T H E H E A LT H C O M P A N Y A N N U A L R E P O R T

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1 THE HEALTH COMPANY ANNUAL REPORT 2001

2 STADA 2001 Key Figures for the Group Key figures for the Group in e million ± Sales % EBITDA ) +38% Profit before taxes ) +43% Annual net profit ) +34% Cash flow (gross) % Total assets % Equity capital % Capital expenditure % Depreciation/amortization % Personnel expenses % Average number of employees 1,827 1, % Group sales in e million EBITDA in e million (consolidated) Net profit in e million (consolidated) ) ) Key figures per share ± Earnings per common share (DVFA) in e % Earnings per common share (DVFA/SG) in e % Dividend per common share in e ) % Closing price of common stock (XETRA) in e (Dec. 31) % Market capitalization in e million (Dec. 31) % 1) Excluding extraordinary expenses for capital measures in 2000 of 3,571 thousand e 2) Excluding extraordinary expenses for capital measures in 2000 of 3,571 thousand e and taking into account the German tax rate 3) Proposed dividend

3 Contents Table of Contents Annual Report 2001 STADA. The Health Company. Letter to the shareholders Market potential The STADA strategy Financial results of the fiscal year Dividend/Proposed profit appropriation The STADA share STADA s employees Sales and marketing The international sales network Pharmaceutical production Product development Fiscal year 2002 and outlook Index to the Annual Financial Statements Annual Financial Statements and Notes Audit opinion Report of the Supervisory Board Board members Financial calendar Publishing information Five year consolidated financial summary At the beginning of 2002 STADA changed over its company currency to euro. Accordingly, the official consolidated financial statements as of December 31, 2001, filed with the commercial register are still reported in Deutsche Mark. Throughout the entire consolidated annual report for the fiscal year 2001, for the sake of transparency of information, all DM figures are converted to euro at the official exchange rate (1.00 e = DM). 1

4 Shareholders Letter Letter to the Shareholders 1) Dear Shareholders, The strategy, current successes and future outlook of a company are the deciding criteria in the assessment by investors. According to these criteria your company, STADA Arzneimittel AG, is in good shape. The consistent implementation of our strategy STADA. The Health Company. led again in 2001 to record results in sales and especially in profits, and to a significant increase in the value of STADA s stock over the course of the year. The strategic and operational strengths of the company indicate that the uninterrupted dynamic growth of STADA s success will continue in the years to come. Our strategy: STADA. The Health Company. STADA operates in the global health care market, concentrating on segments with especially strong growth and profits. Our strategic premise remains unchanged: conscious avoidance of cost-intensive and risky research into active ingredients. This allows us the financial leeway for growth-oriented activity in product development, marketing and sales, as well as in pricing our products. Our business comprises three core segments. All three of these have contributed significantly to the growth of recent years. Generics (2001 sales: 326 million e, +25% compared to the prior year) represent with a 61% share of sales, by far, the largest core segment in the Group. Generics are medicines that are offered after the patent expiration at the same quality but for a significantly lower price. The continuing worldwide pressure on financing in the health care market, and especially in the market for pharmaceuticals, offers generics, as typical value for money products, great potential for long-term structural growth. As a major international supplier of generics, STADA is predestined to continue generating growth from this potential in the years to come. Brands for the health market (2001 sales: 83.3 million e, +8% compared to the prior year) represent the second core segment of our business (sales share: 15%). The focus today is on products for self-medication and in the wellness field, particularly in the German market. 1) This Shareholders Letter also serves as an abbreviated version of this Annual Report that is sent to all shareholders (German version only). 2

5 Hartmut Retzlaff Peter Niemann Wolfgang Jeblonski 3

6 Shareholders Letter Letter to the Shareholders The third core segment for the Group, with a sales share of 3%, comprises the special pharmaceuticals, at the present time vaccines and oncologica (pharmaceutical products for the treatment of cancer) (2001 sales: 16.0 million e, +26% compared to the prior year), which require special sales and marketing strategies depending upon the product or market. To promote our three core segments, we also operate commercial businesses in some national markets (2001 sales: million e, 6% compared to the prior year); typically these show lower margins. The sales share of these commercial businesses, which are not part of our core segments, decreased to 20% in 2001, according to plan. To improve margins, our commercial business in the Netherlands, which, at 92.3 million e, accounts for by far the largest share of our commercial business, is to be restructured in The volume and share of commercial sales will consequently be further reduced. Our strategy includes clear strategic target positions for the operational business of the Group. These are: continuing earnings-oriented growth; the international expansion of the Group; a focus on lean and flexible group structures, especially in procurement and production; a peak position in product development; and acceleration of growth through acquisitions. Obviously the strategy also includes our explicit orientation toward customers and sales, our commitment to quality, and social skills, particularly in dealing with our employees. The ultimate goal of all of our actions is to further increase the value of the company. Our successes in the year 2001 STADA achieved annual sales of million e (1.052 billion DM) in 2001, clearly surpassing the 1 billion DM threshold. That represents growth of +15% for STADA in The organic sales growth, excluding 2001 acquisitions, was +14%. Once again, sales for the Group doubled in just three years. Profits showed excellent advances in With EBITDA (results from ordinary activities before interest, tax, depreciation and amortization) of 74.9 million e for the STADA Group in 2001, the figure for the year before 1) was surpassed by no less than +38%. This amount includes extraordinary appreciation of 4.5 million e. This extraordinary appreciation became necessary because 1) In each case adjusted for the cost of the capital increase in

7 the fiscal authorities extended the useful life of product approvals with retroactive effect. The other profit figures also show similar outstanding growth rates 1) : Before-tax profits grew by +43%, annual net profit by +34% and earnings per share according to DVFA by +21%. The positive development of the most important profit figures verifies the success of our focus on lean, flexible and cost-effective structures. The good profit trend in 2001 also gives us the latitude to be able to suggest to the shareholders meeting that the dividend per share of common stock be increased by +20% to e 0.59, without thereby depriving the company of financial substance for further growth. The Executive Board knows full well that the efforts of a great number of individuals are behind all of these numerical successes. We therefore thank all of the employees for their commitment and performance. Our thanks also go to the Supervisory Board, the Advisory Board and our employee representatives for their constructive cooperation. The development and timely availability of attractive new products is extremely important for the success of our strategy. We are organized efficiently and flexibly, with our own intensive development activities and a network of international development partners. Our achievement of leadership in classic product development is substantiated impressively by the 209 products newly introduced throughout the Group in 2001, among them again numerous generics first offered with precise timing on the day their patent expired. Individual attempts by initial suppliers to take action under patent law against new STADA product introductions (including Omeprazol, Felodipin and the cell pharm offering Epirubicin) have generally been unsuccessful to date. Looking ahead, we are already taking steps today to ensure that our product pipeline will also be very well filled in the years to come. An outstanding example of this is the cooperative development of biogenerics, started at the beginning of STADA will thereby acquire the worldwide marketing rights starting in 2005/2006 for the first biopharmaceuticals, whose patents will expire then. We are currently working on the active ingredients Filgrastim, Erythropoetin and Interferon β. The initial development stages for the active ingredient Interferon α have also been successful. However, as the market is switching more quickly than expected to a new dosage form with sustained release of the active ingredient, the cooperation partners have temporarily suspended the further development of this active ingredient, as the new dosage form will probably be protected by patent for some time and initially will therefore not be accessible for a biogeneric. Nonetheless, it will not be necessary to adjust the sales forecast for the overall project as the growth achieved by the other three active ingredients is well above expectations, and their total annual sales volume now reached approx. 1.5 billion e in the EU. Thus, the sales volume for biogenerics attainable by STADA continues to be estimated at over 100 million e per 1) In each case adjusted for the cost of the capital increase in

8 Shareholders Letter Letter to the Shareholders year after the third full year of marketing. The prospects for biogenerics, which are opened up for the Group by the 2001 development cooperation, thus gives lasting reinforcement to STADA s outlook for the future. But by involving a development partner with experience in biotechnology, together with private venture capital, we have limited at the same time the extraordinarily high development costs and risks of biogenerics to a scale which is acceptable to STADA. The sales network of the STADA Group was also expanded further internationally in In November 2001 the contract was signed to acquire the business operations of the US supplier of generics MOVA Laboratories Inc. (2001 sales volume: 26.0 million US $) effective January 1, 2002, to which additional product acquisitions for the US market (acquisition of a generics packet from ESI Lederle with an annual sales volume of approximately 4.0 million US $) could be added still before the end of the year STADA thereby takes its first step into sales in the largest market for generics in the world. In addition, the acquisition of majority interests in local sales companies at the beginning of 2001 has opened up the markets in the Philippines and in China. The selling power of the Group was also reinforced in 2001 by further increasing sales forces in existing sales companies. Again in the current year 2002, the international expansion of sales has already continued with: the signing of a letter of intent to acquire the marketing and sales activities of the Italian brand name supplier Crinos (acquired sales volume will be around 22 million e), acquisition of additional brand name sales in the amount of 2.3 million e, and an increase in our interest in the Spanish firm Ciclum Farma to 74%. The welcome rise in the price of STADA s stock makes it clear that the capital market is positive in its assessment of the company s strategy and results. Despite a difficult market environment, STADA s common stock posted a price of e at the end of 2001, a gain of +66% from the beginning of the year. When the 2001 price performances of all the stocks in the DAX 100 are considered, this puts STADA s stock in 4th place. The market capitalization of STADA increased by +73% in 2001, to million e. Accordingly, in December 2001 STADA was 67th among the corporations listed in official trading in Germany. Contributing factors in the positive price movement include the good performance of fundamentals, as well as the improvement in general technical conditions for STADA stock in For example, the liquidity in stock trading was increased significantly by the 1:1 conversion of the non-voting preferred stock into restricted registered common stock. Because of 6

9 the continuous growth in market capitalization and market liquidity in the last two years, STADA s common stock was included on July 23, 2001, in the MDAX market segment of the German stock market. The elevation into the MDAX gives STADA much greater significance in the capital market, and is yet another important success for us in the fiscal year In the view of the Executive Board, it deserves the rating very successful. Our prospects for the future: STADA continues on its successful course The Executive Board of STADA Arzneimittel AG is optimistic in its view of the years to come. Consistency in pursuing the corporate strategy STADA. The Health Company. will continue to open up every opportunity for the company to continue successfully on the growth track it has followed for many years. The basis for this optimistic assessment is the obvious strategic and operational strengths that we have achieved in implementing our corporate strategy in recent years. Many of the strategic positions that were targeted for our operational business have by now been attained by STADA, and therefore are among the strengths promoting the growth of the Group. These strengths of STADA include: Positioning in segments of the health market with good structural growth opportunities A sales network, which supports EU-wide marketing of generics and at the same time constitutes the basis for internationalizing the other core segments An initial basis for sales in the USA, the largest generics market in the world A lean, cost-oriented company structure A peak position in product development The prospects for biogenerics starting in 2005/2006 Committed and capable employees An excellent capital structure that forms the basis for an active acquisition policy to accelerate the growth of the Group. These strengths form a good foundation for the ability to continue STADA s successful course of growth in the coming years. This is the case, in our estimation, irrespective of influences from health policy or the business climate. Of course, governmental intervention into market structures can cause a temporary deceleration of growth in individual national markets. But the stated goal of such structural intervention is usually to promote the market segment for generics, which is important to STADA, so that it generally tends to be advantageous to our business. For example, new legislative measures in Germany since February 2002 are intended to increase the administration 7

10 Shareholders Letter Letter to the Shareholders of generics, in part by making substitution easier. (In substitution, in place of a medication prescribed by the doctor, the pharmacist dispenses a less expensive generic, which contains exactly the same quantity of the same active ingredient as the prescribed product the so-called aut idem rule). The planned implementation rules do not give rise to any expectation that market structures will change in principle in 2002, however. Starting in the next fiscal year 2002, STADA will follow the International Accounting Standards (IAS) in its consolidated accounting, as announced. In accordance with the wishes of many investors, who are increasingly international in their orientation, this replaces the German Commercial Code (Handelsgesetzbuch = HGB), which has been used in the past for the consolidated accounting. Internal comparisons of quarterly financial statements for the fiscal year 2001 indicate that there are no significant changes to be expected in the operating results of the enterprise as a result of the conversion to IAS. On the whole, we expect the fiscal year 2002 to bring a continuation of the growth course for the Group, i.e., a potential for double-digit sales growth again between +15% and +20% for the total of our core segments. The start in 2002, with a sales increase of approx. +12% by the mid-march, confirms this forecast. Not including the commercial business in the Netherlands, which is currently undergoing restructuring and is not a part of the core segments, the Group s sales will have improved by approx. +20% by mid-march. The earnings will increase again in 2002 by a double-digit percentage for the Group, despite the very high starting level. We feel that this continuity of the increases in sales and earnings provides an excellent basis for continued growth in the value of your company STADA Arzneimittel AG. Hartmut Retzlaff Wolfgang Jeblonski Peter Niemann 8

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12 Markets Market Potential Continuing growth in the health and pharmaceuticals markets The positive development of the world health market continued in the reporting year The health market is still characterized by continually growing demand relatively independent of business cycles. The driving forces behind this growing demand are progress in medicine and increasing human life expectancy. An area of especially strong growth in the world health market is the pharmaceutical segment. In the twelve-month period ending with September 2001, the global pharmaceutical market is reported to have grown by +11% 1). Contributions came from all the major national markets, for example the US market with +16%, Germany with +10%, United Kingdom with +7%, Spain with 11%, France with +7%, and Japan with +4%. The prognoses for further growth in the global pharmaceuticals market are attractive. An average annual growth rate (CAGR) of +9% 2) is expected for the period through All of the important national markets will continue to contribute to this vigorous growth in the future. Anticipated compound annual growth rate (CAGR) for the global pharmaceutical market, , in % Source: IMS HEALTH, Pharma Prognosis Int., Germany France Italy Japan Spain UK USA Global 1) IMS Health Drug Monitor, in: SCRIP no. 2700, Nov ) IMS Health Pharm. Prognosis International, in: SCRIP no. 2662, July

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14 Markets Market Potential National developments will continue to characterize the structures and developments of the health market in the future regardless of the increase in global networking. The organization and financing of health systems remains for the time being in the hands of the individual countries. This is also true of the European Union (EU), despite the introduction of the euro. Growth opportunities for value for money products All national health systems have one structural feature in common. Financing the insurance systems, that is, coming up with the resources to provide for the healthcare of the populace, is becoming more and more problematic due to the growing health market. This development is independent of the systems national forms. The financing pressure within the health market is causing the formation of segments with different growth potential. Vigorously growing segments of the global pharmaceuticals market are distinguished by a demand for products with a favorable price-to-performance ratio. Growth opportunities exist here either for products with improved therapeutic performance, i.e., genuine therapeutic innovations, which are protected by patent, or products with proven therapeutic significance at a favorable price, so-called value for money products. A product pipeline of new active ingredients with innovative therapeutic effect requires the investment of billions, accompanied by high risks. For instance, the average development cost of developing a single new substance to market readiness is reportedly US$ million 1). The chance of successful development is only 1 in 6,000 1). The particular growth opportunity for a genuine therapeutic innovation is therefore tied to high and risky investments. Only financially strong pharmaceutical concerns with global operations can come up with the necessary financial resources. Medium-size pharmaceutical companies that conduct research with limited budgets must hope in the final analysis for flukes of luck in their research, or try to link up with larger, well-capitalized competitors. The cost pressure of pharmaceutical research is seen as a major driver of the concentration process in the researchoriented pharmaceutical industry. 1) PharmaData 2001, Bundesverband der pharmazeutischen Industrie BPI 12

15 The particular growth opportunities of value for money products in the pharmaceutical market, on the other hand, are accessible with significantly lower capital outlay and risk. The most important category of such high-growth value for money products in the world is the generics. Generics classic value for money products with global growth potential Generics are medicines that are offered after the expiration of the patents at the same quality but for significantly lower prices. That makes generics classic value for money products, which offer cost-effective solutions for the financing problems of the health and pharmaceutical markets worldwide. Many national markets have regulations promoting generics. In many cases, new governmental regulations for solving national financing problems also favor generics. The structure of the health market and the inherent financing problem are significant drivers of growth for generics. An additional driver for the growth of generics consists in the impending expiration of patents worldwide for active ingredients with strong Estimated sales volume of active ingredients coming off patent in Europe, , in millions of e sales. The global sales volume of products coming off patent from the 20 leading pharmaceutical companies is estimated at well over 50 billion e worldwide by ). For Europe, the sales volume of products coming off patent is estimated at 4 billion e by ). A conspicuous example is the stomach Source: Nomura Equity Research, October 2001 medication Omeprazol, the biggest product in the world in 2000, with sales of around US$ 6.1 billion 3). Omeprazol lost its patent protection already in 1999 in Germany, the first and only country so far in the EU. With sales of 22.6 million e in 2001 in Germany alone, today Omeprazol is already STADA s biggest product (see p. 43). In the years ahead there will be continuing expiration of patent protection in the other countries of the EU, opening up significant additional sales potential for a generics supplier located in Europe, such as STADA (see pp ). 1) IMS Health, June ) Nomura Equity Research, October ) IMS Health, in: Pharm. Ind. 63, no. 9 (2001) 13

16 Markets Market Potential Because of structural growth impulses and continuing patent expirations, generics have become one of the fastest-growing segments in the pharmaceuticals market. In the USA, the largest generics market in the world (US generics sales approx. 7.5 billion US$ annually, +13% growth 1), and in many European markets, generics grew at an over-proportional rate in 2001 in comparison to the national pharmaceuticals markets. Generics in the EU (2001) Market Total pharma Change from Generics Change from Generics market volume previous year market volume previous year market share in e million in % in e million in % in % Germany 17, , France 15, UK 10, , Italy 10, Spain 6, The Netherlands 2, Belgium 2, Austria 1, Denmark 1, Ireland Source: STADA estimate for 2001 at ex-factory prices Market analyses 2) confirm this growth trend for the years to come, independent of the various underlying definitions of generics, which lead to major differences in terms of market size and market share in the individual analyses at the present time. Despite all the differences in detail, the analyses also agree that over-proportionate growth for generics can be expected in Europe, especially in the so-called emerging markets for generics, France, Italy and Spain. In these countries, for historic reasons, the general structural conditions and market climate are not yet entirely friendly toward generics. The changes expected there in the general structural conditions of the national insurance systems will be accompanied by significant growth potential for generics. 1) STADA estimate at ex-factory prices 2) e.g. Nomura Equity Research, October

17 Brands opportunities for profitable sales Branded products offer opportunities for profitable sales in the health market. In the self-medication and wellness fields, brands are not subject to the same financing pressure from the social insurance plans; consumers generally pay for the products in these areas themselves. In these so-called OTC 1) market segments, more attractive prices and thus more attractive margins are possible, if the brand and the sales support are strong enough. The volume of self-medication and its significance in the total market varies greatly in the EU. Germany, which still represents the major focus of STADA s brand activities at present, is by far the most important self-medication market in the EU 2). Self-medication in the EU (2000) Market Self-medication Market share, market self-medication in e million in % Germany 4, UK 2, France 1, Italy 1, Spain Belgium The Netherlands Austria Denmark Ireland Source: AESGP, June 2001 In the prescription market, too, well-established brands can achieve good margins in the European markets, especially in the middle price segment. Many of the governmental cost suppression measures, which are driven by financing pressure, are concentrated on the high-priced, patent-protected original products, and therefore offer established branded products good earnings opportunities. Special pharmaceuticals attractive niche markets Special pharmaceuticals form niche markets, which can be differentiated from the pharmaceuticals market. Depending on the individual character of the respective market or product, special pharmaceuticals often require special sales and marketing strategies. Specific market entry barriers in development or production also distinguish special pharmaceuticals from the market as a whole. As niche markets, special pharmaceuticals can often be more attractive from the perspective of growth or profits than the market as a whole. STADA is concentrating at present on two types of special pharmaceuticals, vaccines and oncologica (pharmaceutical products for the treatment of cancer). 1) OTC = over the counter, the segment of the pharmaceutical market in which consumers pay for the product themselves and are not reimbursed. 2) AESGP, June

18 Markets Market Potential The preventative character of vaccines makes this market segment relatively insensitive to the financing pressure in healthcare, since prevention is recognized to a growing extent in the economy of pharmaceuticals as a cost-reducing strategy. STADA has gained access to this attractive market segment for special pharmaceuticals through cooperative relationships (see p. 49). Oncologica are counted among the special pharmaceuticals, because these products have a vital character for cancer patients. In conjunction with prioritization, there is a greater tendency to save on less vital products. In addition, even generic marketing of oncologica requires definite scientific support (i.e. so-called semi-generic marketing), since at least the initial therapy decision is made in specialized clinics. Within the STADA Group, the subsidiary company cell pharm specializes in this semi-generic marketing (see p. 50). Growth market for biotechnological medications Medications produced by biotechnological means constitute one of the most rapidly growing special segments of the pharmaceutical market. Most of these are medications for vital indications, which despite their therapeutic significance are often not utilized to the medically appropriate extent, because most of them are very high-priced. Even so, analyses even today anticipate a market volume of well over 1 billion e 1) for biopharmaceuticals in Germany alone. In the next few years, annual growth in the double-digit percentages is expected. Biogenerics, i.e., generics of bio-pharmaceutically produced products, are not yet on the market today, because their patent protection is generally still in effect. However, patent expiration is within view for some big biopharmaceuticals. For biogenerics, extraordinarily attractive sales potential can be anticipated, because of the high prices of the original products, the vital indications, and because the market penetration of the products from the initial suppliers is not yet complete. Thanks to a development cooperation, STADA can expect to offer biogenerics starting in 2005/2006 (see pp ). 1) IMS Health in PMS, September

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20 Strategy The STADA Strategy The strategic premises of STADA The corporate strategy STADA. The Health Company. includes two premises: 1. STADA focuses in the global health market on segments with especially strong growth or earnings. Segments with particularly strong growth in the globally growing health market are generally distinguished by a demand for products with a favorable price-to-performance ratio. Products with good growth opportunities here include both genuine therapeutic innovations and especially value for money products products with known and proven therapeutic significance at a favorable price (see p.12). Under the aspect of earnings, segments of the health market with less vigorous growth can also be attractive, such as branded products, as long as specific market mechanisms in these segments allow a favorable relationship of price level to product cost and thus attractive margins (see p. 15). STADA s own product portfolio combines stronggrowth and strong-earnings segments, with the strategic goal of continuous, profit-oriented corporate growth. 2. STADA does not conduct cost-intensive, risky research into active ingredients. The costs of a product pipeline of patent-protected medicines with a continuous output of sufficiently innovative active ingredients representing actual therapeutic progress run into the billions (see p. 12), and, even with such a high commitment of resources, success is not guaranteed. If a company of STADA s size does not choose to hope for chance hits in substance research, the only possible strategic premise is the conscious avoidance of the search for patent-protected substances of its own. The product portfolio thus becomes concentrated on patent-free substances that have already been offered on the market for many years. In the English-speaking markets such products containing patent-free active ingredients are called multi-source products. By concentrating on multi-source products, a company gives itself financial room for growth-oriented action in product development, marketing and sales, as well as in pricing its products. STADA adheres to this strategic premise, and is thus able to position large parts of its own portfolio in the health market as inexpensive value for money products with great opportunities for growth and good earnings. 18

21 The three core segments of STADA In accordance with these two strategic premises, STADA has focused its own product portfolio for years on three core segments: 1. Generics Generics are medicines that are offered after the expiration of the patents at the same quality but at significantly lower prices. In the global health market, generics are regarded as a segment with particular growth potential. The ongoing financing pressure that characterizes this market worldwide offers generics, as typical value for money products, great potential for long-term structural growth (see pp ). Significant additional potential will develop in the next few years from the impending patent expiration of products with strong sales. STADA, as an internationally important supplier of generics, is predestined to continue generating ongoing, profitable growth from these opportunities in the coming years. 2. Branded products for the health market Branded products for the health market represent the second core segment of STADA s business. The focus today in this segment is on multi-source products for self-medication and in the wellness field, especially in the German market. Branded products offer good opportunities for profitable sales (see p. 15). The segment of branded products thus offers attractive possibilities for further increasing the profitability of the STADA Group. In addition to expanding the Group s established brands domestically and internationally by utilizing the Group s existing sales structures, another possibility is to acquire high-margin products that have already been established in the OTC or in the prescription markets. In an effort to expand the international brand business, a letter of intent to purchase the Italian branded product supplier Crinos was issued on March 19, 2002 (see p. 53). 3. Special pharmaceuticals The third core segment of the Group comprises special pharmaceuticals (at present oncologica and vaccines), which require special sales and marketing strategies depending upon the individual character of the respective product or market. Because of their vital or preventive character, the growth potential of these products is disproportionately high in comparison to other multi-source products. With the specialized semi-generic marketing, however, the competitive and pricing pressure tends to be lower. The biogenerics, which STADA already has under development, are expected to give this segment extraordinary growth impulses starting in 2005/2006 (see pp ). 19

22 Strategy The STADA Strategy Additional activities of STADA STADA also conducts business and holds interests outside of the three core segments. Examples are the commercial sales and the parallel imports in the Netherlands, as well as the participating interest in Medistar, a provider of software for doctors. The aim of these activities is to supplement and support the business of the Group in the three core segments. The commercial business, which due to low margins is not considered a core business of the Group, will be restructured in 2002 (see p. 24). Strategic target positions for STADA s operational business The STADA strategy includes clear strategic targets for our operational business. They are: Continuing earnings-oriented growth, Expanding the Group internationally, Focusing on lean, flexible Group structures, Assuming a leadership position in product development, Accelerating growth through appropriate acquisitions, Having an explicit orientation toward customers and sales, Upholding a quality standard with which STADA does justice to its responsibility as the Health Company, and Exercising social competence, especially in dealing with STADA employees. All activities of STADA have the overall goal of consistently increasing the value of the company. Successful strategy increases company value In recent years, the correctness of the STADA strategy has been impressively confirmed. Many strategic target positions have already been attained by STADA, and are thus among the strengths which contribute to the growth of the Group. Thanks to the consistent implementation of the strategy STADA. The Health Company., the company value has also been increased in tremendous measure in recent years. Since the initial public offering in 1997, the market capitalization of STADA has tripled (see p. 32). For that reason, STADA will continue to adhere to the proven and successful corporate strategy in the future. 20

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24 Financial Results Financial Results for the Fiscal Year 2001 Fiscal year 2001 very successful In the fiscal year 2001 for the 6th time in a row STADA has succeeded in increasing its sales and profits significantly. All of the financial figures show that the fiscal year 2001 deserves to be called very successful. Especially gratifying is the fact that the profitability of the group rose significantly again in Sales double again in three years The STADA Group achieved sales of million e in the fiscal year of This represents a growth in sales of +15% from the year before. The organic sales growth, excluding 2001 acquisitions, was +14%. With this figure STADA clearly surpassed the Group sales in e million sales threshold of 1 billion DM, (511.3 million e) as planned. Once again, consolidated sales more than doubled in only 3 years When viewed by segments, the STADA generics represent the largest of the core business areas in 2001, with sales of million e. Their share of consolidated sales is 61% (prior year: 56%). The generics segment grew by +25% in STADA s branded products achieved sales of 83.3 million e (+8% compared to the prior year). Their contribution to Group sales is thus 15% (prior year: 16%). With a sales share of 3% (prior year: 3%), special pharmaceuticals (oncologica and vaccines) represent the third core business area of the STADA Group; with sales of 16 million e, this segment grew by +26% in The significant growth in all three STADA-core segments clearly demonstrates that the growth of the Group has a broad base. Taken together, these three core segments in 2001 increased sales by +21.4%. 22

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26 Financial Results Financial Results for the Fiscal Year 2001 Growth in Group sales by segment Core segments The segment of commercial sales is not one +XX % +21% +25% +8% +26% 6% of the core business fields (see p. 20). The intentional avoidance of low-margin sales (especially in the Dutch market, see pp ) lessened the growth of commercial sales in the Group; the 2001 sales were million e ( 6% compared to the prior year). Accordingly, commercial sales contribute only 20% to STADA Group sales (prior year: 24%). Core segments total Generics Brands Special pharmaceuticals Commercial sales To improve the margin in the commercial business in the Netherlands, which, at 92.3 million e, accounts for by far the largest share of our commercial business, is to be restructured in The volume and share of commercial sales will thus be further reduced (see p. 54). Strong growth in earnings Profit per share in e according to DVFA The generally very satisfying earnings picture for the STADA Group in 2001 is evident in the increase in earnings per share of +21% to 1.38 e, according to DVFA The DVFA/SG result, in which the goodwill values of the companies are amortized over 20 years according to the guidelines of the Schmalenbach Society (SG), increased in 2001 by +23% to 1.24 e per share. The defining variable for measuring profitability at STADA for years has been EBITDA (results from ordinary activities before interest, taxes, depreciation and amortization). The consolidated EBITDA of 74.9 million e in 2001 represented an impressive increase of +38% over the figure for the prior year, adjusted for the one-time expenditures for last year s capital increase. Included therein is extraordinary appreciation in the amount of 4.5 million e, which was retroactively granted by the fiscal authorities for extension of depreciation deadlines for product approvals. The EBITDA figure thus nearly doubled in only two years. Thus, the EBITDA margin rose in 2001 to 13.9% of sales (prior year: 11.6%). 24

27 EBITDA in e million (consolidated) Profit before taxes in e million (consolidated) Net profit in e million (consolidated) ) ) ) ) Excluding extraordinary expenses for capital measures in 2000 of 3,571 thousand e ) Excluding extraordinary expenses for capital measures in 2000 of 3,571 thousand e ) Excluding extraordinary expenses for capital measures in 2000 of 3,571 thousand e and taking into account the German tax rate Profit before taxes (EBT = earnings before taxes) rose in 2001 to 47.8 million e, corresponding to an increase of +43% after extraordinary charges for the capital increase in fiscal The EBT margin in the Group is thus 8.9% of sales in 2001 (prior year: 7.2%). The net profit for 2001, including a one-time back tax payment of 1.7 million e in the 2nd quarter of 2001 for the years , shows an increase of +34% over the value for the year before, after adjusting for the capital increase in the prior year. Without the one-time back tax payment, the net profit for 2001 for the STADA Group increased by fully +43%. Development of cost in the Group In 2001 the cost of materials ratio count including the changes in inventory for 48.2%. That reduces the cost of materials ratio by 1.8 percentage Cost of materials ratio 1) points. A variety of influences contributed to this effect. The size now attained by the Group makes it increasingly possible to take advantage of cost-reducing economies of scale in procurement and production. A further contribution comes from the growing number of generic products with pan- European approval, where there are no national variations in the composition of the product, so that larger-volume lots are possible (see p. 68). The strategic focus on lean and flexible procurement and production structures 50.0% 48.2% (see p. 58) has also contributed to improving the cost situation. Finally, the reduced portion of low margin commercial sales in the Netherlands improves ) Adjusted for changes in inventory the product mix of the group from the material cost standpoint (see pp ). 25

28 Financial Results Financial Results for the Fiscal Year 2001 When the cost of materials ratio is revised to exclude the total commercial business with its atypically low margins, which is not one of the core segments of the Group, the result is a cost of materials ratio of about 34%. Personnel expenses in the Group increased in 2001 by +21% to 90.0 million e (prior year: 74.6 million e). The reason for the greater increase in personnel costs than in sales is explained by the strategically intended, forced buildup of the sales structures in numerous national markets (see pp ). The personnel expenses were thus 16.7% (prior year: 16.0%) in Compared to sales, the other operating expenses increased less proportionately, at +13.7%, reaching million e in 2001 (prior year: million e). These expenses include primarily costs of marketing, general administration, logistics and maintenance, and of development projects. Again in these cost categories, positive economies of scale from the growth of the Group are increasingly evident. The taxation ratio for 2001 is 48.4% (prior year: 43.6%). The taxation ratio shown here is strongly influenced by a one-time back tax payment of 1.7 million e for the years 1995 to 1998 in the 2nd quarter of By far the largest back tax bill came from the requirement by the German tax authorities that the amortization period for drug approvals be retroactively set to 15 years as of If the taxation ratio is adjusted for the one-time back tax payment in the 2nd quarter, this reduces the taxation ratio for the Group to 44.9%. The increasing internationalization will allow STADA to optimize the business structure from the standpoint of taxes, too. Profits from the sale of the company s own stock Pleasant profits from the sale of the company s own stock contributed positively to the increase in other operating income in fiscal 2001 by +56.3%, to 18.3 million e. At the end of 2001 STADA still held 5,070 shares of its own stock. Compared to the prior year, these holdings were reduced by 451,064 shares. Resulting profits from the increase of the share price brought STADA other operating income in the amount of 5.6 million e. About half of this profit was reinvested already in the second half of 2001 on forcing the international buildup of marketing and sales structures. 26

29 Also among the factors contributing to the other operating income were profits arising from profit-sharing arrangements covering follow-up business from the sale of drug approvals. Other operating income also includes write-ups from the aforementioned tax audit in the second quarter of Capital expenditure and depreciation at high levels In 2001 STADA strengthened the competitive and future capabilities of the Group with capital expenditure totaling 56.6 million e (prior year: 39.3 million e). Thus STADA s investments continued unchanged at a high level. At the center of capital expenditure again in 2001 were investments in intangible assets, at 44.1 million e (prior year: 18.0 million e). These were primarily acquisitions of licenses, brands, and approvals for new products. Conspicuous among them was the acquisition on December 28, 2001, of a package of products which included 81 granted approvals and 11 approval Capital expenditures in the Group in e million applications for generics for the US market. The product package, taken over from ESI Lederle, had sales in 2001 of US $ 4.0 million in the US market (see p. 57). In addition, on July 1, 2001, the brand Plastulen (annual sales volume around 2.6 million e) was acquired from American Home Products for the German sales subsidiary NIDDApharm Financial investments Tangible assets Intangible assets With investments of 12.1 million e in tangible assets (prior year: 17.6 million e), STADA further expanded selected production segments in At the Irish location in Clonmel the Group began in 2001 to expand its own production capacity for antibiotics. With a total investment of 2.3 million e (including 0.4 million e in 2001), STADA is moving to accommodate the growing volume of demand for antibiotics in the Group throughout Europe. The construction of new production and packaging facilities at the Bad Vilbel site, including expansion of quality control laboratories, was completed at the beginning of The total investment in this new construction came to 11.5 million e, with 5.4 million e of that amount in the 2001 fiscal year. Additional investments served to improve Group logistics. Construction of the new logistics building of the subsidiary Quattropharma at the Etten-Leur site was completed in 2001, with a final investment of 0.5 million e. At the Laichingen site, construction of a new building for warehousing and commission trade for ALIUD PHARMA was started. Of the total planned investment sum of 3.8 million e, 1.3 million e was invested in

30 Financial Results Financial Results for the Fiscal Year 2001 STADA is also continuing unchanged in pursuing the program of continuous renewal of production technologies and information technology (hardware and software) at all locations. Consolidated depreciation and amortization in e million The high amount of capital expenditure over many years has led again in 2001 to correspondingly high amounts of depreciation in the Group, totaling 20.1 million e (prior year: 14.7 million e). The focus was again on amortization of intangible assets, at 13.5 million e (prior year: 9.0 million e). Non-scheduled depreciation and amortization were carried out where necessary Regarding the volume of depreciation in 2001 it should be considered that as of 2001 STADA amortizes the costs of drug approvals over 15 years in accordance with requirements of the German fiscal authorities that came into effect retroactively as of 1995 (see p. 26). In the German individual financial statements a significantly shorter amortization period had been chosen in the past. Cash flow again increased Rising profits and high depreciation further strengthened the internal financing power of STADA. The gross cash flow in the Group rose again in 2001 by +12.7% to 40.7 million e. That produces cash flow earnings per share according to DVFA of 2.24 e (prior year: 2.21 e). Overview of the consolidated cash flow in e thousand 1/1/01 12/31/01 1/1/00 12/31/00 Cash flow (gross) 40,694 36,104 Cash flow provided by operating activities 42,863 9,263 Cash flow used for investing activities -62,844-61,503 Cash flow provided by financing activities 20,332 74,959 Net cash flow for the period ,054 28

31 The significant increase in the gross cash flow again enlarged STADA s freedom of financial action overall. Gross cash flow in e million Balance sheet structure ready for growth The structure of the STADA balance sheet continues to be characterized by a high equity capital ratio. On the balance sheet reference date December 31, 2001 this figure was 48.7% (prior year: 51.8%). Together with the high gross cash flow from business operations, this capitalization offers STADA every opportunity to take advantage of the growth potential of the markets and to further organic growth through additional acquisitions With the expansion of business volume in the Group, total assets rose again in 2001, reaching million e (+18.2% compared to the prior year s level of million e). Group balance sheet structure in e million Within the fixed assets, the high value of intangible assets reflects the conscious expansive policy of STADA of investing in licenses, brands, and approvals for new products (see the remarks on capital expenditure earlier) Within the current assets, inventories increased by % to million e. Particularly in Germany, inventories were increased for safety reasons to be ready for eventual peaks in demand caused by new 2000 Fixed assets Current assets Equity capital Accruals Liabilities 2001 regulatory rules for the generics area (see p. 50). The international expansion of business in markets where it is customary to allow customers longer payment terms led again in 2001 to an increase of +28.7% in trade receivables, to 82.4 million e (prior year: 64.0 million e). STADA does not regard this as a significant increase in business risk, since the receivables are distributed over many customers. This assessment is confirmed by the valuation adjustment for the Group, which continues to be low at 2.5% (prior year: 0.9%). 29

32 Financial Results Financial Results for the Fiscal Year 2001 The item for cheques, cash, postal bank balances and bank balances primarily contains bank balances that were available on the balance sheet date for financing the takeover of business operations of MOVA Laboratories Inc., Cranbury, New Jersey, USA, on January 1, 2002, which had been agreed to contractually in November 2001 (see p. 55). The liabilities total million e (prior year: million e). The largest single item is the 75.0 million e in 7.5%-bonds due on June 26, 2005, which STADA issued in June 2000 in conjunction with a warrant issue. Transparency in converting to euro and to IAS At the beginning of 2002 STADA changed its company currency to euro. STADA based the choice of this date on the market and on the needs of the company s customers, which in most cases also did not change to the euro until this date because of the late conversion of the social insurance systems in all of the countries of the euro zone. The official consolidated financial statements for December 31, 2001, filed with the commercial register are consequently still stated in German Marks. In order to make the information more transparent, in this annual report all DM amounts are converted at the official conversion rate (1.00 e = DM). Starting in the current fiscal year 2002, STADA has adopted the International Accounting Standards (IAS) in its consolidated accounting, as announced. In accordance with the wishes of many investors, who are increasingly international in their orientation, this replaces the German Commercial Code (Handelsgesetzbuch = HGB), which has been used in the past for the consolidated accounting. STADA has been preparing for the extensive conversion project ever since 2000, in part with the assistance of external consulting firms, in order to be able to present valid historical data according to the new accounting system in the first quarterly report for Internal comparisons of quarterly financial statements for the fiscal year 2001 indicate that there are no significant changes to be expected in the operating results of the enterprise as a result of the conversion to IAS. 30

33 Dividend Dividend/Proposed Profit Appropriation Significant dividend increase proposed The excellent profits that were posted in the course of the year 2001 by STADA Arzneimittel AG have prompted the Executive Board and Supervisory Board to early consideration of the question of raising dividends. In view of Dividend per share of common stock in e the strong growth in profits, the two bodies passed a resolution in principle already in December 2001 to increase the dividend significantly. The Executive Board and the Supervisory Board accordingly propose that the net profit of 12,961, e for STADA Arzneimittel AG be used to pay a dividend of 0.59 e per share of common stock. This represents an ) increase of +20.4% over the dividend of 0.49 e per share of common stock paid for the previous fiscal year ) Proposed dividend This proposal also results in a double-digit percentage dividend increase for the former holders of preferred stock. The dividend which is now being proposed for the common stock is +9.3% higher than the dividend of 0.54 e paid in the previous year for the preferred stock. Total dividend distribution in e million Allowing for the increased number of shares (see p. 34) and the conversion of the preferred stock into common stock, the proposals of the Supervisory Board and the Executive Board result in a total dividend distribution of 11.0 million e, up by +27.9% from the year before In proposing to increase the dividend, the Executive Board and Supervisory Board are continuing the long-term dividend policy of STADA. STADA s shareholders thereby participate in an appropriate form in the success of the enterprise, without depriving the company of resources for additional dynamic growth. 31

34 Stock The STADA Share 2001 a very pleasant year on the stock market for STADA The stock market year 2001 went very well for STADA and STADA s stock. Despite a difficult market environment, STADA s common stock (WKN // ISIN DE ) finished the year 2001 with a price of e, a gain of +66% from the beginning of the year. That meant a year-end 2001 price/earnings ratio according to DVFA (KGV/DVFA) of 28.2 (prior year: 20.5) Stock prices for STADA common and preferred stock in e STADA AG (common stock) STADA AG (preferred stock) The change in the price of STADA stock is thus well above the changes in the DAX, MDAX and NEMAX segment indices of the Deutsche Börse AG again in Compared to the DAX 100 (the 100 largest German corporations listed in official trading), the increase in price of STADA s stock in 2001 ranks in 4th place. 20 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. The owners of STADA preferred stock, which was converted at 1 to 1 in the 4th quarter of 2001, also scored welcome gains. The price at the final listing of the preferred stock on Performance of STADA vs. DAX, MDAX, NEMAX Index 100 = January 1, 2001 STADA AG (common stock) STADA AG (preferred stock) MDAX DAX 30 NEMAX 50 November 2, 2001, was e, +28% higher than the quotation at the beginning of the year. If one compares the year-end price of the common stock with the price of the preferred stock at the beginning of the year (considering the stock conversion in the meantime), the result is a price increase of +63%. The market capitalization of STADA increased 20 in 2001 by +73%, from million e to Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec million e. Contributing factors were the price increases with 65 percentage points, and new stock shares from converted warrants (see the remarks below on the capital structure) with 8 percentage points. With the 32

35 market capitalization attained in December 2001, STADA is in 67th place among the corporations listed in official market trading in Germany, representing an improvement by 26 places over December ). Market capitalization in e million While the ratio of market capitalization to sales was still 0.9 at the end of 2000, at the end of 2001 this ratio had risen to 1.4. This, too, reflects the substantial increase in value of STADA Arzneimittel AG in A milestone: inclusion in the MDAX The decision of the Deutsche Börse AG on June 26, 2001, to include 12/31/00 12/31/01 STADA s common stock in the MDAX market index, which was implemented on July 23, 2001, is one of the outstanding events of the fiscal year 2001 for STADA. STADA had already moved into the circle of candidates for MDAX in 2000, with a strong increase in market capitalization. The MDAX is the market index of the 70 medium-size corporations listed in official trading which immediately follow the 30 DAX stocks on the basis of market capitalization and trading volume. The MDAX and DAX are often combined into the DAX 100, the index of the 100 largest German corporations listed in official trading. Companies listed in the MDAX attract more attention from the public and from institutional investors; a rise in the MDAX index also proves the growing importance of a company on the capital market. Increased trading volume after conversion of the preferred stock to common stock The general technical conditions for STADA s stock have been improved continuously in recent years, in order to increase the volume of trading in STADA stock and thereby give positive stimulation to its price. In 2000, collective custodianship was introduced for the registered restricted common shares, and a 1:10 stock split was carried out for both common and preferred stock. The concluding step in these efforts is the conversion of the former non-voting preferred stock into restricted registered common stock in the fiscal year At the proposal of the Executive Board and the Supervisory Board, in separate shareholders meetings on June 19, 2001, the common shareholders and the preferred shareholders approved the conversion of the 3,350,000 shares of non-voting preferred stock to restricted registered common stock at the ratio 1:1. 1) common stock only 33

36 Stock The STADA Share In conjunction with the planned technical implementation of the resolutions, the 3,350,000 new shares of restricted registered common stock from the conversion of the non-voting preferred stock were admitted for trading with official listing on the stock markets in Frankfurt am Main and Düsseldorf on October 26, 2001, and were integrated into the existing official listing of the restricted registered common stock on November 5, The stock certificates for the preferred stock of STADA AG now represent only the right to exchange the former non-voting preferred stock for restricted registered common stock in the company; the conversion period announced publicly on October 31, 2001, will run through April 2, Trading volume of STADA stock, monthly comparison of 2001 vs (shares) 2,000, ,500,000 1,000, ,000 Source: Advantage Corporate Communication, 2002 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Preferred and common stock, XETRA und FSE, corrected for 1:10 split The goal pursued for the STADA stock with the technical improvements, to increase the volume of trading in STADA stock, was achieved. In 2001 the volume of trading in STADA stock was above that of the corresponding month a year earlier, in some cases very significantly higher. According to statistics from the Deutsche Börse, in December 2001 STADA was in 58th place among the corporations listed in official trading in Germany (December 2000: 107th place 1) ). Adequate market breadth is needed before international institutional investors will make significant investments. The increase in trading volume thus increases the appeal of STADA s stock for this group of investors. 1) common stock only 34

37

38 Stock The STADA Share Capital structure again strengthened in 2001 Capital structure 12/31/ /31/2000 Restricted registered common stock 18,728,990 14,516,670 Non-voting preferred stock 3,350,000 Warrant 97/02 128,768 1) 215,000 1) With the merger of the two classes of stock, and with the exercise of stock options from the warrants issued in 1997, the number of restricted registered common shares, with a calculated book value of 2.60 e each, rose significantly in 2001 to 18,728,990. Warrant 00/15 450,000 1) 450,000 1) 1) After stock split one warrant for every 10 shares In conjunction with the initial public offering, on October 29, 1997, STADA issued 215,000 warrants (WKN // ISIN DE ). The holders of these warrants were originally entitled to buy one share of bearer preferred stock of STADA Arzneimittel AG at the option price of DM Now, after conversion of the preferred stock to common stock, allowing for the 1:10 stock split in 2000, the subsequent capital increase and the euro conversion, the exercise of each individual option leads to the purchase of 10 shares of restricted registered common stock. The exercise price of the option is therefore now e for every 10 shares of common stock. If, in the period through September 30, 2002, the price of STADA s common stock should fall below the price of e per share (threshold price) on two trading days in a row, the option price will be reduced to e per 10 shares of common stock. Because of the positive performance of the price of STADA s stock, some of these warrants were already exercised in the past fiscal year By December 31, 2001 the company had received a total of e 13,757,453 from these purchases of new shares through exercise of the warrants, further strengthening the capital structure of STADA (equity ratio as of 12/31/2001: 48.7%, see p. 29). The number of restricted registered common shares in circulation increased in the course of the year 2001 by 862,320 shares as a result of the exercise of these options. By the time the warrants expire on September 30, 2002, STADA can receive up to 20,543,646 e in additional funds from exercise of the remaining options; in the process, the number of shares of stock can increase by up to 1,287,680 additional restricted registered common shares without further capital measures. Through February 28, 2002, 727 of those options have been exercised for 7,270 registered shares of common stock, bringing STADA e 115,985 in additional liquid assets. 36

39 In addition, the company also has 450,000 warrants in circulation with an expiration date of June 26, 2015 (WKN // ISN DE ), from the warrant bond issued in Taking the stock split into account, the owners of these warrants are entitled to purchase 10 shares of STADA common stock at an option price of e The option price will be reduced to e per 10 shares of registered common stock, if the arithmetic mean of the official daily cash price for registered common stock of the company on the Frankfurt Stock Exchange was lower than e on the twenty trading days preceding the day on which five calendar years have passed since the warrant was issued (June 26, 2005). 100% free float STADA stock is owned at the present time by around 25,000 shareholders (as of Feb. 28, 2002). No single shareholder or shareholder group owns more than 5% of STADA s stock. Accordingly, the so-called free float of STADA s stock continues to be 100%. Deutsche Börse AG has announced plans to take the free float of a stock into account in the index structuring during the course of the year This move can be expected to further increase the weight of STADA in the MDAX. Profit from the sale of the company s own stock At the end of 2001, STADA still held 5,070 shares of its own stock. These shares were acquired on the basis of the KonTraG and after approval by the shareholders meeting, and are used in accordance with the articles of incorporation to obtain liquidity quickly when sold. Compared to the prior year, the holdings of own shares were reduced by 451,064 shares. Realized profits from changes in the stock price brought STADA other operating income of 5.6 million e (see p. 26). STADA gains new institutional investors in 2001 Numerous private investors, including especially pharmacists and doctors, continue to hold a large number of shares of STADA stock in widely distributed portfolios. In conjunction with its inclusion in the MDAX, STADA has intensified its investor relations activities. At international roadshows in London, Edinburgh, Zurich, Frankfurt, Brussels, Milan, Chicago, Denver, Boston and New York, new groups of institutional investors were recruited for STADA. That led to a significant increase in the number of institutional investors in the course of the year 2001; these parties now have a combined share of around 26% in the capital stock of the company (as of February 28, 2002). 37

40 Employees STADA s Employees One of STADA s strengths its employees The committed, skilled, and highly productive employees of STADA are one of the major strengths of the enterprise. STADA s human resource management has the task of consolidating and expanding this strength. The guideline according to the corporate strategy is that STADA assigns, challenges and promotes each person according to his or her individual ability. This means that besides addressing and selecting new employees, additional training and motivation are also focal points of STADA s human resource management. In accordance with STADA s orientation toward flexibility and lean corporate structures, human resource management at STADA is also largely decentralized in its organization. The international subsidiaries in particular act largely autonomously in the human resource area within the framework of the corporate guidelines, in order to respond quickly and incisively to the local needs. STADA creates new jobs The growth of STADA s sales and profits creates new jobs; the number of persons employed at STADA increased significantly again in At the end of 2001 the Group had 1,827 employees, a total of 288 more than at the end of Germany, with 904 employees (prior year: 814), counts for a percentage of 49% of the group s employees (prior year: 53%). 46% of the employees work in sales (prior year: 40%), 33% in production and logistics (prior year: 39%), and 21% in administration and development (prior year: 21%). This breakdown makes it clear that STADA has again vigorously expanded the strong sales orientation of the Group in the last fiscal year. With personnel expenses of 90.0 million e in the Group in 2001, the quota of personnel expenses reached 16.7% (prior year: 16.0%) (see p. 26). The increase in the personnel expense quota reflects the intensive efforts of STADA to further strengthen its sales force. For an expanding enterprise like STADA, approaching and selecting new employees is of critical importance. 38

41 Employees in 2001 Total Sales Production & Administration & logistics development Austria Belgium China Czech Republic Denmark France Germany Ireland Italy The Netherlands Philippines Spain Switzerland Thailand Total Group 1, In personnel marketing, the Group uses the entire spectrum of classic instruments for hiring talent. Visits to specialty training fairs and university marketing are also used. The selection of new employees then takes place through structured individual interviews for technical personnel and managers, group assessments in the trades, and aptitude tests in the training area. Finally, newly recruited employees are integrated into the company through a carefully constructed orientation. Performance pays off at STADA A performance-oriented compensation policy is an important element of motivation at STADA. In addition to basic compensation, STADA therefore uses additional variable forms of compensation wherever possible, so as to take individual performance particularly into account. These are based on goal agreements and performance assessments, which are practiced in many areas of the enterprise. 39

42 Employees STADA s Employees Following this policy, technical experts and managers, as well as sales force employees, have a higher proportion of variable compensation, so as to take the individual performance and the company results even more closely into account. Another provision for rewarding individual performance is the company suggestion system. Employees made numerous suggestions for improvement again in 2001, and these were rewarded with appropriate bonuses. In addition to regular compensation, STADA contributes in Germany within the terms allowed by national laws to the purchase of STADA stock by employees. The level of response to these programs is gratifying. Flexibility of working hours a matter of course at STADA Flexible working hours, adapted equally to the needs of the company and its customers and to the needs of the employee, are an important instrument of personnel policy for STADA, which the company has accommodated with flexitime through the year and need-based work schedule models. Our employees value these models because of the high degree of self-determination of the individual daily working schedule. STADA has thereby gained a large measure of flexibility in personnel assignment planning. In conjunction with the efforts to achieve flexible working schedules, STADA also accommodates requests for part-time work, as long as this can be reconciled with work procedures. In Germany, in addition to the provisions of the labor contract STADA also offers older employees who are not covered by the contract the possibility of utilizing an age-based part-time model. Qualification enhancement and development opportunity for STADA s employees STADA offers its employees prospects. Management positions are filled frequently by internal promotion. The company specifically trains suitable employees for this purpose on the job for technical and managerial duties that will lead to advancement, supported by outside training activities. 40

43 The employees are also regularly offered opportunities for further individual development. In addition to individual activities matched to the profile of the individual employee, the areas of foreign languages and e-business continue to be focal points of training throughout the enterprise. In addition, at the Bad Vilbel location STADA employs trainees for the professions of industrial clerk, pharmaceutical production assistant and energy electronics engineer. The number of traineeship positions is governed by the company s needs, since STADA offers all suitable employees regular jobs after they have completed their training. Transparency an important management principle at STADA Wide-scale transparency about the company s performance in the markets, about important activities of the company, and about all questions relating to employees is one of the essential management principles at STADA. The employees are regularly informed about the company s strategy and market situation and about their particular unit of the enterprise. In Germany all employees also receive a regular employee newspaper, and starting in 2001 also a personnel and social report which is also available to the public and to applicants who are interested in STADA at the web site The elected employee representatives are kept informed about all important events in the company to an even greater extent than required by law and are involved in all decisions relating to employees. This transparency provides the basis for cooperation based on trust. The large number of company agreements on individual issues testify to the spirit of partnership in this cooperation between employees and company management at STADA. 41

44 Sales Sales and Marketing Sales orientation as a central success factor Orientation toward customers and sales is an integral component of STADA s strategy. As a central success factor, it determines the operative position of STADA in the individual markets. The international structure of the STADA group is market-oriented. While strategic management; financial management and controlling; the coordination of development activities, procurement, production and logistics; and the classic staff functions such as legal issues and corporate communication are controlled centrally by the Group administration, the individual sales companies are autonomously responsible for the operational management of business, especially sales and marketing, in their business sector or national market, within the framework of agreed-upon strategic and operational goals. The high priority of sales in the STADA corporate structure can also be seen from the relatively large number of employees in sales (see p. 38). Because of the great importance of sales activities to the success of the Group, in 2001 several sales companies were the focus of the reviews under the KonTraG 1). Multiple international sales expertise further expanded The international sales network of STADA was expanded again in 2001 and at the beginning of 2002, and comprises 25 subsidiaries in 16 countries (see p. 46). This network is supplemented by export activities to 23 additional countries (see pp. 57, 58, 59). The multiple international sales expertise associated with this network continues to count for STADA as one of the most important strengths of the enterprise. Only through a sales presence in a market is it possible to tap the full potential for sales there. This is especially true of the countries with emerging generics markets, such as France, Italy and Spain (see pp. 52, 53, 54 56), where STADA has consciously invested in expanding the sales structure in anticipation of the expected market expansion. All in all, the sales expertise of STADA includes outstanding international know-how in marketing generics under greatly varying structural conditions. This enables STADA to react in a flexible and forward-looking manner to individual national structural changes in the national generics markets. 1) Law on Control and Transparency in Companies 42

45 Broad European presence opens market opportunities The European Union (EU) continues to be the focus of STADA s sales activities. With EU sales of million e, a total of 95% of the Group s sales are made here. The rest of Europe generates an additional 9.7 million e in sales, so that STADA achieves total sales of million e in Europe, or 97% of Group sales. In Germany, the largest national pharmaceuticals market in Europe and at the same time by far the largest national generics market in Europe (see p. 14), STADA also continues to maintain a focal point of sales. Total sales in 2001 were million e in Germany, 52% of Group sales volume (prior year: 51%) (see pp ). The sales network in Europe is directed in particular at the sale of generics in the EU. With a strong sales position in Germany, the top-selling generics market in the EU, and with additional local sales companies in 9 countries of the EU, STADA has a widely developed sales structure for generics in the EU in comparison to the competition, and thus good opportunities to benefit from the growth potential of the national generics markets. Top 5 generics in the Group Active ingredient Indication 2001 sales 2000 sales Change from in e million in e million year before Omeprazol Stomach medicine % Lactulose Laxative % Ranitidin Stomach medicine % Amoxillin Antibiotic % Ibuprofen Painkiller % Top 5 brands in the Group Brand Indication 2001 sales 2000 sales Change from in e million in e million year before Grippostad C Cold medicine % Ladival Sunscreen % Magnetrans forte Magnesium ±0% Kamistad Mouth sore treatment % Hoggar N Sleeping aid % 43

46 Sales Sales and Marketing The expansion of international sales expertise in the branded product field continued in In addition to Germany, sales for branded products were significant, more than 1 million e in Belgium, Italy, Austria and the Netherlands. STADA displayed a significant effort to expand the international brand business by issuing a letter of intent to purchase the Italian branded product supplier Crinos on March 19, 2002 (acquired sales volume will be around 22 million e) (see p. 53). The purchase of the branded product Keforal (with the active ingredient Cefalexim) in February 2002 (see p. 53), which has an annual sales volume of 2.3 million e, for the Italian subsidiary EG will also contribute to the expansion of the segment in the current fiscal year. STADA continues in its intention of expanding the Group s branded product expertise in appropriate projects through acquisitions. The sales structure for the special pharmaceuticals (oncologica and vaccines) is still limited to Germany at the present time. Intensive preparations are being made for international expansion of the special pharmaceuticals sector. In the field of vaccines this is taking place through the present buildup of the brand Eurovax, initially in the German market (see p. 49). In the field of oncologica, STADA is pursuing numerous approvals for oncological substances at the European level (see p. 50). At the same time, the sales platform for the biogenerics, which are expected in 2005/2006, will be created with the planned international expansion of expertise in semigeneric sales in the field of oncologica (see pp ). Expanding sales structure in America and Asia The start of sales in the USA the largest generics market in the world is of special significance for STADA. Following the acquisition of the business operations of the generics supplier MOVA Laboratories at the end of 2001 and the purchase of additional generic products from ESI Lederle, sales activities in the USA started in early STADA is pursuing the sales strategy there of entering the highly competitive US generics market with a small and lean marketing and sales unit, i.e., with limited risks and costs, and expanding this unit through organic growth and the purchase of additional products (see p. 57). The expansion of sales activities in Asia has led to a growth in sales there by +44%, to 10.4 million e. Another contributing factor in 2001 were the acquisitions of 60% of the Philippine sales company Croma Medic (see p. 59) as well as 51% of Health Vision in Hong Kong with access to the Chinese market (see p. 58). Asia in total contributes 2% to Group sales in

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48 Sales Network International Sales Network 1) 2) STADA Sales Companies Belgium Denmark Eurogenerics S.A., Brussels PharmaCoDane Aps, Copenhagen STADA Research & Development GmbH, Bad Vilbel Europe ALIUD PHARMA GmbH & Co. KG, Laichingen cell pharm GmbH, Hanover NIDDApharm GmbH, Bad Vilbel Germany Eurovax GmbH, Bad Vilbel STADA Arzneimittel International GmbH, Bad Vilbel STADA OTC Arzneimittel GmbH, Bad Vilbel STADApharm GmbH, Bad Vilbel France EG Labo Laboratoires EuroGenerics S.A., Paris United Kingdom 51% GenRX Ltd., Warwick STADA Arzneimittel AG, Bad Vilbel Holding Ireland Italy The Netherlands Austria Clonmel Healthcare Ltd., Clonmel EG S.p.A., Milan Centrafarm B.V., Etten-Leur Quatropharma B.V., Etten-Leur Healthypharm B.V., Etten-Leur STADA Arzneimittel Ges.m.b.H., Vienna Spain 74% 3) Ciclum Farma S.A., Madrid Service companies and associated companies Switzerland 50% Helvepharm AG, Frauenfeld Czech Republic ALIUD PHARMA CZ s.r.o., Prague America USA STADA Pharmaceuticals Inc., Cranbury, New Jersey (business operations of MOVA Laboratories) (from Jan. 1, 2002) China 51% 4) Health Vision Enterprise Ltd., Hong Kong STADA Pharmaceuticals (Asia) Ltd., Hong Kong Asia Philippines 60% Croma Medic Ltd., Manila Thailand 60% STADA Asiatic Co. Ltd., Bangkok 1) Unless indicated otherwise, the companies are wholly owned by the STADA Group. 2) In addition, STADA conducts export business in 23 countries. 3) As of the balance sheet date Dec. 31, 2001: 50% (see pp ). 4) consolidated with 50% (see p. 44) 46

49 International sales network Within the global health market, the individual national markets are strongly distinguished by different national conditions in approval procedures, sales, and especially in reimbursement by the respective social insurance systems. As a market-oriented enterprise, sales of the STADA group are therefore broken down entirely according to the particular national market in which the sale was achieved starting with the fiscal year In the past, Group sales earnings were referenced largely to the legal domicile of the particular company in the consolidated group. The figures for the prior year have been adjusted to the new organization. Europe Belgium The STADA sales company Eurogenerics in Belgium managed to increase its sales by an outstanding +54%, to 37.5 million e. With a market share of over 60%, Eurogenerics continues unchanged as the undisputed market leader in the Belgian generics market. Numerous new introductions contributed Sales by region in e million ±% Belgium China Denmark Germany France UK Ireland Italy The Netherlands Austria Philippines Switzerland Spain Thailand Czech Republic Other countries Source: STADA 2001 to the strong growth in sales. The newly introduced fixed prices in Belgium in June 2001 gave business in Belgium new stimuli, which more than compensated for the necessary price adjustments in the product portfolio. With a strong sales force working with doctors, and the cooperative sales arrangement since 1999 with the Belgian wholesaler Omegapharma servicing pharmacies, Eurogenerics is in a very good sales position for continuing to convert the potential of the Belgian generics market into growth. Growth potential is expected from the patent expiration of the active ingredient Omeprazol in the fourth quarter of 2002 with its high sales volume (market volume in Belgium above 60 million e). Eurogenerics expects to be able to introduce a corresponding generic product soon after the expiration of the patent. Denmark PharmaCoDane, the STADA sales company operating in Denmark, contributed 4.3 million e (+2%) to sales of the STADA Group in That provided confirmation in 2001 for the sales level reached in 2000 by PharmaCoDane with rapid growth and many new introductions. New 47

50 Sales Network International Sales Network stimuli for this market are expected from the introduction of a generic drug based on the active ingredient Omeprazol (market volume in Denmark above 25 million e) by PharmaCoDane, anticipated in the 4th quarter of Germany Germany, as the largest health market in the EU, is the key market in Europe. This is especially true of generics and self-medication products, because the volume and the penetration of both segments in Germany are already especially high (see p. 13). With a network of sales companies, each operating in a specific market segment, STADA again succeeded in expanding its market position in Germany in STADA managed to increase its total sales in the German market by +19%, to million e (prior year: million e) 1). Two subsidiaries operate in the STADA core segment of generics; STADApharm (2001 sales: million e) and ALIUD PHARMA (2001 sales: 53.6 million e); they achieved outstanding growth rates again in 2001, +24% and +36%, respectively. According to data from an independent market research institute, STADApharm and ALIUD PHARMA are among the most vigorously growing German pharmaceutical companies. With these figures, STADA has further expanded its position as Number 3 in the German generics market. While STADApharm expanded its field staff again in 2001 to promote the STADA generics onsite in doctors offices and pharmacies, ALIUD PHARMA bases its promotion of its own generic line AL exclusively on a mailing concept. This cost-effective sales structure enables ALIUD PHARMA to offer an intentionally low-priced product range. This brings to the market a clear differentiation in both sales approach and pricing between the two independently operating German generics sales lines of STADA. STADApharm and ALIUD PHARMA were able to introduce numerous new generics again in 2001, thanks to the good product pipeline. Important active ingredients such as Roxithromycin, Ofloxacin, Ciprofloxacin and Loratadin were available for marketing right on schedule, just as their patents expired (see p. 66). These new products contributed 8.5 million e to the Group s generics sales in Germany in ) For the first time without sales from the subsidiary STADA International, Bad Vilbel, which is exclusively active in the export business; the export sales of STADA International are now assigned to the respective countries in which the products come to the market. STADA International achieved sales of 4.5 million e in 2001 (-7% from the year before). 48

51 In February 2002 the possibilities of substitution 1) were expanded by law in Germany. This is intended to enable the pharmacist to play a cost-reducing role in the selection of medicines. The effects of these new rules on the market structures in the German generics market, and thus on the sales and earnings situation of our German generics business, are not yet fully visible. The legal rules for implementation indicate at present that the market structures should not be expected to change in principle. Because of the traditionally characterized strength of sales in the German pharmacy, however, STADA should have every opportunity to be among the winners in such a change. STADA OTC Arzneimittel, which sells classic STADA brands for self-medication and for the wellness field in the German market, achieved sales of 50.8 million e in 2001 (up +2% from the year before). With this sales volume, and in the current environment of a stagnant German selfmedication market 2), STADA OTC Arzneimittel maintained its market position quite well. The largest and most profitable brands in the line were able to expand, with stronger increases in sales (see p. 43). During the fiscal year STADA intentionally concentrated its marketing and sales activities on these leading brands for that purpose. Following this focus, the product range of STADA Medical Care was severely trimmed in the course of 2001 and its sales were integrated into STADA OTC Arzneimittel. Because of the tightening, the sales of this product range dropped all the way from 2.3 million e in 2000 to 0.7 million e in The sales company NIDDApharm also succeeded in expanding its market position in NIDDApharm sales increased by +6% in 2001 to 20.2 million e. Current additions to the product range led to a rearrangement of the operational structures of NIDDApharm at the beginning of The NIDDApharm field service for doctors now concentrates fully on selling the vaccines that are part of the Group s special pharmaceuticals. This part of the product range was expanded at the beginning of the year through licensing agreements with Aventis, and is being presented to the market since that time under the new umbrella brand Eurovax. NIDDApharm also includes branded products, for which the demand is based primarily on doctors prescriptions. This part of the product range was strengthened by the acquisition of the branded product Plastulen N (active ingredients: iron and folic acid) on July 1, 2001 (see p. 27). Since the beginning of 2002 the NIDDApharm branded products have been promoted to doctors by means of a new mailing concept. Sales of both the NIDDApharm brands and the Eurovax vaccines continue to be supported by the pharmacy sales force of STADA OTC Arzneimittel. The special pharmaceuticals in the area of oncology are sold in Germany through the subsidiary cell pharm. For this activity cell pharm makes use of a so-called semi-generic strategy, in which inexpensive patent-free products for the treatment of cancer patients are sold with extensive 1) Substitution (also known as the aut idem rule) = replacement of a medicine prescribed by the doctor with an inexpensive medicine containing the same active substance when it is dispensed by the pharmacist. 2) BAH aktuell 200/

52 Sales Network International Sales Network scientific support to doctors and clinics that specialize in this field. In 2001 cell pharm was able to increase its sales by +28%, to 13.4 million e. A contributing factor was the introduction of the product Epi-Cell (active ingredient Epirubicin) in March 2001, which brought sales of 2.6 million e already in The subsidiary Taxon also handled sales to outside companies for cell pharm in 2001 under medium-term delivery contracts in the area of oncology, thereby achieving sales of 2.3 million e (up +17% from the year before). As before, Taxon has no regular staff of its own; the services are performed by employees of cell pharm. The preparations for the internationalization of cell pharm progressed according to plan in Numerous licensing applications for cell pharm products have been filed throughout Europe or are in preparation. With these oncological products, cell pharm should be expanded by 2005 in cooperation with the respective national Group companies into a Europe-wide sales platform specializing in Group products with a semi-generic marketing strategy, and thus be ready as a distribution line for the biogenerics which are expected then (see pp ). The various German sales companies are supported by extensive activities across sales lines in the areas of telemarketing and e-business. These include, for example, cooperation agreements with various suppliers of software for doctors. At present, more than 40,000 doctors offices in Germany can use their respective software systems to easily prescribe products stemming from STADA sales companies. In one of the cooperation partners, Medistar Praxiscomputer GmbH in Hanover (one of the largest suppliers of doctors software in Germany), STADA has held a minority interest since All of the products of the Group are marketed in Germany exclusively through pharmacies. With approx. 67 million packages sold in 2001 (according to data provided by an independent market research firm), STADA ranks 4th by unit sales in this segment. In 2001 STADA took legal action to prohibit efforts, which disregard existing German laws, to offer STADA products in Germany by mail order. However, STADA is attentively anticipating possible changes by e-business, EU regulations or national law-making in the German market structure and especially on the established distribution channels for pharmaceuticals. It is still too early to assess the nature and extent of the changes precisely. STADA is confident, however, that it will be able to adapt in time to possible new forms of distribution whenever that time arises. 50

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54 Sales Network International Sales Network France The French subsidiary EG Labo increased its sales in 2001 by +6% to 11.5 million e. Sales of the product segment of INN generics started in 2000 (generics which are sold under the international name of their active ingredient with the addition of the company s designation) increased by +225% to 9.3 million e; the INN generics of EG Labo, which by now number 43, already contributed 81% to the company s 2001 sales. The original product segment of branded generics (generics which are sold under their own brand name) was reduced to only 0.6 million e in 2001 through sell-offs and curtailment of sales, according to plan. In 2002, the sales of EG Labo will be generated to a great extent by INN generics. The French subsidiary EG Labo thereby successfully completed the conversion of its product portfolio, which was initiated in view of the changing national market structures. United Kingdom STADA achieved sales in the UK of 10.3 million e (prior year: 11.3 million e) with generics from the Group portfolio, through export activities of the subsidiaries STADA International and Clonmel Healthcare. Both companies limit themselves to those products with which the local sales partners in the UK can achieve adequate margins. The operational start of the joint venture agreed to in 2000 with the British wholesaler Dowelhurst 1) for marketing generics in the UK, GenRX, was postponed again in the fiscal year 2001 by agreement of both partners. The deciding factor was the strongly fluctuating price situation for generics. Profitability of the business did not appear assured with the envisioned product portfolio in the UK. In view of the low local level of prices for generics, STADA will probably concentrate again in 2002 in the UK on the successful sales channel of selective export activities. Ireland The sales of 10.9 million e achieved in the Irish generics market by the local subsidiary Clonmel Healthcare represents an increase of +16% over the year before. Clonmel thus continues to be the leader in the Irish generics market. A special stimulus for growth is expected in 2002 from the patent expiration of the active ingredient Omeprazol expected in the second quarter, which sells extremely well also in Ireland (sales volume in Ireland above 25 million e). Clonmel expects to introduce an Omeprazol-generic during the course of the same quarter. 1) STADA s share: 51% 52

55 Generics exports by Clonmel Healthcare to the USA were slightly higher, yielding 7.2 million e (+5% compared to the prior year). There was a slight decline in the export activities 1) of Clonmel Healthcare, so that the company achieved total sales of 27.5 million e (+2% compared to the prior year). Thus the significant increase in sales achieved after the acquisition of Clonmel Healthcare in 2000 was confirmed on the whole in Italy In Italy, a country considered to have an emerging market for generics with great potential for growth (see p. 14), the local STADA sales company, EG, has made great progress. Just two years after beginning operations, it has now passed the threshold of operational profitability. Sales by EG in Italy were increased in 2001 by an outstanding +293% to 13.1 million e. Of that amount, sales were already 9.1 million e (prior year: 1.6 million e) in the local generics business, which is still in the build-up stage. The brand segment, which comprises primarily OTC products acquired in 1999, achieved sales of 4.0 million e (prior year: 1.7 million e). Combining the promotion of generics and brands in the Italian pharmacy has proven to be successful for both segments of EG. This strategy will be supported by the purchase of the brand-name product Keforal (active agent Cefalexim), with a sales volume of 2.3 million e annually for EG as of February On March 19, 2002, STADA issued a letter of intent with the current private owners to purchase the marketing and sales activities of the Italian pharmaceuticals company Crinos Spa. The acquired sales volume will be around 22 million e. Once the contract of sales has been completed, STADA will take over the marketing and sales operations, drug approvals, as well as all trademarks. Research and development, all patent rights and production will continue with the current ownership. Under the agreement STADA secured the option to assure the future supply of Crinos products from the current owners on a manufacturing contract basis. Crinos presently sells 23 branded products in Italy that span various types of indications. Two of the products are under patent for several years to come, one of which is protected until 2007 Proclitide (active ingredient: Defibrotide), an antithrombotic and vasoprotective product and Crinos largest product with sales of 7.5 million e. In the future, Crinos will continue to operate independently in the market. The purchase of Crinos strengthens STADA s international branded product business, and is thus especially attractive from the aspect of profits. 1) Primarily exports to Great Britain (see p. 52) and USA (see p. 57) 53

56 Sales Network International Sales Network The Netherlands After Germany, the Netherlands is the second largest national market segment for STADA. The Group operates in the Netherlands with three specialized sales companies. The sales company Centrafarm focuses on the sale of generics and parallel imports for the Dutch prescription market. Parallel imports are branded medicines imported from a different national market of the EU with lower price levels (source country), and are sold on the basis of a separate national approval held by the importer in price competition with the national branded product. In the Netherlands, pharmacists can substitute with generics as well as parallel imports; that is, they can be dispensed in place of prescribed original products with the same active agent. This market is characterized by far-reaching substitution by the pharmacist, who thereby decisively determines the demand for both generics and parallel imports. The sales company Quattropharma operates a classic wholesale business in the Netherlands, in order to promote the sales of Centrafarm products with the pharmacies through package offerings typical for this market. The Dutch OTC activities of STADA are packaged in the sales company Healthypharm. The three Dutch sales companies, which are consolidated together as a sub-group, achieved total sales to outsiders in 2001 of million e ( 3% compared to the prior year). This sales performance is characterized by the intentional avoidance of low-margin business, especially in the commercial area. As the commercial businesses in the Netherlands (with a sales volume of 92.5 million e) in their current structure are unlikely to earn the sort of margins shown by the other segments in the Group for the foreseeable future, these businesses will be restructured with the aim of improving the margins in In this process, cooperation with local wholesalers will also be considered. Consequently, the volume and share of commercial sales will be reduced in the Netherlands and, as a result, also in the Group. The generics business in the Netherlands may be stimulated in 2002 by the expected expiration of patents for strongly selling substances. The patent on Omeprazol (sales of over 190 million e in the Netherlands) is due to expire there in the fourth quarter of Centrafarm expects to be able to launch an Omeprazol generic in the Netherlands still in the same quarter. Austria In Austria, Group sales rose by an encouraging +38% to 4.0 million e, of which generic drug sales accounted for 2.5 million e (+43% compared to the prior year) and branded drug sales 1.3 million e (+29% compared to the prior year). 54

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58 Sales Network International Sales Network Spain Ciclum Farma increased its sales slightly in 2001, to around 1.6 million e (prior year: 1.5 million e). This company, founded in 1999, sells in Spain a product package of branded generics, which are products with patent-free active ingredients sold under their own brand name. In accordance with STADA s share in the company in 2001, Ciclum Farma is represented at the 50% level in the STADA consolidated financial statements for Per January 1, 2002, STADA increased its ownership of Ciclum Farma to 74%, so that in 2002 Ciclum Farma will be included accordingly in the consolidated statements. In the course of the change in the ownership structure of Ciclum Farma, the company Grünenthal GmbH, Aachen, Germany acquired the remaining 26% of the shares. Grünenthal is already present on the Spanish market with two subsidiaries and contributes therefore additional local market expertise to Ciclum Farma. A financial investor was the former owner of the shares newly acquired by STADA and Grünenthal. Preserving the sales structure of Ciclum Farma is a deliberate investment for STADA, in view of the possibly outstanding growth potential for generics. Spain is regarded as an emerging market for generics, in which the present low penetration of generics should increase sharply in the next few years, if the state push for the generics market (which has long been under discussion) is implemented (see p. 14). Ciclum Farma is well prepared for such structural growth stimuli for the Spanish generics market. European markets outside of the EU Switzerland The Swiss sales company Helvepharm, which is 50% owned by STADA and can therefore be consolidated at the 50% level, achieved sales of 1.4 million e (+7% compared to the prior year). The local wholesaler Zur Rose owns the remaining shares. Moreover, additional sales in the amount of 1.5 million e were achieved by STADA, one reason being follow-up orders after approval sales. Czech Republic In the Czech Republic the local STADA sales company ALIUD PHARMA CZ was successful in defending its market position. The sales of 4.9 million e represent growth of +3%. 56

59 Other European markets Through export activities 1), in some cases using their own local sales offices, STADA and STADA sales companies in Bosnia-Herzegovina, Bulgaria, Estonia, Finland, Lithuania, Luxemburg, Malta, Norway, Poland, Romania, Russia, Sweden, Slovakia, and the Ukraine were able to post sales of 3.2 million e (prior year: 2.3 million e). America USA In 2001, STADA generated sales of 7.2 million e (see p. 53) in the USA through the export activities of its Irish subsidiary Clonmel. Since January 1, 2002, STADA is operationally represented by its own sales company in the USA, largest generics market in the world. In November 2001, the contract was concluded for the purchase of the business operations of the US generics supplier MOVA Laboratories Inc., in Cranbury, New Jersey, effective January 1, Under the terms of the acquisition STADA took over the approvals for generic products in the USA (known as ANDAs), as well as MOVA s sales in the USA, which came to 26.0 million US$ in The acquired product line consists of 15 generics in various areas of indication and one OTC brand product. STADA also acquired from MOVA: five development projects for additional US generic approvals; 12 additional ANDAs, which were not being marketed at the time of the takeover; and all of the documents and contracts with customers and suppliers that are necessary for business operations. With this acquisition STADA has created a lean marketing and sales unit for generics and inexpensive branded products in the USA. This will make it possible to sell generics from STADA s own product pipeline in the USA in the medium-term future (see p. 70). On December 28, 2001, STADA purchased a package of generic products with a sales volume of 4.0 million US$ from ESI Lederle, for integration into this sales unit. The transaction involved a product package with 81 ANDAs, along with running approval applications for 11 additional generic products from various areas of indications. STADA expects sales of around 38 million e (over 33 million US$) from the newly established US business in 2002, and will also strive to expand US business through acquisition of additional products. 1) Export activities are normally handled through the subsidiary STADA International, located in Bad Vilbel (see p. 48). 57

60 Sales Network International Sales Network Other American markets In various national markets in the Americas (Brazil, Surinam, the Dutch Antilles), STADA and STADA sales companies achieved sales totaling 0.2 million e through export activities 1) in 2001 ( 6% compared to the prior year). Even if expanding business in Latin America is not a focal point of STADA s strategy at present, it is conceivable that sales activities could be expanded there if the general conditions were favorable (for example a joint venture with an experienced local partner, or suitable acquisition opportunities). Asia China STADA Asia, headquartered in Hong Kong, coordinates the STADA activities in the Asian market. In addition, STADA Asia is active in local business in the Chinese special economic zone of Hong Kong, where it achieved sales of 1.5 million e 2) (+8% compared to the prior year). As of January 1, 2001, STADA contractually acquired 51% of the shares of Health Vision Enterprise Ltd., based in Hong Kong. The management of Health Vision continues to hold a 49% interest in the company. Health Vision is a specialist in the licensing and marketing of pharmaceuticals from small and medium-sized European pharmaceuticals companies in China. Health Vision will also take over the marketing of STADA products in China in the future. Health Vision achieved sales of 8.7 million e in As it was intended and contractually agreed that the current management team should be involved as an equal partner in the operational management of Health Vision, STADA has only consolidated 50% of Health Vision. Additionally, the structure of the acquisition, and thus the time needed for the share transfer, brought the result that STADA consolidates in 2001 only sales of 0.4 million e. 1) Export activities are normally handled through the subsidiary STADA International, located in Bad Vilbel (see p. 48). 2) Presently export sales to other Asian countries are not included; these are reported separately (see p. 48). 58

61 The Philippines Effective January 1, 2001, STADA purchased 60% of the shares of Croma Medic Inc. in the Philippines. The former management continues to hold a 40% interest in Croma Medic. Croma Medic achieved sales of 3.1 million e in 2001 with the sale of pharmaceutical products in the Philippines. Croma Medic will also take over the local sale of STADA products in the future. The basis for this is the strong sales orientation of Croma Medic, which has 70% of its almost 100 employees working in field service in the Philippines. Thailand STADA Asiatic, the local Thai sales company, was able to post sales of 4.0 million e in Thailand ( 5% compared to the prior year). The decline is due to the weak economic situation in Thailand. Other Asian sales activities STADA and STADA sales companies achieved 1.4 million e in additional sales in 2001 ( 13% compared to the prior year) in the Asian countries Korea, Malaysia, Singapore, Taiwan, and Vietnam through export activities 1). STADA will continue to actively pursue expansion options in additional national markets in Asia. Sales activities in the rest of the world STADA and STADA sales companies achieved 0.1 million e in additional sales in 2001 in Egypt through export activities 1). 1) Export activities are normally handled through the subsidiary STADA International, located in Bad Vilbel (see p. 48), and as far as Asia is concerned, by STADA Asia, located in Hong Kong. 59

62 Production Pharmaceutical Production Networking and flexibility create cost advantages Quality-oriented work, networking, and flexibility in the value chain of the Group s products are STADA s maxims for strategic action for every step in the production of pharmaceuticals, from procurement of the raw materials to production of the pharmaceutical dosage forms to packaging. STADA s aim with this strategy is to utilize the intensive competition in the global raw materials market and the international overcapacities in pharmaceuticals manufacturing to optimize its own cost structure in pharmaceutical production. With a strategy of this sort, new products from the Group and an increasing demand for established products, as the company grows, can be integrated cost-efficiently into the production network. This enables STADA to realize cost-reducing influences from the growth of the Group in its production. Globally oriented procurement In this strategy, STADA intentionally avoids producing raw materials, active ingredients or process materials itself. Instead STADA uses a globally oriented procurement system to buy these substances, which it needs for its own pharmaceutical production, from appropriate special suppliers. This ensures favorable acquisition costs together with reliable quality. STADA is flexible in its handling not only of the selection of procurement sources, but also of the scheduling commitment to the respective source of raw materials. Depending on the market situation for the substance to be acquired, either longer-term contracts for delivery are made or current market situations are exploited by means of bidding procedures in order to realize cost advantages for STADA. This vertical flexibility in procurement clearly distinguishes STADA from some of its competitors in the generics market, which pursue vertical integration with production sites of their own for raw and source materials. STADA considers the vertical flexibility it pursues in its own group to be more cost-effective. Furthermore, its flexible procurement and production structures enable it better to integrate the volume increases expected as a result of the Group s growth into the Group s logistics. 60

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64 Production Pharmaceutical Production With the numerous product developments of the Group in the field of generics as well, cooperation arrangements with raw material suppliers specializing in the particular active substance are clearly more advantageous than setting up and maintaining the company s own capacities for raw materials and active ingredients. Because STADA does not produce active ingredients or chemicals on its own, STADA also does not have any of the operating and emission risks that are typically associated with such production facilities. Production with a make-or-buy orientation Quality, flexibility, and cost optimization are also STADA s maxims of action in the further steps of pharmaceutical production of the Group s products. The sites in Bad Vilbel, Clonmel, and Etten-Leur remain unchanged in their orientation toward the production and packaging of standard forms of medications, such as tablets, capsules, liquids and ointments or creams, and cover about 40% of the Group s needs. The remaining production and packaging capacities are provided by a network of around 90 international contract manufacturers. This contract production takes place in accordance with the drug approvals granted to STADA, according to STADA formulas, and under the control of STADA quality management. Technically complex forms of medications such as sterile injectibles and vaccines are not the only products where specialized contract manufacturers often can offer better quality at significantly lower costs than the company s own production. Thanks to STADA s intensive networking with contract manufacturers, make-or-buy decisions can also be made or reviewed regularly in the case of standard products. Thus STADA s strategy of vertical flexibility also ensures cost optimization in the areas where the company does its own manufacturing. Wherever possible, the contract manufacturers also assume part of the market risk by means of price adjustment clauses. 62

65 Significant drop in the cost of materials ratio in 2001 The successful results of the flexible, cost-oriented production strategy can be recognized from various statistics. Thus, the cost of materials ratio including changes in inventories dropped in 2001, from 50.0% in 2000 to 48.2% in 2001 (see p. 25). In particular, contributing factors include the strategic focus on lean and flexible procurement and production structures, in addition to a product mix producing better margins and cost-reducing effects of the Group s growth. In the area of procurement and production alone, 5.1 million e were saved in 2001 compared to the former standard. When the cost of materials ratio is revised to exclude commercial business with its atypically low margins (see p. 26), which is not one of the core segments of the Group, the result is a cost of materials ratio of about 34% (see p. 26). According to external cost comparisons, with this STADA still counts itself with this ratio as one of the cost leaders among comparable western European competitors. But STADA also stands up to cost comparisons with eastern European or Asian competitors, since STADA s strategy of vertical flexibility allows local cost advantages to be passed along quickly from local suppliers to STADA. Expansion of strategically important production segments When implementing its production strategy, STADA pays close attention to preserving its own freedom to act. If the volume of contract production in one production segment reaches a critical level, STADA decides whether to build up its own capacities. In this way STADA further extended select, strategically important production segments again in At the Irish location in Clonmel, the Group began to expand its production capacity for antibiotics in With an investment totaling 2.3 million e (0.4 million e of that amount in 2001), STADA is following the growing volume demand Europe-wide in the Group for antibiotics. The choice of Ireland as the place for the investment was obvious because of the on-site expertise and aspects of taxation as well. The construction of new production and packaging capacities at the Bad Vilbel site, including expanding the quality control laboratories, was completed at the beginning of The total investment for this new construction came to 11.5 million e, with 5.4 million e of that amount in the fiscal year Finally STADA is also continuing in persuing the programme of continuous renewal of production technologies at all locations. 63

66 Production Pharmaceutical Production Quality and product reliability strategically important for STADA Being the Health Company, the commitment to quality is self-evident for STADA. STADA bears this responsibility with respect to patients, members of the healing professions, and everyone who relies on the products and services of the Group. STADA has therefore explicitly formulated the statement that all products and activities of the STADA Group must always be of appropriate quality in its corporate strategy. STADA s Quality Management, a staff department connected directly to the Executive Board of the Group, uses regular, comprehensive audits in its own production facilities, as well as those of suppliers and contract producers, to ensure the quality demanded by STADA throughout the entire procurement and production network of the Group. For environmentally appropriate production, STADA upholds the rules of the Association of the German Chemical Industry (VCI). One important part in the quality of medicines is estimating the risk of newly occurring, formerly unknown side effects of an active substance. This risk continues to be slight for most STADA products, since only substances that have long been known and researched are generally used. Of course, STADA has nevertheless also implemented all of the usual graduated plan procedures for determining or recognizing such risks of medicines in its business operations throughout the Group. For the non-drugs in the Group s product range, i.e., for medical products, diagnostics, cosmetics and nutritional supplements, STADA s quality management system meets the usual ISO standards and has been certified according to EN ISO 9001/2000, EN ISO 13485/2000 and EN 46001/1996. Overall, STADA bases its quality policy Group-wide on criteria extending beyond the particularly strict requirements of law for medicines and health care products. In so doing, STADA is taking into account the strategic importance of quality and product reliability in the health market as best as it can. 64

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68 Product Development Product Development Substantial expenditures for new products A peak position in product development is one of the strategic goals of STADA. An extensive selection of products attuned to the market requires a strong position in the development field. This is especially true of the core segment of generics. The introduction of new generics near the day of patent expiration is a critical prerequisite in all national markets, in order to stand out among the competition to the customers namely, the patients, doctors, and pharmacists. Thus, STADA concentrates its development activities on: Developing new generics right on time as the patent on the particular substance expires, Expanding the existing product portfolio with additional products or administration forms, Optimizing established products with the goal of lower costs or better application possibilities, and Internationalizing nationally successful products 1). Costs and investments for new products in e million 47.9 For years, STADA has made substantial resources available for its effort toward a peak position in product development. The total amount of investments and costs for new products in 2001 was 47.9 million e, up 133% from the year before. Successes in product development Investments Costs STADA achieved visible successes in product development once more in 2001, thus again functionally fulfilling the company s strategic standard of a peak position in this area. Again in 2001, no fewer than 209 new products in all could be made available to the various national sales companies for marketing (prior year: 193). Numerous new generics were introduced again in 2001 precisely when their patents expired. For example, in the Group s most important generics market, Germany, it was possible to introduce the generics, amongst others, with the active ingredients Roxythromycin, Loratidin, Ofloxacin, Ciprofloxacin on the days the respective patents expired, through the local STADA sales company 1) For example, oncologica of the German sales company cell pharm; see p

69 STADApharm. With the new generics for these 4 active ingredients alone the STADA Group 1) achieved sales of 8.6 million e in In all, the STADA Group made 32% of its generics sales in 2001 with products that were introduced in the last three years ( ). This is a clear indication of the importance of successful product development, especially in the core segment of generics. In addition, STADA again captured the leading position in European approvals of generics in The European approval agency EMEA lists a total of 486 2) generics approvals granted to STADA by the end of 2001 in connection with the European licensing procedure 3) again more than for any other competitor. Extensive STADA know-how in the development of generic products. STADA is optimistic that the peak position attained in product development, especially of generics, will be long lasting. This is attested not only by the constancy of the good development results in recent years, but also by the extensive know-how STADA exhibits in the development of generics. For example, in recent years STADA has built up extensive expertise in patent law. The patent process for pharmaceutical substances varies not only worldwide, but also from country to country in the EU. In the EU the actual patent period can still be extended by means of protection certificates (known as SPCs), with an effective period that varies by country. With the lawsuits, large pharmaceutical groups that conduct research are more and more systematically attempting to prolong their own industrial property rights past their expiration. This does not call into question the quality of the generics. In suits pending against STADA (including among others those relating to Omeprazol, Felodipin, and the cell pharm offering of Epirubicin), court decisions so far have generally been favorable to STADA. Until the final deciding court reaches its decision, STADA is nevertheless cautious and constantly sets aside provisions for the disputed products as appropriate to the sales of these products. In the development of generic products, early identification of the products to be developed is important. STADA regularly examines the sales potential of active ingredients that are still under patent protection, and where the potential is attractive begins developing generics several years in advance. Since the permissibility of development activities prior to patent expiration under patent law varies greatly among countries, STADA has established a network of international development partners. The STADA corporate strategy of favoring flexibility and lean structures 1) In the meantime the second German sales line ALIUD PHARMA now also sells generics of these active ingredients. 2) Internal online research on the Internet as of February 4, ) Known as mutual recognition procedures (MR procedures). Such MR procedures are an especially demanding route to licensing, but offer significant time and cost advantages (see p. 68). 67

70 Product Development Product Development is thus also implemented in the area of product development. The ability to establish and control such a network of international development partners and at the same time achieve results precisely on time is a central success factor for STADA s product development. International action in development of generics is critical to success, and not only in choosing the right development location and the right development partner. An international orientation in organizing the approval documentation and the approval procedure is also of decisive importance for rapid and inexpensive approvals of generics. In the approval process the responsible authorities demand proof of comparable therapeutic effect (bioequivalence) of the generic to the patented product, by means of biostudies. STADA commands considerable expertise in designing the biostudies in such a way that as many different national requirements as possible can be fulfilled simultaneously or with clearly defined additional expense. STADA has mastered the European approval route for generics. After a first national approval has been obtained in one country of the EU, an EU-wide extension of this approval is possible within certain defined deadlines through the mutual recognition (MR) procedure. In many cases this is the most favorable route for approvals, when aspects of time and cost are considered, if EU-wide marketing is planned. Furthermore, this is the only type of Europe-wide approval that guarantees a uniform product throughout the EU over the entire life cycle, since in the case of an MR approval national authorities cannot impose national requirements for changes to the formula after the product has been brought to market. In such MR procedures, the content of the approval documentation is normally subject to the highest demands, so that conducting a Europe-wide procedure requires especially pronounced expertise in generic product development. Based on the total number of approvals obtained through this MR procedure, STADA has demonstrably been the most successful of all the suppliers of generics for years (see p. 67). The content of approval documentation accepted by the EU constitutes a good foundation for also conducting an approval procedure for a generic in the USA. However, for a US approval 68

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72 Product Development Product Development specific requirements of the US authorities still necessitate extensive changes and additions to the EU approval documents at present. Consequently it will take some years still until the new sales activities in the USA (see p. 57) can be supported by approvals from STADA development. Until then, STADA will build up the product pipeline for business in the US through purchases from outside. In view of the need for extensive know-how even in the approval procedure for generics, a market has developed for documentation and approvals for generics, since smaller suppliers in particular are often unable to make the investment needed for timely or international approvals for a generic. Again in 2001, STADA sold numerous multiple approvals to competitors, thereby realizing significant sales in the amount of 1.6 million e (prior year: 1.7 million e) and partially refinancing its own development activities. STADA s development pipeline: well filled Numerous substances with strong sales will come off patent in the individual national markets of the EU in the next few years (see p. 13). In the four largest markets of the EU (Germany, France, United Kingdom, and Italy), sales of the biggest substances to come off patent are around 4.5 billion e (see table on p. 71). STADA has new generics in the process of development or an approval procedure for all these substances, as well as many others. This means that the respective national STADA sales companies can continue to expect new generics for important substances in the future, just as or soon after the national patents expire. This also includes the approvals anticipated in 2002 for the substance Omeprazol, which has particularly vigorous sales in Belgium, Denmark, the Netherlands, and Ireland (see p. 13). STADA biogenerics from 2005/2006 onward A special segment in the health market with strong growth prospects are the medicines produced through biotechnology (biopharmaceuticals). Great market potential is also expected for the first generics of these products, the so-called biogenerics (see p. 16). STADA also aims to achieve a peak position in the product development of biogenerics. 70

73 Sales and expected patent expirations 1) of important active ingredients in the 4 largest markets of the EU Germany France Great Britain Italiy Total Substance e million quarter/year e million quarter/year e million quarter/year e million quarter/year e million Omeprazol 315 2) expired 440 Q II/ Q IV/ Q I/ Simvastatin 155 Q II/ Q IVQ II/ Q II/ Q II/ Amlodipin Fluticasonpropionate Salmeterol Lansoprazol Pravastatin Ciprofloxacin Ramipril 150 Q I/ Q I/ Q IV/ Q IV/ Q III/ ) expired 175 Q I/ Q III/ Q I/ Q IV/ Q IV/ Q III/ Q IV/ Q I/ Q I/ Q I/ Q IV/ Q IV/ Q III/ Q I/ Q I/ Q II/ Q I/ Q I/ Q IV/ Q I/ Q I/ Q I/ Source: STADA estimate for 2001 sales at ex factory prices 1) Due to a patent or SPC (see p. 67) 2) Patent expiration April 3, 1999, share of generics market 12/2001: above 50% of sales 3) Patent expiration August 21, 2001, share of generics market 12/2001: above 60% of sales The requirements for developing biogenerics are extraordinarily high. The production of biogenerics by living cells demands complex development and production processes and extensive approval requirements. Broad experience in biotechnology, which has to cover not only the development questions but also the later production, is an indispensable prerequisite. The development of biogenerics consequently also requires significantly higher investments than the development of conventional generics. STADA was able to make the necessary development expertise available at the beginning of the reporting year 2001, through a cooperation arrangement with the Dutch DSM Group, which is experienced in biotechnology. Under the agreements, BIOGENERICS Arzneimittel AG 1), founded by STADA in the spring of 2000, commissioned DSM Biologics to develop biogenerics. When the development is completed, BIOGENERICS Arzneimittel AG will commission the STADA subsidiary STADA R&D to conduct drug licensing procedures for these biogenerics. First contacts with the responsible European licensing agency EMEA to coordinate the profiles for the necessary biostudies have now already been initiated. After the drug approvals are granted, 1) Change of name to BIOCEUTICALS AG intended 71

74 Product Development Product Development STADA or STADA subsidiaries will have the rights to worldwide marketing of the biogenerics that have been developed. BIOGENERICS Arzneimittel AG will receive licensing royalties for them based on sales. The biotechnological production of these products will be handled by DSM Biologics. To finance the development and approval activities, at the beginning of 2001 BIOGENERICS Arzneimittel AG increased its capital through a private placement with private venture capitalists. After which, STADA still owns 10% of the stock in this company. BIOGENERICS Arzneimittel AG has a budget of 65 million e available to finance the development of biogenerics. STADA has the option to buy back all of the shares of BIOGENERICS Arzneimittel AG starting in The option is conditioned on market success and return on investment. The first development activities under the cooperation agreement began during Currently under work are the active ingredients Filgrastim, Erythropoetin and Interferon β. The initial Sales and growth of biopharmaceuticals in the EU Biopharmaceuticals Sales in e million Growth 2001 from year before Erythropoetin % Filgrastim % Interferon β % Source: STADA estimate at ex-factory prices development stages for the active ingredient Interferon α have also been successful. However, as the market is switching more quickly than expected to a new dosage form with sustained release of the active ingredient, the cooperation partners have temporarily suspended the further development of this active ingredient, as the new dosage form will probably be protected by patent for some time and initially will therefore not be accessible for a biogeneric. Nonetheless, it will not be necessary to adjust the sales forecast for the overall project as the growth achieved by the other three active ingredients is well above expectations and their total sales volume has now reached about 1.5 billion e in the EU. The sales volume for biogenerics attainable by STADA starting in 2005/2006 continues to be estimated at over 100 million e per year for the Group after the third full year of marketing. The prospects for biogenerics available to the Group thanks to the 2001 development cooperation thus solidifies STADA s outlook for the future. 72

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76 2002 and Outlook Fiscal Year 2002 and Outlook STADA has already made progress in the current fiscal year 2002 in expanding the strategic and operational position of the enterprise. This includes especially: the takeover of the business operations of MOVA Laboratories in the USA (see p. 57) the increase in the shares of the Spanish company Ciclum Farma to 74% (see pp ) the new sales structures of the German sales company NIDDApharm (see p. 49) the expansion of the German vaccine business with license products and under the brand name Eurovax (see p. 49) the purchase of the brand product Keforal (active agent Cefalexin) for the Italian sales company EG (see p. 53) the input of capital from the continued conversion of STADA warrants valid through September 30, 2002, to STADA stock (see p. 36) the signing of a letter of intent for the acquisition of the Italian brand supplier Crinos (see page 53) Furthermore, STADA has decided to restructure its low-margin commercial business in the Netherlands in 2002 with the aim of improving margins. The restructuring will include a review of cooperation possibilities with local wholesalers which may result in lower commercial sales in the Netherlands and, as a result, in the Group. These events since the end of the fiscal year 2001 are presented in detail on the pages above in the context of their respective circumstances. The Executive Board of STADA Arzneimittel AG is looking forward to the continuation of the fiscal year 2002, and to future years, with optimism. Consistent adherence to the corporate strategy STADA. The Health Company. will continue to open up every opportunity for the company to continue its longstanding growth course with success in the future. The optimistic assessment is supported by the obvious strategic and operational strengths which STADA has achieved in implementing the corporate strategy in recent years. Many of the strategic goals which were targeted for STADA s operational business have by now been reached, and thus now count among the strengths which promote the growth of the Group. 74

77 These include: positioning in segments of the health market with good chances of structural growth a sales network which supports EU-wide marketing of generics, and at the same time forms the basis for internationalization of the other core segments a first basis for sales in the USA, the largest generics market in the world a lean, cost-oriented corporate structure a peak position in product development the prospects for biogenerics starting in 2005/2006 committed and capable employees an excellent capital structure as the basis of an active policy of acquisitions to accelerate the growth of the Group These strengths form an excellent foundation for continuing the successful growth course of STADA in the years to come. This applies regardless of influences from health policies or the business climate. Of course, governmental intervention in market structures can cause growth to slow down temporarily in individual national markets. But such structural intervention usually has the goal of promoting the market segment of generics, which is important for STADA, so that as a rule they tend to be favorable to our business. In Germany, for example, new provisions of law since February 1, 2002, are expected to reinforce the dispensation of generics, in part by making substitution easier (see p. 48). The planned rules for implementation do not lead to any expectation of changes in market structure in principle for 2002, however. On the whole, the Executive Board expects the fiscal year 2002 to bring a continuation of the growth course for the Group, i.e. a double-digit sales growth again between +15% and +20% for the total of the core segments. The beginning of 2002 confirms this view. The Group recorded a sales growth of +12% from January to mid-march. Adjusted for the Dutch commercial business which is being restructured and not part of the Group's core business, Group sales increased by approx. +20%. Despite the very high starting level, earnings in 2002 will also increase in a double-digit percentage. STADA is in good shape strategically and operationally. Together with the continuing increases in sales and profits, this provides a good basis, in the opinion of the Executive Board, for continuing growth in the worth of STADA Arzneimittel AG in the years to come. 75

78 Index Index to the Annual Financial Statements Financial statements for the STADA Group Income statement Balance sheet Fixed asset table Cash flow statement Combined notes to the individual and consolidated financial statements of STADA Arzneimittel AG Combined Group management report for the individual financial statements and consolidated financial statements of STADA Arzneimittel AG Audit opinion At the beginning of 2002 STADA changed over its company currency to euro. Accordingly, the official consolidated financial statements as of December 31, 2001, filed with the commercial register are still reported in Deutsche Mark. Throughout the entire consolidated annual report for the fiscal year 2001, for the sake of transparency of information, all DM figures are converted to euro at the official exchange rate (1.00 e = DM). 76

79 Income Statement Consolidated Income Statement STADA Group Income Statement for the Period from January 1, 2001, to December 31, 2001 e Previous year e 000s 1. Sales revenues 1 537,820, , Increase/decrease in finished goods and work in progress 2 17,905, Own work capitalized 133, Other operating income 3 18,280, , Cost of materials 2 a) Cost of raw materials, consumables, and supplies of purchased materials 276,152, ,099.2 b) Cost of purchased services 934, ,087, Personnel expenses 4 a) Wages and salaries 76,447, ,503.0 b) Social security and other pension costs, of which 13,524, ,122.9 in respect of old-age pensions e 2,609, ,972, (previous year e 2,253,034.49) 7. Depreciation/amortization of intangible fixed assets and tangible assets 20,149, , Other operating expenses 5 132,453, , Investment income 267, Income from other securities and debt instruments in the investment portfolio Other interest and similar income 1,393, , Amortization of financial assets and marketable securities Interest and similar expenses 6 8,294, , Results from ordinary activities 47,845, , Extraordinary expenses , Taxes on income 8 22,673, , Other taxes 503, Annual net profit 24,668, , Loss accruing to other shareholders 38, Profit carried forward from previous year 24,810, , Withdrawal from the treasury stock reserve 27 7,204, Allocation to the treasury stock reserve 27 18, Allocation to other revenue reserves 17,673, , Consolidated net earnings 39,030, ,452.3 Cf. notes on pp

80 Balance Sheet Consolidated Balance Sheet STADA Group Balance Sheet as of December 31, 2001 ASSETS e Previous year e 000s A. Fixed assets 9 I. Intangible assets Concessions, industrial property rights and similar rights and values as well as licences thereto ,282, , Goodwill , Payments on account 13 24,250, , ,646, ,416.5 II. Tangible assets Land and leasehold rights and buildings, including buildings on third-party land 15 26,673, , Plant and machinery 16 10,430, , Other fixtures and fittings, tools, and equipment 16 12,759, , Payments on account and tangible assets in course of construction 17 1,747, , ,610, ,879.2 III. Financial assets Shares in affiliated companies 9,125, , Loans to affiliated companies 94, Investments 19 15,872, , Investment securities 5, Other loans 97, ,195, ,862.0 B. Current assets 20 I. Inventories Raw materials and supplies 13,279, , Work in progress 7,109, , Finished goods and goods for resale 85,712, , Advance payments 132, ,232, ,445.8 II. Accounts receivable and other assets 1. Trade accounts receivable ,435, , Amounts due from affiliated companies 25 1,401, Receivables from companies held as investments 10, Other assets ,697, ,154.0 of which 102,545, ,396.6 due in more than 1 year e 5,783, (previous year e 5,042,126.35) III. Investments 1. Shares in affiliated companies 198, Own shares 27 81, , Other investments 224, , ,589.0 IV. Cheques, cash, postal bank balances, and bank balances 28 33,363, ,937.7 C. Prepaid expenses and deferred charges ,593, ,690, ,

81 LIABILITIES e Previous year e 000s A. Capital stock 31 I. Subscribed capital 48,695, ,453.3 II. Capital reserve 117,451, ,862.5 after offsetting the difference resulting from capital consolidation e 21,986, III. Revenue reserve 1. Statutory reserve 451, Reserve for own shares 27 81, , Other revenue reserves 26,164, , ,697, ,210.5 IV. Consolidated net earnings 39,030, ,452.3 V. Minority interests 93, B. Accrued liabilities 1. Provisions for pensions 32 6,699, , Provisions for taxation 33 12,837, , Other provisions ,564, , ,100, ,989.5 C. Liabilities 1. Bonds, thereof convertible ,000, , Amounts due to banks ,500, , Advances received on orders 29, Trade accounts payable ,768, , Liabilities to affiliated companies 33, Liabilities to companies held as investments 13, Other liabilities 15,428, ,903.1 of which taxes e 1,617, ,774, ,336.4 (previous year e 3,204,992.29) of which due to social security institutions e 1,611, (previous year e 1,504,631.75) D. Prepaid expenses and deferred charges 847, ,690, ,348.9 Cf. notes on pp

82 Fixed-Asset Table Consolidated Fixed-Asset Table STADA Group Fixed-Asset Table for the Year Ended December 31, 2001 Additions and disposals Additions A due to changes in Disposal D Balance Write-ups W consolidated group Reclassification R Balance Jan. 1, Dec. 31, 2001 e e e e e A. Fixed assets 8 I. Intangible assets 9 1. Concessions, industrial property rights and similar rights and values, as well as licences thereto ,051, ,630, A 4, , D 177,411, ,533, W 5,718, R 2. Goodwill 11 1,297, , , D 832, R 3. Payments on account 12 23,444, ,423, A , D 24,885, ,991, R II. Tangible assets Land and leasehold rights and buildings including buildings on third-party land 14 26,027, ,299, A , D 35,738, ,069, R 2. Plant and machinery 15 27,505, ,373, A , D 28,216, R 3. Other fixtures and fittings, tools, and equipment 15 23,193, ,700, A 147, , D 30,285, ,054, R 4. Payments on account and tangible 9,170, ,699, A D 1,747, assets in course of construction 16-9,123, R III. Financial assets Shares in affiliated companies 9,677, , A D 10,010, R 2. Loans to affiliated companies , A D 94, R 3. Investments 18 13,568, , A , D 18,519, ,000, R 4. Investment securities 52, , A D 5, , R 5. Other loans 94, , A D 97, R Cf. notes on pp ) Reclassification from current assets to fixed assets and vice versa 265,084, ,560, , ,170, ,844, ,533, ,677, ) 80

83 Additions and disposals due to changes in Disposal D Balance Additions consolidated group Reclassification R Balance Balance Balance Jan. 1, Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 2001 e e e e e e e 33,877, ,467, , , D 46,129, ,173, ,282, R 352, , , , D 719, , , , , D 635, ,298, ,250, ,078, ,136, , D 9,065, ,948, ,673, R 16,215, ,194, , D 17,785, ,290, ,430, R 14,724, ,332, , , D 17,526, ,469, ,759, R D ,170, ,747, , D 885, ,792, ,125, D , ,646, D 2,646, ,922, ,872, D , , D , , ,926, ,149, , ,804, ,392, ,157, ,451,

84 Cash Flow Consolidated Cash Flow Statement STADA Group Cash Flow Statement for 2001 STADA Group Cash Flow Statement in g thousands Net income for the period excluding extraordinary items 24,669 20, Depreciation / amortization (+) / write-ups (-) of fixed assets 15,616 14, Increase (+) / decrease (-) in long-term provisions Other non-cash expenses (+) / income (-) / minority interests Gains (-) / losses (+) on the disposal of fixed assets Cash flow (gross) 40,694 36, Increase (-) / decrease (+) in inventories -15,393-13, Increase (-) / decrease (+) in trade receivables -16, Increase (-) / decrease (+) in amounts due from affiliated companies -1, Increase (-) / decrease (+) in amounts due from participating interests Increase (-) / decrease (+) in other receivables / prepaid expenses 964-6, Increase (-) / decrease (+) in short-term securities 2,606 1, Sub-total -29,635-19, Increase (-) / decrease (+) in short-term provisions 21,242 2, Increase (-) / decrease (+) in advance payments received Increase (-) / decrease (+) in trade payables 11,428-7, Increase (-) / decrease (+) in amounts due to affiliated companies Increase (-) / decrease (+) in amounts due to participating interests Increase (-) / decrease (+) in other liabilities / deferred income , Sub-total 31,804-3, Proceeds (+) / payments (-) relating to extraordinary items - -3, Cash flow provided by operating activities 42,863 9, Proceeds (+) from the disposal of tangible fixed assets 1, Payments (-) for investment in tangible fixed assets -12,073-17, Proceeds (+) from the disposal of intangible fixed assets Payments (-) for investment in intangible fixed assets -44,054-17, Proceeds (+) from the disposal of financial assets Payments (-) for investment in financial assets , Proceeds (+) from the sale of consolidated companies Payments (-) for the acquisition of consolidated companies -8,008-22, Proceeds (+) relating to the investment of financial resources / short-term treasury management Payments (-) relating to the investment of financial resources / short-term treasury management Cash flow used for investing activities -62,844-61, Proceeds (+) from additions to equity capital / share capital of STADA AG 2,242 12, Proceeds (+) from additions to equity capital / capital reserve of STADA AG 11,515 57, Payments (-) to shareholders (dividend distribution) -8,642-6, Proceeds (+) from the issue of bonds and finance facilities 15,217 75, Payments (-) for the repayment of bonds and finance facilities - -63, Cash flow provided by financing activities 20,332 74, Cash-effective changes in cash and cash equivalents , Currency, consolidation, and valuation-related changes Currency, consolidation, and valuation-related changes Currency, consolidation, and valuation-related changes Net cash flow for the period , Cash and cash equivalents at the beginning of the period 32,938 9, Cash and cash equivalents at the end of the period 33,364 32,938 The cash flow statement was prepared in accordance with German Accounting Standard No. 2 (DRS2) and thus in accordance with 342 (2) of the German Commercial Code (HGB). 82

85 Notes Combined Notes I. Combined notes to the individual and consolidated financial statements of STADA Arzneimittel AG Accounting principles According to 267 HGB (German Commercial Code), STADA Arzneimittel AG is counted among the large corporations. In addition to the general regulations on accounting ( 238 ff. HGB) the supplemental regulations for corporations covering the annual financial statements and management report ( 264 ff. HGB) as well as the audit ( 316 ff. HGB) also apply. Furthermore, STADA Arzneimittel AG utilizes the regulations covering the consolidated financial statements and the consolidated management report ( 290 ff. HGB). 292a HGB was not used. The income statement in the individual and the consolidated financial statements was prepared in accordance with the total cost method. The consolidated companies The consolidated financial statements of STADA Arzneimittel AG for December 31, 2001, included the following subsidiaries (all subsidiaries are wholly-owned unless other percentages are given): STADA OTC Arzneimittel GmbH, Bad Vilbel STADA Research and Development GmbH, Bad Vilbel STADA Arzneimittel International GmbH, Bad Vilbel BEPHA Beteiligungsgesellschaft für Pharmawerte mbh, Frankfurt am Main NIDDApharm GmbH, Bad Vilbel LIFE TRANS Pharma Vertriebs GmbH, Bad Vilbel STADApharm GmbH, Bad Vilbel UZARA-WERK GmbH, Bad Vilbel ALIUD PHARMA GmbH & Co. KG, Laichingen ALIUD PHARMA Verwaltungs-GmbH, Laichingen STADA Medical Care GmbH, Bad Vilbel 1) cell pharm Gesellschaft für pharmazeutische und diagnostische Präparate mbh, Hanover Taxon GmbH, Hanover Helvepharm AG, Frauenfeld, Switzerland (50% owned) STADA Arzneimittel AG, Givisiez, Switzerland 1) Now renamed Eurovax GmbH, Bad Vilbel 83

86 Notes Combined Notes STADA Arzneimittel Ges. mbh, Vienna, Austria ALIUD PHARMA GmbH & Co. KEG, Vienna, Austria ALIUD PHARMA Verwaltungs Ges. mbh, Vienna, Austria STADA Service Holding B.V., Etten-Leur, Netherlands Centrafarm Nederland B.V., Etten-Leur, Netherlands Quatropharma Groothandel B.V., Breda, Netherlands EG Labo Laboratoire EUROGENERICS S.A., Paris, France STADA Pharmaceuticals (Asia) Ltd., Hong Kong, China ALIUD PHARMA CZ s.r.o. Prague, Czech Republic N.V. Eurogenerics S.A., Brussels, Belgium AAXL Pharma S.A., Brussels, Belgium PharmaCoDane Aps, Copenhagen, Denmark EG S.p.A., Milan, Italy STADA Asiatic Ltd., Bangkok, Thailand (60% owned) Bioline Naturmedizin GmbH, Vienna, Austria (90% owned) Ciclum Farma S.A., Madrid, Spain (50% owned 1) ) Healthypharm B.V., Etten-Leur, Netherlands Clonmel Healthcare Ltd., Clonmel, Ireland SFS International Ltd., Clonmel, Ireland For the first time: Croma Medic, Inc., Manila, Philippines (60% owned) Health Vision, Enterprise Ltd., Hong Kong (51% owned 2) ) In fiscal year 2001, Marcofina S.A., France, Emma B.V., Netherlands, and Quatropharma Qurier B.V., Netherlands, were 100% deconsolidated. Inclusion of the companies which were added to the consolidated financial statements for the first time, as well as the eliminations, did not detract significantly from the comparability of the financial statements to the prior year. 1) 74% owned as of Jan. 1, ) As it was intended and contractually agreed that the current management team with its 49% share in the company should be involved as an equal partner in the operational management of Health Vision, STADA consolidates only 50% of Health Vision. Due to the structure of the acquisition and the necessary timeframe for the process of the share transfer, STADA consolidates in fiscal 2001 only sales of 0.4 million e. 84

87 The companies cell pharm Gesellschaft für pharmazeutische Präparate mbh, Hanover Taxon AG, Frauenfeld, Switzerland GenRX Ltd., Warwick, United Kingdom Lettershop Akurat s.r.o., Marienbad, Czech Republic STADA Pharmaceuticals Inc., Cranbury, New Jersey, USA STADA Inc., Cranbury, New Jersey, USA are of secondary importance for the asset, financial, and earnings situation of the Group and for this reason are not included in the consolidated financial statements. In addition 313 Par. 3 HGB was utilized and one company was thereby excluded because of the threat of considerable detriment. For the proportions of the shares of the consolidated and non-consolidated subsidiaries and associated companies in the subscribed capital and the other information required in accordance with 313 Par. 2 HGB the reader is referred to the notes to the individual financial report. Principles of consolidation The capital consolidation was performed in accordance with 301 Par. 1 No. 1 HGB according to the book value method. In so doing, the book value of the interest of the parent company at the time the interest was acquired is compared to the net assets reported by the subsidiaries (at book values). For the subsidiaries included in the consolidated financial statements the capital consolidation was performed on the basis of the reported values at the time the shares were acquired. Setting off the book values of the investment interests against the net assets of the included companies produced additional differences on the asset side in the year 2001 in the amount of 6,926, e. Deconsolidations in 2001 resulted in additional capital gains of 3.0 million e which are not reflected in the individual financial statements of the respective local parent companies. Goodwill values were offset against the capital reserves in accordance with 309 Par. 1 Sent. 3 HGB. Inventories from intercompany deliveries presented on the balance sheet were valued at cost of production and any intercompany profits were eliminated. The contingencies and other financial obligations amount to 47,512, e, of which 3,108, e are due to obligations against affiliated companies. Principles of accounting and valuation Assets and liabilities of STADA Arzneimittel AG and its subsidiaries which are included in the consolidated financial statements were valued consistently according to the rules in the German Commercial Code. The valuation estimates in the balance sheet of the STADA Group for December 31, 2000, were taken over unchanged. 85

88 Notes Combined Notes Notes to the Income Statement 1 The consolidated sales revenues break down by national markets as follows. For the first time this distribution is not organized according to the legal domicile of the respective company which made the sales revenues, but by the respective national market in which the sales were made. Generics Brands Special pharma- Commercial ceuticals 1) sales e e e e 1. EU, total 307,452, ,087, ,968, ,229, Austria 2,453, ,329, Belgium 34,518, ,033, Denmark 415, ,928, France 9,842, , Germany 191,337, ,424, ,968, ,961, Ireland 10,978, Italy 9,061, ,985, The Netherlands 37,645, ,616, ,338, Spain 808, UK 9,790, Rest of EU 599, Rest of Europe, total 7,993, , Czech Republic 4,888, Switzerland 575, , Rest of Europe 2,529, , Asia, total 3,256, , ,092, China incl. Hong Kong 1,477, , Philippines ,051, Thailand 340, , ,614, Rest of Asia 1,438, USA, total 7,204, Rest of world, total 112, , ) Oncologica, vaccines 86

89 In addition there were also other sales revenues of 6,065, e (prior year: 3,063, e). These include in particular 1,558, e from the sale of drug approvals. 2 The overall ratio of material costs including the change in inventories within the Group was 48.2% (prior year: 50.0%). 3 The largest individual item in the other operating income is the income from the sale of own stock in the amount of 5.6 million e. Also contributing to the other operating income were shares in the profits of follow-up business from the sale of drug approvals. As a result of the German tax authorities requirement that the cost of drug approvals be amortized over 15 years retroactively as from 1995, the 2001 financial statements report a one-time write-up of intangible assets in the Group amounting to 4.5 million e. 4 The Group employed an average of 1,827 persons in 2001, broken down as follows: Sales 846, manufacturing and logistics 607, administration and research and development 374. Broken down by region: Belgium 67, China 20, Denmark 7, Germany 904, France 56, Ireland 197, Italy 81, the Netherlands 267, Austria 19, Philippines 98, Switzerland 4, Spain 54, Thailand 39, Czech Republic 14. Overall the personnel expense rate in the Group was 16.7% (prior year: 16.0%). 5 The other operating expenses include primarily costs of marketing, general administration, logistic services and maintenance, as well as development projects. 6 The interest paid is related primarily to the warrant issue in the 2nd quarter of 2000, with an interest rate of 7.5% 7 An extraordinary expense in the amount of 3,571 thousand e arose in conjunction with the capital measures of the year The tax ratio in the Group is 48.4% (prior year: 43.6%). This includes additional tax payments of 1.7 million e for the fiscal years because of a tax audit completed for those years. Without these additional tax payments the tax ratio for the group is 44.9%. Fixed assets 9 For the changes in fixed assets in the year 2001, including the cumulative costs of acquisition or production and the cumulative depreciation, the reader is referred to the separately presented table of fixed assets for the Group (pp ). 10 Purchased intangible assets are valued at the cost of acquisition, less scheduled and insofar as necessary unscheduled amortization or write-ups. For intangible assets a useful life of 3 to 20 years was applied. Reported under intangible business assets are drug approvals, patents, trademarks, software, license agreements, and goodwill. 87

90 Notes Combined Notes 11 The industrial property rights and similar rights and values as well as licenses to such rights and values include for the most part approvals, trademarks, and patents. Where necessary, extraordinary depreciation has been recorded. This amounts to 5,186, e, of which 1,862, e are due to a tax audit covering the fiscal years The goodwill of 113, e in 2001 results from the individual financial statements of ALIUD PHARMA GmbH & Co. KG. Where necessary, extraordinary depreciation has been recorded. The amount is depreciated in a straight line over a period of 15 years. 13 Payments made on account apply primarily to products in process of licensing or products prior to market introduction. 14 Property, plant, and equipment are reported at cost of acquisition, less scheduled depreciation corresponding to the useful life. Where necessary, extraordinary depreciation has been taken. This amounts to 47, e. 15 The depreciation on buildings is based on a useful life of up to 50 years. 16 As a rule the useful life is between five and ten years. The simplification rule was utilized, which states that the full annual depreciation can be taken for assets added in the first half of the fiscal year and half the annual depreciation can be taken for assets added in the second half of the fiscal year. Low-value fixed assets are depreciated fully in the year of their acquisition. 17 Payments made on account as of the balance sheet closing date pertain for the most part to the expansion building for logistics and administration at the Laichingen site and an expansion of antibiotics production at the Clonmel site. 18 The financial assets are valued at the cost of acquisition, where no lower applicable value could be found. 19 By far the largest participating interest is the investment in Medistar GmbH, Hanover. Current assets 20 The principle of the lower of cost or market is observed. 21 The inventories are valued at the cost of acquisition or production. Included in the costs of production, in addition to the direct costs, are manufacturing and material overhead costs as well as a proportion of administrative costs. The principle of the lower of cost or market is observed. The production costs do not include any interest on borrowed capital. 22 The accounts receivable include allowance for recognizable individual risks from itemized allowances for bad debts. 23 Adequate allowance for the general credit risk is made by means of a lump sum valuation adjustment. 88

91 24 Receivables and payables which are stated in foreign currencies are valued at acquisition cost and, insofar as necessary under the principle of the lower of cost or market, at the exchange rate on the balance sheet closing date. 25 Receivables and payables between the consolidated companies were balanced out in conjunction with consolidation of debts; the reported claims for accounts receivable are against associated companies which are not included in the consolidation. In the consolidated income statement for the Group, income and expenses from deliveries and services within the Group as well as expenses and earnings based on the exiting profit and loss transfer agreements were eliminated. Currency conversion was calculated according to the current rate method; that is, all items are converted uniformly at the rate in effect on the balance sheet date. The currency differences resulting from the conversion of the balance sheet valuations of the foreign subsidiaries at the balance sheet date, if they resulted from earlier years, were offset against the consolidated net profit for the year, otherwise they were recorded as affecting current operating results. 26 The other assets are reported at nominal value or, where necessary, at a lower rate applicable on the closing date for the financial statements. 27 Within the Group, on the balance sheet date December 31, 2001, STADA Arzneimittel AG held 5,070 shares of own stock. On December 31, 2000, the holding was 456,134 shares of own stock. In the year 2001 the company purchased 547 shares (of no par value) and sold 451,611 shares (of no par value) (selling price 12,764, e). The own shares were acquired on the basis of control and transparency in business (KonTraG) and after approval by the shareholders meeting of 2000; according to the articles of incorporation they are to be used upon disposal to obtain short-term liquidity. 28 Cheques, cash, postal bank balances, and bank balances include mainly bank balances which are earmarked for financing the takeover of the business operations of MOVA Laboratories Inc., Cranbury, New Jersey, on January 1, 2002, which was agreed to by contract in November Prepaid expenses and accrued income 29 The prepaid expense item refers to a disagio in the amount of 41, e. 30 The prepaid expense item in the consolidated balance sheet contains deferred taxes as defined in 306 HGB in the amount of 511, e. Shareholders equity 31 As of December 31, 2001, the share capital is represented by 18,728,990 restricted registered shares of common stock at a calculated nominal value of 2.60 e each. On December 31, 2000, the share capital was still represented by 14,516,670 restricted registered shares and 89

92 Notes Combined Notes 3,350,000 shares of non-voting preferred stock at a calculated nominal value of 2.60 e each. Holders of common and of preferred stock approved the conversion of all preferred stock to common stock at the ratio of 1:1 in separate shareholders meetings on June 19, In conjunction with the planned technical implementation of the resolutions, the 3,350,000 new shares of restricted registered common stock from the conversion of the non-voting preferred stock were admitted for trading with official listing on the stock markets in Frankfurt am Main and Düsseldorf on October 26, 2001, and were integrated into the existing official listing of the registered stock on November 5, The stock certificates for the preferred stock of STADA AG now represent only the right to exchange the former non-voting preferred stock for restricted registered stock in the company; the conversion period announced publicly on October 31, 2001, will run through April 2, In conjunction with the initial public offering on October 29, 1997, 215,000 warrants were issued. The holders of these warrants were originally entitled to purchase one bearer share of non-voting preferred stock in STADA Arzneimittel AG for the option price of DM Now, after conversion of the preferred stock to common stock, allowing for the 1:10 stock split in 2000, in accordance with the applicable resolutions in the shareholders meetings of the common shareholders and the preferred shareholders on June 19, 2001, the exercise of each individual option leads to the purchase of 10 shares of restricted registered common stock. Adjusted for the recent capital increases and the conversion to the euro, the exercise price for the options is set at e for every 10 shares of common stock. If, in the period through September 29, 2002, the price of STADA s common stock should fall below the price of e share (threshold price) on two trading days in a row, the option price will be reduced to e per 10 shares of common stock. Some of these warrants were already exercised in the past fiscal year The number of restricted registered common shares in circulation increased in the course of the year 2001 by 862,320 to 18,728,990 shares as a result of the exercise of these options. By December 31, 2001, the company had received a total of 13,757,453 e from these purchases of new shares through exercise of the warrants. If additional options from the warrant running through September 30, 2002, are exercised, STADA can receive up to 26,543,646 e in additional funds from exercise of the remaining options; in the process, the number of shares of stock can increase by up to 1,287,680 additional restricted registered common shares in 2002 without further capital measures, to as many as 20,016,670 shares of common stock. Through February 28, 2002, options for an additional 7,270 restricted registered shares of common stock had been exercised, bringing the company 115, e in funds. 90

93 In addition, in June ,000 bearer warrants were issued, originally for the purchase of one share each, now since the 1:10 stock split of October 2, 2000, for ten shares of restricted registered common stock in STADA Arzneimittel AG, in conjunction with the placement of the warrant issue. The holders of these warrants are entitled to purchase 10 shares of registered stock at an option price of e. The option right can be exercised on any bank business day in the period from June 26, 2000, through June 26, 2015, inclusive. The option price will be reduced to e per 10 shares of registered common stock, if the arithmetic mean of the official daily cash price for registered common stock of the company on the Frankfurt Stock Exchange was lower than e for a single share of registered common stock (taking into account the 1:10 stock split) on the twenty trading days preceding the day on which five calendar years have passed since the warrant was issued. Provisions 32 The pension provisions have been calculated according to actuarial principles, using an assumed annual interest rate of 6%. The calculation was made on the basis of the biometric tables of 1998 by Dr. Klaus Heubeck. 33 The tax provisions and other provisions take into account all recognizable risks and contingent obligations. 34 The other provisions include primarily personnel provisions, outstanding bills of costs, commission provisions and provisions for pending lawsuits. They were set up primarily in Germany. In divergence from the prior year, provisions for part-time retirement and employees anniversaries have been determined in accordance with commercial-law principles (prior year: tax-law principles). The changes in valuation have reduced the net figure by 801,428 e. Liabilities 35 By resolution of the extraordinary shareholders meeting on March 8, 2000, the Executive Board of the company was authorized to issue, one or more times through March 7, 2005, bearer bonds with attached bearer warrants with a total nominal value of up to 100,000,000 e with a maturity of no more than 7 years. The Executive Board of the company decided on May 25, 2000, with the approval of the Supervisory Board on the same date, to issue a 75,000,000 e bond with warrant, divided into 75,000 bearer bonds with a nominal value of 1,000 e each, each having six (i.e. a total of 450,000) bearer warrants attached for the purchase of one registered share each of no par value common stock in STADA Arzneimittel AG. On the date of reference, June 14, 2000, the Executive Board of the company with the approval of the Supervisory Board set the coupon for the warrant (cum) at 7.5% per annum and the issue price at %. The bonds will be redeemed on June 26, 2005, at face value. The bonds will earn interest starting on June 26, 2000, at an annual rate of 7.5%. The interest is payable on June 26 of each year for the period just ended. 91

94 Notes Combined Notes 36 The convertible bonds are structured as follows: with a remaining time to maturity of up to one year 0.00 e (prior year 0.00 e) with a remaining time to maturity of 1 to 5 years 75,000, e (prior year 75,000, e) with a remaining time to maturity of over 5 years 0.00 e (prior year 0.00 e) 37 The obligations to financial institutions are structured as follows: with a remaining time to maturity of up to one year 52,392, e (prior year 34,321, e) with a remaining time to maturity of 1 to 5 years 108, e (prior year 1,829, e) with a remaining time to maturity of over 5 years 0.00 e (prior year 119, e) The short-term liabilities on the balance sheet date include among other things a liability in foreign currency, which is hedged by a currency hedging transaction. 38 The trade accounts payable are structured as follows: with a remaining time to maturity of up to one year 50,768, e (prior year 38,163, e) with a remaining time to maturity of 1 to 5 years 0.00 e (prior year 0.00 e) with a remaining time to maturity of over 5 years 0.00 e (prior year 0.00 e) Other financial obligations On the balance sheet date there were financial obligations in the amount of 47,512, e. Of this amount, 3,108, e pertain to liabilities toward affiliated companies. Share ownership The share ownership information according to 285 No. 11 HGB is given outside of the notes in a listing of share ownership. The list is filed with the Bad Vilbel District Court under Register Number HRB

95 Net annual profit of STADA Arzneimittel AG The 2001 net annual profit of STADA Arzneimittel AG takes the following shape: Status on January 1, 2001 Profit distribution for 2000 Profit carried forward Net earnings for 2001 Withdrawals from treasury stock reserves Transfers to treasury stock reserves Transfers to other profit reserves 9,265, e 8,641, e 623, e 10,264, e 7,204, e 18, e 5,112, e 12,961, e Executive Board The following were members of the Executive Board on the balance sheet date: Hartmut Retzlaff, Chairman and Chief Executive Officer (contract expires March 31, 2003) Peter Niemann, Chief Technology Officer (contact expires April 30, 2004) Wolfgang Jeblonski, Chief Financial Officer (contract expires April 30, 2004) The total compensation for the Executive Board for the year 2001 was 2,059, e for the corporation (AG) and 2,208, e for the Group. Of the total compensation for the Executive Board of the Group, the Chief Executive Officer received 1,161, e, the Chief Technology Officer 530, e, and the Chief Financial Officer 517, e. Former members of the Executive Board received a total compensation of 118, e. The provisions for ongoing pensions for this group of persons come to 1,216, e. There were no loans outstanding to members of the Executive Board on the balance sheet date. Supervisory Board The members of the Supervisory Board are: Dr. med. Eckhard Brüggemann, Herne (Chairman since February 5, 2001) Karl Hertle, Bad Vilbel (Vice Chairman) Heike Ebert, Niddatal Dr. Rolf Engelsing, Pharmacist ( December 16, 2001), Herzogenrath Dr. Arnold Hertzsch, Pharmacist, Dresden Dieter Koch, Pharmacist, Dänischhagen Reinhard Kraft, Friedberg Dr. Claus Jürgen Lang, Pharmacist, Stuttgart (Chairman until January 22, 2001) Eugen Weber, Pharmacist, Ettenheim The total compensation of the members of the Supervisory Board in the year 2001 was 124, e. There were no loans outstanding to members of the Supervisory Board on the balance sheet date. 93

96 Management Report Combined Management Report Combined management report for the individual annual report and consolidated management report for STADA Arzneimittel AG in accordance with 289 and 315 HGB The strategy STADA. The Health Company. STADA focuses on those segments of the global health care market that promise especially strong growth and profits. The strategic premise remains: the conscious avoidance of costintensive and risky research into active ingredients. This allows the enterprise the financial flexibility for growth-oriented activities in product development, marketing and sales, as well as in the pricing of its products. STADA s business comprises three core segments. All three have contributed significantly to the growth of recent years. Generics represent by far the largest core segment in the Group. Generics are medicines which are offered after the patent expiration at the same quality but at a significantly lower price. The continuing worldwide pressure on financing in the health care market, and especially in the market for pharmaceuticals, offers generics as typical value for money products great potential for long-term structural growth. Brands for the health market represent the second core segment of our business. The focus today is on products for self-medication and in the wellness area, particularly in the German market. The third core segment comprises the special pharmaceuticals (at the present time vaccines and oncologica), which require special sales and marketing strategies geared to the specific products or markets. To promote the three core segments, STADA also operates commercial businesses in some national markets; typically these show lower margins. The strategic target positions for the operational business of the Group are: continuing earningsorientated growth, the international expansion of the Group, a focus on lean and flexible group structures, especially in procurement and production, a peak position in product development, and acceleration of growth through appropriate acquisitions. Naturally, the strategy also includes an explicit orientation towards customers and sales, a dedication to quality, and social skills, particularly in dealing with employees. The ultimate goal of all actions is to further increase the value of the company. 94

97 Euro and IAS STADA changed over its company currency to euro at the beginning of Accordingly, the official consolidated financial statements as of 31 December 2001 filed with the commercial register is still reported in Deutsche Mark. Throughout the entire consolidated annual report for the fiscal year 2001, including the management report printed here, all DM figures are converted to euro at the official exchange rate (1.00 e = DM) for the sake of transparency of information. The annual financial statements for 2001 were prepared in accordance with the German Commercial Code (HGB). Starting with the current fiscal year 2002, STADA will follow the International Accounting Standards (IAS) in its consolidated accounting. STADA has been preparing the huge conversion project ever since 2000, in part with the assistance of external consulting firms, in order to be able to present valid historical data according to IAS in the first quarterly report for Internal comparisons of quarterly financial statements for the fiscal year 2001 indicate that there are no significant changes to be expected in the results of the enterprise as a result of the conversion to IAS. Pleasant increases in sales and earnings in 2001 STADA achieved annual sales of million e (1.052 billion DM) in 2001, clearly surpassing the 1 billion DM threshold. That represents growth of +15% for STADA in Once again, sales for the Group doubled in just three years. When viewed by segments, STADA s generics represent the largest core business area in 2001 with sales of million e. Their share in Group sales is 61% (prior year: 56%). The generics segment grew by +25% in STADA s branded products achieved sales of 83.3 million e in 2001 (up +8% from the year before), thereby contributing 15% to Group sales (prior year: 16%). Special pharmaceuticals (oncologica, vaccines), with a 3% share of sales (prior year: 3%) are the third core business area of the STADA Group; this segment had sales of 16.0 million e and growth of +26% in The growth by double-digit percentages in the three core segments makes it clear that the growth of the Group rests on a broad basis. The intentional avoidance of low-margin sales (especially in the Dutch market) lessened the growth of commercial sales, which are not one of the core segments in the Group. This segment recorded 2001 sales of million e (-6% compared to the prior year). Commercial sales thus contribute only 20% to STADA Group sales (prior year: 24%). Other sales of 6.0 million e (+98% compared to the prior year) contribute 1% (prior year: 1%) to STADA Group sales. The generally very pleasing earnings picture for the STADA Group in 2001 is evident in the increase in earnings per share of +21.1% to 1.38 e according to DVFA. The DVFA/SG result, in which goodwill is depreciated over 20 years according to the guidelines of the Schmalenbach Society (SG), increased in 2001 by +22.8% to 1.24 e per share. 95

98 Management Report Combined Management Report The defining variable for measuring profitability at STADA for years has been EBITDA (results from ordinary activities before interest, taxes, depreciation, and amortization). The consolidated EBITDA of 74.9 million e in 2001 represented an increase of +38.2% over the figure for the prior year, adjusted for the one-time expenditures for last year s capital increase. This includes extraordinary write-ups in the amount of 4.5 million e due to a prolongation of the useful life of drug approvals effected retroactively by the fiscal authorities. The EBITDA figure nearly doubled in only two years. The net profit after taxes for 2001, adjusted for a one-time back tax payment of 1.7 million e in the 2nd quarter of 2001 for the years , shows an increase of +43.5% over the value for the year before, after adjusting the latter for the one-time expenses of the capital increase in the prior year. Profits from the sale of the company s own stock contributed positively to the increase in other operating income in fiscal 2001 by +56.3% to 18.3 million e. At the end of 2001 STADA still held shares of its own stock valued at 0.08 million e. Compared to the prior year, these holdings were reduced by 451,064 shares with a value of 12.7 million e. Resulting profits from price changes brought STADA other operating income in the amount 5.6 million e. About half of this profit was reinvested already in the second half of 2001 in forcing the international buildup of marketing and sales structures. Also contributing to other operating income are e.g. profits arising from profit-sharing agreements covering follow-up business from the sale of drug approvals. Cost trends in the Group The cost of materials ratio including the changes in inventory decreased by 1.8 percentage points to 48.2% in When the cost of materials ratio is revised to exclude the low-margin commercial business, which is not one of the core segments of the Group, the result is a cost of materials ratio of about 34%. Personnel expenses in the Group increased in 2001 by +20.6% to 90.0 million e (prior year: 74.6 million e). The reason for the greater increase in personnel costs than in sales is explained by the forced buildup of the sales structures in numerous national markets in accordance with the strategic intent. The cost of personnel ratio in 2001 was 16.7% (prior year: 16.0%). The other operating expenses increased underproportionally compared to sales, at +13.7%, reaching million e in 2001 (prior year: million e). These expenses include primarily 96

99 costs of marketing, general administration, logistics and maintenance, and of development projects. Again in these cost categories, positive economies of scale from the growth of the Group are evident. The taxation ratio for 2001 is 48.4% (prior year: 43.6%). The taxation ratio shows the long-term influence of a one-time back tax payment of 1.7 million e for the years 1995 to 1998 in the 2nd quarter of By far the largest back tax bill came from the requirement by the German tax authorities that the drug approval costs for new products be amortized over a longer period, namely over 15 years, retroactive to If the taxation ratio is adjusted for the one-time back tax payment in the 2nd quarter, this reduces the taxation ratio for the Group to 44.9%. Investments, depreciation, and cash flow at high levels In 2001, STADA strengthened the competitive and future capabilities of the Group with investments totaling 56.6 million e (prior year: 39.3 million e). Thus STADA s investments continued unchanged at a high level. At the center of investments again in 2001 were investments in intangible assets, at 44.1 million e (prior year: 18.0 million e). These were primarily acquisitions of licenses, brands, and approvals for new products. Conspicuous among them was the acquisition on December 28, 2001, of a package of products which included 81 granted approvals and 11 approval applications for generics for the US market. The product package, taken over from ESI Lederle, had sales in 2001 of US $ 4.0 million in the US market; its sales will be integrated into the business operations of the US generics supplier MOVA Laboratories, which was taken over as of January 1, In addition, on July 1, 2001, the brand Plastulen (annual sales volume around 2.6 million e) was acquired for the German sales subsidiary NIDDApharm. With investments of 12.1 million e in tangible assets (prior year: 17.6 million e), STADA further expanded selected production and logistic segments in Examples are the start of the expansion of the antibiotics production site in Clonmel, Ireland, the completion of new production and packaging facilities with new quality labarotories in Bad Vilbel, and the start of a new building for warehousing and commission at the location Laichingen for STADA s subsidiary ALIUD PHARMA. STADA is also continuing its program of continuous renewal of production technologies and of information technology (hardware and software) at all locations. The high investments over many years have led again in 2001 to correspondingly high depreciation in the Group, totaling 20.1 million e (prior year: 14.7 million e). The focus was again on the amortization of intangible assets, at 13.5 million e (prior year: 9.0 million e). 97

100 Management Report Combined Management Report As a result of the German tax authorities requirement that the cost of drug approvals be amortized over 15 years retroactively as from 1995, the 2001 financial statements report a onetime write-up of intangible assets in the Group amounting to e 4.5 million. Rising profits and high depreciation further strengthened the internal financing power of STADA. The gross cash flow in the Group rose in 2001 by +12.7% to 40.7 million e. That produces cash flow earnings per share according to DVFA of 2.24 e (prior year: 2.21 e). Overall, this clear increase in the gross cash flow again expanded the room for financial action by STADA. Balance sheet structure again ready for growth The structure of the STADA balance sheet continues to be characterized by a high equity ratio. On the balance sheet reference date December 31, 2001, this figure was 48.7% (prior year: 51.8%). With the expansion of business volume in the Group, total assets rose again in 2001, reaching million e (up +18.2% from the prior year level of million e). Within the fixed assets, the high value of intangible assets reflects the conscious expansive policy of STADA of investing in approvals, brands, and licenses for new products (see the remarks on investments earlier). Within the current assets, inventories increased by +18.8% to million e. Primarily in Germany, safety levels of inventory have been built up towards year-end in order to be duly prepared for sudden peaks in demand in the wake of regulatory changes in the generics segment. The international expansion of business in markets where it is customary to allow customers longer payment terms, led again in 2001 to an increase of +28.7% in trade receivables, to 82.4 million e (prior year: 64.0 million e). STADA does not regard this as a significant increase in business risk, since the receivables are distributed over many customers. This assessment is confirmed by the valuation adjustment for the Group, which continues to be low at 2.5% (prior year: 0.9%). The liabilities total million e (prior year: million e). The largest single item is the 75.0 million e in 7.5% bonds due on June 26, 2005, which STADA issued in June 2000 in conjunction with a warrant issue. 98

101 The sales network The sales network of STADA was further expanded internationally in 2001 and again in the current fiscal year The multiple international sales expertise which is associated with this network continues to count for STADA as one of the most important strengths of the enterprise. Only through a sales presence in a market is it possible to tap the full potential for sales there. This is especially true of countries with emerging markets for generics such as France, Italy and Spain, where STADA has consciously invested and will continue to invest in expanding the sales structure in anticipation of the expected market expansion. Because of the great importance of sales activities to the success of the Group, in 2001 two sales companies (Clonmel Healthcare and NIDDApharm) were the exemplary focus of the reviews under the KonTraG. The European Union continues to be the focus of STADA s sales activities. With EU sales of million e (prior year: million e), a total of 95% of the Group s sales are made here. The remainder of Europe generates an additional 9.7 million e in sales, so that STADA achieves total sales of million e in Europe, or 97% of group sales. In Germany, the largest national pharmaceuticals market in Europe and at the same time by far the largest national generics market and the largest market for brand products in the field of self-medication and wellness in Europe, STADA also continues to maintain a focal point of sales. Total sales in Germany in 2001 were million e 1) (prior year: million e), or 52% of group sales volume (prior year 51%) All of the products of the Group are marketed in Germany exclusively through pharmacies. In 2001 STADA took legal action to prohibit efforts which disregard existing laws and offer STADA products in Germany by catalog order. However, STADA is attentively anticipating possible changes to the German market structure and especially the established distribution channels for pharmaceuticals which may be brought about through e-business, EU regulations or national laws. It is still too early to assess the nature and extent of the changes precisely. STADA is confident, however, that the company will be able to adapt to any new forms of distribution when the time arises. The Netherlands are currently the second largest national market segment of STADA behind Germany. The three Dutch sales companies Centrafarm (for generics and parallel imports), Quatropharma (for commercial sales), and Healthyfarm (for OTC-products) which are consolidated together as a sub-group, achieved total sales to outsiders in 2001 of million e (-3% from the prior year). This sales performance is characterized by the intentional avoidance of lowmargin business, especially in the commercial area. As the commercial businesses in the Netherlands (sales volume: 92.5 million e) in their current structures are unlikely for the foreseeable future to earn margins comparable to other segments in the Group, these businesses 1) For the first time, this figure does not include the sales of the subsidiary STADA International, Bad Vilbel, which operates exclusively as an exporter; the export sales of STADA International are now assigned to the respective countries in which the products come to the market. 99

102 Management Report Combined Management Report will be restructured in 2002 with the aim of improving margins. Cooperations with local wholesalers may also be considered. Eventually, the share of commercial sales will be reduced in the Netherlands and as a result also in the Group. The generics business in the Netherlands may be stimulated in 2002 by the expected expiration of patents for strongly selling substances, e.g. Omeprazol in the fourth quarter of STADA's most important European national market segments with sales of more than 10 million e each besides Germany and the Netherlands currently are: Belgium (Sales 2001: 37.5 million e, +54% compared to the prior year), Ireland (Sales 2001: 11.0 million e, +13% compared to the prior year), France (Sales 2001: 11.6 million e, +6% compared to the prior year), Italy (Sales 2001: 13.1 million e, +297% compared to the prior year), and United Kingdom (export only) (Sales 2001: 10.3 million e, -9% compared to the prior year). Outside Europe, sales activities in the USA started at the beginning of 2002 with the acquisition of the business operations of the generics supplier MOVA Laboratories (effective January 1, 2002) and the purchase of additional generic products from ESI Lederle (effective December 28, 2001). STADA is pursuing the sales strategy there of entering the highly competitive US generics market with a small and lean marketing and sales unit, i.e. with limited risks and costs, and expanding this unit through organic growth and the purchase of additional products. STADA s activities in the Asian market are entirely controlled by the subsidiary STADA Asia, based in Hong Kong. The expansion of sales activities in Asia has led to a growth of sales by +44% in 2001, to 10.4 million e. In addition, with the acquisition of majority interests in local sales companies at the beginning of 2001 (Croma Medic in the Philippines and Health Vision in Hong Kong) the Philippine and especially the Chinese market have been opened up. As it was intended and contractually agreed that the current management team should be involved as an equal partner in the operational management of Health Vision, STADA consolidates only 50% of Health Vision. Due to the structure of the acquisition and the necessary timeframe for the process of the share transfer, STADA consolidates in fiscal 2001 only sales of 0.4 million e. The expansion of international sales expertise in the branded product field continued in In addition to Germany as the current focus of STADA's brand business, significant sales exceeding 1 million e with branded products are also being recorded in Belgium, Italy, Austria, and the Netherlands. On July 1, 2001, the brand Plastulen, with sales of around 2.6 million e, was 100

103 acquired for the German sales company NIDDApharm. A significant international expansion of the company s brand-name business was initiated with the signing on March 19, 2002, of a letter of intent for the acquisition of the marketing and sales activities of the Italian brand supplier Crinos (the sales volume to be acquired amounts to approx. 22 million e). In addition, other individual brands with total sales of 2.3 million e have been acquired already in STADA continues in its intention to expand the Group s brand-name product expertise in suitable projects through additional acquisitions. The sales structure for the special pharmaceuticals (oncologica, vaccines) is still limited to Germany at the present time. Intensive preparations are being made for international expansion of the special pharmaceuticals sector. In the field of vaccines this is taking place through the present buildup of the brand Eurovax, initially in the German market. STADA has been able to conclude sales cooperation agreements with Aventis for this purpose. In the field of oncologica, STADA is pursuing numerous approvals for oncological substances at the European level. At the same time, the planned international expansion of expertise in semigeneric sales in the field of oncologica will create the sales platform for the biogenerics which are expected starting in 2005/2006. Strong growth in STADA s market capitalization in 2001 The pleasant rise in the price of STADA s stock makes it clear that the capital market is positive in its assessment of the company s strategy and results. Despite a difficult market environment, STADA s common stock posted a price of e at the end of 2001, a gain of +66% from the beginning of the year. When the 2001 price performances of all of the stocks listed in the DAX 100 are considered, this puts STADA s stock in 4th place. It means that the market capitalization of STADA on the stock market increased by +73% in 2001, to million e. The general technical conditions for STADA s stock have been improved continuously in recent years, in order to increase the volume of trading in STADA stock and thereby give positive stimulation to its price. The concluding step in these efforts is the conversion of the former nonvoting preferred stock into restricted registered common stock in November 2001 at the ratio of 1:1. With the merger of the two classes of stock, and with the exercise of stock options from the warrants issued in 1997, the number of restricted shares rose significantly in As of December 31, 2001, the capital stock of STADA took the form of 18,728,990 restricted registered shares of common stock with a calculated book value of 2.60 e each. In conjunction with the initial public offering, on October 29, 1997, STADA issued 215,000 warrants. Some of these warrants 1) were already exercised in the past fiscal year By December 31, 2001, the company had received a total of 13,757,453 e from these purchases of new 1) After the 10 for 1 stock split in 2000; each warrant entitles the holder to subscribe for ten restricted registered shares of common stock. 101

104 Management Report Combined Management Report shares through exercise of the warrants. By the time the warrants expire on September 30, 2002, STADA can receive up to 20,543, e in additional funds from exercise of the remaining options. Through February 28, 2002, 727 of those options have been exercised for 7,270 registered shares of common stock, bringing STADA 115, e in additional liquid assets. In addition, the company also has 450,000 warrants 1) in circulation with an expiration date of June 26, 2015, from the warrant bond issued in STADA stock is owned at the present time by around 25,000 shareholders. No single shareholder or shareholder group owns more than 5% of STADA s stock. Accordingly, the so-called free float of STADA s stock continues to be 100%. Numerous private investors, including especially pharmacists and doctors, continue to hold a large number of shares of STADA stock in widely distributed portfolios. In conjunction with its inclusion in the MDAX, STADA has intensified its investor relations activities. At international roadshows, new groups of institutional investors were recruited for STADA. Institutional investors now hold approx. 26% of the capital stock of the company (as of February 28, 2002). Significant dividend increase proposed The Executive Board and the Supervisory Board propose that the net profit of 12,961, e for STADA Arzneimittel AG be used to pay a dividend of 0.59 e per share of common stock. This represents an increase of +20% over the dividend of 0.49 e per share of common stock paid for the previous fiscal year. This proposal also results in a significant percentage dividend increase for the former holders of preferred stock. The dividend which is now being proposed for the common stock is +9% higher than the dividend of 0.54 e paid in the previous year for the preferred stock. Allowing for the increased number of shares and the conversion of the preferred stock into common stock, the proposals of the Supervisory Board and the Executive Board result in a total dividend distribution of 11.0 million e, up by +28% from the year before. Peak position in product development The development and timely availability of attractive new products is extremely important for the success of STADA s strategy. STADA is organized efficiently and flexibly, with its own intensive 1) After the 10 for 1 stock split in 2000; each warrant entitles the holder to subscribe for ten restricted registered shares of common stock. 102

105 development activities and a network of international development partners. The company s achievement of leadership in classic product development is substantiated impressively by the 209 products newly introduced throughout the Group in 2001, among them again numerous generics first offered with precise timing on the day their patent expired. Looking ahead, STADA is already taking steps today to ensure that the Group s product pipeline will also be very well filled in the years to come. An outstanding example of this is the cooperative development of biogenerics, started at the beginning of STADA will thereby acquire the worldwide marketing rights starting in 2005/2006 for important biopharmaceuticals, whose patents will expire then. Currently under work are the active ingredients Filgrastim, Erythropoetin, and Interferon β. The initial development stages for the active ingredient Interferon α have also been successful. However, as the market is switching more quickly than expected to a new dosage form with sustained release of the active ingredient, the cooperation partners have temporarily suspended the further development of this active ingredient, as the new dosage form of the drug will probably be patent-protected for some time and may therefore initially not be accessible for a biogeneric. Nonetheless, it will not be necessary to adjust the sales forecast for the overall project as the growth achieved by the other three active ingredients is well above expectations and their total sales volume now reaches approx. 1.5 billion e. The sales volume for biogenerics attainable by STADA continues to be estimated at over 100 million e per year for the Group after the third full year of marketing. By involving a development partner with experience in biotechnology, together with private venture capital, the company has limited the extraordinarily high development costs and risks of biogenerics to a scale which is acceptable to STADA. Risks of future development essentially unchanged According to the German Commercial Code, the management report is supposed to include an analysis of the risks of future development to the Group. In the view of the Executive Board, these risks have been essentially unchanged for STADA for years and have not significantly impaired the dynamic growth of the Group in sales and earnings in recent years. In the present view of the Executive Board they include especially the following points: Competition: In the health market, and especially in the segment of the generics market, there are important competitors which are employing substantial resources to expand their competitive position. STADA must continue to grow dynamically, as planned, in order to remain independent. In implementing its growth strategy, the company also selectively accepts the risk of short-term and medium-term losses in individual market segments in order to take advantage of long-term growth prospects. 103

106 Management Report Combined Management Report Margins: In the health market, and especially in the segments of generics and commercial sales, intensive price competition prevails in general. Through close management of costs, STADA has succeeded so far in offering its own products on the whole at successfully competitive prices and sufficient margins. The Executive Board expects that this will continue to be the case in general in the future at least in the core segments of the Group. Price wars or governmental price directives motivated by health policy, with effects on the sales and earnings of individual subsidiaries, cannot be ruled out, however. Market structures: The health market is subject to tight general legal guidelines worldwide, and these are constantly changing at the national level. Even though the "value for money strategy pursued by STADA permits the expectation that new market structures will normally tend to be favorable to STADA, individual regulations can still have a negative effect on sales and earnings. For example, it is still too early to see clearly what effect the substitution possibilities introduced recently in Germany will have on sales and profits of the generics business there. Also, an increase in e-business or a changing legal framework for ordering medicines by catalog could lead to structural changes in individual national markets whose consequences on STADA's sales and earnings may not be established today. Products: With practically any pharmaceutical product there is a risk that new, previously unknown side effects will occur which could limit the marketing of a product already established or under development, or even make it impossible. For most STADA products this risk is slight, since generally only active ingredients and adjuncts which have long been known and researched are used. Particularly in the segment of generics, temporary marketing barriers can arise for legal reasons relating to patents or competition. Pharmaceutical companies which conduct research are attempting increasingly and systematically to extend their own industrial property rights beyond their expiration by means of lawsuits. In the suits which are pending against STADA (including those relating to Omeprazol, Felodipin, and the cell pharm offering Epirubicin), court decisions so far have generally been favorable to STADA. Until final decisions are reached by the court of last instance, STADA nevertheless constantly sets aside provisions for disputed products appropriate to the sales of the respective products for reasons of caution. Product development: An important driver of growth for STADA is a constant flow of new introductions, especially in the core segment of generics. If STADA is unable to hold onto its 104

107 position in the forefront of product development, declines in sales, market share, and profits are possible. For that reason the Group has been investing for years on a substantial scale in product development and the procurement of new products. For individual products the burden of this activity on costs can have a significant effect on profits, especially if a product development has to be broken off without success. This risk of failure is low for STADA however, since in general the Group does not conduct any research into or development of active ingredients but as a rule only uses active ingredients and adjuncts in its product development which have been known for a long time. The significantly greater risk of failure in the product development of biogenerics obtained from living cells has led STADA to include private venture capital in the development of biogenerics, thereby reducing the company s own risk to an acceptable level. Cooperation agreements: STADA is increasingly having essential services performed by third parties under cooperation agreements, rather than the Group performing these activities itself. Although STADA selects its cooperation partners carefully, it cannot rule out the possibility that the unexpected default of a cooperation partner may have an adverse impact on the Group s business. Outsourcing: Outside suppliers are integrated to a large degree into the business processes of STADA, especially in development, raw material procurement, and pharmaceutical production. STADA minimizes the associated risk of failure by means of appropriate organization (maintenance of inventory, contract design, holding alternative suppliers in reserve), as well as careful selection and regular audits of contract suppliers by STADA s quality management. Internationalization: The increasing internationalization of the STADA Group is attended by risks. These are present for example in the currency risk for business outside of the euro zone, as well as in the legal and tax conditions which differ from the home market. The Group protects itself against these risks, for example by hedging transactions and by drawing on outside experts in important international questions about law and taxes. Expertise: Because of the flat, market-oriented corporate structure, a limited number of executives are the repositories of expertise. The unexpected loss of managers from the administration of the Group or from the management of subsidiaries could thus have significant detrimental effects. On the whole, the Executive Board of STADA is unchanged in its belief that the opportunities for the company far outweigh the foreseeable risks, and that STADA will continue its successful growth course in the coming years. 105

108 Management Report Combined Management Report Future prospects: STADA s successful course continues Strategy, current successes, and future prospects are the critical assessment criteria for investors. Under these criteria, STADA is in good shape. The Executive Board of STADA Arzneimittel AG is optimistic in its view of the business years ahead. Continuing to pursue the corporate strategy STADA. The Health Company. will continue in the future to open up every opportunity for the company to continue successfully on its path of many years of growth. This optimistic assessment is based on the obvious strategic and operational strengths which the Group has attained in implementing the corporate strategy in recent years. Many of the strategic positions which were targeted for the company s operational business have by now been attained by STADA, and therefore are among the strengths which promote the growth of the Group. These include: positioning in segments of the health market with good structural growth opportunities a sales network which supports EU-wide marketing of generics and at the same time constitutes the basis for internationalizing the other core segments an initial basis for sales in the USA, the largest generics market in the world a lean, cost-oriented company structure a peak position in product development the prospects for biogenerics starting in 2005/2006 committed and capable employees an excellent capital structure as the basis for an active acquisition policy to accelerate the growth of the Group These strengths form a good foundation for the ability to continue STADA s successful course of growth in the coming years. This is the case, in our estimation, irrespective of influences from health policy or the business climate. It is true, of course, that governmental intervention into market structures can cause a temporary deceleration of growth in individual national markets. But the stated goal of such 106

109 structural interventions is usually to promote the market segment for generics, which is so important to STADA, so that they generally tend to be advantageous to our business. For example, new legislative measures in Germany since February 2002 are intended to increase the administration of generics, in part by making substitution easier. In substitution, in place of a medication prescribed by the doctor the pharmacist dispenses a less expensive generic which contains exactly the same quantity of the same active ingredient as the prescribed product (the so-called aut idem rule). The planned implementation rules do not give rise to any expectation that market structures will change in principle in 2002, however. On the whole, we expect the fiscal year 2002 to bring a continuation of the growth course for the Group, i.e. a double-digit sales growth again between +15% and +20% for the total of the core segments. The beginning of 2002 confirms this view. The Group recorded a sales growth of +12% from January to mid-march. Adjusted for the Dutch commercial business which is being restructured and not part of the Group's core business, Group sales increased by approx. +20%. Despite the very high starting level, earnings in 2002 will also increase in a double-digit percentage for the Group. STADA is in good shape strategically and operationally. The Executive Board believes that this, together with the continuity of the increases in sales and earnings, provides an excellent basis for continued growth in the value of STADA Arzneimittel AG in the years ahead. Bad Vilbel, March 25, 2002 Hartmut Retzlaff Wolfgang Jeblonski Peter Niemann 107

110 Audit Opinion Audit Opinion We have examined the annual financial statements and accounting of STADA Arzneimittel AG, Bad Vilbel, as well as the consolidated financial statements prepared by the company and its report of the status of the company and of the consolidated Group for the fiscal year from January 1 through December 31, The preparation of these documents according to the regulations of German commercial law and the supplemental rules in the articles of incorporation is the responsibility of the legal representatives of the company. Our task is to render an opinion on the annual financial statements and accounting, as well as the consolidated annual financial statements prepared by the company, and of the management report for the company and the consolidated Group on the basis of the audit which we have performed. We conducted our audit of the annual financial statements and consolidated annual financial statements in accordance with 317 HGB, with attention to the principles of orderly auditing specified by the German Institute of Auditors (IDW). According to those principles, the audit is to be planned and conducted in such a way that there is sufficient certainty of recognizing inaccuracies and violations which materially affect the presentation of the asset, financial, and profit situation conveyed by the annual financial statements and the consolidated annual financial statements according to the principles of orderly accounting, and by the management report for the company and the consolidated Group. Knowledge about the business activity and the economic and legal environment of the company, as well as expectations of possible errors, were taken into account in determining the auditing procedures. In the course of the audit the effectiveness of the internal control system and proofs of the information in the accounting, in the annual and consolidated financial statements and in the management report for the company and the Group are evaluated primarily on the basis of random samplings. The audit includes an assessment of the principles of accounting and consolidation utilized and the important estimations of the legal representatives, as well as an evaluation of the overall portrayal of the annual and consolidated financial statements and of the management reports for the company and the Group. 108

111 We are of the opinion that our audit constitutes an adequately reliable basis for our assessment. Our examination did not lead to any objections. We are satisfied that the annual financial statements and the consolidated financial statements with attention to the principles of orderly accounting convey a true and fine view of the asset, financial, and profit situation of the company and of the consolidated Group. The combined management report accompanying the individual financial statements and the consolidated management report give on the whole an accurate picture of the status of the company and of the Group and accurately portray the risks of future development. Frankfurt am Main, March 27, 2002 TREUROG GmbH Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft O. Biernat, Wirtschaftsprüfer 109