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Grupo Casa Saba, S.A.B. de C.V. · 20-F · For 12/31/11

Filed On 5/15/12, 5:25pm ET   ·   Accession Number 950157-12-210   ·   SEC File 1-12632

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

 5/15/12  Grupo Casa Saba, S.A.B. de C.V.   20-F       12/31/11   11:5.1M                                   Cravath Swaine &...01/FA

Annual Report of a Foreign Private Issuer   —   Form 20-F
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F        Annual Report                                       HTML   2.42M 
 2: EX-4.1      Translation of Credit Facility Agreement            HTML    363K 
 3: EX-4.2      Summary of Amended and Restated Cfa                 HTML     56K 
 4: EX-4.3      Summary of the Irrevocable Guarantee Trust          HTML     36K 
 5: EX-4.4      Summary of the Amendment to the Igt                 HTML     19K 
 6: EX-4.5      Summary of the Non-Possessory Pledge Agreement      HTML     20K 
 7: EX-4.6      Summary of the Amendment to the Non-Possessory      HTML     14K 
                          Pledge                                                 
 8: EX-8.1      List of Subsidiaries of the Registrant              HTML     26K 
 9: EX-12.1     Certification of the Principal Executive Officer    HTML     15K 
10: EX-12.2     Certification of the Principal Administrative       HTML     14K 
                          Officer                                                
11: EX-13.1     Certification of the CEO and the Cao                HTML     14K 


20-F   —   Annual Report
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"Part I
"Item 1
"Identity of Directors, Senior Management and Advisers
"Item 2
"Offer Statistics and Expected Timetable
"Item 3
"Key Information
"Item 4
"Information on the Company
"Item 4A
"Unresolved Staff Comments
"Item 5
"Operating and Financial Review and Prospects
"Item 6
"Directors, Senior Management and Employees
"Item 7
"Major Shareholders and Related Party Transactions
"Item 8
"Financial Information
"Item 9
"Offer and Listing Details
"Item 10
"Additional Information
"101
"Item 11
"Quantitative and Qualitative Disclosures about Market Risk
"118
"Item 12
"Description of Securities Other than Equity Securities
"120
"Item 12A
"Debt Securities
"Item 12B
"Warrants and Rights
"Item 12C
"Other Securities
"Item 12D
"American Depositary Shares
"Part Ii
"Item 13
"Defaults, Dividend Arrearages and Delinquencies
"121
"Item 14
"Material Modifications to the Rights of Security Holders and Use of Proceeds
"Item 15
"Controls and Procedures
"Item 16
"Reserved
"122
"Item 16A
"Audit Committee Financial Expert
"Item 16B
"Code of Ethics
"Item 16C
"Principal Accountant Fees and Services update 2010
"Item 16D
"Exemptions from the Listing Standards for Audit Committees
"123
"Item 16E
"Purchases of Equity Securities by the Issuer and Affiliated Purchasers
"Item 16F
"Change in Registrant's Certifying Accountant
"Item 16G
"Corporate Governance
"Item 16H
"Mine Safety
"125
"Part Iii
"Item 17
"Financial Statements
"126
"Item 18
"Item 19
"Exhibits
"Management's Report on Internal Control over Financial Reporting
"F-2
"Consolidated Balance Sheets as of December 31, 2010 and 2011
"F-6
"Consolidated Statements of Income for the years ended December 31, 2009, 2010 and 2011
"F-7
"Consolidated Statements of Stockholders' Equity for the years ended December 31, 2009, 2010 and 2011
"F-8
"Consolidated Cash Flow Statement for the years ended December 31, 2010 and 2011
"F-9
"Notes to Consolidated Financial Statements
"F-10

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 


FORM 20-F

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
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:


Title of Each Class
Name of Each Exchange
on Which Registered
 
 
American Depositary Shares, each representing ten Ordinary Shares, without par value
New York Stock Exchange
 
 
Ordinary Shares, without par value
New York Stock Exchange
(for listing purposes only)
 
 
 


 
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  __

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):

Large accelerated filer __
Accelerated filer  X
Non-accelerated filer __

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

U.S. GAAP __
International Financial Reporting Standards as issued by the International Accounting Standards Board __
Other X

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
 
 
 


 


 


   
     
   
     
   
 
 


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:
 

 
International, national and local general economic, financial and market conditions, inflation and interest rate movements;


 
The overall size and growth of the Mexican, Brazilian, and Chilean pharmaceutical markets;


 
The level of competition among distributors, suppliers and sellers of pharmaceuticals;


 
Fluctuations and difficulty in forecasting operating results;


 
Our ability to integrate acquisitions and expansion into new markets;


 
Our ability to operate our retail pharmacy business efficiently;


 
Dependence on suppliers and clients;


 
General risks associated with doing business in Mexico, Brazil, and Chile including political and economic instability and changes in government regulations; and


 
Other factors referenced in this annual report.

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.


Identity of Directors, Senior Management and Advisers

 
Not applicable.

Offer Statistics and Expected Timetable

 
Not applicable.

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 21 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 22 to our audited consolidated financial statements provides a partial 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(d) 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 21 and 22 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”.

Year  ended December 31
 
2007
   
2008
   
2009
   
2010
   
2011
   
2011 (1)
 
    (in thousands of Pesos and U.S. Dollars, except share and per share data)
Income Statement
                                   
Mexican FRS:
                                   
Net sales
    25,259,662       28,400,059       29,791,657       33,840,754       46,568,226       3,331,370  
Gross profit
    2,484,257       3,065,588       3,225,855       4,527,791       8,774,219       627,685  
Operating expenses
    1,424,852       2,104,883       2,335,130       3,853,139       7,207,752       515,624  
Operating income
    1,059,405       960,705       890,725       674,651       1,566,467       112,061  
Comprehensive cost of financing, net
    17,848       181,118       262,243       262,239       1,040,060       74,403  
Other income (expense) (2)
    51,756       58,189       (136,307 )     (97,131 )     (132,400 )     (9,472 )
Income before taxes  on earnings
    1,093,313       897,567       492,175       318,181       400,169       28,627  
Controlling interest net income
    905,087       595,118       280,278       276,934       72,639       5,196  
Non-controlling interest net income
                            (6,864 )     4,346       311  
 
 


 
Year ended December 31
 
2007
   
2008
   
2009
   
2010
   
2011
   
2011 (1)
 
    (in thousands of Pesos and U.S. Dollars, except share and per share data)
Income Statement
                                   
Net income per Ordinary Share (3)
    3.41       2.24       1.05       1.01       0.33        
Weighted average Ordinary Shares outstanding (in thousands) (3)
    265,419       265,419       265,419       265,419       265,419        
U.S. GAAP (4):
                                             
Net sales
    25,259,662       28,400,059       29,791,657       33,840,754       46,568,226       3,331,370  
Gross profit
    2,484,257       3,065,588       3,225,855       4,527,791       8,774,219       627,685  
Operating income
    1,044,482       963,648       780,648       3,824,913       1,592,757       113,942  
Income before taxes on earnings
    1,078,390       900,510       592,098       646,425       426,459       30,508  
Controlling interest net income (4)
    890,164       598,061       246,582       248,708       98,929       7,077  
Non-controlling interest net income
                            (6,864 )     4,346       311  
Net income per Ordinary Share (3)
    3.35       2.25       0.93       0.91       0.37          
Weighted average Ordinary Shares outstanding (in thousands) (3)
    265,419       265,419       265,419       265,419       265,419          
Balance Sheet Data
                                               
Mexican FRS:
                                               
Property and equipment, net
    1,269,821       1,404,985       1,400,188       3,534,551       3,406,855       243,718  
Total assets
    12,039,715       14,647,532       15,087,669       31,312,711       32,094,064       2,295,926  
Short-term debt
            271,824       1,491,126       9,195,340       3,050,826       218,248  
Long-term debt
            1,053,000       891,644       2,289,346       9,505,715       680,014  
Capital stock
    1,123,764       1,123,764       1,123,764       1,123,764       1,123,764       80,391  
Controlling interest stockholders’ equity (4)
    6,092,720       6,609,761       6,651,209       6,931,453       6,952,026       497,330  
Non-controlling interest stockholders equity
                            151,395       155,741       11,141  
U.S. GAAP (4):
                                               
Property and equipment, net
    1,269,821       1,404,985       1,400,188       3,534,551       3,406,855       243,718  
Total assets
    12,066,643       14,674,460       15,215,597       31,312,711       32,290,417       2,309,973  
Short-term debt
            271,824       1,491,126       9,195,340       3,050,826       218,248  
Long-term debt
            1,053,000       891,644       2,289,346       9,505,715       680,014  
Capital stock
    1,123,764       1,123,764       1,123,764       1,123,764       1,123,764       80,391  
Controlling interest stockholders’ equity (4)
    6,091,437       6,586,925       6,728,296       7,131,709       7,182,918       513,847  
Non-controlling interest stockholders equity
                            151,395       155,741       11,141  
 
 


(1)
Peso amounts have been translated into U.S. Dollars solely for the reader’s convenience, at the rate of Ps. 13.9787 per U.S. $1.00, which was the Peso to U.S. Dollar exchange rate as of December 31, 2011, as reported by the Mexican Central Bank in the Official Gazette of the Federation.


(2)
Other income consists of fees on returned checks, miscellaneous articles and non-taxable items adjustments and services. See Note 3(k) to our audited consolidated financial statements for a description of impairment of intangible assets included as other expenses.


(3)
Based on the weighted average number of Ordinary Shares outstanding during each year.
 
 


 

(4)
For a discussion of the principal differences between U.S. GAAP and Mexican FRS concerning net income and total stockholders’ equity as well as a partial reconciliation to U.S. GAAP of net income and total stockholders’ equity, see Notes 22 and 23 to our audited consolidated financial statements.

                                (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 Mexico, 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.  Five percent of our net income for the year ended December 31, 2011 was applied to the legal reserve. 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:
 

 
the resolution by our shareholders in light of our results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by our shareholders for this purpose;


 
the extent to which we receive cash dividends, advances and other payments from our subsidiaries.  We are a holding company with no significant operating assets other than the ones we own through our subsidiaries.  Given the fact that we receive substantially all of our operating income from our subsidiaries, our ability to meet our financial obligations, including the payment of dividends, depends significantly on the dividend payments we receive from our subsidiaries; and


 
the extent to which we have cash available for distribution after funding our working capital needs, capital expenditures and investments.
 
 

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.

   
Exchange Rate(1)
Year ended December 31,
 
High
 
Low
 
Average(2)
 
Period End
                   
2007
 
Ps. 11.27
 
Ps. 10.67
 
 
Ps. 10.93
 
Ps. 10.92
2008
 
13.94
 
9.92
 
 
11.14
 
13.83
2009
 
15.41
 
12.63
 
 
13.50
 
13.06
2010
 
13.19
 
12.16
 
 
12.62
 
12.38
2011
 
14.25
 
11.51
   
12.43
 
13.95
                   
                   
 
 
 
 
 
 
 
 
 
 
Month ended
                 
October 31, 2011     Ps. 13.93     Ps. 13.10       Ps. 13.44     Ps. 13.17
 
14.25
 
13.38
 
 
13.70
 
13.62
 
13.99
 
13.49
 
 
13.77
 
13.95
 
13.75
 
12.93
 
 
13.40
 
12.98
February 28  2012
 
12.95
 
12.63
 
 
12.78
 
12.79
 
12.99
 
12.63
   
12.75
 
12.81
 
13.18
 
12.73
   
12.97
 
13.15
 


(1)
The free market exchange rate is the Noon Buying Rate for Mexican Pesos, as reported by the Board of Governors of the U.S. Federal Reserve Bank of New York.


(2)
Annual average rates reflect the average of month-end rates. Monthly average rates reflect the average of daily rates.

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

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 Río 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 jeapordize 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 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.  The Company has not determined definitively the effect that the adoption of IFRS will have on its financial information, nor has it determined completely the variations that may result when comparing the financial information from previous years.
 
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 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, 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 México 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 México, 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:


 
inflation can adversely affect consumer purchasing power, thereby adversely affecting consumer demand for the products we sell and/or distribute; and


 
to the extent that inflation exceeds price increases, our prices and revenues will be adversely affected in “real” terms.

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 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. During fiscal year 2011, 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.
 
 

 
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 15% 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.
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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, central Chile was struck by a magnitude 7.1 earthquake 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.
 
 


 
Information on 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 by us 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, Michoacán, 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.  Drogasmil currently operates 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 are 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 México 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 México 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. 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 transaction. 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”.
 
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. We believe that the Acquisition is creating 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. José 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 Gómez and Jorge Manuel Sánchez 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 Jesús Benavides Guerra acquires the existent “Botica del Carmen” in Monterrey, State of Nuevo León, 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 León, and in Torreón, 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 Torreón, State of Coahuila, Gómez 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 and Guanajuato 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. Álvaro Rodríguez 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. Álvaro Rodríguez 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 León, 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. On 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 Río Bravo in the state of Tamaulipas; Ciudad Juárez and Chihuahua in the state of Chihuahua; San Luis Potosí; Uruapan in the state of Michoacán; 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 Díaz resigns as operations officer and Mr. José 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, Torreón, 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.

In light of the amendments to the Mexican Federal Income Tax Law, effective January 1, 2010, relating to changes in the tax consolidation regime, the Company decided to deconsolidate for tax purposes and filed a deconsolidation tax return on June 25, 2010 for an amount of Ps. 132,629 in thousands of Mexican pesos, which has been paid as of this date.
 
 

 
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”.
 
   
Year ended December 31,
 
       
2010(1)
   
2011
 
                   
Distribution fleet
  Ps. 
19.4
    Ps. 
10.3
    Ps. 
0
 
Technology and computer equipment
    12.3       11.6    
      37.1
 
Other general capital expenditures
    30.7       14.7    
      72.5
 
Total capital expenditures Distribution Division
  Ps. 
62.3
    Ps. 
36.6
    Ps. 
109.7
 
                       
Pharmacies
  Ps.
0.5
    Ps. 
322.3
    Ps.
231.9
 
Infrastructure
    9.9       41.3            35.6  
Distribution
    3.3       20.6              7.0  
                         
Total capital expenditures Retail Division
  Ps. 
13.3
    Ps.
384.2
    Ps.
274.6
 
Total capital expenditures
  Ps. 
75.6
    Ps. 
420.8
    Ps.
384.3
 



(1)
In 2010, we are including FASA’s full-year CAPEX
 
Our capital expenditures during 2009 were approximately Ps. 75.6 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. 13.3, 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. 109.7 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. 274.6 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:


 
6,400 pharmaceutical products;


 
5,400 health and beauty products;


 
700 general merchandise and other products, such as food and toiletries; and


 
3,000 publications.
 
 

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


 
approximately 14,000 pharmacies owned by private individuals;


 
over 5,100 privately-owned pharmacy chains and around 620 government pharmacies;


 
approximately 3,500 regional and national supermarkets;


 
approximately 600 racks and 110 nationwide agents;


 
over 160 department stores; and


 
approximately 330 major wholesalers and 3,100 convenience stores.

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 more than 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. 32,094,059 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:

 
 
Year Ended December 31,
 
 
     
2010
   
2011
 
Pharmaceuticals(1)(2):
 
 
   
 
       
 - Private
    75.11%       71.91%       46.16%  
 - Government
    3.04%       2.83%       2.60%  
Health, Beauty, Consumer Goods, General Merchandise & Other Products
    8.49%       6.42%       5.20%  
Publications
    2.53%       2.47%       1.70%  
Retail Pharmacy
    10.82%       16.36%       44.34%  
Total
    100%       100%       100%  
          _________________
 

 
(1) 
For a brief description of the types of products included within the term “pharmaceutical products” for purposes of this annual report, as well as a discussion of the differences between the pharmaceutical markets in Mexico and the United States, see “—Pharmaceutical Industry,” below in this item.



 
(2)
In 2009, the operations of Casa Saba Brasil and our retail pharmacy business in Mexico were consolidated and reflected in the Private Pharmaceuticals business division.  For the year ended December 31, 2010 and thereafter the results of our retail pharmacy business will be reported separately as the “Retail Pharmacy-” division.

                                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 states1.  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 more than 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.
 
 

1 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:


 
Strengthening our retail pharmacy business in Mexico and Latin America;


 
Strengthening the company’s financial position


 
Improving the efficiency of our retail operations and strengthening customer loyalty;


 
Identifying opportunities in both our distribution and retail divisions to increase our market penetration in sectors with high growth potential


 
Maintaining continuous contact with clients and suppliers to enhance the supply chains in which we participate;


 
Analyzing the efficiency of our existing distribution centers and implementing IT solutions and internal savings programs that will increase our operational efficiency and maximize profitability;
 
 

 

 
Offering our clients both value-added and internet solutions for facilitating commercial transactions and promoting higher sales; and


 
Continuing to focus on internal savings and operating efficiencies programs that will maximize our operations’ profitability.


 
As a result of these measures, as of December 31, 2011, we:


 
Successfully completed the integration of Farmacias Ahumada, S.A., a Chilean-based retail pharmacy chain and Farmacias Benavides, its Mexican based subsidiary, into our Group;


 
Restructured the bridge loan that was obtained to acquire FASA with more favorable terms for the Company;
 

 
Negotiated the divestiture of our Peruvian operations, and completed the sale of this subsidiary in January 2012;
 

 
Increased the efficiency of our retail pharmacy operations by improving our product offering as well as the level of service that we provide at the point-of-sale;


 
Developed and launched new private label and controlled (exclusive) brand products in our pharmacies;


 
Launched a new concept of “Solution Centers” in some of our Chilean and Mexican Pharmacies;


 
Began offering medical consultations in some of our Mexican pharmacies to increase the level of service that we offer to our customers;


 
Had commercial operations with almost all of the clients and suppliers of the private pharmaceutical market in all of the countries where we currently operate;


 
Developed and installed state-of-the-art Business Intelligence and Point-of-Sale systems for some of our government clients;


 
Continued with the second phase of the launch of GPRS mobile devices for our sales force;


 
Successfully migrated the telecommunications network in Mexico to a new Multiprotocal Label Switching (MPLS) format, which offers faster, safer and a more economic communications protocol with improved data quality


 
Offered value-added services to our distribution clients such as targeted publications, special discount programs and an electronic procurement portal that helps facilitate purchasing for our clients; and


 
Reviewed and, in some cases, changed the commercial terms of several of our clients and suppliers and, when required, discontinued unprofitable operations.
 
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. 7,732.9 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 wellbeing 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 Petroleos de México (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:


 
“ISSSTE” – The Instituto de Seguridad y Servicios Sociales para los Trabajadores del Estado, the health and social security institution for Mexican federal government employees;


 
“PEMEX” – The hospitals and pharmacies operated by Petróleos Mexicanos, the Mexican national oil company and one of the largest employers in Mexico;


 
“IMSS” – The hospitals and pharmacies of the Instituto Mexicano del Seguro Social, the health and social security institution for Mexican employees of private companies; and


 
“State Health Institutions” – The hospitals, clinics and pharmacies of each of the States of Mexico.  The government employees of the States of Mexico have the right to go to these institutions for their healthcare needs.

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:
 
 

 

 
Mexsana talcum powders from Schering Plough (since 1999);


 
The Sensual Tea (since 2004);


 
Mustela products (since 2007);


 
Costalitos, trash bags (since 2007);


 
Aquanet, hair sprays and hair care products (since 2009);


 
Jergen’s, hand and body creams (since 2009);


 
Bioré, facial cleansing products (since 2009);


 
John Frieda, hair care products (since 2009);


 
Nature Made, dietary supplements and herbal products (since 2010);


 
ACTII, microwaveable popcorn (since 2010);
 

 
D’Stevia, natural sweetners (since 2010);


 
CUREL (since 2011);


 
Xiomega, Chia seed based nutritional supplements (since 2011);


 
Xtraviril, (since 2011);


 
Dream Water (since 2011);


 
Vudu  Shot, pheromone perfumes (since 2011);


 
Finesse, shampoos (since 2011);


 
Ardell, false eyelashes (since 2011);


 
Nutrigomitas, children’s nutritional supplements (since 2011); and


 
2Life, toothbrushes, baby wipes and razors (since 2011).

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 days in 2009, 73 days in 2010 and 51 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.

Credit terms
 
Days
Pharmacies
      50
Supermarkets and local wholesalers
      60
Government
    100
Publications to wholesalers
      60
Publications to retailers (1)
      60
 
     
  (1)
National retail chains are centralized

                                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 delivered orders directly to the distribution warehouse that placed the order, or to our transportation subsidiary, Marproa.  Suppliers typically delivered 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 primarily 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.  Imported products are delivered to our warehouses by the customs agent 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. Currently, Citem is only distributing publications (magazine and books titles) that meet the Group’s minimum profit requirement.  Purchases are made through our centralized administration.  As a result of this profitability strategy, certain titles were discontinued from Citem’s product catalog.

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.  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, our retail pharmacy business consists of our operation of over 150 pharmacies in the states of Jalisco, Mexico, Guanajuato, Michoacán, Coahuila, Tamaulipas and Mexico City, through Farmacias ABC, over 740 Farmacias Benavides stores located in 17 Mexican states and more than 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 more than 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.
 
 


 
                                Private and Government Pharma Business Divisions

 
 
Year Ended December 31,
 
 
     
2010
   
2011
 
 
     
Pharmaceuticals:
       
 
   
 
 
Private sector
    22,377.4       24,335.4       21,497.2  
% Growth
    3.9 %     8.8 %     (11.7 )%
Government
    906.1       959.3       1,209.1  
% Growth
    (12.4 )%     5.9 %     26.0 %
Health, Beauty, Consumer Goods, General Merchandise and Other Products
    2,530.4       2,173.6       2,421.8  
% Growth
    0.4 %     (14.1 )%     11.4 %
Publications
    753.4       835.5       792.6  
% Growth
    0.6 %     10.9 %     (5.2 )%
Retail Pharmacy
    3,224.3       5,536.9       20,647.5  
% Growth
    26.3 %     71.7 %     272.9 %
Total
    29,791.6       33,840.8       46,568.2  
Total % Growth
    4.9 %     13.6 %     37.6 %
 
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:

   
Year Ended December 31,(1)
 
 
 
2009
   
2010
   
2011
 
Sales in millions(2)
  $ U.S.8,377.5     $ U.S.9,195.0     $ U.S. 9,836.7  
Sales in millions of units(3)(4)
    909.7       915.9       966.0  
Average unit price(3)
  $ U.S.9.21     $ U.S.10.04     $ U.S. 10.18  
Growth in average unit price
    (15.2 )%     9.0 %     1.4 %
 


(1)
Statistics based on information made publicly available by IMS Health, A.G. for private sector data and our estimates.


(2)
Revenues based on prices charged by wholesalers to retailers.
 
 

 

(3)
In Mexico, pharmaceutical products are distributed in pre-packaged doses or units, which may vary in size from year to year.


(4)
To calculate U.S. dollar amounts, IMS Health uses a semester average based on the daily interbank rate published by OANDA Corporation (based on data from Banco de México, the Mexican Central Bank). The U.S. Dollar rate used for conversion in 2011 was Ps. 12.40 per U.S.$1.00.

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

In Mexico, our principal competitors in our publications product line include:


 
Intermex, a company owned by Televisa, which primarily distributes its own publications;


 
Codyplirsa, which primarily distributes popular magazines nationwide; and


 
DIMSA, which distributes primarily English-language 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:

   
Year Ended December 31,(1)
 
 
 
2009
   
2010
   
2011
 
Sales in millions(2)
  $ U.S.15,406.6     $ U.S.20,608.9     $ U.S. 25,780.0  
Sales in millions of units(3)(4)
    1,767.0       2,067.4       2,343.7  
Average unit price(3)
  $ U.S.8.72     $ U.S.9.97     $ U.S. 11.00  
Growth in average unit price
    (2.9 )%     14.3 %     10.3 %



(1)
Statistics based on information made publicly available by IMS Health, A.G. for private sector data and our estimates.


(2)
Revenues based on prices charged by wholesalers to retailers (based on list prices).


(3)
In Brazil, pharmaceutical products are distributed in pre-packaged doses or units, which may vary in size from year to year.


(4)
To calculate U.S. dollar amounts, IMS Health uses a semester average based on the daily interbank rate published by OANDA Corporation (based on data from the Brazilian Central Bank). The U.S. Dollar rate used for conversion in 2011 was $R1.838 per U.S.$1.00.

The Brazilian pharmaceutical market has been growing steadily since 2000, driven, in large part, by improvments 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:

   
Year Ended December 31,(1)
 
 
 
2009
   
2010
   
2011
 
Sales in millions(2)
  $ U.S.1,048.5     $ U.S.1,217.4     $ U.S. 1,397.9  
Sales in millions of units(3)(4)
    221.3       225.1       227.5  
Average unit price(3)
  $ U.S.4.74     $ U.S.5.41     $ U.S. 6.14  
Growth in average unit price
    (0.8 )%     14.2 %     13.5 %
  

(1)
Statistics based on information made publicly available by IMS Health, A.G. for private sector data and our estimates.


(2)
Revenues based on prices charged by wholesalers to retailers.


(3)
In Chile, pharmaceutical products are distributed in pre-packaged doses or units, which may vary in size from year to year.
 
 

 
 

(4)
To calculate U.S. dollar amounts, IMS Health used the annual average based on the daily interbank rate published by OANDA Corporation (based on data from Banco Central de Chile, the Chilean Central Bank). The U.S. Dollar rate used for conversion in 2011 was CLP 483.01 per U.S.$1.00.

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 deoderants.  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 disponsible income to spend elsewhere.  In December, employeers 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-farmceutical 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 speciality 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 and Publications business divisions, 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:

Name of Subsidiary (1)
 
 
 
Economic Interest
(Direct or Indirect) (2)
 
 
 
 
 
 
Mexican Subsidiaries
 
 
2010
   
2011
 
Direct Interest
 
 
 
       
Casa Saba, S.A. de C.V.(3)
(Casa Saba)
    48.21 %     48.21 %
Distribuidora Casa Saba, S.A. de C.V. (4)
(Dicasa)
    99.9 %     99.9 %
Publicaciones Citem, S.A. de C.V.  (5)
(Citem)
    99.9 %     99.9 %
Transportes Marproa, S.A. de C.V. (6)
(Marproa)
    99.9 %     99.9 %
Farmacias ABC de México, S.A. de C.V. (7)
(Farmacias ABC)
    99.9 %     99.9 %
Controladora de Clínicas Ambulatorias y de Rehabilitación Sports Clinic, S.A. de C.V. (8)
(Controladora de Clínicas)
    50.005 %      50.005
Centennial, S.A. de C.V. (9)
(Centennial)
    99.9 %     99.9 %
Grupo Mexatar, S.A. de C.V. (10)
(Mexatar)
    99.9 %     99.9 %
Controladora Casa Saba, S.A. de C.V.(28)
(Controladora Casa Saba)
    99.9 %     99.9 %
Real estate and other service companies (27)
  (23 subsidiaries)
    99.9 %     99.9 %
Name of Subsidiary (1)
 
 
 
Economic Interest
(Direct or Indirect) (2)
 
 
 
 
 
 
Mexican Subsidiaries
 
 
2010
   
2011
 
Indirect Interest
 
 
 
       
Casa Saba, S.A. de C.V. (3)
(Casa Saba)
    51.79 %     51.79 %
Distribuidora Drogueros, S.A. de C.V. (11)
(Didrosa)
    99.9 %     99.9 %
Daltem Provee Norte, S.A. de C.V. (12)
(Daltem Norte)
    99.9 %     99.9 %
Drogueros, S.A. de C.V. (13)
(Drogueros)
    99.9 %     99.9 %
Farmacias Provee de Especialidades, S.A. de C.V. (14)
(Farmacias Provee)
    99.9 %     99.9 %
Servicios Corporativos Drogueros, S.A. de C.V. (15)
(Secodro)
    99.99 %     99.99 %
Inmuebles Visosil, S.A. de C.V. (16)
(Visosil)
    99.9 %     99.9 %
Servicios Corporativos Saba, S.A. de C.V. (17)
(Secosa)
    99.9 %     99.9 %
 
 
               
Other companies (27)
  (2 Subsidiaries)
    99.9 %     99.9 %
Foreign Subsidiaries:
 
               
Casa Saba Brasil Holdings Ltda. (Brazil**) (18)
(Casa Saba Brasil)
    100 %     100 %
Farmacias Ahumada, S.A. (Chile***) (19)
 (FASA)
    97.8 %     97.8 %
 
 
               
Associates:
 
               
                   
Lomas Sports Clinic Ambulatorias, S.A. de C.V. (20)
      36.2 %      36.2
WTC Sports Clinic Ambulatorias, S.A. de C.V. (21)
      47.0 %      47.0
Resonancia Sports Clinic, S.A. de C.V. (22)
      49.9 %      49.9
Servicios Corporativos Sports Clinic, S.A. de C.V. (23)
      49.9 %      49.9
Tampico Sports Clinic Ambulatorias, S.A. de C.V. (24)
      49.6 %      49.6
Inmobilaria Avantuen, S.A. (25)
      49.0 %     49.0 %
Inmobilaria Faster (26)
      49.0 %     49.0 %
 

(**)
CS Brasil holds 100 percent of the issued and outstanding capital stock of CSB Drogarias, S.A. (CSB Drogarias) in Brasil.


(***)
Farmacias Ahumada, S.A. (FASA) is an entity incorporated in accordance with the laws of Chile, which was acquired by the Company on October 3, 2010.  FASA is registered in the Securities Registry of the Superintendence of Securities and Insurance (SVC-Spanish acronym) of Chile, and it trades its shares on the Chilean securities market.  FASA holds 99.9 percent of the shares representative of the capital stock of Fasa Chile, S.A. and its subsidiaries (9 Chilean and one Uruguayan), as well as 99.9 percent of the shares of Fasa Investment, Ltda.  In turn, Fasa Investments, Ltda. holds 100 percent of the shares of Farmacias Peruanas, S.A. and its subsidiary, as well as 95.6 percent of the shares of Farmacias Benavides, S.A.B. de C.V. and three subsidiaries.  Farmacias Benavides is a company listed on the Bolsa Mexicana de Valores, S.A.B. de C.V.
 
 

 

(****)
Associates with shareholdings held by FASA.


(1)
With the exception of Casa Saba, S.A. de C.V. and CSB Drogarias, S.A., none of our operating subsidiaries is a “significant subsidiary” within the meaning of Rule 1-02(w) of Regulation S-X of the Securities Act of 1933.


(2)
Percentage of equity owned by us directly or indirectly through subsidiaries or affiliates.


(3)
We directly own 48.21% of the shares of Casa Saba and the remaining 51.79% is held through our subsidiary Transporte Marproa, S.A. de C.V.  Through this subsidiary we distribute pharmaceutical products to private and government clients.


(4)
Subsidiary that provides logistical and transportation services to Casa Saba, S.A de C.V.


(5)
Subsidiary through which we distribute publications.


(6)
Subsidiary through which we deliver products to our distribution centers throughout Mexico.  We place centralized purchase orders for all of our distribution centers directly with suppliers, who deliver these centralized purchase orders to Transportes Marproa, S.A. de C.V., or Marproa.  Marproa then distributes customized orders to our distribution centers throughout Mexico.  Marproa also provides freight services to third parties at market rates.


(7)
Subsidiary through which we sell pharmaceutical products.


(8)
Subsidiary through which we operate medical clinics.


(9)
Subsidiary through which we distribute general merchandise and other products.


(10)
Subsidiary through which we own Casa Saba Brasil Holdings Ltda.


(11)
Subsidiary through which we distribute pharmaceutical products to private and government clients.


(12)
Subsidiary through which we distribute pharmaceutical products to private and government clients.


(13)
Subsidiary through which we distribute pharmaceutical products to private and government clients.


(14)
Subsidiary through which we sell pharmaceutical products.


(15)
Subsidiary that provides administrative, legal, accounting, tax planning, financial counseling and other professional services to Drogueros, S.A. de C.V.


(16)
Subsidiary through which we lease real estate to our other subsidiaries.  Inmuebles Visosil, S.A. de C.V. owns substantially all of the capital stock of Drogueros, S.A. de C.V.


(17)
Subsidiary that provides administrative, legal, accounting, tax planning, financial counseling and other professional services to Casa Saba, S.A de C.V.


(18)
Subsidiary, organized under Brazilian laws, through which we own operating subsidiaries in Brazil, including Drogasmil.


(19)
Subsidiary, organized under Chilean laws, through which we sell pharmaceutical products.


(20)
Subsidiary through which we provide specialized medical, rehabilitation and surgical services for short-stay patients.


(21)
Subsidiary through which we provide specialized medical, rehabilitation and surgical services for short-stay patients.
 
 


 

(22)
Subsidiary through which we purchase medical equipment.


(23)
Subsidiary that provides administrative, legal, accounting, tax planning, financial counseling and other professional services to Lomas Sports Clinic Ambulatorias., S.A. de C.V. and WTC Sports Clinic Ambulatorias, S.A. de C.V.


 (24)
Subsidiary through which we provide specialized medical, rehabilitation and surgical services for short-stay patients.


(25)
A Chilean real estate and Service company.


(26)
Chilean real estate and Service company.


(27)
Real estate and Service companies (25 subsidiaries).

                                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 and free of any liens or encumbrances.  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 and is free of any liens or encumberances.  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:

 
Distribution Center Name
Location (City, State)
1.
Taxqueña
Mexico City, Federal District
2.
Chihuahua
Chihuahua, Chihuahua
3.
Coatzacoalcos
Coatzacoalcos, Veracruz
4.
Culiacán
Culiacán, Sinaloa
5.
Guadalajara
Guadalajara, Jalisco
6.
Hermosillo
Hermosillo, Sonora
7.
Juárez
Ciudad Juárez, Chihuahua
8.
La Laguna
Gómez Palacio, Durango
9.
León
León, Guanajuato
10.
Centennial
Tlalnepantla, Mexico
11.
Monterrey
Monterrey, Nuevo León
12.
Peninsular
Mérida, Yucatán
13.
Citem
Tlalnepantla, Mexico
14.
Reynosa
Reynosa, Tamaulipas
15.
Tampico
Tampico, Tamaulipas
16.
Tijuana
Tijuana, Baja California
17.
Drogueros, S.A. de C.V.
Mexico City, Federal District
18.
Tuxtla
Tuxtla Gutiérrez, Chiapas
19.
Vallejo
Mexico City, Federal District
20.
Veracruz
Veracruz, Veracruz
21.
Daltem Norte
Monterrey, Nuevo León
22.  Daltem Nacional  Mexico City, Federal District 
23.
Droguería y Distribuidora FASA
Santiago, Chile
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 Peru2 as of December 31, 2011:

Brand
 
Location
 
Number of Pharmacies
Farmacias ABC
 
Jalisco
 
74
Farmacias ABC
 
Michoacán
 
26
Farmacias ABC
 
Mexico City and State of Mexico
 
27
Farmacias ABC
 
Guanajuato
 
21
Farmacias ABC
 
Tampico, Tamaulipas
 
1
Farmacias ABC
 
Saltillo, Coahuila
 
5
         
         
         
Drogasmil
 
Río de Janeiro
 
85
Drogasmil
 
São Paulo
 
3
         
Farmacias Ahumada, S.A.
 
Tarapacá
 
6
Farmacias Ahumada, S.A.
 
Antofagasta
 
10
Farmacias Ahumada, S.A.
 
Atacama
 
7
Farmacias Ahumada, S.A.
 
Coquimbo
 
16
Farmacias Ahumada, S.A.
 
La Aranucanía
 
11
Farmacias Ahumada, S.A.
 
Metropolitana de Santiago
 
189
Farmacias Ahumada, S.A.
 
Valparaíso
 
39
Farmacias Ahumada, S.A.
 
Libertador General Bernardo O’Higgins
 
11
Farmacias Ahumada, S.A.
 
Maule
 
14
Farmacias Ahumada, S.A.
 
Bío Bío
 
29
Farmacias Ahumada, S.A.
 
Los Lagos
 
8
Farmacias Ahumada, S.A.
 
Aysén del General Carlos Ibáñez del Campo
 
2
Farmacias Ahumada, S.A.
 
Magallanes y de la Antártica Chilena
 
4
 

 2 Please note that our Peruvian operations were sold in January of 2012
 
 

 

Brand
 
Location
 
Number of Pharmacies
Farmacias Ahumada, S.A.
 
Los Ríos
 
5
Farmacias Ahumada, S.A.
 
Arica y Parinacota
 
5
         
         
Farmacias Benavides, S.A.B. de C.V.
 
Aguascalientes
 
14
Farmacias Benavides, S.A.B. de C.V.
 
Baja California Norte
 
47
Farmacias Benavides, S.A.B. de C.V.
 
Baja California Sur
 
2
Farmacias Benavides, S.A.B. de C.V.
 
Coahuila
 
62
Farmacias Benavides, S.A.B. de C.V.
 
Chihuahua
 
52
Farmacias Benavides, S.A.B. de C.V.
 
Durango
 
9
Farmacias Benavides, S.A.B. de C.V.
 
Guanajuato
 
18
Farmacias Benavides, S.A.B. de C.V.
 
Jalisco
 
79
Farmacias Benavides, S.A.B. de C.V.
 
Nayarit
 
16
Farmacias Benavides, S.A.B. de C.V.
 
Nuevo Leon
 
202
Farmacias Benavides, S.A.B. de C.V.
 
San Luis Potosi
 
8
Farmacias Benavides, S.A.B. de C.V.
 
Sinaloa
 
29
Farmacias Benavides, S.A.B. de C.V.
 
Sonora
 
73
Farmacias Benavides, S.A.B. de C.V.
 
Tamaulipas
 
117
Farmacias Benavides, S.A.B. de C.V.
 
Veracruz
 
10
Farmacias Benavides, S.A.B. de C.V.
 
Zacatecas
 
3
Farmacias Benavides, S.A.B. de C.V.
 
Mexico City (D.F.)
 
5
         
Boticas Fasa
 
Lima Metropolitana
 
110
Boticas Fasa
 
Barranca
 
1
Boticas Fasa
 
Cajamarca
 
2
Boticas Fasa
 
Chiclayo
 
8
Boticas Fasa
 
Chimbote
 
4
Boticas Fasa
 
Huacho
 
2
Boticas Fasa
 
Huaral
 
1
Boticas Fasa
 
Huanuco
 
2
Boticas Fasa
 
Huaraz
 
2
Boticas Fasa
 
Piura
 
6
Boticas Fasa
 
Talara
 
2
Boticas Fasa
 
Trujillo
 
9
Boticas Fasa
 
Tumbes
 
1
Boticas Fasa
 
Huancayo
 
4
Boticas Fasa
 
Apurimac
 
2
Boticas Fasa
 
Arequipa
 
12
Boticas Fasa
 
Cañete
 
1
Boticas Fasa
 
Cayma
 
2
Boticas Fasa
 
Chincha
 
2
Boticas Fasa
 
Cusco
 
5
Boticas Fasa
 
Ica
 
4
Boticas Fasa
 
Moquegua
 
2
Boticas Fasa
 
Pisco
 
2
Boticas Fasa
 
Tacna
 
3
Boticas Fasa
 
Tarapoto
 
1
 
 
In our Retail Pharmacy division, we have an established annual expansion plan.  For 2012, we estimate that we will build more than 100 new pharmacies in two of our main markets, Mexico and Chile.  We believe that these additional points-of-service will help stimulate our growth in these regions and we expect that the funds used to construct these facilities will come from cash generated by our operations.  As a result, the actual number of pharmacies that we build will be subject to the amount of cash that we have available at the time.
 
Both our distribution and retail pharmacy businesses are highly diversified, both geographically and in terms of the size of our operations.
 
In our Mexican Distribution division, we have 22 distribution centers that provide nationwide coverage as well as over 800 transportation units located throughout the country.  Due to the strategic locations of our distribution centers, in the event that any of these properties or units was damaged as the result of a natural disaster, we would most likely be able to reroute replacement vehicles to cover the affected routes or service our clients from a nearby Distribution Center, if necessary.
 
In terms of our Retail Pharmacy business, we have over 900 stores in the 19 Mexican states where we currently operate, more than 350 stores in 15 Chilean regions and over 85 stores that offer service in two Brazilian states.  In the event that any of these properties were negatively affected due to adverse climate conditions, we believe that we would still have adequate coverage and that the overall effect on our business would be minimal.
 
While there have been some natural occurrances in several of the countries where we operate in recent years, to date they have had a minimal effect on our overall operations.  The earthquake that occurred in southern Chile in 2010 caused us to temporarily close down 11 stores.  However, eight of these stores were reopened within less than 5 months of the incident, on average.  Mexico has also experienced several large earthquakes as well as some hurricane activity which could potential reoccur in the future.  While the impact on our installations has been minimal thusfar, we cannot guarantee that we will not be affected by climate-related or other environmental issues in the future.  However, we believe that the geographic diversity and the ample coverage that we have in the majority of the countries where we operate would help mititgate the negative affects of these environmental occurrances, should they transpire.

Unresolved Staff Comments.

Not applicable
 
Operating and Financial Review and Prospects

The following discussion should be read in conjunction with our audited consolidated financial statements and the accompanying notes included in this annual report starting on page F-1.  Our audited consolidated financial statements have been prepared in accordance with 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 primary differences between Mexican FRS and U.S. GAAP.  Note 23 also provides a partial reconciliation of consolidated net income for each of the three years in the period ended December 31, 2011 and consolidated stockholders’ equity as of December 31, 2010 and 2011 from Mexican FRS to U.S. GAAP.
 
 

 
                                Overview

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 U.S.$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 50% 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 21st, 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 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. See “Item 4.  Information on the Company—History and Development of the Company.”
 
As publicly disclosed by the Company on August 10, 2011, we entered into an Amendment Agreement with regard to the Acquisition Loan dated August 30, 2010, by means of which Grupo Casa Saba had secured the requisite funds to complete the Acquisition. 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 Acquisition Loan includes the affirmative and negative covenants that are customary for this type of transaction.
 
As part of the evolution of our business model, Grupo Casa Saba has decided to concentrate its efforts on its expansion in Mexico, Chile and Brazil.  As a result, in early 2012 it completed a series of negotiations with Quitafex, SA, 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 conducted our operations in Peru. Part of the agreements reached with Quitafex, S.A. 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.
 
In 2011, the Group’s consolidated net sales were Ps. 46,568 million compared to Ps. 33,840.8 million in 2010.  This increase was primarily the result of the consolidation of FASA’s sales into our Group.  However, given that we purchased FASA in October 2010, only its fourth quarter sales were reflected in our 2010 net sales.  Therefore, this figure is not comparable with our 2011 sales, when a full twelve months of FASA’s sales were consolidated into the Group’s total sales.
 
 

 
Inflation and Interest Rates
 
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 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 level of inflation in Mexico in recent years (3.8% in 2011, 4.4% in 2010, 3.6% in 2009 and 6.5% in 2008), the cumulative inflation rate in Mexico over the three-year period preceding December 31, 2010 does not qualify the economic environment as inflationary.  Moreover, the economic environment in the other countries where we operate does 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 in our 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.
 
In recent years, Mexico has experienced lower levels of inflation than in the past.  The rate of inflation on an annualized basis, as measured by changes in NCPI, was 3.6% for 2009, 4.4% for 2010, and 3.8% in 2011.  High inflation rates can adversely affect our business and our results of operations by adversely affecting consumer purchasing power, thereby adversely lowering the demand for the products that we distribute.  In addition, to the extent that inflation exceeds our price increases or to the extent that we do not increase our prices, high inflation rates can adversely affect our revenues by adversely affecting our prices in “real” terms.
 
Mexico has had, and is expected to continue to have, competitive nominal interest rates.  The interest rates on 28-day Mexican government treasury bonds averaged approximately 5.4%, 4.40% and 4.2% for 2009, 2010 and 2011, respectively.  In the first quarter of 2012, the 28-day Mexican CETES averaged 4.2%.
 
Brazil and, to a lesser extent, Chile have historically had high inflation and interest rates.  The impact of high inflation rates and high interest could have adverse effects in our operations in these countries.  Consumer demand could decrease as purchasing power declines and access to the respective credit markets could become more difficult and at high interest rates.
 
Currency Fluctuations

As a result of our recent acquisition in Chile, we have incurred debt that is denominated in several foreign currencies. Therefore, we could be adversely affected by decreases in the value of the Peso against the respective currency, which would most likely result in net foreign exchange losses.  Nevertheless, a significant portion of our revenues are and will continue to be Peso-denominated.
 
A portion of the debt is U.S. dollar denominated.   Based on the change in the Noon Buying Rate as reported by the Board of Governors of the U.S. Federal Reserve Bank of New York, the Mexican Peso depreciated by approximately 12.7% against the U.S. Dollar in 2011 to reach $13.98 pesos per dollar.  During the first quarter of 2012, the Peso regained some ground, appreciating 8.4% against the U.S. Dollar to reach $12.81 pesos per dollar.  Any future depreciation of the Peso could result in price increases from our suppliers, which in turn could impact the purchasing capacity of the final consumers, and cause a reduction in our net sales.
 
 

 
In addition to the U.S. Dollar, we now face currency exchange risk versus the Chilean peso (CLP), the Euro and the Chilean Development Unit (or UF by its Spanish acronym).  As part of the acquisition, we assumed certain CLP, Euro and UF-denominated liabilities by which we could be adversely affected in the event that any of these currencies appreciate against the Peso. Nonetheless, the asset accounts and future revenues would have the opposite effect under such a scenario. In the event that any of these currencies depreciates against the Peso, the opposite would hold true.  For the year ended December 31, 2011, 89.1% of our total debt that is subject to foreign exchange fluctuations was CLP-denominated, 9.8% was denominated in UFs, 1.1% was U.S. dollar-denominated and 0.1% was denominated in Euros.  We cannot assure you that fluctuations in any of the currencies used in the countries where we have operations will not adversely affect our financial results in the future.
 
Severe devaluation or depreciation of the Peso may also result in the disruption of the international foreign exchange markets.  This may limit our ability to transfer or to convert Pesos into U.S. Dollars and other currencies for the purpose of making timely payments of principal and interest on any non-Peso-denominated debt we may incur in the future, which could, in turn, affect our ability to obtain foreign services and products.  Devaluation or depreciation of the Peso against the U.S. Dollar may also adversely affect U.S. Dollar prices for 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 affect the conversion value of any cash dividends paid on the Ordinary Shares in Pesos into U.S. Dollars.

                                Effects of Economic and Governmental Factors on Our Results of Operations

The majority of our operations and assets are located in Mexico.  As a consequence, our results of operations may be significantly affected by the general condition of the Mexican economy, Mexican inflation, interest rates and political developments in Mexico.  With the acquisition of Drogasmil and FASA, our operations in the countries where we now have a presence may be significantly affected by the general conditions of these economies.  See “Item 3.  Key Information—Risk Factors Relating to Economic and Political Developments”.

Economic Situation

In 2005, the Mexican economy benefited from sharp increases in oil prices and global economic recovery.  As a result, the Mexico’s GDP for the year grew by 3.0%, annual inflation was 3.3% and the interest rate on 28-day CETES averaged 9.2%.  During 2006, Mexico’s GDP grew 4.8% mainly as a result of presidential, congressional and state elections, which enhanced extraordinary spending and a continued increase in oil prices.  Inflation was 4.1% and the interest rate on 28-day CETES averaged 7.2%.  During 2007, the Mexican economy proved resilient in the face of a downturn in the U.S. economy.  GDP growth was 3.3%, inflation was 3.8% and the interest rate on 28-day CETES averaged 7.2%. In response to the worldwide economic downturn, in 2008 Mexico’s GDP growth was cut in half, declining to  1.6%, inflation rose to 6.5% and the interest rate on 28-day CETES averaged 7.7%.  In 2009, the Mexican economy continued to be affected by the global economic crisis.  GDP declined by 6.5% while the average interest rate on the 28-day CETES fell to 5.4%.  Inflation, however, decreased to 3.6%.  In 2010, the Mexican economy gained strength, posting a GDP growth of 5.5% stemming from increased production and the demand for exports brought on in large part by increased industrial activity in the United States. The interest rate on 28-day CETES averaged 4.40% as a result of national monetary policies that were in line with the trends in the global economy, and the inflation rate was 4.40%.  During 2011, despite lower GDP growth (3.9%), a record drought that has fueled farm prices and greater volatility in the peso/dollar exchange rate, the Mexican economy was relatively stable given that overall annual inflation rate fell to 3.8% and the interest rate for the 28-day CETE averaged 4.2%.
 
For each of the years ended on December 31, 2006 and 2007 approximately 99% of our consolidated net sales resulted from sales to parties located within Mexico.
 
 

 
With the acquisition of Drogasmil in Brazil in May 2008 and the subsequent purchase of FASA in October 2010, approximately 22% of our consolidated net sales in 2011 resulted from sales to parties located outside of Mexico.  In the past, inflation has led to high interest rates and devaluations of the Peso.  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 us, in particular.  One result of inflation in Mexico is the decrease in the real purchasing power of the Mexican population, which can lead to a decrease in the demand for the products that we distribute and/or sell.  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.  Such policies have had and could have an adverse effect on our business, financial condition and results of operations.
 
Brazil and, to a lesser extent, Chile have historically had high inflation and interest rates.  The impact of high inflation rates and high interest in these countries could have adverse effects in our operations in such country.  Consumer demand could decrease as purchasing power declines and access to their respective credit markets could become more difficult and at high interest rates.
 
In Brazil, the annual inflation rate was 6.5% in 2011, somewhat higher than the 4.5% target set by the Central Bank while annual GDP growth was 2.7%, stimulated primarily by agriculture and internal demand which was driven by the country’s robust labor market, lower bowering costs and a reduction in the industrial production tax on select consumer goods. Lower GDP growth can be attributed to a combination of external factors such as the Eurozone crisis as well as internal factors such as rising inflation.  In 2011, the Selic averaged 11.67%, down from its peak of 12.5% in July.
 
In 2011, the Chilean economy posted an annual GDP growth of 6.3%, its fastest pace since 1997 and annual inflation was 4.4%.  The labor market is tight as the unemployment rate dropped to 6.6% at the end of December, which could potentially put pressure on prices in the future, causing inflation to rise.
 
                                Introduction to Our Operations

The following table sets forth the real price increases and unit volume growth for our Private Pharma division for the years indicated:
 
    Year Ended December 31,
    2009     2010     2011  
                   
Total Mexican Private Pharmaceuticals Market:
                 
    Real Unit Price Increases
    (0.4 %)     (2.3 %)     (4.2 %) 
    Growth in Units
    (2.5 %)     0.7 %     5.5
 
                       
Casa Saba Private Pharmaceutical Distribution:
                       
    Real Unit Price Increases
    3.1 %     (5.9 %)     2.3 %
    Growth in Units
    (5.8 %)     3.9 %     (6.7 %)
 
                       
Market Share of Grupo Casa Saba(1):
    22.9 %     23.6 %     20.9 %
Inflation:(2)
    3.6 %     4.4 %     3.8 %



(1)
Based on information from IMS Health, A.G. (Mexico) and Grupo Casa Saba’s own estimates.  This market share does not include purchases made by government institutions and sales in the private pharmaceutical market related to pharmaceutical products with the same active ingredient but are not branded by any particular laboratory (similares), generics and, generic products that are recommended to clients by pharmacy employees at the point-of-sale or by the dispensing physician (impulse).  Also includes an IMS estimate of sales through non-wholesalers.


(2)
Based on the changes in the NCPI.
 
 

 
For a more detailed description of the Mexican private pharmaceutical market and our private pharmaceutical business, see “Item 4.  Information on the Company—Business Overview—Pharmaceutical Industry”.
 
The following table sets forth our net sales by division and the corresponding growth rates for each of our business divisions for the years indicated.

 
 
Year Ended December 31,
 
 
     
2010
   
2011
 
 
     
Pharmaceuticals:
       
 
   
 
 
Private sector
    22,377.4       24,335.4       21,497.2  
% Growth
    3.9 %     8.8 %     (11.7 )%
Government
    906.1       959.3       1,209.1  
% Growth
    (12.4 )%     5.9 %     26.0 %
Health, Beauty, Consumer Goods, General Merchandise and Other Products
    2,530.4       2,173.6       2,421.8  
% Growth
    0.4 %     -14.1 %     11.4 %
Publications
    753.4       835.5       792.6  
% Growth
    0.6 %     10.9 %     -5.2 %
Retail Pharmacy
    3,224.3       5,536.9       20,647.5  
% Growth
    26.3 %     71.7 %     272.9 %
Total
    29,791.6       33,840.8       46,568.2  
    Total % Growth
    4.9 %     13.6 %     37.6 %

The following table sets forth the net sales for each of our business divisions and our results of operations as a percentage of our total net sales for the years indicated:

 
 
Year Ended December 31,
 
 
     
2010
   
2011
 
Pharmaceuticals:
 
 
   
 
       
 - Private
    75.11 %     71.91 %     46.16 %
 - Government
    3.04 %     2.83 %     2.60 %
Health, Beauty, Consumer Goods, General Merchandise & Other Products
    8.49 %     6.42 %     5.20 %
Publications
    2.53 %     2.47 %     1.70 %
Retail Pharmacy
    10.82 %     16.36 %     44.34 %
Total
    100 %     100 %        
 
                       
Cost of Sales
    89.2 %     86.6 %     81.2 %
Gross Profit
    10.8 %     13.4 %     18.8 %
Operating expenses:
                       
 - Selling expenses
    3.1 %     3.7 %     2.9 %
 - Administrative expenses
    4.7 %     7.7 %     12.6 %
 
    7.8 %     11.4 %     15.5 %
Operating income
    3.0 %     2.0 %     3.4 %
Comprehensive cost of financing, net
    0.9 %     0.8 %     2.2 %
Other income
    0.5 %     0.3 %     0.3 %
Income tax and employee profit sharing
    0.7 %     0.1 %     0.7 %
    Net income
    0.9 %     0.8 %     0.2 %

For a more detailed description of each of our divisions, see “Item 4.  Information on the Company—Operations”.
 
 

 
                                Results of Operations

In accordance with Mexican FRS, Peso amounts presented below are expressed in nominal terms.

As a result of the incorporation of FASA’s sales as of October 2010, the Group’s overall sales have increased.  In 2011, the retail division posted gains versus its 2010 sales.  This increase was primarily the result of an increase in the number of stores in Mexico and Chile as well as improvements in our efficiency at the store level.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

In September 2010, the company acquired 97.8% of Farmacias Ahumada, S.A. (FASA), a chain of more than 1,260 pharmacies with operations in Chile, Mexico and Peru. Therefore, GCS consolidated figures for 2010 incorporate three months figures of FASA.  In 2011 the company consolidated 12 months of FASA, thus, comparison for the full year are not comparable. The majority of the 2011 figures are not comparable with those that were reported in previous years. The following chart describes the figures for GCS and FASA and the Consolidated net amount for 2011:
 
   
Consolidated Group
   
FASA
   
Net amount
 
   
(Amounts in millions of Mexican pesos)
                   
Net sales
 
Ps. 46,568.2
   
Ps. 19,139.8
   
Ps. 27,428.4
 
Gross Profit
    8,774.2       4,711.8       4,062.4  
Operating income
    1,566.4       522.0       1,044.4  
 
Total Net Sales. Grupo Casa Saba’s total net sales amounted to Ps. 46,568.23 million for the year ended December 31, 2011, an increase of 37.61% as compared to the same period of 2010.  The increase was primarily due to the addition of FASA’s sales. Excluding FASA, sales for GCS would have decreased 8.46%, due to lower sales to some supermarket chains, some regional and traditional clients, as well as lower sales from our publication division, Citem. This decrease is affected by the elimination of the sales from Casas Saba to Benavides (a subsidiary of FASA) which during 2011 accounted for $2,996.9 million and in 2010 for $723.94 (please note that this figure only reflects sales from Oct - December). However, this decrease was partially offset by an increase of 26% in sales from our Government Pharma business division due to a higher participation in bidding processes.
 
Sales by Division: Net Private Pharma Sales. Net sales from our Private Pharma business division went from Ps. 24,335.4 million for the year ended December 31, 2010 to Ps. 21,497.2 million for the year ended December 31, 2011, a decrease of 11.7%, due to lower sales to some supermarket chains and some regional and traditional clients. This decrease was affected by the elimination of the sales from Casas Saba to Benavides (a subsidiary of FASA), which during 2011 accounted for $2,996.9 million and in 2010 for $723.94 (please note that this figure only reflects sales from Oct - December). As a result, this division’s sales represented 46.2% of the Group’s total net sales.
 
Net Government Pharma Sales. Net sales from our Government Pharma business division rose 26% with respect to 2010, increasing from Ps. 959.3 million for the year ended December 31, 2010 to Ps. 1,209.1 million for the year ended December 31, 2011. The increase in sales reflects a higher participation in bidding processes during the period to various federal and state government health institutions. Government Pharma sales represented 2.6% of the Group’s total net sales in 2011.
 
Net Health, Beauty, Consumer Goods, General Merchandise and Other Sales. Net sales from our Health, Beauty, Consumer Goods, General Merchandise and Other business division were Ps. 2,421.8 million for the year ended December 31, 2011 compared to Ps. 2,173.6 million for the year ended December 31, 2010. This increase was mainly due to a higher demand for these types of products in the different markets where we offer them.  Net sales by this division represented 5.2% of our total 2011 net sales.
 
Net Publication Sales. Net sales from our Publications business division decreased 5.2% due to the we received fewer copies of some magazine titles from some of our publishers, as well as a reduction in the overall number of publications distributed. Sales went from Ps. 835.6 million for the year ended December 31, 2010 to Ps. 792.6 million for the year ended December 31, 2011 and accounted for 1.7% of our total net sales.
 
 

 
Retail Pharmacy Sales. This division was created as a result of the FASA acquisition given that, due to its size and scope, our retail pharmacy operations became much more significant than they were in previous years.
 
Net sales from our Retail Pharmacy business division totaled Ps. 20,647.5 million in 2011, and are not comparable with the 2010 figures given that, in that year, we consolidated only three months of FASA.  Our sales by country are as follows: in Mexico, our “Benavides” chain increased its sales 5.2% in 2011 with respect to 2010, as a result of new commercial strategies that were put into place since the acquisition of FASA.  In addition our “Farmacias ABC” chain’s sales decreased 2.5%, mainly due to lower sales to institutional clients in Mexico. In Chile, “Farmacias Ahumada” sales decreased 0.4% reflecting a highly competitive environment and a delayed expansion program that took effect in the fourth quarter of 2011.  In Peru, “Boticas Fasa” was deconsolidated given that it was sold during the first quarter of 2012.  Finally, in Brazil “Drogasmil” sales grew 26.2%, as a result of new store openings and a new and more aggressive commercial strategy. The Retail Pharmacy division accounted for 44.3% of total 2011 net sales.
 
Gross Profit. Grupo Casa Saba’s gross profit totaled Ps. 8,774.2 million for the year ended December 31, 2011, an increase of 93.8% as compared to Ps. 4,527.8 million for the same period of 2010. The increase reflects a full 12 months consolidating FASA, compared to 2010 when we only consolidated three months of FASA. The previously mentioned 2011 gross profit led to an improvement in the gross margin, which was 18.84% for the year ended December 31, 2011, compared to the margin of 13.38%, registered in 2010.  The higher gross margin was the result of the sales from our Retail Pharmacy operations which, due to the nature of the business, is higher than the margins obtained in the distribution businesses.
 
Operating Expenses.  Our operating expenses totaled Ps. 7,207.8 million for the year ended December 31, 2011, an increase of 87.1% as compared to Ps. 3,853.1 million for the year ended December 31, 2010.  This was mainly the result of the incorporation of FASA and, therefore, is not comparable.  Operating expenses in FASA, due to the nature of its retail business, are higher than in the wholesale business. As a result, this figure is also not comparable with the previous year. Excluding FASA, operating expenses were 2.8% higher than in 2010, primarily as a result of salary increases.  However, operating efficiencies partially offset this increase. Consequently, operating expenses represented 15.48% of our total net sales for the year ended December 31, 2011.
 
Operating Income.  Operating income for the year ended December 31, 2011 was Ps. 1,566.5 million, an increase of 132.2% as compared to Ps. 674.7 million for the year ended December 31, 2010.  As a result, our operating margin for the year ended December 31, 2011 was 3.36%, compared to a margin of 1.99% for the year ended December 31, 2010.
 
Comprehensive Financing Cost, Net.  Pursuant to Mexican FRS, we report four items within this line item: interest expense, interest income, foreign exchange (gain) loss and the (gain) loss on net monetary position.  Foreign exchange losses (or gains) arise primarily from U.S. Dollar-denominated position or loans as the Peso devalues or appreciates against the U.S. Dollar.  The gain or loss on the net monetary position reflects the effect of inflation on monetary assets and liabilities.  Monetary gains arise from holding a net monetary liability position during periods of inflation, while monetary losses arise from holding a net monetary asset position during periods of inflation.  Since January 1, 2008 we ceased inflation accounting pursuant to Mexican FRS.
 
Our 2011 comprehensive financing cost was Ps. 1,040.1 million, 296.6% higher than the $262.2 million reported during the 2010 fiscal year.  This increase was mainly the result of the increase in our interest expense, which totaled Ps. 1,028.6 million in 2011, and is related to the loan for the acquisition of FASA.  In 2010, interest expenses totaled Ps. 493.0 million.
 
Tax Provisions.  Provisions for taxes for the year ended December 31, 2011 were Ps. 312.4 million, an increase of 547.4%, as compared to Ps. 48.26 million for the year ended December 31, 2010.  Income tax for the year ended December 31, 2011 amounted to Ps. 744.7 million, which was partially offset by a deferred income tax of Ps. 432.2 million.
 
 

 
Net Income.  The Group’s net income for the year ended December 31, 2011 amounted to Ps. 77.0 million, a decrease of  71.5% as compared to Ps. 270.1 million for the year ended December 31, 2010.  This decline was primarily due to the increase in interest paid and higher income tax payments.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Prior to 2010, Grupo Casa Saba entered an expansionary stage as part of its strategy to increase the Company’s profitability.  Since then, the Group has completed acquisitions in several South American countries, beginning in May 2008 with the acquisition of the Brazilian pharmacy chain Drogasmil (currently known as Casa Saba Brasil).  In September, 2010, the company acquired 97.8% of Farmacias Ahumada, S.A. (FASA), a chain of more than 1,260 pharmacies with operations in Chile, Mexico and Peru and, as a result, has reclassified its divisions in accordance with this strategy, creating a new division known as “Retail Pharmacy.” As a result, the majority of the 2010 figures are not comparable with those that were reported in previous years. The impact of the acquisition in 2010 was as follows:

 
   
Consolidated
Group
   
FASA
   
Net amount
 
   
(Amounts in millions of Mexican pesos)
                   
Net sales
 
Ps. 33,840.8
   
Ps. 3,877.5
   
Ps. 29,963.2
 
Gross Profit
    3,538.0       989.8       2,548.2  
Operating income
    601.4       73.2       528.2  

Total Net Sales. Grupo Casa Saba’s total net sales amounted to Ps. 33,840.8 million for the year ended December 31, 2010, an increase of 13.59% as compared to the same period of 2009.  The increase was primarily due to the addition of the sales of FASA.
 
Sales by Division: Net Private Pharma Sales. Net sales from our Private Pharma business division went from Ps. 22,377.4 million for the year ended December 31, 2009 to Ps. 24,335.4 million for the year ended December 31, 2010, an increase of 8.8%.
 
Net Government Pharma Sales. Net sales from our Government Pharma business division increased during 2010, from Ps. 906.1 million for the year ended December 31, 2009 to Ps. 959.3 million for the year ended December 31, 2010. The increase in sales reflects a higher participation in bidding processes during the period to the IMSS as well as various state government health institutions. As a result, this division’s sales represented 2.83% of the Group’s total net sales.
 
Net Health, Beauty, Consumer Goods, General Merchandise and Other Sales. Net sales from our Health, Beauty, Consumer Goods, General Merchandise and Other business division were Ps. 2,530.44 million for the year ended December 31, 2009 compared to Ps. 2,173.6 million for the year ended December 31, 2010.  Net sales by this division represented 6.42% of our total net sales compared to 8.49% in 2009.
 
Net Publication Sales. Net sales from our Publications business division also posted strong gains, from Ps. 753.4 million for the year ended December 31, 2009 to Ps. 835.5 million for the year ended December 31, 2010 and accounted for 2.47% of our total net sales for the year ended December 31, 2010.  This result was primarily due to the increase in sales in specialty title and collector’s item sales related to the World Cup sporting event.
 
Retail Pharmacy Sales. This division was created as a result of the FASA acquisition given that, due to its size and scope, our retail pharmacy operations became much more significant than they were in previous years.
 
Net sales from our Retail Pharmacy business division totaled Ps. 5,536.9 million in 2010, an increase of 71.7% versus the Ps. 3,224.3 million in 2009.  The increase in sales was due to the acquisition of FASA.
 
 

 
This division represented 16.36% of the Company’s net sales in the 2010 fiscal year.
 
Gross Profit. Grupo Casa Saba’s gross profit totaled Ps. 4,527.8 million for the year ended December 31, 2010, an increase of 40.4% as compared to Ps. 3,225.8 million for the same period in 2009.  The improvement in the gross margin, which was 13.38% for the year ended December 31, 2010, as compared to 10.83% registered during the previous year, was primarily the result of higher margin sales from our Retail Pharmacy operations. FASA’s gross margin for 2010 was 24.7% which, due to the nature of the business, is higher than the margins in the distribution business.
 
Operating Expenses.  Our operating expenses totaled Ps. 3,853.1 million for the year ended December 31, 2010, an increase of 65.01% as compared to Ps. 2,335.1 million for the year ended December 31, 2009.  This was mainly the result of the incorporation of FASA into our retail operations given that operating expenses, such as store rents, are generally higher in the retail business than they are in distribution due to the nature of the operations. Therefore, this figure is not comparable with the previous year. Consequently, operating expenses represented 11.39% of our total net sales for the year ended December 31, 2010.
 
Operating Income.  Operating income for the year ended December 31, 2010 was Ps. 674.7 million, a decrease of 24.3% as compared to Ps. 890.7 million for the year ended December 31, 2009.  This was due to the increase in our operating expenses, as described above.  As a result, our operating margin for year ended December 31, 2010 was 1.99%, compared to the margin of 2.99% for the year ended December 31, 2009.
 
Comprehensive Financing Cost, Net.  Pursuant to Mexican FRS, we report four items within this line item: interest expense, interest income, foreign exchange (gain) loss and the (gain) loss on net monetary position.  Foreign exchange losses (or gains) arise primarily from U.S. Dollar-denominated position or loans as the Peso devalues or appreciates against the U.S. Dollar.  The gain or loss on the net monetary position reflects the effect of inflation on monetary assets and liabilities.  Monetary gains arise from holding a net monetary liability position during periods of inflation, while monetary losses arise from holding a net monetary asset position during periods of inflation.  Since January 1, 2008 we ceased inflation accounting pursuant to Mexican FRS.
 
Our 2010 comprehensive financing cost, net remained the same as the previous year, at Ps. 262.2 million for both the year ended December 31, 2009 and for the year ended December 31, 2010.  This increase was the result of the rise in our interest expense, which totaled Ps. 493.0 million in 2010, related to the acquisition of FASA compared to Ps. 264.5 million in 2009.  However, this increase was partially offset by higher interest income earned, in the amount of Ps. 199.4 million, compared to Ps. 5.1 million in 2009, as well as an exchange rate gain of 31.4 million as discussed in our consolidated statement of income.
 
Tax Provisions.  Provisions for taxes for the year ended December 31, 2010 was Ps. 48.3 million, a decrease of 77.2% as compared to Ps. 211.9 million for the year ended December 31, 2009.  Income tax for the year ended December 31, 2010 amounted to Ps. 386.4 million, 12.42% greater than the income tax provisions for the year ended December 31, 2009, and which was partially offset by the deferred income tax of Ps. 338.0 million.
 
Net Income.  The Group’s net income for the year ended December 31, 2010 amounted to Ps. 270.0 million, a decrease of 3.6% as compared to Ps. 280.2 million for the year ended December 31, 2009.  This decline was primarily due to the increase in our operating expenses which was not offset by the higher gross profit.
 
                                Liquidity and Capital Resources

In May 2008, to finance the acquisition of Drogasmil, we entered into a long-term loan with Scotiabank Inverlat for an aggregate amount of up to Ps. 1,210 million, which has to be repaid monthly at the TIIE rate plus 0.75 percentage points for a term of seven years, with a grace period of 12 months.  As of December 31, 2009, we had drawn the full amount under the loan.  The obligations under such agreement were guaranteed by the Company and our subsidiary, Drogueros, S.A. de C.V.
 
 

 
On March 25, 2010, Casa Saba entered into a credit agreement with Scotiabank Inverlat, S. A. to liquidate the bank loans payable by Drogarias. On March 26, 2010, Casa Saba drew down this credit in the amount of Ps. 520 million and on October 3, 2010 Casa Saba prepaid this loan with part of the proceeds from the Acquisition Loan.
 
On August 30, 2010, the Company entered into 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 the respective countries.  The Acquisition Loan bears interest at the TIIE rate plus a margin. However, under the Acquisition Loan the Company had to pay each Lender the principal amount of the Acquisition Loan, in a single payment, twelve (12) months after the disbursement date, unless the Acquisition Loan term was extended to an additional seven year period. The obligations under the credit agreement are guaranteed by the Company and the majority of the subsidiaries. See “Item 11.  Quantitative and Qualitative Disclosures about Market Risk.” and Note 23(g) to our consolidated financial statements.
 
As publicly disclosed by the Company on August 10, 2011, we entered into an Amendment Agreement with regard to the Acquisition Loan, which extended the loan term for seven years. The effectiveness of such Amendment Agreement was subject to the satisfaction of certain conditions precedent, all of which were satisfied by GCS in September 2011. The Amended and Restated Acquisition Loan includes the affirmative and negative covenants that are customary for this type of transactions.
 
As of December 31, 2011, the Distribution Division had arranged for short-term revolving credit lines for a total aggregate principal amount of Ps. 2,110.0 million with the following lenders: Banco Santander S.A. Institución de Banca Múltiple, Grupo Financiero Santander, BBVA Bancomer, S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer, Banco Autofín México, S.A. Institución de Banca (Mi Banco), Banco Ve por Más, Financiera Bajío, IXE Banco and Banca Mifel.
 
In addition, the Mexican Retail Division had a total aggregate principal amount of Ps. 423.5 in short-term credit facilities with the following lenders: BBVA Bancomer, S.A., Institución de Banca Multiple, Grupo Financiero BBVA Bancomer, HSBC Mexico, S.A. and Banco Inbursa, S.A.
 
These facilities may each be accessed depending on our cash flow requirements.  The Company does not provide guarantees for any of these facilities.  The loans made under these facilities bear interest at variable rates depending on the Equilibrium Interbank Interest Rate (TIIE) published periodically by Banco de México plus an average of approximately 2.5 percentage points.  The basis points which will be added to TIIE depend on negotiations and prevailing market conditions.
 
In Chile, for the year ended December 31, 2011 Farmacias Ahumada, S.A. had arranged for short-term revolving credit lines for a total aggregate principal amount of Ps. 773.3 million with the following lenders: BBVA, Bancomer, S.A., Banco de Chile, Banco Estado, Banco Santander, S.A. and Banco CorpBanca, S.A. As is the case in Mexico, these facilities may each be accessed depending on our cash flow requirements and the Company does not provide guarantees for any of these facilities.  The loans made under these facilities are negotiated with fixed rates that average approximately 7.2%.
 
As of December 31, 2011, our Brazilian subsidiary, CSB Drogarias, had arranged for short-term revolving credit lines for a total aggregate principal amount of Ps. 186.4 million with the following lenders: Banco Santander, S.A., Banco Bradesco, S.A. and Banco Itaú, S.A.  The loans made under these facilities are negotiated with fixed rates that average approximately 1.4%.
 
See “Item 11.  Quantitative and Qualitative Disclosures about Market Risk.” and Note 23(g) to our consolidated financial statements for additional information regarding market risks.
 
See Note 12 to our consolidated financial statements for further description of our indebtedness.
 
 

 
Overview Cash Flows

Historically, our cash and capital requirements have been satisfied through cash from operations and bank loans.  We plan to continue to satisfy our cash and capital expenditure requirements primarily through cash from our operations.  If deemed necessary, we can access our revolving credit facilities totaling an aggregate principal amount of up to Ps. 3,493.3 million.  Net working capital (current assets minus current liabilities) as of December 31, 2011 was Ps. 4,273.8 million compared to (Ps. 2,971.7) million as of December 31, 2010.
 
Our inventories, net as of December 31, 2011, were Ps. 8,704.9 million or 2.1% higher than the Ps.  8,526.2 million on December 31, 2010.  For the year ended December 31, 2011, our inventory days were 84.0 days, 5.0 days higher than the 79.0 days registered for the year ended December 31, 2010.  As of December 31, 2010, our inventory days were 79.0 days, 9.3 days higher than the 69.7 days for the year ended December 31, 2009.   Accounts Receivable for the year ended December 31, 2011 registered 51.0 days while accounts payable were 84.3 days for the same period.  Accounts Receivable for the year ended December 31, 2010 were 72.9 days while accounts payable were 85.7 days for the same period.   Accounts Receivable for the year ended December 31, 2009 were 63.2 days while accounts payable were 68.5 days for the same period.
 
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. The Retail Division also increases its inventory of both pharmaceutical and non-pharmaceutical products during the winter months when the demand for these products is generally at its peak.

Accounts Receivable

As of December 31, 2011, our accounts receivable net decreased to Ps. 5,381.0 million, 22.2% lower than the Ps. 6,920.4 million as of December 31, 2010.  This decline was largely due to the fact that our retail division sales are primarily cash transactions. Accounts receivable days as of December 31, 2011 decreased 21.9 days to 51.0 days from 72.9 days in 2010.  As of December 31, 2009, accounts receivable days were 63.2.
 
For a description of the nature and amounts of accounts receivable due from current and former related parties, see “Item 7.  Major Shareholders and Related Party Transactions—Related Party Transactions” and Note 11 to our audited consolidated financial statements.

Trade Accounts Payable

As of December 31, 2011, trade accounts payable decreased to Ps. 8,848.8 million or 4.7% lower compared to Ps. 9,288.8 million as of December 31, 2010.  The decrease was due to the incorporation of FASA.  As a result, our trade accounts payable days decreased to 84.3 in 2011 compared to 85.7 days for the year ended December 31, 2010.  As of December 31, 2009, our trade accounts payable days were 68.5. Beginning in 2010, this calculation takes into account FASA’s total accounts payable balance with its suppliers; therefore, the figures are not comparable with previous years.
 
For a description of the nature and amounts of trade accounts payable owed to current and former related parties, see “Item 7.  Major Shareholders and Related Party Transactions—Related Party Transactions” and Note 11 to our audited consolidated financial statements.
 
 

 
Grupo Casa Saba is a company with no significant operations or material assets other than the capital stock of our subsidiaries and some of our direct subsidiaries have other subsidiaries.  As a result, our subsidiaries’ ability to make cash available to us, by dividend, royalties or otherwise is important for our shareholders. Please note that there are certain legal, tax and economic restrictions and formalities for our subsidiaries in order to transfer funds to us in the form of cash dividends, loans, capital reductions, royalties or advances; the legal and tax restrictions and formalities depend on the applicable law in the country of domicile of each of our subsidiaries.

Economic Restrictions

 Each of our subsidiaries is a distinct legal entity and, under certain circumstances, 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.

      Legal Restrictions

      México

Dividends. The General Law of Commercial Companies establishes certain restrictions and formalities applicable to Mexican companies in order to make payment of dividends. These restrictions apply to all of our Mexican Subsidiaries. 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 the Board of Directors of each of our subsidiaries.  Our subsidiaries cannot pay dividends, unless these allocations are previously made.
 
From a tax perspective, the dividends paid by our Mexican subsidiaries must come from the net tax profit account of each our Subsidiaries (which is a tax account comprised of financial profits which have been subject to taxation in Mexico at a corporate level). Dividends paid from distributable earnings that have not been subject to taxation at the corporate level are subject to a dividend tax at an effective rate of 42.86% from 2010 to 2012 (40.85% for 2013 and 38.89% for 2014 and following years) at the corporate level. The corporate-level dividend tax on the distribution of earnings is not final and may be credited against income tax payable during the fiscal year in which the dividend tax was paid and in the following two years.  Dividends paid from distributable earnings, after corporate income tax has been paid with respect to these earnings, are not subject to this corporate-level dividend tax.

Chile

Pursuant to Chilean law, public companies, like FASA, must yearly allocate 30% of its profits to be distributed pro-rata among its shareholders unless the by-laws provide otherwise. Despite the above, most of the Chilean subsidiaries of the Group are non-public companies so they are not required to allocate the above-mentioned percentage of dividends and are regulated solely by their by-laws. The payment of dividends takes place five days after the date that such payment was approved.
 
From a tax perspective, under the provisions of the Chilean Income Tax Law (Ley del Impuesto Sobre la Renta), dividends paid to resident holders with respect to the Chilean shares shall be subject to Chilean income tax. Dividends allocated to a non-resident shareholder or that are remittance to a foreign entity, shall be subject to Withholding tax, unless the distributed profits are exempt earnings or exempt of the Additional Tax.

 
Indebtedness
 
As of December 31, 2011 the Group’s interest-bearing liabilities were Ps. 12,556.5 million and our net debt was Ps. 10,246.1 million.

Since the majority of our debt is acquisition-related, our borrowing requirements are not particularly seasonal in nature.  In August 2011, the company renegotiated the bridge loan that was executed on August 30, 2010 in the amount of Ps. 7,723.9 million.  The loan term was extended for seven years, thus converting it into a long-term loan, which is now divided into two tranches.  The shorter average life tranche has an average margin of TIIE + 2.25% while the longer average life tranche’s margin is TIIE+2.76%.

                                Treasury Policies and Objectives

Each of the three countries in which we have a presence operates its treasury independently and is responsible for meeting its established budgetary objectives. The Group has established corporate policies that vary, depending on the company’s needs and are in effect as long as they do not contradict the budgetary objectives for each country.
 
Grupo Casa Saba’s Treasury departments operate under strict controls that include maintaining joint checking and electronic banking accounts (two signatures required), both of which operate with security measures, such as codes, and an accounting matching systems for check cashing in each of their respective systems (RP BaaN for Casa Saba and SAP for the Retail Division).  In addition, payment made to providers and employee payroll are automated for electronic transfers as well as for account and payment amount reconciliation.  The Group’s trade accounts payable departments are dependent on the Treasury department.  Therefore, its information and the generation of payments originate from our BaaN and SAP systems, which enable us to maintain consistency between our established policies and procedures for our treasury and accounting departments.
 
In terms of resource management, GCS’s considers its treasury policies to be conservative.  Our investment policies require us to invest excess resources solely in local currency and highly liquid government instruments.  In addition, the cash and credit lines that we have with a variety of banks are also strictly short-term, local currency denominated instruments that can then be used to meet our working capital needs.
 
                The Use of Financial Instruments for Hedging Purposes

Within the course of its normal operations, the Company, through its subsidiaries Farmacias Benavides, S.A.B, de C.V and Farmacias Ahumada, engages in foreign currency transactions in which it is exposed to exchange rate risk.   Therefore, these companies are permitted to use forward contract hedges to reduce these risks by establishing a fixed exchange rate for future transactions at a known cost.  The subsidiaries are only allowed to hedge against exchange rate risks that are related to liabilities that are recognized on the balance sheet, firm contractual commitments and transactions that are highly likely to occur.  These instruments are negotiated in the Over-the-Counter (OTC) market with nationally and internationally recognized banks and/or their affiliates.
 
 

 
In the event that there was a margin call, the Company would cover it by using cash generated from its normal business operations. To date, the Group has not received a margin call, although it does have and established credit line granted to it by the bank in order to cover any type of variation in the market value of current financial derivative instruments.
 
In May 2007, Farmacias Benavides contracted eight USD-Euro forward contracts.  In January and May 2009, the company entered into an additional five USD-MXP contracts and in December 2009 it contacted 12 more like contracts.  In 2010, this subsidiary negotiated 12 more USD-MXP contracts and in February 2011 it contracted one USD-MXP forward.  To date, Benavides has covered all of its financial derivative instruments in a timely manner.  As of December 31, 2011, only one forward contract was still active as it came due in January 2012.
 
Farmacias Ahumada, S.A. currently has 8 outstanding short-term forward contracts which will all come due during 2012 and one forward contract that is due in November 2013.

Capital Expenditures

Our distribution-related capital expenditures during 2011 were approximately Ps. 109.7 million, which consisted of Ps. 37.1 million for technology and computer equipment, and Ps. 72.5 million for other general expenditures.  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.
 
Of the Ps. 274.6 million in capital expenditures that we used in the retail division throughout the course of 2011, Ps. 231.9 million were utilized for projects at the point-of-sale while Ps. 35.6 million were used for infrastructure projects.  An additional Ps. 7.0 million was spent on improvements to the distribution centers.  These projects are generally funded with cash from our operations.
 
Research and Development, Patents and Licenses

Not applicable
 
 

 
Industry Trend Information

                                Production/Products

Since 2010, the loss of patent protection has begun to facilitate the entry  of a greater number of generic products into the Mexican market.   In 2011 alone, three of the five highest selling products in the world lost their patent protection and by the end of 2012, a total of 60 products will be eligible for generic production in Mexico.
 
Several multinational laboratories have implemented a variety of strategies in an attempt to counter the competition by national generic drug producers.  Some, such as Pfizer, are trying to offset their losses by formulating their own generic versions of the original branded product while others, such as Novartis and Sanofi-Aventis, have purchased companies that specialize in generic drug production.
 
The Mexican government’s decision to lift the restriction that required drug makers to operate plants in the country in order to sell their products has also had an affect on pharmaceutical production trends in Mexico.   As the demand for generics continues to grow, it has also begun to attract foreign companies specializing in this segment.  In 2011, Hetero Drugs, an Indian-based pharmaceutical company, entered the Mexican market and has begun working with private sector clients to produce their controlled and private label brands. Brazilian generic drug maker, Medley (which was purchased by Sanofi-Aventis in 2009), has announced that it would be entering the Mexican market in 2012 with an initial portfolio of 32 low-cost generic drugs, which will provide further competition for this sector.
 
Another trend that may have an impact on future drug production and sales is the increase in the number of patients worldwide who are being diagnosed with diseases such as diabetes.  The number of people who have been diagnosed with diabetes in Mexico, particularly type II diabetes, has grown significantly over the past several years and it is believed that more than half of the population that has this disease has still not been diagnosed. Pharmaceutical companies have therefore begun forming long-term commercial alliances to develop new diabetes products to meet the growing demand.  Generics producers are also gaining ground in this area, especially with government health providers who seek lower-cost options.

                                Sales and Inventory

In general, the Latin American pharmaceutical market has grown steadily over the last several years and is projected to continue growing due to a combination of factors that include: generally stable economic conditions, ageing populations and the efforts being made by governments within the region to increase access to healthcare among the overall population.
 
The Mexican private pharmaceutical market has solid growth fundamentals which lead us to expect sustained annual growth over the coming years.  The main factors supporting this expected growth are Mexico’s demographic structure (adults represent an increasing proportion of Mexico’s total population), the increase in chronic illnesses such as diabetes and the increase in the life expectancy of the Mexican population.  The combination of these factors has generated growth in the demand for healthcare services and pharmaceutical products.  In addition, the government’s Seguro Popular Program has been instrumental in granting health care access to nearly 100% of the Mexican population.
 
Despite the overall growth that we expect to continue in the pharmaceutical market, which generally benefits our wholesale distribution business, in recent years there has been a shift in the percentage of private sector pharmaceutical sales from those that are placed through wholesalers, like us, to sales that are placed directly by the manufacturers to large retail pharmacy chains and supermarket supercenters that purchase sufficiently large volumes to have direct access to the laboratories.  According to IMS Health, A.G. and our internal data, private sector pharmaceutical sales that are placed through wholesalers have declined from 90% in 2007 to around 75% in 2011. A continued increase in direct sales by manufacturers to retail pharmacy chains could have a material adverse effect on our results of operation in this division.
 
 

 
Grupo Casa Saba has always considered Information Systems to be a key competitive factor in current competing markets.  Therefore, we believe that we have been successful in using technology to help us optimize both our sales and our inventory days.  Our record of on-time deliveries is in the range of 98%, which we believe is one of the best rates in the business.  The use of GPRS mobile devices for our sales force has also had a positive effect in terms of sales agility and more up-to-the minute information for our sales representatives.  Today, these devices work under a Windows Mobile platform. Nevertheless,  we believe that in the near future a more open platform such as Android will be available, which will put downward pressure on prices that we are preparing to take advantage of.
 
We have also recently completed the development of a new version of our Point-of-Sale System focused on government pharmacy operations.  We believe that this new software solution may be one of the best in the business today, given that it has been developed with open standards that allow it to be very slim, web based, and easy to modify. We expect this to be an excellent tool for improving our position in the Government market segment in the near future.
 
Although electronic data interchange (EDI) has been available in our market for many years, it was only recently that Government regulations for EDI have been fully implemented.  This regulation not only regulates electronic transactions but it will require all Mexican business to adopt Electronic Invoicing between 2011 and 2012.  Grupo Casa Saba fully complies with this regulation and has been active in the discussions related to its implementation.
 
With respect to our non-pharmaceutical or HBCG/other products related business divisions, we believe that higher levels of economic growth are necessary to increase the demand for these products; therefore, our ability to generate positive results in the coming years will depend on the improvement of general economic conditions and increases in consumer purchasing power.
 
Socio-demographic trends have helped fuel the growth of the retail market in Brazil. As is the case in Mexico, Brazil is also experiencing similar trends in terms of the growth of the adult population, prompted by an increase in overall life expectancy.  Brazilians’ average life expectancy has increased, from 68.5 years in 1995 to 72.3 years in 2009.  As a result, the over-60 population in the country has increased significantly over the course of the last ten years and it is this group that is most likely to stimulate the demand for both healthcare services and pharmaceutical products in the future.  In addition, older consumers are generally more affluent and have larger discretionary incomes, making them a target demographic for many manufacturers, including for over-the-counter healthcare products.  Government programs, such as the “Bolsa Familia” and the “Farmacias Popular” which offer subsidized medicines have also helped stimulate demand for these products. From a socio-economic standpoint, we would also expect that the decrease in the unemployment in Brazil from 12.3% in 2004 to less than 4.7% in December 2011, combined with an increase in the average salary in the last ten years, will stimulate the consumption of ethical drugs, HBCG and Other products as the middle class continues to expand.  The increase in the number people who are formally employed also means that more Brazilians are covered by private insurance. As a result, they are more likely to consult physicians when they are ill, thus broadening access to pharmaceutical products.  However, as is the case in Mexico, the continued demand for these products will require a continued stable economic environment.
 
The Chilean public health system covered nearly three quarters of the population in 2011, with health care expenditures representing 4.4% of the country’s overall GDP.  As the population continues to grow and more workers are incorporated into the formal sector, government health spending is expected to keep pace with the increase. The country’s strong economic growth projections are also expected to have a positive effect on the pharmaceutical industry, which has been growing steadily since 1996.
 
 

 
                                Selling prices since the latest financial year

As distributors, we do not establish selling prices.  In Mexico, the Secretaria de Salud establishes a maximum public sales price at the point-of-sale that cannot be exceeded without penalty.  In Brazil, the CMED authorizes a maximum price increase once a year.  Therefore the increase in selling prices are limited in these markets.  In Chile, the government lifted its price controls on pharmaceutical products in both the private and public sectors, leaving the market to set the price.
 
Since 1998, when the production of generic medicines was first approved in Mexico, generic penetration in Mexico has been minimal.  However, several factors, including the loss of patent protection beginning in 2010, and the lack of a full-scale economic recovery, are contributing to an increase in the demand for these products.  As a result, generics are gaining market share in Mexico and are poised for significant growth in the coming years.  While their lower prices generate lower overall sales for both our retail and distribution businesses, the margins on generic products are generally higher than branded products, which help strengthen our results.
 
In 2011, generic products had a market penetration of over 40% in Brazil.  As is the case in Mexico, the demand for generics has been growing steadily in recent years and is projected to continue to grow at rates above that of other types of products.  Should this occur, their lower prices will contribute less to our overall sales but should have a positive effect on our overall results.  In addition, the recent consolidation among  pharmacy chains in this country has been partly responsible for driving up discounts, which helps lower costs for pharmacy patrons.
 
In Chile, beginning in 2008, the sale of branded generics as well as private label products has gained ground in the marketplace.  Nevertheless, the higher price of branded (originator) drugs and branded generics compared to unbranded generics and private label brands, continues to exert pressure on the market’s average price.  In an effort to help increase awareness and stimulate the demand for these products among the populace, the Chilean Health Ministry has begun conducting campaigns to promote generics.  Our strategy of increasing our private label and exclusive brands is in line with this strategy and should, therefore, enable us to benefit from any future growth in this sector.
 
During 2011, we also continued with our strategy of profitable growth and implemented a number of operating efficiency programs to maximize the profitability of our operations.  We applied profitability requirements to our clients and suppliers, even when this meant discontinuing operations with certain clients and suppliers that did not meet the minimum parameters that we requested from them.  In terms of our cost-saving programs, we successfully reengineered routes and optimized our distribution centers. We believe that our profitability strategy will allow us to continue growing our divisions with acceptable margin levels and we will continue to focus our efforts on increasing profitability in the different markets in which we operate.
 
In connection with the FASA Acquisition, we have incurred a significant amount of debt which may have an adverse effect on the price of our outstanding shares. Such financing could, likewise, have important consequences to the Company, including an increase in our interest costs.  The Acquisition Loan provides for a series of covenants which, among other things, restrict the ability of the Company to pay dividends on the 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.  In August 2011, we successfully refinanced the bridge loan as well as the collateral package executed to guarantee its obligation under the loan into a long-term loan with more favorable terms for the Company.
 
On December 9, 2008, the Chilean Antitrust Authority or Fiscalía Nacional Económica initiated a procedure against FASA before the Chilean Antitrust Court or Tribunal de Defensa de la Libre Competencia, such procedure intended, among others, to prove that FASA had agreed with its competitors, Cruz Verde and Salcobran a mechanism to fix the price of medicines, to impose certain fines to 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 process continued in 2011 with respect to FASA’s aforesaid competitors. On January 31, 2012, Cruz Verde and Salcobrand were convicted by the Chilean Antitrust Court and both companies challenged the applicable judgment; the Supreme Court Justice of Chile shall resolve this lawsuit.
 
 

 
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, 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 amendment of the judgment against them, Salcobrand could also sue FASA claiming the payment of consequential damages arising from the antitrust process that they were a party to. If FASA is unable to address such suits and win the processes that may be initiated against it, the occurrence of any of these factors could have a material adverse impact on our business and our financial results.
 
The trends described in this section and expectations of Grupo Casa Saba may be affected by the relatively slow economic recovery, both globally and locally in the markets where we have operations.  See “Item 3. Key Information—Risk Factors—Risk Factors Relating to Economic and Political Developments”.

                                Non-Exchange Traded Contracts Accounted for at Fair Value

All financial assets and financial liabilities derived from any type of financial instrument are recognized in our balance sheet and assessed at fair value. The valuation effect, as well as costs and returns generated by financial instruments, form part of the comprehensive gain or loss on financing when incurred or earned.
 
As of December 31, 2010 and 2011 the carrying value of financial instruments approximates their value due to their short-term nature.  Long-term debt incurred through bank loans with similar terms and due dates accrues interest at variable prevailing financing rates.

                                Off-Balance Sheet Arrangements
 
The Group currently does not have any off-balance sheet arrangement that has or is reasonably likely to have a current or future effect on the financial statements, changes in liquidity, capital expenditures or capital resources that are material to investors.
 
                                Aggregate Contractual Obligations

Below is a table containing a description of Grupo Casa Saba’s aggregate contractual obligations as of December 31, 2011.

                Tabular Presentation of Aggregate Contractual Obligations

Contractual Obligations
 
Payments due by period
 
(millions of Pesos)
 
 
 
 
 
 
   
 
   
 
 
 
 
Total
 
Less than 1 year
 
1-3 years
   
3-5 years
   
More
than 5 years
 
 
 
 
 
 
 
 
   
 
   
 
 
Long-Term Debt (1)
    7,524.8         2,778.8       2,951.6       1,794.4  
Capital Lease Obligations (2)
                                   
Operating Leases (3)
                                 
Purchase Obligations (4)
    1,980.9         1,003.7       382.8       594.3  
Other Long-Term Liabilities (deferred income tax and other liabilities) reflected on our Balance Sheet under Mexican FRS (5)
    264.0         87.9       176.1          
Total
    9,769.7         3,870.5       3,510.5       2,388.8  
 
 


(1)
Current maturities of long-term debt (see Note 12 to our audited consolidated financial statements).


(2)
Not applicable.


(3)
Our operating leases are primarily related to our retail pharmacy business. These leases, which amounted to Ps. 1,273.5 million in 2011, are entered into in the ordinary course of business and their term varies from one-year to a longer term of up to ten years, depending on the circumstances and location.


(4)
FASAs bond obligations.


(5)
Includes reserve for retirement pensions and seniority premiums.  The maturity of this obligation will occur in accordance with the disclosure in Note 3(o) to our audited consolidated financial statements.
 
 

 
                                Critical Accounting Policies

 
Application of critical accounting policies
 
Preparing our consolidated financial statements requires that we make certain estimates and use certain assumptions to determine the valuation of certain assets and liabilities, disclose our contingent assets and liabilities at the date of our financial statements, and the reported amount of revenues and expenses incurred during the reporting periods. We base our estimates and judgments on our experience and on various other reasonable factors that together form the basis for making judgments about the carrying values of our assets and liabilities. Our actual results may differ from these estimates under different assumptions or conditions. We evaluate our estimates on an ongoing basis and they are continuously reviewed by using the available information. Our significant accounting policies are described in Note 3 to our audited consolidated financial statements. We believe that our most critical accounting policies that imply the application of estimates and/or judgments are:

Allowance for doubtful accounts
 
The allowance for doubtful accounts represents our estimate of the probable loss inherent in all trade receivables by considering the general historical trend of customers’ payment performance and factors surrounding the specific customer’s credit risk. On a periodic basis, we analyze the recoverability of our accounts receivable in order to determine whether due to credit risk or other factors, some receivables may not be recovered. If we determine that such a situation exists, book value related to the non-recoverable assets is adjusted and expensed through an increase in the allowance for doubtful accounts provision. This determination requires substantial judgment by our management. Final losses from doubtful accounts may differ from our estimated reserve.

Estimate for slow-moving inventory
 
Periodically, we analyze the recoverability of our inventories (basically pharmaceutical products) in order to determine whether due to certain factors or conditions related to occurrence of adverse events such as physical damage, obsolescence expiration, etc, certain products in our inventories may not be available or useable for sale purposes. If such a situation exists, book value related to the non-recoverable assets is adjusted and expensed through an increase in the estimate for slow-moving inventory. As a result, final losses from slow-moving inventory could differ from our estimated reserves.
 
 

 
Property and equipment
 
Our balance sheets reflect significant amounts of long-lived assets (mainly property and equipment, goodwill and other intangible assets) associated with our operations throughout Mexico, Brazil and, effective October 2010, Chile and Peru. Many of these assets have resulted from past acquisitions, which have required us to report these assets at their fair value at the acquisition date. In accordance with to their characteristics and specific treatment, we assess the recoverability of our long-lived assets at least once a year, normally during the fourth quarter, as is the case for goodwill, or whenever events arise that we believe trigger a review such carrying values, as is the case with property and equipment and intangible assets of definite life.  Property and equipment to be disposed of are assessed on the date on which the sale plan is approved at the lower of its net carrying value and its fair value less associated sale costs.  Moreover, we monitor the lives assigned to these long-lived assets for purposes of depreciation.  This analysis is subjective and form part to the determination of whether impairment has occurred.

Property and equipment are initially recorded at acquisition cost. Effective January 1, 2008, when inflationary accounting is applied in high inflationary periods, those assets are restated by using INPC factors applicable to the country where those assets are established, as discussed in Note 3 e) to our financial statements.

While we believe that our estimates are reasonable, different assumptions could materially affect our evaluations. Our evaluations for 2011 and 2010 and up to the date of this annual report did not lead to any impairment of property and equipment.  Accordingly, fair value of property and equipment was equivalent to or greater than the carrying value thereof at that date.  We can give no assurance that our expectations will not change as a result of new information or developments.

Business acquisitions, intangible assets and goodwill
 
Business acquisitions are recognized by using the purchase method to allocate the purchase price to the net assets acquired and the noncontrolling interest. Therefore: (i) intangible assets acquired are recognized at its estimated fair value at acquisition date; (iii) the unallocated portion of the purchase price that is not identifiable is included as goodwill, which is allocated to the cash flow generating unit in order to periodically evaluate the impairment.  The goodwill value is adjusted for any correction to the preliminary value allocated to the net assets acquired and the noncontrolling interest within the twelve months subsequent to the acquisition date.
 
 

 
Intangible assets with indefinite useful life, including goodwill, are subject to periodic impairment tests by determining the recoverable amount of the reporting units, which consists of higher between of the reporting units’ fair value less the cost of sale related, and the reporting units’ value in use represented by the discounted amount of estimated future cash flows to be generated by such reporting units to which goodwill relates.  Management takes into account a horizon whose projections do not establish growth rates beyond five years, unless a greater period is justified.  We determine the fair value by using methodologies generally accepted in the market to determine the value of entities.  Moreover, we monitor the lives assigned to these long-lived assets for purposes of amortization.  This analysis is subjective and form part to the determination of whether impairment has occurred.

Significant judgment is required to appropriately assess the recoverable amount. Management considers that the value in use through its cash flow projections is the best estimate of future cash flows from continued use of the cash generating unit.   Therefore, the cash flows projections models recognize medium and long-term economic variables fairly at the time of calculation which are related to future estimated price of products, changes in operating expenses, industry economic trend, the growth expectation in the market, as well as the discount rates and rates of growth rates applied in perpetuity.

Under U.S. GAAP, the excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  If the carrying amount exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess. Under Mexican FRS “perpetuity value” is applied.

The situation referred to above, in addition to differences in the determination of the “value in use” by applying the “perpetuity value” (Note 3 n) to our financial statements) under Mexican FRS as compared to U.S. GAAP, as well as differences in the reporting units’ carrying amounts between Mexican FRS and U.S. GAAP, originate, when applicable, different amounts of impairment losses.

Based on the results of goodwill impairment testing at December 31, 2009 under U.S. GAAP, the Group recorded an estimated impairment loss in connection with its reporting unit in the Brazil in the amount of Ps. 109,000 which differs from impairment loss under Mexican FRS due to referred to above.  Under Mexican FRS, goodwill impairment loss was determined in the amount of Ps. 210,000.  In 2010, the Group determined the fair value of a reporting unit exceeds its carrying amount of goodwill and indefinite-lived intangible assets, under USGAAP and Mexican FRS.  In 2011 under USGAAP, the Group recorded an estimated impairment loss in connection with its reporting units in Drogueros and Citem in the amount of Ps.46,210, Ps.56,456, respectively.  Under Mexican FRS, goodwill impairment loss was determined in the amount of Ps. 78,425 and Ps. 56,456, respectively.

This impairment loss concurred with the generalized crisis in the economic environment that had a negative impact on the pharmaceutical industry.  In determining whether it is more likely than not that a goodwill impairment exists, the Group will consider whether there are any adverse qualitative factors indicating that an impairment may exist.
While we believe that our estimates are reasonable, different assumptions could affect our evaluation. We can give no assurance that our expectations will not change as a result of new information or developments.
 
 

 
Labor obligations
 
Our labor liabilities include obligations for defined benefits for retirement pensions and seniority premiums, as well as severance from causes other than restructuring. Costs are recognized in income as employees render their services. Toward that end, actuarial computations are applied to the present value of labor obligations using long-term assumptions.

Defined benefit obligations, unamortized items, and the net periodic cost applicable to labor obligations referred to above are determined by using the “projected unit credit method”.  We evaluate our assumptions at least annually. Those assumptions include the discount rate, expected long-term rate of return on plan assets, rates of increase in compensation costs and certain employee-related factors, such as turnover, retirement age and  mortality rate. Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expenses and recorded obligations in such future periods.  While we believe that our estimates are reasonable, different assumptions could affect our evaluation. We can give no assurance that our expectations will not change as a result of new information or developments.

The following table is a summary of the three key assumptions used in determining 2011 annual labor cost:

Assumptions:
 
   México
 
Discount rate
7.75%
Salary increase rate
4.00%
Return of plan assets
9.25%
   Chile
 
Discount rate
5.00%
Salary increase rate
3.00%
Return of plan assets
3.00%


Income Tax, Single Rate Business Tax
 
Our operations are subject to taxation on Mexico, Chile and Brazil. Taxes on earnings represent the sum of the income tax due and the deferred income tax effect determined in accordance with currently enacted tax legislation applicable in the different jurisdictions in which each entity operates. Effective January 1, 2008, the Mexican tax authorities enacted the Ley del Impuesto Empresarial a Tasa Unica, Single Rate Business Tax Law, or IETU Law, which co-exists with the Income Tax Law.

In 2011 and 2010, Management determined that the taxes on earnings that will normally be paid by its Mexican subsidiaries will be that which is obtained from the taxable income base of income tax, which the Management estimates will exceed the taxable income base of IETU, in accordance with a projection based on reasonable assumptions.
 
 

 
Deferred income tax is determined by applying the “asset and liability method” which requires a determination of the temporary differences between the financial statements carrying amount and the tax basis of assets and liabilities.  Significant judgments are required to appropriately assess the amounts of tax assets and liabilities.  We record tax assets when we believe that the recoverability of the asset is determined to probable by considering the “more likely than not” criteria.  If this determination cannot be made, a valuation allowance is established to reduce the carrying value of the asset.  The more-likely-than-not threshold represents a positive assertion by management that the Group is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained, no benefits of the position are to be recognized in the financial statements.
 
For the recognition of deferred tax assets derived from net operating losses and their corresponding valuation reserve, we make an assessment of:
 
(a) the aggregate amount of the tax loss carryforwards included in our income tax returns that we consider that the tax authorities would not reject such tax loss carryforwards based on available evidence; and
 
(b) the likelihood of the recoverability of such tax loss carryforwards prior to their expiration through an analysis of estimated future taxable income.

More-likely-than-not is based on its technical merits (legislation and statutes, legislative intent, regulations, rulings, and case law) at the reporting date. For this assessment, the Group assumes that the tax authorities will examine and have full knowledge of all relevant information for each position.

If during any period after recognition the threshold ceases to be met, the previously recorded benefit must be derecognized. Moreover, the benefit of a tax position that initially fails to meet the more-likely-than-not threshold should be recognized in a subsequent period if changing facts and circumstances enable to meet the threshold, the matter is effectively settled through litigation with the tax authorities, or the statute of limitations has expired.

Tax examinations may involve complex issues and their resolution may carry multiple years, if subject to negotiation or litigation. The Group believes its estimates of the unrecognized tax benefits are reasonable, however uncertainties could affect the amount of unrecognized tax benefits in the future periods. It is difficult to estimate the timing and range of possible change related to the uncertain tax positions, as finalizing audits with the authorities may involve administrative and legal proceedings. Therefore, any settlements or statute expirations may result in a significant increase or decrease in the total unrecognized tax benefits, including those positions related to tax examinations being currently conducted.
 
Every reporting period, we analyze our actual results versus our estimates and adjust our tax asset valuations as necessary. If actual results vary from our estimates, the deferred tax asset and/or valuations may be affected and necessary adjustments will be made based on relevant information. Any adjustments recorded will affect our net income in such period.
 
 

 
Tax and legal contingencies
 
We are subject to various claims and contingencies related to tax and legal proceedings as described in Note 20 to our consolidated financial statements. Due to their nature, such tax and legal proceedings involve inherent uncertainties including, but not limited to, court rulings, negotiations between affected parties and governmental actions. Management periodically assesses the probability of loss for such contingencies and accounts for a liability and/or discloses the relevant circumstances, as appropriate. If the potential loss from any claim or tax and legal proceedings are considered probable and the amount can be reasonably estimated, we account for a liability for the estimated loss.
 
Our tax strategies are complex and involve interpretations of tax laws and regulations and are subject to review by the tax authorities. It is possible that the tax authorities could challenge our application of these regulations. The tax authorities have challenged interpretations that we have made and have assessed additional taxes. Although we have, from time to time, paid some of these additional assessments, in general, we believe we have been successful in sustaining our positions. No assurance can be given, however, that we will continue to be as successful as we have been in the past or that pending appeals of current tax assessments will be judged in our favor.

Foreign operations
 
The Group’s foreign operation operates in a non-inflationary economic environment and its functional currency is the Brazilian real, and effective October 3, 2010, Chilean peso and Peruvian peso.

We are exposed a variety of risks and uncertainties related to operating in Brazil, Chile and Peru, including political, economic or social upheaval, devaluations in the Brazilian Real, Chilean peso and Peruvian peso, 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.

Related parties
 
In accordance with the Mexican Income Tax Law, companies that carry out related party transactions are subject to tax obligations, with respect to the determination of prices agreed upon. Such prices should be comparable to prices that would be used with or among independent parties at arm’s length transactions. The tax authorities could reject the amounts determined and demand payment of taxes. Management estimates that all related party transactions were agreed upon at arm’s length basis and, therefore, there is no contingency in its charge.

Fair Value of Derivatives
 
Our transactions are contracted to hedge the associated risks with changes exchange rate.  Our hedges is documented by describing the strategy and objective of management of risks, hedged risks, identification of the hedged primary position, its accounting recognition, and how its effectiveness is measured.  We estimate that the changes in cash flows of the derivative financial instrument maintain high effectiveness in offsetting the changes in cash flows of the primary position, both at the beginning and throughout the relationship of the designated hedge.
Our derivative financial instruments are traded on recognized markets and with high creditworthy and reputable counterparties.
The estimated fair values of derivative financial instruments fluctuate over time determined by assessing the effect of future relevant economic variables as of the reporting date. These values should be viewed in relation to the fair values of the underlying instruments or transactions, and as part of our overall exposure to fluctuations in foreign exchange rates.
 
 

 
Revenue recognition
 
Our consolidated revenues represent the value, before tax on sales, of products sold by consolidated subsidiaries as a result of ordinary activities, after the elimination of related party transactions. Revenues are quantified at the fair value of the consideration received or receivable, decreased by any trade discounts or volume rebates granted to customers.
 
Revenue from the sale of goods is recognized when goods are delivered or services are rendered to customers, there is no condition or uncertainty implying a reversal thereof, and they have assumed the subsequently we sell the goods to another third party, are recognized on a gross basis, considering that we assume the total risk of property on the goods purchased and we are not acting as agent or commissioner.
 
Accounting Pronouncements and Related Effects
 
Under Mexican FRS
 
New Accounting Pronouncements

In 2009 and 2010, the CINIF issued the following Mexican FRS that will go into effect as of January 1, 2011 and 2012:

FRS B-5. “Financial information by segment” (FRS B-5)
 
This accounting standard substitutes Bulletin B-5 with the same name. Effective 2011, the main changes are: (i) companies should disclose information by operating segment that is used regularly by executive management, in addition to the information about products or services and geographic areas reported in accordance with Mexican Bulletin B-5; (ii) disclosure of information by primary and secondary segments is eliminated; (iii) for qualifying as operating segments, it is not required for business areas to be subject to distinct risks between each other; (iv) it allows for considering a business in a pre-operating stage as an operating segment; and (v) it requires that the components of the RIF be disclosed as well as liabilities by operating segment. This pronouncement was applied retrospectively for comparative purposes.  It had no impact on the key segments disclosed in our Note 19) to our financial statements.
 
FRS B-9. “Interim financial reporting” (FRS B-9)
 
This accounting standard substitutes Mexican Bulletin B-9 (Bulletin B-9) with the same name.  This pronouncement establishes the content to be included in a complete or condensed set of financial statements for an interim period. Adoption of FRS 9 did not impact the Group’s financial statements.

 

 
FRS C-4. “Inventories” (FRS C-4)
 
 
This accounting standard substitutes Mexican Bulletin C-4 with the same name. Effective 2011, the main changes are: (i) the direct costing system is eliminated; (ii) the allocation formula of the “last-in/first-out” cost of inventories is eliminated; (iii) inventory valuation should consider the lower of acquisition cost or its net realization value; (iv) impairment losses are recorded in the cost of sales and reversed by decreasing the cost of sales when the circumstances that generate it no longer exist. The Group adopted retrospectively the new FRS C-4, “Inventories”. This standard supersedes the Bulletin with the same name. That adoption had no impact on the consolidated financial statements.
 
FRS C-5. “Prepaid expenses” (FRS C-5)
 
This accounting standard substitutes Mexican Bulletin C-5 with the same name. Effective 2011, the Group adopted retrospectively the new Mexican FRS C-5, "Prepaid expenses" that supersedes the Bulletin with the same name.  Accordingly, prepaid expenses are presented as a current asset when the period in which their benefits are expected to be obtained is equal to or less than one year.  Prepaid expenses for goods are presented in the short-term or long-term, depending on the classification of the item intended (e.g.: inventory or property and equipment).  That adoption had no impact on the consolidated financial statements.

FRS C-6. “Property, plant and equipment” (FRS C-6)
 
This accounting standard will replace Mexican Bulletin C-6 with the same name. Effective January 1, 2011, the main changes, whose application is prospective, are: (i) it sets forth the guidelines for recognizing the exchange of nonmonetary assets at fair value and the bases for determining the residual value of a component; and (ii) the unused component should be depreciated, unless depreciation is determined based on the activity of the component.

Effective 2011, the Group adopted retrospectively the new Mexican FRS C-6, "Property, plant and equipment" that supersedes Bulletin C-6, "Property, machinery and equipment".  That adoption had no impact on the consolidated financial statements.

“Improvements to 2011 Financial Information Standards”
 
Effective January 1, 2011, the main changes are as follows:

(i) FRS B-1. “Accounting changes and error corrections” for presenting the opening statement of financial position if adjustments are retrospective.  In our Note 3 a) to our financial statements, we determined various events or circumstances existing at the acquisition date of FASA, which required an adjustment to the recognized amounts of the acquisition.  As a result, the Company recorded certain liabilities incurred, as well as the impairment of some long-lived assets retrospectively to the date of completion of the business acquisition.
 
 
Implementation of IFRS.
As described in our Note 21 to our audited consolidated financial statements, we have adopted IFRS for the preparation of our financial information beginning in 2012. Pursuant to current SEC reporting requirements, foreign private issuers may provide in their SEC filings financial statements prepared in accordance with IFRS, without reconciliation to U.S. GAAP.

The consolidated financial statements that we issue for the year ending December 31, 2012 will be our first annual financial statements prepared in accordance with IFRS. Our IFRS transition date is January 1, 2011, and accordingly, the year ended December 31, 2011 will constitute part of the comparative period covered by IFRS 1, “First-Time Adoption of International Financial Reporting Standards” (which we refer to as IFRS 1). We have therefore applied all mandatory exemptions and certain optional exemptions from the retrospective application of IFRS provided by IFRS 1.

The Group applied the relevant mandatory exceptions to retrospective application of IFRS as follows:

Attributed cost
An entity may elect to measure an item or all of property, plant and equipment, as well as certain intangible assets at the transition date at its fair value and use that fair value as its attributed cost at that date. In addition, a first-time adopter may elect to use a previous GAAP’s revaluation of an item of property, plant and equipment at, or before, of the transition date as attributed cost at the date of the revaluation, if the revaluation was, at the date of the revaluation, broadly comparable to: (i) fair value; or (ii) cost or depreciated cost in accordance with IFRS, adjusted to reflect changes in a general or specific price index.  The Group has adopted the following criteria:


 
For real property, use a revaluation under GAAP at a date prior to the date of transition as attributed cost;

 
for minor property and equipment and certain intangibles, use their values restated in accordance with GAAP at a date prior to the transition as an attributed cost.

 
for indefinite-lived intangible assets (trademarks), use the fair value related to the acquisition of FASA, which was completed in October 2010.

Employee Benefits:
At the transition date, the Company will apply IAS 19, “Employee benefits” (revised), which eliminates the use of the "corridor method” that tends to defer actuarial gains and losses, and it is required to be recorded in other items of comprehensive income.  Therefore, the Company will recognize actuarial gains and losses existing at the date of transition against the opening balance of retained earnings.  As of the transition date, the Company will recognize the effect of all actuarial gains and losses in "other comprehensive income" when accrued.

In the transition date, the Company will eliminate the liability of termination benefits due to a cause other than restructuring under Mexican FRS against retained earnings.  Under IAS 19, this item is recognized when the entity has the legal obligation with its employees. If not, its effect is recorded in income as accrued.

Accumulated translation differences
At the transition date, the Company will reverse the accumulated effect of translation gains or losses generated under Mexican FRS.  Therefore, the Company will transfer the balance of the "Accumulated translation effect" against the opening balance of retained earnings as of the transition date.  This reclassification would not affect the balance of stockholders’ equity.
Investments in subsidiaries, jointly controlled entities and associates
IFRS 1 allows for valuing these investments as of the transition date as indicated below, provided that the entity selects the “cost model”:


 
at cost, determined in accordance with IAS 27, "Consolidated and individual financial statements"; or

 
at the attributed cost that can be: (i) fair value under IAS 39, "Financial Instruments: Recognition and Measurement" as of the transition date in the individual financial statements of the entity; or carrying value on that date under prior GAAP.

As of the transition date, the Company will recognize its investments in subsidiaries and associates in its individual financial statements at their carrying value under prior GAAP.


Assets and liabilities of subsidiaries
IFRS 1 allows that if a holding company becomes a first-time adopter later than its subsidiary, in its consolidated financial statement, it should measure its assets and liabilities of the subsidiary on the date of transition at the same carrying values as in the IFRS financial statements of the subsidiary. Accordingly, the Company will value the assets and liabilities of its subsidiaries in Brazil and Chile that had adopted IFRS before the Company did at the same carrying values that they have in the financial statements under IFRS of those subsidiaries.

Business combinations
IFRS 1 allows IFRS 3, "Business combinations" (IFRS 3) to be applied prospectively, as of the transition date or from a specific date prior to the transition date.
 
The Company will apply IFRS 3 prospectively to business combinations that occur as of the transition date. Therefore, the business combinations agreed upon prior to the transition date will not be reestablished. Consequently, the goodwill balance determined in accordance with prior GAAP at the transition date was not affected by the migration. Consequently, the carrying amount of the assets acquired and liabilities assumed in the business combination will be their attributed cost, in accordance with IFRS on that date.

Tax criteria
Under Mexican FRS, the tax effect of a tax criterion is determined in accordance with a model of likelihoods. In accordance with IFRS, that effect is recognized under the confidence level that a tax position acquires or expects to acquire. Therefore, the tax effect of a position should be recognized if it meets the "more likely than not" based on its technical merits. If a tax position is not considered as "more likely than not", no benefit of the position will be recognized in the financial statements.
 
Management is about to determine if there are effects associated with uncertain tax liabilities that might result in the recognition of a provision in its opening statement of financial position under IFRS, which it will apply against the opening balance of retained earnings.

Impact of inflation
In accordance with Mexican FRS B-10, the impact of inflation is recognized when the economic environment of the entity is inflationary (inflation equal to or above 26 percent accumulated in the three annual prior fiscal years). For IAS 29, ”Financial Reporting in Hyperinflationary Economy” an economy is hyperinflationary when inflation in that period approximates or exceeds 100 percent.

The last hyperinflationary period for Mexico was 1997 (Brazilian and Chilean operations were acquired in 2008 and 2010, respectively). Accordingly, the Company will eliminate the impact of inflation previously recorded in Mexico for the period of 1998 up to December 31, 2007.

Estimates
The estimates conducted by the Company under IFRS 1 as of the transition date are consistent with the estimates previously recorded under MFRS at that same date.



Under U.S. GAAP

There are no significant new accounting pronouncements effective in year 2011 impacting the Group.

New ASU applicable to the Company are as follows:


 
ASU 2011-05 “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” issued in June 2011 (ASU 2011-05)
 
 

 
Under ASU 2011-05 an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income.

ASU 2011-05 should be applied retrospectively. For public entities it is effective for fiscal years beginning after December 15, 2011. Early adoption is permitted. Management is in the process of evaluating the impact that adopting ASU 2011-15 will have on the Company's financial statements.


 
ASU 2011-08 “Intangible-Goodwill and Other (Topic 350): Testing Goodwill for Impairment (ASU 2011-08)

Under ASU 2011-08, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit, as described in paragraph 350-20-35-4. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any, as described in paragraph 350-20-35-9. Under ASU 2011-08, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period.
 
ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. Management is in the process of evaluating the impact that adopting ASU 2011-15 will have on the Company's financial statements.
 
Directors, Senior Management and Employees

                                Board of Directors

The following table sets forth the names of our directors, their dates of birth, their principal occupations, their business experience, including other directorships, and the number of years of service they have as directors.  All of these individuals were elected by our shareholders at our annual shareholders’ meeting, which was held on April 27, 2012.
 
                                Directors
 
Name and Date of Birth
 
Principal Occupation
 
Business Experience
 
First Elected
             
Manuel Saba Ades
(11/03/67)
 
Chairman of the Board
 
Director – Xtra Inmuebles, S.A. de C.V. and of Grupo Casa Saba, S.A.B. de C.V.  Member of the Board of Grupo Xtra S.A., de C.V. and of Ixe Grupo Financiero, S.A.B. de C.V.
 
April 2009
 
 
 
 
 
 
 
Alberto Saba Ades
(07/09/65)
 
Vice Chairman of the Board
 
Director – Xtra Inmuebles, S.A. de C.V.
Chairman of the Board of Grupo Xtra, S.A. de C.V.
 
February 2000
 
 

 
 
Name and Date of Birth
 
Principal Occupation
 
Business Experience
 
First Elected
             
 
Chief Executive Officer
 
Executive Director – Grupo Comercial Hotelera, S.A. de C.V. and Grupo Casa Saba, S.A.B. de C.V.
 
April 2009
 
 
 
 
 
 
 
Juan Carlos Peralta del Río
(24/09/75)
 
Vice President
 
Vice President - IUSA Footwear International S.A. de C.V
 
April 2008
 
 
 
 
 
 
 
Pedro Alejandro Sadurni Gómez
(10/8/59)
 
Executive Vice President, Retail Division GCS
 
Former Chief Financial and Administration Officer– Grupo Casa Saba, S.A.B de C.V.
 
April 2009
 
 
 
 
 
 
 
Julio Emilio Madrazo García
(07/07/66)
 
Partner
 
De la Calle Madrazo Mancera, CMM and Director-Zimat Golin Harris
 
April 2009
 
 
 
 
 
 
 
Miguel Alemán Magnani
(04/25/66)
 
President
 
 
Grupo Alemán
 
April 2009
 
 
 
 
 
 
 
 
Gabriel Alarcón Velázquez
(02/23/37)
 
Director
 
 
Banco de Comercio
 
April 2006
 
 
 
 
 
 
 
Enrique Castillo
Sánchez-Mejorada
(13/08/56)
 
CEO of Wholesale Banking
 
Grupo Financiero Banorte
S.A.B. de C.V.
 
April 2010
 
Francisco Fuentes Ostos is the Secretary of our Board of Directors, without being a member of the Board.  Alberto Saba Ades and Manuel Saba Ades are brothers.  Manuel Saba Ades and Alberto Saba Ades are cousins of Gabriel Saba D’jamus.  Alberto Saba Ades is the Chairman of the Board of Directors of Grupo Xtra, S.A. de C.V. and Manuel Saba Ades is a regular member of the same Board.  In addition, Manuel Saba Ades was elected as a member of the Board of Directors of Grupo Financiero Banorte, S.A.B. de C.V. and Alberto Saba Ades continues to serve as an alternate member of this same Board.  Our directors are not party to a service contract with us, and there are no arrangements pursuant to which any of them was elected as a director of the Company. On April 27, 2012 at the annual shareholders’ meeting the resignation of Ivan Moguel Kuri as the alternate independent board member was accepted.

                                Executive Officers

The following table sets forth the names of our executive officers, their dates of birth, their current position, their prior business experience, and the year in which they were first appointed to their current position.

Name and Date of Birth
 
Current Position
 
Business Experience
 
First Appointed
 
 
 
 
 
 
 
 
Chief Executive Officer
 
Executive Director – Grupo Comercial Hotelera, S.A. de C.V. and Grupo Casa Saba, S.A.B. de C.V.
 
April 2009
 
 
 
 
 
 
 
Juan Roberto Júarez
(01/31/59)
 
 
Chief Adminstrative Officer/Comptroller
 
 
Former Comptroller of Grupo Casa Saba, S.A.B. de C.V.
 
 
November 2011
 
 
 

 

Name and Date of Birth
 
Current Position
 
Business Experience
 
First Appointed
 
 
 
 
 
 
 
Jorge Sánchez Lanzilotti
(03/23/70)
 
Chief Strategic Planning & Finance Officer
 
Former Chief Administrative & Financial Officer of Farmacias Benavides,, S.A.B de C.V.
 
November 2011
 
 
 
 
 
 
 
Héctor Manzano de la Torre
(04/21/67)
 
Sales Director
 
Former Manager of Citem, S.A. de C.V.
 
September 1991
 
 
 
 
 
 
 
Oscar Gutiérrez Melgar
(17/04/67)
 
Purchasing Director
 
Former Manager of Drogueros, S.A. de C.V.
 
November 1985
 
 
 
 
 
 
 
Jesus Guerra de Luna
(05/29/61)
 
General Counsel
 
Legal Manager – Grupo Casa Autrey, S.A. de C.V.
 
June 1995
 
 
 
 
 
 
 
Ricardo Ríos Cárdenas
(02/01/55)
 
Human Resources Director
 
Director of Sales & Operations, Northern Region – Grupo Casa Saba, S.A.B. de C.V.
 
March 2009
 
 
 
 
 
 
 
Pedro Canton y Figueroa
(08/05/49)
 
Sales Director
 
Director of National Warehouse Operations
 
December 2008
 
 
 
 
 
 
 
Jorge Luis García
(09/12/61)
 
Chief Information Officer
 
Former Manager – Grupo Casa Autrey, S.A. de C.V.
 
May 1992
             
Efraín Yañez
González
(10/26/70)
 
Special Accounts Director
  Former Director of Collections- Grupo Casa Saba, S.A.B. de C.V.   February 2011
             
Pedro Alejandro Sadurni Gómez
(10/08/59)
   Executive Vice President, Retail Division GCS  
Former Chief Financial and Administration Officer– Grupo Casa Saba, S.A.B de C.V.
  November, 2011 
 
                                Compensation

Pursuant to our bylaws, all executive compensation must be approved by our Board of Directors on a yearly basis.  For the year ended December 31, 2011, the aggregate compensation paid by us to key management personnel and/or our executive officers in all three of the countries where we had operations in 2011 for services rendered in all capacities was approximately Ps. 85.8 million.  At the ordinary annual shareholders’ meeting held on April 27, 2012, it was resolved to pay the members of the Board of Directors, without withholding income tax, a fifty peso coin known as a “Centenario” as compensation or to grant them the equivalent value of one “Centenario” for each Board of Director’s meeting attended.
 
 


 
                                Employee Profit Sharing

Under Mexican law, we are required to contribute 10% of our yearly taxable profits, as adjusted, to our employees.  This contribution is distributed in May of each year.  In addition, in the past we have customarily paid an annual Christmas bonus to our employees in an amount equal to between two (the minimum required by law) and five weeks’ salary, depending on seniority.

                                The Pension Fund

We recognize the labor obligations for retirement pensions and seniority premiums derived from defined benefit plans for all their employees in accordance with Mexico’s Federal Labor Law, as well as the schemes that have been established for each plan.  Seniority premiums are granted for a voluntary separation of personnel who have completed at least fifteen years of service and are calculated based on the number of years worked.  Retirement pensions are granted to all personnel who have completed at least ten years of service and reached 65 years of age.  We are required to pay certain severance benefits to employees that are dismissed without proper cause.  These payments are expensed when paid.
 
Projected benefit obligations, unamortized items and the net periodic cost applicable to labor obligations referred to above are determined by using the “projected unit credit method”, in conformity with Bulletin D-3, “Labor obligations” of Mexican FRS. Severance benefits which arise from restructuring causes, should continue to follow the guidelines of Bulletin C-9, “Liability, provisions, contingent assets and liabilities, and commitments” of Mexican FRS.
 
We have created a fund placed in irrevocable trusts at a financial institution to meet the labor obligations referred to above.  Contributions to these funds are determined annually by an actuarial calculation approved by our Board of Directors.  We believe that obligations under these trusts are closely monitored by their trustee.
 
During 2009 and 2010 contributions to the fund amounted to Ps. 20.6 million and Ps. 9.6 million, respectively.  In 2011, no contributions were made to this fund.  As of December 31, 2009, 2010 and 2011, fund assets consisted primarily of investments in equity securities as well as in fixed income securities issued by Mexican companies that are traded on the Mexican Stock Exchange.

                                Board Practices

The management of our business is vested in our Board of Directors and the Chief Executive Officer.  Our bylaws provide that the number of seats on our Board of Directors shall be determined by our shareholders at a general ordinary shareholders’ meeting held for the purpose of appointing and electing directors, which at any time may be formed by at least six but no more than twenty-one members of the Board of Directors.  Directors and alternate directors are elected for one-year terms by our shareholders at each annual shareholders’ meeting, and each serves until a successor is elected and takes office.  In order to have a quorum for a meeting of the Board of Directors, a majority of the directors must be present.
 
According to the Mexican Securities Market Law, the Board of Directors may have up to 21 members and each member may have its alternate.  The members of the Board of Directors shall be appointed by the shareholders’ meeting and shareholders controlling 10% of the capital stock of the company may appoint or revoke in the shareholders’ meeting a member of the Board of Directors.
 
 

 
In accordance with the Mexican Securities Market Law and our bylaws, 25% of the members of our Board of Directors must qualify as “independent directors”.  Under Mexican law, a person will not qualify as an “independent director” if he or she is, among other things:


 
one of our employees or managers;


 
a controlling shareholder;


 
a director, executive officer or relative of a controlling shareholder, or entities controlled or managed by a controlling shareholder; or


 
a significant client, supplier, debtor or creditor, or member of the board of directors or executive officer of any of these entities.

Our bylaws also provide that the Chairman of the Board of Directors shall have the casting vote in the event of a tie.  The Board of Directors is required to meet at least once a quarter.  The Chairman, 25% of the directors or the Chairman of the Audit and Corporate Practices Committee may call for a meeting of the Board of Directors.  Also, our bylaws provide that the Board of Directors must approve with input from the Audit and Corporate Practices Committee, on an individual basis (i) any transaction with related parties, subject to certain limited exceptions, (ii) the appointment of our Chief Executive Officer, his compensation and removal for justified causes, (iii) our financial statements and those of our subsidiaries, (iv) unusual or non-recurrent transactions and any transactions or series of related transactions during any calendar year that involve (a) the acquisition or sale of assets with a value equal to or exceeding 5% of our consolidated assets or (b) providing collateral or guarantees or the assumption of liabilities, equal to or exceeding 5% of our consolidated assets, (v) agreements with our external auditors and (vi) accounting policies, within GAAP.
 
In addition, pursuant to the Mexican Securities Market Law and our bylaws, holders of at least 10% of our voting stock are also entitled to appoint a director and a corresponding alternate director.

                                Committees of Our Board of Directors

In accordance with the Mexican Securities Market Law, we have an Audit and Corporate Practices Committee.  As of April 27, 2012, the Audit and Corporate Practices Committee is formed by Messrs. Julio Madrazo García (chairman), Gabriel Alarcón Velázquez and Juan Carlos Peralta del Río, all independent members of the Board of Directors.  As required by the Mexican Securities Market Law, both the chairman and a majority of the members of the Audit and Corporate Practices Committee are independent directors.  Among other duties and responsibilities, the Audit and Corporate Practices Committee must:


 
supervise our external auditors and analyze their report;


 
analyze and supervise the preparation of our financial statements;


 
inform the Board of Directors of our internal controls and their adequacy;


 
request reports of our Board of Directs and executive officers whenever it deems appropriate;


 
inform the Board of any irregularities that it may encounter;


 
receive and analyze recommendations and observations made by the stockholders’ meetings;


 
supervise the activities of our Chief Executive Officer;


 
provide an annual report to the Board of Directors;


 
provide opinions to our Board of Directors;


 
request and obtain opinions from independent third parties; and


 
assist the Board in the preparation of annual reports and other reporting obligations.
 
 

 
The Chairman of the Audit and Corporate Practices Committee shall prepare an annual report to our Board of Directors with respect to the findings of the Audit and Corporate Practices Committee, which shall include among others:  (i) the status of the internal controls and internal audits and any deviations and deficiencies thereof, taking into consideration the reports of external auditors and independent experts; (ii) the results of any preventive and corrective measures taken based on results of investigations in respect of non-compliance of operating and accounting policies; (iii) the evaluation of external auditors; (iv) the main results from the review of our financial statements and those of our subsidiaries; (v) the description and effects of changes to accounting policies; (vi) the measures adopted as a result of recommendations and observations of stockholders, directors, executive officers and third parties relating to accounting, internal controls, and internal or external audits; (vii) compliance with stockholders’ and directors’ resolutions; (viii) observations with respect to relevant directors and officers; (ix) the transactions entered into with related parties; and (x) the remunerations paid to directors and officers.

                                Employees
 
 
 
2009
   
2010
   
% Change
   
2011
   
% Change
 
Total  Employees
    8,454       20,579       143.4 %     19,702       -4.3 %
Total No. Employees in Mexico
    7,257       14,069       93.9 %     13,251       -5.8 %
Total No. Employees in Brazil
    1,197       1,545       29.1 %     1,401       -9.3 %
Total No. Employees Chile
    -       3,619    
NA
      3,402       -6.0 %
Total No. Employees in Peru
    -       1,346    
NA
      1,648       22.4 %
 
As of December 31, 2010, we had 19,702 employees.  In Mexico we had 13,251 employees, 5,689 of which are part of the distribution business and 7,562 are part of the retail pharmacy business.  On the distribution side, 2,452 are sales representatives for our Pharmaceutical and HBCG/Other Products businesses and other divisions, 929 are administrative employees and 2,308 are operational employees.  On the retail pharmacy side, 302 are administrative employees, 355 are operational employees and 6,905 are in sales. In Brazil we had a total of 1,401 employees of which 104 were administrative employees, 153 were operational employees and 1,144 were in sales.  In Chile, we had 3,402 employees at the end of fiscal year 2011.  Of these, 230 carried out administrative functions, 3,120 held sales positions and 52 were on the operational side.
 
A significant majority of our employees in Mexico, 83.6% as of December 2009, 72.0% as of December 2010 and 75.5% as of December 31, 2011, were represented by unions.  Almost all of our employees in Brazil, 99.9% as of December 31, 2010 and 99.9% as of December 31, 2011, were unionized.  In Chile 28.4% of our employees were representd by union as of December 31, 2010 and 27.0% were represented by unions at the end of 2011.
 
We believe that our relations with our employees and the unions with which they are affiliated are good.  In 2011, the total number of employees declined by 4.3% compared to 2010, primarily as a result of  programs aimed at improving our operating efficiency and controlling costs and expenses.

                                Share Ownership of Directors and Officers

Share ownership of our directors and executive officers is set forth in the table under the caption “Item 7.  Major Shareholders and Related Party Transactions”.  Except as set forth in the table, none of our directors or executive officers is the beneficial owner of more than 1% of any class of our capital stock or options representing the right to purchase more than 1% of any class of our capital stock.
 
 

 
 
Major Shareholders and Related Party Transactions

  We are not directly or indirectly owned or controlled by another corporation or by any foreign government.

                                Principal Shareholders

All information presented in this section regarding beneficial ownership of our capital stock is based on the number of Ordinary Shares outstanding as of March 31, 2012, which was 265,419,360.  As required by Mexican law, the number of Ordinary Shares outstanding is presented net of the number of repurchased Ordinary Shares held in our treasury as of March 31, 2012, which was 14,729,720.  We repurchased these Ordinary Shares in the open market pursuant to our share repurchase program, as described under the caption “Item 9.  Offer and Listing Details—Share Repurchases”.  Currently, there are no arrangements known to us that could result in a change of control of the Company.
 
On May 6, 2008, Mr. Isaac Saba Raffoul, as settler and beneficiary “A”, executed a trust agreement with Ixe Banco, S.A., Institución de Banca Múltiple, Grupo Financiero Banorte, as trustee, Mrs. Beki Ades Tawil, as beneficiary “B”, and Mr. Manuel Saba Ades and Mr. Alberto Saba Ades both as beneficiaries “C”.  In addition to other assets, the 225,606,456 Ordinary Shares directly owned by Mr. Isaac Saba Raffoul were deposited into Trust F-709.  Upon the death of Isaac Saba Raffoul on July 27, 2008, Manuel Saba Ades and Alberto Saba Ades, sons of Isaac Saba Raffoul became, on an equal basis, the sole beneficiaries of the 225,606,456 Ordinary Shares held by Trust F-709.  References in this annual report to “our controlling shareholder” is to Trust F-709, as direct holder of 225,606,456 Ordinary Shares for the benefit of Manuel Saba Ades and Alberto Saba Ades.
 
As of March 31, 2012, our controlling shareholder directly held 225,606,456 Ordinary Shares, representing 85% of our issued and outstanding capital stock.  As of April 19, 2012, approximately 11.3% of our Ordinary Shares were held through ADSs by 26 registered holders.
 
The following table shows information, as of March 31, 2012, regarding the ownership of our capital stock by each person known by us to own or beneficially own more than 5% of our outstanding capital stock and by each of our directors, executive officers and key employees.

Name
 
Number of Ordinary Shares Owned
   
Percentage Stake
 
                 
Trust F-709 (1)
    225,606,456       85.00 %
 
               
Total
    225,606,456       85.00 %
 
                                        ______________________

 
(1) 
Manuel Saba Ades and Alberto Saba Ades, both of whom are directors of the Company, are the sole beneficial owners, on an equal basis, of the Ordinary Shares held directly by Trust F-709.  The trustee of Trust F-709 is Ixe Banco, S.A. Institución de Banca Múltiple, Grupo Financiero Banorte, División Fiduciaria.

Although minority shareholders have separate minority shareholdes rights, provided in our By-Laws and the Mexican General Corporation Law, in general terms, all shares entitle their holders to the same rights and impose the same obligations on them. For a description of the nature of the minority shareholders rights, see “Item 10.  Additional Information,” which is includes a summary of our By-laws.
 
                                Related Party Transactions

In 2011, we engaged in, and we may continue to engage in, transactions with related parties, including, without limitation, the transactions described below.  Exclusively for purposes of this discussion, the term “related party” includes our affiliates, associates, directors, officers and principal shareholders, as well as affiliates of our directors, officers and principal shareholders, but does not include our consolidated subsidiaries.  Conflicts of interest are inherent in transactions with related parties.  See Note 11 to our audited consolidated financial statements for all of the information that we must make publicly available in Mexico regarding related party transactions.
 
 

 
All related party transactions we engage in are submitted in advance to the Audit and Corporate Practices Committee, and are subject to thorough evaluation, which results in the determination of the terms and conditions under which the transactions shall be carried out.  During this evaluation period, the Audit and Corporate Practices Committee makes relevant market research and obtains quotations from several different non-related parties that render the exact or similar services to those intended to be performed by the related party with which the transaction is intended to be conducted.  Once the research is concluded, the Audit and Corporate Practices Committee prepares the guidelines that must be observed in establishing the terms of the related party transactions and submits its evaluation to the Board of Directors and to our shareholders.  This procedure enables the Company to obtain objective information as to competitive market prices and conditions and, therefore, guarantees that the transactions entered with related parties are at all times entered into on an arm’s-length basis.

Principal Transactions and Arrangements with Affiliates and Related Parties of Our Directors, Officers and Principal Shareholders Effective During 2011

Leases.  In 2001, we entered into a lease for office space with Xtra Inmuebles, S.A. de C.V., an entity owned and controlled by our controlling shareholder.  During 2011, we maintained our lease for office space with Xtra Inmuebles and do not have plans to terminate this agreement.  In 2011, we expensed Ps. 5.5 million as compared to Ps. 5.2 million in 2010 and Ps. 4.3 million in 2009 with respect to this lease.  In 2008, we entered into a lease for storage space with Xtra Inmuebles, S.A. de C.V., a company that is also owned and controlled by our controlling shareholder.  In 2011, we expensed Ps. 1.5 million compared to Ps. 0.4 million in 2010 and Ps. 1.2 million in 2009. We believe that both leases were entered into in the ordinary course of business, were made on an arm’s-length basis and are on terms no less favorable than those that could have been obtained from unaffiliated third parties.
 
Services.  In 2002, one of our subsidiaries, Servicios Corporativos Casa Saba, S.A. de C.V., entered into an air transport service agreement with Aero Xtra, S.A. de C.V. an entity indirectly owned and controlled by our controlling shareholder.  Services pursuant to this agreement were also provided to us in 2009, 2010 and 2011.  During 2011, we expensed a total amount of  Ps. 28.0 million as compared to Ps. 18.0 million in 2010 and Ps. 17.7 million in 2009 related to the services rendered by Aero Xtra, S.A. de C.V.  This contract was entered into in the ordinary course of business, and was made on an arm’s-length basis on terms no less favorable than those that could have been obtained from unaffiliated third parties.
 
As of December 31, 2009, 2010 and 2011, the receivable balances from Aero Xtra, S.A. de C.V. were Ps. 4.5 million, Ps. 0 and Ps. 2.0 million, respectively.  For Xtra Inmuebles, S.A. de C.V., they were Ps. 0, Ps. 0 and Ps. 11.6 million, respectively.  The receivable balance from Aero Xtra, S.A. de C.V. and Xtra Inmuebles, S.A. de C.V. represented prepaid flight services and the leasing of real estate, respectively.  In addition, we had receivable balances from Tenedora Farmacéutica de México, S.A. de C.V. in the amount of Ps. 9.6 million in 2009, 2010 and in 2011.  The account receivable balances from Tenedora de Farmacias Morelianas, S.A. de C.V. were Ps. 18.6 million in 2009, Ps. 20.6 million in 2010 and and Ps. 20.6 million in 2011.  In 2011, our accounts receivable balances from Grupo Xtra were Ps. 10.5 million compared to Ps. 11.6 million in 2010 and Ps. 8.6 million in 2009.  The receivables balances from Sports Clinic totaled Ps. 0 in 2011 compared to Ps. 6.7 in 2010 and Ps. 0 in 2009.  As of December 31, 2009, 2010 and 2011, the receivable balances from Comercializadora Lundedeq, S.A. de C.V. were Ps. 0, Ps. 0.1 million and Ps. 0, respectively while those from Farmaprice, S.A. de C.V. were Ps. 0 in 2009, Ps. 0.1 million in 2010 and Ps. 0 in 2011.  Finally, the receivable balances from Adminstradora Inmas, S.A. de C.V. were Ps. 0 in 2009, Ps. 0.3 million in 2010 and Ps. 0 in 2011.
 
As of December 31, 2009, 2010 and 2011, the accounts payable balances with Administradora Inmas, S.A. de C.V. were Ps. 0.4 million, Ps. 0 and Ps. 0 million, respectively.
 
See Note 11