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Orion Group Interim Report 1-3/2003

- Orion Group net sales came to EUR 571.3 million (EUR 235.7 million in 1-3/2002). The volume growth was mainly contributed by the Swedish pharmaceutical distributor, KD which was acquired in July 2002. Net sales of Orion Pharma declined by around 4% from the comparative period.
- Group operating profit came down to EUR 6.0 million, and Orion Pharma's operating profit plummeted down to EUR -1.5 million. Its profit includes a provision of EUR 7.8 million for the costs of terminating the deramciclane research program. KD showed good profit performance.
- Earnings per share were EUR 0.05.
- Actions are already being taken in Orion Pharma to improve profits. The favourable impacts of the measures will be seen in the profits in 2004.
Orion Group in 1-3/2003
Net sales increased due to added volume in the pharmaceutical distribution business.
Profit fell along with that of Orion Pharma, which is now in intensive care to recover profitability
The strong growth of the Group net sales is mainly due to the large additional volume resulting from the acquisition of KD, the Swedish pharmaceutical distributor. KD contributed more than half of the Group net sales, and the Wholesale and Distribution division altogether as much as 72%. Oriola's distribution volumes have increased considerably, thanks to new contracts. Orion Pharma's net sales declined by slightly over 4% while Noiro and Orion Diagnostica came to approximately the same level as in the comparative period.
The Group operating profit dropped down to EUR 6.0 million in consequence of the weak performance of Orion Pharma. Only KD and Orion Diagnostica improved their profitability.
There were several factors pressing down the Group profit. Orion Pharma's net sales declined by EUR 5 million from the comparative period. The US dollar has weakened in the past year, with a negative impact of around EUR 2.5 million on the Group profit. The research expenses of Orion Pharma include a provision of EUR 7.8 million as an extra burden booked for Q1 for the expenses estimated to occur later in the year due to stopping the deramciclane clinical program.  Also, depreciation has increased by almost one half due to high investments and the KD acquisition last year.
Orion's organisation will adapt to the changes
- The high research expenditure has been a conscious and well-motivated choice for Orion, says Jukka Viinanen, President and CEO of the Orion Group.  Now that the clinical results from deramciclane are clear, we must re-evaluate the situation. We can cut down annual costs considerably by just readjusting our annual R&D expenditure back to the level of the past years. The full impacts of generic substitution on our operations remain still to be seen, as only some weeks have passed since its introduction in Finland. Products showing poor profitability will be withdrawn from our product program. Sorting out them from the portfolio calls for a critical examination of all our operations and their adjustment to the level on which profitability is on a sustainable ground. In this situation we shall also re-examine the ways we are present on international markets.
- In connection with the recent profit warning we announced that Orion Pharma is aiming at a 20 percent operating profit level by the end of 2005. This target is fully realistic. The core of our strategy continues to be in proprietary products, but the new organisation pattern of Orion Pharma provides us improved possibilities to exploit the full market potential of all our products, confirms Jukka Viinanen.
Group investment in fixed assets in the current year will be notably lower than in the past two years. Construction is underway in Turku, where the second expansion and renovation phase of the research facilities has been recently started. Investment in machinery and equipment in the review period were almost the same level as in the comparative period. Of the total of EUR 12.3 million, buildings accounted for 1.6 million, machinery and equipment for 7.5 million and other fixed assets for 3.2 million.
Balance Sheet
The current liabilities include EUR 62 million representing the total amount of dividends paid in April.  The Balance Sheet shows a value reduction of the own shares by EUR 5.3 million as an intra-Balance item. Shareholders' equity at the end of the review period was 44.0% (67.5%). Gearing was -7.8%  (-21.7%). 
Group Equity Ratio and solvency were good. In the financial items, the net earnings from exchange rate changes were EUR 0.3 million.  Net interest expenses were EUR 0.1 million. Investments in securities caused a net loss of EUR 0.2 million. (Net financial income in 1-3/2002 came to EUR 1.4 million.)
Orion Corporation has made a Domestic Commercial Paper Program totalling EUR 100 million, which will allow the company to issue Commercial Papers with a validity period of up to one year. The purpose of the program is to provide a possibility for the company to acquire short-term financing from capital markets, when required.
The average number of personnel in the Group during 1-3/2003 was 5,836 (5,288). The growth was mainly consequence of the KD acquisition which added personnel by around 500. In March, the number of employees in the Group came to 5,850 while it was 5,826 in December last year. The number of personnel in Orion Pharma is decreasing. In the other business divisions it has been almost stable.
Decisions by the Annual General Meeting
At the Annual General Meeting of Orion Corporation held on 27 March 2003, the Income Statements and the Balance Sheets of the Group and the Parent Company were confirmed, and the Board of Directors and the President were discharged from liability for 2002.
A dividend of 0.93 euros per share was approved for 2002, in accordance with the proposal by the Board. The dividends, altogether EUR 62 million, were paid on 8 April 2003, the payout ratio being 100%.
The proposal by the Board of Directors concerning the merger of the A and B shares to constitute one single class of shares and to amend the Bylaws accordingly was rejected after a voting.
The Board was authorised to decide upon the acquisition and conveyance of own shares.
The number of Board members was confirmed to be eight, and no changes were made to the composition of the Board. The members elected until the next AGM were as follows: Mr. Erkki Etola, Mr. Heikki Hakala, Mr. Petteri Karttunen, Mrs. Eeva Kölli-Jäntti, Professor Juhani Leikola, Mr. Tuomo Lähdesmäki, Professor Heikki Vapaatalo and Mr. Matti Vuoria. Professor Leikola was elected Chairman. At its meeting on 12 May 2003, the Board elected Mr. Etola as deputy chairman.
Ernst & Young Oy was elected as auditor, Mr. Pekka Luoma, Authorised Public Accountant, being the designated auditor. Mrs. Päivi Virtanen, Authorised Public Accountant, was elected as deputy auditor.
Events after the review period
A profit warning was issued by the Orion Group on 14 April 2003. In the announcement, operating profit for the first annual quarter was estimated to be remarkably lower than that of the comparative period of the previous year. Also the full-year profit was estimated to decrease somewhat.
The project initiated a year ago for the establishment of a new pharmaceutical research company has been discontinued by Orion Pharma, because in an overall re-evaluation of the research projects, a solution satisfactory for Orion could not be found for the arrangement. The revisited R&D strategy and its impact on the new portfolio will be disclosed at Orion's next Capital Markets Day, to be held on 5 June 2003 in Espoo, Finland. 
The B-options of the year 1998 Stock Option Plan were on the Helsinki Stock Exchange as of 2 May 2003, the day when they were also released for subscription.
Acquisition of own shares
The Board of Directors of Orion Corporation has an authorisation by the Shareholders' Meeting to acquire and convey the company's own shares until 27 March 2004.  Up to 1,529,321 A-shares and up to 1,846,599
B-shares can be acquired. The total amount of shares acquired may represent no more than 5% of the share capital of the company and no more than 5% of the voting rights attached to all shares of the company. The shares can be used for developing the capital structure of the company, for financing corporate acquisitions or other arrangements or for otherwise conveying or invalidating them. The terms of the authorisation have been provided in a stock exchange release on 27 March 2003.
On the basis of the earlier authorisation, the company acquired altogether 41,134 own A-shares during 2-29 January 2003 from the Helsinki Stock Exchange. Their total acquisition cost was EUR 0.9 million and the average price per share was EUR 21.34. The total nominal value of these shares is EUR 0.07 million, and they represent 0.06% of the total share capital and 0.13% of the total votes.
The company currently holds altogether 208,932 A-shares and 685,000 B-shares, their combined nominal value being EUR 1.5 million. The shares represent 1.32% of the share capital and 0.75% of the total votes.
Stock Option Plan 1998
The B-options of the 1998 Stock Option Plan of Orion Corporation were released on 2 May 2003 and they were listed on the Main List of the Helsinki Stock Exchange. As the terms of the B-options are equal with those of the A-options that were released two years ago, they were merged with the A-options in the book-entry securities system.  During 2 May 2003 - 30 April 2005, the A/B options entitle holders to subscribe for up to 3,163,200 new Orion B-shares, representing 4.7% of the total share stock and 0.5% of the total votes. The current share subscription price with the A/B options is 26.88 euros per share. On the basis of the subscriptions, the share capital can increase by a maximum of EUR 5,377,440.
Stock Option Plan 2001
The Stock Option Plan 2001, issued to the key persons of Orion Corporation and its wholly-owned subsidiaries, contains altogether 1,800,000 stock options, each entitling to subscribe for one Orion B-share. These options have been allocated to 113 key persons of the Group.  The subscription period for stock options "2001A" will begin on 1 October 2003, for options "2001B" on 1 October 2004, for options "2001C" on 1 October 2005 and for options "2001D" on 1 October 2006. The share subscription period will end on 31 October 2007 for all the options.
The share subscription price before the next dividend payment is EUR 26.88 for the options "2001A" and "2001B" and. The share subscription price for options "2001C" is EUR 21.91.  For options "2001D" the price is EUR 21.96 and the price can only be reduced by possible special dividends per share that differ from the company's normal dividend distribution policy. The share capital can increase by up to EUR 3,060,000 and the number of shares by up to 1,800,000 B-shares. The shares subscribable on the basis of the options of the Stock Option Plan 2001 represent 2.7% of the total number of Orion shares and 0.3% of the total number of votes.
Review of the Business Divisions
Orion Pharma
Net sales MEUR 113.8 (MEUR 118.8), -4.2%
International operations MEUR 68.9 (MEUR 72.1), -4.5%
Operating profit MEUR -1.5 (MEUR 14.9), -109.8%
Sales revenues from proprietary products MEUR 39.1 (MEUR 42.3), -7.6%
R&D expenditure MEUR 30.1 (MEUR 24.7), +22.0%
A weak annual quarter for Orion Pharma.
Actions to improve profitability are already being implemented
During the first months of the year, Orion Pharma has gone through events which influence the entire Group due to the high weight of the division's profitability in the Group. In February, the drug candidate deramciclane proved to show insufficient efficacy in the treatment of anxiety. After the decision to terminate the research program, the situation and the resource allocations in Orion Pharma have been under scrutiny. Actions are already underway all over the division with a target to turn the profitability curve upward and to hoist the operating profit ratio to 20% of net sales by the end of 2005.  A detailed action plan will be confirmed during the second quarter. In March, Orion Pharma invited the personnel representatives to negotiations concerning adjustments and operational improvements in the domestic marketing and sales organisation. This procedure led to a decision made last week to reduce the personnel by more than 50 from this function, around 40 persons of which received a notice of termination. The continuing domestic sales organisation will comprise approximately 100 persons. 
In the first annual quarter, Orion Pharma made an operating loss of EUR 1.5 million. The unusually poor performance resulted from a provision of EUR 7.8 million for the future costs of running down the deramciclane research program, as well as from lower net sales than in the comparative period. No milestone payments were received in the review period. Invoicing suffered from the strongly weakened US dollar for around EUR 3.3 million.
The decrease in the net sales resulted mainly from the challenging situation in the domestic pharmaceutical market as well as the low supply of the Parkinson's disease drug Comtan to the marketing partner.  In the comparative period the Comtan revenues were particularly high (EUR 15.2 million) against the EUR 9 million in the review period. The fluctuation is due to periodical variations in the partner's purchases. 
Breakdown of the Q1 net sales by business processes:
Core Therapy Areas  30 %
Specialty Products  52 %
Animal Health  9 %
Fermion (active ingredients)  9 %
The products from own research contributed 34% to the net sales. The sales revenues are specified in the Tables section. Comtess/Comtan was the best-selling product with over EUR 17 million. Hormone replacement products are showing continued growth despite differences in opinions about the treatment practises and increased regulatory restrictions concerning this product category. The sales of Easyhaler products for asthma are showing delightful growth in Germany in particular, indicating the success of the new strategy and the new marketing partnership. Sales revenues from the heart failure drug Simdax showed good growth from the comparative period. 
The Finnish pharmaceutical market grew by 6.1% from the figures of January - March last year. In the first months of the year, pharmacies started to prepare themselves for the impacts of generic substitution which was introduced in Finland on 1 April.  The change in the legislation obliges the pharmacies to replace the prescribed preparation with the cheapest parallel product in accordance with a list issued by the National Agency for Medicines. Orion's net sales from human preparations decreased by 4%. Orion Pharma maintained its market leadership with a market share of 11.4% for the review period. 
Pharmaceutical R&D
The comprehensive Phase 3 clinical studies with levosimendan (Simdax) in acute congestive heart failure are progressing to plan, with an aim to obtain marketing approvals for the product in the USA, Great Britain, Germany and France. The US drug authority FDA (Food and Drug Administration) recently granted a fast track designation for levosimendan stating that Orion's clinical program is committed to studying the effects of levosimendan on clinical endpoints of clear benefit in the treatment of acute congestive heart failure. The designation will facilitate the collaboration with the FDA during the final stage of the development program of levosimendan, and it also provides a possibility to apply for an expedited review of the new drug application. 
The new preparation combining levodopa, carbidopa and entacapone for the treatment of Parkinson's disease is awaiting marketing approval from the US FDA during the second quarter. The product will be marketed globally under the trade name Stalevo. A European marketing authorisation for Stalevo is anticipated in the latter half of this year. In the US the product will be marketed by Novartis, Orion's long-term partner for entacapone.
The afore-mentioned decision to stop the clinical research program with deramciclane was made together with Pharmacia Corporation on the basis of the results from completed studies. Since the partnership agreement in 2001, Pharmacia has participated in the costs of the program with EUR 39 million.
Wholesale and Distribution
The market position continued to be favourable for Oriola and KD. Their combined market share in Finland was 61% and 49% in Sweden. Non-recurrent cost items have, however, restrained Oriola's profit making ability in the first quarter.
The picture of the impacts of generic substitution on the pharmaceutical distribution business will become clearer when more experience and statistics have accumulated. Generic substitution was introduced in Sweden in October 2002 and in April 2003 in Finland.
Invoicing MEUR 194.6 (MEUR 156.2), +24.6%
Net sales MEUR 108.1 (MEUR 76.5), +41.3%
Operating profit MEUR 3.6 (MEUR 5.2), -30.5%
International operations MEUR 13.6 (MEUR 13.0), +4.7%
Net sales of the Distribution and Wholesale Sector MEUR 79.6 (MEUR 48.8), +63.2%
Net sales of the Medical and Technical Sector MEUR 28.5 (MEUR 27.7), +2.9%
Oriola's invoicing and net sales increased in consequence of the additional volume that came along with new distribution contracts. International operations saw just a slight growth. In the other business units of Oriola, the first months of the year have been rather sluggish, in line with the market development. Sales of dental equipment declined in particular.  Operating profit dropped from the comparative period due to investments in operational resources and costs of non-recurrent nature.
The market share of Oriola's Distribution and Wholesale Sector in Finland came to 38%. Operating profit decreased from the comparative period. Additional premises hired in Espoo will improve the manageability of the increased distribution volumes in Finland. The degree of automation is being raised in all warehouses, and in the central warehouse in Espoo in particular. The situation in the Baltic countries was unsatisfactory. Reformi-Keskus showed flat performance.  
The Medical and Technical Sector showed some growth of net sales and international operations whereas its operating profit weakened slightly from the corresponding period in the previous year. Oriola Medical showed strong growth in the sales of hospital supplies. Oriola Dental, Prolab and Medion showed slow progress in Finland. In the Baltic countries, the Sector's performance as a whole was positive. Oriola Dental developed favourably in Sweden and Denmark.
(KD is consolidated in Orion as of 1 July 2002)
Invoicing MEUR 452.7 (MEUR 411.0), +10.2 %
Net sales MEUR 307.5 (MEUR 282.0), +9.0 % 
Operating profit MEUR 2.5 (MEUR 1.6), + 57.8 %
Invoicing of Pharmaceutical Distribution MEUR 417.8 (MEUR 378.0), +10.5%
Invoicing of Healthcare Logistics MEUR 34.3 (MEUR 33.0), +3.9%
KD's invoicing continued to show growth although at a lower rate than previously. Net sales increased almost accordingly. Operating profit improved considerably from the comparative period. This was consequence of the continued good growth of volumes, successful cost management and the positive progress of the Finnish subsidiary. 
KD's invoicing of pharmaceutical distribution operations in Sweden grew by more than 10% while the market growth was in the class of 7%. KD's market share in Sweden was 49%, the same as at the end of last year. The Finnish subsidiary increased invoicing by no less than 12%, the market growth rate being around 6%, and it achieved a market share of 23%.
A slight improvement was seen in the still unsatisfactory profitability of KD's new business areas.
Net sales MEUR 36.4 (MEUR 35.4), +2.9%
International operations MEUR 12.9 (MEUR 12.9), +0.4%
Operating profit MEUR 2.5 (MEUR 3.7), -31.7%
Noiro's net sales and international operations were almost at the same level as in the first quarter of last year. Also exports to Russia remained at the previous year's level, and they consisted of Lumene cosmetics, Herbina daily personal care products and Cutrin hair care products. Increased marketing expenditure and capital costs following the high investments in production facilities completed last year were major reasons for the notably declined operating profit.
In the growing Finnish market for cosmetics, Noiro continued to add its already strong dominance of cosmetics series and hairdressing products. Particular strong growth was shown by the cosmetics brands Lumene and Nanoel and the Wella hair care product line. Farmos performed well in the stabile market for institutional cleaning and hygiene products.
The new subsidiary, Noiro Polska, promotes Noiro's products in Poland as of the start of the year.
Orion Diagnostica
Net sales MEUR 9.4 (MEUR 9.1), +2.9%
International operations MEUR 7.7 (MEUR 7.4), +4.7%
Operating profit MEUR 1.3 (MEUR 1.2), +5.3%
Orion Diagnostica's net sales increased slightly from the previous year, whereas operating profit was approximately at the level of the corresponding period of the previous year. Sales of the QuikRead test system continued to show strong growth, thanks to the good success of the QuikRead CRP test for diagnosing infections on the basis of the C-reactive protein content in a blood sample.  Particular strong sales growth of this test was seen in China. Uricult, a test for the detection of urinary tract infections, achieved clearly lower sales in the US. Overall sales of hygiene tests progressed in a positive atmosphere.  
Outlook for 2003
Orion Pharma's full-year net sales are anticipated to be at the level of 2002. Generic substitution in Finland is estimated to cause a 3-4% reduction in the domestic net sales of human pharmaceuticals. Sales of proprietary products will increase.  Comtan shipments to the partner are anticipated to pick up, because the market sales of the product have been developing positively. Operating profit of Orion Pharma will decline from the previous year. The favourable impacts of the actions to improve and adjust operations will be shown in Orion Pharma's profitability in 2004.
Orion Pharma aims to grow profitably. This will be achieved by specialisation on the chosen therapy areas and by maintaining a product range which supports the operational entirety and financial performance.
The two wholesale businesses, Oriola and KD, are expected to show further volume growth and their profits are anticipated to improve.
Orion Diagnostica and Noiro are expected to grow and show good operating profit.
The consolidated net sales will be considerably higher than in 2002 due to the impact of KD.  Group operating profit is estimated to decrease from the level of 2002. 
R&D expenditure will be less than EUR 100 million, which is clearly lower than the actual costs for 2002. Gross investments are planned to be around EUR 65 million, clearly less than in 2002. The estimate is without possible company or product acquisitions.
Orion Corporation
Jukka Viinanen                  Jari Karlson
President and CEO              CFO
Contact persons:
Jukka Viinanen, President and CEO, phone +358 10 429 3710                
Jari Karlson, CFO, phone +358 10 429 2883
A press conference on this Interim Report will be held today, Tuesday 13 May starting at 10.30 am, at Orion Corporation Headquarters, address Orionintie 1A, Espoo. The language of the occasion is Finnish.
A Capital Markets Day will be arranged by Orion on Thursday 5 June 2003 at Orion in Espoo, for institutional investors, analysts and the financial media. The language of the event will be English.
Orion Group publication schedule for later Interim Reports for 2003
Interim Report 1-6/2003, Wednesday 6 August 2003  at 8.30 am
Interim Report 1-9/2003, Wednesday 5 Nov 2003  at 8.30 am
The reviews and the related presentation material will be available on the Group homepage instantly upon publication.
The full report including tables can be downloaded from the enclosed link.