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Orion Group Interim Report 1-6/2003

  • Orion Group net sales came to EUR 1,168.8 million (477.7 million in 1-6/2002). To the growth, EUR 613 million were contributed by the Swedish pharmaceutical distributor Kronans Droghandel, which was acquired in July 2002.
  • Profit for the second quarter improved considerably from the first quarter. Operating profit for the first half of the year came to EUR 52.2 million (50.0 million), of which Orion Pharma accounted for EUR 35.7 million. The operating profit includes a milestone payment of EUR 21.1 million received from Novartis in June, based on the US marketing authorisation for Stalevo for Parkinson's disease. 
  • Earnings per share were EUR 0.53 (EUR 0.52).
  • The impacts of generic substitution on the sales of Orion Pharma and the pharmaceutical wholesaling business were in line with estimates.
  • As an elementary part of the ongoing efforts to improve profitability, personnel in Orion Pharma will be reduced by more than 400.
  • The full-year profit of the Group will be considerably lower than in 2002
Events in 4-6/2003 and afterwards
As part of the measures initiated in the spring to improve profitability in Orion Pharma, personnel will be reduced by approximately 300 in Finland. Additionally, more than 100 jobs will be reduced from the foreign units of Orion Pharma by the year-end. The manufacturing of hormonal products will be consolidated in Turku. The total number of employees in the Orion Group at the end of June was 6,064 (5,607) of which Orion Pharma accounted for 3,090 (3,173).
A US marketing authorisation was received for Stalevo, the first new treatment for Parkinson's disease in three years. Stalevo combines levodopa, carbidopa and Orion's proprietary substance entacapone. Also the European new drug application for the product is progressing favourably. In June, the Committee for Proprietary Medicinal Products (CPMP) of the European Agency for the Evaluation of Medicinal Products (EMEA) adopted a positive opinion on the product, recommending the granting of a marketing authorisation.
The German regulatory authority BfArM (Bundesinstitut für Arzneimittel und Medizinprodukte) restarted the review of the new drug application of levosimendan (Simdax) on the basis of the favourable clinical results published in June. The opinion of the BfArM is anticipated in the last quarter of 2003.
The shares in KD Tukku Oy, the Finnish subsidiary of Kronans Droghandel AB, were acquired by Oriola in July. The combined market share of Oriola and KD Tukku of pharmaceutical distribution in Finland was 60.2% during the first half of 2003.
Former president of Kronans Droghandel AB, Ralph Nilsson, retired at the end of June. His successor, Marianne Dicander Alexandersson, former executive vice president, started as new President of KD on 1 July. 
Jukka Viinanen, President and CEO of Orion Corporation:
-The first half of the year has been a time of difficult but necessary decisions for the sake of profitability for Orion Pharma, in particular. Its cost structure must be adjusted to the changed operating conditions. A number of molecules in our research pipeline must find their future outside the Orion Group.
-Personnel reductions are an elementary though not an exclusive way of cutting costs. They go hand in hand with a considerable change in the way of operation and our endeavour to lop the weak twigs off, with a goal to return the profitability to the targeted level.
-Several products will be dropped out from the commercial portfolio, and the earnings potential of the remaining ones will be exploited as comprehensively and efficiently as possible.
-The positive events in the review period include the US marketing approval for Stalevo and its consistent progress in the European regulatory review process, as well as the very favourable results received hitherto from the ongoing clinical studies with Simdax. KD continued to post improved profit, and the joining KD Tukku's operations with Oriola has proceeded fluently.
Net sales and profit
The Group net sales for 1-6/2003 grew by 144.7% to EUR 1,168.8 million (477.7 million). Kronans Droghandel, the Swedish pharmaceutical distributor acquired a year ago, contributed EUR 613 million to the growth. Weakened currency exchange rates had an unfavourable impact of EUR -8.1 million on the Group net sales, of which EUR 6.9 million concerned Orion Pharma. 
The operating profit was EUR 52.2 million (50.0 million), up 4.4% from the corresponding period of the previous year. Operating profit for the second quarter rose considerably from the first quarter. Most of the increase was consequence of Orion Pharma's profit improvement in the second quarter during which a milestone payment of EUR 21.1 million was received from Novartis.
Balance Sheet and financing
The Group equity ratio and solvency were good. Ordinary financial operations resulted in a net cost of EUR 0.2 million (for 1-6/2002, net earnings 2.6 million).  Net interest expenses were 0.5 million and exchange rate changes yielded EUR 0.3 million in net earnings.
In June, about half of the SEK 276.2 million loan taken in 2002 to hedge Orion's share of the shareholders' equity in KD was amortized. The stake of the share capital is now hedged by means of forward contracts.
Investments during the review period came to EUR 23.0 million (56.3 million). 
Share capital and Option plans
In the course of 2003, altogether 100,300 A-shares have been converted to B-shares. After the Trade Register entries of the conversions in July and early August, the current total number of A-shares is 30,486,129 and the number of B-shares is 37,032,292.
The authorisation of the Board of Directors to acquire the company's own shares was not utilised during the review period. The company currently holds altogether 208,932 A-shares and 685,000 B-shares, their combined total nominal value being EUR 1.5 million. The shares represent 1.32% of the share capital and 0.75% of the total votes.
The B-options of the 1998 Stock Option Plan were released on 2 May 2003. Merged with the A-options they are now listed as A/B-options on the Helsinki Stock Exchange.
The stock options had no dilutive impact on the EPS of 1-6/2003. 
Review of the Business Divisions
Orion Pharma
Net sales MEUR 254.1 (238.0), +6.8%
International operations MEUR 166.0 (144.5), +14.9%
Operating profit MEUR 35.7 (34.6), +3.1%
Operating profit in proportion to net sales 14.0% (14.5%)
Sales revenues from proprietary products MEUR 85.9 (84.4), +1.8%
R&D expenditure MEUR 48.6 (51.6), -5.8%
Actions for boosting operations are already being implemented
The net sales of Orion Pharma in the second quarter were EUR 140.3 million (119.2 million), including a EUR 21.1 million milestone payment from Novartis triggered by the US marketing authorisation of Stalevo.  Consequently, also the operating profit improved notably from the poor level of the first quarter. Exchange rates, the US dollar in particular, had a negative impact of EUR 6.9 million on the net sales.
Orion Pharma is undergoing an overall programme to boost profitability. Downsizing of personnel, cutting the research expenditure considerably and an increasingly focused product portfolio are major means here. The impacts of the measures will become visible in 2004, for which costs will be reduced by cutting R&D expenditure alone by EUR 30 million.
The products from own research contributed 34% to the net sales of the first six months. Supply of the Parkinson's disease drug Comtan (entacapone) to Novartis in the second quarter were on the same level as in the corresponding period last year. Due to the low first quarter, the EUR 19 million sales revenues from Comtan for 1-6/2003 were lagging notably behind those for the comparative period (26 million). Supply of Comtan to Novartis is anticipated to pick up further, as the market sales of the product have developed positively. Deliveries of the new Stalevo were started to Novartis, who will launch the product in the USA in September.  
Orion Pharma's market share in Finland was 11% for the first half of the year. The domestic sales of human pharmaceuticals decreased by 4.3% from the first half of last year, mainly due to the price competition induced by the introduction of generic substitution in Finland in early April.
The management responsibility areas in Orion Pharma have been largely redefined recently. Timo Lappalainen has been appointed Executive Vice President of Orion Pharma and Deputy to President Risto Miettunen.
The adjusted strategy confirmed for Orion Pharma in June is based on the development of the core therapy areas and proprietary products. The marketing area of generic specialty products is being extended to Scandinavia and Eastern Europe by exploiting and developing the existing product selection. Sales of animal health products and active pharmaceutical ingredients will also be boosted. Within its core therapy areas, Orion Pharma concentrates its efforts on the further development of entacapone, intravenous levosimendan, animal sedatives and hormone products. The New Ventures project, which was aimed for the further development of selected non-core drug candidates in collaboration with external capital investors, has been discontinued. Orion Pharma is exploring the possibilities to outlicense these molecules.
US marketing authorisation for Stalevo
The US regulatory authority, FDA (Food and Drug Administration) granted a marketing authorisation in June for Stalevo, Orion Pharma's new Parkinson's disease treatment. The drug contains three active substances: levodopa, carbidopa and entacapone, the latter one of which is Orion's proprietary drug discovery. Stalevo is indicated for patients treated with levodopa who experience end-of-dose wearing off symptoms. In the US, Stalevo will be marketed exclusively by Novartis. The European new drug application received a positive opinion from the EMEA in June, and a marketing authorisation is anticipated from the EU Commission during the second half of 2003.

The most important single object in the research portfolio of Orion Pharma is now levosimendan (Simdax), whose clinical trials are progressing to plan, with a target to receive a marketing authorisation for the product in the US, Great Britain, Germany and France. In Germany, levosimendan was already reuptaken for review by the BfArM, the documentation being complemented with new clinical data recently published by Orion Pharma. The opinion of the authority is anticipated in the last quarter of 2003.
Wholesale and Distribution
The combined market share of Oriola and KD of pharmaceutical distribution was slightly over 60% in Finland and 49% in Sweden. The total impacts of generic substitution on pharmaceutical distribution are beginning to show as additional costs both in Sweden and in Finland.
Invoicing MEUR 397.3 (324.2), +22.5%
Net sales MEUR 221.2 (162.0), +36.5%
Operating profit MEUR 8.5 (8.6), -0.8%
International operations MEUR 27.4 (25.2), +8.8%
Net sales of the Distribution and Wholesale Sector MEUR 163.2 (104.9), +55.5%
Net sales of the Medical and Technical Sector MEUR 58.2 (57.1), +1.8%
Oriola's invoicing and net sales were boosted by the additional volumes induced by the new principals. Progress in the other business units has been in line with the overall sluggish market development.  Although the operating profit was burdened by investments in operational resources and one-off items, it improved considerably during the second quarter, and for the first six months it already rose almost to the level of the comparative period. 
Oriola's market share of pharmaceutical distribution in Finland was 38%. The operating profit of the Distribution and Wholesale Sector of Oriola decreased slightly from last year. The new control system and the extensions of the automatic picking lines have been taken into use in the central warehouse in Espoo. The new premises hired in Espoo for handling the increased volumes are in efficient use. The situation in pharmaceutical distribution in Latvia and Lithuania continued to be unsatisfactory whereas Estonia showed some improvement.   
In early July, Oriola acquired the total share stock of KD Tukku Oy.
The net sales and international operations of the Medical and Technical Sector of Oriola showed a slight growth, whereas the operating profit weakened somewhat, partly due to starting up hospital supplies business in Sweden. Business in the Baltic countries continued favourably.
(KD is included in the Orion Group figures as of 1 July 2002)
Invoicing MEUR 914.2 (854.0), +7.0%
Net sales MEUR 612.8 (582.1), +5.3% 
Operating profit MEUR 5.2 (3.5), +48.8%
Invoicing from Pharmaceutical Distribution MEUR 844.6 (787.4), +7.3%
Invoicing from Healthcare Logistics MEUR 69.6 (66.6), +4.5%
KD's invoicing went on showing growth. The net sales grew almost accordingly. The operating profit continued to improve considerably, thanks to good volume development, successful cost management and the favourable development of operations in Finland. Generic substitution is clearly increasing cost pressure in Sweden.
KD's invoicing of pharmaceutical distribution in Sweden grew by around 7% while the market grew by 4.4%. KD maintained its market share in 49% to which it rose towards the end of last year. Invoicing of the Finnish subsidiary increased by 9% while the market grew by 5.5%, and its market share was 22.4%.
The profitability of the healthcare logistic services improved considerably but is still unsatisfactory. 
Net sales MEUR 70.5 (67.8), +3.9%
International operations MEUR 24.6 (23.6), +4.5%
Operating profit MEUR 3.8 (5.4),  -30.4%
The net sales of Noiro grew by 3.9%. Sales to the main export area, Russia, decreased by 8% from last year. Exports to other markets continued mainly as planned. Lumene, Herbina and Cutrin are the most important export brands of Noiro.
The operating profit decreased due to the flat growth of exports, the increased structural costs of marketing, the start-up costs of the new manufacturing plant as well as increased depreciation.
On the steadily growing market for cosmetics in Finland, Noiro continued to strengthen its market share of cosmetic series and hairdressing products. The best growth was posted by the cosmetics brands Lumene and Nanoel, and the Wella haircare line. The Farmos division of Noiro strengthened its position in the stable Finnish market for institutional cleaning and hygiene products. 
Orion Diagnostica
Net sales MEUR 18.4 (18.0), +2.2%
International operations MEUR 15.2 (14.7), +3.5%
Operating profit MEUR 2.5 (2.1), +21.9%
Orion Diagnostica's net sales for the first half of the year saw a slight growth from the comparative period. Operating profit improved, although the review period included considerable costs of the new business information system which was taken into use in early April. 
The QuikRead system continued to show strong sales performance, and the sales of hygiene tests progressed favourably too. Sales of the Uricult test for detecting urinary tract infections declined, mainly in the USA and France.
Outlook for the full year 2003
Orion Pharma's net sales for the full year 2003 are anticipated to be at the level of 2002. The sales of proprietary products will grow, and the marketing of Stalevo in the USA will start in September. Generic substitution is estimated to cut Orion Pharma's domestic net sales of human pharmaceuticals by 4-5%. The activities underway to improve profitability will cause additional costs during the latter half of the year. Accordingly, Orion Pharma's operating profit will decline considerably from the previous year. The positive impacts of the measures to improve profitability will become visible in 2004.
The two wholesale businesses, Oriola and KD, are expected to show further volume growth and improved profit.

Orion Diagnostica is anticipated to show continued sales growth and good operating profit. 
Noiro's net sales growth is anticipated to accelerate in the latter half of the year, and the full-year operating profit is estimated to improve slightly from the previous year.
R&D expenditure will be less than EUR 100 million, which is clearly lower than in 2002.
Gross investments are planned to be around EUR 55 million, also clearly less than in 2002.
The consolidated net sales will be considerably higher than in 2002 due to the impact of KD. The lower domestic sales of human pharmaceuticals, the activities underway to improve operational efficiency and the related costs as well as the unfavourable exchange rate of the US dollar are factors reducing Orion Pharma's operating profit considerably. Because of the proportionally high impact of Orion Pharma to the Group earnings together with the fact that the profits of the other business divisions are developing only slightly positively, the operating profit of the Orion Group for the full year 2003 will decrease considerably from the previous year.    
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, Wednesday, 6 August 2003, starting at 10.30 am, at the VR Auditorium in Helsinki. The language of the occasion is Finnish.
The Interim Report 1-9/2003 of Orion will be published on Wednesday, 5 November 2003  at 8.30 am, and a related press conference will be held at 10.30 at the VR auditorium in Helsinki.
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 following link: