annual report 2007 - pelion · plnm no. of shares last trading day price 52-week high 52-week low...

We are there to protect your health

Annual Report 2007

2005 2006 2007

Stock Highlights (2005-2007)

change2007/2006

PLN

PLN

PLN

PLN

PLN

PLNm

No. of shares

Last trading day price

52-week high

52-week low

Earnings per share

Dividend per share *

Market capitalisation

12,361,263

60.7

63.5

47.7

4.26

2.2

750.3

12,450,967

79.5

90.0

58.2

5.02

2.4

989.9

12,588,240

89.1

125.4

70.3

5.91

2.4

1,121,6

1.10%

12.08%

39.33%

20.70%

17.90%

0.00%

13.33%

* paid during the financial year

Financial Highlights for 2005-2007

change2007/20062005 2006 2007

Sales revenue

EBITDA

Operating profit

Net profit (attributable to parent underta-king’s shareholders)

Balance-sheet total

Equity (parent undertaking)

EPS

P/E

ROE

PLNm

PLNm

PLNm

PLNm

PLNm

PLNm

PLN

%

3,890.7

92.5

75.5

52.6

1,445.4

213.3

4.26

14.2

24.7

4,007.6

108.3

87.0

62.5

1 490.4

246.7

5.02

15.8

25.3

4,410.5

113.7

93.0

74.4

2,011.7

286.4

5.91

15.1

26.0

10.1%

5.0%

6.9%

19.0%

35.0%

16.1%

17.7%

-0.7

0.7

* in 2000 one-off amortisation of goodwill was made with regard to companies acquired during the market consolidation; the amount of the one-off charge was PLN 163.7m

0.13 0.22

-13.10*

0.04

1.84

2.993.84

4.265.02

5.91

We build shareholder value

WSE:

CAGR for earnings per share: 52.8%

PGF codes in online news services:

PGF stock performance on the WSE

PLN points

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

5,000

4,000

3,000

2,000

1,000

0

Sales revenue (PLNm)

278461

1,779

2,907 3,082 3,158 3,490 3,639, 3891 4,008

4,411

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


80

60

40

20

10

0

1,200

1,000

800

600

400

200

0

Net profit (attributable to parent undertaking’s shareholders)

Market capitalisation (PLNm)

8.1

1.3 2.5

-160.3*

0.5

22.636.6

47.052.6

62.574.4

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Tenth straight year of growth in sales

Growth from a firm foundation

1,122

PGF Annual Report 2007 1

POLSKA GRUPA FARMACEUTYCZNABusiness makes sense only when it serves to satisfy people’s

needs. That belief prompted the establishment of Polska Grupa

Farmeceutyczna – the first Polish pharmaceuticals distributor with

an international presence. In Poland, Lithuania and Great Britain

we deliver medicines to thousands of pharmacies and millions of

patients. Every day we work on developing new ideas how to reduce

pharmaceutical prices and contribute to improving healthcare.

I CARE FOR MY HEALTH PROGRAMMEWe have networked almost two thousand pharmacies to offer patients

uniformly high standards of care. Together we form a part of Europe’s

largest patient care initiative. For us health means a lot more than an

opposite of illness. We equip people with knowledge on how to

protect their loved ones.

TRADITIONAL AND MODERNThe depth of our knowledge stems from the experience of pharmacists,

who for generations have been the first source of information on

medicinal products. Hundreds of hours of discussions about patients’

needs led to the creation of a vision, which PGF has remained faithful

to ever since. We have learned how to care for health from the best

pharmacists.

POLAND – EUROPE – FUTUREDrawing on international standards, we look for inspiration both in

Poland and abroad. Currently, we are one of the largest players in

Central and Eastern Europe and a pillar of the Polish economy. Our

team is more than six thousand strong. We are there to protect your

health.

2005 2006 2007

Stock Highlights (2005-2007)

change2007/2006

PLN

PLN

PLN

PLN

PLN

PLNm

No. of shares


52-week high

52-week low

Earnings per share

Dividend per share *


12,361,263

60.7

63.5

47.7

4.26

2.2

750.3

12,450,967

79.5

90.0

58.2

5.02

2.4

989.9

12,588,240

89.1

125.4

70.3

5.91

2.4

1,121,6

1.10%

12.08%

39.33%

20.70%

17.90%

0.00%

13.33%

* paid during the financial year


change2007/20062005 2006 2007

Sales revenue

EBITDA

Operating profit


Balance-sheet total


EPS

P/E

ROE

PLNm

PLNm

PLNm

PLNm

PLNm

PLNm

PLN

%

3,890.7

92.5

75.5

52.6

1,445.4

213.3

4.26

14.2

24.7

4,007.6

108.3

87.0

62.5

1 490.4

246.7

5.02

15.8

25.3

4,410.5

113.7

93.0

74.4

2,011.7

286.4

5.91

15.1

26.0

10.1%

5.0%

6.9%

19.0%

35.0%

16.1%

17.7%

-0.7

0.7


0.13 0.22

-13.10*

0.04

1.84

2.993.84

4.265.02

5.91

We build shareholder value

WSE:

CAGR for earnings per share: 52.8%

PGF codes in online news services:

PGF stock performance on the WSE

PLN points

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

5,000

4,000

3,000

2,000

1,000

0

Sales revenue (PLNm)

278461

1,779

2,907 3,082 3,158 3,490 3,639, 3891 4,008

4,411

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


80

60

40

20

10

0

1,200

1,000

800

600

400

200

0

Net profit (attributable to parent undertaking’s shareholders)

Market capitalisation (PLNm)

8.1

1.3 2.5

-160.3*

0.5

22.636.6

47.052.6

62.574.4

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Tenth straight year of growth in sales

Growth from a firm foundation

1,122

We are eager to deliver medicinal products wherever there is a need to do so more efficiently,

cost-effectively and safely

current footprint prospective markets for PGF in Central Europe

Description of the PGF GroupPGF’s History – 18 Years of GrowthLetter to the ShareholdersManagement Board of PGFSupervisory Board of PGFCorporate Governance RulesKey Events in 2007

PGF on the Stock Exchange

PGF Group – Directors’ ReportPGF Group’s Strategy

Legal Environment

Market Environment

PGF’s Market Position

Financial Performance in 2007

Risk Management

Quality Assurance Policy

PGF as a Corporate Citizen

Employees

Wholesale Distribution MarketMarket Developments in 2007

Services to Pharmacies

Logistics

Support for Drug Producers

Retail Distribution MarketMarket Developments in 2007

I Care for My Health Pharmacies

Hospital Distribution MarketHospital Market in 2007

Services to Hospitals

Auditor’s OpinionFinancial StatementsKey Financial DatesContact Details

040608 12141516

20

2627

30

32

35

37

42

43

44

46

4849

51

53

56

5859

61

6465

66

6870 8384

> Contents

4 PGF Annual Report 2007

Distributionto pharmacies

Other business

GdańskPGF Sp. z o.o.

ŁódźPGF Łódź Branch

Laboratorium Galenowe Olsztyn Sp. z o.o.

Pharmena Sp. z o.o.

TarnowiecPGF Sp. z o.o.

NDS DEPO Sp. z o.o.

DywityPGF Cefarm Sp. z o.o.

PoznańPGF Cefarm - Poznań Sp. z o.o.

Wrocław PGF Urtica Sp. z o.o.

PGF wholesale companies

SzczecinPGF Sp. z o.o.

KatowicePGF Katowice Branch

Bez Recepty Sp. z o.o.

WarszawaPGF Sp. z o.o.

Daruma Sp. z o.o.

BydgoszczPGF Bydgoszcz S.A.

KrakówPGF Cefarm - Kraków Sp. z o.o.

ŁomżaPGF Sp. z o.o.

Farm-Serwis Sp. z o.o.

WrocławPGF Sp. z o.o.

LublinPGF Cefarm - Lublin Sp. z o.o.

RzeszówHurtownia Aptekarz Sp. z o.o.

> Description of the PGF Group

Parent Undertaking

Polska Grupa Farmaceutyczna

Distributionto hospitals

Associated companies

ŁódźDOZ S.A.

LublinPZF Cefarm - Lublin S.A.

ŁódźPZF Cefarm - Łódź Sp. z o.o.

WrocławPF Apexim S.A.

KrakówPZF Cefarm - Kraków S.A.

BydgoszczApteki Cefarm Sp. z o.o.

Retailregions

Retail and foreign operations

United KingdomDOZ UK Limited

LithuaniaUAB Nacionaline farmacijos grupe

PolandDOZ S.A.

LithuaniaLimedika UAB

LithuaniaNorfos Vaistine UAB

LithuaniaGintarine Vaistine UAB

Central European Pharmaceutical Distribution


Description of the PGF Group

Polska Grupa Farmaceutyczna is the largest distributor of pharmaceuticals in Poland and one of the leaders in the Lithuanian market. The Company was founded 18 years ago (it first operated under the name of Medicines until 1997). The main shareholders of the Company are Jacek Szwajcowski and Zbigniew Molenda, the founders and members of the Management Board, and Poland’s largest pension funds. In 1998, PGF was the first Polish pharmaceutical company to be listed on the Warsaw Stock Exchange; The Company used the proceeds from the of-fering to commence consolidation of the pharmaceutical wholesale market. Ever since, PGF has been the leader of the pharmaceuticals market in Poland. Medicinal pro-ducts are delivered to pharmacies by PGF subsidiaries operating across Poland and Lithuania. Thus, the Group is capable of reaching any pharmacy in a matter of hours, regardless of the distance. Drugs are delivered to patients also through 1,700 orange-coloured I Care for My Health Pharmacies, which form one of Europe’s largest pharma-cy partnership programmes. Over five million Poles use the services of the networked pharmacies.

PGF on International Markets

Polska Grupa Farmaceutyczna is the first Polish distributor to enter foreign markets. The Group is present in Poland and Lithuania, across all sectors of the market: wholesale, retail and hospitals. In 2007, PGF launched the first two I Care for My Health Pharmacies in the United Kingdom. The PGF Group’s strategic objective is to achieve the le-ading position in Central Europe.

The PGF Brand

The PGF brand fosters the image of a transparent, am-bitious and innovative organisation. The crowning of the Group’s efforts in 2007 was the Business Superbrand pri-ze awarded to PGF for being one of the strongest and most recognisable business brands on the Polish mar-ket. The ranking was held by The Superbrands Ltd., an organisation present in 70 countries worldwide. PGF’s strong market image was also confirmed by its position in the Image Profile ranking published by the monthly Manager Magazine. In 2007, PGF was listed as one of the top hundred most reputable enterprises according to Polish managers. The Group further strengthened its position as a leading Polish enterprise when it received the first Diamond to the Golden Statuette of the Polish Business Leader, granted by Business Centre Club.

The PGF Group

Companies comprising the PGF Group are independent organisations established and operating pursuant to the provisions of the Commercial Companies Code. PGF’s direct or indirect interests in the share capital of the Group members varies, but in the vast majority of cases, PGF holds the entire share capital of the subsidiaries. In 2007, the number of PGF Group members exceeded 100. Al-most all of them operate pharmaceutical warehouses or pharmacies. The core of the Group is formed by regio-nal companies headquartered in major cities. All these organisations use the “PGF” acronym as they form a sin-gle marketing platform. The Group’s support companies are:

• Farm-Serwis Sp. z o. o. (receivables management)

• DOZ S.A. (marketing services),

• Bez Recepty Sp. z o.o. (publisher),

• NDS DEPO Sp. z o.o., DARUMA Sp. z o.o., (assets and property management),

• Laboratorium Galenowe Olsztyn Sp. z o.o. (production of pharmaceuticals).

Additionally, PGF holds majority interests in a number of foreign companies. The major ones are Central Europe-an Pharmaceutical Distribution of the Netherlands, DOZ UK Limited of the UK and two Lithuanian companies: Limedika UAB and Gintarine Grupe UAB.

> Description of the PGF Group


> PGF’s History – 18 Years of Growth

1990 1993 1998 1999 2000 2001 2002 2003 2004 2007

innovativenesstransparency

PGF’s History – 18 Years of Growth

With the change of the political system and the advent of the free-market economy, transformation of the pharmaceuticals market begins. Jacek Szwajcowski establishes Medicines, a pharmaceutical wholesale business.

Acquisition of pharmaceutical wholesalers:Eskulap and Medicines - Jasło

Merger with Carbo S.A. of Katowice and Cefarm B of Opole

Merger with Urtica S.A.and Biomedic S.A.; acquisition of CefarmBydgoszcz

Merger with CefarmPoznań; acquisition of Cefarm Olsztyn and Cefarm Lublin

Polska GrupaFarmaceutyczna, Poland’s largest pharmaceutical

wholesaler, established.

Medicines established

Listing on the WSE

Consolidation of the industry

PGF becomes the leader in sales

to hospitals, and launches its first own

pharmacies.

After three years of M&A activities,

PGF’s sales revenue increases

ten-fold.

Medicines is the first company in the industry to launch an IT enterprise management system.

Medicines is the first pharmaceutical company to be listed on the Warsaw Stock Exchange.

PGF uses the proceeds from the offering and bank loans to consolidate the pharmaceuticals distribution market.

Launch of Lider 2001 programme to restructure the Group following a series of mergers and acquisitions.

countrywide development, mergers and acquisitions development in central Poland


1990 1993 1998 1999 2000 2001 2002 2003 2004 2007

continued development patient care

From a small Łódź-based company to the leader of the Polish market about to conquer international markets

Acquisition of CefarmKraków

Acquisition of Cefarm Łódźand Apteki Polskie pharmacy chains

Launch of I Care for My Health pharmacies in the UK.

Acquisition of Limedika, a Lithuanian pharmaceutical wholesaler, and Gintarine Vaistine, a chain of pharmacies.

Acquisition of Aptekarz wholesaler of Rzeszów

Launch of I Care for My Health

programme

Beginning of international expansion

The I Care for My Health programme is established; it develops into one of the largest partnership schemes for pharmacies in Europe.

PGF voted 2001 Listed Company of the Year in Poland

PGF is the first listed company in Poland to broadcast a General Shareholders Meeting live over the Internet.

PGF introduces an innovative sales model based on an on-line pharmacy and a network of 1,700 pharmacies participating in the I Care for My Health programme.

PGF becomes the first Polish distributor of pharmaceuticals to enter international markets.

countrywide development, acquisitions, the I Care for My Health programme foreign investments

> History of PGF


Jacek SzwajcowskiPresident of the Management Board of PGF

> Letter to the Shareholders


Ladies and Gentlemen,

In 2007, Polska Grupa Farmaceutyczna achieved the highest revenue and net profit in 18 years. The Company’s sales reached the historic record of PLN 4.4bn. However, we do remember that for the shareholders - sales without profit generate no value and therefore, in line with the Management Board’s declarations, the Group - yet again - achieved a double digit net profit growth with the record value of PLN 73.7m. I would like to thank PGF’s entire team for this result. It is thanks to the everyday work of thousands of people that we can fulfil our mission and develop continuously.

Ten years of development

In 2008, we celebrate the 10th anniversary of our presence on the Warsaw Stock Exchange. I can assert with all certainty that we have used this decade to the full. Since our debut, we have been following the same development strategy, knowing that in low profitability sectors continuous growth is possible only if the scale of activities is constantly increased and the effi-ciency always improved. Our goal is to deliver top quality services to patients and pharmacies alike. We wish to make our contribution, wherever needed, to the improvement of healthcare quality and guarantee that patients have an unhindered access to modern medication. Within the last few years we have proved that we can efficiently manage the assets that have been entrusted to us and make decisions yielding effects in a long term. Since PGF debuted on the Stock Exchange, our revenue has increased almost 16-fold, with net profit’s CAGR of 24.9%. We have been gradually investing the raised capital, allocating, on the whole, half a billion złoty to this purpose. The figures attest to the efficiency of our strategy.

Consistent strategy and innovative solutions

I am particularly pleased to say that more than once during the last decade we initiated changes which helped overcome the stereotypical perception of a distributor’s role in the healthcare system. Allow me to mention that PGF was the sector’s first company to be listed on the Warsaw Stock Exchange. Subsequently, we started the consolidation of the wholesale market, assuming that only a countrywide company stands a chance of reducing the prices of pharmaceuticals and simultaneously increasing shareholder value. In 2001, we redefined our market approach yet again, introducing an innovative business model aimed at offering multi-faceted support to developing independent pharmacies. In seven years, the programme has enabled us to build one of Europe’s largest groups of partner pharmacies. With time, it has become clear that international expansion should be the next stage in our development.



A breakthrough year

The year 2007 proved to be particularly important for our development. We became Poland’s first distributor of pharmaceuticals to operate internationally. In July, the Group incorporated one of Lithuania’s major distributors and five months later we opened our first pharmacies in London. These experiences are to prepare Polska Grupa Farmaceutyczna for the implementation of the next stage in our strategy. We see major potential for growth in Central Europe where the distribution market remains unconsolidated. We hope to achieve a leading position in the region in just over a decade.

Last year saw one more important development: completion of the next stage in the consolidation of the sector in Poland. With the shareholders’ approval, Aptekarz, a Rzeszów-based company and one of the local market leaders, joined PGF. This transaction initiated our cooperation with a few hundred new pharmacies in southern Poland.

With patients’ good in mind

With the patients’ good in mind, last year we launched the www.doz.pl health portal. The new Internet platform is a part of the I Care for My Health programme. Our goal is to support patients by offering reliable and understandable information on health not only in pharmacies, but also at home, via the Internet. A budget on-line pharmacy is a part of the portal. The prices of pharmaceuticals on offer are lower thanks to cost optimization and the use of the distribution potential offered by the I Care for My Health outlets. Additionally, it is the first Polish portal to introduce a unique distribution model which allows patients to collect their Internet order at the pharmacy without having to bear the delivery costs. As a result, we can offer the lowest prices on the market.

At the end of the year we launched yet another project for patients. On the initiative of the pharmacies networked within the I Care for My Health scheme, we established the first Polish foundation offering assistance to patients who cannot afford to buy medication. According to a research, this is one of Poland’s major social problems. After all, effective treatment is hardly possible if the patient cannot afford to buy the necessary medication. We are hoping to help as many patients as possible, although we are well aware that the I Care for My Health Foundation is just a drop in the see of needs.



The future

When assessing the Company’s strategy, it is important to reflect upon the development trends in the sector. With respect to the society’s basic needs, we are a part of an exceptional market. According to global forecasts, within the next few years, sales of pharmaceuticals will see a stable growth of a few percent. Our society is being reshaped by demographic, epidemiological and economic changes. The diseases that afflict wealthy societies begin to plague also the inhabitants of developing countries. Bearing these trends in mind, we can get better prepared for the changes facing Central Europe.

In the coming years, the Polish pharmaceuticals markets will be influenced by three factors. The structure of public spending on healthcare will be changing with the economic growth. This has to be taken into account especially in the context of low refunds for the purchase of medication in Poland. On the other hand, the society, enjoying larger incomes, will be more eager to invest in health. We will also experience changes to the society’s demographic structure, which will inevitably entail increased spending on healthcare. According to forecasts, in a few years’ time every fifth Pole will be over 60 years old. We want to face these challenges because, as one of the partners of the healthcare system, we have become co-responsible for the quality of the services delivered and the care for patients’ health.

The coming year will pose another important challenge for the PGF Group. We have set ourselves three ambitious goals. We wish to enter at least two new foreign markets, maintain our leading position on the Polish pharmaceuticals market and seek market niches for the distribution of pharmaceuticals in Poland and Europe. In 2008, we also wish to further invest in the I Care for My Health programme. Our model of a large, well-organised sales network, based on experienced, independent pharmacies has proved effective in Poland, and so we would like to develop it in other European countries.

I would like to extend my sincere thanks to all those who have contributed to the success of Polska Grupa Farmaceutyczna so far. I am truly optimistic about the future and convinced that the foundations of PGF we have built are a sound base on which to build the Company’s future value. We have become an ambitious, innovative and effective organization and we are set on fulfilling our mission. We are here to protect your health.

Jacek SzwajcowskiPresident of the Management Board of PGF



Jacek Szwajcowski

FounderPresidentof the Management Board of PGF

Corporate Communication,Human Resources, Public Affairs, Corporate Audit, IT

Zbigniew Molenda

FounderVice-President Procurement and Distribution

Supplies and Procurement Policy,Logistics, Quality, Asset Management

> Management Board of Polska Grupa Farmaceutyczna


Anna Biendara

Vice-PresidentFinance Member of the Menagement Board since 1994

Consolidation and Reporting, Finance, Accounting, Budgeting and Controlling

Ignacy Przystalski

Vice-PresidentSales and Marketing Member of the Menagement Board since 2005

Marketing, Sales to Pharmacies, Internet Sales

Jacek Dauenhauer

Vice-PresidentFinancial Strategy and Development Member of the Menagement Board since 2007

International Activities,Financial Strategies and Acquisitions,Investor Relations

> Management Board of Polska Grupa Farmaceutyczna


> Supervisory Board of Polska Grupa Farmaceutyczna

Supervisory Board of PGF

Jerzy LeszczyńskiChairman of the Supervisory Board

Hubert JaniszewskiDeputy Chairman of the Supervisory Board

Jan KalinkaMember of the Supervisory Board

Piotr StefańczykMember of the Supervisory Board

Maria WiśniewskaMember of the Supervisory Board

Audit Committee

Piotr StefańczykJan Kalinka

Appointment and Remuneration Committee

Hubert JaniszewskiMaria Wiśniewska


Corporate Governance

Polska Grupa Farmaceutyczna complies with all the cor-porate governance rules proposed by the Warsaw Stock Exchange and provided for in “Best Practices in Public Companies”, as amended from time to time. The full text of the statement on the application of corporate gover-nance rules at the Company is presented on its web site (www.pgf.com.pl).

General Shareholders Meeting

The General Shareholders Meeting of PGF is the Compa-ny’s most important governing body which exercises the owners’ authority to make the key decisions. The Gene-ral Shareholders Meeting is customarily held each year in June. The General Shareholders Meeting review and approve the Directors’ Report on the Company’s activities and the financial statements. The General Shareholders Meeting also decides on the distribution of profit and sets the dividend payment date. At the General Shareholders Meeting the shareholders grant approval to members of the Company’s governing bodies assessing their perfor-mance of duties, appoint members of the Supervisory Board, and make the key decisions concerning the Com-pany’s assets. The operation of the General Shareholders Meeting is governed by the Rules of Procedure for the General Shareholders Meeting, which comply with the provisions of the Polish Commercial Companies Code and corporate governance principles.

Supervisory Board

The Supervisory Board is the Company’s most important controlling body. The Supervisory Board is composed of five members who form two committees: Audit Commit-tee and Appoitnment and Remuneration Committee. The majority of the members of the Supervisory Board meet the criteria of independent supervisory board members. One of the main responsibilities of the Audit Committee

is to propose Supervisory Board resolutions regarding assessment of the Company’s financial statements and appointment of auditors. The Appointment and Remune-ration Committee proposes resolutions regarding chan-ges in the composition of the Management Board and remuneration of the Management Board members.

Management Board

The Management Board of PGF is composed of five members who manage the Company’s business and represent it in relations with third parties. The Manage-ment Board’s objective is to build the Company value in a long-term. The responsibilities of the Management Bo-ard include all the decisions concerning PGF’s operations which had not been reserved for the other governing bo-dies of the Company under applicable laws or the Com-pany’s Articles of Association. The Management Board operates pursuant to applicable laws, and in particular pursuant to the Polish Commercial Companies Code. The Rules of Procedure for the Management Board are adopted by the Management Board and approved by the Supervisory Board.

Highest Corporate Governance Standards

Since the floatation of its shares in 1998, the PGF Group has pursued a transparent information policy and com-plied with the international corporate governance stan-dards. In 2001, analysts, investment advisers and brokers awarded PGF the title of the “2001 Best Listed Compa-ny”. In subsequent years (2004, 2005), the Institutional Investor Chapter ranked Polska Grupa Farmaceutyczna among the twelve “Most Trusted Companies” applying the highest corporate governance standards. In 2007, the journalists of Gazeta Giełdy Parkiet nominated PGF for the ”Company with the Highest Corporate Governance Standards” award.

> Corporate Governance Rules

Capital market participants expect the listed companies to ensure easy access to information and equal treatment of all shareholders. Very good communication with analysts, investors and media should guarantee the transparency of actions taken by the governing bodies of a company and facilitate understanding of the adopted style of managing the company value.


> Key Events in 2007

Key Events in 2007

AprilAdvertisement of Pharmacies and Online Sale of Drugs PermittedAmendments to the Polish Pharmaceutical Law ennacted in spring permit the advertisement of pharmacies. The Polish parliament also agrees to the sale of drugs on the Internet. Poland is another European country, after the Netherlands, the UK, Germany and Switzerland, to permit the distribution of dugs via the Internet.

JuneDecision on Profit Distribution The General Shareholders Meeting approves the non-consolidated and consolidated financial statements of PGF for 2006 and grants approval to members of the Management Board and Supervisory Board for the per-formance of their duties. The shareholders decide to pay out dividend for the fifth consecutive year. The dividend of PLN 2.4 per share is paid out on July 17th. Like in the previous years, the meeting of the PGF shareholders is broadcast on the Internet.

AugustMarket Rewards PGF’s StrategyThe price of PGF shares reaches its all-time high. Inve-stors pay PLN 125.4 per share and the market capitalisa-tion of the Group is at a record level of over PLN 1.5bn.

With the Needy in Mind FUNDACJA dbam o zdrowie (I Care for My Health Foun-dation) is established. It is the first organisation in Poland whose primary objective is to provide support to the pe-ople who cannot afford to buy drugs.

SeptemberPharmacies Appear on BillboardsThe first campaign promoting pharmacies in Poland is launched. Large-format advertisements of the orange-co-loured I Care for My Health Pharmacies appear in major cities with the slogans: “Take care of your health – we take care of the prices” and “You get more when you buy from us”.


NovemberPatients Have the Right to Know The www.doz.pl portal is launched with the aim to support medical treatment processes and become the largest repository of health-related information in Poland. A low-cost internet pharmacy based on a new business model is a part of the portal. Orders are placed online and the ordered products are collected at one of 1,700 I Care for My Health Pharmacies. It is the most cost-effective me-thod of distribution of drugs in Poland where the prices may be reduced due to online ordering and elimination of logistics costs.

Capital RaisingIssue of medium-term bonds with a total value of PLN 191m, maturing on December 28th 2012.

DecemberSale of Real PropertyThree months after the Company moved to its new offices, PGF’s old warehouse in Poznań is sold for PLN 32.4m (VAT inclusive).


PGF’s Investments in 2007

JulyPGF to Sell Drugs in LithuaniaPolska Grupa Farmaceutyczna becomes the first Polish pharmaceutical company with an international presence. The Company acquires a majority interest in Limediki, the third largest Lithuanian pharmaceutical wholesaler with an 18% market share, for EUR 22.5m, which also covers the purchase of the Gintarine Vaistine chain of pharma-cies, and becomes one of the largest Polish investors in Lithuania.

Apexim Joins PGFApexim, an operator of a network of pharmacies, joins the PGF Group for the price of PLN 27.4m. The constantly growing I Care for My Health network already comprises 1,700 pharmacies providing their services to over five mil-lion Polish customers.

Warehouse in PoznańPoland’s most technologically advanced pharmaceuti-cals warehouse is constructed in Poznań. The automated line for drugs handling facilitates filling of pharmacies’ or-ders in record short times. The cost of construction and equipment of the new warehouse was PLN 22m.

> Key Events in 2007


> Kalendarium 2007

AugustDrug Market LeaderThe shareholders of Hurtownia Aptekarz of Rzeszów decide to join PGF. The Group strengthens its leading po-sition on the Polish drug market. The transaction involves acquisition by PGF of the new shares issued by the Rze-szów-based company for the price of PLN 26.3m, repre-senting 51% of its share capital, and the purchase of sha-res from the existing shareholders. Aptekarz is one of the strongest pharmaceutical wholesalers in south-eastern Poland, with the client base of nearly 500 pharmacies.

DecemberFirst Pharmacies in the UKDOZ UK LIMITED, a subsidiary of PGF, opens its first phar-macy in London. The pharmacy’s employees are bilingu-al, which is to ensure that the appropriate pharmaceutical service is provided to both British and Polish customers living in the UK. It is estimated that over the last several years 600 thousand people left Poland and subsequently formally registered their stay in the UK.


PGF on the Stock Exchange

> we are not afraid of challenges



Shareholder Structure

The Company’s shareholder structure has been stable for years. The PGF shares are popular among investors due to the long-term investment horizon and the stability of the pharmaceutical industry, which is relatively resilient to economic cycles. Polish pension funds, holding 32% of the shares, are the largest investor in the Company. The second largest group of shareholders are foreign institutions (120 entities from 27 countries) and the foun-ding shareholders, each with roughly 23% of shares in the portfolio. Another 10% of the shares are held by the Polish investment funds, 8% - by retail investors, and the remaining 4% - by other Polish institutions. PGF’s share-holders include investors from 28 countries.

Free Float

Around 76% of the shares are in free float. However, the actual free float is lower due to the fact that pension funds and a substantial number of foreign investors are long-term investors who do not trade in the shares on a daily basis.

The shares of Medicines S.A. (the Company’s former name) were admitted to public trading by the Securities and Exchange Commission on September 4th 1997. The first listing of the shares on the Warsaw Stock Exchange took place on February 17th 1998. The shares are traded on the main market of the WSE in the continuous trading system. In 2007, the PGF shares were included in the sWIG80 index. Since March 2008, the PGF shares have been a part of the mWIG40 index.

> PGF on the Stock Exchange

Shareholder Structure

Founding shareholders*Shareholder structure

23.57%

32.01%

22.97%9.60%

4.17%

7.67%

Foreign institutionsInvestment

funds (TFI)

Domestic institutions

Retail share-holders

Free Float and Its Structure

USA

11.1%

Poland45.8%

4.0%Austria

26.8%

The remaining 23 countries

1.2%France

1.1%Germany

10.0%

Retail sha-reholders

*including KIPF Sp. z o.o., a 100% subsidiary controlled by the founding shareholders

as at the dividend record date (June 29th 2007)We are there to protect your health


Vote Structure at the General Shareholders Meeting

The vote structure at the General Shareholders Meeting does not fully correspond to PGF’s shareholder struc-ture as some of the shares are preference shares con-ferring five votes per share. Hence, PGF remains under the control of two founders, Mr Jacek Szwajcowski and Mr Zbigniew Molenda, holding jointly almost 51% of the total vote at the General Shareholders Meeting.


Vote Structure at the General Shareholders Meeting

* including KIPF Sp. z o.o., a 100% subsidiary controlled by the founding sharehold

as at the dividend record date (June 29th 2007)

Founding sharehol-ders*

50.64%

14,69%

Foreign institutions

6.14%

Investmenet funds (TFI)

5.38%Retail shareholdersDomestic

institutions

2.67%

20.48%

Pension funds (OFE)

Shareholders Holding Over 5% of the Total Vote at the General Shareholders Meeting

No. of shares held

% of share capital

No. of votes held

% of total vote at GM

Name

Jacek Szwajcowski

Zbigniew Molenda

KIPF Sp. z o.o.

ING OFE

Julius Bear Investment Management LLC

1,275,312

681,550

919,887

989,001

1,111,869

10.13%

5.41%

7.31%

7.85%

8.83%

5,942,112

3,014,750

919,887

989,001

1,111,869

30.19%

15.32%

4.67%

5.02%

5.65%

Jacek Szwajcowski– Founder, President of the Management Board since the Company’s establishment Zbigniew Molenda– Founder, Vice-President of the Management Board since the Company’s establishment KIPF Sp. z o.o.– A company fully owned by Jacek Szwajcowski and Zbigniew Molenda

ING OFE– A leading Polish pension funds

Julius Baer Investment Management LLC – A financial assets management company, member of the Julius Baer Group, a leading Swiss private banking and asset management group.


> > PGF on the Stock Exchange

PLN

126

123

120

117

114

111

108

105

102

99

96

93

90

87

84

81

78

75

72

PGF Stock Performance in 2007

January2007

February2007

March2007

April2007

May2007

June2007

July2007

August2007

September 2007

October2007

November2007

December2007

PGF Shares Present a Compelling Long-Term Investment Opportunity

Stock Performance

In 2007, the performance of the PGF shares on the War-saw Stock Exchange closely mirrored the behaviour of the rest of the market: an upward trend continued through the first half of 2007 to reverse dramatically in the second half of the year – the same scenario on stock exchanges throughout the world, including the WSE, when the news about the subprime mortgage crisis in the United States first broke.

On June 24th 2007, the price of the Company shares had climbed to PLN 125.4, hitting its all-time high. At the last trading session in 2007, the stock price was PLN 89.1, up by 12.07% relative to the price on the last trading day of 2006. The WIG index rose by 10.39% over the period.

Source: WSE


Selected Data on 2007 Transactions in PGF Shares

• Average trading volume – 17.746 shares

• Average number of transactions per day – 39

• Share in the WIG index’ turnover – 0.18%

• Total turnover – PLN 812.7m


PGF Reaches the Market Capitalisation of PLN 1bn for the First Time Ever in 2007

Since its stock-exchange debut,

the Company generated a return of 197%, including the dividend paid

1,200

1,000

800

600

400

200

0

Market Capitalisation (PLNm)

395430

349443

350

511

730 750

9901122

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: WSE

2005 2006 2007

PLN

PLN

PLN

PLN

PLN

PLNm

Stock Highlights (2005–2007)

2007/2006 growth

No. of shares


52-week high

52-week low

Earnings per share

Dividend per share*


12, 361, 263

60.7

63.5

47.7

4.26

2.2

750.3

12, 450, 967

79.5

90.0

58.2

5.02

2.4

989.9

12, 588, 240

89.1

125.4

70.3

5.91

2.4

1,121.6

1.10%

12.08%

39.33%

20.70%

17.90%

0.00%

13.33%

*paid during the financial year


PGF regularly posts positive cash flows from its operations, which not only enables the Company to reinvest the generated resources but also to pay dividends. The profit distribution policy followed by the Company reflects its attempts to exploit shareholders’ equity as efficiently as possible. PGF has shared its profits with shareholders for five years now. Total dividends paid out in 2002–2006 amounted to PLN 124m.

> PGF na Giełdzie

Dividend Policy

On June 13th 2007, the General Shareholders Meeting of PGF S.A. passed a resolution to appropriate a portion of the 2006 profit, in the amount of PLN 30,219.39 thousand, to dividend payments, with the dividend record day set on June 29th 2007, and the dividend payment day –July 17th 2007.

Dividend per share was PLN 2.40.

Communication with Analysts and Investors

An open line of communication with market participants makes it easier for the Company to showcase its achie-vements and share future development plans. Every year, representatives of the Management Board take part in at least four regular meetings with journalists and stock-exchange analysts in order to comment in detail on the Company’s current standing.

Throughout 2007, PGF’s representatives participated in several dozen meetings with investors and conferences held in London and New York, during which the Compa-ny’s strategy and business were presented. On a simi-lar note, the Management Board’s representatives fol-lowed the established tradition of attending the annual WallStreet Conference organised by the Polish Retail In-vestors Association.

In 2003, PGF became the first listed company in Poland to provide live coverage of its General Shareholders Meeting via the Internet. Ever since, the Group has been broadcasting the ses-sions online every year.

Last year, the disclosure policy pursued by the Company was recognised by journalists of the Gazeta Giełdy Parkiet daily, who named PGF as a nominee for the Corporate Governance Excellence Award.

2002 2003 2004 2005 2006

12.2

24.5

27.129.8 30.2

30.00

25.00

20.00

15,00

10.00

0.50

0

PLNm

Dividend Paid in 2002-2006

2002 2003 2004 2005 2006

1.00

2.002.20

2.40 2.40

3.00

2.50

2.00

1.50

1.00

0.50

0.00

Dividend Per Share in 2002-2006

PLN

> PGF on the Stock Exchange / Dividend Policy


PGF Group

Directors’ Report

> We look into the future with confidence



> Directors’ Report / PGF Group’s Strategy

PGF Group’s Strategy

Organic Growth in the Healthcare Sector

The pharmaceuticals industry has been acclaimed by some experts as “the sector of the future”. The increasing length of human life results in growing medical needs. A growing number of people suffer from chronic conditions, which increases the long-term demand for treatment, while new and previously unknown diseases, urbanisa-tion and increased mobility contribute to the spreading of new pathogens around the world. At the same time, the development of new drugs, people’s growing wealth and their increasing attention to health issues will create in the following years growing needs resulting in the expansion of the drug market. PGF’s goal is to flexibly adjust to tho-se needs and build the Company value by improving the quality of healthcare services in all of its markets.

For 18 years, i.e. since the inception, the goal of Polska Grupa Farmaceutyczna has been to set the direction of development of the pharmaceutical distribution market. In a low-margin industry, increasing the scale of operations is the only way to generate funds for new investments while reducing drug prices. Consequently, the Compa-ny implements the strategy of continuously increasing its sales. At the same time, the Company’s second funda-mental task is to efficiently manage company value. In other words, to be able to operate effectively, the Com-pany has to reduce the cost of each of its internal pro-cesses.

Long-term objectives can be achieved only with a clear strategy. PGF’s future growth is based on the following three pillars: organic growth in the healthcare sector, M&A strategy in Central Europe, and diversification of the support services offered to business partners in all market segments.

M&A Strategy in Central Europe

The Company increases its sales not only through organic growth, but also through the continued consolidation of the distribution market. Consequently, the Company has maintained its leading position in the highly competitive pharmaceuticals market in Poland. Today, the Company’s experienced staff are very well prepared for the next pha-se of development – international operations. In Europe, further market consolidation should be expected and the trend will be ever more dominant also in the countries of Central and Eastern Europe, which are characterised by poorly developed structure and a substantial growth potential. In the years to come, the PGF Group will seek in-teresting acquisition targets in each of the 16 countries of Central Europe. We are particularly interested in the acqu-isition of companies from the top three of each market. As part of the second pillar of its international development, the Company intends to search for market niches, which will facilitate dynamic development in the promising seg-ments of the healthcare sector.

We made first steps towards international expansion in 2007 by opening two I Care for My Health Phar-macies in Great Britain and launching operations in Lithuania. The Group intends to expand its position in the foreign markets by acquiring pharmaceutical di-stributors in at least two other countries by the end of 2008. Central European Pharmaceutical Distribution, a newly created company, will be responsible for the im-plementation of the international expansion plans.

We look into the future with confidence



> Directors’ Report / PGF Group’s Strategy

Platform of Cooperation Between PGF and Its Business Partners

The pharmaceuticals market is constantly changing. A company that wants to be successful has to anticipate the direction of future changes. Pursuant to its develop-ment strategy, Polska Grupa Farmaceutyczna constantly expands the range of support services offered to phar-macies, hospitals and drug producers. We first built a support model for individual pharmacies under the I Care for My Health loyalty programme, which subsequently evolved into the largest partnership retail network in Po-land. The economic growth of each pharmacy covered by the programme contributes to the development of the PGF Group. The next step in the Company’s development is to add new elements to the existing system. We want to strengthen our business partners and facilitate their eco-nomic development. The solutions proposed by PGF are intended to simplify and modernise the relations between all players in the sector, from the drug manufacturer, thro-ugh pharmacies and hospitals, to patients. Thanks to the services offered by us, our partners will be able to grow more quickly and safely and patients will receive not only drugs, but also the highest quality service.

Objectives for 2008

We expect the drug market to grow at the rate of 4%–7% in 2008. With such growth estimates, PGF’s financial plan assumes that the value of sales will exceed PLN 5bn and the two-digit growth of net profit will be maintained. The Group’s objective is not only to increase revenue, but also to conduct sales based on strict profitability criteria.

The scale of PGF’s operations is already large enough to require reorganisation and separation of the overall struc-ture into the wholesale and retail divisions. By the end of 2008, the Group will spin off a new entity, which will take over the management of the pharmaceutical distributors in selected European countries. The existing companies of the PGF Group operating in the retail Polish market (DOZ S.A.) and Group’s all foreign subsidiaries compa-nies operating abroad will be incorporated into a new structure. By doing so, we want to streamline the mana-gement processes and raise new funds for investments in Central Europe.

In 2008, the Group also plans new investments aimed at reducing its operating costs. PGF intends to open a new warehouse in Bydgoszcz and modernise its distribution centre in Kraków, where some orders will be processed automatically. Next year, we also plan to start construction of a new warehouse in Kaunas, to handle orders from the entire territory of Lithuania. In the near future, the market will undergo dramatic changes, therefore our goal is to flexibly adjust to the needs of customers.


PGF’s goal is to build company value by improving the quality of healthcare

services in all of its markets.

Jacek SzwajcowskiPresident of PGF

By the end of 2008, Astra Zeneca Polska will probably have made the decision on the launch of a direct distri-bution model in Poland. PGF is one of four companies considered as the providers of logistics services.

We also intend to substantially strengthen our position in the Internet in 2008. The online sales segment is expected to grow dynamically over the next few years. The Group’s objective is to strengthen its position in that market seg-ment by developing of the www.doz.pl platform and its Internet pharmacy.


Legal Environment in Poland

Pharmaceutical Law

PGF Group’s operations are regulated mainly by the Polish Pharmaceutical Law, which together with its se-condary legislation - provide the legal framework for such activities as trading in therapeutic products, define the terms and conditions to be met to obtain approvals and to operate a pharmacy or pharmaceutical wholesale bu-siness, and lay down the rules governing advertisement of therapeutic products and pharmacies. In accordance with the applicable laws, the operation of a pharmacy or pharmaceutical wholesale business requires an approval of the Provincial Pharmaceutical Inspector (in the case of a pharmacy) or the Chief Pharmaceutical Inspector (in the case of a pharmaceutical wholesale business).

Trading in pharmaceuticals, as an activity especially important from the point of view of health and social security, is heavily regulated. In 2007, three important changes were introduced in PGF’s legal environment of PGF. Laws regulating mail-order drug sales, pharmacy advertisement and drug discount system were enacted.

> Directors’ Report / Legal Environment

State Drug Subsidies

Approximately 50% of all drugs sold in pharmacies are subsidised by the state. Therefore, the official decision issued by way of a regulation by the Minister of Health specifying the drugs and medical products financed from public funds, their maximum prices and the level of sub-sidies is an important factor affecting the performance of pharmaceutical wholesale businesses and pharmacies.

The legal act which regulates the state’s policy of subsi-dising drugs is the law on healthcare services financed from public funds. The law, together with its secondary le-gislation, specifies the list of drugs and medical products financed from public funds, the price limits and the rules of reimbursement. The secondary legislation specifies for which drugs available in pharmacies patients should pay a lump-sum price, and for which patients will have to pay a certain percentage of the price (the regulations also set the maximum price which may be charged by pharma-cies). With respect to unlisted drugs, pharmacies may set their prices without any restrictions.


Legal Environment in Lithuania

Republic of Lithuania’s Law on Pharmaceutical Activities

The Republic of Lithuania’s Law on Pharmaceutical Acti-vities is a binding legal act which regulates all aspects of activities involving trade in medicinal products. It is worth noting that the limited body of secondary legislation is conducive to promoting competition and keeping prices relatively low. In Lithuania, no regulations are in place which would restrict the number of pharmacies a single entity can own. The Law on Pharmaceutical Activities sets forth the following:

• Rules governing the issuance of authorisations to operate a pharmacy or engage in wholesale of phar-maceutical products

• Rules governing the distribution of pharmaceutical products on the market, including rules for their pro-motion and marketing

• Ruthorisation of pharmaceutical activity

• Manufacturing and imports of pharmaceutical pro-ducts, including relevant manufacturing and import authorisations

• Rules governing pharmacies’ operations

• Rules governing the disclosure of information on medicinal products and advertising thereof

• Rules governing supervision and control exercised by competent authorities

• Rules governing the pricing of subsidised medici-nes, setting caps on wholesale and retail prices of medicinal products. The Act refers the reader to the official gazette, in which a list of subsidised medicines and medicinal products is published every year.

> Directors’ Report / Legal Environment > Directors’ Report

Changes in the Regulatory Environment in 2007

On May 1st 2007, an act amending the Pharmaceutical Law came into force. The key provisions affecting the ope-rations of the PGF Group were the regulations permitting advertisement of pharmacies provided it is not connected with the advertisement of drugs reimbursed from public funds. The amendment also regulates the segment of ma-il-order and online drug sales, permitting such activity in Poland with respect to OTC drugs.

On September 29th 2007, an act amending the law on healthcare services financed from public funds came into force. The amendment was aimed at harmonising the Po-lish regulations with the European Union law. The new act also contains provisions regulating discounts that may be offered on drugs.


Pharmaceuticals Market in Poland

The pharmaceuticals market can be divided into two segments: sales to pharmacies and sales to hospitals. In Poland, the latter has accounted for approximately 10–12% of the total value of sales in the last few years. The market size can be estimated based on three different criteria:

• Volume of pharmaceuticals sold by the manufac-turer to the wholesaler – value of the market in at net producer prices

• Volume of pharmaceuticals sold by the wholesaler to pharmacies and hospitals – value of the market at wholesale prices

• Volume of pharmaceuticals sold by pharmacies to patients – value of the market in at retail prices.

Given the special character of its demand-supply me-chanism, the pharmaceuticals market remains relative-ly unaffected by economic cycles. In 2007, the value of drugs sold by pharmacies to patients rose by 5.8%, to PLN 21.5bn. The annual per capita expenditure on medi-cines in Poland, however, still remains lower than in other European countries (22nd position in Europe in terms of market value per inhabitant), the underlying causes being producer prices of medicines, lower than in most coun-tries in Europe, and low subsidies. As experts predict, in the upcoming years the market’s value will grow by appro-ximately 6–7% on a yearly basis. In Poland, the expected growth will be fueled by the following factors:

Companies operating in the pharmaceutical industry have a major role to play in the life of contemporary societies. Apart from pursuing business objectives, their mission is to improve the quality of healthcare and the quality of life.

> Directors’ Report / Market Environment

18,000

17,000

16,000

15,000

14,000

13,000

12,000

Value of the Polish Pharmaceuticals Market at Net Producer Prices

13,254

14,242

16,600

14,839

2004 2005 2006 2007 PLNm

20,000

19,000

18,000

17,000

16,000

15,000

14,000

Value of the Polish Pharmaceuticals Market at Wholesale Prices

15,538

16,751

19,471

17,737

2004 2005 2006 2007 PLNm

Source: IMS Health

Source: IMS Health


22,000

21,000

20,000

19,000

18,000

17,000

16,000

Value of the Pharmaceuticals Market at Retail Prices

17,500

18,880

21,520

20,340

2004 2005 2006 2007

> Directors’ Report

Size of the Over-60 Group The proportion of people aged 60 or over directly transla-tes into the number of prescriptions written, and, conse-quently, plays a key role in shaping the pharmaceuticals market’s dynamics. Expansion of this age group is one of the major factors propelling the global pharmaceuticals market. Central European countries will be affected by the same demographic changes. In the coming years, one out of five Poles will be over 60, which will have a posi-tive bearing on the development of the pharmaceuticals market.

Stronger GDP The percentage of prescriptions dispensed is linked to the healthcare expenditure, viewed as a share of GDP, and society’s economic welfare. Figures representing the ave-rage annual expenditure on pharmaceuticals products in Poland are among the lowest in Europe. A plausible conc-lusion would be that, against the backdrop of economic prosperity following Poland’s accession to the EU, the pharmaceuticals market will grow on the back of stronger GDP figures and more substantial healthcare spending.

State’s Subsidising Policy Although producer prices of pharmaceuticals products sold in Poland are among the lowest in Europe, the share of drug purchase costs borne by patients ranks as one of the largest in the region. The reasons include low drug subsidies which, in turn, are a symptom of a flawed he-althcare system and insufficient healthcare expenditure from the state budget. On average, a consumer must co-ver 66% of the drug price (based on total drug purchases at pharmacies) – the highest percentage to be found in Europe. Along with the growing GDP and higher budget revenue, the state’s expenditure on drug refund schemes is expected to rise in the years to come.

PLNm

Source: Pharma Expert


Pharmaceuticals Market in Lithuania

The pharmaceuticals market in the Baltic States is one of the most fast-paced in Europe. In 2007, Lithuania could boast a record growth rate of 13% (to EUR 435m). The market will continue to post a two-digit growth rate in the next five years (2007–2011), and is likely to outstrip Poland by twofold.

Still, despite the substantial growth rates recorded every year, the consumption of pharmaceuticals remains low compared with the European average. During 2007, the average per capita drug spending went up to EUR 110, and the value of the pharmaceuticals market in Lithuania reached almost EUR 440m. The increase was driven ma-inly by a stronger consumer purchasing power, increased refund amounts, and a modest share of generic drugs in the overall structure of medicinal products consumed. A factor of major importance was also a rise in the con-sumption of advanced, new generation drugs marked by much higher prices. In the next few years, further market growth is expected, which, similarly to the other Baltic States, results from a rapid economic growth and more substantial healthcare spending. The following will remain to be the key drivers of market development:

• Sustainable GDP growth and decline in unemploy-ment rates

• Favourable tax regime – 5% VAT on drugs (relative to the general VAT rate of 18%)

• Expected beneficial changes to pricing of refund drugs and OTCs

• Increased market shares of OTC drugs

• Limited sales of cheap drugs from the former CIS member states (expired registration, or non-complian-ce with the GMP standards)

• Increased life expectancy.

500

400

300

200

100

0

EUR m

Value of the Lithuanian Pharmaceuticals Market at Net Producer Prices

344.3 328.7

435.3384.9

2004 2005 2006 2007

Source: IMS Health

> Directors’ Report / Market Environment


Market Position in Poland

Wholesale Distribution Market

Poland’s wholesale pharmaceuticals market is worth PLN 19.5bn. The top five companies in the sector generate almost 75% of total sales. Polska Grupa Farmaceutyczna has been the largest supplier of pharmaceuticals to Polish patients in the past ten years. In 2007, the Company’s sales revenue totalled PLN 4.4bn, with net profit at PLN 74.1m. For years, the growing sales have been accom-panied by an overall improvement in the key operating efficiency ratios.

Polska Grupa Farmaceutyczna – Established Leaderof the Pharmaceuticals Industry

> > Directors’ Report / PGF’s Market Position

Retail Distribution Market

There are approximately 13,000 pharmacies in Poland; in 2007, their sales revenue totalled PLN 21.5bn. About 35% of retail pharmacy outlets participate in loyalty pro-grammes. Established by Polska Grupa Farmaceutyczna in 2001, the I Care for My Health programme is the largest (and first established) of such schemes in Poland. The programme covers the entire country, networking over 1,700 pharmacies (13% of the market) under a single brand.


PGF’s Market Position in Lithuania

Wholesale Distribution Market

In Lithuania PGF supplies medicinal products to pharma-cies through Limedika. The company’s head office and logistics centre are located in Kaunas in central Lituania. The company supplies medicines to over 60% of Lithu-anian pharmacies. However, it finds it difficult to reach the remaining outlets due to their strong links with other wholesalers.

Approximately 95% of pharmaceuticals offered in Lithu-ania are imported. As opposed to Poland, in Lithuania drugs can be bought only at pharmacies. Worth EUR 435m, the wholesale sector is controlled by six largest wholesalers which jointly command 87% of the market. VP Group is the market leader, with footholds in Poland, the Czech Republic, Estonia and Latvia. PGF ranks third, with an 18-percent market share.

> Directors’ Report / PGF’s Market Position


The PGF Group controls approximately 24% of the retail segment through the Gintarine Vaistine chain of pharma-cies and the Baltijos Vaistinu Grupe (BVG) partnership programme for private pharmacies

The BVG is modelled after PGF’s I Care for My Health programme. In both markets, the chief objective behind the programmes is to intensify cooperation with private pharmaceuticals outlets and drug manufacturers, which fosters implementation of state-of-the-art pharmaceuti-cals care solutions. Lithuania’s pharmaceuticals market significantly differs from its Polish peer. In total, there are eight times fewer pharmacies in Lithuania than in Poland (1,550). Since the end of the 1990s, the segment has gone through a series of wide-ranging consolidation and restructuring processes. Today five largest wholesalers control – through company-owned pharmacies, loyalty programmes and franchised operations – approximately 70% of the retail market; the balance of the Lithuanian retail segment is shared among private pharmacies.


> Directors’ Report / Financial Performance in 2007

In 2007, the PGF Group recorded the highest ever sales revenue (PLN 4.4bn), thus maintaining the leading position in the domestic market of pharmaceuticals distribution.

1,300

1,200

1,100

1,000

900

800

700

600

PLNm

Financial Performance in 2007

Seasonality of Sales

1Q ‘0

2

2Q ‘0

2

3Q ‘0

2

4Q ‘0

2

1Q ‘0

3

2Q ‘0

3

3Q ‘0

3

4Q ‘0

3

1Q ‘0

4

2Q ‘0

4

3Q ‘0

4

4Q ‘0

4

1Q ‘0

5

2Q ‘0

5

3Q ‘0

5

4Q ‘0

5

1Q ‘0

6

2Q ‘0

6

3Q ‘0

6

4Q ‘0

6

1Q ‘0

7

2Q ‘0

7

3Q ‘0

7

4Q ‘0

7


dynamics2007/20062005 2006 2007

Sales revenue

EBITDA

Operating profit


Balance-sheet total


EPS

P/E

ROE

PLNm

PLNm

PLNm

PLNm

PLNm

PLNm

PLN

%

3,890.7

92.5

75.5

52.6

1,445.4

213.3

4.26

14.2

24.7

4,007.6

108.3

87.0

62.5

1,490.4

246.7

5.02

15.8

25.3

4,410.5

113.7

93.0

74.4

2,011.7

286.4

5.91

15.1

26.0

10.1%

5.0%

6.9%

19.0%

35.0%

16.1%

17.7%

-0.7

0.7



Sales of pharmaceuticals are driven by seasonality fac-tors. This is why, due to higher incidence of diseases in the autumn and winter period, the PGF Group posts the highest sales in Q1 and Q4, while spring and summer (Q2 and Q3) usually see lower turnovers.

Compared with 2006, 2007 sales revenue rose by 10.1%. The gross margin on sales stood at 10.5%, which equal-led the level recorded in 2006.

Relative to 2006, selling costs and general and admini-strative expenses increased by 14.7% year on year, amo-unting to PLN 397,404 thousand. The cost ratio in the pe-riod was 9.0%, having increased by 0.4 percentage point over 2006. The rise in these costs and expenses resulted directly from the inclusion of retailers in the Group, who-se activities are characterised by higher operating costs compared with wholesalers.

In 2007, the Group’s operating profit was increased by the positive balance between other operating income and other operating expenses, amounting to PLN 26,523 tho-usand (including profit on disposal of non-financial non-current assets of PLN 25,965 thousand).

Operating profit was PLN 93,044 thousand, and the ope-rating margin stood at 2.1%, down by 0.1 percentage po-int on the previous year.

The balance between financial expenses and financial income in 2007 was PLN 5,298 thousand. The key items of financial income included interest received on loans and receivables. The key items of financial expenses were interest paid on loans and bonds, as well as impairment charges for interest.

In 2007, the PGF Group posted pre-tax profit of PLN 89,999 thousand. The gross margin was 2.0%.

The 2007 net profit attributable to equity holders of the parent was PLN 74,410 thousand, while the net margin was 1.7%. i.e. up 0.1 percentage point from the prior year-end.

Operating Expenses

(PLNm) 2007 2006 y-o-y change

Selling costs

General and admini-strative expenses

Total expenses

Cost ratio

302.0

95.4

397.4

9.01%

264.0

82.4

346.4

8.64%

14.4%

15.8%

14.7%

0.32 p.p.

12%

10%

8%

6%

4%

2%

0%

gross margin on sales (%) EBITDA (%) EBIT (%)

Profitability Ratios

Operating Expenses

9.58

%

10.4

9%

10.5

1%

2.38

%

2.70

%

2.57

%

1.94

%

2.18

%

2.11

%

3.0%

2.5%

2.0%

1.5%

1.0%

05%

0%

1.86

%

2.03

%

2.04

%

1.39

%

1.57

%

1.67

%

pre-tax margin net margin

Profitability Ratios

2005 2006 2007

2005 2006 2007


gross margin on sales (%) EBITDA (%) EBIT (%)

An event which had a significant bearing on the results of operations was an agreement for sale of property com-prising a warehouse and office building in Poznań and perpetual usufruct right to land. Net gain on the transac-tion was PLN 17m.

Structure of the Group’s Assets and the Sources of Their Financing

In 2007, the structure of assets did not materially change compared with 2006. Current assets, representing 69.2% of total assets, prevail over non-current assets. The main items of current assets are inventories and trade rece-ivables. As at the end of 2006, the value of trade rece-ivables was PLN 480,430 thousand and was higher by PLN 46,948 thousand year on year.

As at the end of 2007, the average collection period was 38 days and remained unchanged compared with 2006.

The inventory cycle was 48 days, shortening by one day compared with the balance-sheet date of the previous year.

Current financial assets of PLN 127,779 thousand com-prised mainly loans advanced. As at the end of 2007, cash and cash equivalents amounted to PLN 116,296 thousand.

In 2007, the PGF Group undertakings granted loans for a total of PLN 154,443 thousand. The parent underta-king granted loans to its Group companies for a total of PLN 42,014 thousand.

As at the end of 2007, non-current assets accounted for 30.8% of total assets. They included chiefly goodwill (18.7%), property, plant and equipment (8.9%) and intan-gible assets (1.3%)

Inventory Cycle, Collection Period and Payment Period (days)

(PLNm) Dec 31 2007 Dec 31 2006 y-o-y change

Inventory turnover*

Average collection period*

Average payment period*

49.5

43.0

70.7

50.0

42.5

77.9

+0.5

-0.5

+7.2

* Based on levels reported at the end of the period and the volume of sales in the period

1,200,000

1,000,000

800,000

600,000

400,000

200,000

0

100%

80%

60%

40%

20%

0%

Credit Limits and Their Utilisation in 2007

March June September DecemberPLN

35.2

% 45.8

% 59.9

%

48.3

%

total debt limits + cash utilisation (%)




Structure of Assets in 2006 and 2007

As at the balance-sheet date, i.e. December 31st 2007, 14.2% of the assets were financed with the parent under-taking’s equity. The balance of 85.8% was financed with liabilities and minority interests, going up by 2.4 percen-tage points relative to the end of 2006.

Liabilities, provisions for liabilities and other equity and liabilities (PLN 1,605,139 thousand) included mainly trade payables of PLN 810,001 thousand and financial liabilities of PLN 698,301 thousand.

Non-current liabilities comprised chiefly financial liabilities, which accounted for 29.4% of total equity and liabilities.

Current liabilities comprised mainly trade payables, which as at the end of 2007 represented 40.3% of total equity and liabilities, and were 15.1 percentage points lower than as at the end of 2006.

Structure of Equity and Liabilities in 2006 and 2007

At year-end 2007, the average payment period was 69 days, that is 4 days shorter than as at the end of 2006.

As at December 31st 2007, current financial liabilities ac-counted for 5.3% of total equity and liabilities. Total finan-cial liabilities increased by 129.7% over the end of 2006.

In 2007, the share capital of PGF S.A. was increased by PLN 17 thousand, to PLN 25,521 thousand, following an issue of 8,400 Series N3 shares with a par value of PLN 2 per share.In 2007, the parent undertaking used two note issue pro-grammes:

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Structure of Assets

2007 2006

current receivables

other assets

inventories

non-current assets

30.8%

29.7%

25.9%

13.6% 8.0%

23.8%

36.8%

31.4%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Structure of Shareholders’ Equity and Liabilities

2007 2006

minority interests

14.2%

30,7%

49.1%

6.0%16.6%

10.5%

69.9% current liabilities and other current equity and liabilities

non-current liabilities and other non-cur-rent equity and liabilities

equity of parent undertaking

3.0%


• Under the PLN 200m Note Issue Programme, im-plemented by ABN AMRO Bank, the Company issu-ed 27 tranches of short-term notes worth PLN 278.5m and redeemed 27 tranches of short-term notes worth PLN 287.3m.

• Under the PLN 300m Note Issue Programme, im-plemented by BRE Bank, the Company issued three tranches of medium-term notes worth PLN 191m.

Proceeds from the issues are used to finance the Compa-ny’s day-to-day operations and help manage the financial liquidity within the Group.

As at the balance-sheet date, the current ratio and the quick ratio amounted to 1.4 and 1.1, respectively. Relative to December 31st 2006, they improved by 0.3 and 0.2, respectively.

As at the end of 2007, the total value of off-balance sheet items was PLN 267,450 thousand and principally included contingent liabilities under guarantees and sureties issu-ed for the benefit of related and other undertakings. The total net cash flow was positive at PLN 65,481 thousand.

Investment expenditure on property, plant and equipment totalled PLN 66,018 thousand; the bulk of the expenditure was related to the construction of a warehouse in Poznań, and upgrading of the existing headquarters of the Group companies. As part of equity investments, the amount of PLN 130,784 thousand was spent on acquisition of sha-res and formation of new companies; other expenditure included the cost of share capital increases at the PGF Group companies and loans advanced.

Equity and Debt

2007 2006 y-o-y change

Equity

Financial liabili-ties*

Cash and cash equivalents

Net financial liabilities

Net debt/equity

Net debt/EBITDA

406.6

638.7

116.3

522.4

1.28

4.6

291.3

304.0

52.2

251.8

0.86

2.33

22.4%

190.7%

137.5%

181.1%

+0.42

+1.67

Cash Flows

(PLNm) Dec 31 2007 Dec 31 2006

Operating CF

Investing CF

Financing CF

Total change in cash

+11.2

-154.2

208.5

65.5

118.6

23.5

-128.5

13.6

* Net of liabilities under valuation of the PUT option



Risk Management

PGF’s internal audit and risk management system serves as a gauge of efficacy and a source of information on the quality of business processes. In the order of importance, the Company’s attention is focused on identifying stra-tegic risks, then financial and operational risks. The risk management system covers the following areas:

• Compliance/regulatory risk – arising from non-compliance with or violation of applicable regulations in the course of business

• Operational risk – arising from customer attrition, demand fluctuations, competition risk, trade and con-tract risk, customer insolvency risk, supply chain risk, risk of losing lease rights, personnel-related risks, and risk associated with the security and protection of as-sets

• Financial risk – connected with financing of ope-rations and securing financial stability, including the assessment of creditworthiness of counterparties, in-terest rate risk, foreign exchange risk and investment risk

• Technology/IT risk – including risk associated with the security and protection of data stored in IT sys-tems

• Risk of abuse

• Other types of risk, including risk related to busi-ness continuity, crisis management, reputation risk, and risk related to the lack of information flow.

Risk management within the PGF Group lies within the scope of responsibilities of the Management Board whose task is to identify potential threats and issue instructions to develop procedures aimed at mitigating the identified risk. Each unit implements a set of control procedures.

The objective of the internal audit function is to monitor and audit the efficacy of risk management procedures based on the International Standards for the Professional Practice of Internal Auditing and standards developed by the Institute of Internal Auditors (IIA).

Operational Risk

As part of its operational risk management framework, the PGF Group:

• Sets limits on sales to pharmacies, applicable across the entire Group, classifying hospitals accor-ding to specific risk groups based on their financial performance;

• Sets limits on trade credits extended to pharmacies, applicable across the entire Group, based on a pre-defined algorithm;

• Monitors the structure and turnover of accounts re-ceivable, and efficiency of the collection procedures

• Monitors daily sales and financial performance;

• Performs peer comparison and monitors the mar-ket environment in Poland and abroad on an ongoing basis.

Financial Risk

Credit risk is chiefly associated with trade receivables and loans. The Group’s credit risk concentration is relatively low due to distribution of credit exposure across a large customer base. Trade credit aplications are first analysed by the Risk Committee and submitted for approval by the Management Board. As part of its credit risk management framework, the PGF Group:

Business risk is inherent in running any business enterprise. Identifying threats in the immediate environment and mitigating their impact on the Company’s performance is the basic function of a risk management system.

> Directors’ Report / Risk Management


• Sets trade limits for individual customers, defining the cap for a given customer’s total liabilities towards the Group companies. In the event of a heightened risk exposure, security on assets is established

• Monitors the level of current indebtedness and utili-sation of trade credit limits, using appropriate system tools to block deferred payment transactions if trade limits are exceeded;

• Maintains insurance cover for a portion of trade re-ceivables.

Interest rate risk is related to the Group’s use of bank lo-ans and issue of notes. A majority of these financial instru-ments bear interests at variable interest rates and expose PGF to the risk of changes in cash flows and increased fi-nancial expenses due to interest rate movements. As part of its risk management function, the Company partially hedges against the exposure by entering into hedging transactions, such as IRSs and options.

Currency risk is related to purchases of goods for resale settled in foreign currencies. Since the proportion of the purchases settled in foreign currencies in relation to the aggregate value of goods for resale purchased is fairly low, i.e about 2%, the PGF Group considers the currency risk exposure to be minimal. Transactions are hedged with forward contracts on a selective basis, depending on the currency market conditions.

Liquidity risk is strictly connected with the PGF Group’s ability to meet the outstanding liabilities. As part of its liqu-idity risk management framework, the Group:

• Forecasts cash flows as part of the liquidity analy-sis;

• Monitors liquidity and secures financing by entering into loan agreements and maintaining credit lines.

Quality Assurance Policy

Commitment to good quality standards is a blueprint for success and a way to achieve satisfaction of business partners. The quality assurance system was implemented at the PGF Group for the purpose of increasing efficien-cy and minimising errors. It complements the risk mana-gement system. Thanks to a synergistic combination of these two systems, the Group has the ability to effectively reduce potential threats and accurately identify its streng-ths and weaknesses. The responsibilities of the Quality Assurance Division, which operates as a separate unit, include:

• Ensuring consistency of quality assurance activities across the Group;

• Monitoring the quality assurance system to ensure its compliance with the law;

• Ensuring appropriate quality of marketed products;

• Monitoring, control and coordination of the quality assurance system at the Group companies to ensure its conformity with the standards of Good Distribution Practice (GDP) and Good Manufacturing Practice (GMP).

> Directors’ Report / Quality Assurance Policy


> Directors’ Report / PGF as a Corporate Citizen

PGF as a Corporate Citizen

In our view, social responsibility means conducting day-to-day operations based on five pillars:

• Strengthening the relationship of trust with all sta-keholders

• Ensuring high operational standards

• Conducting business in a transparent and straight-forward manner

• Following the path of continued growth

• Enhancing competencies and ensuring a consistent and balanced value growth.

Benefits derived from the development of the pharma-ceuticals distribution market should include not only lower prices but also improved access to modern treatment re-gimes and better quality of pharmaceutical services. Sin-ce 2001, PGF has been implementing the I Care for My Health programme. One of the programme’s objectives is to promote the perception of a pharmacy as a place where patients, in addition to buying inexpensive medi-cines, may also seek information on their use as well as disease prevention advice. The programme participants obtain knowledge which may prove relevant in their later contacts with phisicians, and which turns them into pa-

tients with an informed attitude towards their health.Since 2007, the I Care for My Health Pharmacies can be accessed via the Internet at www.doz.pl. The website is intended to become the largest health and patients rights information repository in Poland. Any information is com-municated in a clear fashion, which facilitates understan-ding of complicated medical terms.

FUNDACJA dbam o zdrowie

August 2007 witnessed the establishment of FUNDACJA dbam o zdrowie (I Care for My Health Foundation), a pio-neering Polish organisation which gives priority to helping people who cannot afford to buy prescribed medicines. It was no coincidence that the concept of establishing the foundation originated from the pharmaceutical communi-ty. Pharmacists – dealing with the problem on a daily basis – best understand the frame of mind of a patient who le-aves the pharmacy with a prescription that was too expen-sive to fill. The foundation gives out special Gift of Health cards to the needy, which are credited with funds to be spent at one of the 1,700 I Care for My Health Pharmacies on selected products, including prescription drugs.

Owing to the unique nature of the pharmaceutical industry, activities undertaken by PGF not only contribute to the value growth but also have a bearing on the quality of the entire healthcare system. At all times, our efforts are guided by the patient welfare. With no harm to the core business, we mark our presence by entering into projects which strengthen PGF’s close relationship with local communities.


Local Community

The Group’s organisational structure serves as a platform for social responsibility activities. PGF assists in imple-menting local initiatives and supports the pharmaceutical community through the Group companies operating lo-cally. A good example is PGF Urtica, the largest domestic distributor of medicines for the in-patient healthcare seg-ment, which has been known as the organiser of the “Urti-ca for Children” charity campaign for eleven years now. To date, proceeds from art auctions helped hundreds of children admitted to cancer treatment hospitals across Poland. As for the region of central Poland, for four years PGF has been engaged in organising paintings auctions and a charity concert to raise funds for chronic and termi-nal child patients.

Tradition and Innovation

Polska Grupa Farmaceutyczna has been built with the support from pharmacists, who for generations have been the first source of information on medicinal pro-ducts. Hundreds of discussions about patients’ needs led to setting a uniform objective for PGF and thousands of its partner pharmacies. The objective is to combine tradi-tion with innovation, or, in other words, the most valuable experience gained in the past with a vision of the future. In order to preserve the memory of common origins, PGF supports the development of two museums, in Lublin and Łódź, founded on the Group’s initiative for the purpose of saving from oblivion the grand tradition of the Polish phar-macy. What is more, PGF acts as a patron of historical pharmacies, of which the most ancient one was founded in Zamość and dates back to 1609. The museum interiors have preserved their unique character, and a great varie-ty of pharmaceutical artefacts of historical interest were gathered thanks to a personal commitment of the Com-pany’s employees. We have substantiated the claim that a long-standing tradition may harmoniously coexist with state-of-the-art technology.



> Directors’ Report / Employees

Employees

PGF Employment

Increase in the workforce seen in 2007 stemmed from the merger of the Lithuanian companies and of a number of retailers, the largest of which was the Apexim Group. In total, the Group’s workforce expanded by 1,467 as a re-sult of the mergers and acquisitions executed in 2007. Besides, in connection with the development of compa-nies already operating within the Group and a new form of employment used by the Company, headcount at the PGF Group increased by a further 967 jobs. In 2007, PGF had blue-collar staff of 1,569 and white-collar staff of 4,828. The average employment at the Group was 6,397.

Competence Development Programme

A competence development system is supported by the Human Resources Department. PGF staff participate in various trainings to enhance their personal competences. The areas crucial for PGF’s development primarily inclu-de sales trainings and skills development trainings in the fields of finance, IT technology and management.

The largest of all training schemes in 2007 was a pro-gramme addressed to the sales personnel; altogether, it comprised a total of 3,000 training man-days. The princi-pal objective of the programme was to develop knowled-ge and skills of the staff in the telemarketing department, customer consultants and coordinators of the I Care for My Health programme, whose daily responsibilities – in addition to sales cooperation – include business process support and pharmacy management advisory. As a result of the project, PGF has standardised sales procedures and improved competitiveness.

As a result of a series of acquisitions in the past years, the PGF Group has been developing dynamically, consistently increasing its headcount. As at the end of 2007, the PGF Group had a workforce of 6,544.

7,000

6,000

5,000

4000

3,000

2,000

1,000

0

Employment at the PGF Group

4,069 3,776

6,544

4,110

2004 2005 2006 2007 persons

junior positions

blue collars

29.51%

25.91%

specialists/professionals

26.72%

middle management

15.62%

top executives2.24%

Employment Structure by Position


> Raport Zarządu

Improvement of the Managerial Staff’s Qualifica-tions

One of the objectives of the PGF Group’s HR policy is to ensure development of the organisation through tra-ining and promoting employees with strong development potential. The most outstanding individuals participate in MBA courses and managerial skill development program-mes sponsored by PGF. Our objective is to promote the most outstanding individuals who feel connected with the PGF team and wish to continue their professional careers in the pharmaceutical business in the future. Over 30% of the Group’s senior management staff who form PGF S.A.’s governing bodies have been promoted internally.

Stable Team

The most valuable of our assets are those employees who not only readily perform their duties but also strive for self-development and associate their future with the Compa-ny. On average, a PGF employee is 36 years of age, with the average length of service of six years. HR policies are tailored towards supporting development of high-poten-tial staff and cooperation with experienced professionals, who naturally become trainers of future leaders.

PGF – the Largest Employer for Pharmacists in Poland

In Poland, Polska Grupa Farmaceutyczna is the largest employer offering pharmacists a wide array of employ-ment opportunities. These include employment at PGF-owned pharmacies, wholesale companies and the Com-pany’s head office, including employment at managerial posts. The majority of pharmacists employed at PGF are females, which has a strong bearing on the Group’s em-ployment structure and HR policies. We strive to offer fle-xible employment terms to our staff, particularly to young mothers, to make work easier for them.

higher education

37.41%

secondary education

48.60%

other

13.99%

Employment Structure by Education

up to 25 years of age

12.76%

26-35 years of age

36.93%

36-45 years of age

20.59%

46-55 years of age

23.17%

over 55 years of age

6.55%

Employment Structure by Age


WholesaleDistribution Market

> We treadnewpaths



> Wholesale Distribution Market / Pharmaceuticals

Pharmaceuticals Distribution Market in Poland

Poland is the sixth largest pharmaceuticals market in Europe. There are approximately 200 pharmaceutical wholesalers active in this market, the majority of which have a local reach and frequently supply drugs to several pharmacies only. The largest market players include PGF, Farmacol, Torfarm, ACP Pharma and Prosper, which, col-lectively, command approximately 75% of the PLN 19.5bn market (y-o-y growth rate of 9.8%). For several years the number of wholesalers has been on a decline. Consolida-tion of the drug distribution segment in both Poland and global markets is prompted by market-driven mechani-sms. Due to low net margins on sales of pharmaceuticals (1–2.5%), only the increased scale of operations can help leverage the synergies and lead to cost reductions.

Sales of pharmaceuticals to pharmacies are strongly se-asonal. The largest volumes are always reported at the beginning and end of the year, which is linked to increased disease incidence in autumn and winter.

Three Models of Pharmaceuticals Distribution

Poland’s pharmaceutical distribution model is still in the phase of adjusting to the systems used in Western Eu-rope. Until the end of the 1990’s the wholesale and retail trade in pharmaceuticals was under the state’s control; its exclusive participants were 17 state-owned Cefarm companies. In the initial years after the political system transformation, wholesale and retail operations were con-ducted separately, the only exception being privatised Ce-farm companies which sold pharmaceuticals also to their own pharmacies. The year 1999 brought about a change: the first mergers of Cefarm enterprises with countrywide wholesalers (Farmacol, PGF, Orfe) were carried out. As a result of vertical integration, the second model has been formed where a wholesaler manages a chain of its own pharmacies. It is the model followed by the majority of the largest wholesalers nowadays. The third distribution

Three international companies, namely Celesio, Phoenix and Alliance Boots, are the dominant market players on many European markets. Their exceptionally strong market position is due to a strategy centred on consolidating the market through acquisitions of countrywide and regional pharmaceuticals wholesalers in individual national markets of the EU. In this respect, Poland is different from other European countries: hospitals and pharmacies are mostly supplied by privately-owned companies of Polish origin.

model is based on pharmaceutical wholesale businesses (drug wholesalers run by groups of pharmacies). Howe-ver, this model proved ineffective as wholesalers were unable to create a successful management system. Con-sequently, in 2006 all pharmaceutical wholesalers owned by pharmacies began looking for external investors. The process reached its height in 2007 when the largest of them attracted strategic investors.

20,000

19,000

18,000

17,000

16,000

15,000

14,000

Size of the Pharmaceuticals Market at Wholesale Prices

15,568

16,751

19,471

17,737

2004 2005 2006 2007 PLNm

Source: IMS Health



> Rynek dystrybucji hurtowej

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0

num

ber o

f pha

rmac

ies

num

ber o

f who

lesa

lers

1,000900800700600500400300200100

0

Change in the Number of Pharmacies and Wholesalers (Developments in Pharmaceutical Distribution)

1990 1995 2000 2001 2002 2003 2004 2005 2006 2007

number of pharmaciesnumber of wholesalers

Source: IMS Health

Market Developments in 2007

2007 saw the completion of yet another phase of the market consolidation when the largest pharmaceutical wholesalers united in Apofarm Group Unia Hurtowni Aptekarskich Sp. z o.o. (Optima Radix, Galenica Silfarm, Hurtownia Aptekarz, Multi Pharme) found strategic in-vestors. PGF was joined by one of the largest compa-nies associated in the Apofarm Group, Rzeszów-based Hurtownia Aptekarz, which supplies pharmaceuticals to pharmacies in southern Poland. In total, this phase of the wholesale market consolidation resulted in a number of acquisitions of large wholesalers with a local reach, whose total share in the countrywide market is estimated

at approximately 10%. As at the end of the year, the ag-gregate market share of the top five wholesalers rose to around 75%.

Another milestone in the development of the industry in 2007 was the launch of foreign operations by the first Polish wholesaler. In a EUR 22.5m transaction, Polska Grupa Farmaceutyczna acquired Limedika, Lithuania’s third largest pharmaceuticals wholesaler which controls 18% of the domestic market, and Gintarine Vaistine, one of the largest pharmacy chains in Lithuania.


Services to Pharmacies

We Lower Drug Prices by Reducing Costs

In the traditional distribution model, the wholesaler buys drugs from the producer and sells them to pharmacies, hospitals and other wholesalers. For storage and trans-port of products, distributors receive payment in the form of a margin, which is to some extent regulated by the sta-te (the margin on reimbursed drugs). Market competition forces wholesalers to share their margin with pharmacies, which usually pass it onto customers. In other words, wholesalers give up a portion of their profit, which results in lower drug prices. On the other hand, every company’s objective is to increase its value. As a result, in order to grow without increasing prices of drugs, wholesalers have to increase the scale of their operations and offer a whole range of additional services addressed not only to phar-macies, but also to drug producers and hospitals.

PGF as the Key Supplier to Private Pharmacies

More than 500 employees of the sales and telemarketing departments are available to assist pharmacists practical-ly 24 hours a day. The Group’s offering comprises the wi-dest range of drugs in Poland, i.e. over 20 thousand items, including not only drugs from all therapeutic groups, but also medical and rehabilitation equipment, herbs, dietary supplements and cosmetics. The PGF Group guarantees access to all drugs registered in Poland. In other words, thanks to PGF’s flexibility, thousands of pharmacies may be assured that when needed we can delivery any pro-duct to the right place and at the right time. We deliver products to pharmacies even three times a day to enable our customers to provide patients with quick access to any drug. It is particularly important today, when pharma-

No one in Poland delivers drugs as quickly, cheaply

and safely as we do.

PGF Revenue Structure

Other pharmacies30%

Hospitals

15%

44%

2%Other

Pre-wholesale9%


Change in the Number of Pharmacies and Wholesalers (Developments in Pharmaceutical Distribution)

> Wholesale Distribution Market / Pharmaceuticals Distribution

Pharmaceuticals Distribution Structure in Poland

Manufacturer

Pre-wholesale

Wholesalers

Patients

Pharmacies Hospitals

<1% 3%97%

11%89%

Source: IMS Health.

cies compete not only on price, but also on the range of available products. Only a few years ago a typical phar-macy cooperated with as many as up to six wholesalers. Today, almost 40% of all pharmacies are supplied by only one wholesaler and with time the proportion will continue to rise.


Selection of a supplier is based on the range of offered products, frequency of deliveries and the range of additional services.

Internet Helps Reduce Prices of Drugs

PGF is the only distributor of drugs in Poland which uses the Internet to such an extent. The Group was the first company in the sector to organise the Internet Pharma-ceutical Trade Fair for pharmacies. The new sales chan-nel facilitates inexpensive and effective promotion, saves time and offers lower costs of extending the offering to a large number of pharmacies.

PGF also operates Poland’s first online sales portal for pharmacies, www.emedicines.pl, which is a wholesale platform offering more than five thousand most popular therapeutic products. Everything on the emedicines por-tal is done online. Orders are generated and submitted by pharmacists themselves. We have managed to sim-plify the portal and its operation and at the same time reduce costs, which translates into low prices of offered drugs. Pharmacies have also 24 hour-a-day access to the current offering; thus, PGF is in constant touch with its customers.

> Wholesale Distribution Market / Services to Pharmacies

We Support Our Partners

PGF’s goal is to simplify and modernise the relations be-tween producers, pharmacies and patients’ to be able to reduce operating costs and maximise profit. The value of such a model increases in line with the improvement of profitability of each pharmacy on which the economic strength of the system is based. Every day we work on a wide range of solutions facilitating development of our partners. Apart from delivering drugs, we also offer ad-ditional services to our customers. We support pharma-cies at each level of management. The services offered by PGF include training, assistance in fitting out pharma-cies’ premises, marketing programmes, organisation of national and regional pharmaceutical fairs, investment lo-ans and multi-level support under the I Care for My Health programme.


Distribution Centres in Poland and Lithuania

GdańskDywity

Łomża

Warszawa

Lublin

Rzeszów

TarnowiecKraków

Opole

Wrocław

Poznań

Szczecin

Bydgoszcz

Łódź

Kowno

Katowice

local warehousespurchase centres

Logistics

Logistics in the Pharmaceuticals Industry

In sectors where use-by dates of products are long and the retail outlets can store even 100% of the offered product range, the primary concern is to ensure that the outlets are fully stocked. In the pharmaceuticals sector such an approach would be completely ineffective, as there are a lot of slow-moving products used in the treatment of a very narrow group of conditions. If all pharmacies were stocked with all the drugs offered by the wholesalers, two thirds of the products would pass their use-by date each year. Therefore, in the model applied in the pharmaceuti-cals sector pharmacies stock only the most popular drugs comprising 30% of the product range. The remaining pro-ducts are stored at the distributor’s warehouse and are and, when needed, are delivered to pharmacies within a few hours. The full range of medical products and efficient service are the most important factors considered when selecting the wholesaler by pharmacies. The time in which the drug reaches the patient is determined by efficient logistics of the wholesaler. Modern warehouse facilities meeting the Good Distribution Practice requirements and the method of storage and transport of drugs show that in Poland the highest global quality and security standards in drug trading.

Each month the fleet of 450 cars delivering drugs to pharmacies make over 3m kilometres, which is the distance required to circulate the Earth 75 times. This makes the optimisation of logistics costs at PGF one of the pillars of the Company’s effective management.

> Wholesale Distribution Market / Logistics


> Wholesale Distribution Market / Logistics

Logistics at PGF

PGF is currently the largest supplier of drugs in Poland. Every day our delivery vehicles make over 1,500 trips to pharmacies filling almost 20 thousand orders. The ware-houses of the PGF Group supply mainly pharmacies and hospitals as well as smaller wholesalers. In our wareho-uses, with an area of over 70 thousand square meters, we store all pharmaceuticals products available in Poland. Thanks to the appropriate location of our 16 warehouses, we are able to deliver drugs to any location in Poland and Lithuania within a few hours, irrespective of the distance.

Cost Optimisation

One of our priorities is to reduce logistics costs. We try to optimise all possible processes, from utilisation of the wa-rehouse space to automation of deliveries to frequency of deliveries made to pharmacies. Overall, in the last seven years, the rationalisation of the transport operations has allowed the PGF Group to reduce the transport cost ratio by approx. 37%.

The automation of processes helps us deliver drugs more quickly, cheaply and safely. So far, we have modernised one third of our warehouses, which in total account for over 40% of the Group’s sales. As a result, the efficiency of operations of the PGF warehouses have increased by 70% over the last seven years.

In 2007, we opened Poland’s most technologically ad-vanced drug warehouse in Poznań. The value of the pro-ject was PLN 22m. Thanks to the process automation we are able to fill orders in record-short times. Orders for the most popular products are prepared without any human assistance. We also managed to reduce the time required to prepare a delivery in the life saving mode to just a few minutes.


1,700 I Care for My Health Pharmacies already sell drugs to over five million customers


Support for Drug Producers

Drug wholesalers are required to ensure distribution of me-dicinal products to as many customers as possible – it is a fundamental precondition; but, increasingly more often, the scope of their business encompasses a wide range of logistics, management, sales and trade marketing servi-ces. For a traditional drug wholesaler a strategic objective is now to develop in the segment of services supporting more dynamic growth of its business partners.

Polska Grupa Farmaceutyczna cooperates with all phar-maceuticals producers present in Poland and Lithuania, as well as with the majority of producers of cosmetics, herbal preparations, dietary supplements and hygiene products sold at pharmacies. We ensure uninterrupted supplies to every place in Poland and Lithuania.

In addition to supply chain management and financial and administration services, PGF also provides a full array of sales support services. We help our customers arrange promotional activities relating to their products, engaging in market research, telemarketing support and providing a team of customer assistants. Through 1,700 I Care for My Health Pharmacies, we are the only company in Poland that can provide a comprehensive range of marketing se-rvices relating to marketed products, including joint ad-vertising campaigns, distribution of POS materials, direct mailing, merchandising and publications for pharmacies and patients with a monthly circulation of over 80,000.

New Distribution Model

2008 is likely to see major changes in the Polish pharma-ceuticals market. Astra Zeneca Polska will probably test a direct-to-pharmacy distribution model, first introduced in the UK. If the plans do not change, only distributors selected by the producer will be able to provide logistics support in the distribution of its products, which will con-tinue to be owned by them. In this model, supplies will be provided on behalf and for the account of producers, as opposed to the model where wholesalers first purchased goods, then charged a margin and went on to sell the goods to pharmacies at a profit. Though it offers greater control of the supply chain to drug manufacturers, the new model is more costly and it degrades the quality of service to pharmacies.

International Cooperation

Drug producers will be among the first beneficiaries of PGF’s expansion to other Central European markets. Operating on several markets in the region, the Group will be able to offer an even more comprehensive support to its customers. Centralised support functions, large-scale procurement, long-term contracts with guaranteed payment terms – these are just a few services from the full range of new opportunities. Flexible approach to ma-nufacturers’ needs and mutual development have been the key pillars of PGF’s market success to date. This is why we will devote special attention to this segment of our business in the future.

> Wholesale Distribution Market / Support for Drug Producers

Drug producers are increasingly more willing to outsource non-core activities to external providers. Therefore, the coming years may see rapid changes taking place in the market and along the distribution chain. A modern drug distributor must adjust its operating model to meet its customers’ expectations, not only in a single country but in international markets as well.


We want to provide producers with access to almost 200 million patients in Central Europe

> Wholesale Distribution Market

PGF’s current activities development paths for PGF in Central Europe

RetailDistribution Market

> we arealwaysclose to patients




Pharmacy Market in 2007

Almost 89% of pharmaceuticals sold by wholesalers are purchased by general pharmacies. In terms of sales of medicinal products through pharmacies, in 2007 the va-lue of the Polish pharmaceuticals market increased to approximately PLN 21.5bn (up by 5.8% y-o-y). Pharmacy sales comprise three segments:

• OTC products

• non-subsidised prescription drugs

• subsidised prescription drugs.

Structure of the Market

Poland’s pharmacy market is highly competitive. Appro-ximately 13,000 pharmacies operate across the country, which gives a ratio of ca. 3,000 persons per pharmacy. Based on these estimations, Poland ranks among the Eu-ropean countries with the highest pharmacy saturation. Accordingly, prospects for further dynamic development of this distribution channel have been reduced to nil. Vir-tually all general pharmacies are held by private owners. At the end of 2007, the number of non-chain pharmacies slightly fell, from 64% to 62%. Smaller pharmacy chains comprising up to five outlets accounted for 27% of the market, while large chains (five or more pharmacies with equity links and a uniform marketing policy) controlled 10% of the market. In the US, pharmacies principally ope-rate as part of franchise chains, while in Western Europe the largest pharmacy chains are linked with wholesalers. It is so as chain-based cooperation helps reduce costs, which automatically results in cheaper drugs for patients and pharmacists. The franchise business model is not known in Poland, though pharmacies united in partner-ship programmes also use a mechanism to reduce costs through the economies of scale. The largest and longest established scheme of this kind is the I Care for My Health programme managed by Polska Grupa Farmaceutycz-na.

> Retail Distribution Market / Pharmacy Market

22,000

21,000

20,000

19,000

18,000

17,000

16,000

Value of the Pharmaceuticals Market at Retail Prices

17,500

18,880

21,520

20,340

2004 2005 2006 2007 PLNm

Segments of the Pharmacy Market in 2007

OTC products30% 20%

50%

Non-subsidised prescription drugs

Subsidised prescription drugs

The number of pharmacies in Poland has been growing dynamically in recent years. As a result, patients have easier access to pharmaceuticals, while competition among pharmacies drives prices of drugs down. On the other hand, harsh rules of the free market make it hard to conduct a profitable pharmaceuticals business. Strong economic pressures and rising competition result in an increasing number of pharmacies seeing a need for professional management of their market image and marketing activities.


Source: Pharma ExpertWe are there to protect your health


> Retail Distribution Market / Pharmacy-Supply Market

Market Developments in 2007

In 2007, a number of signs were observed, suggesting that a process of change had begun on the Polish phar-maceuticals market. Intensified economic pressures and ever-stronger competition are among the reasons why a growing number of pharmacies recognise the need for professional management of its business image and mar-keting activities. Loyalty programmes are gaining in popu-larity and are run by approximately 30% of pharmacies. The Polish pharmaceuticals market is characterised by high selling costs therefore price competition is becoming less relevant in winning the customer. Due to a high de-gree of market saturation, the profit margin per medicine unit sold by a pharmacy is considerably lower compared with Western Europe. This is coupled with a consistent rise in the costs of doing business: rent expenses are on the increase, so are credit costs and salary pressures. Ac-cordingly, pharmacies have an increasingly more limited room for manoeuvre when it comes to price cuts.

In order to attract customers, pharmacies compete aga-inst each other by offering a differentiated product range, greater number of products in stock and, primarily, secu-ring customer relationship by means of loyalty program-mes.

A fairly new phenomenon on the market is selling medi-cines online. Poland joined a group of the EU member states that permitted distribution of drugs via the Internet (the group comprises Germany, the United Kingdom, the Netherlands and Switzerland). Online pharmacies allow consumers to save up to 30% on pharmaceuticals, hence it is very likely that in a few years one out of ten medicinal products in Poland will be bought via the Internet.


At all times, our efforts are guided by the

patient welfare


Philosophy

The network of 1,700 orange-coloured pharmacies be-aring the I Care for My Health logo currently ranks among the largest partnership programmes in Europe, and also the most cost-efficient systems of distributing pharma-ceuticals in Poland. The programme’s primary objective is to promote the perception of a pharmacy as a place where patients, in addition to buying inexpensive medi-cines, may also seek information on new healthcare pro-ducts, their use and, most importantly, disease prevention advice. As many as five million Poles are already served under the I Care for My Health scheme.

Loyalty Programme

From a business point of view, the programme’s objective is to unify the best-performing Polish pharmacies under one brand and to provide them with comprehensive sup-port. Programme tools are designed to assist pharmacies in attracting the largest possible number of customers and to ensure high-quality of patient care. Whenever a new pharmacy becomes a programme participant, PGF enhances its operations by providing it with advanced IT solutions, changing the interior design, placing it under a common marketing umbrella, and organising regular staff trainings. Owing to their cooperation with Polska Grupa Farmaceutyczna, the I Care for My Health Pharmacies have access to the largest assortment of drugs in Poland. An independent pharmacy may join the programme on the condition that at least 80% of its medicinal products are purchased from the PGF Group.

> Retail Distribution Market / I Care for My Health Pharmacies


Other pharmacies30%

Hospitals

15%

44%

2%Other

Pre-wholesale9%



Marketing

The pillars of the programme are private pharmacies ma-intaining a business relationship with PGF which have agreed to conduct business under the uniform orange-coloured logo. In this way, awareness of and loyalty to a common brand of independent pharmacies, guarante-eing a certain service quality standard, is built.

The programme is backed by wide-ranging marketing ac-tivities whose foundation is the support offered to phar-macies in winning new customers. Such pharmaceuticals marketing is aimed at convincing patients to purchase products at pharmacies participating in the programme rather than at stimulating demand for pharmaceuticals. Customer communication is handled by means of a wide spectrum of available IMC tools, from the loyalty program-me concept, to nationwide advertising and PR measures, to Internet communications and direct marketing.

With Patients’ Good in Mind

In 2007, the I Care for My Health Pharmacies introduced a unique solution to improve the efficiency of pharmaceu-tical care: a website dedicated to medicine and health, available at www.doz.pl was launched. Abstracts of re-cently published articles from Polish and foreign maga-zines are posted on the website everyday. The website provides a single platform for dissemination of informa-tion on medical conditions, drug effects, interactions and less expensive substitutes.

> Retail Distribution Market / I Care for My Health Pharmacies


The website provides an online pharmacy service, based on the model which combines Internet sales with distribu-tion through the nationwide pharmacy network. Products ordered online can be collected at one of the 1,700 phar-macies participating in the I Care for My Health scheme. Consequently, www.doz.pl can boast the lowest prices on the market as the purchase costs do not include the costs of shipment. Moreover, patients with acute conditions do not have to wait for the delivery for several days, as is the case with typical Internet shops. The online sales market in Poland is currently estimated at PLN 50m. In five to ten years, it is expected to account for around 10% of the entire retail pharmaceuticals market.

www.doz.pl– Highly Innovative Health

Website

> Retail Distribution Market



Hospital Distribution Market

> Together We Can Achieve More


Hospital Distribution Market

Hospital Market in 2007

Last year, the value of the hospital market grew by nearly 7%, to PLN 1.9bn. The growth of this market segment is closely related to the amount of funds which may be allo-cated by the National Healthcare Fund to finance advan-ced methods of treatment. In the future, hospital market growth will be driven by increased public spending on healthcare and, as in the case of the pharmacy market, demographic changes. Because the system of care se-rvices for people above the age of 60 is poorly developed in Poland, a lot of such elderly people receive help in ho-spitals instead of long-term care institutions.

Unlike pharmacy sales, the in-patient health-care market is not subject to seasonal fluctuations. The only exception is that in the summer months there is a slight decline in revenue, just as in other sectors of the economy.

The major problem of hospitals is the unresolved issue of debt and the hospitals’ difficulties in maintaining financial liquidity. Unfortunately, the debt restructuring carried out in 2004 did not yield the expected results. The hospitals which were cleared of their debts fell into debt again, which is a consequence of the system’s inefficiency. Ho-wever, the fast growing segment of private hospitals may be viewed as a chance for the development of the hospital market. Private hospitals are better managed and more profitable than their public counterparts. As a result, priva-te hospitals may spend more on more expensive but also more effective therapies and treatment methods.

> Hospital Distribution Market / Hospital Market

2,000

1,800

1,600

1,400

1,200

1,000

Size of the Hospital Market

1,346

1,593

1,892

1,772

2004 2005 2006 2007 PLNm

The hospital market is a difficult place for suppliers. Polish hospitals, the majority of which operate as public health-care centres, are in poor financial condition, which is further aggravated by medical personnel strikes, low value of contracts with the National Healthcare Fund and the fact that hospitals lack sufficient financing by their founding bodies. In spite of these difficulties, the PGF Group has remained the leader of the hospital segment for the last ten years, implementing its mission of delivering drugs anywhere they are needed. One in three drugs used in Polish hospitals comes from the warehouses of Polska Grupa Farmaceutyczna.




We do not focus on debt enforcement, but rather on

resolving problems – also in cooperation with producers.

Services to Hospitals

Our wholesale companies and PGF Urtica, a dedicated subsidiary, are responsible for hospital sales within the PGF Group. PGF Urtica is the only company which spe-cialises in sales of drugs to hospitals and has for many years been the most competitive company in that market segment. PGF Urtica was established in 1991 and soon afterwards it started to specialise in supplying hospitals and became focused exclusively on that market seg-ment.

The sales to hospitals are carried out under public pro-curement contracts. In 2007, PGF’s tender department prepared 2,149 bids. In 81% of the cases the Company was awarded contracts. Its present market position is the effect of the best offer which PGF may propose to ho-spitals:

• Due to the scale of operations, the Group offers the lowest prices on drugs and the largest range of products on the market;

• PGF has the best logistics network in the industry allowing it to deliver drugs to any location in Poland within a few hours, which is of particular importance in the transport of life-saving drugs;

• PGF’s proprietary programme enables automated ordering of products from all warehouses of the Gro-up at the very moment when the customer places the order. Thanks to this innovative solution, it is possible to reduce the cost of storing drugs and to create an offering the competitors cannot match for logistics reasons.

> Hospital Distribution Market / Services to Hospitals

Support Programmes

PGF Urtica thoroughly analyses the financial standing of its customers. The on-going monitoring of receivables allows PGF Urtica to eliminate any threats of excessive increase in customers’ indebtedness as such threats ari-se. First of all, any establishment which begins coopera-tion with the Group is evaluated by the Proprietary Risk Assessment System based on several criteria, including financial liquidity, profitability and growth strategy. As a result, the establishments are divided into risk groups and the terms and conditions of cooperation are determi-ned based on the classification. The system allows PGF to effectively manage sales and flexibly respond to any alarming changes in the financial standing of each of the cooperating establishments. Subscribing to the principle that our customers’ problems are our problems, PGF of-fers hospitals programmes which allow them to improve their financial liquidity. The Promissory Note Programme and the Credit Partner Programme, both credit schemes, provide a much better solution than debt enforcement proceedings. Thanks to the above programmes, PGF has no major bad debts, as it tries to resolve financial problems together with hospitals. On the other hand, the hospital management is guaranteed continuity of drug supplies. In 2007, the total amount of financing provided was PLN 134m.


Other pharmacies30%

Hospitals

15%

44%

2%Other

Pre-wholesale9%



Urtica Club

Although sales on the hospital market are dependent on proper tender proceedings and price-driven bids, the ma-intenance of partnership relations aimed at obtaining lon-g-term benefits is also important. That was the objective behind the creation of the Urtica Club programme, which was established to offer partner support in the resolving of problems related to hospital management and creating conditions for mutual development. The cooperation un-der the programme is multi-levelled: from advisory and audit services in such areas as finance and accounting, through human resources management, organisation of diagnostic departments, analysis of medical services, to organisation of training and conferences. The scope of cooperation is defined by the hospital, and PGF tailors its service package to the hospital’s needs.

> Hospital Distribution Market


> Auditor’s Opinion

Auditor’s Opinion

To the Shareholders and Supervisory Board of PGF S.A.

We have audited the attached consolidated financial sta-tements of the PGF Group, whose parent undertaking is Polska Grupa Farmaceutyczna S.A., registered office in Łódź, at ul. Zbąszyńska 3, including:

• consolidated balance sheet as at December 31st 2007, showing a balance-sheet total of PLN 2,011,720 thousand,

• consolidated income statement for the period Janu-ary 1st – December 31st

2007, showing a net profit of PLN 73,719 thousand,

• statement of changes in the consolidated equity for the period January 1st – December 31st 2007, sho-wing an increase in equity of PLN 115,332 thousand,

• consolidated cash-flow statement for the period Ja-nuary 1st – December 31st 2007, showing an increase in cash of PLN 64,096 thousand,

• notes to the consolidated financial statements.

The Management Board of the Parent Undertaking is re-sponsible for the preparation of the consolidated financial statements. Our responsibility was to audit the consolida-ted financial statements and to issue an opinion regarding their clarity, accuracy and reliability.

The consolidated financial statements contain financial information concerning one hundred and three subsidia-ry undertakings consolidated with the full method, two associated undertakings consolidated with the equity method and one jointly-controlled undertaking consolida-ted proportionately. The financial statements of fourteen subsidiary undertakings were audited by other qualified auditors. We received the financial statements of the subsidiary and associated undertakings along with au-ditors’ opinions thereon. Our opinion on the consolidated

financial statements, to the extent it pertains to the data concerning the aforementioned subsidiary undertakings, is based on the opinions issued by the other qualified auditors. The data contained in the financial statements of the subsidiary undertakings with respect to which we relied exclusively on the opinions issued by other qualified auditors and in the financial statements of the unaudited subsidiary undertakings account for 9.52% and 23.83%, respectively, of the total consolidated assets and consoli-dated sales revenue before consolidation adjustments.


In our opinion, based on the performed audit and on the opinions issued by other qualified auditors, the audited consolidated financial statements of the PGF Group for the financial year 2007 offer a fair and clear view of all information relevant to the assessment of the Group’s as-sets, financial standing and financial result as at and for the twelve months ended December 31st 2007. The finan-cial statements were prepared, in all material respects, in accordance with the International Financial Reporting Standards, as endorsed by the European Union.

The Directors’ Report on the operations of the PGF Group in the financial year 2007 is complete within the meaning of Art. 49.2 of the Polish Accountancy Act and the Polish Council of Ministers’ Regulation on current and periodic information to be published by issuers of securities, da-ted October 19th 2005, and the data contained therein, sourced directly from the audited consolidated financial statements, is consistent with them.

Warsaw, April 30th 2008

Our audit of the consolidated financial statements was arranged and performed in accordance with the provi-sions of:

• Chapter 7 of the Polish Accountancy Act of Sep-tember 29th 1994 (Dz.U. of 2002, No. 76, item 694, as amended),

• the professional auditing standards issued by the Polish National Board of Chartered Auditors

so as to obtain all the information and explanations ne-cessary in order to provide us with sufficient evidence to give reasonable assurance that the audited consolidated financial statements are free from material misstatements. The audit comprised primarily inspection of the consoli-dation documentation relevant to the amounts and disc-losures in the consolidated financial statements. It also included an assessment of significant estimates and judgments made in the preparation of the consolidated financial statements and of whether the accounting po-licies are appropriate to the situation of the Company. In forming our opinion we also evaluated the overall adequ-acy of the presentation of information in the consolidated financial statements.

We believe that our audit has provided us with sufficient evidence to issue an opinion.

> Auditor’s Opinion

Qualified auditor of financial statements

entered into the register of the qualified

auditors maintained by the National Board

of Chartered Auditors under Reg. No. 73

Milena Zwolińska-Grabowicz Qualified Auditor Reg. No. 10318/7629


> Financial Statements

CONSOLIDATED BALANCE SHEET (PLN ‘000)

NON-CURRENT ASSETS

ASSETS

TOTAL ASSETS

Goodwill

Intangible assets

Property, plant and equipment

Investment property

Investments accounted for with equity method

Non-current financial assets

Non-current receivables

Deferred tax asset

Other non-current assets

Inventories

Non-current assets held for sale

Current financial assets

Current receivables

Trade and other receivables

Income tax receivable

Cash and cash equivalents

Other current assets

619,360

376,760

26,834

179,684

882

1,081

17,154

402

16,528

35

1 392,360

597,868

24,372

127,779

521,454

519,460

1,994

116,296

4,591

2,011,720

355,280

155,550

28,906

148,334

1,192

859

11,171

588

8,678

2

1 135,130

549,096

1,482

62,054

467,335

466,832

503

52,200

2,963

1,490,410

Dec 31 2007 Dec 31 2006

CURRENT ASSETS


Equity of parent undertaking

Share capital

Statutory reserve funds

Other capitals

Retained earnings/(deficit)

Minority interests

Non-current liabilities and provisions

Financial liabilities

Deferred tax liability

Non-current provisions

Other non-current equity and lbilities

Current liabilities and provisions

Financial liabilities

Current provisions

Trade and other payables

Income tax expense

Other current equity and liabilities

CONSOLIDATED BALANCE SHEET (PLN ‘000)

TOTAL EQUITY

EQUITY AND LIABILITIES

TOTAL EQUITY AND LIABILITIES

406,581

286,429

25,521

272,722

13,477

(25,291)

120,152

617,058

615,557

591,150

13,563

10,844

1,501

988,081

976,070

107,151

3,700

853,979

11,240

12,011

2,011,720

291,249

246,734

25,504

234,309

8,969

(22,048)

44,515

157,165

155,867

133,837

13,313

8,717

1,298

1,041,996

1,034,175

170,225

5,187

856,335

2,428

7,821

1,490,410

Dec 31 2007 Dec 31 2006

NON-CURRENT LIABILITIES AND OTHER NON-CURRENT EQUITY AND LIABILITIES

CURRENT LIABILITIES AND OTHER CURRENT EQUITY AND LIABILITIES



Sales revenue

Cost of sales

Profit/(loss) on sales

Selling costs

General and administrative expenses

Other net operating income/(expenses)

Share in net profit/(loss) of associated undertakings

Operating profit/(loss)

Gain/(loss) on investments

Financial income

Financial expenses

Profit/(loss) before tax

Corporate income tax

Net profit/(loss) on continued operations

Net loss on discontinued operations

Total net profit/(loss)

Attributable to:

- equity holders of the parent

- minority interests

Weighted average number of ordinary shares

Diluted weighted average number of ordinary shares

Continued operations

Earnings per ordinary share

- basic / diluted

Continued and discontinued operations

Earnings per ordinary share

- basic / diluted

CONSOLIDATED INCOME STATEMENT (PLN ‘000)

CONTINUED OPERATIONS

4,410,525

(3,946,823)

463,702

(301,984)

(95,420)

26,523

223

93,044

2,253

25,132

(30,430)

89,999

(16,280)

73,719

-

73,719

74,410

(691)

12,588,240

12,588,240

5.91

5.91

DISCONTINUED OPERATIONS

Jan 1-Dec 31 2007

Jan 1-Dec 31 2007

Jan 1-Dec 31 2006


4,007,621

(3,587,138)

420,483

(264,044)

(82,394)

13,056

(85)

87,016

358

20,894

(26,990)

81,278

(18,287)

62,991

-

62,991

62,521

470

12,450,967

12,450,967

5.02

5.02

Jan 1-Dec 31 2006


1. Share in net (profit)/loss of subordinated undertakings accounted for with equity method

2. Depreciation and amortisation

3. Foreign exchange (gains)/losses

4. Interest and profit distributions (dividends)

5. (Profit)/loss on investing activities

6. Change in inventories

7. Change in receivables

8. Change in current liabilities (net of loans and borrowings)

9. Income tax paid

10. Other adjustments, net

III. Net cash provided by/(used in) operating activities (I +/- II)

B. CASH FLOWS FROM INVESTING ACTIVITIES

I. Cash provided by investing activities

1. Sale of intangible assets and property, plant and equipment

2. Cash provided by financial assets, including:

a) disposal of financial assets

b) repayment of loans advanced

c) interest received

3. Other net cash provided by investing activities

II. Cash used in investing activities

1. Acquisition of intangible assets and property, plant and equipment

2. Cash used on financial assets, including:

a) acquisition of financial assets

b) increase in loans advanced

3. Dividends and other distributions from profit paid out to minority shareholders

4. Other net cash used in investing activities

III. Net cash provided by/(used in) investing activities (I - II)

CONSOLIDATED CASH-FLOW STATEMENT (PLN ‘000) (INDIRECT METHOD)

I. Profit/(loss) before tax

II. Total adjustments

A. CASH FLOWS FROM OPERATING ACTIVITIES

89,999

(78,819)

(223)

20,640

(215)

13,372

(25,258)

4,427

1,121

(77,011)

(16,663)

991

11,180

Dec 31,2007

178,006

66,532

111,474

27,393

77,191

6,890

-

(332,197)

(64,149)

(241,113)

(86,670)

(154,443)

-

(26,935)

(154,191)

81,278

37,339

85

21,338

-

13,375

(15,074)

(33,745)

(1,161)

69,995

(18,218)

744

118,617

Dec 31 2006

143,620

88,741

54,859

6,100

45,317

3,442

20

(120141)

(30,234)

(87,141)

(4,312)

(82,829)

-

(2,766)

23,479

Dec 31 2007 Dec 31 2006



C. CASH FLOWS FROM FINANCING ACTIVITIES

I. Cash provided by financing activities

1. Net proceeds from issue of shares, other equity instruments and additional

contributions to equity

2. Increase in loans and borrowings, issue of debt securities

3. Other net cash provided by financing activities

II. Cash used in financing activities

1. Acquisition of treasury shares

2. Dividend and other distributions to shareholders

3. Distributions from profit other than distributions to shareholders

4. Repayment of loans and borrowings, redemption of debt securities

5. Other financial liabilities

6. Interest paid

7. Other net cash used in financing activities

III. Net cash provided by/(used in) financing activities (I - II)

D. TOTAL NET CASH FLOW (A.III +/-B.III +/- C.III)

E. BALANCE-SHEET CHANGE IN CASH, INCLUDING:

- change in cash resulting from foreign exchange differences

F. CASH AT BEGINNING OF PERIOD

G. CASH AT END OF PERIOD (F+/- D)

CONSOLIDATED CASH-FLOW STATEMENT (PLN ‘000) (INDIRECT METHOD)

564,333

12,754

551,579

-

(355,841)

(399)

(30,219)

-

(297,693)

(3,974)

(23,556)

-

208,492

65,481

64,096

1,385

52,200

116,296

275,677

4

275,673

-

(404,158)

-

(29,854)

-

(351,757)

(5,005)

(17,528)

(14)

(128,481)

13,615

13,615

-

38,585

52,200

Dec 31 2007 Dec 31 2006



1. Share capital at beginning of period

1.1. Changes in share capital

a) increase, including:

- issue of shares

1.2. Share capital at end of period

2. Called-up share capital not paid at beginning of period

2.1. Changes in called-up share capital not paid


- issue of shares

b) decrease, including:

- share capital paid up

2.2 Called-up share capital not paid at end of period

3. Statutory reserve funds at beginning of period

3.1. Changes in statutory reserve funds


- profit distribution


- covered loss

3.2. Statutory reserve funds at end of period

4. Revaluation capital reserve at beginning of period

4.1. Revaluation capital reserve at end of period

5. Treasury shares at beginning of period

5a. Treasury shares at beginning of period, after reconciliation with comparable data

5.1. Changes in treasury shares


- acquisition of treasury shares with a view to their retirement

5.2. Treasury shares at end of period

STATEMENT OF CHANGES IN CONSOLIDATED EQUITY (PLN ‘000)

I. Equity at beginning of period

I.a. Equity at beginning of period,

after reconciliation with comparable data

A. EQUITY OF PARENT UNDERTAKING

246,734

246,734

25,504

17

17

17

25,521

(288)

288

-

-

(288)

(288)

-

234,309

38,413

39,302

39,302

889

889

272,722

-

-

-

-

(399)

(399)

(399)

(399)

213,335

213,335

25,216

288

288

288

25,504

-

(288)

(288)

(288)

-

-

(288)

198,182

36,127

36,127

36,127

-

-

234,309

-

-

-

-

-

-

-

-

Dec 31 2007 Dec 31 2006



6. Other capital reserves at beginning of period

6.1. Changes in other capital reserves


- management stock options

- profit distributions

b) decrease

6.2. Other capital reserves at end of period

7. Exchange differences on translation of subordinated undertakings

8. Retained profit/(loss) brought forward at beginning of period

8.1. Retained profit brought forward at beginning of period

8.2. Retained profit brought forward at beginning of period, after reconcilia-tion with comparable data

a) increase


- dividend paid

- transfer to statutory reserve funds

- transfer to capital reserves

8.3. Retained profit brought forward at end of period

8.4. Retained deficit brought forward at beginning of period

8.5. Retained deficit brought forward at beginning of period, after reconciliation with comparable data


- minority losses charged against the Group’s equity


- covered loss

8.6. Retained deficit at end of period

8.7. Retained profit/(deficit) brought forward at end of period

8.8. Current year net profit/(loss)

a) net profit

8.9 Retained earnings/(deficit) at end of period

II. Equity of parent undertaking at end of period

STATEMENT OF CHANGES IN CONSOLIDATED EQUITY

9,257

9,966

9,966

966

9,000

-

19,223

(5,347)

(22,048)

93,209

93,209

-

78,521

30,219

39,302

9,000

14,688

115,257

115,257

21

21

889

889

114,389

(99,701)

74,410

74,410

(25,291)

286,429

8,513

744

744

744

-

-

9,257

-

(18,576)

65,981

65,981

-

65,981

29,854

36,127

-

-

84,557

84,557

12

12

-

-

84,569

(84,569)

62,521

62,521

(22,048)

246,734



B. MINORITY INTERESTS

I. Minority interests at beginning of period

a) increase

- current year profit

- minority losses charged against the Group’s equity

- first-time consolidation of companies as at their acquisition date

- shares issued

b) decrease

- decrease in equity interests

- current year loss

- first-time consolidation of companies as at their acquisition date

II. Minority interests at end of period

C. EQUITY

STATEMENT OF CHANGES IN CONSOLIDATED EQUITY

44,515

76,813

-

21

6,540

70,252

1,176

485

691

-

120,152

406,581

44,042

482

470

12

-

-

9

-

-

9

44,515

291,249



OTHER NON-CURRENT FINANCIAL ASSETS

1. Shares

2. Loans advanced and interest on loans

3. Other financial assets

Total net non-current financial assets

CURRENT FINANCIAL ASSETS

1. Shares

2. Other securities

3. Loans advanced and interest on loans

4. Other financial assets

Total net current financial assets

LOANS ADVANCED (MATURITY STRUCTURE AS FROM THE BALANCE-SHEET DATE)

Total gross loans advanced

Total impairment charges on loans advanced

Total net loans advanced

CURRENT TRADE AND OTHER RECEIVABLES

1. Trade receivables

2. Tax, subsidy, customs duty, social security, health insurance and other

receivables (without income tax)

3. Other receivables

4. Receivables under court proceedings

Total net current receivables

a) impairment charges for receivables

Total gross current receivables

SELECTED NOTES TO THE BALANCE SHEET (PLN ‘000)

Dec 31 2007

24

9,393

7,737

17,154

Dec 31 2007

-

-

116,552

11,227

127,779

Dec 31 2007

130,315

4,370

125,945

Dec 31 2007

480,430

17,228

21,351

451

519,460

124,483

643,943

Dec 31 2006

110

11,061

-

11,171

Dec 31 2006

-

-

59,340

2,714

62,054

Dec 31 2006

73,007

2,606

70,401

Dec 31 2006

433,482

20,814

12,536

-

466,832

126,815

593,647



INVENTORIES

a) materials

b) semi-finished products and work in progress

b) finished products

c) goods for resale

Total net inventories

Impairment charges

Total gross inventories

CASH AND CASH EQUIVALENTS

a) cash in hand and cash at banks

b) other cash

c) other cash equivalents

Total

NON-CURRENT FINANCIAL LIABILITIES

a) loans and borrowings

b) debt securities in issue – notes/bonds

c) other financial liabilities, including:

- liabilities under acquisition of enterprise from the State Treasury

- liabilities under financed lease

- liabilities under acquisition of shares

- liabilities under share purchase options

- other non-current financial liabilities

Total non-current financial liabilities

CURRENT FINANCIAL LIABILITIES

a) loans and borrowings

b) debt securities in issue – notes/bonds

c) other financial liabilities, including:

- liabilities under financed lease

- current portion of non-current liabilities to the State Treasury under acquisi-

tion of enterprise

- liabilities under acquisition of shares

Total current financial liabilities

SELECTED NOTES TO THE BALANCE SHEET

Dec 31 2007

7,276

121

869

589,602

597,868

4,905

602,773

Dec 31 2007

110,375

5,785

136

116,296

Dec 31 2007

328,923

191,000

71,227

-

80

7,737

59,724

3,686

591,150

Dec 31 2007

41,288

9,652

56,211

272

990

54,949

107,151

Dec 31 2006

5,525

-

741

542,830

549,096

3,203

552,299

Dec 31 2006

42,677

9,512

11

52,200

Dec 31 2006

132,438

-

1,399

1,399

-

-

-

-

133,837

Dec 31 2006

46,363

116,992

6,870

602

2,656

3,612

170,225



CURRENT TRADE AND OTHER PAYABLES

a) trade payables

b) taxes, customs duties, social security and other payables

(without income tax)

c) salaries and wages payable

d) promissory notes payable

e) liabilities under acquisition of shares

f) other

Total current liabilities

COSTS BY TYPE

a) depreciation and amortisation

b) materials and energy used

c) contracted services

d) taxes and charges

e) labour costs

f) other costs by type, including:

- business trips

- marketing costs

- costs of advertising and entertainment

- property insurance

- other costs

Total costs by type

Change in inventories, products, accruals and deferrals

Cost of products for own needs (negative value)

Selling costs (negative value)

General and administrative expenses (negative value)

Cost of products sold

SELECTED NOTES TO THE BALANCE SHEET

SELECTED NOTES TO THE INCOME STATEMENT (PLN ‘000)

Dec 31 2007

810,001

24 ,455

12,093

1,771

-

5,659

853 ,979

Jan 1-Dec 31 2007

20,610

23,549

139,332

10,647

237,629

43,085

926

28,266

10,430

2,051

1,412

474,852

371

(75)

(301,984)

(95,420)

77,744

Dec 31 2006

826 103

15 461

2 639

7 299

-

4 833

856 335

Jan 1-Dec 31 2006

21,304

21,661

154,865

9,620

160,592

35,224

672

21,629

10,655

1,763

505

403,266

(4,562)

-

(264,044)

(82,394)

52,266



OTHER OPERATING INCOME/(EXPENSES)

a) gain on disposal of non-financial non-current assets

b) subsidies

c) released provisions

d) other, including:

- donations received

- released impairment charges for trade receivables and court costs (payment)

- release of impairment charges for property, plant and equipment

- reimbursed court fees and cost of enforcement proceedings

- liquidated insurance claims

- other

Total other operating income

a) loss on disposal of non-financial non-current assets

b) revaluation of non-financial assets

- property, plant and equipmen

- receivables

- intangible assets

c) created provisions

- for future liabilities

- for employee benefits

d) other, including:

- donations granted

- compensations paid

- cost of damage removal

- cost of bank guarantees

- receivables cancelled and written off

- court fees and cost of enforcement proceedings

- membership fees

- other

Total other operating expenses

Other net operating income/(expenses)

SELECTED NOTES TO THE INCOME STATEMENT

Jan 1-Dec 31 2007

25,965

508

117

13,042

560

7,632

54

267

2,798

1,731

39,632

-

3 ,900

6

3,894

-

3,943

1,664

2,279

5,266

1,468

315

614

221

80

862

245

1,461

13,109

26,523

Jan 1-Dec 31 2006

12,600

490

428

12,596

3,300

3,408

3,158

282

1,175

1,273

26,114

-

6,342

83

6,257

2

3,034

1,209

1,825

3,682

799

160

503

219

182

870

182

767

13,058

13,056



FINANCIAL INCOME

1. Interest

a) on loans advanced

b) on discount of promissory notes

c) on receivables and other interest

2. Other financial income

a) released impairment charges for interest on receivables

b) released impairment charges for purchased receivables

c) payment of purchased receivables written off in previous years

d) other

3. Revaluation of financial assets

Total financial income

FINANCIAL EXPENSES

1. Interest accrued on:

a) loans

b) notes/bonds

c) liabilities

d) financed lease

e) other

2. Revaluation of financial assets

- loans advanced

- interest on loans advanced

3. Other financial expenses

- impairment charges for interest on receivables

- impairment charges for receivables

- financial derivatives

- balance-sheet valuation of financial derivatives

- fees and commissions

- gain/(loss) on sale of receivables

- share capital increase costs

- created provisions for financial expenses

- other

Total financial expenses

SELECTED NOTES TO THE INCOME STATEMENT

Jan 1-Dec 31 2007

14,589

6,075

2,145

6,369

9,617

2,815

3,714

-

3,088

926

25,132

Jan 1-Dec 31 2007

23,310

15,291

5,760

346

72

1,841

1,639

1,353

286

5,481

3,142

195

-

-

521

651

206

255

511

30,430

Jan 1-Dec 31 2006

13,770

4,394

-

9,376

6,697

1,234

3,826

1,013

624

427

20,894

Jan 1-Dec 31 2006

19,690

10,289

7,293

356

122

1,630

983

617

366

6,317

4,469

422

14

23

479

258

434

200

18

26,990



> Key Financial Dates

Key Financial Dates

February 29th 2008Consolidated Q4 2007 Report

May 15th 2008Consolidated Q1 2008 Report

June 19th 2008General Shareholders Meeting

August 14th 2008Consolidated Q2 2008 Report

September 30th 2008Consolidated H1 2008 Report

November 14th 2008Consolidated Q3 2008 Report


> Contact Details

Contact Details

Polska Grupa Farmaceutyczna S.A. ul. Zbąszyńska 391-342 ŁódźPoland

www.pgf.com.plwww.doz.pl

Management Board Officetel.: +48 42 61 33 510fax: +48 42 61 33 333

Investor Relations

e-mail: [email protected]

Tomasz Kisieltel.: + 48 42 61 33 512mobile: +48 691 730 108fax: +48 42 61 33 433e-mail: [email protected]

Public Relations

e-mail: [email protected]

Michał Johntel.: +48 42 61 33 594mobile: +48 691 730 142fax: +48 42 61 33 433e-mail: [email protected]

Report design by:

Studio Graficzne Temperówka S.C.www.temperowka.ple-mail: [email protected]

Pictures:

PGF’s ArchivesKordalski Architektura’s ArchivesJacek KusiskiMichał GmitrukAndrzej Świetlik

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