Moscow, 31 August, 2011 – OJSC Pharmstandard (LSE: PHST IL, RTS: PHST RU) reports 1H2011 unaudited financial results.

Financial results and key highlights for 1h2011:
· Revenue grew by 59.8% and amounted to RUR 18,450.2 million;
· Gross profit grew by 40.2% and amounted to RUR 7,142.2 million;
· EBIDTA^[1] grew by 42.3% and amounted to RUR 5,446.4 million;
· Net profit grew by 51.5% and amounted to RUR 4,189.7 million.
Development of manufacturing and warehousing capacities of the Company:

Investment in development of manufacturing and warehousing capacities of the Group, specifically in construction of new storage facilities and modernization of manufacturing facilities at OJSC Pharmstandard-Leksredstva and OJSC Pharmstandard-Ufavita amounted to RUR 731 million.

In April 2011, construction of production facilities for manufacturing of cytostatic products commenced at OJSC Pharmstandard-Ufavita. The main objective is to launch a wide range of cytostatic products, in the future.
Co-operation with JSC Grindeks:

In July 2011, a complete production cycle of preparation Mildronate® was launched at the aseptic fill facilities of OJSC Pharmstandard-Ufavita. Production began according to schedule agreed on by two leading pharmaceutical companies, JSC Grindeks and OJSC Pharmstandard. By the end of 2011,
900 thousand packages of Mildronate® are expected to be manufactured as per productions plan.

Financial results

This section contains a table with an overview of the financial results comparing the main data for 1H2011 and 1H2010 as absolute figures and as percentage of sales.

This table presents Third Party Products (hereinafter - TPP) as a separate entry in the revenue structure for the periods under review. This way sales of Company’s own (organic) products and Third Party Products manufactured and sold under agreements with other pharmaceutical companies, can be analysed separately.

Sales

The Company’s main areas of activity are production and sales of pharmaceutical products and substances, and of medical equipment. Sales of pharmaceuticals comprises 98.5% of total sales; the share of medical equipment is 1.5%. Sales of pharmaceuticals and medical equipment are primarily carried out on the basis of direct contracts with wholesale distributors and/or medical establishments, as well as under open state auctions won by the Company. In 1H2011 sales amounted to RUR 18,450.2 million which represented a 59.8% increase vs 1H2010 (RUR 11,543.4 million).

Revenue from sales of Vital and essential drugs (hereinafter - VED) in 1H2011 amounted to RUR 12,077.6 million or 65.5% of the Company’s total revenue.

In comparison to the same period a year ago, the increase in sales of pharmaceutical products in 1H2011 amounted to 61.0% including 14.9% due to the increase in sales of Company’s own pharmaceutical products (organic growth without TPP).

Consolidated revenue from TPP sales in 1H2011 amounted to 52.9% of the total revenue of the Company from sales of pharmaceuticals or, in monetary terms, to RUR 9,754.0 million (in terms of reference: 33.3% in 2010). The most considerable contribution to the sales of TPP products were made by the following products: Mabtera®, Velcade®, Pulmozyme®, Coagil VII, Prezista®, IRS®-19, Imudon® and Mildronate®. Their sales amounted to 91.9% of the TPP revenue. In 2011, within the framework of a new project with F. Hoffman-La Roche Ltd., the Company began filling and packaging of Mabtera® and Pulmozyme® at the JSC “Pharmstandard-Ufavita” production facilities. In 1H2011, sales of these products amounted to RUR 4,176.8 million and RUR 819.5 million respectively.

Organic Sales

Sales of OTC products grew by RUR 967.0 million, or 17.0%, from RUR 5,674.9 million in 1H2010 to RUR 6,641.9 million in 1H2011. Sales in the OTC segment have demonstrated an overall increase, with a 29.2% gain due to higher prices and a reduction by 12.2% in volume terms caused exclusively by the shift in consumer demand to more expensive brands and a consequent decrease in sales of non-branded OTC products. Sales leaders were Arbidol® (RUR 1,548.5 million), Pentalgin® (RUR 1,209.5 million), Complivit® (RUR 651.9), Afobazol® (RUR 341.8 million), Flucostat® (RUR 309.6), Amixin® (RUR 166.5 million). The following products were the main drivers of growth in this segment: Pentalgin® (RUR +332.6 million or 37.9%), Complivit® (RUR +180.3 million or 38.2%), Acipol® (RUR +121.9 million or 1,034.4%^[2]), Afobazol® (RUR +97.6 million or 40%), Magnelis® B6 (RUR +34.5 or 126.2%).

Sales in this segment are primarily driven by products for cold, analgesics and vitamins which are subject to seasonal fluctuations: their sales peak during the cold seasons of the year and periods of cold and flu epidemics.

Sales of Rx products grew by RUR 50.7 million or 3.2%, from RUR 1,588.1 million in 1H2010 to RUR 1,638.8 million in 1H2011. Factor analysis demonstrates an overall increase in sales of Rx products due to the price component (+8.5%) accompanied by a decrease in volume sales of 5.3% which, similarly to the OTC segment, is attributable exclusively to the lower demand for cheaper, non-branded products. Sales leaders in value terms were Phosphoglive® (RUR 394.4 million), Biosulin® (RUR 177.0 million), Combilipen® (RUR 168.1 million), Rastan® (RUR 112.8 million), Picamilon® (RUR 77.6 million). The following products were the main drivers of growth: Phosphoglive® (RUR +76.1 million, or 23.9%), Combilipen® (RUR +51.2 million, or 43.8%), Azitrox® (RUR +43.3 million, or 146.4%), Octolipen® (RUR +36.0, or 99.3%), Artrozan® (RUR +22.6 million, or 156.2%) and Biosulin® (RUR +16.4, or 10.2%).

Without taking into account the effect on sales of Rastan® which, during this period, was not realized under open auctions, the total growth of the Rx segment amounted to RUR 238.9 million, or 18.6%.

Medical equipment and disposables

The volume of sales of medical equipment and disposables grew, in 1H2011, by RUR 19.3 million, or 7.7% and amounted to RUR 271.1 million in comparison to RUR 251.8 million 1H2010. This growth is mainly attributable to the sales of sterilizers and components for them.

Cost of sales

Cost of sales in 1H2011 grew by RUR 4,857.7 million, or 75.3%, in relation to 1H2010, and amounted to RUR 11,308.0 million in 2011 vs RUR 6,450.2 million in 2010.

The growth of overall cost of sales is attributable to the increase in “Cost of TPP” by RUR 4,788.7 million or 148.7%, from RUR 3,219.9 million in 1H2010 to RUR 8,008.5 million in 1H2011 resulting directly from an increase in TPP volume and range.

The table below specifically demonstrates the changes in TPP sales and cost of sales.

The following table demonstrates the organic changes in sales and cost of sales, excluding TPP sales.

In 1H2011, cost of sales of Pharmstandard’s own, i.e. organic, products in relation to the respective sales was 37.9% which represents an improvement of 4.7% as compared to the corresponding 1H2010 figure. This change in cost of sales was primarily attributable to the reduction in expenditure on “API and other components” following the changes in the sales structure as described above, and also by the reduction in cost of the main APIs bought for hard currency due to strengthening of the rouble in relation to foreign currencies during the period under review. This reduction in the share of cost of sales in relation to sales, against the backdrop of an increase in organic sales of drugs, can also be explained by the increase in sales of branded products with higher cost effectiveness and reduced consumption of materials.

Until the end of 2011, the Company will operate primarily on the basis of fixed contract prices for the main APIs and materials. For this reason, we do not expect considerable changes in cost of organic sales, established in 1H2011, to occur by the end of 2011, provided currency rates do not experience considerable fluctuations which may affect the cost of APIs and materials purchased under foreign currency contracts.

Gross profit

The Company’s gross profit increased by RUR 2,049.0 million or 40.2%, from RUR 5,093.2 million in 1H2010 to RUR 7,142.2 million in 1H2011. In relation to the volume of sales, the share of total gross profit decreased from 44.1% in 1H2010 to 38.7% in 1H2011 (in terms of reference: in 2010 it was 43.7%). This was due to an increase of the TPP share in the overall structure of sales.

Gross profit of the Company’s pharmaceutical segment amounted to RUR 7,079.1 million in 1H2011, or 38.9% of the segment’s volume of sales vs RUR 5,028.7 million or 44.5% of the volume of sales in 1H2010.

A review of the Company’s organic sales (excluding TPP sales) shows that in 1H2011 gross profit amounted to RUR 5,396.7 million which exceeds the figure of RUR 4,356.8 million for 1H2010 by RUR 1,039.9 million or 23.9%. In relation to the volume of sales, gross profit from Company’s organic sales in 1H2011 amounted to 62.1% vs 57.4% in 1H2010 (in terms of reference: in 2010 it was 57.4%). In this case such an increase resulted primarily (1) from the changes in products’ cost of sales described above and (2) by the increase in sales of branded products with higher cost effectiveness

At present, the Company does not envisage any significant changes of gross profit ratio in the segment of organic sales, provided the current market conditions and the rate of rouble to foreign currencies remain stable.

TPP sales profitability in 1H2011, as compared to the same period a year ago, remained almost unchanged: 17.9% vs 18.6% in 1H2010 (in terms of reference: in 2010 it was 16.4%). Excluding Company’s new project, i.e. sales of large volume of preparation Mabtera®, gross profit amounts to 19.5%. It should be noted that after localization of Velcade® and Pulmozyme® at Company’s facilities, profitability of these projects in relation to the same period a year ago, has increased.

Gross profit in the medical equipment segment in 1H2011 amounted to RUR 63.1 million, or 23.3% of sales volume, which is quite similar to the total figure for 1H2010 amounting to RUR 64.5 million or 25.6%. This was due to changes in cost structure and raw materials price increase .

Operating expenses

In absolute terms, operating expenses grew by RUR 494.5 million, or 31.2%, from RUR 1,584.0 million in 1H2010 to RUR 2,078.5 million in 1H2011. In relation to sales, this indicator decreased and amounted to 11.3% in 1H2011 vs 13.7% in 1H2010. Decrease of this indicator, in percentage terms, was due to the increase of the TPP sales share in total Company’s sales. It is worth noting that the share of operating expenses related to TPP sales, is considerably lower than the share of expenses related to organic sales, primarily due to absence of active promotion.

Selling and distribution (S&D) costs increased by RUR 407.7 million, or 34.9% in relation to the previous year and amounted to RUR 1,576.6 million for 1H2011 vs RUR 1,168.9 million in 1H2010 which, in percentage terms, amounted to 8,5% and 10.1% of sales volume for respective years.

Organic selling and distribution costs (excluding TPP) amounted to 16.9% of the total volume of sales in 1H2011 vs 14.2% in 1H2010.

Marketing, advertising and promotion costs amounted to RUR 658.7 million or 41.8% of the total S&D expenses which represents an increase of RUR 120.2 million, or 22.3% in relation to 1H2010 (RUR 538.5 million). Expenses on marketing, advertising and promotion in 1H2011 amounted to 3.6% of Company’s total sales, vs 4.7% in 1H2010. The biggest share of expenses in this area is allocated for active promotion of branded OTC products manufactured by the Company by means of advertisement placement in mass media.

Labour costs in 1H2011 increased by RUR 178.4 million, or 47.3%, in comparison to 1H2010 and amounted to RUR 555.5 million (35.2% in the structure of S&D). This was due to an increase, at 16.9% of number of sales forces, a scheduled increase in annual payroll rates, and an increase of statutory contributions to social insurance funds due to changes in the rates established by the state.

Other S&D expenses grew by RUR 109.1 million, or 43.1% in relation to 1H2010 and amounted to RUR 362.4 million (23.0% of S&D). Expenses grew due to the following main factors related to the increase in sales: increased cost of freight, insurance and certification of finished goods resulting from an increase in sales volume and tariffs; an increase in expenses for travel and training of promotion personnel due to an increase in their numbers; an increase in expenses for renting, care and maintenance due to expansion of office and storage facilities.

General and administrative expenses (G&A) in 1H2011 grew by RUR 86.7 million or 20.9% and amounted to RUR 501.9 million vs RUR 415.2 million in 1H2010, or 2.7% of the overall volume of sales in 1H2011 in comparison to 3.6% in 1H2010.

Organic G&A expenses (excluding TPP) amounted to 5.3% of the overall volume of sales in 1H2011 vs 4.8% in 1H2010.

Labour costs represented the greatest share of G&A (63.9%) and increased by RUR 51.0 million (18.9%) from RUR 269.6 million in 1H2010 to RUR 320.6 million in 1H2011. This was primarily due the scheduled increase in payroll rates, changes introduced to the bonuses scheme, and an increase in social contributions following changes in the legislation.

Operating profit

Operational profit in 1H2011 grew dramatically and totalled RUR 5,063.7 million vs RUR 3,509.2 million in 1H2010 (in relative terms this amounted to +44.3%). In relation to sales, operating profit accounted for 27.4% of sales volume in 1H2011 vs 30.4% in 1H2010 (in terms of reference: in 2010 it was 30.9% ).

Organic operating profit (excluding TPP) in 1H2011 amounted to 39.8% of total sales of Company’s own products, compared to 38.5% in 1H2010 (in terms of reference: in 2010 it was 40.0% ).

We attribute this increase in organic profitability primarily to the changes in the structure of sales, as described above, in favour of sales of original products with higher margin.

EBIDTA^[3] 

EBIDTA in 1H2011 amounted to RUR 5,446.4 million, or 29.5% in relation to total sales vs RUR 3,826.1 million, or 33.1%, in 1H2010. In 1H2011 EBIDTA grew by RUR 1,620 million or 42.3% or compare with the same period for 2010.

Organic EBIDTA (excluding TPP) demonstrates an increase by RUR 612.7 million (19%) from RUR 3,240.1 million in 1H2010 to RUR 3,852.8 million in 1H2011 representing 42.7% and 44.3% in relation to organic sales, respectively.

Other expenses (income)

Other Expenses in 1H2011 amounted to RUR 72.2 million, as compared to RUR 112.4 million in 1H2010. This change is mainly attributable to: (1) foreign exchange gain amounting to RUR 124.0 million vs foreign exchange loss of RUR 47.6 million in 1H2010 resulting from strengthening of the rouble exchange rate in relation to foreign currencies; (2) increase in income from non-core activities, primarily agency fee incurred in respect of sale of certain third-parties products by the Company; (3) recognition of cash rebates on procurement of several products which were recognized in accordance with the terms of signed contracts.

Financial income and financial expense

Our financial expense, which is mainly related to interest payable with respect to loans, decreased by RUR 10.9 million, or 39.5%, from RUR 27.6 million in 1H2010 to RUR 16.7 million in 1H2011. This was primarily due to the decrease in the balance of a syndicated loan organized by Citibank, as per agreement concluded in December 2006 (it is expected to be fully repaid by the end of 2011). Financial income in 1H2011 which amounted to RUR 115.4 million, in comparison to RUR 119.8 million in 1H2010, mainly resulted from cash deposits placed in other banks.

Income tax expense

In 1H2011, the Company incurred RUR 1,054.2 million of income tax expense, compared to RUR 723.4 million in 1H2010. Effective tax rate in 1H2011 was 20.1%

Profit for the period

The Company’s net profit grew by RUR 1,424.1 million or 51.5% and amounted to RUR 4,189.7 million in comparison to RUR 2,765.6 million in 1H2010. These figures represent 22.7% and 24.0% of sales for the respective periods.

Profit from organic sales (excluding TPP) in 1H2011 represented 33.5% of such sales compared to 30.3% in 1H2010.

In 1H2011, profit attributable to the equity holders of the parent company amounted to RUR 4,179.3 million.

Earnings per share, in 1H2011, amounted to RUR 114.26 representing an increase of 56.3% as compared to the respective figure in 1H2010, RUR 73.09 per share.^[4]

Cash Flows Overview

The following table summarizes our cash flows in 1H2011 and 1H2010.

Net cash from operating activities

Substantially, all our cash flows from operating activities for the periods covered by the Company’s Interim Consolidated Financial Statements were generated from sales of Company’s own (organic) products and TPP, from sales of medical equipment and also as interest based income from available cash deposits.

In 1H2011 and 1H2010, net cash flow from operating activities amounted to RUR 2,935.6 million and RUR 2,222.9 million respectively. The increase in net cash from the Company’s operating activities in 2011 resulted from both an increase in sales of its own leading brands such as Pentalgin®, Complivit®, Codelac®, Acipol®, Afobazol®, Phosphoglive®, Combilipen®, Azitrox®, and from an increase in sales of Third Party Products such as Mabtera®, Coagil VII, Prezista®, Pulmozyme®, IRS®-19, Imudon®, including those which are procured by the Company under the terms of state open auctions.

In 1H2011, net cash flow, due to the decrease in receivables, amounted to RUR 1,847.3 million vs RUR 950.5 million in 1H2010. This increase in cash inflow was due to (1) an increase in the amount of receivables with respect to supplies carried out in 4Q2010 and (2) repayment in 2H2010 of receivables dated 30 June 2010 which occurred pursuant to contracts regarding sale of TPP.

Usually, Company’s production plans make provisions for an increase in the stock by midyear to be able to carry out planned supplies in 3^rd and 4^th quarters of the year when sales tend to reach their peak due to an increased seasonal demand for cold and flu products. Nevertheless, positive net cash flow due to the decrease in inventories in 1H2011 amounted to RUR 447.4 million in comparison to the negative net cash flow of RUR 1,264.3 million due to the increase in inventory in 1H2010. This change is mainly attributable to supplies under state open auctions, in 2011, of products, primarily Mabtera® and Pulmozyme®, which are accounted for as stock existing on 31 December 2010.

Net cash outflow, following the reduction in payables and advance payments received for 1H2011, amounted to RUR 3,735.9 million, as compared to net cash inflow of RUR 223.0 million due to the increase in payables in 1H2010. This change was attributable to the following: (1) as on 31 December 2010 The Ministry of Health and Social Development of the Russian Federation made part pre-payment pursuant to the state open auctions won by the Company, and in 1H2011 the Company carried out the supplies with respect to this pre-payment as per contract; (2) repayment of debt, in 2011, pursuant to the terms of contracts, arising from supplies, in 2010, of TPP, primarily Prezista®, Mabtera® and Pulmozyme®.

The increase in the net cash flow in 2011 was also due to (1) an increase in cash flow with respect to interest payments on deposits and loans which amounted to RUR 125.8 million in 1H2011 vs RUR 41.6 million in 1H2010; (2) a decrease in the cash outflow related to tax, primarily VAT, in 2011.

Net cash used in investing activities

In 1H2011, net cash inflow related to investment activities amounted to RUR 15.5 million compared to RUR 2,945.5 million of net cash outflow in 1H2010. In 1H2011, net cash inflow from operations with short-term financial assets, including bank deposits, amounted to RUR 1,098.0 million in comparison to net cash outflow in 1H2010 related to similar operations and amounting to RUR 1,902.8 million.

Apart from this, within the above periods, the most significant investment activities included construction and modernization of manufacturing facilities, and acquisition of equipment for the Company’s production facilities. In 1H2011 and 1H2010 we paid RUR 910.3 million and RUR 497.4 million, respectively, for fixed assets, construction and modernization of production facilities and equipment. These acquisitions were primarily made as investment in development of Company’s production and storage facilities, specifically: construction of new facilities for storage of finished goods and APIs in Ufa and Kursk; expansion, modernization and construction of new production lines for manufacturing of injectable drugs and installation of modern equipment for them in Ufa; construction of a new production building with modern equipment for manufacturing cytostatics in Ufa; re-construction of existing facilities for manufacturing of new products in Kursk. On the whole, investments in major new projects in Ufa and Kursk amounted to RUR 558.6 million and RUR 172.1 million ,respectively. Other capital investments were made in worn-out equipment renewal at all production facilities of the Company, and also were connected to the continued construction of R&D and infrastructure facilities of NauchTechStroi Plus LLC (NTS+).

In 1H2011, the Company paid RUR 181.8 million to purchase 55% of Biolek’s (Ukraine) shares. It is worth noting that RUR 184.1 million were paid by the Company as pre-payment in 4Q2010. We would also like to mention that in 1H2010 the Company paid RUR 481.1 million to acquire JSC Grindeks shares which were realised in 2H2010.

Net cash used in financing activities

In 1H2011 and 1H2010, net cash used in financing activities amounted to RUR 5,658.4 million and RUR 195.3 million respectively. These amounts were primarily related to (1) repayment of a Citibank syndicated loan denominated in US dollars received in 2006; (2) consideration in amount to RUR 5,474.3 million paid by OJSC Pharmstandard-Leksredstva for Company’s treasury shares.