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Grupo Casa Saba, S.A.B. de C.V. – ‘20-F/A’ for 12/31/11

On:  Tuesday, 9/17/13, at 4:14pm ET   ·   For:  12/31/11   ·   Accession #:  1571049-13-749   ·   File #:  1-12632

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 9/17/13  Grupo Casa Saba, S.A.B. de C.V.   20-F/A     12/31/11   12:2.7M                                   Toppan Vite NY Inc./FA

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F/A      Amendment No. 2 to Form 20-F                        HTML   1.46M 
 2: EX-4.1      Instrument Defining the Rights of Security Holders  HTML    280K 
 3: EX-4.2      Instrument Defining the Rights of Security Holders  HTML     43K 
 4: EX-4.3      Instrument Defining the Rights of Security Holders  HTML     26K 
 5: EX-4.4      Instrument Defining the Rights of Security Holders  HTML     15K 
 6: EX-4.5      Instrument Defining the Rights of Security Holders  HTML     15K 
 7: EX-4.6      Instrument Defining the Rights of Security Holders  HTML     11K 
 8: EX-8.1      Opinion re: Tax Matters                             HTML     16K 
 9: EX-12.1     Statement re: Computation of Ratios                 HTML     12K 
10: EX-12.2     Statement re: Computation of Ratios                 HTML     12K 
11: EX-13.1     Annual or Quarterly Report to Security Holders      HTML     11K 
12: EX-15.1     Letter re: Unaudited Interim Financial Information  HTML      9K 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 20-F/A

(Amendment No. 2)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

for the year ended December 31, 2011

Commission file number 1-12632

Grupo Casa Saba, S.A.B. de C.V.

(Exact name of Registrant as specified in its charter)

N/A
(Translation of Registrant’s name into English)

Mexico
(Jurisdiction of Incorporation or Organization)

Paseo de la Reforma, No. 215
Colonia Lomas de Chapultepec, Mexico, D.F. 11000

Mexico
(Address of Principal Executive Offices)

Sandra Yatsko

+(52 55) 5284-6672
+(52 55) 5284-6633

syatsko@casasaba.com
Paseo de la Reforma, No. 215
Colonia Lomas de Chapultepec, Mexico, D.F. 11000
(Name, Telephone, E-mail and/or facsimile number and address of contact person)

SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b)

OF THE ACT:

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

The number of outstanding shares of each class of capital or common stock as of December 31, 2011 was:

265,419,360 Ordinary Shares, without par value.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨                                       No x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes ¨                                       No x

Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x                                      No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Not applicable

Yes ¨                                       No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 ¨      Item 18 x

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨                                       No x

EXPLANATORY NOTE

This Amendment No. 2 to the Annual Report on Form 20-F/A (“Amendment No. 2”) amends the Annual Report on Form 20-F of Grupo Casa Saba, S.A.B. de C.V. (the “Group”) for the fiscal year ended December 31, 2011 (the “Original Filing”), originally filed with the Securities and Exchange Commission (the “SEC”) on May 15, 2012.

This Amendment No.2 is being filed to amend “Item 3A. Selected Financial Data”, “Item 5. Operating and Financial Review and Prospects,” “Item 15. Controls and Procedures,” “Item 18. Financial Statements,” and “Item 19. Exhibits”of the Form 20-F to (i) restate the Group’s previously filed consolidated financial statements and related financial statement schedule for the fiscal years ended December 31, 2011, 2010 and 2009, (ii) attach an unqualified audit report on the financial statements issued under the standards of the Public Company Accounting Oversight Board (U.S.) by our independent registered public accounting firm, Salles Sainz-Grant Thornton (SS-GT), (iii) amend management’s controls and procedures disclosures, including management’s assessments of disclosure controls and procedures and internal control over financial reporting as of December 31, 2011 and iv) amend SS-GT’s attestation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011 (collectively, the “Restatement). The restatement of financial statements resulted from errors to the Group’s previously filed consolidated financial statements as of December 31, 2011 and 2010 and for the three fiscal years in the period ended December 31, 2011.

This Amendment also reflects the changes to “Item 16F. Change in Registrant’s Certifying Accountant” which were included in Amendment No. 1 to the Original Filing, as filed with the SEC on May 18, 2012 (“Amendment No. 1”).

As required by Rule 12b-15 of the U.S. Securities Exchange Act of 1934, we are including currently-dated certifications by our principal executive officer and our principal financial officer as exhibits to this Amendment No. 2 under “Item 19. Exhibits” hereof.

The Amendment No. 2 does not reflect events occurring after the filing of Amendment No. 1. Accordingly, the Amendment should be read in conjunction with the Original Filing and Amendment No. 1, as well as the Company’s other filings made with the SEC subsequent to the filing of Amendment No. 1.

i

TABLE OF CONTENTS

INTRODUCTION

Grupo Casa Saba, S.A.B. de C.V. is a limited liability stock corporation with variable capital, or sociedad anónima bursátil de capital variable, organized under the laws of the United Mexican States, or Mexico, and is a holding company that conducts substantially all of its operations through subsidiaries. In this annual report, except when indicated or the context otherwise requires, the words “Grupo Casa Saba”, “the Group”, “the Company”, “we”, “us”, “our” and “ours” refer to Grupo Casa Saba, S.A.B. de C.V. and its consolidated subsidiaries. Each subsidiary of Grupo Casa Saba is an independent legal entity with its own accounting, corporate structure and records, executives and employees. References in this annual report to divisions are to combinations of various subsidiaries that have been grouped together for management and presentation purposes.

This annual report contains translations of certain constant Mexican Peso amounts into U.S. Dollars at specified rates solely for the convenience of the reader. These convenience translations should not be construed as representations that the constant Peso amounts actually represent such U.S. Dollar amounts or could be converted into U.S. Dollars at the rate indicated or at all. The exchange rates used in preparing our consolidated financial statements and in preparing convenience translations of such information into U.S. Dollars are determined by reference as of the specified date to the rate of Mexican Pesos per U.S. Dollar reported by the Banco de México, or the Mexican Central Bank, in the Diario Oficial de la Federación, or the Official Gazette of the Federation. As of December 31, 2011, the Mexican Pesos per U.S. Dollar exchange rate, as reported by the Mexican Central Bank in the Official Gazette of the Federation, was Ps. 13.9787 to one U.S. Dollar. See “Item 3. Key Information—Exchange Rate Information”.

Unless otherwise specified, information included in this annual report is as of December 31, 2011. References to “Ps.” or “Pesos” in this annual report are Mexican Pesos, references to “$CLP” are to Chilean pesos, references to Soles are to Peruvian Soles, references to “R$” or “Reais” are to Brazilian Reais, and references to “Dollars”, “U.S. Dollars”, “$” or “U.S.$” are to United States Dollars. Certain amounts included in this annual report may not sum due to rounding.

MARKET SHARE AND OTHER INFORMATION

Market share information for our private sector pharmaceutical sales is based on statistics provided exclusively to us by IMS A.G., known internationally as IMS Health, and our own Company estimates.

INTELLECTUAL PROPERTY

This annual report includes names of certain products, trade names and brand names which constitute trademarks that we own or license. This annual report also contains other brand names, trade names, trademarks or service marks of other companies, and these brand names, trade names, trademarks or service marks are the property of those companies.

FORWARD-LOOKING STATEMENTS

Some written information and oral statements made or incorporated by reference from time to time by us or our representatives in this annual report, other reports, filings with the Securities and Exchange Commission, or the SEC, press releases, conferences, or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are subject to various risks and uncertainties, include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievement, and may contain forward-looking terminology such as “anticipate”, “believe”, “continue”, “expect”, “estimate”, “project”, “potential”, “should”, “could”, “assume”, “intend”, “will”, “will likely result”, “may”, “plan”, or words or phrases of similar meaning that are predictions, estimates, expectations or indications of future events and future trends. These statements are contained in the sections entitled “Item 3. Key Information—Risk Factors”, “Item 4. Information on the Company”, “Item 5. Operating Financial Review and Prospects” and other sections of this annual report.

Forward-looking statements reflect our best assessment or estimate at the time and thus involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future.

We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operation, financial condition and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements. Therefore, these forward-looking statements are qualified by reference to the cautionary statements set forth in this annual report.

The risks and uncertainties involved in the forward-looking statements are detailed from time to time in reports we file with the SEC and include, among others, the following:

5

The risks summarized above are not exhaustive. Other sections of this annual report may include additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all of these risk factors, nor can it assess the impact of all of these risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors and analysts should not place undue reliance on forward-looking statements as a prediction of actual results. Accordingly, when considering forward-looking statements, investors and analysts should bear in mind the factors described in “Item 3. Key Information—Risk Factors” and other cautionary statements appearing in “Item 5. Operating and Financial Review and Prospects” and elsewhere in this annual report.

The predictive and forward-looking statements in this annual report may never materialize and are made under the SEC’s safe harbor disclosure. Forward-looking statements speak only as of the date they are made and we do not undertake any obligation to update them in light of new information or future developments.

PART I

Item 1.            Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2.           Offer Statistics and Expected Timetable

Not applicable.

Item 3.           Key Information

(a)  Selected Financial Data

Our audited consolidated financial statements are prepared in accordance with Mexican Financial Reporting Standards, or Mexican FRS, which differ in some significant respects from U.S. GAAP. Note 22 to our audited consolidated financial statements provides a description of the principal differences between Mexican FRS and U.S. GAAP as they relate to us. Note 23 to our audited consolidated financial statements provides a reconciliation to U.S. GAAP of net income and stockholders’ equity.

We publish our consolidated financial statements in Mexican Pesos.

Through the end of 2007, Bulletin B-10, “Recognition of the impact of inflation on the financial information (integrated document)” required us to recognize certain effects of inflation in our consolidated financial statements, including the requirement to restate financial statements from prior periods to constant Pesos as of the end of the most recent period presented. The method of restatement required us to calculate a restatement factor using a weighted average rate based upon the Mexican National Consumer Price Index, or NCPI. The recognition of the effects of inflation through December 31, 2007 principally resulted in the recognition of gains and losses for inflation on monetary and non-monetary items, which were presented in the financial statements. See Note 3(e) to our consolidated financial statements.

Effective January 1, 2008, FRS B-10 “Impact of inflation”, no longer requires us to recognize the effects of inflation unless the economic environment qualifies as “inflationary”. An economic environment is considered inflationary if the cumulative inflation rate equals or exceeds an aggregate of 26% over the three preceding years (equivalent to an average of 8% in each year). Because of the relatively low levels of inflation in Mexico during recent years (3.8% in 2011, 4.4% in 2010, 3.6% in 2009, 6.5% in 2008, and 3.8% in 2007), the cumulative inflation rate in Mexico over the three-year period prior to December 31, 2011 does not qualify the economic environment as inflationary. Moreover, the economic environments in other countries where we operate do not qualify as inflationary. Additionally, based on current forecasts, we do not expect the economic environment of Mexico or any other country where we operate to qualify as inflationary in 2012. These expectations could change depending on actual economic performance.

As a result, the Group has not recognized the impact of inflation effective January 1, 2008, due to the non-inflationary economic environment existing in Mexico, Chile and Brazil. Consequently, the amounts of statements of income and cash flows are presented in nominal Mexican pesos. Financial information for dates and periods prior to January 1, 2008 continue to be expressed in constant Pesos as of December 31, 2007, in accordance with Mexican FRS. The impact of inflation accounting under Mexican FRS has not been reversed in our reconciliation to U.S. GAAP. See Notes 22 and 23 to our audited consolidated financial statements. The information set forth in the following table has been selected from our audited consolidated financial statements for the periods indicated. This information should be read together with, and it is qualified in its entirety by reference to, our audited consolidated financial statements, the notes to such financial statements and the information under the section entitled “Item 5. Operating and Financial Review and Prospects”.

As discussed in Note 3 a) “Accounting error corrections” subparagraphs i) and ii) to our audited consolidated financial statements, the Group´s 2011 and 2010 consolidated financial statements have been restated to correct certain accounting errors. As a result, there are some differences in the figures and items that are presented in this table from the original filing. Please see Note 3 a) to our audited consolidated financial statements for an explanation of the items that were affected by the restatement.

(b) Dividends

Under Mexico’s Ley General de Sociedades Mercantiles, or General Corporations Law, 5% of our net income in a given year must be allocated annually to a legal reserve. This legal reserve must be increased annually until it reaches 20% of our capital stock. After this allocation is made, it is then possible to make additional allocations, such as a contribution of funds for the payment of dividends or the creation of special reserves, generally, but not necessarily, upon the recommendation of our Board of Directors. We cannot pay dividends on our shares of capital stock, which we refer to as Ordinary Shares, unless these allocations are previously made. Additionally, the credit facility agreement entered into by the Company on August 30, 2010, as borrower, with HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, or HSBC Mexico, and Banco Mercantil del Norte, S.A., Institución de Banca Múltiple, Grupo Financiero Banorte, as lenders, for the amounts of Ps. 5,773,857,695 and Ps. 1,950,000,000, respectively (the “Acquisition Loan”) provides for a series of covenants which, among other things, restrict the ability of the Company to pay dividends on our capital stock or redeem, repurchase or retire our capital stock; and to create any consensual limitation on the ability of the Company’s subsidiaries to pay dividends, make loans or transfer any distribution, among other customary covenants and provisions. These limitations will be effective until the Company’s obligations under the Acquisition Loan are fully paid. As of December 31, 2011, we had a legal reserve of approximately Ps. 252.0 million, which represented approximately 22.4% of our capital stock as of that date. See Note 17 to our audited consolidated financial statements. Five percent of our net income for the year ended December 31, 2007 was applied to the legal reserve, and thus our annual shareholder’s meeting held on April 29, 2008 approved the payment of a dividend in the amount of Ps. 170.0 million (U.S$16.6 million),¹ the equivalent of Ps. 0.6405 (U.S$0.06) per Ordinary Share. Five percent of our net income for the year ended December 31, 2008 was applied to the legal reserve, and thus our annual shareholder’s meeting held on April 30, 2009 approved the payment of a dividend in the amount of Ps. 170.0 million (U.S$12.7 million),¹ the equivalent of Ps. 0.6405 (U.S$0.05) per Ordinary Share. Five percent of our net income for the year ended December 31, 2009 was applied to the legal reserve. At our annual shareholder’s meeting, held on April 30, 2010, our shareholders resolved not to declare a dividend given the strategic growth alternatives being considered, which required the use of the Company’s resources. Five percent of our net income for the year ended December 31, 2010 was applied to the legal reserve. At our annual shareholder’s meeting, held on April 29, 2011, our shareholders resolved not to declare a dividend given the restrictive covenants established in the Acquisition Loan. At our annual shareholder’s meeting, held on April 27, 2012, our shareholders once again resolved not to declare a dividend given the restrictive covenants established in the Acquisition Loan used to purchase FASA in October 2010. See “Item 4. Information on the Company—History and Development of the Company.” Our controlling shareholder has the ability to determine, by means of a shareholder vote, whether we will declare and pay dividends, in cash or otherwise. See “Item 3. Key Information—Risk Factors—Risk Factors Relating to Our Securities—Our Controlling Shareholder Has the Ability to Restrict the Payment and Amount of Dividends”. A determination to declare and pay dividends may depend on the following factors, among others:

¹ U.S. dollar conversions were calculated using the applicable exchange rate on the day that the dividend was paid. In 2008, the exchange rate used was Ps. 10.2721:1 USD and for 2009, the exchange rate was Ps. 13.39:1 USD.

To the extent that we declare and pay dividends on our Ordinary Shares, these dividends are payable to the holders of our American Depositary Shares, or ADSs. Owners of our ADSs are entitled to receive any dividends payable on the Ordinary Shares underlying their ADSs. We pay all cash dividends in Pesos, to the depositary of our ADSs, The Bank of New York. Except as otherwise provided in the Amended and Restated Deposit Agreement pursuant to which our ADSs are issued, cash dividends received by the depositary are converted by the depositary from Pesos into U.S. Dollars and, after the deduction or upon payment of the depositary’s expenses, are paid to the holders of ADSs in U.S. Dollars. No withholding tax applies to dividends on our ADSs paid to individuals and non-residents of Mexico. See “Item 10. Additional Information—Mexican Tax Considerations—Dividends.”

(c) Exchange Rate Information

The following table sets forth, for the periods indicated, the high, low, average and period-end free market exchange rates, as reported by the Board of Governors of the U.S. Federal Reserve Bank of New York for the purchase of U.S. Dollars, expressed in nominal Pesos per $1.00 U.S. Dollar. The noon buying rate for Pesos on April 13, 2012 was Ps. 13.15 per U.S. Dollar.

According to the U.S. Federal Reserve Board, during 2011, the Brazilian Real reached a high of $1.8865 Brazilian Reais per U.S. $1.00 on November 25, 2011, and a low of $1.5375 Brazilian Reais per U.S. $1.00 on July 26, 2011. On December 31, 2011, the exchange rate was Ps. 7.47 per $1.00 Brazilian Real and CLP 37.11 per $1.00 Mexican Peso as published by Mexico’s Central Bank, Banco de México

(d) Risk Factors

For purposes of this section, when we state that a risk, uncertainty or problem may, could or would have an “adverse effect” on us, we mean that the risk, uncertainty or problem may, could or would have an adverse effect on our business, financial condition, liquidity, operating revenues, results of operations or prospects, except where otherwise indicated or as the context may otherwise require.

The risks described below are intended to highlight risks that are specific to us, but are not the only risks that we face. Additional risks and uncertainties, including those generally affecting the industries in which we operate and the countries where we have a presence, risks that we currently deem immaterial or other unforeseeable risks, may also impair our business.

The information in this annual report includes forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of numerous factors, including, without limitation, those described in this section, under the sections entitled “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects” or elsewhere in this annual report. Please see “Forward-Looking Statements”.

Risk Factors Related to the Company

Material Weaknesses Related To Group’s Brazilian Subsidiary caused The Reissuance Of The Group’s 2011 Consolidated Financial Statements. Material weaknesses related to the internal control over financial reporting by the Group´s Brazilian subsidiary CSB Drogarias, S.A. (as further described in “Item 15 Controls and Procedures”) caused the restatement of the Group´s 2011 consolidated financial statements. As a result of our management team´s constant effort and work, we have established certain programs and activities to root out immediately these material weaknesses in our internal control over financial reporting. Nevertheless, because of the inherent limitations of the internal control over financial reporting we cannot guarantee that our new internal control policies put in place may prevent or detect material misstatements in the future.

We Participate in Competitive Markets and Increased Competition May Adversely Affect Our Business. We face competition in the distribution of pharmaceuticals, health, beauty aids and consumer goods, publications, general merchandise and other products. In our Pharmaceutical Products business division, we face competition primarily from Mexico’s only other national distributor, Nacional de Drogas, S.A. de C.V., or Nadro, and several regional distributors. In our Health, Beauty Aids and Consumer Goods, Publications and General Merchandise and Other Products business divisions, we compete with many manufacturers, wholesalers and distributors that target the same markets that we do.

The retail pharmacy markets in Mexico and Brazil are very fragmented. In Mexico, we face competition from other large pharmacy chains, such as Farmacias Guadalajara, Farmacias Fénix as well as Farmacias del Ahorro and supercenter chains, such as Wal-Mart. In Brazil, we face competition from other pharmacy chains such as Drogaria São Paulo, Pague Menos and Drogasil, in the states of Rio de Janeiro and São Paulo. In addition, we face competition from supermarkets, mass merchandisers, discount stores, independently owned pharmacies, e-commerce and other smaller participants. In Chile, we face competition from Farmacias Cruz Verde, S.A. and Salcobrand, S.A., both of which are chain pharmacies.

Our ability to achieve profitability in our retail and distribution businesses depends on our ability to attract and retain loyal, repeat customers. Loss of existing or future market share to competitors may adversely affect our performance and, to the extent that one or more of our competitors becomes more successful than us with respect to any key competitive factors, our operating margins and profitability could be adversely affected.

Our Results of Operations May Suffer Upon the Bankruptcy, Insolvency or Other Credit Failure of Our Suppliers. Our relationships with pharmaceutical suppliers and manufacturers give rise to substantial amounts that are due to us from time to time, including amounts owed to us for returned or defective goods and for services provided. The continued volatility of the capital and credit markets may adversely affect the solvency or creditworthiness of our suppliers. The bankruptcy, insolvency or other credit failure of any supplier or group of suppliers at a time when such suppliers have a substantial account payable balance due to us could have a material adverse affect on us.

Our Total Revenue and Results of Operations May Suffer Upon the Bankruptcy, Insolvency or Other Credit Failure of Our Customers. Most of our customers in our distribution business buy pharmaceuticals and other products and services from us on credit that is short-term in nature and generally unsecured. Credit is extended based on evaluation of a customer’s financial condition. The continued volatility of the capital and credit markets may adversely affect the solvency or creditworthiness of our customers. Any adverse change in general economic conditions can adversely reduce sales to our customers, affect consumer buying practices or cause our customers to delay or be unable to pay accounts receivable owed to us, which would reduce our revenue growth and cause a decrease in our profitability and cash flow. The bankruptcy, insolvency or other credit failure of any customer or group of customers that in the aggregate have a substantial amount owed to us could have an adverse affect on our results of operation.

Our Distribution Business is Dependent upon Sophisticated Information Systems. The Implementation Delay, Malfunction or Failure of These Systems for Any Extended Period of Time Could Adversely Affect Our Business. We rely on sophisticated information systems in our distribution business to obtain, rapidly process, analyze and manage data to (i) facilitate the purchase and distribution of thousands of inventory items from numerous distribution centers, (ii) receive, process and ship orders on a timely basis, (iii) manage the accurate billing and collections for thousands of customers and (iv) process payments to suppliers. If any such system is interrupted, damaged by unforeseen events or fails for any extended period of time, we could suffer an adverse effect on our results of operations.

We Provide Remote Hosting Services That Involve Operating Both Our Software and the Software of Third-Party Vendors for Our Customers. The ability to access the systems and the data, including inventory, purchasing management, price updates and advisory services that we provide to our customers, including data provided through our proprietary point-of sale system, www.farmaservicios.pdv, is critical to them. Our operations and facilities are vulnerable to interruption and/or damage from a number of sources, many of which are beyond our control, including, without limitation (i) power loss and telecommunications failures, (ii) fire, flood, hurricane and other natural disasters and (iii) software and hardware errors, failures or crashes. We attempt to mitigate these risks through various means including disaster recovery plans and test systems but our precautions may not protect against all problems. Any significant instances of system downtime could adversely affect our reputation and ability to sell our remote hosting services.

The intrusion of unauthorized parties into our computer systems, as well as any other interruption or cyber-attack could jeopardize the confidentiality of our information and the continuity of our processes.

Grupo Casa Saba and its subsidiaries collect and store highly sensitive information within servers and private networks, such as: (i) business information, (ii) intellectual property rights (unpublished), (iii) information of our customers and suppliers, and (iv) personal information of our employees and executives. The processes related to the transmission, maintenance and security of this information are critical for our transactions and business strategies. Regardless of the security measures adopted by Grupo Casa Saba and its subsidiaries, our information and technological infrastructure may be exposed to cyber-attacks, failures caused by errors performed by our employees, or any other unauthorized intrusion into our technological infrastructure.

Any attack or failure in our systems, could jeopardize the information that we store and expose it to theft or losses, which could result in lawsuits and legal proceedings against Grupo Casa Saba and / or any of its subsidiaries, due to the violation of confidentiality agreements executed with our customers, suppliers, employees or business partners, in addition to the reputational damage that the Company could suffer. This could adversely affect our operations and our market position.

Our Results of Operation May be Negatively Affected if We are Unable to Operate our Retail Pharmacy Business Efficiently. A portion of our future operations and cash flow will depend upon our ability to operate our retail pharmacy business efficiently, achieve the strategic operating objectives for our business and realize significant cost savings and synergies. Our management team may encounter unforeseen difficulties in managing the integration of the retail pharmacy business. The retail pharmacy business entails different risks, strategies and models to which our management must adapt. Any substantial diversion of management’s attention or any difficulties in operating the retail pharmacy business together with the distribution business could affect our sales and ability to achieve operational, financial and strategic objectives.

Our Retail Pharmacy Business is Subject to Additional Risks That May Impede Our Desired Growth Plan. Our ability to grow our retail pharmacy business may be constrained if suitable new store locations cannot be identified with lease terms or purchase prices that are acceptable to us. We compete with other retailers and businesses for suitable locations for our stores. Local land use and other regulations applicable to the types of stores we may seek to lease or construct could impact our ability to find suitable locations and influence the cost of leasing, constructing and refurbishing our pharmacies. The expiration of leases at existing store locations may adversely affect us if the renewal terms of those leases are unacceptable to us and we are forced to close or relocate stores. Further, changing local demographics at existing store locations may adversely affect revenue and profitability levels at those stores.

Our retail pharmacy sales and profit margins are affected by the introduction of new brand name and generic drugs. New brand name drugs can result in increased drug utilization and associated sales revenues, while the introduction of lower priced generic alternatives typically result in higher gross profit margins. Accordingly, a decrease in the number of significant new drugs or generics successfully introduced could adversely affect our results of operation.

If We Fail to Offer Products and Services that are Attractive to our Customers, the Sales of our Retail Pharmacy Business may be Adversely Affected. The success of our retail operations depends on our ability to offer a superior shopping experience, quality assortment of available merchandise and excellent customer service. We must identify, obtain supplies of, and offer to our customers, attractive, innovative and high quality products on a continuous basis. Our products and services must satisfy the desires of our customers, whose preferences may change in the future. If we misjudge either the demand for products and services we sell or our customers’ purchasing habits and tastes, we may be faced with excess inventories of some products and missed opportunities for products and services we chose not to offer. As a consequence, our sales may decline or we may be required to sell the merchandise we have obtained at lower prices, which would adversely affect our business and results of operations.

There are Differences in Corporate Disclosure and Accounting Standards for Mexican Companies and This May Cause Our Financial Statements to Differ in Certain Respects from U.S. Issuers. One of the primary objectives of the United States, Mexico and other countries’ securities laws is to promote full and fair disclosure of all material corporate information. However, there may be less publicly available information about foreign private issuers of securities listed in the United States than is regularly published by or about domestic issuers of listed securities. Corporate governance standards applicable to companies listed in Mexico and the United States differ. See “Item 16G. Corporate Governance.” In January of 2009, the Mexican National Banking and Securities Commission published certain amendments to the regulations applicable to pubic companies, which included the obligation to prepare and present financial statements based on IFRS as of 2012. Our financial statements as of December 31, 2011 were prepared based on the applicable Mexican FRS. Note 21 to the audited consolidated financial statements describes the migration from MFRS to IFRS and the effects that the transition may have on the preparation of the consolidated financial statements.

For the year concluded on December 31, 2012, the Company will be reporting its financial information pursuant to IFRS, with its official adoption as of January 1st, 2012. IFRS differ in certain significant aspects from Mexican FRS. An analysis of the principal differences between IFRS and Mexican FRS, along with an estimation of the application of IFRS in the General Balance of the Company for March 30 of 2012 is presented in Item 5 — Operating and Financial Review and Prospects— Accounting Pronouncements and Related Effects. As a result of the adoption of IFRS, our financial consolidated information under the terms established by IFRS for fiscal year 2012 may not be comparable to our financial information of previous periods prepared under the terms provided by Mexican FRS.

Risks related with the publicity control applicable to the so called ¨Miracle Products”. The recent amendments to the Regulation of the General Health Law in Publicity Matters (Reglamento de la Ley General de Salud en Materia de Publicidad) and the strict measures carried out by the Mexican health authorities in order to withdraw from the market the so called “miracle products” could adversely affect the Group. The “Miracle Products”, are those products consisting of herbal remedies, dietary supplements and cosmetic products that are advertised or commercialized as drugs or products with therapeutic qualities or effective for preventive treatment, rehabilitation or the healing of one or more conditions. Some of the products distributed and commercialized by the Company, through its subsidiaries, may be considered miracle products; therefore there is a risk that the sale of said products could be adversely affected as a result of the measures adopted by the Mexican health authorities.

We Are Controlled by One Controlling Shareholder. Eighty-five percent of our outstanding Ordinary Shares are directly owned by our controlling shareholder. See “Item 7. Major Shareholders and Related Party Transactions—Principal Shareholders”. Our controlling shareholder controls our business and has the power to elect the majority of our Board of Directors, as well as to determine the outcome of all actions that require shareholder approval, including the determination to declare and pay dividends, in cash or otherwise.

We Rely on Certain Key Managers and Other Personnel, and Our Business Could Be Adversely Affected If We Are Not Able to Retain These Key Personnel or Find Suitable Replacements. Our growth and success depend on our ability to retain skilled, qualified and experienced managerial and technical personnel. Any loss or interruption of the services of key senior personnel, or the inability to timely recruit sufficient qualified personnel, could adversely affect our business, results of operations and financial condition.

We Are a Holding Company; Therefore, Our Ability to Pay Dividends, Repay Our Indebtedness and Finance Our Operations Is Dependent on Cash Flow Generated by Our Subsidiaries and Their Ability to Make Distributions to Us. We are a holding company with no significant operations or material assets other than the capital stock of our subsidiaries. As a result, our ability to pay dividends is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividends, debt repayments or otherwise. Our subsidiaries may not be able to, or be permitted to, make distributions to enable us to pay dividends or make payments in respect of our indebtedness. Each of our subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions, as well as their financial condition and operating requirements, may limit our ability to obtain cash from our subsidiaries. In addition, our right to receive assets from our subsidiaries or shareholders of our subsidiaries, in the case of a liquidation or corporate reorganization, is subordinated to the rights of the creditors of such subsidiaries, including suppliers.

Continuity in the Consolidation of FASA within Grupo Casa Saba. We have continued with the strengthening of our retail pharmaceutical business and we hope to acquire more pharmaceutical chains as well as individual drugstores in the future. As part of the integration of FASA and its subsidiaries, we began the implementation of an integration plan during fiscal year 2011. Integration of acquisitions involves a number of risks including the diversion of management’s attention to the assimilation of the operations of businesses we acquire, difficulties in the integration of operations and systems, the realization of potential operating synergies, the assimilation and retention of the personnel of the acquired companies, challenges in retaining the customers of the combined businesses and potential adverse effects on operating results.

We May Not Be Able to Pay Dividends in the Immediate Future as a Result of the Acquisition. Pursuant to Mexican law, decisions regarding the payment and amount of dividends are subject to approval of the Company’s shareholders. Depending on the results and condition of our business, dividends for any specific year may be paid to the extent that such payment is approved by our shareholders and would not impair our ability to invest and grow. Therefore, any dividend payment would depend on the cash that the Company generates in a given year as well as on the market conditions of our business and on our subsidiaries’ ability to make cash available to us. The Acquisition Loan provides for a series of covenants which, among other things, restrict the ability of the Company to pay dividends on our capital stock or redeem, repurchase or retire our capital stock and to create any consensual limitation on the ability of the Company’s subsidiaries to pay dividends, make loans or transfer any distribution, among other customary covenants and provisions. These limitations will be effective until the Company’s obligations under the Acquisition Loan are fully paid.

In Connection with the Acquisition, the Company has incurred a Significant Amount of Debt, Which May Result in an Adverse Effect on the Price of Our Shares and an Increase Our Interest Costs. For purposes of completing the Acquisition, in 2010 we incurred significant amounts of debt, which may have an adverse effect on the price of our outstanding shares. In August 2011, the Company restructured this loan at more favorable terms. Such financing could, likewise, have important consequences to the Company, including an increase in our interest expense.

Restrictive Covenants in Our Finance Documents Related to the Acquisition May Restrict the Manner in Which We Can Operate Our Business. The agreements governing our and our subsidiary guarantors’ outstanding indebtedness in connection with the Acquisition limit, among other things, limit our ability and the ability of certain subsidiaries to: (i) incur, assume or allow the existence of indebtedness, (ii) create liens, (iii) consolidate, merge or transfer assets, (iv) sell assets, including capital stock of our subsidiaries, (v) make loans, (vi) modify the nature of our business, (vii) pay dividends on our capital stock or redeem, repurchase or retire our capital stock, (viii) make investments, and (ix) create any consensual limitation on the ability of our subsidiaries to pay dividends, make loans or transfer any distribution to us, among other customary covenants and provisions.

If we fail to comply with these covenants, we would be in default under the loan agreement related to the Acquisition, and the principal and accrued interest of such loan or other outstanding indebtedness may become due and payable. These restrictions could limit our ability to seize attractive growth opportunities for our businesses that are currently unforeseeable, particularly if we are unable to incur financing or make investments to take advantage of these opportunities. This could have an adverse effect on us.

The Instruments Governing the Debt Incurred in Connection with the Acquisition Contain Cross-Default Provisions that May Cause All of the Amounts Owed under Such Loan, to Become Immediately Due and Payable as a result of a Default under an Unrelated Debt Instrument. The instruments governing the debt incurred in connection with the Acquisition contain numerous restrictive covenants. Instruments governing our other indebtedness also contain certain affirmative and negative covenants and require us and our subsidiaries to meet certain financial ratios and tests. Our failure to comply with the obligations contained in any instrument governing our indebtedness could result in an event of default under the applicable instrument, which could then result in the related debt and the debt issued under other instruments becoming immediately due and payable. In such event, we would need to raise funds from alternative sources, which may not be available to us on favorable terms, on a timely basis or at all. Alternatively, such default could require us to sell our assets and otherwise curtail operations in order to pay our creditors.

FASA Could Be Subject of Further Claims by Cruz Verde and Salcobrand in the Process that Is Currently Being Held Against Them before the Chilean Antitrust Authority. On December 9, 2008, the Chilean Antitrust Authority, or Fiscalía Nacional Económica, initiated a proceeding against FASA before the Chilean Antitrust Court, or Tribunal de Defensa de la Libre Competencia, which intended, among other things, to prove that FASA had agreed with its competitors, Farmacias Cruz Verde S.A. (“Cruz Verde”) and Farmacias Salcobrand S.A. (“Salcobrand”) to fix the price of medicines, to impose certain fines on FASA and to end the alleged agreement. On March 23, 2009, the Chilean Antitrust Authority and FASA filed a settlement agreement before the Chilean Antitrust Court, which was approved on April 13, 2009. Although the investigation is now over with respect to FASA due to the approval of the settlement agreement, this proceeding continued in 2011 with respect to Cruz Verde and Salcobrand.

On January 31, 2012, Cruz Verde and Salcobrand were convicted by the Chilean Antitrust Court and both companies appealed the judgment to the Supreme Court Justice of Chile.

Prior to the notification of the judgment against Cruz Verde and Salcobrand, on August 17, 2011, Cruz Verde instituted a civil action in order to obtain from FASA the payment of damages and lost profits, derived from the so-called antitrust acts related to the settlement agreement. However, it is important to point out that in this agreement FASA only acknowledged its own acts and did not make any accusations against Cruz Verde and/or Salcobrand. Therefore, it is unlikely that either of these parties would win a lawsuit against FASA.

In the event that Cruz Verde and Salcobrand obtain the reversal of the judgement against them, Salcobrand could also sue FASA claiming the payment of consequential damages arising from the antitrust process that both were a party to. An adverse judgment in any of these actions could have an adverse effect on our business and our financial results.

Risk Factors Related To the Sale of Operations in Peru

Temporary Restrictions to Compete in the Local Markets of Peru and Bolivia. After operating for more than one year in Peru, on January 12, 2012 Grupo Casa Saba ended its operations in this country after selling its participation held through FASA in the capital stock of Farmacias Peruanas, S.A. and Droguería La Víctoria S.A., companies that were indirectly acquired by Grupo Casa Saba after the purchase of FASA in 2010. The company that will continue with the operations of these Peruvian companies is Quitafex S.A. As a consequence of the sale of operations in Peru, several agreements were executed with Quitafex S.A. and its parent company, one of which established a non-compete restriction for Grupo Casa Saba and its subsidiaries in the market for drug distribution, which prevents them from developing operations in the markets of Peru and Bolivia for a period of five years.

Today, the markets in Peru and Bolivia are not contemplated as places for expansion in our business plan. However, once the restriction imposed on Grupo Casa Saba expires, if the Company intends to venture into such markets, it may find a strong and consolidated competitor that may impede our development in the drug distribution market.

Risk Factors Related to Our Securities

Our Controlling Shareholder Has the Ability to Restrict the Payment and Amount of Dividends. Under Mexico’s Ley General de Sociedades Mercantiles, or General Corporations Law, decisions regarding the payment and amount of dividends are subject to the approval of our shareholders, generally, but not necessarily, based on the Board of Directors’ recommendation. Our controlling shareholder owns 85% of our outstanding Ordinary Shares and, so long as it continues to own a majority of our outstanding shares, it will have the ability to determine whether or not we will declare and pay dividends, in cash or otherwise. See “Item 3. Key Information—Dividends” and “Item 7. Major Shareholders and Related Party Transactions—Principal Shareholders”.

Preemptive Rights May Be Unavailable to Holders of Our ADSs. Under Mexican law, our shareholders are afforded preemptive rights. In the event that we issue new Ordinary Shares for cash, our shareholders will have the right to purchase the number of Ordinary Shares necessary to maintain their existing share participation. U.S. holders of our ADSs cannot exercise their preemptive rights unless we register newly issued Ordinary Shares under the Securities Act of 1933 or qualify for an exemption from registration. If U.S. holders of our ADSs cannot exercise their preemptive rights, the interests of these holders would be diluted in the event that we issue new Ordinary Shares for cash. We intend to evaluate, at the time of any offering of preemptive rights, the costs and potential liabilities associated with registering any additional Ordinary Shares under the Securities Act of 1933. We cannot assure you that we will register any new Ordinary Shares that we issue for cash. In addition, although the deposit agreement provides that the Depositary may, after consulting with us, sell preemptive rights in Mexico or elsewhere outside the United States and distribute the proceeds to holders of ADSs, such sales are not allowed under current Mexican law.

The Protections Afforded to Minority Shareholders in Mexico are Different from those in the United States. Under Mexican law, the protections afforded to minority shareholders are different from those in the United States. In particular, the law concerning fiduciary duties of directors is not fully developed, there is no procedure for class actions or shareholder derivative action, and there are different procedural requirements for bringing shareholder lawsuits. As a result, in practice, it may be more difficult for our minority shareholders to enforce their rights against us or our directors or controlling shareholder than it would be for shareholders of a U.S. company. In accordance with the Ley del Mercado de Valores, or the Mexican Securities Market Law, as amended, we amended our bylaws to increase the protections afforded to our minority shareholders in an effort to try to ensure that our corporate governance procedures are substantially similar to international standards. See “Item 10. Additional Information—Amendments to the Mexican Securities Market Law—Bylaws”.

You May Be Unable to Enforce Judgments Against Us. We are a corporation with variable capital (sociedad anónima bursátil de capital variable) organized under the laws of Mexico. A majority of our assets and operations are located, and a majority of our revenues are derived from sources, outside of the United States. All of our directors and officers reside outside of the United States and all, or a significant portion of, the assets of these persons and of our Company are located outside of the United States. As a result, it may not be possible for shareholders to effect service of process within the United States upon such persons or upon us, or to enforce against them or against us judgments by U.S. courts predicated upon the civil liability provisions of the U.S. federal securities laws or otherwise. As of this date, there is no effective treaty between the United States and Mexico for the reciprocal enforcement of judgments issued in the other country. Generally, Mexican courts would enforce final judgments rendered in the United States if certain requirements are met, including the review in Mexico of the U.S. judgment to ascertain compliance with certain basic principles of due process and the non-violation of Mexican law or public policy, provided that U.S. courts would grant reciprocal treatment to Mexican judgments. Additionally, we have been advised by our Mexican counsel that there is doubt as to the enforceability, in original actions in Mexican courts, of liabilities predicated in whole or in part on U.S. federal securities laws as well as to the enforceability in Mexican courts of judgments of U.S. courts obtained in actions predicated upon the civil liability provisions of U.S. federal securities laws.

Risk Factors Relating to Economic and Political Developments

Economic and Political Developments in Mexico May Adversely Affect Our Business. We are a Mexican company and the vast majority of our business operations take place in Mexico. Approximately 78% of our consolidated net sales for the year ended December 31, 2011 derived from sales made in Mexico. Consequently, our business, financial condition and results of operations are affected by economic, political or social developments in Mexico, including, among others, any political or social instability, changes in the rate of economic growth or contraction, changes in the exchange rate between the Peso and the U.S. Dollar, an increase in Mexican inflation or interest rates, changes in Mexican taxation and any amendments to existing Mexican laws and regulations. Accordingly, Mexican governmental actions and policies concerning the economy in general and healthcare policy in particular could have a significant impact on us, as well as more generally on market conditions, prices and returns on Mexican equity securities. We cannot assure you that changes in governmental policies in Mexico will not adversely affect our business, results of operations, financial condition and prospects.

Social and political instability in Mexico or other adverse social or political developments in or affecting the countries in which we have operations could adversely affect us and our ability to obtain financing. We cannot provide any assurance that the current political situation or any future developments in Mexico will not have a material adverse effect on our financial condition or results of operations. The presidential election in Mexico will take place in July 2012, and the elected president will take office in December 2012. In response to his or her election, diverse social and political changes could arise as consequence of the significant policy differences between the principal political parties in Mexico, which could, in turn, have an adverse effect on our financial condition or our results of operation.

Our business may be adversely affected by economic conditions in Mexico. Mexico has experienced both prolonged periods of weak economic conditions and deterioration in economic conditions that have had an adverse effect on our company. During 2011, Mexico’s gross domestic product, or GDP, grew by 3.9%. Mexico has also experienced high levels of inflation and high domestic interest rates in the past, which significantly lowered the purchasing power of consumers and businesses. The annual rate of inflation, as measured by changes in the NCPI, as published by the Banco de México, was 3.8% for 2011 and the average interest rate on 28-day Mexican government treasury securities, or “CETES”, averaged 4.2%. In addition, the Mexican government’s efforts to control inflation by tightening the monetary supply have historically resulted in higher financing costs, as real interest rates have increased. High inflation rates may also lead to Peso devaluations. Inflation itself, as well as governmental efforts to reduce inflation, has had significant negative effects on the Mexican economy in general and on Mexican companies, including ours. Such policies have had and could in the future have an adverse effect on us. Future economic slowdowns or developments in or affecting Mexico could adversely affect our business, results of operations, financial condition, prospects and ability to obtain financing.

In addition, international events affecting Mexico may also have an adverse effect on our business.

Mexico Has Experienced a Period of Increasing Criminal Activity and Such Activities Could Adversely Affect Our Financing Costs and Exposure to Our Customers and Counterparts. Recently, Mexico has experienced a period of increasing criminal activity and violence, primarily due to organized crime. These activities, their possible escalation and the violence associated with them may have an adverse effect on the business environment in which we operate and, therefore, on our financial condition and the results of operation.

Devaluation of the Peso Against the U.S. Dollar Could Adversely Affect Our Financial Condition and Results of Operations. We are affected by fluctuations in the value of the Peso against the U.S. Dollar. In 2004, high oil prices, higher remittance levels and a recovery in the U.S. economy led to a slight appreciation of the Peso against the U.S. Dollar of 0.8%. During 2005, this trend continued in that the peso appreciated 4.7% against the U.S. Dollar. In 2006, however, the peso depreciated 1.6% with respect to the U.S. Dollar due to higher inflation levels in Mexico. The combination of more moderate GDP growth and a slightly lower level of inflation led to a 1.0% depreciation of the Peso against the U.S. Dollar in 2007. As a result of the global economic crisis that began in 2008 and has lead to a significant increase in inflation as well as slowdown in GDP growth, the Peso depreciated by 26.7% versus the U.S. Dollar in 2008. In 2009, the Peso appreciated 5.6% against the U.S. Dollar as a result of lower inflation levels and, in 2010 the Peso appreciated an additional 5.2% against the U.S. Dollar, driven in large part by the increase in GDP as well as a relatively low inflation rate. During 2011, the pesos depreciated 12.7% against the U.S. Dollar primarily as a result of lower GDP growth brought on by a record drought that has fueled increases in farm prices as well as the failure of the U.S. and other major economies to fully recover from the economic crisis, and concerns regarding the potential for economic contagion stemming from the sovereign debt crisis and material weaknesses in several European countries.

Any future depreciation or devaluation of the Peso will most likely result in price increases from our suppliers. If this were to happen, it would, in turn, impact the purchasing capacity of the final consumers. This, in turn, would lead to a reduction in our sales. A severe devaluation or depreciation of the Peso may also disrupt international foreign exchange markets and, as such, may limit our ability to transfer or to convert Pesos into U.S. Dollars and other currencies for the purpose of obtaining imported goods. A devaluation or depreciation of the Peso against the U.S. Dollar may also adversely affect the U.S. Dollar prices of our securities on the Mexican Stock Exchange, including the Ordinary Shares and, as a result, will likely affect the market price of the ADSs. Such fluctuations would also impact the conversion value of any cash dividends paid on the Ordinary Shares in Pesos into U.S. Dollars in order to pay such dividend to the holders of our ADSs.

High Levels of Inflation and High Interest Rates in Mexico Could Adversely Affect Our Financial Condition and Results of Operations. In recent years, Mexico has experienced high levels of inflation. The annual rate of inflation, as measured by changes in the NCPI, was, 3.8% for 2007, 6.5% for 2008, 3.6% in 2009, 4.4% in 2010 and 3.8% in 2011. High inflation rates can adversely affect our business and our results of operations in the following ways:

Mexico also has, and could continue to have, high nominal interest rates. The interest rates on 28-day CETES averaged approximately, 7.7% in 2008, 5.4% in 2009, 4.4% in 2010, 4.2% during 2011, and by March 2012 the CETE remained stable, averaging 4.2% for the quarter. Accordingly, we may be subject to high interest rates in the event we incur Peso-denominated debt in the future.

If Foreign Currency Exchange Controls and Restrictions Are Imposed, Investors would be Exposed to Foreign Currency Exchange Rate Risk. In the past, the Mexican economy has experienced balance of payments deficits, shortages in foreign currency reserves and other issues that have affected the availability of foreign currencies in Mexico. The Mexican government does not currently restrict or regulate the ability of persons or entities to convert Pesos into U.S. Dollars. However, it has done so in the past and could do so again in the future. We cannot assure you that the Mexican government will not institute a restrictive foreign currency exchange control policy in the future. Any such restrictive foreign currency exchange control policy could (i) affect the ability of the depositary of our ADSs to convert dividends, which are payable in Pesos, into U.S. Dollars for purposes of making distributions to the holders of our ADSs, (ii) prevent or restrict access to U.S. Dollars, (iii) should we incur any U.S. Dollar-denominated debt in the future, affect our ability to service such debt and (iv) have an adverse effect on our business and financial condition.

Risks Related to Our Operations in Brazil May Adversely Affect Our Business. As a result of our acquisition of Drogasmil in May 2008, we are exposed to a variety of risks and uncertainties related to our operations in Brazil including political, economic or social upheaval, devaluations in the Real, high levels of inflation and interest rates, the introduction of import, investment or currency restrictions, including pricing regulation on pharmaceutical products, restrictions on the repatriation of earnings and capital, as well as tariffs and import quotas that may indirectly increase the cost of the products that we sell. These disruptions can affect our ability to sell products and to repatriate funds, affecting the levels of consumer demand, and therefore our levels of sales and profitability.

The Brazilian monetary unit, the Real, has been devalued frequently over the past four decades. Throughout this period, the Brazilian government has implemented various economic plans and exchange rate policies, including sudden devaluations, exchange controls, dual exchange rate markets and a floating exchange rate system. From time to time, there have been significant fluctuations in the exchange rate between the Brazilian currency and the U.S. Dollar and other currencies. For example, the Real depreciated against the U.S. Dollar, on average, by 22.3% in 2001, 19.6% in 2002 and 4.8% in 2003. In 2004, 2005, 2006 and 2007 the Real appreciated 8.8%, 13.4%, 9.5% and 16.3%, respectively, against the U.S. Dollar. In 2008, the Real depreciated 31.9% against the U.S. Dollar, in 2009 the Real appreciated 24.7% against the U.S. Dollar and in 2010, the Real appreciated an additional 3.3% against the U.S. dollar. However, the Real depreciated 12.0% against the U.S. dollar in 2011. In general, devaluations decrease consumers’ purchasing power, which could have a negative effect on our business should a devaluation occur.

Our business could be affected by high rates of inflation and interest rates in Brazil, which historically has experienced such high rates. According to the Brazilian Central Bank’s Índice Nacional de Preços Ao Consumidor Amplo (National Consumer Price Index), or “IPCA,” the inflation rates in Brazil were, 4.5% in 2007, 5.9% in 2008, 4.3% in 2009, 5.9% in 2010 and 6.5% in 2011. Periods of higher inflation may slow the rate of growth of the Brazilian economy, which could lead to a reduced demand for our products in Brazil and decreased net sales. Inflation is also likely to increase some of our costs and expenses, which we may not be able to pass on to our customers and, as a result, may reduce our profit margins and net income.

In addition, high inflation generally leads to higher domestic interest rates and, as a result, the costs of servicing any Real-denominated debt that we may incur in the future may increase, resulting in lower net income. The Sistema Especial de Liquidação e Custodia rate (SELIC) is the Brazilian Central Bank’s overnight lending rate. In 2004 and 2005, the Brazilian interest rate was higher than 16% (17.8% in 2004 and 18.0% in 2005). In 2006, interest rates decreased to 13.3% and in 2007, the SELIC decreased further, to 11.3% only to increase to 13.8% in 2008. During 2009, the SELIC averaged 10.0%, and by the end of 2010, the SELIC averaged 9.8%. During 2011, the SELIC averaged 11.7%. Inflation and its effect on domestic interest rates can, in addition, lead to reduced liquidity in the domestic capital and lending markets, which could affect our ability to refinance any indebtedness that we may incur in the future in those markets.

Brazil has also implemented exchange controls in the past, as well as restrictions on repatriation of capital. We cannot guarantee that such types of policies will not be adopted by Brazil in the future, which would have an adverse effect on our dividend flow to Grupo Casa Saba, which depends on dividends from its subsidiaries as a source of income.

Risks Related to Our Operations in Chile May Adversely Affect Our Business. As a result of our acquisition of FASA and Benavides in 2010, we are exposed to a variety of risks and uncertainties related to our operations in Chile, including political, economic or social upheaval, devaluations in the Chilean peso (CLP), high levels of inflation and interest rates, the introduction of import, investment or currency restrictions, including pricing regulation on pharmaceutical products, restrictions on the repatriation of earnings and capital, as well as tariffs and import quotas that may indirectly increase the cost of the products that we sell. These disruptions can affect our ability to sell products and to repatriate funds, as well as affecting the levels of consumer demand, and therefore our levels of sales and profitability.

Developments in Other Emerging Market Countries May Adversely Affect Our Business or the Market Price of Our Securities. The market price of securities of Mexican companies is, to varying degrees, affected by economic and market conditions in other emerging market countries. Although economic conditions in such countries may differ significantly from economic conditions in Mexico, investors’ reactions to developments in such countries may have an adverse effect on the market price of securities of Mexican companies, including ours. In late October of 1997, prices of Mexican securities dropped substantially, precipitated by a sharp drop in the price of securities traded in the Asian markets. Likewise, prices of Mexican securities were adversely affected by the economic crises in Russia and Brazil in the second half of 1998 and, to a lesser extent, the economic crisis in Argentina in 2002. During 2005, the Mexican Stock Exchange Index increased by 37.8%, as did the average index for emerging markets, including Latin America, Asia and Emerging Europe. The considerable growth of the Mexican exchange was supported by high economic growth worldwide and low interest rates. During 2007, the index of the Mexican Stock Exchange increased by 11.7%, somewhat lower than the last four years, but still positive as a result of strong economic growth of emerging economies such as China and Brazil, as well as solid internal economic activity. During 2008, the index of the Mexican Stock Exchange declined by 24.2%, mainly due to the volatility brought on by the financial crisis that began during the second half of 2008 in the United States and which had a negative effect on both developed and developing countries worldwide. During 2009, the Mexican Stock Exchange Index recovered, posting a gain of 43.5%. By the end of 2010, the Mexican Stock Exchange as measured by the IPyC recovered, posting a gain of 20.0%, in line with the positive performance of both emerging and developed markets worldwide. An increase in liquidity following the world economic crisis as well as positive outlooks for emerging markets, including Mexico, contributed to this increase. During 2011 the Mexican Stock Exchange Index declined 3.8% due to a combination of investor uncertainty over the likelihood of a recovery of the U.S. economy as well as additional uncertainties brought on by a series of events including the Japanese earthquake and tsunami which sparked a nuclear energy crisis in that country, the Middle East political crisis in several countries including Egypt, and continuing concerns over the European debt crisis in countries such as Greece, Ireland, Spain and Portugal. By March 31, 2012 the IPyC recuperated some of its losses, gaining 6.6% versus the end of 2011, mainly as a result of the efforts of the Europen Union to come to the aid of some of the weaker member economies, which is boosting confidence in the region. There can be no assurance that the market price of our securities will not be adversely affected by future events elsewhere in the world, particularly in other emerging market countries.

Risk Factors Relating to Regulations to Which Our Business is Subject

Mexican Antitrust Law and Regulations May Affect Our Ability to do Business. Mexico’s Federal Antitrust Law, or Ley Federal de Competencia Económica, and its Regulations, or Reglamento de la Ley Federal de Competencia Económica, may affect some of our activities. In particular, such laws and regulations may adversely affect our ability to acquire and sell businesses or to enter into joint ventures with competitors due to our market share in some of the industries in which we operate and the reduced number of participants in those markets.

The most recent amendments to Mexico’s Federal Antitrust Law are in full force as of May 11, 2011. Such amendments, among other things, have significantly increased monetary fines and provided for changes in the actions to be taken by the Mexican Antitrust Commission or Comision Federal de Competencia, with respect to illegal conduct. In addition, Mexico´s Federal Antitrust Law and related regulations or conditions imposed by the Mexican Antitrust Commission may adversely affect our ability to determine the manner in which we provide our products and services. Approval of the Mexican Antitrust Commission is required for us to acquire certain businesses or enter into certain joint ventures. There can be no assurance that in the future the Mexican Antitrust Commission will authorize certain acquisitions or joint ventures related to our businesses, the denial of which may adversely affect our business strategy, financial condition and results of operations.

Changes in Mexican Legislation May Adversely Affect Our Operations and Revenue. Existing laws and regulations could be amended, the manner in which laws and regulations are enforced or interpreted could change, and new laws or regulations could be adopted. The implementation of such amendments or changes in interpretation or enforcement of existing Mexican laws and regulations or any other future laws or regulations could materially and adversely affect our operations and revenue. During 2011 and the first quarter of 2012, different reforms were implemented to the General Health Law in Mexico. As a result of these reforms, as of June 2011 cosmetic products are goods regulated by the General Health Law. The regulation of the cosmetic products impacts its marketers due to the imposition of requirements on the importation and exportation processes, and publicity. In addition, as of September 2011, all cosmetics products that contain hormones, vitamins and in general, substances with a therapeutic effect are considered as drugs, therefore its producers, distributors and marketers must comply with the dispositions and legal requirements applicable to drugs.

At the beginning of 2012, the General Health Law was modified in order to implement the term “orphan drugs”, which are defined as those medicines intended for the prevention, diagnosis or treatment of uncommon conditions. Such conditions have a frequency of no more than 5 persons per each 10,000 people. The scarcity of these products is a concern to the Ministry of Health, the legislative reform allowed said authority to implement the necessary measures and actions to boost and promote the availability of orphan drugs.

In addition, on January 19, 2012, the Regulations of the General Health Law were amended to regulate the publicity of “Miracle Products”. Miracle products were a controversial topic during 2011 due to the strict measures adopted by the authorities in order to withdraw different herbal remedies, dietary supplements and cosmetic products that were publicized and commercialized as drugs or products with a therapeutic quality or effective for preventive treatments, rehabilitation or healing of one or more conditions from the market.

As a consequence of amendments to the federal Income Tax Law (Ley del Impuesto Sobre la Renta), Grupo Casa Saba decided to drop out of the tax consolidation regime and during the fiscal year 2010 filed the relevant application. Therefore, the Company and its subsidiaries filed its tax return for the Single Rate Business Tax (Impuesto Empresarial a Tasa Única) and the Income Tax, individually. For 2011, the Company once again received the approval of the Mexican tax authorities to determine its consolidated taxable income solely for the companies that are considered to be controlled companies, as set forth by the Mexican Income Tax Law.

Our Ability to Increase the Prices of Some Products is Regulated by the Mexican Government. Our historical operating performance has been adversely affected by price controls imposed by the Mexican government in the pharmaceutical sector. Prices of pharmaceuticals continue to be subject to approval by the Mexican government. As a result, neither our suppliers nor we may be able to increase pharmaceutical prices at or above the rate of inflation, which would substantially limit the growth of our pharmaceutical-related revenues. Since 1990, the Mexican government has deregulated pharmaceutical prices to some extent, and prices have increased in the Mexican pharmaceutical market as a result of this deregulation. However, we cannot assure you that the Mexican government will continue to deregulate pharmaceutical prices, or if they do, that our ability to increase prices will continue, or that these increases will result in an improvement in our operating performance.

Any Value-Added Tax Imposed on Prescription Drugs May Adversely Affect Our Business, Financial Condition and Results of Operations. Unlike the Health, Beauty and Consumer Goods (HBCG), entertainment products, general merchandise and other products that we distribute, the prescription drugs and over-the-counter drugs that we distribute are not currently subject to a 16% value-added tax. In April 2001, a proposal was filed with the Mexican congress requesting a substantial amendment to Mexican tax laws. One of the reforms contemplated by this proposal was an increase in the value-added tax on prescription drugs and over-the-counter drugs from 0% to 15%. Although that bill was not passed by the Mexican Congress, the current government may file similar proposals. If prescription drugs and over-the-counter drugs become subject to a value-added tax in excess of the currently applicable 0% rate, the prices paid by consumers for prescription drugs and over-the-counter drugs would likely increase by the percentage amount of the value-added tax rate. While any price increases resulting from the imposition of a higher value-added tax would be non-recurring, we still believe that these price increases would have an adverse effect on consumer demand for these products and result in a decrease in related revenues. To the extent that any of these price increases adversely impact revenues related to prescription and over-the-counter drugs, our business, financial condition and results of operations could be adversely affected. We cannot assure you that the proposal containing this request or other similar proposals will not be filed again with the Mexican congress and, if such proposal were enacted into law, will not adversely affect our business, financial condition or results of operations.

Changes to Retail Pharmacy Regulation in Mexico May Adversely Affect Our Business. Our retail pharmacy business operations are subject to health and safety laws and regulations, including those concerning the commercialization of controlled medicines, commercialization and storage of controlled substances used in pharmaceutical products and the sale and distribution of cigarettes, among others. The enactment of more stringent laws and regulations, or a change in the interpretation of such existing laws and regulations, could entail new obligations for us, restrictions or result in our having to invest additional amounts in health control matters, all of which could have an adverse effect on our results of operations and financial condition.

Changes in Brazilian Regulations Relating to the Sale of Pharmaceutical Products and Retail Pharmacy Operations May Adversely Affect Our Business. Pharmacies are required to obtain a number of permits and operating licenses from federal, state and local authorities in Brazil, including from the Secretaria de Vigilância em Saúde, Health Surveillance Secretariat of the Ministry of Health, or SVS, in order to engage in the handling, distribution, transport, repackaging, import and export of the substances determined by the SVS, as well as the medicines that contain such substances. Changes in the type of permits that are required or our failure to obtain such permits may adversely affect our results of operations in Brazil.

Our operating performance in Brazil may also be affected by the price controls on pharmaceutical products and certain non-pharmaceutical products imposed by the Brazilian government through the Câmara de Regulação do Mercado de Medicamentos, the Chamber for Regulation of Medicine Market, or CMED, with the oversight of the Agência Nacional de Vigilância Sanitária, the National Health Surveillance Agency, or ANVISA. As a result neither our suppliers nor we may be able to increase prices above the maximums established by the relevant Brazilian authorities. Price controls are governed through regulatory mechanisms that allow for controlled percentage increases in prices due to fluctuations in the exchange rate, inflation rate and raw material costs, among other factors. Adjustments to price controls take place on an annual basis, on March 31 of each year. The CMED established a maximum drug price adjustment of 5.85% for the year commencing on March 31, 2012. We cannot assure you that more stringent measures will not be implemented by the Brazilian government in respect of price controls. Changes to the manner in which price controls are implemented in Brazil may adversely affect our results of operations in Brazil.

In August 2009, ANVISA adopted new rules for the sale of products in pharmacies in an effort to curb self-medication. Resolution RDC 44/09 prohibits the sale of convenience products and other services not related to health and personal hygiene. In addition, pursuant to the new rules, pharmacies will be required to place several products, including common over-the-counter drugs like analgesics and antacids, behind the counter. The new rules came into effect on February 18, 2010. We believe such rules are not legal and that ANVISA went beyond its powers in issuing them. Based on the foregoing, Abrafarma, the Brazilian Association of Pharmacy and Drugstore Networks of which our subsidiary Drogarias is a member, has filed for an injunction for the benefit of its members against the application of the new rules. In January 2010, a federal court in the Federal District granted the injunction to Abrafarma and its members, including Drogarias, against the application of the above-mentioned rules. If such new rules were to be applied to Drogarias, its business, results of operation and financial condition may be adversely affected.

Currently, Brazil’s Federal Pharmaceutical Council, Conselho Federal de Farmacia, is considering a draft resolution that would require that over-the-counter medications, such as analgesics and antacids, may only be sold if prescribed by a pharmacist. If approved, we believe such regulation could have an adverse effect on the operations of our subsidiary Drogarias.

The sale of pharmaceutical products in Brazil is subject to a tax rate of up to 19%, one of the highest in Latin America. Further increases in the taxes applicable to the sale of the products we sell may adversely affect our results of operation and our margins in Brazil to the extent that we are not able to pass on such costs to the end-consumer, for example, as a result of price controls.

Changes in Chilean Regulations Relating to the Sale of Pharmaceutical Products and Retail Pharmacy Operations May Adversely Affect Our Business. The Chilean National Congress is currently discussing a bill by means of which the Chilean Sanitary Code intends to be modified in order to regulate several aspects of the pharmaceutical industry: including, among other, the (i) prohibition on giving any type of incentive to the sellers of pharmaceutical establishments, (ii) banning vertical integration between pharmaceutical chains and laboratories, (iii) regulatory requirements on price information for medicines, and (iv) authorization of the retail sale of certain drugs in stores different from pharmacies or drugstores. We cannot predict the effects of such amendments, nor assure that more stringent measures will not be implemented by the Chilean government. Changes to the manner in which the pharmaceutical industry, as well as the sale of pharmaceutical products and retail pharmacy operations are regulated in Chile may adversely affect our results of operations.

In response to the devastating earthquake that struck Chile in 2010, in 2011 the Post-Earthquake Country Reconstruction Financing Law (Ley de Financiamiento para la Reconstrucción del País Post-Terremoto) (Law No. 20.455) was enacted. As a result, the first category income tax rate was temporarily raised from 17% to 20%. Although this change had a negative impact on the results for the period, it did not adversely affect us from an accounting and taxation perspective, given that it is a deferred tax that can be compensated with tax losses.

The Chilean Health Institute (Instituto de Salud Pública de Chile) issued a resolution by means of which certain bioequivalence analysis were required to be filed with respect to some pharmaceutical products called monodrugs (monodrogas), on January 31, 2012 at the latest. Such analyses will be considered as a registration requirement for some generic medicines, and the lack of such analyses may give rise to cancelation from the sanitary registrar for generic medicines. The performance of the bioequivalence analysis does not depend entirely on us, so if the Company’s subsidiaries fail to comply with the ruling, it may cause shortages in the supply of certain medicines.

Natural Events that May Occur as a result of Climate Change in Regions where we Operate could have Adverse Effects on the Company, such as the Temporary Cessation of Operations, Grupo Casa Saba and its subsidiaries have operations in Mexico, Chile and Brazil, countries which, like many others, have experienced natural disasters such as hurricanes, earthquakes, floods, volcanic eruptions, etc. As a consequence of the drastic climate changes that have been identified by the scientific community in recent years, the risk of natural disasters caused by climate change may increase in number or intensity, which could adversely affect the Company.

Mexico City, the seat of our headquarters, has been affected by unusual and continuous seismic activity during the first months of 2012. Also, in late March 2012, a magnitude 7.1 earthquake struck central Chile and subsequent quakes have followed. Some of our most important business operations are concentrated in Mexico City and Santiago, Chile. Therefore, if such strategic locations were subject to a natural disaster, our employees, customers and suppliers could be exposed to the cessation of operations, which could adversely affect the Company.

History and Development of the Company

Grupo Casa Saba, S.A.B. de C.V. is a sociedad anónima bursátil de capital variable, or stock corporation with variable capital, which was organized under the laws of Mexico on November 16, 1982. Our deed of incorporation was registered with the Public Registry of Commerce in Mexico City on January 10, 1983 under Commercial Folio Number 55,635. Pursuant to the terms of our estatutos sociales, or bylaws, our corporate existence is indefinite. Our principal executive offices are located at Paseo de la Reforma, No. 215, Colonia Lomas de Chapultepec, C.P. 11000, D.F., Mexico. Our telephone number at that address is (52 55) 5284-6600. Grupo Casa Saba’s authorized representative in the United States is Puglisi & Associates and is located at 850 Library Avenue, Suite 204, P.O. Box 885, Newark, Delaware 19714. Their telephone number is (302) 738-6680.

Grupo Casa Saba was founded as a pharmacy in 1892, and is currently one of the leading multi-channel, multi-product national wholesale distributors in Mexico, operating through one of Mexico’s largest nationwide distribution networks of its type. We distribute pharmaceutical products, health, beauty aids and consumer goods, general merchandise, publications and other products. The majority of these products are distributed on a non-exclusive basis. With over 115 years of experience, we serve a significant number of Mexico’s pharmacies, mass merchandisers, retail and convenience stores, supermarkets and other specialized channels.

In February 2000, Mr. Isaac Saba y Raffoul, also known as Isaac Saba Raffoul, acquired 225,606,456 of our Ordinary Shares. In 2008, he contributed them to Trust F-709, of which he was the sole beneficiary. Upon his death on July 27, 2008, Manuel Saba Ades and Alberto Saba Ades, sons of Isaac Saba Raffoul, are the sole beneficiaries, on an equal basis, of the Ordinary Shares held by Trust F-709. References in this annual report to “our controlling shareholder” are to Trust F-709, as the direct holder of 225,606,456 Ordinary Shares for the benefit of Manuel Saba Ades and Alberto Saba Ades.

By the end of 2007, we had no interest-bearing liabilities and our net debt by year-end was Ps. 684 million. As of December 31, 2008, our interest-bearing liabilities were Ps. 1,324.8 million and our net debt was Ps. 723 million, primarily as a result of the acquisition of Drogasmil, a Brazilian pharmacy chain. Our interest-bearing liabilities at the close of the 2009 fiscal year totaled Ps. 2,382.7 million and our net debt was Ps. 1,719 million. At the end of 2010, our interest-bearing liabilities totaled Ps. 11,484.7 million and our net debt was Ps. 10,249.0 million. As of December 31, 2011, our interest-bearing liabilities were Ps. 12,556.5 million and our net debt was Ps. 10.246.1 million, primarily as a result of the acquisition of FASA, a Chilean-based pharmacy chain.

See “Item 5. Operating and Financial Review and Prospects—Indebtedness” and Note 12 to our consolidated financial statements.

During 2008, as part of our growth strategy, we expanded our retail pharmacy operations in Mexico and overseas. We experienced significant growth in the retail pharmacy chain that we operate through our subsidiary Farmacias ABC de Mexico, S.A. de C.V., or Farmacias ABC, which at the time was based in Guadalajara, Jalisco. We acquired Farmacias ABC in November 2007 with 40 pharmacies and grew to over 150 pharmacies by the end of 2008 through a series of small acquisitions of retail pharmacy assets (primarily inventory and store locations) in the metropolitan area of Mexico City and in the states of Guanajuato, Michoacan, Jalisco and Coahuila. In May 2008, we expanded into the Brazilian retail pharmacy market. We acquired 100% of the shares of Drogasmil, a closely-held company, for a transaction price of approximately $155 million Reais. We financed the acquisition by obtaining a long-term loan for an aggregate amount of up to Ps. 1,210 million from a Mexican financial institution, of which we had drawn Ps. 1,210 million as of December 31, 2009. As of December 31, 2011, Drogasmil operated pharmacies in the states of Rio de Janeiro and São Paulo. In 2008, we incorporated Casa Saba Brasil Holdings Ltda., or Casa Saba Brasil, as a holding company for our operations in Brazil. References in this annual report to Casa Saba Brasil include any of its subsidiaries, including Drogasmil.

In April of 2008, we continued to open new lines of business through the acquisition of 50.1% of Controladora de Clínicas Ambulatorias y de Rehabilitación, S.A. de C.V., or Controladora de Clínicas Ambulatorias, a company that operates two full-service clinics under the name “Sport Clinic” specializing in orthopedics, trauma, sports medicine, nutrition, otorhinolaryngology and plastic surgery for short-stay patients. Each clinic is staffed with highly-trained, specialized personnel that conduct out-patient surgeries and provide rehabilitative therapy. Both clinics are located in Mexico City. With this acquisition, we were seeking to diversify and increase our participation in the healthcare sector. In 2008, we began construction of a new clinic in Tampico, Tamaulipas, which opened to the public in November 2009. In addition, in 2009 we continued our expansion in the healthcare sector and opened Perfect Image in Mexico City, a clinic specializing in plastic surgery as well as health and beauty treatments. However, in accordance with our business plan, during 2011 we began the process of divestiting Sports Clinic.

On March 25, 2010 our subsidiary Casa Saba entered into a new credit agreement with Scotiabank Inverlat, S.A. to liquidate the bank loans related to Drogarias, which was prepaid on October 3, 2010.

As part of our strategy to expand our retail pharmacy operations, on May 17, 2010 we entered into a Stock Purchase and Sale Agreement, or the FASA Agreement, with a group of entities controlled by Mr. Jose Codner Chijner to acquire up to 100% of the capital stock of Farmacias Ahumada, S.A., or FASA, for a total price of approximately $637 million, including the assumption of net debt that, as of March 31, 2010, was $162 million. FASA is the largest retail pharmacy chain in Latin America, with annual sales of approximately $1,691 million in 2010 and over 1,260 pharmacies in Chile, Mexico and Peru. The transaction was subject to the completion of a tender offer for all of the outstanding shares of FASA on the Santiago Stock Market, at a price of 1,642 Chilean Pesos per share and the validity of such offer was conditioned upon the acquisition of at least fifty percent plus one of the outstanding shares of FASA. The Acquisition was also subject to the approval of our general shareholders’ meeting and the Mexican Antitrust Commission, Comision Federal de Competencia.

On July 21, 2010, our shareholders approved the Acquisition by ratifying the execution of the FASA Agreement. Additionally, our shareholders authorized the Company to launch a tender offer, directly or indirectly through one of its subsidiaries, for up to all of the shares that represented the capital stock of FASA, and to carry out all necessary acts, including the granting of collateral, in order for the Company to obtain the necessary resources to finance the Acquisition.

On August 30, 2010, the Company entered into a credit facility agreement, as borrower, with HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC or HSBC Mexico and Banco Mercantil del Norte, S.A., Institución de Banca Múltiple, Grupo Financiero Banorte, as lenders, for the amounts of Ps.5,773.9 million and Ps.1,950.0 million, respectively (the “Acquisition Loan”). Certain subsidiaries of the Company executed the Acquisition Loan as joint obligors. HSBC Mexico and HSBC Bank (Chile) were appointed as collateral agents in their respective countries. The Acquisition Loan provides for a series of covenants which, among other things, restrict the ability of the Company and the joint obligors to: (i) incur, assume or allow the existence of indebtedness, (ii) create liens, (iii) consolidate, merge or transfer assets, (iv) sell assets, including capital stock of our subsidiaries, (v) make loans, (vi) modify the nature of our business, (vii) pay dividends on our capital stock or redeem, repurchase or retire our capital stock, (viii) make investments, and (ix) create any consensual limitation on the ability of our subsidiaries to pay dividends, make loans or transfer any distribution to us, among other customary covenants and provisions.

On September 28, 2010, the Company and certain subsidiaries entered into an irrevocable guaranty trust as trustors and second beneficiaries with The Bank of New York Mellon, S.A., Institución de Banca Múltiple, as trustee, pursuant to which the trustors transferred the property of certain shares to the trustee in favor of HSBC Mexico as first beneficiary and acting as Mexican collateral agent, in order to secure its obligations under the Acquisition Loan. In case of execution on the collateral, the Company has agreed that the beneficiary is entitled to instruct the sale of the trust estate to the trustee, in order to obtain the necessary resources to pay the Acquisition Loan. In this case, the trustee shall follow the procedure established in the trust agreement for the sale of the trust estate. Among other customary covenants, the trustors have agreed to immediately transfer to the trustee any additional shares that each trustor acquires from time to time, and to abstain from creating or allowing the existence of any lien over the trust estate.

On the same date and in addition to the aforesaid guaranty trust, the Company entered into a non-possessory pledge agreement as pledgor with HSBC Mexico as pledgee and acting as Mexican collateral agent pursuant to which the Company pledged (i) all its inventory, including raw materials and products, finished and in process, and general assets that are used for the ordinary course of business of the Company, and (ii) all the present and future account receivables related to the Company’s preponderant activity. Among other customary covenants, the Company agreed not to sell, transfer or in any way dispose the pledged assets, except when the sale or property transmission takes place in the ordinary course of business or in any of the exceptions established in the Acquisition Loan. In accordance with Mexican applicable law, the Company is bound to maintain the inventories located in the warehouse.

On August 31, 2010, the Company announced that it had obtained final approval of the Acquisition from the Mexican Antitrust Commission, and published the announcement for the initiation of the tender offer period to acquire up to 100% of FASA’s outstanding shares on the Santiago Stock Exchange.

On September 30, 2010, the Company announced that the period to participate in the tender offer launched to acquire up to 100% shares of FASA’s outstanding shares on the Santiago Stock Exchange, which began on August 31, 2010, had expired. As a result of the tender offer, the Company, through Inversiones GCS Limitada, a wholly owned subsidiary incorporated under the laws of Chile, acquired 146,693,539 of the 150 million outstanding shares, or 97.8% of FASA’s capital stock. The transaction totaled $240,870,791,038 Chilean pesos or approximately Ps. 6,201,240,000, based on an exchange rate of $39 Chilean pesos: Ps.1 Mexican peso. FASA owns approximately 95.62% of the outstanding shares of the capital stock of Farmacias Benavides, S.A.B. de C.V. or Farmacias Benavides. Therefore, as a result of the Acquisition the Company indirectly acquired a controlling share in Farmacias Benavides, the operator of FASA’s pharmacy network in Mexico.

Payment for the shares resulting from the above-mentioned tender offer took place on October 3, 2010 and was made with the proceeds of the Acquisition Loan.

As publicly disclosed by GCS on August 10, 2011, on such date GCS entered into an Amendment Agreement with regard to the Credit Agreement dated August 30, 2010, by means of which GCS had obtained the necessary funds to complete the acquisition of Farmacias Ahumada, S.A. in Chile. The effectiveness of such agreement was subject to the satisfaction of certain conditions precedent, all of which were satisfied by GCS in September 2011. The Amended and Restated Credit Agreement includes the affirmative and negative covenants that are customary for this type of transactions. As result of the execution of this document, the non-possessory pledge agreement and the irrevocable trust agreement over shares No. F/00756 were amended, both were guaranties of the Credit Agreement granted for the acquisition of FASA. For a description of the Amended and Restated Credit Agreement and its ancillary documents, see “Exhibits 4.2, 4.4 and 4.6”.

As part of the evolution process of our business model, Grupo Casa Saba has decided to concentrate its efforts in its expansion in Mexico, Chile and Brazil. As a result, in early 2012 it completed a series of negotiations with Quitafex, SA and its parent company, which resulted in the sale of our operations in Peru through the disposal of the equity of our subsidiaries in Farmacias Peruana S.A. and Droguería La Victoria S.A., vehicles through which we developed our operations in Peru. Part of the agreements reached with Quitafex, S.A. and its parent company resulted in a 5 year non-competition period for Grupo Casa Saba and its subsidiaries to develop operations related to the supply of drugs in Peru and Bolivia, countries that, for the moment, are not part of our strategic expansion plan.

The Acquisition has increased the position of our retail pharmacy division in cities where it did not previously have coverage and has increased its presence in cities where it previously was minor. We consider ourselves to be the largest retail pharmacy chain in Latin America, with a platform of approximately 1,300 pharmacies across Mexico, Brazil and Chile as of December 31, 2011. We believe that the Acquisition creates value for our shareholders through the projected benefits of the synergies that were created. The synergies and economies of scale that the Company is obtaining through this Acquisition include, but are not limited to, operating efficiencies, a greater supply and penetration of product for customers as well as savings in terms of administrative and sales expenses.

History of FASA

FASA was founded in Chile 1968 by Mr. José Codner Chijner and, from there, the company expanded its operations into Peru and then, in 2002, Mexico. The individual history of each company is as follows:

Chile

1968 Mr. Jose Codner Chijner acquires the first pharmacy.

1969 The first drugstore of the FASA chain is established.

1992 The national expansion process begins with the opening of the first pharmacy in the region of Arica and Parinacota in Chile.

1996 The development of the Peruvian market begins and Boticas Fasa, S.A. is incorporated.

1997 On December 4, FASA carries out its initial public offering for an amount of approximately U.S.$21 million becoming a publicly traded company in the Stock Exchange of Santiago in Chile (“BCS”), and increasing the number of shareholders from 11 to 256.

1998 The affiliate company Administradora de Beneficios Farmacéuticos, ABF S.A. is incorporated, providing medicine coverage to institutions, corporations and insurance companies.

1999 Falabella S.A.C.I. and the American fund Latin Health Care Fund become shareholders of FASA, acquiring 20% and 7.7%, respectively, of the shares representing FASA’s capital stock. Such transaction was made in the BCS through a capital increase of approximately U.S.$49 million.

2000 FASA acquires 50% of the company named Compañía Nutrición General in order to merchandise the GNC products. FASA and AIG Capital acquire 77% of Drogamed, Brasil.

2001 An additional 15% of the capital stock of Boticas Fasa is acquired, obtaining the control of such company and another 17% of GNC Chile.

2002 The rest of the capital stock of Compañía Nutrición General is acquired by Fasa, turning the Said company into a wholly owned subsidiary. On December 23, FASA assumes the control of Farmacias Benavides.

2004 FASA successfully carried out the offer of two series of notes.

2005 FASA incorporates 26 pharmacies from Droguería y Farmacias El Fénix, S.A. de C.V.

2006 On January 26, FASA completed its exit of the Brazilian market by selling 100% of Drogamed.

FASA and Laboratorio Volta associate to incorporate a new company named Pharma Genexx S.A. dedicated to the commercialization of generic pharmaceutical products as well as medical and hospital supplies within Chile and other foreign countries.

On December 15, FASA closed its Alliance with Distribución y Servicio D&S S.A. to operate 68 stores of the Farmalíder chain.

2007 On April 10, FASA increased its participation in Benavides resulting in a 71.076% interest. On June 28, FASA closes the strategic alliance with Grupo Euroamérica for the creation of a new real estate company named Inmobiliaria Avantuen, FASA holds a 49% interest while Grupo Euroamérica holds a 51% interest. The main purpose of this alliance is to develop commercial centers, strip centers and stores in which the FASA chain may have an important presence.

2008 In January, FASA acquired an additional 24.55% of Farmacias Benavides, resulting in a 95.62% participation. On May 15 and 19, respectively, the offer of the series E and F notes was successfully carried out. The proceeds of such offer were used to refinance the series C and D notes and the acquisition of the additional interest in Benavides.

2009 On October 2, 2009, FASA sold its interest in Pharma Genexx to Inversiones Opko Limitada.

2010 On May 17, 2010, the Company signed a purchase agreement, under the terms of which Grupo Casa Saba was bound to carry out a tender offer on the Santiago Stock Exchange, in Chile, for all of FASA’s outstanding shares of capital stock once it had obtained the necessary corporate and governmental authorizations. FASA owns approximately 95.62% of the outstanding shares of the capital stock of Farmacias Benavides; therefore, as a result of the acquisition of FASA’s shares, Grupo Casa Saba indirectly acquired a controlling participation in Farmacias Benavides.

On August 31, Grupo Casa Saba announced that it had received final approval from the Federal Competition Commission (Cofeco by its Spanish acronym), Mexico’s anti-trust authority, to acquire control of FASA, including Farmacias Benavides. In addition, the Company signed certain contracts with both HSBC, S.A. and Banorte, S.A. to finance the transaction and published the announcement of the initiation of the tender offer period to acquire up to 100% of FASA’s outstanding shares on the BCS.

2011 In April, the shareholders of FASA held an ordinary and extraordinary shareholder meeting by means of which it approved, amongst others: (i) the financial statements for year 2010; (ii) the appointment of Surlatino Auditores Limitada (member of Grant Thornton International Ltd) as external auditors for year 2011; (iii) the reduction of members in the Board of Directors from 7 to 5; (iii) the composition of the Board of Directors as follows: Manuel Saba Ades, Alberto Saba Ades, Gabriel Saba D´Jamus, Pedro Alejandro Sadurni Gomez and Jorge Manuel Sanchez Lanzilotti; (iv) the appointment of Manuel Saba Ades as President of the Board of Directors.

In connection with the judgment issued by the Chilean Antitrust Court against Salcobrand and Cruz Verde, in August, Cruz Verde instituted a civil action in order to obtain from FASA the payment of damages and lost profits, derived from so-called antitrust acts performed by FASA.

2012 In January, FASA reached a definitive agreement to sell 100% of its Peruvian operations to Quitafex, S.A. and its parent company for US$50,500,000 including its shares of the Peruvian subsidiaries: (i) Farmacias Peruanas, S.A. and (ii) Droguerías La Victoria, S.A.C. As part of the transaction, FASA simultaneously agreed to the sale and long-term licensing of several brands, which are owned by FASA. As part of the agreement, FASA agreed to a non-compete restriction in the drug distribution market, which prevents FASA and its related parties from developing operations in Peru and Bolivia for a period of five years.

In addition, in January, Inmobiliaria Avantuen, S.A., a subsidiary of FASA, executed and closed an asset purchase agreement by means of which it transferred all of its assets to Seguros Corpvida, S.A.

Mexico

Farmacias Benavides was incorporated on January 1, 1963 under the name of Servicios Comerciales y Contables, S.A.

On October 1991 the corporate name was changed to Far-Ben S.A. de C.V.

On September 19, 2003 a general extraordinary shareholders meeting was held. Among other resolutions which were passed, it was decided to change the corporate name from Far-Ben, S.A. de C.V. to Farmacias Benavides, S.A. de C.V. and to concentrate the operation of all the pharmacies.

Amendments to the Mexican Securities Market Law were published on December 30, 2005 due to those amendments and in order to comply with such law, Benavides adopted the expression “Bursátil” in its corporate name, resulting in the current corporate name Farmacias Benavides, S.A.B. de C.V.

1917. Mr. Felipe de Jesus Benavides Guerra acquires the existent “Botica del Carmen” in Monterrey, State of Nuevo Leon, Mexico, a drugstore mainly dedicated to the manufacture of medicines. In this year, the retail and wholesale distribution of medicines was initiated.

1935. In order to strengthen the wholesale distribution, Droguería Benavides, S.A. was created.

1940. Commercial deployment begins with the opening of pharmacies, one in the city of Monterrey, State of Nuevo Leon, and in Torreon, State of Coahuila, both in Mexico under the commercial name of Farmacias Benavides, the name which will later distinguish the pharmacies operated by Farmacias Benavides.

1942. Pharmacies are opened in five major locations within Mexico, Matamoros, Reynosa and Tampico in the State of Tamaulipas, in Saltillo, State of Coahuila and the State of Durango.

1947. Farmacias Benavides introduces the coffee shop concept, as a business diversification and customer service.

1956. The convenience store concept that started developing in previous years is strengthened as a complement to the pharmacy, offering consumers a wide range of products such as perfumes, cosmetics, photography, groceries, personal hygiene, toys and sweets, among others.

1960-1970. The participation in new markets increases, mainly in the northwest of Mexico, through the acquisition of Boticas Moebius, Farmacia San Rafael and Boticas Moderna, S.A.

1987. The sale of medical equipment and supplies for hospitals is initiated with the acquisition of Diamedic, S.A. de C.V.

1988. Boticas La Palma, S.A. de C.V. another pharmacy operator with 30 stores is acquired by Farmacias Benavides, consolidating its presence in the cities of Torreon, State of Coahuila, Gomez Palacio, Lerdo and Durango in the State of Durango.

1989. Farmacias Benavides buys Farmacias Levi, S.A. de C.V., entering the western region of Mexico, mainly in the cities of Guadalajara, State of Jalisco, Tepic, State of Nayarit and Leon, in the State of Guanajuato.

1990. The marketing expansion of photographic materials and service is initiated, upon the purchase of Foto Viza, S.A. de C.V. and Cámaras y Películas, S.A. de C.V., offering photo developing and printing, as well as related products.

1992. 60 new pharmacies are opened. At the end of the year, the pharmacies under the commercial name “Farmacias Benavides” totaled 309. In October the authorization for recording the shares representing its capital stock in the National Securities Registry, and to carry out the initial public offering of such shares, was obtained.

1993. Farmacias Benavides makes an initial and secondary public offering with the ticker symbol “BEVIDES”. As a result of such offerings, the 24% of the capital stock of the company was acquired by the public. At the end of the year, Farmacias Benavides operated 371 pharmacies, distributed along 86 cities within 15 Mexican States.

1994. During this period 76 new selling spots were developed in order to be as close as the customers needed, reaching 447 pharmacies among 16 Mexican States.

1995. With the closure of a limited number of stores that did not operate according to the standards of Farmacias Benavides, 10 stores were relocated and other 12 were redesigned as “convenience stores”, including perishable goods for the first time.

1996. Farmacias Benavides reinitiates its expansion process by acquiring the “Del Paseo” drugstore chain, with 10 pharmacies located alongside hospitals and clinics, seeking greater proximity to consumers. The number of stores increases up to 470 with the traditional pharmacy form and 218 of them with photo developing laboratories. At the end of the year the number of stores totals 522.

1997. At the beginning of the year Farmacias Benavides acquired 50% of the capital stock of another drugstore chain called Droguería y Farmacia el Fénix, based in the city of Tampico, State of Tamaulipas, Mexico, with 124 years in existence and with 54 pharmacies. In May, a bond issuance was carried out whereby 2,250,000 convertible bonds were publicly offered with a face value of 100 Unidades de Inversión, due June 13, 2002.

1998. A distribution agreement is entered into by Farmacias Benavides and the Company, by means of which the supply of pharmaceutical and non-pharmaceutical products is guaranteed, allowing Farmacias Benavides to operate a more efficient supply chain and focus on its core business of selling products, reducing its costs and, additionally, closing its three distribution centers located in Monterrey, Guadalajara y Hermosillo.

2000. As part of an administrative improvement process, the number of subsidiaries is reduced in order to improve the efficiency of the group.

2001. Farmacias Benavides initiates an integral reorganization process, consolidating the operations base and focusing on five important aspects: new merchandising and costs system, alignment of strategies, organizational productivity improvement of the capital structure and a more adequate presentation of the financial information.

2002. During this year, Farmacias Benavides concluded its search for a strategic partner. In August Farmacias Benavides executed an agreement with Farmacias Ahumada, S.A. (“FASA”) that enabled FASA to acquire its control. The operation consisted of a capital contribution made by FASA and the Benavides family, as well as the restructuring of Farmacias Benavides’ stock market debt.

In November, Farmacias Benavides increased the variable portion of its capital stock in an amount of Ps. 737 million through the issuance of 368.5 series “B” shares, and Mr. Alvaro Rodriguez Arregui is appointed as the new chief executive officer.

On December 23, Benavides successfully concluded a capitalization process, receiving total cash contributions for Ps. 512,117,056. FASA contributed Ps. 450,000,000 while the shareholders of Benavides contributed with Ps. 60,000,000 and the public investors contributed Ps.2,117,056, exercising their right of first refusal.

Once this capitalization process was concluded, FASA, one of the ten best drugstore chains in the world, acquires control of Benavides with 68% participation.

2003. The efforts of Benavides focused on the financial and operational reorganization of its business, in order to achieve a competitive price strategy and a renewed variety of products.

On January 9, after concluding the capitalization process, the new board of directors held its first meeting.

On February, the store remodeling program is initiated to implement the new corporate image of Benavides in the stores of the chain. This program represented one of the most important measures adopted to transform the business of Benavides and redirect it to the needs of its customers.

286 pharmacies were remodeled in the west and northeast region, which represent more than half of the total stores of the chain, with an investment of more than Ps.120,000,000.

This same program also contemplated the closing of 50 sales spots, including 7 coffee shops operating under the commercial name “Ben’s” and 19 photo shops, as such business areas were not part of the main business of Benavides, and concentrating on the operation of the pharmacies in order to satisfy the needs of the customers.

On August, Mr. Alvaro Rodriguez Arregui resigns as chief executive officer, and Mr. Jaime Poblete Stambuk assumes such position temporarily.

On September 19, 2003 a general extraordinary shareholders meeting was held and in this meeting the following resolutions were adopted, among others: Benavides changes its corporate name from Far-Ben, S.A. de C.V. to Farmacias Benavides, S.A. de C.V., concentrating the operation of all the pharmacies, the spinoff of a new subsidiary, the incorporation of two new services companies and the liquidation of two subsidiaries.

On October 2003 real estate sales begins, from operating pharmacies to assets that are not strictly part of Benavides’ business, as a way to optimize the asset structure of the company and invest in more productive areas, looking to improve the company’s profitability.

The 17,500 meters distribution center, located in the municipality of Guadalupe in the estate of Nuevo Leon, Mexico, started to operate utilizing the best logistic and distribution practices implemented by FASA in Chile, with the purpose of improving the merchandise supply.

The project started on November 2003, mainly provisioning the pharmacies located in the west and north region of the country.

The total investment in this distribution project amounted to Ps.31,000,000.

2004. In January Mr. Walteer Westphal Urrieta was appointed as chief executive officer.

In February, Benavides opens its new offices in their current location.

With the incorporation of FASA and the new administration, Benavides paid a dividend of Ps. 0.00792 per share to its shareholders, which was approved by the general ordinary shareholders meeting that was held on April 1, 2004.

The pharmacies remodeling program was successfully concluded with 506 remodeled sales spots and the programmed growing process for 2005 began.

2005. In March, Benavides ended its 50% participation in the company Droguería y Farmacias El Fénix, S.A. de C.V. maintained in 1997 (“El Fénix”). Under the termination agreement, Benavides assumed as of May 21 the control of 30 sales spots out of the total 59 operated by El Fénix. The pharmacies that were incorporated to the chain are located in Matamoros and Rio Bravo in the state of Tamaulipas; Ciudad Juarez and Chihuahua in the state of Chihuahua; San Luis Potosi; Uruapan in the state of Michoacan; Aguascalientes; and Tuxpan, Tempoal and Poza Rica in the state of Veracruz.

For the second consecutive year the general ordinary shareholders meeting, held on April 21, 2005 resolved to pay the shareholders of Benavides a dividend of Ps. 0.165 per share.

In May Mr. Enrique Mendoza Diaz resigns as operations officer and Mr. Jose Ramiro Garza Elizondo assumes its charge. The real estate development department is created, its main purpose is to manage the expansion plans of Benavides, Mr. Fernando Benavides Sauceda was appointed as head of the said department.

In May 2005, Farmacias Benavides finalized the liquidation process for two of its subsidiaries, Droguería Benavides, S.A. de C.V. and Benavides de Monterrey, S.A. de C.V.

In October, the general ordinary shareholders meeting resolved to pay a dividend of Ps. 0.191 per share to the shareholders of Benavides, resulting in a total amount of Ps. 78,089,278.49

In 2005, 14 new branches were open in Monterrey, Guadalajara, Torreon, Reynosa and Tampico with an investment of Ps. 94.6 million. This investment was made in addition to the operational infrastructure and preventive maintenance investment programs for the existing drugstores. Therefore, the 26 pharmacies that were incorporated to the chain as a result of the separation from El Fénix were remodeled and 21 low performance stores were closed.

Farmacias Benavides closed 2005 with a base of 529 pharmacies, 23 more stores that the ones owned on the closing of 2004. The total pharmacies are the result of 14 openings, 30 stores incorporated from El Fénix in May and 21 closed stores.

2006. During 2006 Farmacias Benavides focused its efforts to consolidate its participation in the market. Thanks to the coordination of the different areas of Benavides, this efforts were realized through successful stores with and innovative design that identify Farmacias Benavides in the different markets where it operates; providing ample spaces and adequate exhibition space of the products for a more comfortable and uniform experience for the customer, as well as a suitable environment for the employees.

63 new stores were opened and 79 were totally remodeled.

2007. During 2007 Benavides opened 74 new pharmacies, closing the year with a total of 641. These pharmacies have an average size of 243.2 square meters of store space, resulting in a total of 155,955 square meters, which represents a 13.5% growth with respect to 2006.

During July 2007, Farmacias Benavides, along with Grupo Elektra, incorporated its pharmacies into the money transferring service network, providing among its services the delivery of money transfers from the United States to Mexico, continuing the strategy of providing valuable service to its customers in order to satisfy their needs in one place.

2008. Farmacias Benavides opened 82 new pharmacies, finalizing the year with 716 stores in operation and 176,547 square meters of store space, representing an increase of 13.2%. This important growth allowed Benavides to offer the consumer an accessible and attractive store network which provides a uniform purchase experience for the customer in 113 cities and municipalities.

During 2008, Farmacias Benavides was able to open 3 new stores, closing the year with 710 operating drugstores and 175,103 square meters of store space, maintaining its market leadership in the 113 cities and municipalities where Benavides has a presence.

The postponement of the expansion plan allowed Benavides to take advantage of its financial health. In December 2009, all of the financial debt of Farmacias Benavides was cancelled, payments were made for a total amount of Ps. 472 million. This was made possible by the strict control of investments and operational expenses.

2010. At the end of the first quarter, Benavides reported its financial results using International Financial Reporting Standards (“IFRS”) for the first time, being one of the first companies in Mexico to conform its financial information to this standard.

Benavides closed the first quarter with 708 stores, 174,671 square meters of store space and 6,594 employees.

On May 17, 2010 the Company signed a purchase agreement, under the terms of which Grupo Casa Saba was bound to carry out a tender offer on the Santiago Stock Exchange in Chile, for all of FASA’s outstanding shares of capital stock once it had obtained the necessary corporate and governmental authorizations. FASA owns approximately 95.62% of the outstanding shares of the capital stock of Farmacias Benavides; therefore, as a result of the acquisition of FASA’s shares, Grupo Casa Saba indirectly acquired a controlling participation in Farmacias Benavides.

2011. During the year, Farmacias Benavides inaugurated 31 stores, closed 8 stores and incorporated two chains, Provee de Especialidades and CMQ. Both chains are located primarily in the western part of the country, thus strengthening the chain’s growth. With the combination of these chains’ stores along with 11 other store openings, the Company ended the period with 746 pharmacies in operation and 179,446 m2 of sales floor space. As a result of the increase in sales floor space, Farmacias Benavides was able to maintain its market position in the 119 cities and 17 states where it offers its products and services.

In November, Fernando Benavides Sauceda resigned as Farmacias Benavides’ Chief Executive Officer and José Luis Rojas Toledo was named in his place. Mr. Rojas was the Company’s previous Operations Director.

At our annual general ordinary shareholders’ meeting, it was approved that the Company implement the stock option and/or purchase plan for employees, officers and/or directors of the Company or its subsidiaries.

As a result, it was also approved to increase the variable portion of the Company’s capital stock, for an amount up to Ps.84,999,982.50, through the issuance of 3,777,777 ordinary shares, nominative, without par value, which will be maintained in the Company’s treasury, to be used later, in the implementation of the aforesaid plan.

Additionally, it was approved that the Board of Directors shall establish the terms and conditions of the stock option and/or purchase plan, as well as the characteristics under which the shares subject to the capital increase will be subscribed and paid, including, without limitation, the form and term. When such terms and conditions are defined, the necessary notices will be published in order for the shareholders to exercise their preemptive rights.

Finally, it was approved that, in the event that after the specified time frame in the relevant notice, the shares that remain unsubscribed by the shareholders may be offered for subscription and payment to whomever the Company’s Board of Directors determines to that effect, including one or more of the Company´s shareholders, pursuant to the applicable laws, at a price that should be no less than the subscription price to be included in said notice.

Capital Expenditures

The table below sets forth our capital expenditures for the years ended December 31, 2009, 2010 and 2011. Our capital expenditure program is primarily focused on new investments in vehicles for our distribution fleet, information technology and computer equipment as well as new store construction and in-store projects for our Retail Pharmacy business. For a discussion of how we funded our capital expenditures in 2011, as well as a more detailed description of our capital expenditures, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Overview” and “—Capital Expenditures”.

Our capital expenditures during 2009 were approximately Ps. 76.1 million, which consisted of Ps. 19.4 million for the purchase of transport and delivery equipment, Ps. 12.3 million for technology and computer equipment and Ps. 30.7 million for other general expenditures. Our retail pharmacy-related expenses totaled Ps. 13.7, of which Ps. 0.5 million were for pharmacy-related projects, Ps. 9.9 million were spent on infrastructure related expenses and Ps. 3.3 million for distribution-related capital expenditures. These expenditures were mainly funded with working capital.

The capital expenditures for our Distribution Division during 2010 were approximately Ps. 36.6 million, which consisted of Ps. 10.3 million for the purchase of transport and delivery equipment, Ps. 11.6 million for technology and computer equipment and Ps. 14.7 million for other general expenditures. Our Retail Division’s 2010 capital expenditures consisted of Ps. 322.3 million for pharmacy-related projects, such as new store openings and store remodeling, Ps. 41.3 million in infrastructure projects and Ps. 20.6 million for distribution-related investments for a total of Ps. 384.2 million. These expenditures are generally funded with cash from our operations. In the event that we need additional funds, we can use our available credit lines.

Our distribution related capital expenditures during 2011 were approximately Ps. 109.6 million, which consisted of Ps. 37.1 million for technology and computer equipment and Ps. 72.5 million for other general expenditures. Our Retail Division’s 2011 capital expenditures consisted of Ps. 231.9 million for pharmacy-related projects, primarily for new store openings and store remodeling, Ps. 35.6 million in infrastructure projects, such as IT systems and Ps. 7.0 million for distribution-related investments for a total of Ps. 274.5 million. These expenditures are usually funded with cash from our operations. In the event that we need additional funds, we can use our available credit lines.

See “—Information and Technology Systems” and “Item 5. Operating and Financial Review and Prospects—Overview”.

In 2012, we expect that our main capital expenditures will be related primarily to IT investments and developments, as well as to the renewal of our distribution fleet for our distribution division while our 2012 retail related capital expenditures will be used mainly for new store openings as well as the remodeling of existing stores, merchandising projects and IT investments in our core markets. We expect to continue to fund our capital expenditures needs with cash from our operations. However, in the event that we need additional funds, we can use our available credit lines.

Public Takeover Offers by Third Parties

Not applicable

Business Overview

Grupo Casa Saba was founded as a pharmacy in 1892 and is currently one of the leading multi-channel, multi-product national wholesale distributors in Mexico, operating through one of Mexico’s largest distribution networks of its type. We distribute pharmaceutical products, health, beauty aids and consumer goods, publications, general merchandise and other products. We distribute the majority of these products on a non-exclusive basis. With over 115 years of experience, we supply a significant number of Mexico’s pharmacies, mass merchandisers, retail and convenience stores, supermarkets and other specialized channels nationwide.

In our Distribution Division, we currently distribute over 15,000 different products, including approximately:

We distribute these products throughout Mexico through our nationwide distribution network to customers in the following segments:

In addition, we are also one of the largest pharmacy retailers in Latin America, where in 2011 we operated over 900 pharmacies in 19 Mexican states, and the metropolitan area of Mexico City, more than 350 pharmacies throughout Chile and 85 pharmacies in the states of Rio de Janeiro and São Paulo in Brazil through which we sell pharmaceutical products as well as health and beauty aids and other related consumer goods.

Our consolidated net sales for the year ended on December 31, 2011 totaled Ps. 46,568.2 million, approximately 78% of which were made in Mexico. As of the end of 2011, our total assets were Ps. 31,600,215 million and we owned 22 distribution centers in Mexico, one distribution center in Santiago, Chile and the Sports Clinic facility in Tampico, Tamaulipas. Our operations outside of Mexico represented 22% of our consolidated net sales for the year ended on December 31, 2011.

Our operations are currently organized into five operative business divisions: the Private Pharmaceutical Products business division, which we refer to as “Private Pharma” (46.16% of our consolidated net sales in 2011); the “Retail Pharmacy” Division which includes results from our retail pharmacies business (44.34% of our consolidated nets sales in 2011); the Government Pharmaceutical business division, which we refer to as “Government Pharma” (2.60% of our consolidated net sales in 2011); the Health, Beauty Aids, Consumer Goods, General Merchandise and Other Products business division, which we refer to as the “HBCG/Other Products” business division (5.20% of our consolidated net sales in 2011); and the Publications business division (1.70% of our consolidated net sales in 2011). The following table shows our sales by business division, as a percentage of consolidated net sales for the last three years:

Distribution Business Overview

We seek to distribute pharmaceutical products on a “full-line/full-service” basis. We distribute a wide array of pharmaceutical and other products of the kinds listed above, as well as provide our clients with a range of value-added services, including multiple daily deliveries and emergency product replacement services. In our HBCG/Other Products business division we distribute certain products on an exclusive basis while also providing our clients with specialized value-added services on a product-by-product basis, including merchandising, marketing support and other customer counseling services.

We purchase the products we distribute from a wide variety of suppliers, the majority of which are located in Mexico. We place purchase orders on an ongoing basis, negotiating quantity and price periodically rather than committing to contractual terms. By distributing pharmaceutical products, our role is generally not that of a “demand creator,” given that we do not advertise products, nor do we suggest or provide substitute products for those ordered.

Our principal strengths are our nationwide distribution network, through which we are able to deliver products within 12 to 24 hours from the time of order, our state-of-the-art technology, our commitment to customer service and our well-trained and experienced personnel. In addition, as a result of our continued use of new technologies since the early 1990s, we have increased our operating efficiency and distribution capacity.

Mexico’s vast and mountainous terrain and old road network connecting small towns present a difficult environment for distribution. This is further complicated in Mexico City and the surrounding areas by traffic congestion. We believe that we will continue to overcome these constraints with our strategically located distribution centers near Mexico’s major population centers.

As of December 31, 2011, we distributed products to our clients nationwide through a distribution network consisting of 22 active distribution centers. Grupo Casa Saba’s warehouses have more than 100,000 square meters of warehouse space. Using a fleet of over 800 vans, trucks and cars, we filled more than 7.1 million orders in 2011, averaging more than 598,000 orders per month. For a list of our distribution centers and their locations, see “—Property, Plant and Equipment,” below in this item.

Retail Business Overview

Consistent with our business strategy, we have continued to strengthen our retail pharmacy business. In Mexico, we sell pharmaceutical products through both the Farmacias ABC pharmacy chain and the Farmacias Benavides chain. Through Farmacias ABC, we operated over 150 pharmacies in 2011, mainly in the metropolitan area of Guadalajara, Jalisco, which is Mexico’s second most populous city, as well as in the Mexico City metropolitan area and in the states of Guanajuato, Michoacan, Coahuila and Tamaulipas. Farmacias Benavides is based in Monterrey, Nuevo Leon and as of December 31, 2011 operated more than 740 pharmacies in 17 of the 32 Mexican states². We currently lease all of the locations where the pharmacies are located. See “—Property, Plant and Equipment”.

Our Brazilian operations are focused on the operation of retail pharmacies. We purchase the pharmaceutical products we sell from Brazil’s three main pharmaceutical wholesale distributors while the majority of our non-pharmaceutical products are purchased from a wide range of distributors, manufacturers and suppliers. We place purchase orders on an ongoing basis, depending on market needs, pricing and payment terms rather than committing to contractual terms. Our presence in the states of Rio de Janeiro and São Paulo, through 85 pharmacies, allows us access to a wide range of customers. Our customers are primarily individual clients, although we do maintain corporate arrangements, which are generally longer-term in nature, with several healthcare providers and corporate clients. Since acquiring Drogasmil in the second quarter of 2008, we have carried out an ongoing process of integrating and raising its operational standards to those of our Mexican operations which has enabled the chain to improve its sales and profitability levels.

² As of 2011, our 8 Farmacias Provee stores are being operated by Farmacias Benavides. However, they will continue to focus on the provision of specialty medicines.

In our stores, we sell pharmaceutical products and a wide assortment of other merchandise. In fiscal year 2011, pharmaceutical product sales, which for purposes of this annual report include prescription drugs as well as over-the-counter medications, accounted for approximately 54% of our retail pharmacy business sales in Mexico. We believe that our pharmacy operations will continue to contribute significantly to our overall sales due to favorable industry trends, including an aging population, increased life expectancy and the discovery of new and better drug therapies. We offer a wide variety of non-pharmaceutical products, including health and beauty aids and other merchandise, which accounted for approximately 46% of our Mexican retail pharmacy business sales in 2011. Non-pharmaceutical products include health and beauty aids, personal care items, cosmetics, household items, beverages, convenience foods, seasonal merchandise and numerous other everyday and convenience products. In Brazil, 60% of the products that we sold in 2011 were pharmaceutical products while the remaining 40% were non-pharmaceutical items.

FASA has an established business model that it has applied in each of the markets where it operates, although it does make adjustments based on the particular conditions in each of the countries. This model consists of developing attractive drugstore type formats that are located close to its client base and that offer a wide assortment of medicines as well as health, beauty and personal care items. In our Farmacias Ahumada chain in Chile approximately 67% of our total 2011 sales corresponded to pharmaceutical products and 33% to non-pharmaceutical items, including health and beauty care items as well as other merchandise.

Business Strategy

Under the direction of our current management, we are focused on enhancing the value of Grupo Casa Saba by:

Strengthen our Retail Pharmacy Business in Mexico and Latin America

We intend to grow our retail pharmacy market share in the countries where we have operations as well as to penetrate into new geographical markets in Latin America, through new store growth and strategic acquisitions. We believe that this will allow us to continue creating synergies with our existing distribution network, and increase our margins in the long term.

Prior to 2008, the Group acquired several small regional pharmacy chains in Mexico and in May 2008, Grupo Casa Saba acquired Drogasmil, a Brazilian pharmacy chain that currently operates in the states of São Paulo and Río de Janeiro. This acquisition was the Company’s first outside of Mexico.

On September 30, 2010, we successfully completed the Tender Offer through which we acquired 97.8% of Farmacias Ahumada’s capital stock. Given that FASA owns 95.62% of Farmacias Benavides’s outstanding capital stock, once we acquired FASA’s shares, the Group indirectly acquired a controlling participation in Farmacias Benavides. We consider that by means of this transaction we are now the largest drugstore chain in Latin America and one of the largest distributors of consumer and pharmaceutical products in the region, with a platform of more than 1,500 pharmacies across Mexico, Brazil, Chile and Peru at the end of 2011. See “—History and Development of the Company” and “Item 10. Additional Information—Material Contracts”.

We believe the Acquisition is creating value for our shareholders. These synergies provide added strength to the Company by significantly increasing its size as one of the main distributors and vendors of pharmaceutical, health, beauty, personal care and general merchandise products and giving us a larger international presence. As a result of the Acquisition, we also seek to reinforce our regional growth strategy through a proven and wide multi-country platform.

We believe that, although the initial costs of growing our retail operations, may be high and our profitability and financial structure may be temporarily affected, the retail pharmacy business will contribute to our long-term growth in both the retail and distribution markets.

By the end of 2011, we had successfully completed the integration of FASA into our corporate structure, although there are still opportunities to continue increasing our efficiency levels going forward. In 2012, we seek to improve both the efficiency and our profitability of our Retail division though a significant expansion plan in Mexico, Chile and Brazil, followed by the application of strict cost control measures and intelligent purchasing methodologies.

In order to concentrate our efforts on the expansion in Mexico, Brazil and Chile, on January 19, 2012, FASA Investment Limitada, a subsidiary of Grupo Casa Saba, sold its shareholding in the social capital of Famacias Peruanas, S.A. and Droguería La Victoria, S.A.C., subsidiary companies of FASA through which a chain of drugstores was operated in Peru.

In line with our strategy, this year, we increased the number of stores in our two main markets, Chile and Mexico. In Chile, we added several new stores in key areas, which will help us, compete more effectively in the marketplace. In Mexico, we grew the number of stores in the Benavides chain and entered the State of Mexico and Mexico City markets. This expansion will enable us to widen our overall client base and increase our presence in this market.

Strengthening the Company’s Financial Position

By the end of 2011, our interest-bearing liabilities totaled Ps. 12,556.5 million and our net debt was Ps. 10,246.1 million, a large part of which was related to the acquisition of FASA in the fourth quarter of 2010.

On August 11, 2011, Grupo Casa Saba successfully refinanced the bridge loan that was executed on August 30, 2010 in the amount of Ps. 7,723.9 million in order to acquire FASA, as well as the collateral package that was executed to guarantee its obligations under the loan. The loan term was extended for seven years, and is divided into two tranches. The shorter average life tranche has an average margin of TIIE (the Mexican Interbank Balance Interest Rate) + 2.25% while the longer average life tranche’s margin is TIIE + 2.76%, which are more favorable terms than those that were negotiated in the original credit agreement.

In order to reduce our debt, in January 2012, we completed a series of negotiations with Quitafex, S.A., which resulted in the sale of the capital stock of our Peruvian subsidiaries, Farmacias Peruana, S.A. and Droguería la Victoria, S.A. The proceeds from this sale will be used to pre-pay the debt and to strengthen our retail pharmacy operations in our core markets, Chile and Mexico.

Improve the Efficiency of Our Retail Operations and Strengthening Customer Loyalty

We seek to focus our efforts on improving the efficiency of our retail operations, by offering pharmaceutical products as well as health, beauty care and general merchandise products at competitive prices while providing excellent service to our customers at the point-of-sale. In Mexico, this product offering will exist not only in the larger cities, but also in smaller cities and rural populations, thus benefiting regions that today do not have access to a wide range of such products at competitive prices.

As part of Benavides’ ongoing commercial strategy, in 2011 we continued to improve our home delivery service by widening our delivery zones and by waiving the charges for this service. In addition, we continued to develop the Benefits Administration Program, which allows us to enter into commercial agreements with large corporations to provide them with our services and established a structured pharmaceutical benefits program for senior citizens, which we expect will help create customer loyalty among our older clients.

In Latin America, we are integrating the experience that we have accumulated in Mexico as one of the leading distributors of pharmaceutical products with FASA’s knowledge as one of the leading participants in the pharmacy segment in various countries. As a result, we offer customers a high quality service and a wide range of products at competitive prices at the point-of-sale.

In 2011, FASA adjusted its business model to include the introduction of new value-added services, including the development and launch of private label products and exclusive brands, which offer customers greater diversity in their product selection and which also contributes to improving the Company’s profitability levels. In addition, this division launched a new in-store concept that seeks to improve our customers’ shopping experience by creating “solution centers”, in which trained staff members offer customers personalized service geared towards their individual needs. In Mexico, as of March 31, 2012 over 140 of our pharmacies are now staffed by a certified physician who provides on-site medical consultations to our clients. We expect that each of these efforts will help us to increase the level of service that we provide to our customers and, therefore, will result in increased customer loyalty.

In addition, the Chilean pharmacies were able to improve their productivity through the installation of WorkForce Management software, which tracks employee’s daily activities in order to identify areas of opportunity for more effective time management. In 2011, Farmacias Ahumada also renovated their Point-of-Service (POS) software, which included a new promotions system that facilitates the identification of promotions and special offers that the sales staff can then recommend to the customer at check out, thus helping to increase overall ticket sales. Finally, in Mexico, the purchasing module of the SAP system was modified in order to allow the purchasing agents to identify the best commercial terms offered by suppliers for each product, thus making the process more efficient and cost-effective.

Identifying Opportunities to Increase our Market Penetration in High Growth Potential Sectors

The generics segment has been growing steadily throughout Latin America over the past several years and we believe that the development of private and exclusive label brands will help us improve our profitability and meet the growing demand for these products in the region. Therefore, in order to compete with other pharmacy chains, our Retail Division is working to introduce generic based OTC, prescription drugs, beauty care products and items for babies. In addition, we expect that the introduction of well-known, exclusive labels will also help strengthen our value proposition for our clients by increasing our overall product selection. Our goal is to offer high quality brands in all three countries where we operate that will improve the health and well-being of our clients while offering cost savings.

To date, we have a network of more than 150 specialized providers with operations worldwide. Our private and exclusive label brands are currently manufactured in various parts of the world, including Chile, Mexico, Argentina, China, the U.S. and the UK. As a result of this diverse sourcing methodology, we are able to achieve economies of scale, which in turn enables us to offer attractively priced products to our customers.

In 2011, we continued to develop, launch and promote new products. To date, our private label offerings include personal care and hygiene products as well as shampoos, deodorants, body lotions and baby care items such as accessories, diapers and wipes. During the year, we also launched a new line of baby formulas in various countries.

In addition to our private label brands, the Company is also focused on offering high quality, international name brands that are available exclusively in our stores. Currently, we offers brands such as “GNC” (a leader in the vitamin and mineral category); Prudence (condoms); “Sally Hansen/La Cross” (U.S. market leader in products for the treatment and care of hands and nails); “ROC” (internationally recognized dermo-cosmetics that include anti-aging and anti-cellulite products), “John Frieda” (a leader in innovative hair care products in the U.S.); “Lumene” (a brand that is the first of its kind to develop an innovative line of cosmetics and skin care items); “Phyto” (a French capillary dermo-cosmetic); Jergens (a U.S. brand with over a century of experience in the skin care industry); Scunci (the market leader in hair accessories); and Bonawell, Igora and Palette de Schwarzkopf (all of which are a part of Henkel’s product portfolio). We expect that the increased variety of name-brand products will make us an even more attractive option for our customers and help foster customer loyalty.

In the Distribution division, we are also working to increase the number of generic products in our catalog in order to meet our clients’ growing demand for these items.

In recent years, our Group has also noted a potential opportunity to increase its participation in the government sector. In 2011, we secured several projects with state and federal government institutions, including Petróleos Méxicanos (PEMEX).

To better serve several of our government customers, this year we developed a complex on-line order processing applications and data sharing services that utilize the latest in web-service technology. These solutions allow our customers to manage their inventory more efficiently and to process orders faster, which improves their product availability at the sales counter. We believe that this innovative new software solution may serve as a valuable tool for helping to secure contracts with other governmental entities in the future, given that it is customizable and completely browser-based, with no additional hardware or software needed to run the programs.

Maintaining Continuous Contact with Clients and Suppliers

We are well aware that continuous contact with our clients and a solid knowledge of the markets in which we operate are key to finding new ways to increase our sales and further develop our core pharmaceutical business. Therefore, in 2011, we continued to focus our efforts on working closely with our clients and suppliers in order to identify their specific needs and customize our services to meet their requirements, including improving our product catalog. All of these efforts were accomplished under our minimum profitability parameters. In terms of our suppliers, we worked closely with them to determine the market’s needs and to create innovative commercial schemes.

Analyzing the Efficiency of Our Distribution Centers and Implementing IT Solutions that Increase Our Operational Efficiency

At Grupo Casa Saba we manage over 15,000 products, which requires a high level of efficiency and systematization in terms of order fulfillment and delivery. Grupo Casa Saba analyzes the geographic location and efficiency of its distribution centers in order to identify facilities that are not operating at maximum efficiency levels. To assure the optimal operation of its infrastructure and distribution network, Grupo Casa Saba continuously renews its distribution fleet and invests in upgrading its logistics and information systems.

The investments made since 2006 in terms of the IBM hardware and middleware platform have been highly beneficial for the Company. Over the course of the last two years, our Total Cost of Ownership, or the total cost of administering our IT processes, has dropped, despite an increase in the number of transactions processed. During this time, our applications have become more complex, thus requiring more computing power, which has been successfully supplied by the IBM platform.

In 2009, our IT efforts were focused primarily on general computer and communication systems updates and maintenance, including the purchase of new computer equipment, the replacement of critical servers for our central site with state-of-the-art hardware and the implementation of a digital voice and data network in all of our distribution centers as well as our corporate headquarters. We believe that these upgrades helped reduce operating costs and improved system availability.

In addition, we significantly reduced the use of paper in several of our warehouses through the use of radio frequency terminals. This measure is intended to decrease paper consumption and improve the accuracy of our order processing. We also updated our software and connectivity with various clients in order to improve on-line order processing and product availability.

In 2010, our IT efforts were focused primarily on general computer systems upgrades and maintenance, including the replacement of critical servers for our central site with state-of-the-art hardware and software. We believe that these upgrades reduced operating costs and improved system availability. Specifically, we updated the company’s critical mission platform by installing IBM’s Power (mr) technology in order to enhance the performance and increase our Disaster Recovery platform’s capacity in the event of an emergency. In addition, we improved the technology used by our sales force by introducing the first series of wireless handheld PDA units equipped with the latest in GPRS technology. This technology enables our sales representatives to transmit their orders remotely, utilizing cellular signals. We expect these units to help us increase productivity by eliminating the need to connect to a landline in order to transmit customers’ orders, resulting in time savings. We consider that all of these features will ensure the quality with which we process client transactions and increase the overall security of our network.

The year 2011 was one of operational excellence in that our record of on-time processing averaged approximately 98% per month, despite an increase in the amount of information services being used. Throughout the year, we continued updating our Operating Systems and Applications versions to keep pace with the speed of technological innovations. This year, we completely renovated all of our Citrix servers, upgraded our Websphere Application Server and deployed improved application balancing features. In addition, we conducted several drills of our Disaster Recovery Planning processes nationwide, in order to ensure that the system that was implemented in 2010 continues to operate at its optimum capacity.

In terms of our communications technology, this year we successfully migrated the existing telecommunications network to a Multiprotocal Label Switching (MPLS) format. This format offers a faster, economical and more secure communications protocol with improved data quality that will benefit virtually all of our back office processes. In our warehouses we continued with the second phase of the launch of GPRS mobile devices for our sales force. These units have had a positive effect in terms of sales agility, by providing up-to-the-minute information for our sales representatives. Today, these devices operate using a Windows mobile platform, although we expect that an open platform, such as Android, will be available in the near future. Once this technology is available, it will put downward pressure on prices and we are prepared to take advantage of the opportunity to lower costs.

In our Retail Division we are also always looking for ways in which to improve the productivity of our warehouses. During the year, we made improvements to our systems so that the release of the orders in each sector can be timed in a manner that optimizes the flow among the various picking areas, eliminating bottlenecks and reducing wait times for the orders to be completed. In addition, we also modified our packaging systems in order to decrease the amount of empty space within each individual box. As a result, we were able to reduce the amount of boxes shipped for each customer order, which helps lower our transportation costs.

Offering Our Clients Value-Added and Internet Solutions to Facilitate Commercial Decision-Making and Promoting Higher Sales

In an increasingly competitive business environment, service is key. Therefore, we do our best to go one step further to provide value-added services to our clients. In 2011, we continued to use an online distribution and information website, www.farmaservicios.com, which we currently make available to our clients free of charge. Clients that log on to www.farmaservicios.com are able to communicate directly with us, as well as place and track their orders and shipments on-line. In addition, these clients have access to a wide range of additional services including news and industry information, business advice and a variety of special promotions. We believe that www.farmaservicios.com is a value-added service that provides our clients with a faster, more convenient way to link their demand to our system, given that they can place and track their orders, unlike with other traditional distribution channels.

To better serve some of our government customers, this year we developed highly complex on-line order processing applications and data sharing services that utilize the latest in web-service technology. These solutions allow our customers to manage their inventory more efficiently and to process orders faster, which improves their product availability at the sales counter.

See “— Information Technology Systems” below in this section. We will continue with our efforts to develop internet-based solutions for our clients and suppliers as we believe that doing so will allow us to provide a value-added service that complements our existing business.

Developing Internal Savings and Operating Efficiencies Programs to Maximize our Operations’ Profitability

During 2011, in our Distribution Division we continued implementing our profitability-focused strategy, which involved the ongoing review and negotiation of commercial terms with our suppliers and clients to obtain better profitability levels, even if, upon occasion, this resulted in our Company deciding not to make certain sales that did not meet our minimum profitability parameters.

Likewise, diverse efficiency and continuous cost-savings programs were successfully implemented, such as ongoing reengineering of routes, the optimization of distribution centers, adapting the fuel used in our distribution vehicles to be more cost-effective and paper waste reduction. In our Mexican retail division, we were able to negotiate the direct delivery of large sized merchandise to our cross-dock facility in Hermosillo, Sonora with some of our providers, saving us significant transportation time and expenses. In addition, we modified our order packing procedures in order to separate liquid products from non-liquid products, thus limiting losses due to accidental leakage during shipment.

Operations

Prior to this year, our operations were organized into four operating business divisions: the Private Pharma business division (which includes our retail pharmacy business), the Government Pharma business division, the HBCG/Other Products Division and the Publications business division. However, as of the fourth quarter of 2010, the Group created a fifth business division, known as the “Retail Pharmacy Division,” where it reports the results of its retail pharmacy business. Please see “Item 5. Operating and Financial Review and Prospects—Results of Operations” for a breakdown of our consolidated net sales by business division for the three year period ended on December 31, 2011.

Private Sector Pharmaceutical Distribution (Private Pharma)

Our private sector customers consist primarily of approximately 14,000 privately owned pharmacies, as well as national and regional pharmaceutical and supermarket chains (comprising more than 8,600 stores) and the pharmacies associated with private hospitals. We were the first nationwide wholesale pharmaceutical distributor to enter the private sector market in Mexico and, since the 1960s we have been one of only two wholesalers providing national coverage. We believe that our customer coverage is one of the highest in the industry and that we cater to a majority of retailers nationwide.

According to IMS Health, A.G. and our estimates, in 2009, 2010 and 2011, Grupo Casa Saba and Nadro, Mexico’s only other nationwide pharmaceutical distributor, together accounted for nearly 50% of prescription and over-the-counter drug sales throughout the private sector wholesale pharmaceutical channels in Mexico (this figure does not include the sale of similar and generic products). Mexico has adopted individual dosage packaging whereby pharmaceuticals are distributed in pre-packaged dosages rather than in bulk. Retail customers demand a rapid and continuous supply of pharmaceutical products. As a result, inventory turnover is high. Consequently, shortages and stock-outs are common and pharmacies are forced to rely on multiple suppliers. We seek to overcome these market constraints by maintaining a superior distribution network. Through our more than 115 years of experience, we have developed a highly sophisticated transportation and inventory logistics system, which enables us to distribute our products between 12 and 24 hours from the time of order nationwide. We believe that we are able to fill the highest rate of orders in the industry and plan to maintain a state-of-the-art distribution network to continue improving our distribution capabilities.

Public Sector Pharmaceutical Distribution (Government Pharma)

Our public sector customers consist of Mexican government institutions. The Mexican government has a vast network of hospitals, clinics and pharmacies on a national level, as well as specialized health institutions, that we serve. The government institutions that purchase products from us include:

Since the Mexican government generally buys directly from manufacturers through IMSS and ISSSTE, it is able to purchase at prices that are substantially lower than those paid by private entities. Our sales to IMSS, ISSSTE hospitals, State Health Institutions, and PEMEX are not in bulk and, therefore, are not offered at bulk prices. In addition, we deliver pharmaceutical products to ISSSTE Tiendas, the supermarket pharmacies operated by ISSSTE, at prices comparable to those prices we charge our large private sector customers. We are able to sell our pharmaceutical products to approximately 240 ISSSTE Tiendas at private sector prices because we can provide them with additional services and increased efficiency. Since our sales to ISSSTE Tiendas are not through the usual public sector channels, we classify them as private sector sales. Sales to PEMEX are at prices substantially lower than those for the private sector. Sales to IMSS are made also at prices substantially lower than those for the private sector and, in many cases, depend on the negotiations conducted with the laboratories for each specific product.

The sales of our Government Pharma business division depend greatly on the contracts that we are able to obtain from our government institution clients, particularly ISSSTE, IMSS, PEMEX and other State Health Institutions. Our sales by the Government Pharma business division have tended to fluctuate from year to year since most of these government contracts are awarded through bidding processes on an annual basis.

In the last three fiscal years we have experienced the following trends in our Government Pharma division. Sales for our Government Pharma division decreased by 12.4% in 2009, mainly as a result of a reduction in our sales to PEMEX. This reduction was primarily due to a lower participation in the bidding processes. In 2010, sales from this division increased 5.9%, primarily as a result of increased sales to IMSS as well as various state government health institutions. During 2011, sales from this division grew 26.0% due to a higher participation in bidding processes during the period with various federal and state government health institutions. We cannot assure that we will participate in future PEMEX (or other government) auction processes or that we will be awarded contracts with PEMEX or other governmental institutions similar to those we have had in previous years.

Health, Beauty Aids, Consumer Goods, General Merchandise and Other

Prior to 2004, we had separate divisions for General Merchandise and Other Products and Office Products. In 2004, however, as part of a strategic business decision, the Group decided to combine all three divisions under the name of “Health, Beauty Aids, Consumer Goods, General Merchandise and Other, or HBCG/Other Products.” The decision was made due to the diminishing sales of the General Merchandise and Other products, which together accounted for less than 1% of the Group’s total net sales.

We distribute health and beauty aids as well as various consumer products that are typically sold through supermarkets, convenience stores, specialty stores and pharmacies in Mexico. The products distributed in this division consist principally of basic toiletries, food products and consumer goods, some of which are distributed on an exclusive basis, such as:

During 2011, we stopped distributing the Vanart lines of products, Maxell Xbatteries and computer accessories and Alcachofivida, a line of artichoke-based dietary supplements. In addition, we incorporated several additional brands into our product catalog, including Xiomega chia seed based nutritional supplements, Xtraviril energy pills for men, Dream Water natural sleep aid, Vudu Shot pheromone perfumes, the Finesse line of shampoos, Nutrigomitas children’s nutritional supplement and the 2Life line of basic toiletries. During the first quarter of 2012 we added CMD, a new line of herbal-based vitamins and remedies.

At times, we enter into short-term exclusive distribution agreements on a preliminary, experimental basis, in order to test the real demand for specific products. If upon the termination of these agreements we conclude that there is no significant demand for a specific product, we cease the distribution of such product. For this reason, in the normal course of business, products we distribute one year may not be distributed the next year. We are always seeking suppliers with whom we can enter into distribution agreements to distribute health and beauty aids, consumer goods, general merchandise and other products, so long as they provide acceptable margins. We cannot assure you that we will enter into distribution agreements to distribute any or all of these products at acceptable margin levels.

In the HBCG/Other Products business division, in some cases, we provide manufacturers with highly specialized integrated services. These services range from purchasing, planning, centralized sales, merchandising, collections, execution of promotions and product information.

We anticipate that the market in Mexico for health and beauty aids, consumer goods, general merchandise and other products will continue to grow due to the young profile of the Mexican population. We believe that as the Mexican population continues to grow and consumers’ disposable income increases, consumer demand for our products in this division could increase. However, we are uncertain how the effects of the global economic downturn may affect our sales of health and beauty aids, consumer goods, general merchandise and other products. If there is a prolonged recession and consumers’ disposable income decreases, our results of operations for this division may be affected.

We distribute general merchandise and other products that are generally sold through grocery stores, supermarkets, convenience stores, major warehouses and pharmacies in Mexico. The general merchandise products that we distribute consist primarily of packaged foods, beverages, vitamins and nutritional supplements as well as personal care products. The other products that we distribute consist of over-the-counter products, household items and toiletries. The general merchandise and other products that we distribute are mostly products sold on an exclusive basis in specified geographic areas pursuant to contractual arrangements.

In 2009, sales in our HBCG/Other Products Division increased by 0.4% while in 2010, sales from this division decreased 14.1%. During 2011, our HBCG/Other sales grew by 11.4% primarily due to a higher demand for these types of products in the different markets where we offer them.

Publications

We distribute books and magazines, a large majority of which we distribute on an exclusive basis through our publishing subsidiary, Publicaciones Citem, S.A. de C.V., or Citem, which we believe is one of the leading distributors of magazines in Mexico. We are also one of the leading suppliers of self-service store chains, as well as the exclusive supplier of Wal-Mart Mexico’s VIPS and Portón restaurant chains in Mexico City. We sell primarily through approximately 110 nationwide agents and one firm affiliated with the Union de Voceadores, or Union of Newspaper Boys, in Mexico City. Citem also distributes entertainment products to other establishments, including supermarkets, convenience stores, racks and magazine newsstands in airports, libraries and hotel magazine stores. In addition, Citem offers one of the most efficient forces of rack-jobbers, or shelf-keeping merchandisers, to the VIPS and Portón restaurant chains. These merchandisers keep the shelves of more than 600 stores across Mexico duly organized.

In the second half of 2002, Citem started an administrative and operational restructuring to achieve higher levels of profitability. This process has involved changes in Citem’s product catalog, client base, personnel and distribution units and methods, among other changes. As a result of the restructuring process our sales were affected in 2002 and 2003 but a positive trend of increases in sales started in the last quarter of 2003 and carried on through 2007. During 2009, sales in the Publication division increased 0.6%, aided by the reincorporation of various publications to the catalog as well as strong year-end specialty title and collector’s item sales. Publication sales for 2010 rose 10.9%, driven primarily by increased sales of albums, stamp books, guides and magazines related to the World Cup sporting event that took place in June 2010 as well as the inclusion of new, more profitable publications in the product catalog. In 2011, sales from our Publications division posted a decline of 5.2%, primarily as a result of a downward adjustment in the number of publications we received from various publishers as well as the fact that several special title items were released last year and no similar items were released this year.

In terms of our export sales, in 2008, we decided to discontinue distributing our publication products outside of Mexico. This decision was made due to our intention to focus on domestic distribution where we benefit from our proprietary distribution network, as well as to the reduced margins of our export sales caused by fluctuations in currency exchange rates that were brought on by the worldwide economic crisis. Given that we did not reinitiate our international business during the 2011 fiscal year, we did not register any export sales during the period.

Payments and Collections

Most of our distribution sales are made on credit, with customers signing promissory notes for each invoice indicating the delivery of a product. Cash-on-delivery terms are mainly used with new clients or those whose credit has been temporarily suspended. We negotiate the number of days of credit that we will extend to our clients on a case-by-case basis. The determination of the number of days that we will extend credit to a particular client depends on a number of factors, including the client’s creditworthiness, as well as the length and nature of the client’s relationship with us. The determination of the number of days that we will extend credit to a particular client also depends on our current business strategy. For example, in connection with our efforts to increase sales to particular sectors of the market, in some cases we extend credit to clients in these sectors on more favorable terms than those offered to our overall client base and, as a result, the maturity of accounts receivable due from clients in these sectors increases slightly. We are constantly adapting our collection methods to market and general economic conditions. The average maturity of accounts receivable due from our overall client base was 63.2 days in 2009, 73.6 days in 2010 and 41.6 days in 2011.

Although we are continuously seeking to reduce the average maturity of our accounts receivable and maintain an aggressive collection policy for delinquent accounts receivable in conjunction with our efforts to improve our financial results and the efficiency of our operations, we could, in the future, decide to extend credit to clients in particular sectors on more favorable terms than those offered to our overall client base.

The following chart sets forth the average contracted maturity of accounts receivable due from various types of clients.

Purchasing

We order all of our products for the distribution business on an ongoing basis, negotiating quantity and price periodically, rather than committing to contractual terms. While the majority of our suppliers are Mexican companies, we do purchase some products from international manufacturers. We negotiate exchange risks by purchasing these products in Pesos or setting a limit on our exchange risk exposure.

In previous years, each of our distribution centers placed its own orders on a weekly basis, directly to suppliers. These orders were placed through our computerized order system, Electronic Document Interchange, or EDI, which we have implemented to communicate efficiently with clients and suppliers through a platform supporting different electronic communication protocols. Suppliers typically deliver bulk orders directly to the distribution warehouse that placed the order. In the second half of 2000, we centralized our purchasing to improve our financial results and increase the efficiency of our operations. As a result, all of our orders for all of our distribution centers are placed through our centralized system. Deliveries of non-Mexican products are handled by Mexican customs near the U.S. border or the port town of Manzanillo, and are typically made directly from the supplier to a Mexican customs agent. Once the customs agent completes the importation procedure, the products are then sent to our distribution center via ground transportation.

Marproa is a common carrier that also provides freight services to third parties at market rates. From Marproa, we make deliveries several times a week to each of our distribution centers.

Maintaining good relationships with our suppliers and publishers is important to our competitive success because of the tight inventory policies that are common in the Mexican pharmaceutical industry. We are committed to making rapid and timely deliveries to our customers.

Pharmaceutical Products

We purchase pharmaceutical products from over 150 laboratories and manufacturers. Most of these suppliers are located in Mexico City and its surrounding areas. Purchases are made through purchase orders from time to time, on an as-needed basis. More than two-thirds of the suppliers that manufacture pharmaceuticals products in Mexico are owned by large multinational companies. Purchases made from these suppliers represent more than 80% of our Private Pharma and Government Pharma business divisions’ purchases. Companies such as Sanofi-Aventis, Pfizer, Merck Sharpe Dohme, Roche, Astrazeneca, Boehringer, Bayer, Novartis, Eli Lilly, Genomma Labs, Janssen Cilag, Merck and Bristol-Myers Squibb are among our major suppliers.

Health, Beauty, Consumer Goods, General Merchandise and Other Products

We purchase health, beauty and consumer goods from more than 150 suppliers, located primarily in Mexico City. We purchased our catalog of approximately 700 general merchandise and other products from a wide range of suppliers including, Plastoza (maker of Costalitos), Laboratorios Expanscience (Mustela), Schering Plough (Mexsana), Herbamedica (The Sensual Tea), Kao Brands (Jergens, Bioré and John Frieda), Conagra Foods (ACTIII), Pharmavite (Nature Made), Aquabeauty (Aqua Net), Pronatural (Xtraviril, Xiomega and Nutrigomas), Lonarmed (Finesse) and INT’L Business (2Life). In some cases, we negotiate directly with our suppliers in other countries and directly import the products through a customs agent. The customs agent delivers imported products to our warehouses after complying with all the legal requirements, which in some cases depends on the type of product.

Publications

Our Publications business division distributes, through Citem, magazines, books, albums and stickers from leading licensors and publishers in the market. Nearly all of the products purchased as of today may be returned to the publisher. During 2009, Citem’s clients included over 250 publishers for whom it distributed more than 4,000 publications. For the year 2010, Citem worked with more than 200 publishers and distributed more than 3,500 of their publications. In 2011, we distributed more than 3,000 publications from more than 200 publishers. Purchases are made through our centralized administration.

Retail

In Brazil, we purchase pharmaceutical products mainly from the three largest wholesale distributors, which deliver the products directly to our stores using a “just-in-time” system, enabling us to receive our products promptly and to minimize stock-outs. Approximately 90% of our non-pharmaceutical products are purchased directly from our suppliers while the remaining 10% are purchased from local distributors. We centralize our purchases of new non-pharmaceutical products through a distribution center that provides logistics support to our pharmacies.

In Mexico, we purchase merchandise from a various wholesalers as well as directly from some providers, the combination of which depends on the chain’s commercial strategy. Our pharmacies obtain some of the products we sell from our own distribution channels although approximately 65% of the products are purchased from third parties including other large wholesalers. Some of our main providers include: Unilever, Kimberly Clark, Procter & Gamble, Nestlé, Genomma Lab, Pfizer and Glaxo Smithkline.

In Chile, our pharmacies maintain comercial relations with all of the national and foreign laboratories for both pharmaceutical and non-pharmaceutical products. The products that we purchase are delivered to our distribution center in Santiago, Chile, the nation’s capital city.

Information Technology Systems

Overview

We periodically acquire and use new technologies to increase our efficiency and distribution capabilities as well as to improve our operative efficiency in our pharmacies. All dealings with suppliers, lessors, banks and insurance companies, as well as our treasury, are centralized in both GCS and our subsidiaries. We believe that our information technology systems have been, and will continue to be, instrumental in our ability to provide value-added services to our clients.

Retail Order Computers

In our wholesale distribution division, all of our sales representatives use portable hand-held computer terminals to take and process orders. These orders are transmitted via Internet to a mirrored and redundant data center. The orders are then printed and separated by route and filled according to a departure schedule. We continually upgrade our systems to increase the effectiveness of our order system, install individual workstations in a greater number of locations, and track customer and supplier orders in the system’s network to ensure the accurate fulfillment of those orders. In our retail division, orders to wholesalers are transmitted electronically from our replenishment and inventory management systems. The reception of merchandise is also controlled through the inventory management system.

Pharmacy Personal Point-of-Sale Computers

In our distribution division, we have developed a point-of-sale software known as www.farmaservicios.pdv., which is a PC-based application that has been designed to meet the needs of our pharmacy customers. www.farmaservicios.pdv has point-of-sale, inventory control and Internet capabilities to update and synchronize data using web-based technology. Clients that use www.farmaservicios.pdv can access and synchronize point-of-sale data through our website. Pharmacies that use our system are automatically linked to our order placement systems, which allow these pharmacies to order items electronically, view current product prices and track promotional discounts and pending orders. Additionally, through this system, we can also assist customers with their own inventory control and business management. The www.farmaservicios.pdv application can operate on a stand-alone PC or in a network environment, depending on the customer’s particular needs. The pharmacy owners purchase the PCs and related hardware and we provide the software package. Management believes that www.farmaservicios.pdv will continue to be an important factor in developing customer loyalty and improving overall customer service to pharmacies, which are our primary client base. As of December 31, 2011, we had more than 4,580 registered users, 3% more than we did at the end of 2010.

Automatic Picking Technology

We use automated pickers in some of our distribution centers. An automated picker is a computerized robot that matches an order number with an order number previously submitted by one of our sales representatives, selects the appropriate item(s) ordered and deposits the item(s) in a box for delivery. Each automated picker processes, in some cases, approximately 50% of the total units sold out of each distribution center where one is located and is significantly more efficient than a team of experienced workers. The automated pickers operate at high speed with extremely high accuracy and include error correction features. In our retail division, we have state-of-the-art distribution centers in Monterrey, Nuevo Leon, Mexico and Santiago, Chile. These centers’ technologies enable us to replenish our pharmacy’s stock of pharmaceutical and non-pharmaceutical products more accurately.

As of December 31, 2011, 6 of our 25 distribution centers had automated pickers. The installation of additional automated pickers in our remaining manual pick distribution centers will depend upon whether or not we deem the cost to be justifiable.

Computerized Purchase Order Placement System

In our distribution division, we have developed and continue to update an automatic inventory control and order placement system. This system utilizes inventory optimization software to track historic demand for products and to forecast future demand. The system also seeks to optimize inventory levels and order sizes at each distribution center through a “just-in-time” inventory approach.

Back-Office and Accounting Services

Our back-office information systems for our distribution division operate using a software program called BaaN, an Infor Software Company product. The database provides us with a strong analytical tool for decision-making that affects all aspects of our operations. BaaN is an integrated back-office and accounting system that currently manages our General Ledger, Accounts Receivable, Accounts Payable and Treasury, as well as other financial information. In our retail division, our back-office information systems operate with SAP technology that allows us to have access to both management and executive reports on-line.

Retail Pharmacy Business

With the acquisition of FASA, as of December 31, 2011 our retail pharmacy business consisted of over 150 pharmacies in the states of Jalisco, Mexico, Guanajuato, Michoacan, Coahuila, Tamaulipas and Mexico City, through Farmacias ABC, over 740 Farmacias Benavides stores located in 17 Mexican states and 85 pharmacies in the states of Rio de Janeiro and São Paulo in Brazil, through Drogasmil. In Chile, we operate over 350 pharmacies spanning 15 regions of the country. For the year ended December 31, 2011, net sales by our retail pharmacy business amounted to Ps. 20.7 million, which represented 44.3% of our total consolidated net sales.

In Mexico, our Benavides pharmacies obtain some of the products they sell from our own distribution channels. However, approximately 65% of the products purchased in 2011 came from third parties. In Farmacias ABC, around 60% of our stocked items were sourced from third parties in fiscal year 2011. On average, our Benavides stores stock over 15,000 items while the ABC chain stocks over 9,500 items, on average.

Through our 85 pharmacies located in Sao Paulo and Rio de Janeiro, Brazil, two of the countries largest population centers, we sell approximately 11,000 items, including health and beauty aids, generic drugs, prescription drugs, over-the-counter drugs and other consumer goods. We operate a call center through which we channel the delivery of products to our customer’s home or office in one hour’s time. We have entered into partnerships with providers of health care plans and corporate clients that allow us to gain access to a wider customer base. In addition, we participate in the Popular Pharmacy Program, a government sponsored program through which we grant discounts to low-income customers and then we obtain a refund of the discount amount from the government.

FASA has an established business model that it has applied in each of the markets where it operates, although it does make adjustments based on the particular conditions in each of the countries. This model consists of developing attractive drugstore-type formats that are located close to its client base and that offer a wide assortment of medicines as well as health, beauty and personal care items, including baby items, wellness products, photography and general merchandise goods.

We sell many different types of non-pharmaceutical products, from health and beauty aids to consumer goods such as magazines, candies and other food products. The types and number of non-pharmaceutical products in each store vary, and selections are based on customer needs and preferences and available space. In our Farmacias Ahumada chain, each store stocks an average of 15,600 items, although this figure varies by store format. No single non-pharmaceutical product category contributed significantly to our sales during 2011.

In 2011, our main classes of products were prescription drugs and over-the-counter medications and non-pharmaceutical products, including health and beauty aids and other merchandise. In Mexico, at our Farmacias ABC chain, approximately 62% of the sales were derived from pharmaceutical products and the remaining 38% was derived from health and beauty aids and other merchandise. In Farmacias Benavides, pharmaceutical products represented 52% of total sales while health and beauty aids, consumer goods and other merchandise accounted for the remaining 48% of items sold. The customer base of our retail pharmacy business is well diversified; therefore the loss of any one customer would not have a material adverse impact on our results of operations. In our Farmacias Ahumada chain in Chile 67% of total sale corresponded to pharmaceutical products and 33% to no-pharmaceutical items, including health and beauty care items as well as other merchandise while in Peru, 62% of total sales were pharmaceutical products and the remaining 38% were non-pharmaceutical products.

In addition to these products, our Retail Division is working to introduce generic based OTC products, prescription drugs, beauty care products and items for babies that are effective yet reasonably priced for our customers. In addition, we expect that the introduction of well-known, exclusive labels will also help strengthen our value proposition for our clients by increasing our overall product selection.

To date, we have a network of more than 150 specialized providers with operations worldwide. Our private and exclusive label brands are currently manufactured in various parts of the world, including Chile, Mexico, Argentina, China, the U.S. and the UK. As a result of this diverse sourcing methodology, we are able to achieve economies of scale, which in turn enables us to offer attractively priced products to our customers.

In 2011, we continued to develop, launch and promote new products. To date, our private label offerings include personal care and hygiene products as well as shampoos, deodorants, body lotions and baby care items such as accessories, diapers and wipes. During the year, we also launched a new line of baby formulas in various countries.

In addition to our private label brands, the Company is also focused on offering high quality name brands that are available exclusively in our stores. Currently, we offers brands such as “GNC” (a leader in the vitamin and mineral category); Prudence (condoms); “Sally Hansen/La Cross” (U.S. market leader in products for the treatment and care of hands and nails); “ROC” (internationally recognized dermo-cosmetics that include anti-aging and anti-cellulite products), “John Frieda” (a leader in innovative hair care products in the U.S.); “Lumene” (a brand that is the first of its kind to develop an innovative line of cosmetics and skin care items); “Phyto” (a French capillary dermo-cosmetic); Jergens (a U.S. brand with over a century of experience in the skin care industry); Scunci (the market leader in hair accessories); and Bonawell, Igora and Palette de Schwarzkopf (all of which are a part of Henkel’s product portfolio).

We expect that the increased variety, name-brand and lower cost products will make us an even more attractive option for our customers and help foster customer loyalty.

In 2011, FASA also introduced several new value-added services including a new concept known as “Solution Centers,” in which trained staff members offer customers personalized service geared towards their individual needs. In Mexico, some of our pharmacies are staffed by a certified physician who provides on-site medical consultations to our clients. We expect that both of these projects will help us to increase the level of service that we provide to our customers and, therefore, will result in higher sales as well as increased customer loyalty.

We believe that the retail pharmacy markets in the countries where we now operate will continue to grow due to the growing population, the stable demand for pharmaceutical products, an increase in the amount of senior citizens with access to health care and social security coverage and the growing market of over-the-counter products and other health and beauty aids and consumer goods that are sold at our retail pharmacies. However, we cannot assure you that the retail pharmacy market will not experience decreases in growth or that our results of operations will not be adversely affected, should the countries where we have operations fail to recover fully from the global economic crisis.

Business Divisions

Mexican Pharmaceutical Industry Overview

In Mexico, pharmaceuticals are available to the public through both private and government distribution channels. The Mexican government plays a significant role in the market for pharmaceuticals. In Mexico, pharmaceutical products consist of prescription drugs that may be sold only in licensed pharmacies and “over-the-counter” pharmaceutical products that may be sold without a prescription in licensed pharmacies. For the purposes of this annual report, pharmaceutical products include “over-the-counter” pharmaceuticals.

The Secretaría de Salud, or the Mexican Ministry of Health, oversees the provision of public health care through hospitals in Mexico, pharmacies and clinics operated by various governmental agencies and state-owned institutions. Distribution of pharmaceuticals within the public sector is largely undertaken by each governmental agency through direct purchases from manufacturers during yearly bidding programs based primarily on price.

Based on information from IMS Health, A.G. and our internal data, we estimate that approximately 75% of private sector pharmaceutical sales are placed through wholesalers, which in turn sell primarily to retail pharmacies. The remaining 25% of private sector pharmaceutical sales are placed directly by manufacturers to a few large pharmaceutical retail chains that purchase sufficiently large volumes to have direct access to the laboratories. Most manufacturers have adopted a “wholesaler only” policy because it is the most cost-efficient method of distributing their products. Nearly all of the individual pharmaceutical purchases take place at retail pharmacies and are either paid for by individuals or through private health insurance.

The following table shows annual sales and average unit prices in U.S. Dollars and growth rates for the private sector of the Mexican pharmaceutical market:

Competition

Pharmaceutical Products

Our primary competitor in the private pharmaceutical distribution business is Nadro, Mexico’s only other national pharmaceutical distributor. According to IMS Health, A.G. and our estimates, in 2009, 2010 and 2011, Grupo Casa Saba and Nadro together accounted for nearly 50% of prescription and over-the-counter pharmaceutical sales through private sector wholesale pharmaceutical channels in Mexico (this figure does not include the sale of similar and generic products, which if included would increase that percentage). Our other primary competitor is Casa Marzam, S.A. de C.V., a large Mexican regional distributor. Our other competitors include approximately twelve regional distributors, some of which own pharmacy chains. We believe that our distribution services are superior to those of the regional distributors due to the speed with which we distribute our products, as well as the quality, product catalog and value-added services that we provide.

In the government pharmaceutical distribution business, government entities acquire products through bidding programs in which wholesalers and laboratories participate directly. These bidding processes are open to the public and, therefore, we face competition in this division just as we do in the private sector.

Health, Beauty, Consumer Goods, General Merchandise and Other Products

Our competition in the Health, Beauty, Consumer Goods, General Merchandise and Other Products business division is similar to the competition that we face in our pharmaceutical products distribution business unit. We compete primarily with manufacturers that deliver directly to supermarkets, some pharmaceutical chains and with various regional distributors. In addition, Nadro and other regional wholesalers also distribute health, beauty, consumer goods, general merchandise and other products. This holds true in our retail pharmacy business as well, in that we compete with other major pharmacy chains that offer similar products.

Our principal competitors in the general merchandise and other products market segment are manufacturers that deliver directly to supermarkets and some regional distributors. We compete directly with many middle and product-specialized wholesalers that distribute to convenience stores, independent grocery stores and “mom and pop” stores. In terms of the lines that we distribute exclusively, we face no competition from other wholesalers.

Publications

Retail Pharmacy

In Mexico, the retail pharmacy market is highly fragmented, with independent pharmacies making up nearly 45% of the total market. As a result, our Farmacias ABC and Benavides pharmacies face competition from large pharmacy chains, such as Farmacias Guadalajara, Farmacias del Ahorro, Farmacias Fénix as well as from Wal-Mart supercenters and smaller players.

Brazilian Pharmaceutical Industry Overview

The following table shows annual sales and average unit prices in U.S. Dollars and growth rates for the private sector of the Brazilian pharmaceutical market:

The Brazilian pharmaceutical market has been growing steadily since 2000, driven, in large part, by improvements in socio-demographic indicators, and is projected to continue growing at rates of between eight and ten percent over the next five years.

Like Mexico, the Brazilian retail pharmacy market is also very fragmented. We face competition from companies such as Drogarias Pacheco, Raia, Drogaria Sao Paulo, Venancio and Drogasil, which operate large pharmacy chains, as well as from supermarkets and retailers that sell pharmaceutical products, such as Carrefour, Walmart and Pão de Açúcar. In addition, we compete with, among others, independently owned drugstores, supermarkets, mass merchandisers, discount stores, e-commerce sites that specialize in drugstore items and other small market participants.

Chilean Pharmaceutical Industry Overview

The following table shows annual sales and average unit prices in U.S. Dollars and growth rates for the private sector of the Chilean pharmaceutical market:

In Chile, national laboratories represent around 57% of the total market and international laboratories the remaining 43%. Together, they sell approximately 70% of their product lines through the retail pharmacy segment while the remaining 30% is sold to both Private and Public Institutions as well as directly to physicians and individual patients.

Unlike Mexico and Brazil, the Chilean retail pharmacy market is a highly consolidated and, therefore, a highly competitive market with three main drugstore chains making up approximately 90% of the playing field. As a result, our primary competitors are the other two major chains: Salco-Brand and Cruz Verde.

In general, our retail pharmacies compete on the basis of store location and convenient access, customer service, product selection and price. We believe continued consolidation of the drugstore industry in Mexico and Brazil, the aggressive discounting of generic drugs by supermarkets, specialized generic drug pharmacies and mass merchandisers and the increase of promotional incentives to drive prescription sales will further increase competitive pressures in the retail pharmacy market of the countries.

Seasonality

Both our distribution and retail business are subject to seasonal fluctuations and related market conditions. For example, during the winter months (which is from November – February in Mexico and May – August in Chile), we stock additional cold and flu care products to meet the seasonal demand for these items. During the warmer months, the population tends to consume larger quantities of alimentary tract aids and antibiotic products and, on the front-end, we feature personal care items such as sun tan lotions and deodorants. Allergy season also requires us to supply greater quantities of these remedies.

Socio-economic factors also dictate spending patterns linked to specific seasons. The back-to-school period means that the average household incurs higher out-of-pocket expenditures, leaving them less disposable income to spend elsewhere. In December, employers are required to give their employees a holiday bonus, so disposable income is typically higher at the end of the year.

During vacation periods such as Holy Week (March – April depending on the Easter break) and summer break, children are less likely to contract illnesses from their fellow schoolmates and there is also generally less traffic in the points-of-sale.

Our cash flows are also subject to seasonal fluctuations and market conditions. To maintain a larger winter inventory and to ensure adequate inventory levels for the two or more weeks of holidays in December, during which suppliers in Mexico and Chile do not make sales or deliveries, our accounts payable and inventories typically increase at year-end for both our distribution and Mexican retail divisions. After reaching their highest levels in November/December our inventories gradually decrease to what we estimate is a normal operational level of approximately 50 inventory days. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Overview”.

Marketing Channels

In our Mexican Distribution Division, we deliver both pharmaceutical and non-pharmaceutical products to over 22,000 clients throughout the country that a range from small mom and pop stores, to national and regional pharmacy chains, government institutions, both private and public sector hospitals, supermarkets and self-service chains such as Wal-Mart as well as specialty and convenience stores.

Special Sales Methodologies

Exclusive Distribution Agreements

In the areas of HBCG/Other Products and Publications, exclusive distribution agreements are typically limited to specific products, channels and geographic areas. Some of our exclusive distribution agreements can be terminated without cause, by means of proper notice, given by either party. We do not anticipate the imminent termination of any of these agreements, other than those that we decide to terminate if the products distributed are not sufficiently profitable. Before entering into exclusive distribution arrangements, we require that each prospective supplier agrees to advertise its services and offer a specific number of promotions and trade discounts to ensure that the supplier is seeking to take a leading position in the Mexican market. We provide manufacturers with highly specialized integrated services, ranging from purchasing, planning, centralized sales, merchandising, collections, execution of promotions and the provision of information.

We are currently seeking to enter into exclusive distribution agreements that will allow us to distribute products, particularly in our HBCG/Other Products business division, at acceptable margins. We cannot assure you that we will enter into distribution agreements to distribute any or all of these products at acceptable margins.

Call Centers

To better serve our private sector clients who purchase specialty medicines and vaccines, we have installed a dedicated Call Center that provides nationwide coverage. Given that the direct sale of vaccines to the public is prohibited by Mexican law, our vaccine clients are primarily physicians, private hospitals and clinics as well as secondary distributors. Our specialty medicine clients are generally physicians, large pharmacy chains, national supermarket chains as well as individuals. Products are delivered to the client’s home or office from one of our centralized distribution centers. The Call Center offers a range of services that include customer service, order taking (in-bound calls) and direct sales (out-bound calls) as well as the coordination of special projects. Sales are conducted by trained staff members and special projects include conducting vaccination campaigns with private sector clients.

Pharmacies

In our pharmacies we have at times entered into partnerships with providers of health care plans, corporate clients, governmental institutions and non-profit organizations, which allow us to gain access to a wider customer base.

In addition, we participate in government sponsored program such as the Popular Pharmacy Program in Brazil.

Value-Added Pharmaceutical Services

We believe that we distinguish ourselves from our distribution competitors, in part, by the wide range of value-added services we provide our customers in addition to our products. For example, we provide pharmacies with suggested retail price lists that are updated immediately upon notice of price changes from our suppliers. These price lists are the only notices used by pharmacies to adjust their prices. We also provide purchasing management, price updates and advisory services to our customers through direct personal computer links between us and individual pharmacies using www.farmaservicios.pdv, our proprietary point-of-sale system. See “—Technology Information Systems—Pharmacy Personal Point-of-Sale Computers” above in this item.

We also offer our customers a series of specialized services, including training, conferences and trade fairs. Some customer services are supported by a monthly pharmaceutical publication, “Farmservicios Editorial,” formerly “Correo Farmacéutico,” a monthly magazine and product catalog. We have already established an online distribution and information site for our clients and suppliers, www.farmaservicios.com, which we currently make available to them free of charge. Clients that log on to www.farmaservicios.com are able to communicate directly with us, and can place and track their orders and shipments on-line. These clients also have access to a wide range of additional services, including news and industry information, free e-mail, business advice and a variety of special promotions. www.farmaservicios.com also links to www.farmaservicios.pdv. See “—Information Technology Systems” above in this item.

Patents and Licenses

Due to the nature of our business, we do not currently have any type of patent. In terms of licenses, we have a sanitary license to operate each of our distribution centers as well as every one of our pharmacies. In addition, we have licenses that enable us to import products, although they are not material in terms of our sales at this time.

As a result of our broad client and supplier base and the general nature of our business, neither our retail nor distribution business is particularly dependent on any type of industrial or commercial contract.

Regulation

In Mexico, both our distribution and pharmacy businesses are primarily regulated by the Ley General de Salud, or General Health Law, and the accompanying regulations. Two federal agencies that pertain to the executive branch of the Mexican government, the Mexican Ministry of Health and the Mexican Ministry of Economy, mainly regulate the pharmaceutical industry. We are required to obtain authorization from the Mexican Ministry of Health to distribute prescription drugs and over-the-counter pharmaceuticals on the wholesale level. Similarly, the retail sales of pharmaceutical products, health and beauty aids and other merchandise is subject to the General Health Law and its regulations, state and local health rules and regulations, the Ley Federal de Proteccíon al Consumidor, or Federal Consumer Protection Law, and Normas Oficiales Mexicanas, or Mexican Official Norms. We are required to obtain a license for each pharmacy to commercialize controlled medicines that contain certain substances. Such medicines cannot be sold without prescription and sales must be registered in accordance with specific requirements set forth in applicable regulations in control books. We are required to appoint a pharmacist who must be present at the pharmacy during business hours and who is responsible for compliance with the applicable health regulations in such pharmacy. Such appointment must be notified to the Mexican Ministry of Health. We believe that we have obtained all necessary authorization and permits required for the operation of our distribution and retail businesses and we do not foresee any revocation, cancellation or termination of such authorizations and/or permits.

The Ministry of Economy regulates both the wholesale and retail prices of prescription and over-the-counter pharmaceutical products. Mexican law requires us to sell all prescription and over-the-counter drugs at a price that is equal to or lower than the price approved by the Ministry of Economy for each product. The Ministry of Economy periodically receives and, if appropriate, approves revised price lists submitted by manufacturers on a product-by-product basis.

The pharmaceutical industry in Brazil operates in highly regulated environment. The pharmaceutical industry is regulated at the federal, state and municipal levels. Federal laws and regulations provide a regulatory framework. Enforcement and specific regulation is implemented through state and municipal rules and regulations through agencies such as the Conselho Regional de Farmacia, or Pharmaceutical Regional Council. Pharmacies in Brazil are required to obtain an operating license from the Secretaria de Vigilância em Saúde, Health Surveillance Secretariat of the Ministry of Health, or SVS, in order to engage in the handling, distribution, transport, repackaging, import and export of the substances regulated by the SVS, as well as the medicines that contain such substances. In addition, operating permits, certificates and authorizations must be obtained periodically from relevant local authorities. All pharmaceutical products and certain non-pharmaceutical products, including certain health and beauty aids, are required to be registered with the Agência Nacional de Vigilância Sanitária, the National Health Surveillance Agency or ANVISA. Although retail pharmacies are not responsible for obtaining registration of the products sold, pharmacies must check that products offered are duly registered with the appropriate authorities. We believe that we have obtained all the necessary licenses and permits necessary to operate our business in Brazil.

The pricing of certain pharmaceutical and non-pharmaceutical products sold through pharmacies in Brazil are controlled and monitored by the Brazilian government through the Câmara de Regulação do Mercado de Medicamentos, the Chamber for Regulation of Medicine Market or CMED, with general oversight from ANVISA. ANVISA establishes regulatory mechanisms that allow for controlled percentage increases in prices due to fluctuations in the exchange rate, inflation rate and raw material costs. Adjustments to price controls take place on an annual basis, on March 31st of each year. The CMED established a maximum drug price adjustment of 5.85% for the year commencing on March 31, 2012. Most over-the-counter drugs are not subject to such price controls.

In Chile, the pharmaceutical industry is controlled under the Sanitary Code, which regulates everything related to the promotion, protection and restoration of its residents’ health, except for those matters subject to special laws. The authority responsible for sanitary control of pharmaceutical products is the Chilean Public Health Institute (“CPHI”) (Instituto de Salud Pública de Chile). In order to commercialize and distribute a pharmaceutical or cosmetic product in Chile, it must be previously recorded before the sanitary registry office maintained by the Institute. However, in Chile, in order to install and operate a drugstore, authorization from the Chilean Health Service (Servicio de Salud Chileno) is required, who is likewise responsible for its supervision and monitoring.

As a general rule, in Chile, the retail sale of pharmaceutical products for human use can only be made in drugstores, which must have a pharmaceutical chemist in charge. Notwithstanding the foregoing, the authority may allow the retail sale of pharmaceutical products by other establishments.

Chilean law provides that in establishments in which the manufacturing, distribution and retail sale of pharmaceutical products is carried out, advertising may only be made through posters, billboards and flyers, which indicate their official name and approved container, information contained in the label, as well as the trademark or trade name of the producer or the distributor, if any. Likewise, the use of advertising which may lead to consumption and self-medication or encourage the sale through incentives of any nature to the drugstore staff, is prohibited.

Industry Prices

As a result of government regulation, Mexican pharmaceutical prices are lower than in other countries such as the United States. We believe that price increases of pharmaceutical and over-the-counter products in Mexico continue to represent an area of possible future revenue growth for us. Prior to 1990, the Mexican government was responsible for determining pharmaceutical prices and did not increase pharmaceutical prices at the rate of inflation, thereby limiting the growth of our revenues from the distribution of these products. As of 1990, the Mexican government, acting through the Secretaría de Comercio y Fomento Industrial, or Ministry of Commerce and Industrial Promotion, now known as the Secretaría de Economía, or Ministry of Economy, and the Cámara Nacional de la Industria Farmacéutica, or National Chamber of the Pharmaceutical Industry, known as Canifarma, entered into a series of agreements to deregulate the prices of domestically manufactured pharmaceutical products, which constitute most of the pharmaceutical products we sell. In order to obtain the benefits of these agreements, many Mexican pharmaceutical manufacturers have agreed, in conjunction with Canifarma, to continue submitting price increase proposals for approval by the Ministry of Economy. Under current practice, any manufacturer seeking a price increase must file a request before the Ministry of Economy, outlining the reasons for the price increase. The most important factors considered by the Ministry of Economy are: the minimum wage increase, the inflation rate, the exchange rate and the amount of foreign direct investment that the manufacturer commits to its Mexican facilities. If the Ministry of Economy does not respond within 30 days, the increase is automatically granted. Canifarma and the Ministry of Economy continuously engage in negotiations regarding the level of price increases for individual products and for the pharmaceutical sector as a whole. In the case of new pharmaceutical products, the manufacturer is required to file a request for a price increase before the Ministry of Economy, which outlines the price for the new product and the rationale behind the chosen price. Since 1990, prices have increased above the rate of inflation. However, this trend has subsided in recent years, with average prices coming back into line with the annual inflation rate. In 2009, the average unit price increased by 3.2% in Peso terms, below the rate of inflation of 3.6% and during 2010, the average unit price rose by 2.1%, below the annual inflation rate of 4.40%. During 2011, the average unit price increased 2.5% in Peso terms, somewhat lower than the annual inflation rate of 3.8%.

The devaluation of the Peso may affect our ability to increase the prices of some of our products. See “Item 3. Key Information—Risk Factors—Risk Factors Relating to Political and Economic Developments”.

In Brazil, the pricing of certain pharmaceutical and non-pharmaceutical products sold through pharmacies are controlled and monitored by the Brazilian government through the Câmara de Regulação do Mercado de Medicamentos, the Chamber for Regulation of the Medicine Market or CMED, with the general oversight of the Agência Nacional de Vigilância Sanitária, the National Health Surveillance Agency or ANVISA. ANVISA is linked to the Ministry of Health and was founded in 1999. CMED was founded in 2003. The foundation of both entities was an attempt to curtail spiraling costs associated with existing drug products that resulted from nearly a decade of deregulation and unchecked commercial practices. During the time of deregulation, drug manufacturers set retail prices that were marked-up to cover wholesale and retail activities, as well as tax liabilities, which inflated prices for the consumer. In such an environment, the prices paid by the consumer included a pharmacy mark-up as high as 30% of a medication’s total price. Moreover, a federal tax of 6% and a state tax of approximately 18% were imposed, making the products costly as retailers passed on much of the cost to the consumer. In 2002, the retail pharmacy market in Brazil suffered drastic declines due to a devaluation of the Brazilian currency. Nevertheless, prices in local currency continued to rise. In October 2003, legislation was enacted that re-established price controls and empowered ANVISA and CMED to monitor the prices, set a maximum sales price and determine maximum annual price adjustments, thus limiting the degree to which pharmaceutical companies and pharmacies can set their own prices. Price controls are governed through regulatory mechanisms that allow for controlled percentage increases due to fluctuations in the exchange rate, inflation rate and raw material costs, among other factors. Adjustments to price controls take place on an annual basis, on March 31st of each year. The CMED established a maximum drug price adjustment of 5.85% for the year commencing on March 31, 2012.

In 1980, the Chilean government lifted its price controls on pharmaceutical products in both the private and public sectors, leaving the market to set the price.

Organizational Structure

Grupo Casa Saba is a holding company that has an ownership interest in the subsidiaries through which we operate. Grupo Casa Saba and all of our significant subsidiaries listed below are organized under the laws of Mexico, except where otherwise indicated.

The following table sets forth our significant subsidiaries and our direct or indirect percentage equity ownership in such subsidiaries as of December 31, 2011:

Property, Plant and Equipment

As of December 31, 2011, our principal properties in Mexico consisted of 22 strategically located distribution centers that represent more than 100,000 square meters of warehouse space, complete with all of the equipment necessary to operate these centers. From these centers, we filled more than 7.1 million orders in 2011, averaging more than 598,000 orders per month. The majority of our fixed assets are wholly owned.  However, as part of the Acquisition Loan with HSBC and Banorte, these assets were granted in guarantee under the Documents of Guarantee (as such term is defined in the Acquisition Loan)  We also own a fleet of over 800 vans, trucks and cars, which we use to distribute products to our customers.

In addition, FASA owns its Chilean distribution center as well the equipment needed to operate this facility. This distribution center provides service to our local pharmacy stores. Some of the movable assets of FASA also form part of the guarantee for the above-mentioned credit as provided in the Documents of Guarantee.  The facility is strategically located in the nation’s capital city in order to optimize transport to and from the points-of-sale.

The following table shows our current distribution centers and their locations, as of April 15, 2012:

In January 2009 we started operations in our new distribution center in Hermosillo, Sonora. The new facility quadrupled the storage capacity of the previous center and features semi-automatic picking capabilities, thus allowing for more efficient distribution to the surrounding region.

In Brazil, we lease all of the properties where our retail pharmacies are located, as well as one distribution center in São João de Meriti, which has approximately 5,000 square meters of storage space and is used to provide local logistics support to our pharmacies. In Mexico and Chile, we currently lease all of the properties where our retail pharmacies are located as well as the 48,750 square meter Mexican distribution center that is located in Guadalupe, Nuevo Leon and that provides service to Benavides. All of the properties, equipment and our inventory are covered by insurance policies. The insurance program includes coverage against a variety of risks such as fire and theft, as well as third party liability and the temporary shutdown of the business due to natural disasters.

In addition to our distribution centers, we also own the approximately 3,500 square meter site (2,548 square meters of construction) of the Sports Clinic facility located in Tampico, Tamaulipas, as well as all of the necessary equipment for its operation.

The following table shows our pharmacy locations in Mexico, Brazil, Chile and Peru as of December 31, 2011: