establishment, the Foundation has given assistance to 12 thousand people, allocating for the purpose above PLN 1 m.


> ???

museum of Pharmacy

Polska Grupa Farmaceutyczna was formed owing to the support of pharmacists, who have been the prima-ry source of information on medicines for generations. Hundreds of interviews on patients’ needs enabled us to define the same objective for PGF and thousands of co-operating pharmacies. The aim is to combine tradi-tion with modernity – the most valuable experience from the past with the vision of future. Not to forget common roots, PGF supports the development of two museums, one in Lublin and one in Łódź, which were founded by the Group. The Museums of Pharmacy are to preserve the great tradition of Polish pharmacies. In addition, PGF is a patron of historical pharmacies, the oldest of which was set up in 1609 in Zamość. The inimitable historical style of the pharmacies’ interiors has been preserved. As a result of personal commitment of our employees, a number of historical exhibits of apothecary practice has been col-lected there.

A number of those historical pharmacies have been pre-served exclusively owing to the commitment and consid-eration of PGF S.A. and I Care for My Health pharmacies. The pharmacies are supplied by Polska Grupa Farma-ceutyczna and enjoy security of deliveries and PGF’s complete offering, which embraces modern marketing, frequent and attractive promotions, efficient logistics, as well as conferences with leading management experts.

We admire the rapid and continuous advances around us, but we also preserve our fine tradition. Therefore, we publish monographs devoted to historical pharmacies in Poland. Anyone fond of the history of pharmacy in Po-land will find these publications fascinating. The books from the series “Najsłynniejsze polskie apteki” (Poland’s Most Famous Pharmacies) contribute to the so-called “collective memory discourse” - which is both dynamic and seminal – by enabling us to establish a relationship with the past events, and, concurrently, assisting us to comprehend our present condition.

Urtica Dzieciom

Through companies operating in various regions of Po-land, PGF encourages initiatives of local communities and backs up the pharmaceutical professionals. For instance, the largest, domestic distributor of medicines for in-patient care, PGF Urtica, has been holding charity auctions called Urtica Dzieciom (Urtica for Children) for twelve years. So far the money raised at the art auctions has helped hundreds of children in oncological hospitals throughout Poland.

In central Poland, PGF has been holding charity painting auctions and concerts for four years. Proceeds have been donated to chronically or terminally ill children. In 2008, thanks to people who took part in the auction organised at Wrocławski Teatr Współczesny im. Edwarda Wiercińskiego (a famous theatre in Wrocław), children in 15 oncological hospitals received medical equipment, toys and other nec-essary items.


Financial Information


> Financial Information / Financial performance in 2008

in 2008, the PGF Group posted the highest ever sales revenue of PlN 5.1bn, maintaining a leading position on the Polish market of pharmaceutical distribution.

Financial highlights 2005-2008

2008/20072005 2006 2007 2008

Sales revenue

EBITDA

Operating profit

Net profit

Net profit attributable to equity holders of the parent company

Balance-sheet total

Equity of parent undertaking

Earnings per share (EPS)

Price/earnings ratio (P/E)

PLNm

PLNm

PLNm

PLNm

PLNm

PLNm

PLNm

PLN

x

3,890.7

92.5

75.5

54.3

52.6

1,445.4

257.4

4.26

14.2

4,007.6

108.3

87.0

63.0

62.5

1,490.4

291.2

5.02

15.8

4,410.5

113.7

93.0

73.7

74.4

2,011.7

406.6

5.91

15.1

5,095.8

109.6

83.5

51.5

52.1

2,242.5

444.4

4.16

6.6

15.5%

-3.6%

-10%

-30.0%

-30.0%

11.5%

9%

-29.6%

-56%

Financial performance in 2008

1,400

1,300

1,200

1,100

1,000

900

800

700

Seasonality of sales (PLNm)

1Q ‘0

2

2Q ‘0

2

3Q ‘0

2

4Q ‘0

2

1Q ‘0

3

2Q ‘0

3

3Q ‘0

3

4Q ‘0

3

1Q ‘0

4

2Q ‘0

4

3Q ‘0

4

4Q ‘0

4

1Q ‘0

5

2Q ‘0

5

3Q ‘0

5

4Q ‘0

5

1Q ‘0

6

2Q ‘0

6

3Q ‘0

6

4Q ‘0

6

1Q ‘0

7

2Q ‘0

7

3Q ‘0

7

4Q ‘0

7

1Q ‘0

8

2Q ‘0

8

3Q ‘0

8

4Q ‘0

8


Sales of pharmaceuticals are driven by seasonality fac-tors. This is why, due to higher incidence of diseases in the autumn and winter period, the PGF Group records the highest sales in Q1 and Q4, while spring and summer (Q2 and Q3) usually see the lowest turnovers.

Financial performance

In 2008, the PGF Group posted the highest ever sales revenue of PLN 5.1bn. The figure represented a 15.5% increase on 2007, which – in the context of the marked economic slowdown triggered by the global financial cri-sis – must be viewed as a remarkable result. Gross margin reached 10.62%, showing an improvement of 0.11 per-centage point year on year.

Selling costs and general and administrative expenses in-creased by 21.4% year on year, to PLN 482.6m. The cor-responding cost ratio in the period was 9.47%, up by 0.46 percentage points relative to 2007. The rise in the above costs and expenses resulted chiefly from the inclusion of retailers in the Group, whose activities entail higher costs compared with wholesalers, as well as the implementa-tion of restructuring and development projects.

In 2008, the Group recorded a positive balance of other operating income and other operating expenses, which added PLN 24.5m to its operating result (the figure in-cluded gain on sale of non-financial non-current assets of PLN 27.3m).

Operating profit fell by 10.2% compared with the 2007 level, to PLN 83.5m. Operating margin also saw a year-on-year drop – by 0.5 percentage point, to 1.6%.

The Group generated negative cash flows from financing activities of PLN 23.2m, owing primarily to a rise in inter-est rates and a higher level of debt, connected with the need to finance the acquisitions carried out in 2007 and partly in 2008. The key items of financial income included


Key items of the income statement

PLNm 2008 2007 y-o-y change

Sales revenue

Operating profit

Pre-tax profit

Net profit attributable to equity holders of the parent

Operating profit margin

Pre-tax profit margin

Net margin

5,095.8

83.5

61.5

52.1

1.6%

1.2%

1.0%

4,410.5

93.0

90.0

74.4

2.1%

2.0%

1.7%

+15.5%

-10.2%

-31.7%

-30.0%

-0.5 p.p.

-0.8 p.p.

-0.7 p.p.

Operating expenses

PLNm 2008 2007 y-o-y change

Selling costs

General and admi-nistrative expenses

Total expenses

Cost ratio

344.1

138.5

482.6

9.47%

302.0

95.4

397.4

9.01%

13.9%

45.2%

21.4%

0.46 p.p.

The highest sales revenue in our history

- peaked at PLN 5.1.bn


>Financial Information

interest received on loans and receivables. The key items of financial expenses were interest paid on loans and notes, as well as impairment charges for interest.

Due to higher financial expenses, pre-tax profit in 2008 fell by 31.7% year on year, to PLN 61.5m. Pre-tax margin stood at 1.2%, down by 0.8 percentage point compared with the previous year.

Similarly, net profit declined by 30%, to PLN 52.1m, which translated into net margin of 1% (down by 0.7 percen-tage point from 2007).

2008 was one of the most challenging periods in PGF’s history. The ongoing restructuring processes: the spin-off of the retail business and its transfer to CEPD N.V., the introduction of a new sales policy and the preparation to operate the direct distribution project, must be cited as the major cost drivers. Additionally, the rise in interest rates coupled with a higher level of debt significantly drove up financial expenses. The combination of these factors contributed to the deterioration of the Group’s profitabil-ity ratios across the entire P&L. The only exception was gross margin which rose on the back of the scale-up of the Group’s retail business and the implementation of a new marketing policy.

Structure of assets and sources of their financing

In 2008, the structure of assets did not materially change compared with 2007, and current assets prevailed over non-current assets.

12%

10%

8%

6%

4%

2%

0%

% gross margin % EBITDA margin % EBIT margin

Profitability ratios

10.4

9%

10.5

1%

10.6

2%

2.70

%

2.58

%

2.15

%

2.18

%

2.11

%

1.64

%

2006 2007 2008

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0%

2.03

%

2.04

%

1.21

%

1.57

%

1.67

%

1.01

%

pre-tax margin net margin

Profitability ratios

2006 2007 2008

2008 was one of the most challenging periods in PGF’s history



structure of assets in 2008 and 2007

Current assets accounted for 63.2% of total assets, com-pared with 69.2% a year earlier. The main items of cur-rent assets were inventories and trade receivables. As at the end of 2008, the value of trade receivables was PLN 438.9m and was lower by PLN 41.5m year on year.

The average collection period for trade receivables was 31 days and was seven days shorter than in the previous year. The quality of the receivables portfolio is given key importance and in 2008 – especially in the face of the anticipa-ted economic slowdown – both the receivables portfolio and the related risks were closely monitored.

As at the balance-sheet date, the inventory cycle was 52 days, having shortened by two days compared with the end of 2007. Inventories accounted for 30.3% of PGF’s assets. Relative to the end of 2007, that proportion rose by 0.6 percentage point. The shorter inventory cycle testifies to the gradually improving efficiency of the central ware-house management implemented by the Group.

Current financial assets of PLN 157.1m (PLN 127.8m in 2007) comprised mainly loans advanced. As at the end of 2008, cash and cash equivalents amounted to PLN 66.6m (PLN 116.3m in 2007).

Non-current assets accounted for 36.8% of the bal-ance-sheet total, having risen by 6 percentage points from the level recorded at the end of the previous year. They included chiefly goodwill (23.0%), property, plant and equipment (10.0%) and intangible assets (1.2%).

Inventory cycle, collection period and payment period (days)

days Dec 31 2008 Dec 31 2007 y-o-y change

Inventory cycle*

Average col-lection period*

Average pay-ment period*

52

31

63

54

38

69

-2

-7

-6

* trade receivables at beginning of period + trade receivables at end of period/2/total sales revenue*365 days

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Structure of assets

2007 2008

current receivables

other current assets

inventories

non-current assets

30.8%

29.7%

25.9%

13.6% 10.8%

36.8%

30.3%

22.1%

Lower indicators


>Financial information

structure of equity and liabilities in 2007 and 2008

15.2% of assets were financed with equity. Liabilities and minority interests accounted for 84.8% of equity and liabilities.

The average payment period was 63 days, that is six days shorter than as at the end of 2007.

Liabilities and other equity and liabilities (PLN 1,798m) comprised primarily trade payables of PLN 914m and fi-nancial liabilities of PLN 660m.

Non-current liabilities comprised mainly financial liabilities which represented 21.8% of the balance-sheet total.

Current liabilities comprised mainly trade payables, which represented 40.8% of total equity and liabilities.

Current financial liabilities accounted for 7.6% of the ba-lance-sheet total.

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Structure of equity and liabilities

2007 2008

minority interests

14.2%

30.5%

49.3%

6.0%

15.2%

26.9%

53.3%liabilities and other equity and liabilities - current

liabilities and other equity and liabilities - non-current

equity of the parent undertaking

4.6%

Equity and debt

2008 2007 y-o-y change

Equity

Financial liabilities*

Cash and cash equivalents

Net financial liabilities

Net debt/equity

Net debt/EBITDA

444.4

660

66.6

593.4

1.34

5.41

406.6

635.8

116.3

519.5

1.28

4.74

9%

4%

-43%

14%

0.06

0.67

*net of liabilities under put option



Sources of debt financing

The Company diversifies its debt financing sources. The PGF Group uses Polish złoty-denominated financing, which bears interest at variable interest rates established in reference to WIBOR rates. The main sources of debt financing are long- and short-term loans and notes. Only the Lithuanian subsidiaries of UAB Nacionaline Farmaci-jos Grupe contract their liabilities in the euro (EUR) and in the Lithuanian litas (LTL).

liquidity

As at the balance-sheet date, the current and quick ratios stood at 1.2 and 0.6, respectively (down by 0.2 and 0.2 relative to the end of 2007).

off-balance-sheet items

As at the end of 2008, off-balance-sheet items stood at PLN 391.3m, and included mainly contingent liabilities un-der guarantees and sureties issued to related companies and other companies of the PGF Group.

What is a noteworthy achievement is significant operating cash flow of PLN 140m generated thanks to significant profit earned in 2008 and the optimising of current assets.

Maturity structure

Other

19%

37%Bank A

30%Bank B

46%

One year to three years

14%Bank D

22%

Over three years

32%Less than one year

Breakdown of available debt financing sources

Other institutions10%

27%

33%Bank A

11%Bank B

10%Bank C

4%Bank E

5%Bank D

Long-term bonds

Other - seven other institutions


>Financial Information

However, because of high expenditure in investing activi-ties, total net cash flow was negative at PLN 49.7m.

In 2008, investment expenditure on non-current assets amounted to PLN 64.1m, including investment expendi-ture on property, plant and equipment of PLN 57.9m. The most significant investments in property, plant and equipment were related to upgrading and alteration of the existing head offices of the Group companies.

The most substantial part of investments, of a total amount of PLN 14.6m, was purchase of bonds (PLN 12.9). The investments were financed using own resources as well as external sources of financing.

Cash flows

PLNm 2008 2007

Operating CF

Investing CF

Financing CF

Total change in cash

139.8

-205.4

15.9

-49.7

11.2

-154.2

208.5

65.5


> Auditor’s Opinion

Auditor’s opinion

to the shareholders and supervisory Board of PGF s.A.

We have audited the attached consolidated financial statements of the PGF Group, the parent undertaking of which is PGF S.A., registered office at ul. Zbąszyńska 3, Łódź, including:

• Consolidated balance sheet as at December 31st 2008, showing a balance-sheet total of PLN 2,242,484 thousand,

• Consolidated income statement for the period Janu-ary 1st–December 31st 2008, showing a net profit of PLN 51,461 thousand,

• Statement of changes in consolidated equity for the period January 1st–December 31st 2008, showing an increase in equity of PLN 37,864 thousand,

• Consolidated cash-flow statement for the period January 1st–December 31st 2008, showing a de-crease in cash of PLN 49,718 thousand,

• Notes to the consolidated financial statements.

The Management Board of the parent undertaking is re-sponsible for the preparation of the consolidated financial statements. Our responsibility was to audit the consolida-ted financial statements and to issue an opinion regarding their reliability, accuracy and clarity.

The consolidated financial statements contain financial information concerning one hundred and twenty-three fully-consolidated subsidiary undertakings, two asso-ciated undertakings consolidated with the equity method, and one jointly-controlled undertaking consolidated pro-portionately. The financial statements of fifteen subsidiary undertakings were audited by other auditors. The finan-cial statements along with the auditors’ opinions thereon were subsequently delivered to us. Our audit opinion on the consolidated financial statements with respect to the data of the fifteen undertakings is based on the opin-ions of qualified auditors. The data contained in the finan-cial statements of the subsidiary undertakings with respect to which we relied exclusively on the opinions issued by other qualified auditors and in the financial statements of unaudited subsidiaries account for 19.01% and 20.86%, respectively, of the total consolidated assets and consoli-dated sales revenue before consolidation adjustments.


In our opinion, based on the performed audit and on the opinions issued by other qualified auditors, the au-dited consolidated financial statements of the PGF Group for the financial year of 2008 were prepared in all material respects in accordance with the International Financial Reporting Standards as adopted by the European Union and give a fair and clear view of all the information relevant to the assessment of the Group’s assets, financial stan-ding and financial performance as at and for the twelve months ended December 31st 2008.

The Directors’ Report on the operations of the PGF Group in the financial year 2008 is complete within the meaning of Art. 49.2 of the Polish Accountancy Act and the Polish Minister of Finance’s Regulation on current and periodic information to be published by issuers of securities and on conditions for recognising as equivalent information re-quired by the laws of a non-member state, dated February 19th 2009, and the data contained therein, sourced directly from the audited consolidated financial statements, is con-sistent with them.

Milena Zwolińska – Grabowicz

Qualified auditor Reg. No.10318/7629

Warsaw, April 10th 2009

Our audit of the consolidated financial statements was planned and performed in accordance with the provi-sions of:

• Chapter 7 of the Polish Accountancy Act of Sep-tember 29th 1994 (Dz.U. of 2002, No. 76, item 694, as amended),

• The professional auditing standards issued by the Polish National Board of Statutory Auditors,

so as to obtain sufficient and reasonable assurance that the audited consolidated financial statements are free from material misstatements. The audit comprised pri-marily inspection of the consolidation documentation rel-evant to the amounts and disclosures in the consolidated financial statements. It also included an assessment of ac-counting principles (policies) applied in the preparation of the consolidated financial statements, and the related sig-nificant estimates. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the consolidated financial statements.

We believe that our audit has provided us with sufficient evidence to issue an opinion.

Entity qualified to audit financial statements, entered into the register of the qualified auditors maintained by the National Board of Statutory Auditors under Reg. No. 73

> Auditor’s Opinion


Financial Statements


> Important Financial Dates

important Financial Dates:

April 30th 2009Consolidated 2008 Annual Report May 15th 2009Consolidated Q1 2009 Report

June 3rd 2009General Shareholders Meeting August 31th 2009Consolidated Semi-annual Report for H1 2009

November 13th 2009Consolidated Q3 2009 Report


> Financial Statements

CONSOLIDATED BALANCE SHEET (PLN ‘000)

NON-CURRENT ASSETS

ASSETS

TOTAL ASSETS

Goodwill

Intangible assets

Property, plant and equipment

Investment property

Investments accounted for with equity method

Non-current financial assets

Non-current receivables

Deferred tax asset

Other non-current assets

Inventories

Non-current assets held for sale

Current financial assets

Current receivables

Trade and other receivables

Income tax receivable

Cash and cash equivalents

Other current assets

824,412

515,355

27,685

224,891

323

3,966

29,312

593

21,355

932

1,418,072

678,513

13,591

157,120

495,101

485,213

9,888

66,578

7,169

2,242,484

619,360

376,760

26,834

179,684

882

1,081

17,154

402

16,528

35

1,392,360

597,868

24,372

127,779

521,454

519,460

1,994

116,296

4,591

2,011,720

Dec 31 2008 Dec 31 2007

CURRENT ASSETS

note

7

8

11

13


equity of parent undertaking

Share capital

Called-up shared capital not paid

Statutory reserve funds

Other capital reserves

Exchange differences on translation of subordinated undertakings

Retained earnings/(deficit)

minority interests

Non-current liabilities and provisions

Financial liabilities

Liabilities under share purchase options from minority shareholders

Deferred tax liability

Non-current provisions

other non-current equity and liabilities

current liabilities and provisions

Financial liabilities

Liabilities under share purchase options minority shareholders

Current provisions

Trade and other payables

Income tax expense

other current equity and liabilities

CONSOLIDATED BALANCE SHEET (PLN ‘000)

TOTAL EQUITY

EQUITY AND LIABILITIES

TOTAL EQUITY AND LIABILITIES

444,445

341,694

25,521

320,667

(7,662)

65,565

7,529

(69,926)

102,751

602,470

600,814

489,237

89,615

16,342

5,620

1,656

1,195,569

1,183,444

170,774

37,497

3,114

970,740

1,319

12,125

2,242,484

406,581

286,429

25,521

272,722

(399)

19,223

(5,347)

(25,291)

120,152

613,372

611,871

527,740

59,724

13,563

10,844

1,501

991,767

979,756

108,083

–

3,700

856,733

11,240

12,011

2,011,720

Dec 31 2008 Dec 31 2007

NON-CURRENT LIABILITIES AND OTHER NON-CURRENT EQUITY AND LIABILITIES

CURRENT LIABILITIES AND OTHER CURRENT EQUITY AND LIABILITIES


note

20

22

20

22


sales revenue

cost of sales

Profit/(loss) on sales

selling costs

General and administrative expenses

other net operating income/(expenses)

Share in net profit/(loss) of associated undertakings

Operating profit/(loss)

Gain/(loss) on investments

Financial income

Financial expenses

Profit/(loss) before tax

corporate income tax

Net profit/(loss) on continued operations

Net loss on discontinued operations

Total net profit/(loss)

Attributable to:

- equity holders of the parent

- minority interests

Weighted average number of ordinary shares

Diluted weighted average number of ordinary shares

continued operations

earnings per ordinary share

- basic / diluted

continued and discontinued operations

Earnings per ordinary share

- basic / diluted

CONSOLIDATED INCOME STATEMENT (PLN ‘000)

CONTINUED OPERATIONS

5,095,841

(4,554,433)

541,408

(344,147)

(138,486)

24,526

212

83,513

1,107

31,560

(54,730)

61,450

(9,989)

51,461

–

51,461

52,096

(635)

12,528,713

12,528,713

4.16

4.16

4,410,525

(3,946,823)

463,702

(301,984)

(95,420)

26,523

223

93,044

2,253

25,132

(30,430)

89,999

(16,280)

73,719

–

73,719

74,410

(691)

12,588,240

12,588,240

5.91

5.91

DISCONTINUED OPERATIONS

Jan 1-Dec 31 2008

Jan 1-Dec 31 2008

Jan 1-Dec 31 2007

Jan 1-Dec 31 2007


note

25

25

25

26

28

29


1. Share in net (profit)/loss of subordinated undertakings accounted for with equity method

2. Depreciation and amortisation

3. Foreign exchange (gains)/losses

4. Interest and profit distributions (dividends)

5. (Profit)/loss on investing activities

6. Change in inventories

7. Change in receivables

8. Change in current liabilities (net of loans and borrowings)

9. Income tax paid

10. Other adjustments, net

III. Net cash provided by/(used in) operating activities (I +/- II)

B. CASH FLOWS FROM INVESTING ACTIVITIES

i. cash provided by investing activities

1. Sale of intangible assets and property, plant and equipment

2. Cash provided by financial assets, including:

a) disposal of financial assets

b) repayment of loans advanced

c) interest received

3. Other net cash provided by investing activities

ii. cash used in investing activities

1. Acquisition of intangible assets and property, plant and equipment

2. Cash used on financial assets, including:

a) acquisition of financial assets

b) increase in loans advanced

3. Dividends and other distributions from profit paid out to minority shareholders

4. Other net cash used in investing activities

iii. Net cash provided by/(used in) investing activities (i - ii)

CONSOLIDATED CASH-FLOW STATEMENT (PLN ‘000) (INDIRECT METHOD)

I. Pre-tax profit/(loss)

II. Total adjustments

A. CASH FLOWS FROM OPERATING ACTIVITIES

61,450

78,344

(212)

26,129

(39)

30,780

(28,416)

(32,656)

67,748

49,831

(31,037)

(3,784)

139,794

Dec 31 2008

177,203

96,605

80,598

4,617

63,826

12,155

–

(382,567)

(93,457)

(287,175)

(145,571)

(141,604)

–

(1,935)

(205,364)

89,999

(78,819)

(223)

20,640

(215)

13,372

(25,258)

4,427

1,121

(77,011)

(16,663)

991

11 180

Dec 31 2008

178,006

66,532

111,474

27,393

77,191

6,890

–

(332,197)

(64,149)

(241,113)

(86,670)

(154,443)

–

(26,935)

(154,191)

Dec 31 2008 Dec 31 2007



C. CASH FLOWS FROM FINANCING ACTIVITIES

I. Cash provided by financing activities

1. Net proceeds from issue of shares, other equity instruments and additional

contributions to equity

2. Increase in loans and borrowings, issue of debt securities

3. Other net cash provided by financing activities

II. Cash used in financing activities

1. Acquisition of treasury shares

2. Dividend and other distributions to shareholders

3. Distributions from profit other than distributions to shareholders

4. Repayment of loans and borrowings, redemption of debt securities

5. Other financial liabilities

6. Interest paid

7. Other net cash used in financing activities

III. Net cash provided by/(used in) financing activities (I - II)

D. TOTAL NET CASH FLOW (A.III +/-B.III +/- C.III)

E. BALANCE-SHEET CHANGE IN CASH, INCLUDING:

- change in cash resulting from foreign exchange differences

F. CASH AT BEGINNING OF PERIOD

G. CASH AT END OF PERIOD (F+/- D)

CONSOLIDATED CASH-FLOW STATEMENT (PLN ‘000) (INDIRECT METHOD)

380,848

–

380,697

151

(364,996)

(7,263)

–

–

(313,820)

(1,216)

(42,656)

(41)

15,852

(49,718)

(49,681)

(37)

115,058

65,377

564,333

12,754

551,579

–

(355,841)

(399)

(30,219)

–

(297,693)

(3,974)

(23,556)

–

208,492

65,481

64,096

1,385

52,200

116,296

Dec 31 2008 Dec 31 2007



1. share capital at beginning of period

1.1. changes in share capital

a) increase, including:

- issue of shares

1.2. share capital at end of period

2. called-up share capital not paid at beginning of period

2.1. changes in called-up share capital not paid

a) decrease, including:

- share capital paid up

2.2 called-up share capital not paid at end of period

3. statutory reserve funds at beginning of period

3.1. changes in statutory reserve funds


- profit distribution

b) decrease, including:

- covered loss

3.2. statutory reserve funds at end of period

4. Revaluation capital reserve at beginning of period

4.1. Revaluation capital reserve at end of period

5. treasury shares at beginning of period

5a. treasury shares at beginning of period, after reconciliation with comparable data

5.1. changes in treasury shares


- acquisition of treasury shares with a view to their retirement

5.2. treasury shares at end of period

STATEMENT OF CHANGES IN CONSOLIDATED EQUITY (PLN ‘000)

i. equity at beginning of period

i.a. equity at beginning of period,

after reconciliation with comparable data

A. EQUITY OF PARENT UNDERTAKING

286,429

286,429

25,521

–

–

–

25,521

–

–

–

–

–

272,722

47,945

47,945

47,945

–

–

320,667

–

–

(399)

(399)

(7,263)

(7,263)

(7,263)

(7,662)

246,734

246,734

25,504

17

17

17

25,521

(288)

288

(288)

(288)

–

234,309

38,413

39,302

39,302

889

889

272,722

–

–

–

–

(399)

(399)

(399)

(399)

Dec 31 2008 Dec 31 2007



6. other capital reserves at beginning of period

6.1. changes in other capital reserves


- management stock options

- profit distributions

6.2. other capital reserves at end of period

7. exchange differences on translation of subordinated undertakings

8. Retained profit/(loss) brought forward at beginning of period

8.1. Retained profit brought forward at beginning of period

8.2. Retained profit brought forward at beginning of period, after reconcilia-tion with comparable data

a) increase, including

- change in shareholding structure


- dividend paid

- transfer to reserve funds

- transfer to capital reserves

- disposal of a company

8.3. Retained profit brought forward at end of period

8.4. Retained deficit brought forward at beginning of period

8.5. Retained deficit brought forward at beginning of period, after reconciliation with comparable data


- minority losses charged against the Group’s equity


- covered loss

8.6. Retained deficit at end of period

8.7. Retained profit/(deficit) brought forward at end of period

8.8. Current year net profit/(loss)

a) net profit

8.9 Retained earnings/(deficit) at end of period

ii. equity of parent undertaking at end of period

STATEMENT OF CHANGES IN CONSOLIDATED EQUITY

19,223

46,342

46,342

946

45,396

65,565

7,529

(25,291)

93,286

93,286

82

82

93,368

–

47,945

45,396

27

–

118,577

118,577

3,445

3,445

–

–

122,022

(122,022)

52,096

52,096

(69,926)

341,694

9,257

9,966

9,966

966

9,000

19,223

(5,347)

(22,048)

93,209

93,209

–

–

78,521

30,219

39,302

9,000

–

14,688

115,257

115,257

21

21

889

889

114,389

(99,701)

74,410

74,410

(25,291)

286,429



B. MINORITY INTERESTS

i. minority interests at beginning of period

a) increase

- current year profit

- minority losses charged against the Group’s equity

- first-time consolidation of companies as at their acquisition date

- shares issued

b) decrease

- decrease in equity interests

- current year loss

ii. minority interests at end of period

C. EQUITY

STATEMENT OF CHANGES IN CONSOLIDATED EQUITY

120,152

31,442

3,445

17,538

–

10,459

48,843

48,208

635

102,751

444,445

44,515

76,813

21

6,540

70,252

–

1,176

485

691

120,152

406,581



OTHER NON-CURRENT FINANCIAL ASSETS

1. Shares

2. Other securities

3. Loans advanced and interest on loans

4. Other financial assets

Total net non-current financial assets

CURRENT FINANCIAL ASSETS

1. Shares

2. Other securities

3. Loans advanced and interest on loans

4. Other financial assets

Total net current financial assets

CURRENT TRADE AND OTHER RECEIVABLES

1. Trade receivables

2. Tax, subsidy, customs duty, social security, health insurance and other

receivables (without income tax)

3. Other receivables

4. Receivables under court proceedings

total net current receivables

a) impairment charges for receivables

total gross current receivables

SELECTED NOTES TO THE BALANCE SHEET (PLN ‘000)

Dec 31 2008

1,727

12,917

5,656

9,012

29,312

Dec 31 2008

118

58

155,964

980

157,120

Dec 31 2008

438,906

23,878

22,429

–

485,213

117,644

602,857

Dec 31 2007

24

–

9,393

7,737

17,154

Dec 31 2007

–

–

116,552

11,227

127,779

Dec 31 2007

480,430

17,228

21,351

451

519,460

124,483

643,943


note 7a

7b

8


INVENTORIES

a) materials

b) semi-finished products and work in progress

c) finished products

d) goods for resale

total net inventories

impairment charges

total gross inventories

CASH AND CASH EQUIVALENTS

a) cash in hand and cash at banks

b) other cash

c) other cash equivalents

total

NON-CURRENT FINANCIAL LIABILITIES

a) loans and borrowings

b) debt securities in issue – notes/bonds

c) other financial liabilities, including:

- liabilities under financed lease

- liabilities under acquisition of shares

Total non-current financial liabilities

CURRENT FINANCIAL LIABILITIES

a) loans and borrowings

b) debt securities in issue – notes/bonds

c) other financial liabilities, including:

- liabilities under financed lease

- current portion of non-current liabilities to the State Treasury under acquisi-

tion of enterprise

- liabilities under financial derivatives

- liabilities under acquisition of shares

Total current financial liabilities

SELECTED NOTES TO THE BALANCE SHEET

Dec 31 2008

6,374

–

748

671,391

678,513

7,805

686,318

Dec 31 2008

55,580

9,722

1,276

66,578

Dec 31 2008

289,146

190,806

9,285

272

9,013

489,237

Dec 31 2008

158,081

7,234

5,459

345

–

1,914

3,191

170,774

Dec 31 2007

7,276

121

869

589,602

597,868

4,905

602,773

Dec 31 2007

110,375

5,785

136

116,296

Dec 31 2007

328,923

191,000

7,817

80

7,737

527,740

Dec 31 2007

41,288

9,652

57,143

272

990

–

55,881

108,083


11 note

13

20a

20b


CURRENT TRADE AND OTHER PAYABLES

a) trade payables

b) taxes, customs duties, social security and other payables

(without income tax)

c) salaries and wages payable

d) promissory notes payable

f) other

total current liabilities

COSTS BY TYPE

a) depreciation and amortisation

b) materials and energy used

c) contracted services

d) taxes and charges

e) labour costs

f) other costs by type, including:

- business trips

- marketing costs

- costs of advertising and entertainment

- property insurance

- other costs

total costs by type

Change in inventories, products, accruals and deferrals

Cost of products for own needs (negative value)

Selling costs (negative value)

General and administrative expenses (negative value)

cost of products sold

SELECTED NOTES TO THE BALANCE SHEET

SELECTED NOTES TO THE INCOME STATEMENT (PLN ‘000)

Dec 31 2008

914,008

33,401

16,770

2,597

3,964

970,740

Jan 1-Dec 31 2008

26,102

30,473

171,227

11,709

324,596

50,498

1,168

33,640

11,998

2,254

1,438

614,605

(3,301)

(56)

(344,147)

(138,486)

128,615

Dec 31 2007

812,755

24,455

12,093

1,771

5,659

856,733

Jan 1-Dec 31 2007

20,610

23,549

139,332

10,647

237,629

43,085

926

28,266

10,430

2,051

1,412

474,852

371

(75)

(301,984)

(95,420)

77,744


note

22

25


OTHER OPERATING INCOME/(EXPENSES)

a) gain on disposal of non-financial non-current assets

b) subsidies

c) released provisions

d) other, including:

- donations received

- released impairment charges for trade receivables and court costs (payment)

- release of impairment charges for property, plant and equipment

- reimbursed court fees and cost of enforcement proceedings

- liquidated insurance claims

- other

total other operating income

a) loss on disposal of non-financial non-current assets

b) revaluation of non-financial assets

- property, plant and equipmen

- receivables

- intangible assets

- other

c) created provisions

- for future liabilities

- for employee benefits

d) other, including:

- donations granted

- compensations paid

- cost of damage removal

- cost of bank guarantees

- receivables cancelled and written off

- court fees and cost of enforcement proceedings

- membership fees

- other

total other operating expenses

other net operating income/(expenses)

SELECTED NOTES TO THE INCOME STATEMENT

Jan 1-Dec 31 2008

27,271

1,031

4,859

10,269

653

3,810

639

105

2,172

2,890

43,430

–

7,761

924

6,228

70

539

2,182

2,182

–

8,961

4,136

355

665

289

330

568

221

2,397

18,904

24,526

Jan 1-Dec 31 2007

25,965

508

117

13,042

560

7,632

54

267

2,798

1,731

39,632

–

3,900

6

3,894

–

–

3,943

1,664

2,279

5,266

1,468

315

614

221

80

862

245

1,461

13,109

26,523


26 note


FINANCIAL INCOME

1. Interest

a) on loans advanced

b) on discount of promissory notes

c) on receivables and other interest

2. Other financial income

a) released impairment charges for interest on receivables

b) released impairment charges for purchased receivables

c) payment of purchased receivables written off in previous years

d) other

3. Revaluation of financial assets

Total financial income

FINANCIAL EXPENSES

1. Interest accrued on:

a) loans

b) notes/bonds

c) liabilities

d) financed lease

e) other

2. Revaluation of financial assets

- loans advanced

- interest on loans advanced

- impairment of shares

3. Other financial expenses

- impairment charges for interest on receivables

- impairment charges for receivables

- balance-sheet valuation of financial derivatives

- fees and commissions

- gain/(loss) on sale of receivables

- share capital increase costs

- created provisions for financial expenses

- other

Total financial expenses

SELECTED NOTES TO THE INCOME STATEMENT

Jan 1-Dec 31 2008

23,535

11,647

2,653

9,235

4,871

2,027

1,222

1,292

330

3,154

31,560

Jan 1-Dec 31 2008

45,578

26,544

15,016

238

27

3,753

666

114

415

137

8,486

2,502

1,014

2,385

465

632

353

1,055

80

54,730

Jan 1-Dec 31 2007

14,589

6,075

2,145

6,369

9,617

2,815

3,714

–

3,088

926

25,132

Jan 1-Dec 31 2007

23,310

15,291

5,760

346

72

1,841

1,639

1,353

286

–

5,481

3,142

195

–

521

651

206

255

511

30,430


note 28

29


> Contact Details

contact Details

Polska Grupa Farmaceutyczna s.A. ul. Zbąszyńska 3 91-342 ŁódźPoland

www.pgf.com.plwww.cepd.nlwww.doz.pl

Management Board Office tel.: +48 42 61 33 510 fax : +48 42 61 33 333

investor Relations e-mail: [email protected]

tomasz Kisiel tel.: + 48 42 61 33 512 mobile: +48 691 730 108 fax: +48 42 61 33 433 e-mail: [email protected]

Public Relations

e-mail: [email protected]

Aleksandra tadeuszak tel.: +48 42 61 33 529 mobile: +48 691 730 142 fax: +48 42 61 33 433 e-mail: [email protected]

Report design by:

Studio Graficzne “Temperówka” S.C.www.temperowka.ple-mail: [email protected]

Pictures:

PGF’s ArchivesKordalski Architektura’ ArchivesJacek KusiskiMichał GmitrukAndrzej ŚwietlikTomasz PikułaWojciech Woźniak

annual report 2008 · care sector on european markets, specifically focusing on central and eastern...

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