Environment/market risks and opportunities
Economic risks and opportunities
In principle, our activities in the healthcare market are less dependent on
economic cycles. However, demand for over-the-counter (OTC) medicines,
cosmetics or care products tends to dip when the economy takes a turn for the worse and purchasing power is down. Our modern shop concepts throughout the European pharmacy network create new incentives to buy. Direct effects could have a more significant impact on our business development, however,
including the development of interest rates, customer solvency and in particular financing issues and cost pressure in national healthcare systems.
Regulatory risks and opportunities
The pharmaceutical and healthcare markets are subject to regulatory intervention
in the form of numerous different measures. Growing demand for healthcare services – driven by demographic change – often collides with the interests of squeezed healthcare systems whose financial difficulties are only heightened by the weak economic development in Europe. Governments respond through
intervention, adjusting compensation structures to cut spending as seen recently in France, Portugal and Slovenia. Such measures directly affect our business development and earnings and therefore constitute a major risk for Celesio.
Besides lean cost management, we rely on a range of strategic projects including our European pharmacy network and the end-to-end supply chain to compensate for this risk (read more about our strategy on ➞ page 102).
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Specific market risks and opportunities
Overall, the healthcare sector with its constantly shifting parameters is a dynamic market and can be associated with a number of risks:
•
New wholesale distribution modelsManufacturers are increasingly keen to reduce the role of the wholesaler
and are turning instead to models such as directtopharmacy (DTP) supply by
the manufacturer or reduced wholesale where the manufacturer maintains exclusive agreements with just a few wholesalers. This actually constitutes
both a risk and an opportunity because Celesio’s strong market position
makes it a popular partner for these exclusive distribution models. Celesio is sharpening its focus on communication with manufacturers to position itself as an attractive business partner with new offerings for manufacturers. For instance, our end-to-end supply chain initiative sees us extend our logistics competence to the entire fully-integrated supply chain, allowing us to leverage synergy effects and providing a basis for future growth potential.
•
Tougher competitionOur line of business is an extremely competitive one. Besides attempts from
traditional logistics firms to encroach on the pharmaceutical distribution business, our competitors’ activities can also squeeze earnings. The French
market was a good example of this as was Germany in the fourth quarter of
2012. We aim to counter this trend by improving services for our customers and by running customer loyalty programs.
•
Removal of pharmacy-only statusThe question of whether pharmacy-only status should be lifted for certain OTC products, enabling them to be sold freely in supermarkets, for example,
is a recurring topic of political debate. We hope to make pharmacies more appealing and improve their position compared to other outlets by offering our pharmacists regular training and implementing innovative shop concepts.
•
Patent expiryPatent protection has recently run out or will do so over the coming years on a number of blockbusters. This will push up the market share of cheaper
generics, impacting our revenue and, depending on the local reimbursement system, our earnings in the medium term. We endeavour to compensate
for this by carefully monitoring patent expiry dates around the world and, if necessary, working closely with manufacturers to come up with more
efficient models.
Corporate strategy risks and opportunities
Portfolio optimisation measures will remain an important component of our strategy in the future. As decisions of this kind are also associated with risk, acquisition and investment plans are examined in a due diligence process and
analysed in terms of return on risks. Our M&A and Market Intelligence department
coordinates closely with the relevant departments in the case of complex acqui
sition projects. There is also a clearly defined review and authorisation process
for smaller acquisitions, such as individual pharmacies, using local resources and
expertise on the market and competition. Changes in the market environment could block or hinder original targets, despite extensive due diligence procedures. We therefore conduct annual impairment tests, which can lead to an adjustment of goodwill. We are also exposed to potential risks from the integration of the acquired operations or from interests in companies in which our responsibility
for the company is shared or limited.
On the positive side, regional expansion – especially in developing and emerging growth markets – offers further development potential for Celesio.
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Operating business risks
There are a number of special risks relating to the safety and quality of pharma ceuticals supply in all countries.
•
Interruption of operating businessOur operating processes, especially transport, storage and dispensing, demand a mature infrastructure and are also highly dependent on IT. We have contin gency plans in place in all divisions to safeguard continued business operations
and an uninterrupted supply to our customers in case of unexpected events.
We are also insured against business interruptions.
•
Incorrect handling of medicines in the logistics chainMedicines need to be handled with particular care, bearing in mind the special challenges associated with products such as vaccines which require
strict maintenance of a cool chain. If the cool chain is broken during storage or transport, such products have to be destroyed. We address this risk through a range of preventive measures such as roundtheclock temperature
monitoring at warehouses and insulated transport containers. We have also
implemented various quality control mechanisms to counter further risks such as counterfeit pharmaceuticals.
•
Dispensing errorsDispensing the wrong medicines is an inherent risk at pharmacies. We mini mise this risk through detailed process definitions and regular training for our pharmacists and pharmaceutical technicians.
Financial risks
Currency risks
Due to the international nature of our business, we operate in various currency
areas. The associated currency risks are systematically reduced based on our
internal guidelines. We distinguish between transaction risks and translation risks:
Transaction risks
Exchange rate fluctuations can lead to changes in the value of assets bought or sold in a foreign currency. We enter into hedging agreements with banks as a way of minimising these by compensating any changes in values. This risk is low at Celesio because the individual subsidiaries primarily operate in their own currency areas.
Translation risks
Items of the statement of financial position (e.g. equity) of subsidiaries outside the eurozone are translated into € for consolidation purposes. This leads to changes in value due to exchange rate fluctuations. We aim to reduce associated risks
by ensuring that funds are sourced and used in the same currency. This avoids unequal changes in the statement of financial position.
Translation risks can also arise in connection with income statement items. Owing to the large share in earnings contributed by our business in the UK, the largest currency risk is in pound sterling. Other currencies of significance to
Celesio are the Brazilian real and the Norwegian krone.
Risk of default on receivables
We generally set customers payment terms for goods supplied and services
rendered. The associated risk – also known as the risk of bad debt – depends significantly on the customer structure. We benefit from a low risk of default thanks to our diversified customer portfolio. Government or equivalent payers in
the healthcare system are monitored using publicly available credit ratings. Our lean and proactive receivables management system captures other risks of default on receivables. Our risk mitigation approach primarily consists of monitoring our
customers’ payment patterns on an ongoing basis, testing creditworthiness and
adjusting payment terms and conditions as necessary.
The tense budget situation in many countries and a suppressed economy can lead to a slip in the quality of individual receivables. In light of these factors,
we have sharpened our focus on both central and local credit risk management.
Factoring is used in the UK and Norway to reduce the risk further. We were recently able to extend existing agreements.
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Liquidity and financing risks
The aim of our systematic liquidity management is to ensure that Celesio is in a position to meet its obligations at any time. A variety of different financing
sources afford the company long-term financial flexibility. For instance, another corporate bond was issued in October 2012 to complement the existing capital
market instruments. Further liquidity sources include promissory notes, corporate
bonds and convertible bonds as well as bilateral credit lines. In 2012 we also still had access to a syndicated loan of € 600m, which we did not draw on, as in previous years. This syndicated loan expired in February 2013 but was replaced seamlessly by a new instrument with a volume of € 500m and a term expiring in 2018 (also see ➞ page 175). When selecting which instruments to use, we ensure
that our portfolio of debt investors is well diversified. The bilateral credit lines and syndicated loan mentioned above were concluded with international banks.
An evenly distributed maturity structure means that refinancing risks are kept
to a minimum; no extraordinarily high cash repayments are made in a single
year. In our daytoday operations, liquidity risks are reduced by making use of
a cash pool and adopting a strict approach to net working capital management.
Interest rate risks
The price payable on the financial markets for floatingrate liabilities changes regularly. We largely cover the associated risk of changing interest rates by issuing
a high volume of financial liabilities with a fixed coupon. Furthermore, we hold
longterm interest rate derivatives, ensuring that the derivatives in question
have a straightforward and transparent structure. We use these derivatives to swap floating-rate interest payments for fixed ones.
Counterparty risks from derivatives
Derivatives are used to hedge interest and currency items. We conclude such
transactions with banks from our portfolio of approved banks. If the counter
party were to default, there is a risk that we would have to restore current items to the market at less favourable conditions (replacement risk). We apply strict standards when selecting counterparties to avoid this risk. For instance, trans
actions are only entered into with business partners that exhibit a pre-defined
minimum credit rating. A limit system is in place to block transaction orders past
a pre-defined maximum volume. Our internal risk department is responsible for monitoring whether limits are observed as well as how the market value of
individual derivatives develops.
Measurement risks
International financial and capital markets are subject to fluctuations that are reflected in volatile securities prices. One of the potential effects is a change in the measurement of investments held to cover pension obligations.