Chairman's Statement

In this, my first Chairman’s statement since taking over from Ronnie Kells in February 2012, I would like to acknowledge his significant contribution to the Company during his time as Chairman. Under his predecessors, United Drug began its corporate journey from Ballina in the West of Ireland, to becoming the leading pharmaceutical wholesaler on the island of Ireland, and then took the initial steps to expand beyond Ireland’s shores.

Profit before tax


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2011: €68.5m

Dividend per share

9.04 cent

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2011: 8.66cent

But in the six years that Ronnie chaired the Board, which included a global recession, United Drug made significant progress in its strategic development, epitomised by the fact that in his final full year as Chairman, 65% of the Group’s profits came from markets other than the Republic of Ireland, illustrating its successful transformation into an international healthcare services company headquartered in Ireland. That momentum continued in 2012, even as he handed over the reigns. His steady leadership of the Board and support for the management team as they responded to the challenges and opportunities of the last six years was a major factor in the progress made, and helped deepen the foundations of our company.

Financial performance and dividend

The financial results for the year to 30 September 2012 are discussed in detail elsewhere in this report. From the Board’s perspective they were strong. Helped by favourable currency movements (after several years of unfavourable movements), all divisions delivered results ahead of 2011 and thus group earnings were ahead by 11%. In addition, 92% of operating profit was converted to cash, while return on capital averaged 13%, compared to 13.4% last year. The lower ROCE is an artifact of the timing of the investments made during the 2012 financial year.

Based on these results, we are proposing a final dividend of 6.56 cent per share, which together with our already paid interim dividend of 2.48 cent per share, represents an overall increase of 4% for the year. While the results of 2012 on a standalone basis could support a higher level of increase, in arriving at this, the Board has taken into account the dividend increases it maintained over recent years when earnings were not as strong.

Strategic development

United Drug has embarked on a challenging journey for many years. Once a market leading position had been attained in the Republic of Ireland, a strategy to diversify beyond Ireland and into new, but related, service areas was devised and has been pursued for the last 12 years. While the Healthcare Supply Chain (HSC) division is where we began, our Sales, Marketing & Medical (SMM) division, and our Packaging & Specialty (P&S) division have both been built through acquisition into significant additional business areas. In 2012 each of these took further major steps on their path to scale.

The SMM division, which at its core is market leader in the UK and Ireland in contract sales and marketing services, agreed in July to acquire Pharmexx, a large European Contract Sales Organisation (CSO), having operations in 18 countries across the globe. In a separate development, the division also entered into a commercial arrangement with a major Japanese CSO, expanding our reach into that important pharmaceutical market. With operations in North America, South America, Europe and Asia, the division is now one of the three leading global contract sales providers, and their mission in 2013 is to integrate and restructure the Pharmexx business to improve performance, capitalise on this position, and drive growth. In addition, some further acquisitions may be beneficial to further strengthen our market position in key markets.

Also during the year the SMM division acquired Watermeadow, a UK and US based medical communications business which combines well with our InforMed business acquired in 2010. In the US it also added Drug Safety Alliance Inc., which fits neatly with our Alliance Healthcare business acquired in 2007, giving us a very strong presence in the US pharmaceutical product safety monitoring and medical information market. It also added a small company, Synopia, in the US which provides advisory services to companies as they seek to obtain appropriate reimbursement for their products in the complex US insurance landscape. All these services are complementary to the division’s mission to support pharmaceutical companies in their sales and marketing needs as they adapt to patents expiring, fewer blockbuster products, and cost and pricing pressures.

The P&S division, which began with a small neutraceutical packaging acquisition in the UK in 2005, and which has since seen further pharmaceutical packaging acquisitions in Belgium, the Netherlands and most significantly of Sharp Corporation in the US, has long aspired to also service the specialist clinical trials packaging market. This market plays to two strengths in the Group; specialist packaging, and logistical management. Progress was being made in developing this business organically, but when the opportunity to acquire an established player arose during the year, we were delighted to add Bilcare Global Clinical Supplies to the division. With specialised facilities in the US and the UK and a team that has established itself in this market, our position in this market segment has been significantly enhanced.

The HSC division continued to make progress. Responding to the economic pressures in the Republic of Ireland, the division embarked on a major automation project, which is ongoing, to reduce cost to mitigate lower margins. They also initiated a major IT project to upgrade systems across the division with the goal of increasing efficiency.

The outstanding developments in the division during the year were the strong improvement in the performance of the medical and scientific business and the continuing excellent growth achieved by the Northern Irish operations and by the UK pre-wholesale joint venture, UDG.

In all, we spent €63.4 million on capital projects during the year, the largest single part of which was to buy-back our Magna Park warehouse for €29.9 million. The Board believes that having ownership of our full site in Dublin will give us important flexibility as the Irish market continues to evolve and we configure our business appropriately. The remaining €33.5 million was spent on various projects, some to automate and reduce costs, some to equip for growth, especially in our packaging businesses, and some to begin to replace our IT systems to ensure the Group has the platforms to support its ambitions.

Financial resources

During the year we generated €77.6 million in free cash flow, spent €102.3 million on acquisitions and, as noted above, a further €63.4 million on capital projects. At year end we had net debt of €217.7 million, which represents approx. 2.2 times EBITDA. While our financing arrangements allow leverage of up to 3.5 times EBITDA, the Board has determined that it wishes to use 2.5 times as its broad guideline, to ensure the financial position of the Company is not overstretched even as we seek growth and strategic development.

London Stock Exchange

During the year the Board engaged in a good debate about the merits of moving our primary listing to London, and ultimately agreed that it was difficult to attract broad international coverage and ownership for the Group due to its size and the concentration of share trading in Dublin. For this reason, and as we embarked on further significant internationalisation of the Group through additional acquisitions, we decided to delist from Dublin, and make London our primary trading market. At the FTSE Committee meeting held on December 12 it was confirmed that the Company will be included in the FTSE 250 Index with effect from December 24, which should in the long term benefit trading and broaden our base of investors.

Corporate governance

Here we have included the Directors’ Statement on Corporate Governance, the Report of the Remuneration Committee and the Directors’ Report. These incorporate significant detail on many aspects of our governance, and I will not seek to duplicate that information here but I will outline some of our activities this year.

We schedule at least six board meetings a year, one of which extends over two or three days to enable the Board to visit some of our locations. At these, in addition to reviewing performance and overseeing governance, we endeavour to spend time reviewing strategic development and new strategic opportunities as they arise.

Separately we also schedule a full day meeting annually to focus solely on discussing and updating our strategic plans.

In the last year we had seven additional board meetings, a number of which were called to consider single matters such as an acquisition evaluation, which reflects the significant level of corporate activity undertaken during the year.

Informal meetings of the non-executive directors are also held two to three times a year, and at one of these we are joined by the Chief Executive to discuss succession planning. Since my appointment I have also met with each director separately, to get their views on board matters and to identify any improvements they may wish to suggest for enhanced board effectiveness. We also conduct an on-line survey of directors to formally obtain their feedback on board effectiveness. In 2013 we plan to have an effectiveness review conducted by a third party.

Our Audit, Remuneration and Nomination Committees were also proactive, and information on their work is included elsewhere. Our fourth committee was the Acquisitions and Finance Committee. As the year progressed, and with the Board actively engaged with our acquisition activity, we re-evaluated the purpose of this committee and decided to redefine it. Recognising the importance of risk oversight, which heretofore has been overseen by the Board directly and by the Audit Committee for financial risks, we have now delegated risk oversight, other than specific financial risk, to this committee, redefined its role in acquisition oversight, and reconstituted it to ensure it had only independent non-executive director members to comply with best practice. Chris Brinsmead was appointed as Chair. All this was done as we began the new financial year and we hope this move will further enhance our governance, while ensuring the Board’s agenda is focused on key matters.

Barry McGrane, Annette Flynn and board development

Since year end Barry McGrane, our Finance Director since 2001 and an employee of the Group for over 20 years, has indicated his desire to step down from his executive role in May of 2013, but has agreed to remain as a non-executive director until our AGM in early 2014, (subject of course to his re-election at our upcoming AGM). Barry has been an integral part of United Drug’s journey of transformation, which we very much appreciate, and we wish him the very best for the future.

Annette Flynn, formerly an executive director, but a non-executive director for almost the past two years, has indicated that she will not seek re-election at our upcoming AGM. We are disappointed to lose Annette, thank her for her considerable contributions both as an executive and non-executive director, and wish her continued success.

Following these changes our board will comprise three executive directors, six non-executive directors, of whom one will be non-independent, and myself. We believe we need to continue to add to our board diversity, particularly in the light of our continued internationalisation, and the Nomination Committee is therefore currently conducting a search for additional non-executive director candidates. I hope to report on progress in the coming months.

Management and outlook

2012 has been encouraging despite continued challenges in the world economy, and particularly in Europe. All our business units made progress and have good momentum as we enter 2013. The acquisitions made in the second half of 2012 will take time to absorb, streamline and drive forward, but we are confident that further growth can be achieved in 2013.

None of this would be possible without the hard work, enthusiasm and vision of Liam FitzGerald and his team. As we continue to grow, the demands on them will increase. The Company has proactive management recruitment and development programmes in place and the Board will continue to encourage this to ensure we have sufficient talent available to support the further growth and development that we are confident lies ahead.

Peter Gray