PBS changes and exclusive direct distribution wiped more than $10 million in gross profit, according to FY18 results

Australian Pharmaceutical Industries (API) has reported mixed results in its financial year 2018 announcement.

Underlying net profit after tax (NPAT) was $54.7 million, up 0.9% on the prior corresponding period.

This result is positive after API’s half-year results in April revealed an 8.1% decrease in underlying NPAT, primarily due to challenging retail conditions.

However for the full year to 31 August 2018, API’s underlying earnings before interest and tax (EBIT) was down 1.5% to $90.5 million.

Revenue was $4.026 billion, down 0.9% on the previous year, “reflecting a drop in demand for Hepatitis C medicines of approximately $155 million,” explained API.

Excluding Hepatitis C medicines, revenue increased by 3.3%.

“The 2018 financial year was pivotal in managing the existing business through difficult conditions and in establishing a broader growth portfolio for the company,” said API CEO and Managing Director Richard Vincent.

Broadening the portfolio included API’s acquisition of Clearskincare clinics, of which stage one was completed at the end of July 2018.

The acquisition impacted the NPAT with a one-off cost of $6.6 million, bringing the reported NPAT down to $48.2 million.

API’s pharmacy distribution revenues were slightly lower at $2.9 billion, however excluding Hepatitis C medicines and the effect of PBS changes, underlying revenue was up by 6.4%.

Underlying EBITDA (result from operating activities before depreciation and amortisation) was down 1.5% to $118.7 million.

API said this was primarily due to the effect of an increased number of price reduction cycles in the PBS during FY18, and exclusive direct distribution arrangements.

“A combination of PBS changes and exclusive direct distribution removed more than $10 million in gross profit compared with the prior year,” said the company.

However Mr Vincent said the business was able to offset much of this through revenue growth, without changes in trading terms with pharmacies.

“We’re awaiting the Community Service Obligation (CSO) review before making any decisions on future trading arrangements,” he said.

Last month Mr Vincent told AJP that exclusive supply of medicines is still a “very big issue” and that product should be made available to each and every CSO wholesaler.

Priceline Pharmacy total network sales were up 2.1% to $2.11 billion, however total network like-for-like sales were down 0.2%.

“Comparable store sales, while negative, are improving in trends terms,” said Mr Vincent.

“There has been a focus on better management of promotional sales, stock availability and margin growth.

“Overall health and beauty market share was flat with gains in health categories offset by a weaker beauty result.”

Mr Vincent recently told AJP that Priceline Pharmacy faces competition in the beauty market.

“There’s some fantastic other retailers in the market like Mecca and Sephora in the beauty space, so they keep us on our toes,” he said.

The Priceline Pharmacy store network grew by 13 stores in financial year 2018, up to 475 stores – 334 (70%) of which are Priceline Pharmacies.

“We are growing the network, now with a greater focus on the quality of our new stores, rather than the number of stores opened,” said Mr Vincent.

API expects earnings growth in FY19, and Mr Vincent said he is confident that the business is positioned with the right assets to achieve that.

“We are confident that we have a highly complementary group of assets which will grow revenue and earnings.”

This confidence was reinforced by the Board’s decision to increase the final dividend payment to 4.0 cents per share, up from 3.5 cents last year.