Board of Directors' Report

The Tamro Group results improved during the financial year 2007/08. Despite the tough competition, Tamro maintained its position as the leading pharmaceutical wholesaler in the Nordic area and the Baltic countries.

Markets and operating environment

The overall pharmaceutical market growth in the Nordic countries was higher than in the previous years. Especially sales to the hospital sector showed strong growth due to the use of more modern and thus more expensive therapies. The wholesale margins remained at a very low level compared to the margins of the other players in the pharmaceutical chain. Governments are monitoring the spending on prescription medicines very carefully as they consider a variety of possibilities for intervention.

The pharmaceutical market grew 6.8% in Sweden compared to the previous year. The growth drivers were the aging population and the increased use of new medicines. The plans for a deregulation of the Swedish pharmacy system were made public in January 2008. The government will start drafting the legislative amendment during the spring of 2008, and Parliament’s is expected to make its decision later this year.

Compared to the previous year’s negative pharmaceutical market growth in Finland, this year’s figure of 6.2% indicates significant growth, driven mainly by the hospital sector.

The pharmaceutical market in Denmark grew by 6.0%. The hospital sector’s growth was significant due to the use of new, more expensive medicines in hospitals. The market share of generics continues to increase and will exceed 50%. The market share of parallel trade has also been relatively high at over 10%, and it is expected to remain at this level.

Norway had a more stable market situation with slower growth than the other Nordic countries. The market grew by 2% compared to the previous year. General reimbursement was removed for several products and the market share by volume for generics has increased substantially. At the same time their prices have been reduced within the “step price model”, allowing the government to save considerable funds.

Also in the Baltic region the pharmaceutical market continued to grow. In Estonia the pharmaceutical market grew by 19%, while in Latvia and Lithuania the growth was 23% and 13%, respectively. Pharmaceutical consumption in these markets is still considerably lower than the EU average. High growth was due to improved consumer purchasing power, increased state reimbursement (which is still modest compared with the EU average) and a low generics market share.

In Poland the pharmaceutical market grew by 10%. Consolidation of the wholesale market continued, and the number of pharmacies is still increasing although more slowly than the year before.

Improved consumer purchasing power and government’s increased pharmaceutical spending have influenced the pharmaceutical consumption positively in Russia. The pharmaceutical market growth continued but was more modest: 5% compared to the previous year. The consolidation of the retail and wholesale markets continued.

Tamro maintained its position as a leading pharmaceutical wholesaler and retailer. Group wholesale grew in Finland, Sweden, Norway and Denmark by 6%. Tamro’s market share in the Nordic pharmaceutical wholesale market was thus 54.8%, or 1.2 percentage points higher than in the previous year.

Tamro Group is fully owned by Phoenix Group.

Main events in 2007/08

A major investment in Tamro Finland’s wholesale distribution centre in Tampere was completed. The objectives of the investment were to increase efficiency and improve the workplace for our employees.

Mr. Piotr Stopczyk was appointed as the President and Managing Director of Phoenix Pharma Polska as of September 2007.

Ms. Terhi Kivinen was appointed as the Tamro Group Communications Director as of November 2007.

Financial performance in 2007/08

The net sales of Tamro Group were EUR 5,605.2 (5,464.5) million, up by 2.6% from the previous year.

Tamro Group’s operating profit was EUR 122.4 (117.4) million, and the operating margin was 2.2 (2.1) %. The net profit for the reporting period was EUR 88.8 (126.4) million including extraordinary items.The return on equity decreased to 25.1 (36.8) % and the equity ratio was 26.4 (30.8) %. During the prior year (2006/07) Tamro Group divested the Tamro MedLab division.

Financing

During the reporting year 2007/08 Tamro Group’s financial position remained strong.

The reported net debt was EUR 10.8 (-2.5) million at the end of the financial year. The effective net debt including as debt the receivables sold of EUR 189.7 (190.7) million equalled EUR 200.5 (188.2) million. Cash and liquid assets amounted to EUR 38.6 (55.2) million. The available limit in the revolving credit facilities with core banks amounted to EUR 200.0 (200.0) million, and the unused limit in the securitisation programs was EUR 56.0 (56.0) million at the end of January.

Due to the excellent liquidity situation at the end of the financial year, Tamro Corporation’s Extraordinary Shareholders’ Meeting decided to distribute a dividend of EUR 125.9 million or EUR 1.10 per share. The dividend was paid in January 2008. Net gearing increased to 3.2 (-0.7) % compared to the end of the last financial year.

Cash flow and net working capital

The full year operative cash flow before changes in net working capital and investments was EUR 137.3 (118.2) million. Changes in net working capital resulted in a cash flow of EUR 11.5 (-6.7) million. The utilisation of the securitisation programs is unchanged compared to 2006. The net cash flow effect of investments turned negative to EUR -31.8 (26.0) million. The net cash flow from investments during the second quarter in 2006 included the sales proceeds of the MedLab division. On a full year basis the free cash flow was EUR 116.0 (152.0) million.

Financial expenses

For the whole financial year 2007/08 the Group’s net financial expenses were EUR -1.9 (-6.2) million. The change is explained by external dividends reported in net financial items. Net interest expenses were EUR -2.9 (-3.7) million, exchange rate differences were EUR 0.7 (-0.2) and other financial income and expenses were EUR 0.3 (-2.3) million.

Capital expenditure, acquisitions and divestments

Capital expenditure and acquisitions totalled EUR 37.1 (32.8) million. Investments were made mainly in the warehouse expansion project in Finland and in the retail sector in Norway and the Baltic markets. The improved Tampere warehouse was taken into operation by the end of the financial year 2007/08.

Assessment of operational risks and uncertainties

The company is subject to strategic and operational risks, the most important of which are legislative and regulatory measures imposed by the authorities. Operational risks include changes in the business environment, interference with our stable and reliable operations, including IT systems, and the availability of transport infrastructures. 

The company is subject to asset risks and liability risks related mainly to possible property damage of inventory and to liability risks concerning the quality of its own operations. The company carries limited risk related to product liability as this is largely covered by the manufacturers.  

Operational risks and insurances

The main operational risks are property damage, business interruption and liability risks. The objective of the Group’s operational risk management is to identify and minimise risks associated with operations, assets, the environment and personnel. The local business units are responsible for managing and reducing operational risks and for having appropriate contingency plans in place.

The remaining risks are covered with insurances to the extent defined by the Tamro Group management and the Board of Directors. The Group-level master insurance policies are administered by Tamro Finance Ltd, whereas the business units are responsible for the appropriate local insurance coverage.

The financial risks and the financial risk management are described in the notes to the financial statements.

Major changes in the Group Structure

There were no major changes in the Group structure.

Personnel and organisation

In 2007/08, the average number of personnel employed by Tamro Group totalled 4,736 (4,693). The number is split by country as follows: 40% in Norway, 13% in Denmark, 9% in Sweden, 9% in Lithuania, 8% in Latvia, 8% in Poland, 7% in Finland and 6% in Estonia.

Board of Directors and Auditors

The following Board members were re-elected at Tamro Group’s Annual General Meeting on 28.2.2007. Dr Bernd Scheifele was re-elected as Chairman of the Board, and Matti Elovaara, Mikael von Frenckell, Reimund Pohl, Dr Lorenz Näger and Dr Reinhard Rupp were re-elected as Board members.

Authorized Public Accountants Ernst & Young Oy and Anna-Maija Simola, APA, were re-elected as Tamro’s external auditors.

Events after the financial period

There have been no major events since the financial year-end.

Outlook for 2008/09

Except in Sweden, market conditions are expected to remain stable with some growth. In Finland the introduction of reference pricing is likely in the beginning of 2009. This may affect the market growth negatively from the beginning of 2009 onwards. The Nordic markets are estimated to grow by 4–5% during 2008/09. The Baltic markets are expected to grow by around 12%.

Deregulation of the Swedish pharmacy market is expected to come into effect in January 2009. The transition period is expected to last 2–3 years, forcing Tamro to be flexible and capable of working in different modes. Investments are likely during this period.

In Poland the privatisation of government-owned wholesalers is continuing, and further amendments are expected to the pharmaceutical law. In Estonia the new pharmaceutical law will liberalise the retail outlet regulations, while Latvia is going the opposite way by enforcing the implementation of a more restrictive pharmacy law.  If this takes place it could affect competition and the efficiency of the system, as only pharmacists could own pharmacies from 2011 onwards.

Tamro Group will continue to emphasize cost leadership and customer satisfaction in all its operations. The Group will continue to look for growth opportunities in its existing markets and elsewhere. In those markets where it is legally possible, Tamro will keep extending its retail operations. The lack of qualified pharmacists and the tight labour market in general are significant issues in all retail markets and constitute a threat to Tamro Group’s growth. Tamro expects operational profitability to improve compared to the previous fiscal year.