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Animalcare Group PLC  -  ANCR   

Proposed Acquisition of Ecuphar NV and Placing

Released 07:00 23-Jun-2017

RNS Number : 9589I
Animalcare Group PLC
23 June 2017
 



THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION. THIS ANNOUNCEMENT (INCLUDING THE APPENDICES) AND THE INFORMATION CONTAINED HEREIN IS RESTRICTED AND IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, IN, INTO OR FROM THE UNITED STATES, AUSTRALIA, CANADA, JAPAN, THE REPUBLIC OF SOUTH AFRICA OR ANY OTHER JURISDICTION IN WHICH SUCH RELEASE, PUBLICATION OR DISTRIBUTION WOULD BE UNLAWFUL.

 

For immediate release

 

23 June 2017

 

Animalcare Group plc

("Animalcare", the "Company" or, together with its Subsidiaries, the "Group")

 

Proposed acquisition of Ecuphar NV

Approval of waiver of obligations under Rule 9 of the Takeover Code

Proposed primary placing of approximately 8.6 million New Placing Shares

Proposed secondary placing of up to approximately 0.8 million Sale Shares

Admission of the Enlarged Issued Share Capital to trading on AIM

and

Notice of General Meeting

 

Animalcare Group plc (AIM: ANCR), a leading supplier of generic veterinary medicines and identification products and services to the companion animal veterinary markets, announces that it has today entered into a conditional share purchase agreement to acquire the entire issued share capital of Ecuphar NV ("Ecuphar", together with Animalcare, the "Enlarged Group"), a European animal health company focused on the development and sale of veterinary pharmaceutical products that provide significant benefits to animal health in the companion animal, equine and production animal markets (the "Acquisition").

 

The consideration for the Acquisition is structured on a consolidated Animalcare/Ecuphar Enlarged Issued Share Capital ratio of 37:63 (after taking into account dilution from certain Animalcare incentive arrangements), and will be satisfied through the issue of Consideration Shares and cash to the Ecuphar vendors. The cash component of the consideration will be satisfied in part through a placing of approximately 8.6 million New Placing Shares (representing approximately 40.4 per cent. of the Existing Issued Share Capital) to raise gross proceeds of not less than £30.0 million, with the balance (of £4.0 million) to be funded by existing cash held by the Group. The number of Consideration Shares to be issued to the vendors of Ecuphar, will be determined following completion of the Placing (and by reference to the exact number of New Placing Shares issued in the Placing).

 

The Acquisition constitutes a reverse takeover for the purposes of Rule 14 of the AIM Rules for Companies and, as such, is conditional, inter alia, upon Shareholder approval.

 

In addition, certain directors and employees of the Company intend to participate in the Placing in order to sell up to approximately 0.8 million Existing Ordinary Shares (in aggregate), and a proposed director of the Company, Edwin Torr, a former executive director of Dechra Pharmaceuticals PLC, intends to participate in the Placing by purchasing approximately 85,000 Placing Shares.

 

Highlights

 

Transformational Acquisition

·     Proposed acquisition of the entire issued share capital of Ecuphar, a European animal health company focused on the development and sale of veterinary pharmaceutical products that provide significant benefits to animal health in the companion animal, equine and production animal markets.

·     The consideration for the Acquisition is structured on a consolidated Animalcare/Ecuphar Enlarged Issued Share Capital ratio of 37:63 (after taking into account dilution from certain Animalcare incentive arrangements), and will be satisfied through the issue of Consideration Shares and cash to the Ecuphar vendors.

·     Ecuphar is led by founder and Chief Executive Officer, Chris Cardon, supported by a strong and highly experienced management team.

·     The Existing Directors believe that Animalcare and Ecuphar are highly complementary businesses, in particular with regard to their geographic markets, product portfolios and new product development pipelines, and the Existing Directors therefore expect the Acquisition to provide enhanced scale and capabilities. As such, the Existing Directors consider the Acquisition to provide an opportunity to create a specialist pan-European animal health company that gives the Enlarged Group leadership in its chosen niches that are supported by attractive and complementary market drivers.

·     The Enlarged Group would comprise direct sales organisations in seven countries (currently one for Animalcare); export to approximately 50 markets (currently 12, with agreements signed for a further 14, for Animalcare) and have approximately 98 sales representatives (currently 22 for Animalcare) and 28 agents (currently none for Animalcare).

·     For the year ended 31 December 2016, Ecuphar recorded revenue of £68.4 million and Underlying EBITDA of £8.9 million. Ecuphar has existing credit facilities with KBC Bank NV, BNP Paribas Fortis NV, Belfius Bank NV and ING België NV. These facilities will continue to be available to Ecuphar after Completion.

·     The Acquisition complements, broadens and diversifies Animalcare's existing portfolio of licenced veterinary pharmaceutical products, in particular, generic medicines for the treatment of companion animals. The Enlarged Group will own 50 licenced drugs, eight vaccines and over 100 care and nutraceutical products (currently 21 licenced drugs for Animalcare).

·     The Acquisition materially enhances Animalcare's portfolio of intellectual property and trademarks, which will help to protect the Enlarged Group's overall market position. The Enlarged Group will have three unique veterinary products (other than one competing ethamsylate product in France and currently none for Animalcare); ten patents (currently none for Animalcare) and approximately 300 trademarks (currently 42 for Animalcare).

·     The Existing Directors believe that the Enlarged Group will represent a growing, highly cash generative dividend paying company with a solid pipeline of new products.

·     The Existing Directors believe that, taking into account the business and prospects of the Enlarged Group, the Acquisition will be enhancing to the Board's expectations of underlying earnings for the Existing Group in the first full financial year of ownership.

·     With effect from Admission, Chris Cardon (proposed Chief Executive Officer), Walter Beyers (proposed Chief Financial Officer), Jan Boone (proposed Non-executive Chairman), Edwin Torr (proposed senior independent Non-executive Director) and Marc Coucke (proposed Non-executive Director) will be appointed as Directors of the Company. Iain Menneer will remain as a Director following Admission with his role within the Group changing to Chief Operating Officer. James Lambert will step down as Chairman of the Company but will remain on the Board as a Non-executive Director. Nick Downshire will remain on the Board as a Non-executive Director. Chris Brewster will resign as a Director but will remain a critical and committed member of the senior management team of the Enlarged Group as Country Manager of the Enlarged Group's UK business. Raymond Harding will resign as a Director.

·     The Acquisition constitutes a reverse takeover for the purposes of Rule 14 of the AIM Rules for Companies and, as such, is conditional, inter alia, upon Shareholder approval, which will be sought at a general meeting of the Company to be held at 10.00 a.m. on 12 July 2017 at the offices of Squire Patton Boggs (UK) LLP at 7 Devonshire Square, London, EC2M 4YH.

·     In accordance with Rule 14 of the AIM Rules for Companies, trading in the Existing Ordinary Shares will be suspended from 7.30 a.m. today, 23 June 2017, pending publication of the Admission Document. The Admission Document, which will include a circular and a notice convening the General Meeting, is expected to be published as soon as possible after the Bookbuild (see details below), at which point it is expected that the suspension of trading in the Existing Ordinary Shares will cease the following business day. A copy of the Admission Document will be available on the Company's website at www.animalcaregroup.co.uk upon publication. The Company will provide a further update in due course.

The Placing and the Bookbuild

·     The Company is proposing to raise gross proceeds of not less than £30.0 million by the issue of approximately 8.6 million New Placing Shares, which represents approximately 40.4 per cent. of the Existing Issued Share Capital.

·     The net proceeds of the Placing receivable by the Company will be applied in full to paying a substantial proportion of the cash component of the Acquisition consideration.

·     In addition, the Selling Shareholders intend to sell up to approximately 0.8 million Sale Shares in the Placing. In the case of each of the Selling Shareholders except Lord Nick Downshire, the Sale Shares which may be sold in the Placing will be obtained from the exercise of certain existing Options or the exchange of shares in Animalcare Limited by the relevant individuals.  These Option Shares are expected to represent 6.5 per cent. of the Existing Issued Share Capital

·     Edwin Torr, a proposed Director and former executive of Dechra, is intending to purchase approximately 85,000 Placing Shares in the Placing to show his support for the Acquisition and the Enlarged Group.

·     The Placing will be conducted through an accelerated bookbuilding process (the "Bookbuild"), which will be launched immediately following this Announcement, in accordance with the terms and conditions set out in Appendix III to this Announcement. The Placing Shares are not being made available to the public. It is envisaged that the Bookbuild will be closed no later than 4.30 p.m. today, 23 June 2017. Details of the number of New Placing Shares, the number of Sale Shares, the price per share of the Placing Shares (the "Placing Price") and the gross proceeds of the Placing will be announced as soon as practicable after the closing of the Bookbuild. The Placing will not be underwritten.

·     The Existing Directors believe that the increase in liquidity and free float of the Ordinary Shares of the Enlarged Group following the Placing will be beneficial to the Enlarged Group and to Shareholders as a whole.

·     The Acquisition and Placing are conditional, inter alia, upon the Share Purchase Agreement not having been terminated and having become unconditional, the Placing and Admission Agreement having become unconditional and not having been terminated, the Company raising gross proceeds of not less than £30.0 million pursuant to the Placing of New Placing Shares and upon approval of Resolutions 1-6 by Shareholders at the General Meeting. In total, the Company has received letters of intent and irrevocable undertakings to vote in favour of the Resolutions (other than the Whitewash Resolution) in respect of beneficial holdings totalling 4,231,653 Ordinary Shares, representing, in aggregate, approximately 19.9 per cent. of the Existing Issued Share Capital.

·     Application will be made for the Enlarged Issued Share Capital, including the Existing Issued Share Capital, the New Placing Shares, the Consideration Shares and the Option Shares, to be admitted to trading on AIM. It is expected that Admission will become effective and that dealings in the Enlarged Issued Share Capital will commence at 8.00 a.m. on 13 July 2017, and that the Acquisition will complete at the same time. The ISIN number of the Ordinary Shares is, and from Admission will continue to be, GB0032350695, and the TIDM will remain as ANCR.

·     Rothschild is acting as Financial Adviser to the Company, Panmure Gordon is acting as Nominated Adviser, Lead Bookrunner and Broker to the Company in connection with the Placing and Admission, and Degroof Petercam is acting as Joint Bookrunner to the Company in connection with the Placing of the New Placing Shares.

 

Rule 9 Waiver

·     Ecuphar is majority owned by Ecuphar Invest NV, an entity controlled by Chris Cardon, and Alychlo NV, the investment vehicle of Marc Coucke, a highly successful entrepreneur and investor having founded Omega Pharma. These entities hold, in aggregate, 96.4% of the shares in Ecuphar.

·     The Panel has confirmed that it considers Ecuphar Invest NV, Alychlo NV and Jaak Cardon (the son of Chris Cardon and a minority shareholder in Ecuphar) to be acting in concert for the purposes of the Takeover Code (together, the "Concert Party").

·     Following completion of the Acquisition, this Concert Party (by virtue of the Consideration Shares to be issued to Ecuphar Invest NV, Alychlo NV and Jaak Cardon pursuant to the Acquisition) is expected to control approximately 46.3 per cent. of the voting rights of the Enlarged Group.

·     The Panel has agreed to grant a waiver of Rule 9 of the Takeover Code (which would otherwise require the Concert Party to make a general offer to acquire the balance of Ordinary Shares in issue immediately following the Acquisition), subject to the Whitewash Resolution being passed by the Independent Shareholders, being the Shareholders other than the Selling Shareholders and any person acting in concert with them who holds Ordinary Shares, (on a poll) at the General Meeting.

·     In total, the Company has received letters of intent and irrevocable undertakings to vote in favour of the Whitewash Resolution, on which only the Independent Shareholders are entitled to vote, in respect of beneficial holdings totalling 2,739,075 Ordinary Shares, representing, in aggregate, approximately 13.9 per cent. of the Existing Issued Share Capital entitled to vote on that Resolution.

·     Further details of the Waiver Resolution are set out below and in the Admission Document to be made available shortly after the conclusion of the Bookbuild.

 

Commenting on the Acquisition and the Placing, Iain Menneer, Chief Executive Officer of Animalcare said: "We are very pleased to present to shareholders this highly complementary acquisition which will provide enhanced scale and capabilities for the Group and create a pan-European animal health platform from which to accelerate growth. The acquisition will be truly transformational: it will expand our direct sales operation to cover seven countries and our international reach into 50 export markets, as well as greatly increasing the depth and diversity of our licensed veterinary medicines product range. As an enlarged Group we expect to deliver a growing, highly cash generative, dividend paying company with a solid pipeline of new products and multiple cross-selling opportunities."

 

This summary should be read in conjunction with the full text of this Announcement. Further details of the Acquisition and Placing are set out in Appendix I to this announcement. You should read and understand the information provided in the "Important Notices" section of this Announcement. Unless otherwise defined, defined terms have the same meanings as those given in Appendix IV to this Announcement.

 

The Market Abuse Regulation ("MAR") became effective from 3 July 2016. Market Soundings, as defined in MAR, were taken in respect of the proposed Placing with the result that certain persons became aware of inside information, as permitted by MAR. That inside information is set out in this announcement and has been disclosed as soon as possible in accordance with paragraph 7 of article 17 of MAR. Therefore, those persons that received inside information in a Market Sounding are no longer in possession of inside information relating to the Company and its securities.

 

Enquiries:

 

Animalcare Group plc

 

 

Iain Menneer, Chief Executive Officer

Tel: 01904 487 687

Chris Brewster, Chief Financial Officer

 

 

 

Panmure Gordon (UK) Ltd (Nominated Adviser, Lead Bookrunner and Broker)

Tel: 020 7886 2500

Corporate Finance

 

Freddy Crossley / Peter Steel / Duncan Monteith

 

Corporate Broking

 

James Stearns

 

 

 

Rothschild (Financial Adviser)

Tel: 0113 200 1900

Stephen Griffiths

 

Tim Day

 

 

 

Bank Degroof Petercam NV (Joint Bookrunner)

Tel: +32 2229 6659

Sales

 

Gert Potvlieghe

 

 

 

Walbrook PR Ltd

Tel: 020 7933 8780 or animalcare@walbrookpr.com

Paul McManus

Mob: 07980 541 893

Lianne Cawthorne

Mob: 07584 391 303

 

About Animalcare

Animalcare is a leading veterinary sales and marketing company based in York with 67 employees including a sales team of 22 selling to veterinary practices around the United Kingdom.

 

Animalcare has developed a range of generic veterinary medicines and animal identification products primarily to companion animal veterinary markets.  

 

Animalcare operates in three product areas:

·     Licensed Veterinary Medicines 

·     Animal Welfare Products

·     Companion Animal Identification

For more information see: www.animalcaregroup.co.uk

 

IMPORTANT NOTICES

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

This announcement does not constitute, or form part of, a prospectus relating to the Company, nor does it constitute or contain any invitation or offer to any person, or any public offer, to subscribe for, purchase or otherwise acquire any shares in the Company or advise persons to do so in any jurisdiction.

The content of this announcement has not been approved by an authorised person within the meaning of the Financial Services and Markets Act 2000 ("FSMA"). This announcement has been issued by and is the sole responsibility of the Company. The information in this announcement is subject to change.

This announcement is not an offer of securities for sale into the United States. The securities referred to herein have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and may not be offered or sold, directly or indirectly, in or into the United States, except pursuant to an applicable exemption from registration. No public offering of securities is being made in the United States. This announcement is not for release, publication or distribution, directly or indirectly, in or into the United States, Australia, Canada, Japan, the Republic of South Africa or any jurisdiction where to do so might constitute a violation of local securities laws or regulations (a "Prohibited Jurisdiction"). This announcement and the information contained herein are not for release, publication or distribution, directly or indirectly, to persons in a Prohibited Jurisdiction unless permitted pursuant to an exemption under the relevant local law or regulation in any such jurisdiction.

This announcement is directed only at persons whose ordinary activities involve them in acquiring, holding, managing and disposing of investments (as principal or agent) for the purposes of their business and who have professional experience in matters relating to investments and: (i) if in a member state of the European Economic Area, are qualified investors within the meaning of article 2(1)(e) of the Prospectus Directive ("Qualified Investors"); and (ii) if in the United Kingdom, fall within: (a) article 19(5) (investment professionals) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "Order"); (b) article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of the Order; or (c) if in Belgium, qualified investors within the meaning of article 10 of the act of 16 June 2006 on public offerings; and/or (d) any other person to whom it may lawfully be communicated without any obligation to issue a prospectus approved by competent regulators (all such persons together being referred to as "Relevant Persons"). The minimum consideration to be provided by a Placee for their Placing Participation pursuant to the Placing is EUR100,000. This announcement must not be acted on or relied on by persons who are not Relevant Persons. Any investment or investment activity to which this announcement relates is available only to Relevant Persons and will be engaged in only with Relevant Persons.

Panmure Gordon (UK) Limited ("Panmure Gordon") is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Panmure Gordon is acting as nominated adviser, Lead Bookrunner and Broker exclusively for the Company and no one else in connection with the contents of this announcement and will not regard any other person (whether or not a recipient of this announcement) as its client in relation to the contents of this announcement nor will it be responsible to anyone other than the Company for providing the protections afforded to its clients or for providing advice in relation to the contents of this announcement. Apart from the responsibilities and liabilities, if any, which may be imposed on Panmure Gordon by FSMA or the regulatory regime established thereunder, Panmure Gordon accepts no responsibility whatsoever, and makes no representation or warranty, express or implied, for the contents of this announcement including its accuracy, completeness or verification or for any other statement made or purported to be made by it, or on behalf of it, the Company or any other person, in connection with the Company and the contents of this announcement, whether as to the past or the future. Panmure Gordon accordingly disclaims all and any liability whatsoever, whether arising in tort, contract or otherwise (save as referred to above), which it might otherwise have in respect of the contents of this announcement or any such statement.

Degroof Petercam is acting as Joint Bookrunner exclusively for the Company in the framework of the Placing of the New Placing Shares and no one else in connection with the contents of this announcement and will not regard any other person (whether or not a recipient of this announcement) as its client in relation to the contents of this announcement nor will it be responsible to anyone other than the Company. Degroof Petercam accepts no responsibility whatsoever, and makes no representation or warranty, express or implied, for the contents of this announcement including its accuracy, completeness or verification or for any other statement made or purported to be made by it, or on behalf of it, the Company or any other person, in connection with the Company and the contents of this announcement, whether as to the past or the future. Degroof Petercam accordingly disclaims all and any liability whatsoever, whether arising in tort, contract or otherwise (save as referred to above), which it might otherwise have in respect of the contents of this announcement or any such statement.

The Joint Bookrunners are acting only for the Company in connection with the matters described in this announcement and are not acting for or advising any other person, or treating any other person as their client, in relation thereto and will not be responsible for providing the regulatory protection afforded to clients of the Joint Bookrunners or advice to any other person in relation to the matters contained herein.  Such persons should seek their own independent legal, investment and tax advice as they see fit.

In connection with the Placing, the Joint Bookrunners and any of their respective affiliates, acting as investors for their own accounts, may subscribe for or purchase ordinary shares in the Company ("Ordinary Shares") and, in that capacity may retain, purchase, sell, offer to sell or otherwise deal for their own accounts in such Ordinary Shares and other securities of the Company or related investments in connection with the Placing or otherwise. Accordingly, references to the Ordinary Shares being offered, subscribed, acquired, placed or otherwise dealt in should be read as including any offer to, or subscription, acquisition, placing or dealing by a Joint Bookrunner and any of its respective affiliates acting as investors for their own accounts. In addition, a Joint Bookrunner or its respective affiliates may enter into financing arrangements and swaps in connection with which it or its affiliates may from time to time acquire, hold or dispose of Ordinary Shares. The Joint Bookrunners have no intention to disclose the extent of any such investment or transactions otherwise than in accordance with any legal or regulatory obligations to do so.

N M Rothschild & Sons Limited ("Rothschild"), which is authorised and regulated by the Financial Conduct Authority in the United Kingdom, is acting for Animalcare Group plc and no one else in relation to the Acquisition and Placing and will not be responsible to anyone other than Animalcare Group plc for providing the protections afforded to clients of Rothschild nor for providing advice in relation to the Acquisition, Placing and the contents of this announcement. The information provided in this announcement is entirely based on information provided by Animalcare Group plc and has not been independently verified by Rothschild. Accordingly, Rothschild does not accept any responsibility or liability whatsoever, and makes no representations or warranty, express or implied, for the contents of this announcement. Rothschild disclaims, to the fullest extent permitted by law all and any responsibility and liability howsoever arising which it might otherwise have in respect of this announcement

FORWARD-LOOKING STATEMENTS

This announcement includes "forward-looking statements" which include all statements other than statements of historical facts, including, without limitation, those regarding the Company's business strategy, plans and objectives of management for future operations, or any statements proceeded by, followed by or that include the words "targets", "believes", "expects", "aims", "intends", "will", "may", "anticipates", "would", "could" or similar expressions or negatives thereof. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond the Company's control that could cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding the Company's present and future business strategies and the environment in which the Company will operate in the future. No undue reliance should be placed upon forward-looking statements. These forward looking statements speak only as at the date of this announcement. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based, unless required to do so by applicable law or the AIM Rules for Companies.

 

 

APPENDIX I - FURTHER DETAILS OF THE ACQUISITION AND PLACING

 

Proposed acquisition of Ecuphar NV

Approval of waiver of obligations under Rule 9 of the Takeover Code

Proposed primary placing of approximately 8.6 million New Placing Shares

Proposed secondary placing of up to approximately 0.8 million Sale Shares

Admission of the Enlarged Issued Share Capital to trading on AIM

and

Notice of General Meeting

 

1. Introduction

Animalcare announces that it has entered into the conditional Share Purchase Agreement to acquire the entire issued share capital of Ecuphar from the Vendors. Ecuphar is a European animal health company focused on the development and sale of veterinary pharmaceutical products that provide significant benefits to animal health in the companion animal, equine and production animal markets. Ecuphar is led by founder and Chief Executive Officer, Chris Cardon, together with a strong and highly experienced management team. The Existing Directors believe that Animalcare and Ecuphar are highly complementary businesses, in particular with regard to their geographic markets, product portfolios and new product development pipelines and the Existing Directors therefore expect the Acquisition to provide enhanced scale and capabilities. On completion of the Acquisition, the senior management teams of Animalcare and Ecuphar will be integrated to continue to operate the Enlarged Group, with Chris Cardon assuming the role of Chief Executive Officer and Iain Menneer, current Chief Executive Officer of Animalcare, becoming the Chief Operating Officer. For further details on the Ecuphar Group, see paragraph 3 of Appendix I in this Announcement.

 

The consideration for the Acquisition is structured on a consolidated Animalcare/Ecuphar Enlarged Issued Share Capital ratio of 37:63 (after taking into account dilution from certain Animalcare incentive arrangements), and will be satisfied through the issue of Consideration Shares and cash to the Vendors. The cash component of the consideration will be satisfied in part through a placing of approximately 8.6 million New Placing Shares (representing approximately 40.4 per cent. of the Existing Issued Share Capital) to raise gross proceeds of not less than £30.0 million, with the balance (of £4.0 million) to be funded by existing cash held by the Group. The number of Consideration Shares to be issued to the vendors of Ecuphar will be determined following completion of the Placing (and by reference to the exact number of New Placing Shares issued in the Placing). In addition, certain directors and employees of the Company intend to participate in the Placing in order to sell up to approximately 0.8 million Existing Ordinary Shares (in aggregate), and a proposed director of the Company, Edwin Torr, a former executive of Dechra Pharmaceuticals PLC, intends to participate in the Placing by purchasing approximately 85,000 Placing Shares.

The Existing Directors believe that the increase in liquidity and free float of the Ordinary Shares of the Enlarged Group following the Placing will be beneficial to the Enlarged Group and to Shareholders as a whole.

 

For further details on the terms of the Acquisition and the Placing, see paragraphs 7 and 8 of Appendix I respectively in this Announcement.

 

As further detailed in paragraph 9 of Appendix I in this Announcement, the Panel has confirmed that it considers Ecuphar Invest NV, Alychlo NV and Jaak Cardon (the son of Chris Cardon and a minority shareholder in Ecuphar) to be acting in concert for the purposes of the Takeover Code. Following completion of the Acquisition, this Concert Party (by virtue of the Consideration Shares to be issued to Ecuphar Invest NV, Alychlo NV and Jaak Cardon pursuant to the Acquisition) is expected to control approximately 46.3 per cent. of the voting rights of the Company. The Panel has agreed to grant a waiver of Rule 9 of the Takeover Code (which would otherwise require the Concert Party to make a general offer to acquire the balance of Ordinary Shares in issue immediately following the Acquisition), subject to the Whitewash Resolution being passed by the Independent Shareholders (on a poll) at the General Meeting. Your attention is drawn to paragraph 9 of Appendix I in this Announcement, which contains further details on the Rule 9 Waiver.

 

The Acquisition constitutes a reverse takeover under the AIM Rules for Companies, requiring the approval of a majority of all of the Shareholders who vote. It is also conditional upon, inter alia, the passing of other resolutions relating to the issue of new Ordinary Shares in connection with the Acquisition and the Placing. These approvals will be sought at the General Meeting to be held at Squire Patton Boggs (UK) LLP at 7 Devonshire Square, London EC2M 4YH at 10.00 a.m. on 12 July 2017, notice of which will be set out in the Admission Document. Voting on all of the Resolutions will be by way of a poll.

 

The Company has received letters of intent and irrevocable undertakings to vote in favour of the Resolutions to be proposed at the General Meeting in respect of, in the case of all Resolutions other than the Whitewash Resolution, 4,231,653 Existing Ordinary Shares, representing, in aggregate, approximately 19.9 per cent. of the Existing Issued Share Capital and, in respect of the Whitewash Resolution, on which only the Independent Shareholders are entitled to vote, 2,739,075 Existing Ordinary Shares, representing, in aggregate, approximately 13.9 per cent. of the Existing Issued Share Capital entitled to vote on that Resolution.

 

2. Background to and reasons for the Acquisition

The Existing Directors believe that Animalcare and Ecuphar are highly complementary businesses in particular across products, product development and geographies. As such, the Existing Directors consider the Acquisition to provide an opportunity to create a specialist pan-European animal health company that gives the Enlarged Group leadership in its chosen niches that are supported by attractive and complementary market drivers. The Existing Directors believe that the Enlarged Group will represent a fast growing, highly cash generative and dividend paying company with a solid pipeline of new products.

 

The Existing Directors believe that there is a strong strategic rationale for the Acquisition for the following reasons.

 

Position of critical scale within the European animal health market

The Acquisition materially strengthens the position of Animalcare and Ecuphar in the supply and distribution of companion and food producing animal health products in Europe. This market is large and growing (estimated size of US $8 billion with 5 per cent. historic CAGR). The Directors believe the Enlarged Group's focus on niche, highly specialist therapeutic areas together with its increased scale makes it well positioned to capitalise on the underlying growth in the wider animal health market.

 

Creation of a pan-European platform

The Acquisition creates a pan-European animal health platform, which significantly enhances Animalcare's geographic footprint and sales, marketing and distribution network. Specifically, the Enlarged Group would comprise direct sales organisations in seven countries (currently one for Animalcare); export to approximately 50 markets (currently 12, with agreements signed for a further 14, for Animalcare) and have approximately 98 sales representatives (currently 22 for Animalcare) and 28 agents (currently none for Animalcare). Ecuphar's extensive European presence and established distribution network provides direct access to new markets for Animalcare and its products, and the combination provides the Enlarged Group with a scale platform from which to target new, significant commercial opportunities and attract new distribution partners.

 

Broader, more diversified product portfolio

The Acquisition complements, broadens and diversifies Animalcare's existing portfolio of licenced veterinary pharmaceutical products, in particular generic medicines for the treatment of companion animals. In addition, the Acquisition enlarges Animalcare's addressable market, both by diversifying Animalcare's areas of therapeutic focus within companion animals and adding new product capabilities in food producing animal segments. Specifically, the Enlarged Group will own 50 licenced drugs, eight vaccines and over 100 care and nutraceutical products (currently 21 licenced drugs for Animalcare). This will enable the Enlarged Group to offer its customers a broader range of products and services.

 

Enhanced intellectual property portfolio and new product development pipeline

The Acquisition materially enhances Animalcare's portfolio of intellectual property and trademarks, which will help to protect the Enlarged Group's overall market position. The Enlarged Group will have three unique veterinary products (other than one competing ethamsylate product in France and currently none for Animalcare); ten patents (currently none for Animalcare) and approximately 300 trademarks (currently 42 for Animalcare).

 

Together, the Enlarged Group will have a broader and more diversified new product development pipeline, supported by the greater cash generation of the Enlarged Group. The Existing Directors believe that this enhances the likelihood of successful new product launches and, given the increased scale and network of the Enlarged Group, also increases the potential revenue generation per product once launched versus a launch by Animalcare or Ecuphar on a standalone basis. Specifically, Animalcare currently has 18 projects in its pipeline and Ecuphar has 11 new product development projects in its pipeline. The combined research and development knowledge and expertise of the Enlarged Group may also lead to and accelerate additional product development opportunities.

 

The combined new product development pipeline of the Enlarged Group is as follows:

http://www.rns-pdf.londonstockexchange.com/rns/9589I_-2017-6-23.pdf

 

Highly experienced management team

The Existing Directors believe the experienced and capable management structure at Animalcare will be significantly enhanced by the high quality leadership of Ecuphar's management team. The Enlarged Group's management team will be led by Ecuphar current Chief Executive Officer Chris Cardon, who will join as Chief Executive Officer of the Enlarged Group. Animalcare's current Chief Executive Officer, Iain Menneer, will assume the role of Chief Operating Officer of the Enlarged Group. The Existing Directors and Proposed Directors believe that the Enlarged Group will have a strong management team and organisation, which is positioned to deliver shareholder value.

 

The Enlarged Group's Management team will also have significant M&A experience. The Directors believe that this will support an effective integration process and provide the Enlarged Group with the experience and capabilities to play a shareholder value-creating role in any industry consolidation, within what is considered by the Existing Directors to be a fragmented market.

 

Material opportunities for synergy creation

The Existing Directors believe the Acquisition will create significant synergy opportunities from which to drive shareholder value, including from:

 

•      cross-selling the Enlarged Group's broader range of products and services to Animalcare's and Ecuphar's existing customers;

•      bringing in-house the respective third party distribution of products from Animalcare to customers in Europe and from Ecuphar to customers in the UK;

•    gaining significant operating efficiencies by leveraging the Enlarged Group's substantial supply chain, distribution, sales and marketing network;

•      optimisation of the Enlarged Group's research and development function; and

•      the enhanced brand and market position of the Enlarged Group, which is likely to generate more customer interest.

 

3. Information on Ecuphar

Introduction

Ecuphar is a European animal health company focused on the development and sale of veterinary pharmaceutical products that provide significant benefits to animal health in the companion animal, equine and production animal markets. Ecuphar is headquartered in Belgium and is also directly present in the Netherlands, Germany, Spain, Italy and Portugal through its own sales, marketing and distribution organisations. In addition, Ecuphar supplies its veterinary products to partners in 37 countries and operates a wholesale business, Medini, which is focused on the sale of veterinary pharmaceuticals, supplies and instruments in the Belgian market.

 

Since its foundation, Ecuphar has developed a strong track record of high growth and cash generation. For the year ended 31 December 2016, Ecuphar generated revenue of £68.36 million and Underlying EBITDA of £8.91 million (year ended 31 December 2015: £47.10 million and £4.82 million respectively). This growth is attributable to a combination of strong organic growth driven by the launch of new products and distributions, and the full-year impact of the 2015 acquisition of the animal health business of Laboratorios del Dr. Esteve, S.A. and other entities of the same group, an international pharmaceutical and chemical group, and the resulting expansion into the Spanish, Italian and Portuguese animal health markets.

 

Ecuphar has continuously invested in the future of the business and has a robust new product development pipeline focused on developing innovative licenced veterinary drugs and extending the lifecycle of existing products. In 2016, Ecuphar spent £2.8 million on new product development projects. Ecuphar's product development pipeline is currently composed of eleven new product development projects in various stages of development, which are expected to be launched and commercialised over the coming years.

 

In addition to growing its business through developing and launching new products, Ecuphar has over the past 15 years completed more than 15 asset and company acquisitions to strengthen its product portfolio and enter new geographical markets. Acquisitions are a key focus of Ecuphar's strategy and Ecuphar strongly believes that acquiring complementary veterinary businesses and products can lead to important commercial synergies, including through the cross-selling of Ecuphar's products through the acquiree's sales channels and vice versa.

 

Ecuphar is led by founder and Chief Executive Officer, Chris Cardon, together with a strong and highly experienced management team, which includes Chief Financial Officer Walter Beyers, Chief Strategy Officer, Jeroen Bastijns and Chief Commercial Officer and General Manager South Europe, Emilio Gil Ventura.

 

Background and history

Founded in 2001 in Bruges, Belgium, as Chris Cardon NV and renamed Cardon Pharmaceuticals in 2002 and subsequently Ecuphar in 2006, Ecuphar has grown through a successful focus on product portfolio development. Starting with the development and sale of OTC veterinary products such as Orozyme, for the dental health of companion animals, Ecuphar now has a portfolio of over 300 products covering pharmaceuticals, vaccines, and care and nutraceutical products which are successfully marketed to the European and wider international market, as well as over 250 registered trademarks, 10 patents and three veterinary products considered by Ecuphar to be unique (with the exception of one competing ethamsylate product in France). This has been achieved through in-house product development, acquired products, licensed products (through strategic alliances such as those with Bayer Animal Health and Elanco) and distribution partnerships (such as those with Orion Pharmaceuticals and Eco Animal Health).

 

The chart below shows the revenue evolution of Ecuphar (in £ million, at a constant exchange rate) since its foundation and highlights certain of the key developments in its corporate history.

http://www.rns-pdf.londonstockexchange.com/rns/9589I_1-2017-6-23.pdf 

 

Ecuphar has successfully grown its platform during this time via acquisitions to develop a direct commercial presence in six European countries. Initially, a series of acquisitions between 2005 and 2008 was primarily aimed at expanding its position in the Belgian veterinary market and establishing a foothold in the Netherlands. Acquisitions during this period include among others:

 

2005 Clinagel Vet: the first veterinary pharmaceutical (Belgian anti-bacterial eye gel for companion animals) acquired.

 

Vetred: a Netherlands based specialist distributor of veterinary orthopaedic implants.

 

2006 Ecuphar: a Belgium based animal health company with pharmaceutical products for both companion and production animals. This acquisition led to a change of name from Cardon Pharmaceuticals to Ecuphar.

 

Medini: a Belgium based veterinary wholesaler and distributor.

 

Instrulife: a Belgium based specialist in veterinary instruments.

 

2008 Ace Veterinary Products: a Netherlands based specialist in pharmaceuticals for companion animals and horses.

 

Equipharma: a Belgium based specialist in equine nutraceuticals.

 

Ornis: a France based specialist in pigeon pharmaceuticals.

 

During 2009 and 2011, Ecuphar expanded further abroad with the acquisitions of Nutri-Science in Ireland and the Riemser Animal Health business in Germany:

 

2009 Nutri-Science: Ireland based manufacturer of a broad range of feed supplements for horses and companion animals. This business was sold to Swedencare in 2016 in order to allow Ecuphar to focus more closely on its core veterinary pharmaceuticals business.

 

2011 Riemser Animal Health: Germany based animal health portfolio. The acquisition enabled Ecuphar to enter the vaccines market and gain direct access to the German veterinary market.

 

In 2015, Ecuphar made its largest acquisition to date by acquiring the veterinary business of the Spanish pharmaceutical company, Esteve:

 

2015 Esteve Veterinaria: this acquisition provided Ecuphar with an important footprint in the Spanish, Italian and Portuguese veterinary markets as well as a number of new products in complementary therapeutic areas such as Danilon (equine anti-inflammatory) and Dinalgen (equine, bovine and swine anti-inflammatory).

 

The current group structure of the Ecuphar Group is as follows:

http://www.rns-pdf.londonstockexchange.com/rns/9589I_2-2017-6-23.pdf 

 

Product overview

For management purposes, Ecuphar is organised into two segments: Pharmaceuticals and Wholesale. The Pharmaceuticals segment is active in the development and sale of Ecuphar's veterinary pharmaceutical products that provide significant benefits to animal health directly or via wholesalers to end customers (i.e. veterinary practices), whereas the Wholesale segment focuses on the purchase and re-sale of veterinary pharmaceuticals, supplies and instruments to Belgian veterinary practices.

 

In the year to 31 December 2016, the Pharmaceuticals segment contributed approximately 69 per cent. of Ecuphar's revenue, and as much as 95 per cent. of Underlying EBITDA and is therefore considered the key focus area for Ecuphar's management.

 

http://www.rns-pdf.londonstockexchange.com/rns/9589I_3-2017-6-23.pdf 

 

In the Pharmaceuticals segment, Ecuphar's products fall into three main categories: companion animals (being those that are kept primarily for an individual's company, protection or entertainment), equine (being horses) and production animals (being those that are raised in an agricultural setting to produce commodities such as food, fibre and labour). Within these categories, Ecuphar supplies a broad portfolio of over 300 veterinary products, of which own products include 29 licensed drugs, eight vaccines and over 100 care and nutraceutical products.

 

Ecuphar's Pharmaceuticals segment product portfolio can be summarised as follows:

 


Product range

Growth drivers

Companion animal products

 

•      Veterinary pharmaceuticals, food supplements and care products

•      Specific focus on odontology, dermatology, incontinence, behaviour and anaesthesia

•      Also range of otology, surgery, joint support and anti-parasitic products

 

•      Increasing number of pets due to changes in lifestyle and pets being considered as family members

•      Higher life expectancy of pets due to innovation and increased consumption of veterinary care

•      Increasing disposable income potentially making owners more willing to spend money on their pets

Production animal products

 

•      Broad range of injectables, oral powders, premixes and intra-mammary tubes

•      Also range of feed supplements and dietary complementary feed to support metabolic functions of livestock

 

•      Increasing global population and increasing disposable income leading to increasing demand for protein

•      Increasing industrialisation of meat and milk production to ensure growing demand is met

•      Food safety concerns encouraging more prevention of disease

Equine products

•      Range of veterinary pharmaceuticals, horse supplements and specific care products

•      Specific focus on anti inflammatories

•      Equine customers demand increasingly specialised services

•      Professionalism and globalisation increase the demand for medical care for horses

•      Increasing disposable income makes owners more willing to spend money on their horses

 

Ecuphar's Pharmaceuticals segment revenue in 2016 can be broken down as follows:

 

http://www.rns-pdf.londonstockexchange.com/rns/9589I_4-2017-6-23.pdf 

 

Ecuphar has retained a core focus on licensed pharmaceutical products, and a key area of strategic focus has been the diversification of Ecuphar's product portfolio into different therapeutic areas. This strategy has been successfully executed by the management team, and Ecuphar now supplies products into odontology, dermatology, surgery, anaesthesia and otology areas, among others. Ecuphar's management have also focused on expanding the therapeutic indications for its existing product portfolio to expand the respective product's lifecycle.

 

Details of Ecuphar's Pharmaceutical segment's top ten products for the year ended 31 December 2016, which in aggregate accounted for approximately £20.3 million of revenue in that period, are set out below.

 

Product

Market

Indication

Type

Aivlosin

Production animals

Antibiotic

Distribution

Conofite

Companion animals

Otology

Licence

Danilon

Equine

Anti-inflammatory

Own

Dinalgen

Production animals

Anti-inflammatory

Own

Dokamox

Production animals

Antibiotic

Licence

Flubenol

Production & comp. animals

Antiparasitic

Licence

IsoFlo

Companion animals

Anaesthesia

Distribution

Leisguard

Companion animals

Antiparasitic

Own

Orozyme

Companion animals

Odontology

Own

Seponver

Production animals

Antiparasitic

Licence

 

Ecuphar's own products

Ecuphar's own products represented approximately 33 per cent. of Ecuphar's Pharmaceuticals segment revenue for the year ended 31 December 2016. Product sales can be split between the following categories: pharmaceuticals and biocides representing 78 per cent., nutraceuticals representing 12 per cent., vaccines representing 8 per cent. and other representing 2 per cent. Ecuphar has three veterinary products which it believes are unique (other than one competing ethamsylate product in France):

 

•      Danilon (suxibuzone): equine anti-inflammatory;

•      Hemo-141 (ethamsylate): haemostatic for production animals; and

•      E-6087: anti-inflammatory for companion animals (currently under development).

 

In-licensed and distributed products

Products sold via longstanding licenses with strategic partners represented approximately 24 per cent. of Ecuphar's Pharmaceuticals segment revenue for the year ended 31 December 2016, and third-party products sold via distribution agreements with partners represented approximately 44 per cent. of Ecuphar's Pharmaceuticals segment revenue for the year ended 31 December 2016.

 

Business model

Ecuphar's business model is complementary to that of the Company and the respective businesses are significantly aligned in the way that products are sourced and delivered to veterinary customers and in manufacturing being completely outsourced. Ecuphar relies on a mix of proprietary products, strategic alliances and distribution partnerships to grow and diversify its product portfolio. The process of developing products and acquiring licences is largely driven by the first-hand feedback from Ecuphar's local marketing and sales teams who are in frequent contact with veterinary practices and wholesalers and are therefore able to offer the right portfolio of products to meet customers' needs and provide a fully integrated solution. The two key focus areas for Ecuphar are product development and sales and marketing.

 

Ecuphar's business model can be summarised as follows:

 

http://www.rns-pdf.londonstockexchange.com/rns/9589I_5-2017-6-23.pdf 

 

Products are sourced through in-house development, as well as through product acquisitions, strategic alliances and distribution partnerships. These are marketed by local sales teams in the six countries where Ecuphar has its own presence and through distributors in other markets. Vet practices are the end customers and targeted by the sales teams, although they are usually invoiced and physically supplied through wholesalers.

 

Product development

Product development at Ecuphar focuses on both life cycle extension and novel products. Life cycle extension entails the broadening of existing drug licences into other therapeutic areas, other target species and other application forms (tablet, liquid, injection). This helps to reduce the risk of outfall during the development trajectory. Each project is evaluated against stringent technical and commercial criteria before determining its suitability to become a full development project. All product development occurs in close cooperation with Ecuphar's in-house pharmaceutical and regulatory affairs teams which together comprise a total of 18 people focused on life-cycle extension of existing products and on novel products. As all manufacturing of Ecuphar's products is outsourced, contract manufacturers with whom Ecuphar has developed close working relationships are also involved early in the product development process.

 

Examples of innovations which are currently under development include improved galenic formulations, improved administration devices, improved gastric tolerance and improved palatability, as well as new indications or new species for existing molecules. The product development pipeline of Ecuphar is currently composed of eleven projects in various stages of development which are expected to be launched and commercialised over the coming years, and can be summarised as follows.

 

http://www.rns-pdf.londonstockexchange.com/rns/9589I_6-2017-6-23.pdf 

* CAP: companion animal products; FAP: farm (production) animal products; EQ: equine products

 

Strategic alliances and distribution partnerships

Ecuphar's product portfolio is enhanced by its longstanding strategic alliances with global animal health leaders such as Bayer and Elanco. These alliances provide Ecuphar with long-term licences for the distribution of veterinary pharmaceutical products which both diversifies the scope of therapeutic areas targeted by Ecuphar and enables a broader integrated solution to be provided to its customers. In addition, Ecuphar's product portfolio is further enhanced through distribution partnerships with several leading animal health companies, such as Orion Pharmaceuticals and Eco Animal Health.

 

Local sales and marketing presence and distributors

Ecuphar has direct sales, marketing and distribution operations in Belgium, the Netherlands, Germany, Spain, Italy, and Portugal and supplies products in 37 countries through distribution agreements with local partners. Often the same partners that provide Ecuphar with long-term licenses or distribution agreements for the sale of third-party veterinary pharmaceutical products (see "Strategic alliances and distribution partnerships" above) function as distributor for Ecuphar's products abroad, further strengthening these relationships.

 

At the end of 2016, Ecuphar's workforce counted 201 employees (including consultants), of which 76 were sales representatives and an additional 28 were sales agents, as follows:

 


Employees

Sales reps

Benelux

33

7

Germany

34

13

Spain

73

37

Portugal

11

7

Italy

11

7 (+ 28 agents)

Wholesale segment

39

5

Total

201

76 (+ 28 agents)

 

Ecuphar's commercial workforce is composed of a team of ambitious and result-oriented employees with an in-depth knowledge of their respective regional markets and strong local relationships with customers.

 

Wholesale

In addition to its Pharmaceuticals segment, Ecuphar has a Wholesale segment, which focuses on the purchase and re-sale of veterinary pharmaceuticals, supplies and instruments to Belgian veterinary practices. This business is relatively stable at both revenue and gross margin, and generates a gross margin lower than that of the Pharmaceuticals segment due to the nature of the wholesale business model.

 

Market, customers and competitive environment

 

Market

The European animal health market in which Ecuphar operates is a highly regulated and specialist market with significant intellectual and financial barriers to entry. Animal health in Europe is a large and growing market, underpinned by robust macroeconomic drivers and underlying trends. In the companion animal and equine market segments, these include population growth, and increasing wealth and urbanisation. Population growth and rising life expectancy are driving an increase in the demand for companion animals as pets. In addition, the increase in wealth has led to an increased focus on the welfare of animals and therefore an increased propensity for pet and horse owners to buy animal health products. Pets are increasingly seen as a "family member" which also leads to higher spending on animal health products.

 

The food producing animal market demonstrates similarly solid fundamental drivers and themes, with population growth and increasing wealth driving increases in the levels of protein consumption.

 

Ecuphar's management team believes that the business is well positioned to capitalise on the underlying growth in the animal health market.

 

Customers

The largest group of Ecuphar's customers are veterinary practices, which, depending on local market rules and customs are supplied either directly by Ecuphar or through wholesalers and/or distributors. The commercial efforts of Ecuphar are largely directed at veterinary practices as they create the underlying demand for its products. Customer concentration for Ecuphar is limited with its top ten customers in 2016 together representing less than 20 per cent. of revenue. Ecuphar's top ten customers are, with the exception of one distributor, all wholesalers who are not the actual end-customer, so in effect customer concentration can be considered lower still.

 

Geographically, Ecuphar's customers are spread broadly and total revenue in 2016 can be broken down as follows:

 

http://www.rns-pdf.londonstockexchange.com/rns/9589I_7-2017-6-23.pdf 

 

Competitive environment

Similar to Animalcare, in all countries where Ecuphar operates, the market is dominated by large multinationals that have consolidated over the past years, such as Zoetis/Abbott, Elanco/Novartis, Boehringer/Merial and MSD/Intervet.

 

Ecuphar is differentiating itself from such players by focusing on certain niche markets, such as for instance odontology, dermatology, surgery/anaesthesia and otology. In such niche markets, Ecuphar often markets its products under umbrella brands, such as Orozyme, Dermazyme, Quirofarm and Otofarm. Ecuphar further tries to differentiate itself through its efforts to create customer loyalty. This is achieved through, among other things, value added services such as online advisory, maintenance of equipment, sector meetings and training seminars; as well as through stable local sales teams with many sales representatives having been with Ecuphar for many years, creating a close personal link between the customer and Ecuphar. As a result, Ecuphar can often focus more on attracting business through the relationship and the solution than through price.

 

In the markets where it operates, Ecuphar is also well positioned to become a distributor of choice for licensors that are looking for a professional local sales and marketing company. Because of its entrepreneurial culture and long-lasting local presence, Ecuphar is often preferred by licensors over larger players that often only want to focus on their own product portfolio and who may be slower in making decisions and preparing new product launches because of administrative procedures and complicated international structures.

 

The competitive market is also considered by Ecuphar to be fragmented, and the Ecuphar management team have a proven track record of growth through acquisitions to help the Enlarged Group take advantage of the right opportunities.

 

Ecuphar's financial record

Since its foundation, Ecuphar has developed a strong track record of high growth and cash generation. The table below provides a summary of the financial results of Ecuphar for each of the three financial years ended 31 December 2014, 2015 and 2016 and has been extracted from the historical financial information contained below in this Announcement. This summary financial information should be read in conjunction with the full text of this Announcement. Investors should not rely solely on the summarised financial information.

£ million

12 months to 31 December

 

 

2014

2015

2016

Revenue

34.5

47.1

68.4

 

% change

37%

45%

 

 

Gross Margin

10.6

16.5

28.3

 

% of revenue

31%

35%

41%

 

 

Underlying EBITDA

4.2

4.8

8.9

 

% of revenue

12%

10%

13%

 

 

EBITDA

3.9

3.4

10.7

 

% of revenue

11%

7%

16%

 





 

Underlying Net Earnings

1.5

1.3

4.0

 

Between 2014 and 2016, Ecuphar's revenue nearly doubled to £68.4 million due to the 2015 acquisition of Esteve's animal health business and the resulting expansion into the Spanish, Italian and Portuguese animal health markets, in combination with organic growth driven by the launch of new products and distributions, as well as existing products. Over the same period, gross margin increased from 30.8 per cent. to 41.4 per cent. of revenue as the relative contribution of Ecuphar's higher margin Pharmaceuticals segment became more important in the overall revenue mix, while growth in the lower margin Wholesale segment was less pronounced. Underlying EBITDA margin increased from 12.2 per cent. of revenue in 2014 to 13.0 per cent. in 2016, following a decline to 10.2 per cent. in 2015 due to the temporary impact of the integration of the acquired Esteve animal health business.

 

Underlying EBITDA has been adjusted for non-recurring items which amounted to £1.8 million in 2016. This is comprised of the gain on the sale of Nutri-Science (£2.4 million) and £0.6 million non-recurring costs, largely related to the integration of the Esteve acquisition (£0.4 million). In 2015, non-recurring items largely related to the Esteve acquisition comprising transaction costs (£0.4 million) and a PPA adjustment on acquired stock (£0.4 million). Non-recurring items in 2014 largely comprised non-recurring market research and M&A costs (£0.3 million).

 

Ecuphar has high cash generating capabilities as a result of its business model which focuses on product development and sales and marketing, while manufacturing is outsourced. Therefore, capital expenditure is largely limited to new product development investments and cash conversion is high.

 

Recent trends, current trading and outlook

Trading since 31 December 2016 has been broadly in line with management expectations. Ecuphar has, over this period continued to invest in systems and people to further strengthen the organisation of the company. Recent hires in 2017 include a new country manager in Italy and a new group IT manager.

 

Ecuphar is continuing to invest in its new product development and since 31 December 2016, has closed a number of agreements related to manufacturing, clinical trials and regulatory consulting for products under development. Ecuphar management expects Ecuphar's next new product launch to occur during the fourth quarter of 2017 or the first quarter of 2018. In Belgium, Ecuphar lost the distribution rights for a number of companion animal products from Sogeval (which together represented less than £1 million of revenue in 2016) effective 1 January 2017, following its acquisition by Ceva (in December 2013). A number of new distribution agreements are, however, being discussed with partner companies to further complement Ecuphar's product offering in the future.

 

In February 2017, Ecuphar acquired from Elanco the rights to market a veterinary product in Germany, Ripercol Drench, a roundworm remedy for production animals. This product acquisition will complement Ecuphar's product portfolio for cattle, however, it is not expected to have a material impact on Ecuphar's financial performance.

 

In the second half of 2017, Ecuphar is expecting to start distributing its own Orozyme range of companion animal products in Spain and Portugal, which have until then been distributed by local distributors in those countries.

 

4. Strategy of the Enlarged Group

Following Completion, it is intended that the Enlarged Group will continue to grow both organically and through selective acquisitions to accelerate its overarching strategy of becoming a leader in the European animal health market.

 

The Enlarged Group's core areas of strategic focus will be on:

 

•      initiating cross selling opportunities of both Animalcare's and Ecuphar's products across existing customers and distribution channels;

•      implementing an effective business integration, including by combining product development activities, providing the technology and systems to drive product quality improvement programmes and by optimising the Enlarged Group's supply chain;

•      developing the Enlarged Group's wider network of partnerships and strategic alliances in order to increase its exposure, as licensor and licensee, to global animal health leaders;

•      leveraging its platform by identifying selective value-accretive acquisitions that can broaden the pan-European sales, marketing and distribution platform of the Enlarged Group;

•      diversifying the Enlarged Group's portfolio of products into additional therapeutic areas within the companion animal, as well as production animal and equine, markets; and

•      continuing the shift towards broadening the Enlarged Group's pipeline innovations to include novel therapies.

 

The Existing Directors and Proposed Directors believe that the key components required to ensure that the Enlarged Group continues to deliver this long-term growth strategy are to:

 

•      continue to attract and retain the highest calibre people to drive forward its development;

•      maintain leadership capability in research and development; and

•      invest in high quality infrastructure in strategic locations.

5. Board of Directors and Proposed Directors

The Board of Animalcare is currently comprised of James Lambert as Non-executive Chairman, Iain Menneer as Chief Executive Officer, Chris Brewster as Chief Financial Officer, Lord Nick Downshire as Non-executive Director and Raymond Harding as Non-executive Director.

 

The following changes, each of which will take effect from Admission, will be made to the Board in connection with the Acquisition:

 

•      Chris Cardon, (proposed Chief Executive Officer), Walter Beyers (proposed Chief Financial Officer), Jan Boone (proposed Non-executive Chairman), Edwin Torr (proposed senior independent Non-executive Director) and Marc Coucke (proposed Non-executive Director) will be appointed as Directors;

•      Iain Menneer will remain a Director following Admission and his role within the Group will change to Chief Operating Officer;

•      James Lambert will step down as Chairman of the Company but will remain on the Board as a Non-executive Director;

•      Chris Brewster will resign as a Director but will remain a critical and committed member of the senior management team of the Enlarged Group as Country Manager of the Enlarged Group's UK business; and

•      Raymond Harding will resign as a Director.

 

The biographical details of the Directors upon Admission are set out below:

 

Chris Cardon (aged 49) - Proposed Chief Executive Officer

Chris founded Ecuphar as Chris Cardon NV in 2001 to capitalise on opportunities identified in the animal health industry. The company began with the development of a number of original and high-quality OTC products for companion animal markets. Chris graduated as a pharmacist from the University of Ghent in 1993 after which he took over his family's pharmacy business. In 1995, he completed an MBA at the Vlerick Leuven-Gent Management School and then in 2006 received the prestigious award "Export Lion of Flanders 2005" in the Young Exporters category.

 

Chris has a strong entrepreneurial background in human OTC product development. In 1996, Chris established Mooss Pharma, a company which developed human OTC products that were exclusively distributed by pharmacists. Mooss Pharma developed into a key player in the Belgian market, and in 2001 the OTC assets of Mooss Pharma were acquired by Omega Pharma.

 

Walter Beyers (aged 57) - Proposed Chief Financial Officer

Walter is the current Chief Financial Officer of Ecuphar. He has a master's degree in Economics from the University of Antwerp and obtained an MBA from the University of Leuven (KUL) in Belgium.

 

Walter has significant experience in senior financial management positions in publicly listed and privately owned companies.

 

Walter started his career with the American multinational Cargill and subsequently joined his family's business in logistics until he sold that business. He then became finance director of Akeda, a Belgian family office and in 1998 he joined Euronext-listed company USG People, for which he worked for eight years, before working for listed companies Autogrill and Ecodis, then returning to USG People in 2009 for a further five years as VP Finance, being responsible for ten countries in Europe.

 

Before joining Ecuphar in April 2016, he was CFO Europe for the US based FCMG manufacturer Ecover-Method.

 

Iain Menneer (aged 47) - Proposed Chief Operating Officer

Iain is the current Chief Executive Officer of the Company. He has a degree and PhD in Chemistry, both from Newcastle University.

 

Following roles in the brewery industry in product development and technical research, Iain joined the Group in 2003, working in sales, marketing and business development roles, including an instrumental role in the new product development pipeline.

 

Iain was promoted to the Board as Director of Marketing in July 2011. Iain was appointed Managing Director of Animalcare Limited in March 2012 and subsequently Chief Executive Officer of the Company in January 2013, since when he has led the transformation of the business infrastructure, including the focus on new product development. Following Admission, Iain will fulfil the role of Chief Operating Officer in the Enlarged Group.

 

Jan Boone (aged 45) - Proposed Chairman

Jan is the Chief Executive Officer of Lotus Bakeries, which is listed on Euronext Brussels. He started at Lotus Bakeries as managing director in 2005 and was named chief executive officer in 2011.

 

Between 2000 and 2005, Jan served as Head of Corporate Controlling and Member of the Executive Committee of Omega Pharma. He started his career in the audit department at PricewaterhouseCoopers and holds a Master's degree in Applied Economics (KU Leuven) and a Master's degree in Audit (UMH).

 

In addition to his role at Lotus Bakeries, Jan serves as non-executive director of Club Brugge.

 

Edwin Torr (aged 57) - Proposed Senior Independent Non-Executive Director

Edwin Torr has significant experience of international veterinary and animal health markets, gained over a period of more than 20 years, during which time he has worked for ICI, Pitman Moore, Alfa Laval Agri and Dechra Pharmaceuticals. He was part of the management buyout team that set up Dechra Veterinary Products in 1997, and was an executive director on the board of the Dechra entity that was listed on the London Stock Exchange from 2000 until 2013. During this time, he was responsible for business development, managed the European business unit and was instrumental in setting up the USA business. Since 2014, Edwin has independently advised various companies on sales and marketing structures, M&A opportunities, 'in' and 'out' licensing of products and investment opportunities within the veterinary and animal health market sector.

 

James Lambert (aged 58) - Proposed Non-Executive Director

James was appointed Chairman of the Company in 2008 when the Company was acquired by Ritchey plc for whom he had been the chairman since 2005 and a non-executive director since 2003. James was previously co-founder and Chief Executive Officer of R&R Ice Cream where under James' leadership, R&R Ice Cream made a series of acquisitions to become the largest ice cream manufacturer by volume in the UK. James is now chairman of Burton's Biscuits, a company he helped Ontario Teachers' Pension Plan acquire in 2013. He was also awarded the EY UK Entrepreneur of the Year award in 2014.

 

Marc Coucke (aged 52) - Proposed Non-Executive Director

Marc founded Omega Pharma in 1987 and developed the company into a leading pan-European OTC health and personal care business. Marc has served as both chairman and chief executive officer of Omega Pharma. Following the sale thereof in 2015 to Perrigo Company plc for €3.6 billion, Marc invests via his private investment firm Alychlo NV in several listed and non-listed companies.

 

Marc currently serves as chairman of Mithra Pharmaceuticals (EBR: MITRA) and as non-executive director of Fagron (EBR: FAGR), in addition to a number of private companies.

 

Marc graduated as a pharmacist from the University of Ghent after which he completed an MBA at the Vlerick Leuven-Gent Management School. He was also awarded, as Chief Executive Officer of Omega Pharma, the EY Flemish Entrepreneur of the Year award in 2002.

 

Lord Nick Downshire (aged 58) - Proposed Non-Executive Director

Nick joined the Board of the Company when it was acquired by Ritchey plc for whom he had acted as a director since 1998. Nick is a qualified chartered accountant who has worked in corporate finance and venture capital. He has held and still holds non-executive directorships in a diverse range of businesses in the insurance, agricultural, hospitality, education and technology sectors. Nick runs an estate in Yorkshire with a range of activities including quarrying, renewables, forestry and a hotel as well as agriculture and real estate. He is also Chairman of the Agriculture and Land Use Committee for the Country Landowners & Business Association and also sits on their national policy committee, as well as acting as a trustee for a number of charitable and land related trusts.

 

6. Financial effects of the Acquisition

Animalcare is financing the Acquisition through a combination of the Consideration Shares, the proceeds of the Placing and through existing cash on Animalcare's balance sheet.

 

The Existing Directors believe that, taking into account the business and prospects of the Enlarged Group, the Acquisition will be enhancing to the Board's expectations of underlying earnings for the Existing Group in the first full financial year of ownership.

 

For the year ended 31 December 2016, Ecuphar recorded revenue of £68.4 million and Underlying EBITDA of £8.9 million. The table below shows an unaudited pro forma aggregated income statement for the Enlarged Group for the year ended 31 December 2016:

 

in £'000

Animalcare

 

Ecuphar

 

Total

Revenue

15,556

 

68,361

 

83,917

Gross profit

8,722

 

28,275

 

36,997

Operating costs

(5,181)

 

(22,236)

 

(27,417)

Operating profit

3,541

 

6,039

 

9,580

Depreciation, amortisation & impairment

402

 

4,690

 

5,092

Non recurring items

-

 

(1,814)

 

(1,814)

Underlying EBITDA

3,943

 

8,915

 

12,858

Financial expenses

36

 

(988)

 

(952)

Financial income

-

 

97

 

97

Exceptional costs

(172)

 

-

 

(172)

Profit before tax

3,405

 

5,148

 

8,553

Taxation

(466)

 

(1,632)

 

(2,098)

Net (loss) profit

2,939

 

3,516

 

6,455

Underlying net earnings

3,139

 

3,964

 

7,103

 

Notes:

The Existing Group's results have been presented on a pro forma basis for 12 months period to 31 December 2016, comprising the audited six month period to 30 June 2016 from the audited 12 month accounts to 30 June 2016, plus the unaudited interim accounts to 31 December 2016.

 

The Ecuphar Group's results have been extracted from the audited 12 months accounts to 31 December 2016.

 

Underlying EBITDA is summarised in paragraph 3 of this Announcement.

 

Ecuphar has existing credit facilities with KBC Bank NV, BNP Paribas Fortis NV, Belfius Bank NV and ING België NV, details of which are set out in paragraph 15 of Appendix I and in the notes to the historical financial information contained in Appendix II in this Announcement. These facilities will continue to be available to Ecuphar after Completion. The Existing Group does not have any debt facilities.

 

7. Details of the Acquisition

Animalcare has entered into the Share Purchase Agreement, pursuant to which it has conditionally agreed to acquire the entire issued share capital of Ecuphar from the Vendors in consideration for the issue of Consideration Shares and cash to the Vendors. The cash component of the consideration will be satisfied in part through a placing of approximately 8.6 million New Placing Shares (representing approximately 40.4 per cent. of the Existing Issued Share Capital) to raise gross proceeds of not less than £30.0 million, with the balance (of £4.0 million) to be funded by existing cash held by the Group. The number of Consideration Shares to be issued to the vendors of Ecuphar, will be determined following completion of the Placing (and by reference to the exact number of New Placing Shares issued in the Placing).

 

Under the Share Purchase Agreement, completion of the Acquisition is conditional on, among other things, the passing of Resolutions 1 to 6 at the General Meeting, Admission and the Placing and Admission Agreement having become unconditional. The Share Purchase Agreement contains customary warranties by the Vendors to Animalcare, and vice versa, subject to limitations on liability including a cap on liability. Under the Share Purchase Agreement, Ecuphar Invest NV and Alychlo NV, being the majority Vendors, have agreed to give covenants restricting them from competing with the Enlarged Group for a period of 24 months following Completion.

 

It is also proposed that Ecuphar Invest NV and Alychlo NV will enter into a relationship agreement with the Company and Panmure Gordon with effect from Admission.

 

Following completion of the Acquisition, it is intended that Ecuphar will acquire Animalcare Limited in an intragroup transaction, with Animalcare Limited thereby becoming a subsidiary of Ecuphar. The funding for this will be provided from Ecuphar's existing debt facilities, details of which are set out in paragraph 15 of Appendix I in this Announcement.

 

8. Details of the Placing

The Bookbuild will be launched immediately following this Announcement and will be conducted in accordance with the terms and conditions set out in Appendix III to this Announcement. The timing of the closing of the book, pricing and allocation is at the absolute discretion of the Company and Panmure Gordon. The exact number of Placing Shares will be determined by the Company and Panmure Gordon at the close of the Bookbuild. Details of the number of New Placing Shares, Sale Shares and the Placing Price will be announced as soon as practicable after the closing of the Bookbuild process.

The net proceeds of the Placing receivable by the Company will be applied in full to paying a substantial proportion of the cash component of the Acquisition consideration.

In addition, the Selling Shareholders (who comprise the Participating Directors and certain employees of the Company) also intend to sell up to approximately 0.8 million Sale Shares in the Placing. In the case of each of the Selling Shareholders except Lord Nick Downshire, the Sale Shares which are intended to be sold in the Placing will be obtained from the exercise of certain existing Options or the exchange of shares in Animalcare Limited by the relevant individuals.

Edwin Torr, a Proposed Director, is also showing his support for the Acquisition and the Enlarged Group by intending to purchase 85,000 Placing Shares in the Placing. The extent of the participation by the Selling Shareholders and Edwin Torr will be announced following completion of the Bookbuild.

The New Placing Shares will be issued credited as fully paid and will, on issue, rank pari passu in all respects with the Existing Ordinary Shares, including the right to receive all dividends and other distributions thereafter declared, made or paid on the Enlarged Issued Share Capital.

On 23 June 2017, the Company, the Majority Vendors, the Existing Directors, the Proposed Directors, Panmure Gordon and Degroof Petercam entered into the Placing and Admission Agreement, pursuant to which, among other things, the Joint Bookrunners have each agreed to use its reasonable endeavours to place approximately 8.6 million New Placing Shares on behalf of the Company. In addition, the Company, the Selling Shareholders and Panmure Gordon are intending to enter into the Selling Shareholders' Agreement, pursuant to which Panmure Gordon agreed to use its reasonable endeavours to place up to approximately 0.8 million Sale Shares on behalf of the Selling Shareholders.

The Placing is conditional on, among other things:

•      the Placing and Admission Agreement having become unconditional and not having been terminated in accordance with its terms;

·     the Share Purchase Agreement not having been terminated or amended, and having become unconditional in all respects (other than the conditions relating to Admission and the Placing and Admission Agreement); and

•      Admission occurring by no later than 13 July 2017 (or such later date as the Company and the Joint Bookrunners agree, not being later than 25 July 2017).

By choosing to participate in the Placing and by making an oral and legally binding offer to acquire Placing Shares, investors will be deemed to have read and understood this Announcement in its entirety and to be making such offer on the terms and subject to the conditions in it, and to be providing the representations, warranties, acknowledgements and undertakings contained in Appendix III to this Announcement.

Pursuant to the Placing and Admission Agreement, each of the Majority Vendors and the Participating Directors will also undertake to the Company and Panmure Gordon:

·     not, without the prior written consent of each of the Company and Panmure Gordon, to dispose of any of the Ordinary Shares held by them or their respective associates at Admission for a period of 12 months following Admission; and

·     for a further period of 12 months following the end of such lock-in period, to be subject to customary orderly market restrictions.

9. The Takeover Code and Rule 9 Waiver

Application of the Takeover Code

The Company is subject to the Takeover Code. Brief details of the Panel, the Takeover Code and the protections they afford are described below.

 

The Takeover Code is issued and administered by the Panel. The Takeover Code applies to all takeover and merger transactions, however effected, where the offeree company is, inter alia, a listed public company resident in the United Kingdom. The Company is a listed public company resident in the United Kingdom and its shareholders are therefore entitled to the protections afforded by the Takeover Code.

 

Under Rule 9 of the Takeover Code, where any person acquires, whether by a series of transactions over a period of time or not, an interest in shares (as defined in the Takeover Code) which (taken together with shares already held by him and any interest in shares held or acquired by persons acting in concert with him) carry 30 per cent. or more of the voting rights of such a company, that person is normally required to make a general offer to all the holders of any class of equity share capital or other class of transferable securities carrying voting rights in that company to acquire the balance of their interests in the company.

 

Rule 9 of the Takeover Code also provides that, among other things, where any person who, together with persons acting in concert with him, is interested in shares which in aggregate carry not less than 30 per cent. of the voting rights of such a company but does not hold shares carrying more than 50 per cent. of the voting rights of such a company, and such person, or any person acting in concert with him, acquires an additional interest in shares which increases the percentage of shares carrying voting rights in which he is interested, then such person is normally required to make a general offer to all the holders of any class of equity share capital or other class of transferable securities carrying voting rights of that company to acquire the balance of their interests in the company.

 

An offer under Rule 9 of the Takeover Code must be in cash (or with a cash alternative) and at not less than the highest price paid within the preceding 12 months for any shares in the company by the person required to make the offer or any person acting in concert with him.

 

Rule 9 of the Takeover Code further provides, among other things, that where any person who, together with persons acting in concert with him holds over 50 per cent. of the voting rights of a company, acquires an interest in shares which carry additional voting rights, then they will not generally be required to make a general offer to the other shareholders to acquire the balance of their shares. However, individual members of a concert party will not be able to increase their percentage interest in shares through or between a Rule 9 threshold without Panel consent.

 

For the purposes of the Takeover Code, persons acting in concert comprise persons who, pursuant to an agreement or understanding (whether formal or informal), cooperate to obtain or consolidate control of a company. Paragraph (9) of the definition of 'acting in concert' also deems any shareholders in a private company who sell their shares in that company in consideration for the issue of new shares in a company to which the Takeover Code applies to be acting in concert for the purposes of the Takeover Code unless the contrary is established.

 

Rule 9 Waiver

The Panel has confirmed that it considers Ecuphar Invest NV, Alychlo NV and Jaak Cardon (the son of Chris Cardon and a minority shareholder in Ecuphar) to be acting in concert for the purposes of the Takeover Code. The Panel has also confirmed that it does not consider the other Vendors (the current minority shareholders in Ecuphar) to be acting in concert with the Concert Party.

 

None of the members of the Concert Party hold Existing Ordinary Shares as at the date of this Announcement. On completion of the Acquisition, the Concert Party are expected to hold (by virtue of the Consideration Shares to be issued to Ecuphar Invest NV, Alychlo NV and Jaak Cardon pursuant to the Acquisition) approximately 46.3 per cent. of the voting rights of the Company.

 

Following Completion, it is expected that Chris Cardon, who is presumed under the Takeover Code to be acting in concert with members of the Concert Party, will participate in the New LTIP which may result in him acquiring Ordinary Shares in the Company. The maximum aggregate number of Ordinary Shares that Chris Cardon would be entitled to receive pursuant to any awards made to him under the New LTIP will be equal to 0.5 per cent. of the Enlarged Issued Share Capital (the "New LTIP Awards").

 

On the basis that Chris Cardon is granted and exercises the maximum aggregate number of New LTIP Awards, and assuming no other changes in the Concert Party's or Chris Cardon's holding of Ordinary Shares or in the Company's issued share capital, the maximum controlling interest of the Concert Party and Chris Cardon (being a person presumed to be acting in concert with members of the Concert Party) in the period following Completion is expected to be approximately 46.8 per cent. of the voting rights of the Company.

 

As a consequence of the Acquisition, without a waiver of the obligation under Rule 9 of the Takeover Code, the Concert Party would be required to make a general offer for the balance of Ordinary Shares in issue immediately following the Acquisition. In addition, any future exercise by Chris Cardon of any New LTIP Awards could potentially trigger an obligation under Rule 9 of the Takeover Code, given that he is a person presumed to be acting in concert with members of the Concert Party, depending on the Concert Party's holding of Ordinary Shares at that time. The Panel has been consulted and has agreed, subject to the Whitewash Resolution being passed by the Independent Shareholders (on a poll) at the General Meeting, to waive the obligation that would otherwise arise under Rule 9 of the Takeover Code as a result of the issue of Consideration Shares to the Concert Party pursuant to the Acquisition or the exercise by Chris Cardon of any New LTIP Awards. The Whitewash Resolution will be passed if approved by a simple majority of votes cast by Independent Shareholders on a poll.

 

Shareholders should be aware that if the Resolutions are passed, the Concert Party will not be restricted from making an offer for the Company. Ecuphar Invest NV and Alychlo NV have confirmed that the Concert Party has no intention of making an offer for the Company.

 

Following completion of the Acquisition, unless the Concert Party holds more than 50 per cent. of voting rights in the Company (as to which, see the paragraph below), Rule 9 of the Takeover Code will continue to apply to the Concert Party, requiring a general offer to be made to all Shareholders if any member of the Concert Party or persons acting in concert with them acquires any Ordinary Shares in addition to those which are the subject of the Whitewash Resolution, unless a further waiver is obtained. Shareholders should note that the waiver of Rule 9 of the Takeover Code which the Panel has agreed to give (conditional on the Whitewash Resolution being passed by the Shareholders) is only in respect of the acquisition of Consideration Shares by the Concert Party as a result of the Acquisition and the exercise by Chris Cardon of any New LTIP Awards and not in respect of any other future acquisition of Ordinary Shares by any member of the Concert Party or persons acting in concert with them.

 

Shareholders should note that, if the Ordinary Shares issued to members of the Concert Party and persons acting in concert with them within the scope of the Whitewash Resolution are such that the Concert Party together with such persons controls more than 50 per cent. of voting rights in the Company following completion of the Acquisition, for so long as the Concert Party together with such persons collectively controls more than 50 per cent. of voting rights in the Company, Rule 9 of the Takeover Code will not apply in respect of future acquisitions of interests in Ordinary Shares by the Concert Party. As a result, the Concert Party could acquire further interests in Ordinary Shares without being required to make a general offer to all Shareholders pursuant to Rule 9 of the Takeover Code. Individual members of the Concert Party will not be able to increase their percentage interests in shares through or between a Rule 9 threshold without the Panel's consent.

 

Rothschild has provided independent advice to the Independent Directors in respect of the Acquisition and the Rule 9 Waiver.

 

10. Change of Accounting Reference Date

In connection with the Acquisition, it has been resolved to change the accounting reference date of the Company to 31 December, conditional on Admission. As such, the first full reporting period of the Enlarged Group will be for the 12 month period ending 31 December 2018.

 

11. Dividend Policy

The Existing Directors and Proposed Directors intend to continue the Company's current dividend policy which they believe maintains an appropriate balance between investment for future growth and dividend flow to deliver overall value for Shareholders.

 

The Company issued the following final and interim dividends in 2016, 2015 and 2014:

 

Year ended

Ordinary final dividend

Ordinary interim dividend

Total dividend paid

30 June 2016

£904,000 (4.3 pence per share)

£379,000 (1.8 pence per share)

£1,283,000

30 June 2015

£839,000 (4.0 pence per share)

£378,000 (1.8 pence per share)

£1,217,000

30 June 2014

£788,000 (3.8 pence per share)

£315,000 (1.5 pence per share)

£1,103,000

 

The Company will change its financial year end to 31 December with effect from Admission. As a result, the first dividend expected to be paid will be an interim dividend in respect of the six months to 30 June 2017 which the Existing Directors and Proposed Directors anticipate will be paid in November 2017. The final dividend in respect of the financial year ending 31 December 2017 is currently anticipated to be paid in May or June 2018 following the announcement of the Enlarged Group's preliminary results during March 2018.

 

From 2018 onwards, the Company's interim and final dividend payments are expected to be split approximately 30 per cent. to 70 per cent. respectively, in line with historical payment ratios.

 

12. Working Capital

In the opinion of the Existing Directors and the Proposed Directors, having made due and careful enquiry, the working capital available to the Enlarged Group will be sufficient for its present  requirements, that is, for at least 12 months from Admission.

 

13. Share Incentive Schemes

The Group currently has in place three share incentive schemes: the Executive Share Option Scheme, the Existing LTIP and the Savings Related Share Option Scheme. On 22 June 2017, the Board also adopted the New LTIP. The New LTIP is conditional on, and will take effect from, Admission. The Directors do not intend to issue any new Options under the Existing LTIP or the Executive Share Option Scheme after Admission.

 

In connection with the Acquisition, certain of the holders of Options that have vested and are exercisable under the Executive Share Option Scheme intend to execute a form of election pursuant to which certain of their Options, of approximately 1.4 million Ordinary Shares, will be exercised, conditional on completion of the Acquisition and the Placing. Certain of these Option Shares to be issued on exercise of these Options are intended to be sold in the Placing.

 

The Options not exercised by the Selling Shareholders, as well as the unvested remainder of the Options under the Executive Share Option Scheme and all existing Options under the Savings Related Share Option Scheme will continue in force and effect on their existing terms until they become exercisable.

 

The Company intends to offer the two holders of awards under the Existing LTIP, Iain Menneer and Chris Brewster, the right to exchange their shares in Animalcare Limited for Ordinary Shares before completion of the Acquisition, and each intend to take up that right. As a consequence, approximately 0.9 million new Ordinary Shares are expected to be issued to Iain Menneer and Chris Brewster under the Existing LTIP prior to Admission, and a proportion of such new Ordinary Shares are intended to be sold as part of the Placing. In accordance with the Existing LTIP, the number of new Ordinary Shares to be issued pursuant to the exercise of these rights was determined using the lower of the closing middle market price for an Ordinary Share on 22 June 2017, being the dealing day before the date the offer to exchange was made and the average of the closing middle market prices for an Ordinary Share over the dealing days in the thirty day period before that date.

 

14. Admission, Settlement and Dealings

Application will be made to the London Stock Exchange for the Enlarged Issued Share Capital to be admitted to trading on AIM. It is expected that Admission will become effective and that dealings in the Enlarged Issued Share Capital will commence on 13 July 2017.

 

CREST is a computerised paperless share transfer and settlement system which allows shares and other securities to be held in electronic rather than paper form and transferred otherwise than by written instrument. The Articles permit the Ordinary Shares to be issued and transferred in uncertified form in accordance with the CREST Regulations. The Ordinary Shares are currently enabled for settlement through CREST. Accordingly settlement or transactions in the Ordinary Shares following Admission may take place within CREST if relevant Shareholders so wish. CREST is a voluntary system and Shareholders who wish to hold their shares in certified form will be able to do so.

 

The ISIN number of the Ordinary Shares is, and from Admission will continue to be, GB0032350695. The TIDM is, and from Admission will continue to be, ANCR.

 

15. Material Contracts

Banking facility agreements

Ecuphar has entered into the following bilateral credit facilities with KBC Bank NV, BNP Paribas Fortis NV, Belfius Bank NV and ING België NV (together, the "Banks"): (i) a €10 million bullet term facility dated 31 August 2016 to finance permitted acquisitions of which €10 million was available as at 31 December 2016 (the "Term Loan A"), (ii) a €4.08 million quarterly amortising term facility dated 31 August 2016 to refinance existing financial indebtedness of which €3.725 million was outstanding on 31 December 2016 (the "Term Loan B"), and (iii) a €41.5 million revolving credit facility dated 31 August 2016 to refinance a bridge loan which was used to finance the LDE APA and other existing financial indebtedness and for general corporate purposes and permitted acquisitions of which €25.2 million was drawn as at 31 December 2016 and €16.3 million is available (the "RCF") (together, the "Facilities"). The Facilities mature in March 2022 and carry a floating interest rate calculated as EURIBOR plus a margin of 1.75% for the Term Loan A, 1.50% for the Term Loan B, and 1.50% for the RCF.

 

Ecuphar has granted the following security interests to the Banks on a pari passu basis to secure the Facilities: (i) a business pledge and a business pledge mandate covering substantially all the business assets of Ecuphar, (ii) a pledge on all the shares Ecuphar holds in Medini NV and Orthopaedics.be NV, (iii) a pledge on receivables relating to the LDE APA, and (iv) a pledge on all intellectual property rights owned by Ecuphar.

 

In terms of financial covenants, the Facilities provide for: (i) a minimum adjusted solvency ratio measured as consolidated adjusted equity to consolidated adjusted total assets, (ii) a maximum leverage ratio measured as consolidated net debt to consolidated EBITDA, and (iii) a minimum interest coverage ratio measured as consolidated EBITDA to consolidated interest expenses.

 

The Facilities are subject to general terms and conditions which contain customary covenants (e.g. a negative pledge and restrictions on additional financial indebtedness, acquisitions and disposals), information undertakings, representations and events of default.

 

If a change of control over Ecuphar takes place, the Banks may require a cancellation and repayment of the Facilities prior to their maturity date. Each of the Banks has provided a written waiver and consent letter whereby they have consented to the Acquisition and the change of control resulting from the Acquisition. The Banks have also confirmed that Ecuphar can draw down under the Facilities in order to fund part of the consideration payable in respect of the proposed acquisition of Animalcare Limited following Completion, subject to the satisfaction of certain condition precedents. The Bank may require security to be granted over the shares or assets of Animalcare Limited as one such condition.

16. Significant Change

There has been no significant change in the financial or trading position of the Existing Group since 31 December 2016, the date to which the last interim financial information of the Existing Group was prepared.

 

Net debt of the Ecuphar Group at 31 May 2017 (being the latest practicable date prior to publication of this Announcement) was £28.8 million compared with net debt of £23.8 million at 31 December 2016, being the date to which the consolidated financial information for the Ecuphar Group set out in Appendix II of this Announcement. Management attributes this increase principally to movements in working capital, with the Ecuphar Group carrying higher levels of inventory and trade accounts receivable and a lower level of trade payables. Except as set out in this paragraph, there has been no significant change in the financial or trading position of the Ecuphar Group since 31 December 2016, the date to which the consolidated historical financial information for the Ecuphar Group set out in Appendix II of this Announcement.

17. General Meeting

The full terms of the Resolutions are set out in the notice convening the General Meeting, to be included in the Admission Document to be published shortly after the conclusion of the Bookbuild, and are summarised below:

 

•    Resolution 1 is an ordinary resolution to approve the Acquisition for the purposes of the AIM Rules for Companies.

 

•      Resolution 2 is the Whitewash Resolution described above in paragraph 9 of Appendix I in this Announcement. It is an ordinary resolution. This Resolution requires approval by the Independent Shareholders at the General Meeting.

 

•      Resolution 3 is an ordinary resolution to authorise the Existing Directors under section 551 of the Companies Act to allot equity securities for the purpose of issuing the Consideration Shares and the New Placing Shares. This authority is in addition to the existing authorities granted to the Existing Directors at the previous annual general meeting of the Company.

 

•      Resolution 4 is a special resolution to approve the disapplication of statutory pre-emption provisions to allow for the allotment of the New Placing Shares on a non pre-emptive basis.

 

•      Resolutions 5 and 6 are special resolutions to remove existing, and now redundant, limitations on the authorised capital of the Company set out in the Company's memorandum and articles of association. These are required because the issue of the Consideration Shares and the New Placing Shares would otherwise result in the Company's share capital exceeding the limits set out in the memorandum and articles of association. Resolutions 5 and 6 are not conditional on any of the other Resolutions being passed.

 

•      Resolution 7 is a special resolution to remove existing limitations on the composition of the Company's board and restrictions on non-UK resident directors and shareholders set out in the Company's articles of association, and to conform the provision of the articles of association relating to the timing of the annual general meeting with the position under the Companies Act.

 

All of Resolutions 1 to 6 need to be passed at the General Meeting in order for the Acquisition to be implemented and if any one of those Resolutions is not passed, the Acquisition will not go ahead. Voting on all Resolutions at the General Meeting will be by way of a poll.

 

16. Irrevocable undertakings

James Lambert, being the only Independent Director who holds Existing Ordinary Shares, has given an irrevocable undertaking to the Company to vote in favour of the Resolutions (and to procure that such action is taken by the relevant registered holders) in respect of his beneficial holdings totalling 1,313,691 Existing Ordinary Shares, representing approximately 6.19 per cent. of the Existing Issued Share Capital.

 

In addition, the Company has received letters of intent and irrevocable undertakings from certain other Shareholders to vote in favour of the Resolutions to be proposed at the General Meeting in respect of a total of 1,425,384 Existing Ordinary Shares representing, in aggregate, approximately 6.7 per cent. of the Existing Issued Share Capital.

 

Iain Menneer, Chris Brewster and Nick Downshire (along with the other Selling Shareholders) are considered not to be independent in respect of the Rule 9 Waiver by virtue of their participation in the Placing, and will therefore not vote in respect of the Whitewash Resolution. Iain Menneer, Chris Brewster and Nick Downshire have given irrevocable undertakings to the Company to vote in favour of the Resolutions other than the Whitewash Resolution (and to procure that such action is taken by the relevant registered holders) in respect of their beneficial holdings totalling 1,492,578 Existing Ordinary Shares, representing, in aggregate, approximately 7.0 per cent. of the Existing Issued Share Capital.

 

In total, therefore, the Company has received letters of intent and irrevocable undertakings to vote in favour of the Resolutions to be proposed at the General Meeting in respect of, in the case of all Resolutions other than the Whitewash Resolution, 4,231,653 Existing Ordinary Shares, representing, in aggregate, approximately 19.9 per cent. of the Existing Issued Share Capital and, in respect of the Whitewash Resolution, 2,739,075 Existing Ordinary Shares, representing, in aggregate, approximately 13.9 per cent. of the Existing Issued Share Capital entitled to vote on that Resolution.

 

17. Recommendation

The Existing Directors consider the Acquisition to be in the best interests of the Company and the Shareholders as a whole. Accordingly, the Existing Directors recommend that Shareholders vote in favour of the Resolutions (such recommendation being given, in the case of the Whitewash Resolution, as provided below).

 

Iain Menneer, Chris Brewster and Nick Downshire are considered not to be independent in respect of the Rule 9 Waiver by virtue of their participation in the Placing, and will not therefore vote in respect of the Whitewash Resolution. Iain Menneer, Chris Brewster and Nick Downshire do not therefore feel it appropriate to make any recommendation to Independent Shareholders in respect of the Whitewash Resolution.

 

The Independent Directors, having been so advised by Rothschild, consider that the Rule 9 Waiver is fair and reasonable and in the best interests of the Company and the Independent Shareholders as a whole. In providing advice to the Independent Directors, Rothschild has taken into account the Independent Directors' commercial assessments. Accordingly the Independent Directors recommend that the Shareholders vote in favour of the Whitewash Resolution.

 

 

APPENDIX II - HISTOICAL FINANCIAL INFORMATION ON ECUPHAR

 

Consolidated income statements

in £'000

Notes

For the year ended 31 December

2016

2015

2014

Revenue

20.1

68,361

47,097

34,478

Cost of sales

20.2

(40,086)

(30,566)

(23,842)

Gross profit


28,275

16,531

10,636

Research and development expenses

20.3

(1,776)

(1,064)

(284)

Selling and marketing expenses

20.4

(9,740)

(6,682)

(3,390)

General and administrative expenses

20.5

(12,607)

(8,738)

(5,081)

Net other operating income/(expenses)

20.6

1,887

(345)

(277)

Operating (loss) profit


6,039

(298)

1,604

Financial expenses

20.9

(988)

(668)

(341)

Financial income

20.10

97

74

46

Profit (Loss) before taxes


5,148

(892)

1,309

Current income taxes

20.11

(1,305)

(537)

(466)

Deferred taxes

20.11

(327)

735

53

Net (loss) profit


3,516

(694)

896

Net (loss) profit attributable to:





The owners of the parent

21

3,515

(694)

896

Non-controlling interest


1

Earnings per share attributable to
ordinary owners of the parent





Basic


0.25

(0.06)

0.08

Diluted


0.25

(0.06)

0.08

 

The accompanying notes form an integral part of these consolidated special purpose financial statements.

 

Consolidated statements of comprehensive income

in £'000

Notes

For the year ended 31 December


2016

2015

2014

Net (loss) profit for the year

3,515

(694)

896

Other comprehensive income (loss)




Financial instruments at fair value




through OCI*

(5)

Cumulative translation differences*

2,515

(153)

(354)

Other comprehensive income (loss), net of taxes

2,510

(153)

(354)

Total comprehensive (loss) income for the year, net of taxes

6,025

(847)

542

Total comprehensive (loss) income attributable to:




The owners of the parent

6,025

(847)

541

Non-controlling interest

1

 

*       May be reclassified subsequently to profit & loss

The accompanying notes form an integral part of these consolidated special purpose financial statements.

 

Consolidated statements of financial position

in £'000

Assets

Non-current assets


For the year ended 31 December

1 January

Notes

2016

2015

2014

2014






Goodwill

5

9,959

8,974

2,083

2,229

Intangible assets

6

21,246

19,415

7,279

7,425

Property, plant & equipment

7

719

662

386

330

Deferred tax assets

20.11

1,269

1,240

956

969

Other financial assets


69

68

52

96

Other non-current assets


1

1

Total non-current assets


33,263

30,360

10,756

11,049

Current assets






Inventories

9

13,254

13,024

6,383

6,937

Trade receivables

10

10,781

9,801

3,889

3,699

Available-for-sale financial assets

18

423

1

1

Other current assets


1,191

1,330

300

346

Cash and cash equivalents

11

951

749

966

1,154

Total current assets


26,600

24,905

11,539

12,136

Total assets


59,863

55,265

22,295

23,185

Equity and liabilities






Equity






Share capital

12

7,256

7,256

5,148

5,148

Share premium

12

8,821

8,821

Treasury shares


(646)

(646)

Retained earnings

12

1,258

(142)

660

496

Other reserves


2,518

8

161

515

Equity attributable to the owners of the parent


19,853

15,297

5,323

6,159

Non-controlling interest

12

2

2

2

1

Total equity


19,855

15,299

5,325

6,160

Non-current liabilities






Borrowings

14

24,102

2,019

3,837

4,020

Deferred tax liabilities

20.11

224

44

1

2

Derivative financial liability



30

41

Provisions

15

216

25

8

Total non-current liabilities


24,542

2,088

3,876

4,063

Current liabilities






Borrowings

14

631

26,609

6,908

7,464

Trade payables


10,012

8,406

3,512

3,433

Tax payables


1,774

973

388

299

Derivative financial liability


16

Accrued charges & deferred income

16

812

286

129

228

Other current liabilities

17

2,237

1,588

2,157

1,538

Total current liabilities


15,466

37,878

13,094

12,962

Total equity and liabilities


59,863

55,265

22,295

23,185

 

The accompanying notes form an integral part of these consolidated special purpose financial statements.

Consolidated statements of changes in equity

Attributable to the owners of the parents

 

 

Share

Share

Treasury

Retained

Other


Non‑
controlling

Total

in £'000

Notes

capital

premium

shares

earnings

reserves

Total

interest

equity


--------

--------

--------

--------

-------- --------


--------

--------

At 1 January 2016

7,256

8,821

(646)

(142)

8

15,297

2

15,299


--------

--------

--------

--------

-------- --------


--------

--------

Net profit (loss)

3,515

3,515

3,515

Other comprehensive income (loss)

2,510

2,510

2,510


--------

--------

--------

--------

-------- --------


--------

--------

Total comprehensive income (loss)

3,515

2,510

6,025

6,025


--------

--------

--------

--------

-------- --------


--------

--------

External dividend

(1,469)

(1,469)

(1,469)

Redemption treasury shares

646

(646)


--------

--------

--------

--------

-------- --------


--------

--------

At 31 December 2016

7,256

8,821

1,258

2,518

19,853

2

19,855



Attributable to the owners of the parents








Non‑


Share

Share

Treasury

Retained

Other



controlling

Total

in £'000

Notes

capital

premium

shares

earnings

reserves

Total

interest

equity


--------

--------

--------

--------

-------- --------


--------

--------

At 1 January 2015

5,148

(646)

660

161

5,323

2

5,325


--------

--------

--------

--------

-------- --------


--------

--------

Net profit (loss)

(694)

(694)

(694)

Other comprehensive income (loss)

(153)

(153)

(153)


--------

--------

--------

--------

-------- --------


--------

--------

Total comprehensive income (loss)

(694)

(153)

(847)

(847)


--------

--------

--------

--------

-------- --------


--------

--------

External dividend

12

(108)

(108)

(108)

Capital increase in cash

12

2,108

8,821

10,929

10,929


--------

--------

--------

--------

-------- --------


--------

--------

At 31 December 2015

7,256

8,821

(646)

(142)

8

15,297

2

15,299



Attributable to the owners of the parents








Non‑


Share

Share

Treasury

Retained

Other



controlling

Total

in £'000

Notes

capital

premium

shares

earnings

reserves

Total

interest

equity


--------

--------

--------

--------

-------- --------


--------

--------

At 1 January 2014

5,148

496

515

6,159

1

6,160


--------

--------

--------

--------

-------- --------


--------

--------

Net profit (loss)

896

896

1

897

Other comprehensive income (loss)

(354)

(354)

(354)


--------

--------

--------

--------

-------- --------


--------

--------

Total comprehensive income (loss)

896

(354)

542

1

543


--------

--------

--------

--------

-------- --------


--------

--------

Dividend payment

13

(732)

(732)

(732)

Other movement

12

(646)

(646)

(646)


--------

--------

--------

--------

-------- --------


--------

--------

At 31 December 2014

5,148

(646)

660

-------- -------- -------- -------- -------- -------- -------- --------

161

5,323

2

5,325

The accompanying notes form an integral part of these consolidated special purpose financial statements.

 

Consolidated cash flow statements

in £'000

Operating activities

Notes

For the year ended 31 December


2016

2015

2014




Net (loss) profit for the period


3,516

(694)

896

Non-cash and operational adjustments





Depreciation of property, plant & equipment

7

326

156

154

Amortization of intangible assets

6

3,982

2,957

2,193

Loss (gain) on disposal of property, plant & equipment


(1)

(7)

(4)

Movement in provisions


180

17

8

Movement allowance for bad debt and inventories


355

457

42

Financial income

20.10

(97)

(74)

(46)

Financial expense

20.9

988

668

341

Impact of foreign currencies


1,787

(136)

(334)

Gain from sale of subsidiaries

4

(2,432)

Deferred tax expense (income)

20.11

327

(735)

(53)

Income taxes

20.11

1,305

537

465

Other


31

100

31

Working capital adjustment





Increase in trade receivables and other receivables


(1,447)

(6,706)

(156)

Decrease (increase) in inventories


(890)

(2,152)

512

Increase in trade payables and other payables


2,530

4,644

(1,323)

Income tax paid


(1,172)

(350)

(396)

Net cash flow from operating activities


9,288

(1,318)

2,330

 

The accompanying notes form an integral part of these consolidated special purpose financial statements.

in £'000

 

 

For the year ended 31 December

 

Notes

2016

2015

2014

 





 

Investing activities





 

Purchase of property, plant & equipment

7

(463)

(458)

(290)

 

Purchase of intangible assets

6

(1,185)

(781)

(587)

 

Proceeds from the sale of property, plant & equipment (net)


74

29

57

 

Acquisition of subsidiaries

4

(26,125)

 

Proceeds from sale of subsidiary

4

3,211

 

Purchase available for sale financial investments


(409)

 

Net cash flow used in investing activities


1,228

(27,335)

(820)

 

Financing activities





 

Proceeds from loans & borrowings and convertible debt


15,852

21,091

3,265

 

Repayment of loans & borrowings


(23,925)

(2,817)

(3,245)

 

Proceeds from capital increase


10,924

 

 

Purchase treasury shares


(646)

Dividends paid


(1,469)

(108)

(732)

 

Interest paid


(663)

(498)

(289)

 

Other financial income (expense)


(241)

(104)

(12)

 

Net cash flow from financing activities


(10,446)

28,488

(1,659)

 

 

Net increase of cash & cash equivalents


70

(165)

(149)

Cash & cash equivalents at beginning of period

11

749

966

1,154

 

Exchange rate differences on cash & cash equivalents


132

(52)

(39)

 

Cash & cash equivalents at end of period

11

951

749

966

 

 

The accompanying notes form an integral part of these consolidated special purpose financial statements.

 

Notes to the consolidated special purpose financial statements

1          Corporate information

Ecuphar NV is a limited liability company with its registered office at Legeweg 157, bus I, 8020 Oostkamp, Belgium. The consolidated special purpose financial statements comprise Ecuphar NV (the "Parent Company" or "Parent") and its subsidiaries (collectively, the "Ecuphar Group"). See Note 26 for a list of subsidiaries of the Parent Company.

The Ecuphar Group is a leading provider of animal health products. Through the development of a veterinary pharmaceutical portfolio it aims to increase market penetration in existing markets, expand into new export markets and enter into new strategic partnerships and alliances. The Ecuphar Group sells its products in Europe, Americas and Asia.

2          Basis of preparation

The consolidated special purpose financial statements of the Ecuphar Group for the 3 years ended 31 December 2016 were prepared for the purposes of the proposed acquisition of Ecuphar NV by Animalcare Group plc (the "Company") and the Company's proposed readmission to AIM. These consolidated special purpose financial statements have been prepared in accordance with the requirements of the AIM Rules for Companies, and in accordance the International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU-IFRS"). The Ecuphar Group has applied IFRS 1, First-Time adoption of International Financial Reporting Standards ("IFRS 1") in its adoption of IFRS. The Transition Date ("Transition Date") for the Ecuphar Group was 1 January 2014 which is the opening balance sheet date for fiscal year 2014. The Ecuphar Group has applied IFRS standards effective for the period ended 31 December 2016 to all years presented in these consolidated special purpose financial statements, as if these standards had always been in effect (subject to the mandatory and optional IFRS 1 exemptions discussed in Note 27).

These consolidated special purpose financial statements have been prepared on a historical cost basis, except for the assets and liabilities that have been acquired as part of a business combination which have been initially recognized at fair value and certain financial instruments which are measured at fair value.

The consolidated special purpose financial statements are presented in thousands of pound sterling (K£ or thousands of £) and all "currency" values are rounded to the nearest thousand (£000), except when otherwise indicated.

The preparation of financial statements in compliance with adopted IFRS requires the use of certain critical accounting estimates. It also requires Ecuphar Group management to exercise judgment in applying the Ecuphar Group's accounting policies. The areas where significant judgment and estimates have been made in preparing the financial statements and their effect are disclosed in Note 3.

3          Summary of significant accounting policies

Basis for consolidation

The consolidated special purpose financial statements comprise the financial statements of the Ecuphar Group and its subsidiaries.

Entities are fully consolidated from the date of acquisition, which is the date when the Ecuphar Group obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the entities are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, transactions, unrealized gains and losses resulting from intra-group transactions and dividends are fully eliminated.

The Ecuphar Group attributes profit or loss and each component of other comprehensive income to the owners of the parent company and to the non-controlling interest based on present ownership interests, even if this results in the non-controlling interest having a negative balance.

 

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Ecuphar Group loses control over the subsidiary, it will derecognize the assets (including goodwill) and liabilities of the subsidiary, any non-controlling interest and the other components of equity related to the subsidiary. Any surplus or deficit arising from the loss of control is recognized in profit or loss. If the Ecuphar Group retains an interest in the previous subsidiary, then such interest is measured at fair value at the date the control is lost.

The proportion allocated to the parent and non-controlling interests in preparing the consolidated special purpose financial statements is determined based solely on present ownership interests.

The following changes to the consolidation scope occurred during the reported periods:

·        Acquisition of the assets related to the Animal Health Business of Esteve SA, a Spanish pharmaceutical company, effective on 30 April 2015 (see Note 4). As part of this acquisition, the following entities has entered to the consolidation scope: Ecuphar Veterinaria, Ecuphar Italia, Belphar and Euracon GmbH;

·        Disposal of Nutriscience Ltd., the subsidiary of the Ecuphar Group located in the Republic of Ireland, effective on 31 October 2016 (see Note 4).

Non-controlling interests

The Ecuphar Group has the choice, on a transaction by transaction basis, to initially recognize any non-controlling interest in the acquiree which is a present ownership interest and entitles its holders to a proportionate share of the entity's net assets in the event of liquidation at either acquisition date fair value or, at the present ownership instruments' proportionate share in the recognized amounts of the acquiree's identifiable net assets. Other components of non-controlling interest such as outstanding share options are generally measured at fair value. The Ecuphar Group has not elected to take the option to use fair value in acquisitions completed to date and currently only has minor non-controlling interest resulting from business combinations.

Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the executive committee. Operating segments are aggregated when they have similar economic characteristics which is the case when there is similarity in terms of (a) the nature of the products and services, (b) the nature of the production processes, (c) the type or class of customer for their products and services, (d) the methods used to distribute their products or provide their services, and (e) if applicable, the nature of the regulatory environment. The Ecuphar Group has two operating segments, Pharmaceutical and Wholesale.

Foreign currency translation

Functional and presentation currency

The Ecuphar Group's consolidated special purpose financial statements are presented in Pound Sterling (GBP) which is different that the functional currency of the parent company and subsidiaries. The presentation currency is different as it is the Ecuphar Group intention to be publicly quoted in the United Kingdom.

For each entity, the Ecuphar Group determines the functional currency, and items included in the financial statements of each entity are measured using the functional currency. The functional currency of all entities of the Ecuphar Group is Euro.

The statement of financial position is translated into GBP at the closing rate on the reporting date and their income statement is translated at the average exchange rate at year-end. Differences resulting from the translation of the financial statements of the parent and the subsidiaries are recognized in other comprehensive income as "cumulative translation differences".

 

Foreign currency transactions

Transactions denominated in foreign currencies are translated into Euro at the exchange rate at the end of the previous month-end. Monetary items in the statement of financial position are translated at the closing rate at each reporting date and the relevant translation adjustments are recognized in financial or operating result depending on its nature.

Business combinations

Business combinations are accounted for using the acquisition method at the acquisition date, which is the date at which the Ecuphar Group obtains control over the entity.

The cost of an acquisition is measured as the amount of the consideration transferred to the seller, measured at the acquisition date fair value, and the amount of any non-controlling interest in the acquiree.

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. The Ecuphar Group recognizes any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest's proportionate share of the acquired entity's net identifiable assets.

The Ecuphar Group measures goodwill initially at cost at the acquisition date, being:

·        the fair value of the consideration transferred to the seller, plus

·        the amount of any non-controlling interest in the acquiree, plus

·        if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree re-measured at the acquisition date, less

·        the fair value of the net identifiable assets acquired and assumed liabilities

Goodwill is recognized as an intangible asset with any impairment in carrying value being charged to the consolidated income statement. Where the fair value of identifiable assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess is credited in full to the consolidated income statement on acquisition date.

Acquisition costs incurred are expensed and included in general and administrative expenses. Property, plant and equipment

Property, plant and equipment is stated at cost, net of accumulated depreciation and/or accumulated impairment losses, if any. Such cost includes borrowing costs directly attributable to construction projects if the asset necessarily takes a substantial period of time to get ready for its intended use, it is probable that they will result in future economic benefits to the group and the cost can be measured reliably. When significant parts of property, plant and equipment are required to be replaced at intervals, the Ecuphar Group recognizes such parts as individual assets with specific useful lives and depreciates them accordingly. Likewise, when a major inspection is performed, its cost is recognized in the carrying amount of the property, plant and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognized in the income statement as incurred.

Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows:

Equipment

5 years

Office furniture & office equipment

3-5 years or lease term if shorter

Leased equipment

4-5 years

Leasehold improvements

5 years or lease term if shorter

 

Land is not depreciated.

 

A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Ecuphar Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset or the lease term.

An item of property, plant and equipment and any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement when the asset is derecognized.

The assets' residual values, useful lives and methods of depreciation are reviewed at each financial year-end and adjusted prospectively, if appropriate.

Leases

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date, whether fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement.

Finance leases which transfer to the Ecuphar Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the commencement of the lease at the fair value of the leased item or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability.

Finance charges are recognized as financial expenses in the consolidated income statement.

Where substantially all of the risks and rewards incidental to ownership are not transferred to the Ecuphar Group (an "operating lease"), the total rentals payable under the lease are charged to the consolidated income statement on a straight-line basis over the lease term. The aggregate benefit of lease incentives is recognized as a reduction of the rental expense over the lease term on a straight-line basis.

Intangible assets

Intangible assets comprise the acquired product portfolios, in-process research and development, licensing and distribution rights and customer acquired in connection with business combinations, product portfolios & product development costs and capitalized software.

The useful life of the intangible assets is as follows:

Capitalized software:

5 years;

Patents, distribution rights and licenses:

7-12 years;

Product portfolios & product development:

10 years;

In Process Research and Development

10 years;

Goodwill

Not amortized

 

Intangible assets acquired separately

Intangible assets with finite useful lives which are acquired separately are carried at cost less accumulated amortization and accumulated impairment losses. Intangible assets with finite lives are amortized over their useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. The amortization expense on intangible assets with finite lives is recognized in the consolidated income statement based on its function which may be "cost of sales", "sales & marketing expenses", "research & development expenses" and "general and administrative expenses".

 

Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses.

Goodwill

Goodwill is not amortized but it is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. The units or groups of units are identified at the lowest level at which goodwill is monitored for internal management purposes, being the operating segments.

Internally generated intangible assets - research and development expenditures

Research and development includes the costs incurred by activities related to the development of software solutions (new products, updates and enhancements), guides and other products. Expenditures in research and development activities are recognized as an expense in the period in which they are incurred.

Development activities involve the application of research findings or other knowledge to a plan or a design of new or substantially improved (software) products before the start of the commercial use.

Internal development expenditures on an individual project are recognized as an intangible asset when the Ecuphar Group can demonstrate:

·        the technical feasibility of completing the intangible asset so that the asset will be available for use or sale;

·        its intention to complete and its ability to use or sell the asset;

·        how the asset will generate future economic benefits;

·        the availability of resources to complete the asset;

·        the ability to measure reliably the expenditure during development.

Internal development expenditures not satisfying the above criteria and expenditures on the research phase are recognized in the consolidated income statement as incurred.

Subsequent to initial recognition internally generated intangible assets are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets which are acquired separately.

Intangible assets acquired in a business combination

Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition intangible assets acquired in a business combination are measured at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets which are acquired separately.

Impairment of non-financial assets

Impairment tests on goodwill and other intangible assets with indefinite useful economic lives are undertaken annually at the financial year end. Other non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be

 

recoverable. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), the asset is written down accordingly.

Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the smallest group of assets to which it belongs for which there are separately identifiable cash flows; its cash generating units ("CGUs"). Goodwill is allocated on initial recognition to each of the Ecuphar Group's CGUs that are expected to benefit from the synergies of the combination giving rise to the goodwill.

The Ecuphar Group bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Ecuphar Group's CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. For longer periods, a long-term growth rate is calculated and applied to future cash flows projected after the fifth year.

Impairment charges are included in profit or loss, except, where applicable, to the extent they reverse gains previously recognized in other comprehensive income. An impairment loss recognized for goodwill is not reversed.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

Inventories

Inventories are valued at the lower of cost and net realizable value.

Costs incurred in bringing each product to its present location and condition are accounted for as follows:

·        Raw materials: purchase cost on a first in, first out basis;

·        Goods purchased for resale: purchase cost on a first in, first out basis.

Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.

Financial assets

Financial assets include loans, deposits, receivables measured at amortized cost and available for sale financial investments measured at fair value.

Financial assets measured at amortized cost

The Ecuphar Group has loans and receivables that are measured at amortized cost.

The Ecuphar Group's loans and receivables comprise trade and other receivables, other financial assets and cash and cash equivalents in the consolidated statement of financial position.

Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less, and - for the purpose of the statement of cash flows - bank overdrafts. Bank overdrafts are shown within loans and borrowings in current liabilities on the consolidated statement of financial position.

Financial assets that are classified as loans and receivables are initially measured at fair value plus transaction costs and subsequently at amortized cost using the effective interest rate method (EIR). Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included under financial income in the consolidated income statement. The losses arising from impairment are

 

recognized in the consolidated income statement under other operating expenses or financial expenses.

Available-for-sale financial assets measured at fair value

Available-for-sale financial assets relate to investments that are not initially acquired in view of a short term sale (shares and securities) and that are nor fully consolidated nor equity consolidated. Assets in this category are measured at fair value with the resulting gains and losses being directly recognized in other comprehensive income (equity).

Assets in this category are measured at cost when there is no price input available in an active market and the fair value cannot be measured reliable by applying alternative valuation methods.

Impairment of financial assets

The Ecuphar Group assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is to be impaired if there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred 'loss event') and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.

In case of available-for-sale financial assets, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred) or its current fair value, in case of available-for-sale financial assets. The present value of the estimated future cash flows is discounted at the financial asset's original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate.

The carrying amount of the asset is reduced through the use of an allowance account and the amount of loss is recognized in the income statement. In the event of an impairment loss for available-for-sale financial assets, the accumulated impairment loss is removed from other comprehensive income and recognized in the consolidated statement of profit or loss.

Impairment losses on available-for-sale financial assets are not reversed. Financial liabilities

The Ecuphar Group has financial liabilities measured at amortized cost which include loans and borrowings, trade payables and other payables and financial liabilities resulting from an interest rate swap (classified as held for trading).

Financial liabilities at amortized cost

Those financial liabilities are recognized initially at fair value plus directly attributable transaction costs and are measured at amortized cost using the effective interest rate method. Gains and losses are recognized in the income statement when the liabilities are derecognized as well as through the effective interest rate method amortization process.

Derivative financial liabilities

The Ecuphar Group uses derivative financial instruments to hedge the exposure to changes in interest rates, however the use of derivatives is limited and does not represent significant amounts. Derivative financial instruments are initially measured at fair value. After initial recognition the financial instruments are measured at fair value on the balance sheet date.

 

Such hedging transactions do not qualify for hedge accounting criteria, although they offer economic hedging according to the Ecuphar Group's risk policy. Changes in the fair value of such instruments are recognized directly in the consolidated statement of profit or loss.

Derecognition

A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires.

Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously.

Share capital

Financial instruments issued by the Ecuphar Group are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. The Ecuphar Group's ordinary shares are classified as equity instruments.

Dividends

Dividends paid are recognized within the statement of changes in equity only when an obligation to pay the dividends arises prior to the year end.

Provisions

Provisions are recognized when the Ecuphar Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

Employee benefits

Short-term employee benefits

The Ecuphar Group has short-term employee benefits which are recognized when the service is performed as a liability and expense. The short-term employee benefit is the undiscounted amount expected to be paid.

Management incentive plans

The Ecuphar Group has implemented an incentive plan for some of its employees. The liability recognized is the undiscounted amount expected to be paid.

Post-employment benefits

The Ecuphar Group has a defined contribution obligation where the Ecuphar Group pays contributions based on salaries to an insurance company, in accordance with the laws and agreements in each country.

The Belgian defined contribution pension plans are by law subject to minimum guaranteed rates of return, currently 3.25% on employer contributions and 3.75% on employee contributions. These rate have been modified by the law of 18 December 2015 and effective for contribution paid as from 2016 to a new variable minimum return based on the Belgian government bonds, with a minimum of 1.75% and a maximum of 3.75%.

These plans quality as a defined benefit plan as from 1 January 2016 considering the modified law. Previously, the Ecuphar Group has adopted a retrospective approach whereby the net liability recognized in the statement of financial position is based on the sum of the positive differences,

 

determined by individual plan participant, between the minimum guaranteed reserves and the benefits accrued at the closing date based on the actual rates of return.

The impact of the defined contribution plans accounted for as a defined benefit plan is not material.

Contributions are recognized as expenses for the period in which employees perform the corresponding services. Outstanding payments at the end of the period are shown as other current liabilities.

Revenue recognition Sales of goods

Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for goods supplied, stated net of discounts, returns and value added taxes.

Revenue from the sale of goods is recognized when all the following 5 conditions are met:

·        The Ecuphar Group transfers to the buyer the significant risks and rewards of ownership of the goods;

·        The Ecuphar Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

·        The Ecuphar Group can measure reliably the amount of revenue;

·        It is probable that the economic benefits associated with the transaction flow to the Ecuphar Group; and

·        The Ecuphar Group can measure reliably the costs incurred or to be incurred in respect of the transaction.

Trade goods include goods produced for the purpose of sale and goods purchased for resale.

The Ecuphar Group bases its estimate of return on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

Sales of services

When the outcome of a transaction involving the rendering of services is estimated reliably, revenue associated with the transaction is recognized when the services are rendered. The outcome of a transaction is estimated reliably when all the following four conditions are satisfied:

·        The amount of revenue is measured reliably;

·        It is probable that the economic benefits associated with the transaction will flow to the Ecuphar Group;

·        The stage of completion of the transaction at the balance sheet date can be measured reliably; and

·        The costs incurred for the transaction and the costs to complete the transaction are measured reliably.

In general, these services are invoiced as they are performed and the amounts directly recognized in the income statement and do not require the measurement of the stage of completion.

Up-front income received in relation to long-term service contracts is deferred and subsequently recognized over the life of the relevant contracts.

 

Interest income

For all financial instruments measured at amortized cost, interest income is recorded using the effective interest rate, which is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest income is included under financial income in the income statement.

Financing costs

Financing costs relate to interests and other costs incurred by the Ecuphar Group related to the borrowing of funds. Such costs mostly relate to interest charges on short- and long-term borrowings as well as the amortization of additional costs incurred on the issuance of the related debt. Financing costs are recognized in profit and loss of the period or capitalized in case they are related to a qualifying asset.

Other financial income and expenses

Other financial income and expenses include mainly foreign currency gains or losses on financial transactions and bank related expenses.

Taxes

Current income tax

Income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date.

Current income tax relating to items that are recognized directly in equity is recognized in equity and not in the income statement. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.

Deferred tax

Deferred tax is calculated using the liability method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

 

Fair value measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Ecuphar Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

·        Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities

·        Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable

·        Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable

Events after balance sheet date

Events after the balance sheet date which provide additional information about the parent company's position as at the balance sheet date (adjusting events) are reflected in the financial statements. Events after the balance sheet date which are not adjusting events are disclosed in the notes if material.

New and revised standards not yet adopted

The standards and interpretations that are issued, but not yet effective, up to the closing date of the Ecuphar Group's financial statements are disclosed below.

IFRS 9 Financial Instruments and subsequent amendments

On 24 July 2014 the IASB published the complete version of IFRS 9, Financial instruments, which replaces most of the guidance in IAS 39. This includes amended guidance for the classification and measurement of financial assets by introducing a fair value through other comprehensive income category for certain debt instruments. It also contains a new impairment model which will result in earlier recognition of losses. No changes were introduced for the classification and measurement of financial liabilities, except for the recognition of changes in own credit risk in other comprehensive income for liabilities designated at fair value through profit or loss. IFRS 9 also includes a new hedging guidance. It will be effective for annual periods beginning on or after 1 January 2018. The Ecuphar Group has yet to undertake a detailed assessment but no significant impact is expected.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 specifies how and when a company will recognize revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles based five step model to be applied to all contracts with customers as follows:

·        Identify the contract(s) with a customer;

·        Identify the performance obligations in the contract;

·        Determine the transaction price;

 

·        Allocate the transaction price to the performance obligations in the contract; and

·        Recognize revenue when (or as) the entity satisfies a performance obligation.

IFRS 15 was issued in May 2014 and replaces IAS 11-Construction Contracts, IAS 18-Revenue, IFRIC 13-Customer Loyalty Programmes, IFRIC 15-Agreements for the Construction of Real Estate, IFRIC 18-Transfers of Assets from Customers and SIC 31-Revenue-Barter Transactions involving Advertising Services. The Standard will be effective for annual periods beginning on or after 1 January 2018. The Ecuphar Group will make more detailed assessments of the impact over the next months and expect to complete the assessment in the third quarter of 2017.

IFRS 16 Leases

On 13 January 2016, the IASB issued IFRS 16, Leases, which provides lease accounting guidance. Under the new guidance, lessees will be required to present right-of-use assets and lease liabilities on the statement of financial position. At the lease commencement date, a lessee is required to recognize a lease liability, which is the lessee's discounted obligation to make lease payments arising from a lease, as well as a right of use asset, representing the lessee's right to use, or control the use of, a specified asset for the lease term. IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019, subject to endorsement by the European Union. Earlier application is permitted for entities that apply IFRS 15, Revenue from Contracts with Customers, at or before the initial application of IFRS 16.

As at the reporting date, the Ecuphar Group has non-cancellable operating lease commitments of £2,759k, see Note 22. However, the Ecuphar Group has not yet determined to what extent these commitments will result in the recognition of an asset and a liability for future payments and how this will affect the Ecuphar Group's profit and classification of cash flows.

The other standards, interpretations and amendments issued by the IASB (all of them still subject to endorsement by the European Union), but not yet effective are not expected to have a material impact on the Ecuphar Group's future consolidated financial statements and those applicable for the Ecuphar Group are listed below:

·        Amendments to IAS 12: Recognition of Deferred Tax Assets for Unrealized Losses (issued on 19 January 2016) and effective for annual periods on 1 January 2017, subject to endorsement by the European Union;

·        Amendments to IAS 7: Disclosure Initiative (issued on 29 January 2016) and effective for annual periods on 1 January 2017;

·        Clarifications to IFRS 15 Revenue from Contracts with Customers (issued on 12 April 2016) and effective for annual periods on 1 January 2018;

·        Annual Improvements to IFRS Standards 2014-2016 Cycle (issued on 8 December 2016) and effective for annual periods on 1 January 2018;

Significant accounting judgments, estimates and assumptions

The preparation of the Ecuphar Group's consolidated special purpose financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, and the accompanying disclosures. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities for future periods.

On an ongoing basis, the Ecuphar Group evaluates its estimates, assumptions and judgments, including those related to revenue recognition, development expenses, income taxes, impairment of goodwill, intangible assets and property, plant & equipment and business combinations.

The Ecuphar Group based its assumptions and estimates on parameters available when the consolidated special purpose financial statements were prepared. Existing circumstances and

 

assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Ecuphar Group. Such changes are reflected in the assumptions when they occur.

Internally-developed intangible assets

Under IAS 38, internally generated intangible assets from the development phase are recognized if certain conditions are met. These conditions include the technical feasibility, intention to complete, the ability to use or sell the asset under development, and the demonstration of how the asset will generate probable future economic benefits. The cost of a recognized internally generated intangible asset comprises all directly attributable cost necessary to make the asset capable of being used as intended by management. In contrast, all expenditures arising from the research phase are expensed as incurred.

Determining whether internally generated intangible assets from development are to be recognized as intangible assets requires significant judgment, particularly in determining whether the activities are considered research activities or development activities, whether the product enhancement is substantial, whether the completion of the asset is technical feasible considering a company-specific approach, the probability of future economic benefits from the sale or use.

Management has determined that the conditions for recognizing internally generated intangible assets from product development activities are not met until shortly before the developed products are available for sale. This assessment is monitored by the Ecuphar Group on a regular basis.

Income taxes

Deferred tax assets are recognized for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning strategies.

As at 31 December 2016, the Ecuphar Group had £255k (2015: £58k; 2014: £142k) of tax losses carry forward and other tax credits such as investment tax credits and notional interest deduction. These losses relate to the subsidiaries that have a history of losses, do not expire and may not be used to offset taxable income elsewhere in the Ecuphar Group.

The Ecuphar Group may also be required to evaluate some uncertainty surrounding potential liability in relation to uncertain tax positions. Uncertain tax positions (whether assets or liabilities) are recognized using a 'probable' threshold in accordance with IAS 12, and they are reflected at the amount expected to be recovered from, or paid to, the taxation authorities. It may also include interpretations of complex tax laws as well as transfer pricing considerations which could be disputed by tax authorities. Assessing uncertain tax positions requires significant judgement from Management.

Impairment of goodwill

The Ecuphar Group has goodwill for a total amount of £9,959k (2015: £8,974k; 2014: £2,083k) which has been subject to an impairment test. The goodwill is tested for impairment based on a discounted cash flow model with cash flows for the next five years derived from the budget and a residual value considering a perpetual growth rate. The recoverable amount is sensitive to the discount rate used for the DCF model as well as the expected future cash-inflows and the growth rate used for extrapolation purposes. The key assumptions used to determine the recoverable amount for the different CGUs are disclosed and further explained in Note 5.

No impairment charges have been recorded during the reported periods.

 

Business combinations

The Ecuphar Group determines and allocates the purchase price of an acquired business to the assets acquired and liabilities assumed as of the business combination date. The purchase price allocation process requires the Ecuphar Group to use significant estimates and assumptions, including:

·        estimated fair value of the acquired intangible assets; and

·        estimated fair value of property, plant and equipment.

While the Ecuphar Group is using its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the date of acquisition, our estimates and assumptions are inherently uncertain and subject to refinement. Examples of critical estimates in valuing certain of the intangible assets the Ecuphar Group has acquired or may acquire in the future include but are not limited to:

·        future expected cash flows from customer contracts and relationships, software license sales and maintenance agreements;

·        the fair value of the plant and equipment;

·        the fair value of the deferred revenue;

·        discount rates; and

·        the determination of useful lives and amortization period of acquired intangible assets.

4          Business Combinations and disposals of subsidiaries

Business combinations

The Ecuphar Group did not complete any business combinations during the year ended 31 December 2016.

Esteve

On 30 April 2015, the Ecuphar Group acquired the assets related to the Animal Health business of Esteve SA, a Spanish pharmaceutical company, through an asset purchase agreement. The consideration paid in cash for those assets amounted to £26,125k (€36,000k). This acquisition related in substance to an integrated set of activities as defined by IFRS 3 Business Combinations. As a result a purchase price allocation was performed at the date of acquisition. The fair values of the related assets at acquisition date are described below.

in £'000

Assets

Carrying
value at
acquisition
date

Fair value
adjustments

Fair value
acquisition
at date




Intangible assets

14,582

14,582

Other non-current assets

124

124

Inventory

4,523

423

4,946

Trade receivables

Other current assets

Cash


4,523

15,129

19,652

Liabilities




Financial debts

Deferred tax liabilities

(443)

(443)

Trade payables

Other liabilities


(443)

(443)

Total identified assets and liabilities

4,523

14,686

19,209

Goodwill



6,916

Acquisition price

26,125

 

The purchase price allocation resulted in a residual goodwill balance recognized of £6,916k. The impact on the cash flow position of the Ecuphar Group resulting from this business combination is as follows:

Cash flow from business combination

Consideration paid in cash

26,125

Total cash flow

26,125

The asset purchase agreement did not include any contingent consideration payable in addition to the purchase price.

The goodwill is mainly attributable to Esteve's significant commercial leverages opportunities, the value of the trained and knowledge workforce and the significant operational and commercial synergies realized.

The acquisition has contributed since the date of acquisition until 31 December 2015 a total revenue of £16,005k and a net loss of £(605)k. The Ecuphar Group does not have the information to disclose the impact on the revenue and the net profit as if the acquisition has been completed on 1 January 2015.

Disposals of subsidiaries Nutriscience

On 31 October 2016, the Ecuphar Group entered into a share purchase agreement with Swedencare AB regarding the sale of one of its subsidiaries, Nutriscience Ltd. The consideration received by the Ecuphar Group amounts to £3,507k and this resulted in a gain of £2,432k. The effect of this transaction on the financial position and cash flows of the Ecuphar Group is as follows:

Nutriscience

in £'000

Assets

Carrying value at selling date

 


 

Goodwill

419

 

Property, plant and equipment

53

 

 

Inventories

407

 

Trade receivables

419

Other receivables

37

 

Cash and cash equivalents

296

 


1,631

 

Liabilities


 

Financial debts

 

Trade payables

(315)

 

Other payables

(241)

 


(556)

 

Total assets and liabilities

1,075

 

 

Gain on sale Nutriscience

2,432

 

Selling price received in cash

3,507

Cash flow from sale


 

Cash & cash equivalents transferred

(296)

 

Selling price

3,507

 

Total cash flow

3,211

 

 

This disposal did not meet the IFRS 5 criteria as component of a group, as separate major line of business nor as geographical areas of operations. Therefore discontinued operations and asset held for sale disclosures are not required.

5         Goodwill

The goodwill has been allocated to the cash generating units ("CGU") as follows:

For the year ended 31 December

in £'000

2016

2015

2014

CGU: Pharmaceuticals

9,425

8,513

1,593

CGU: Wholesale

534

461

490

Total

9,959

8,974

2,083

 

The changes in the carrying value of the goodwill can be presented as follows for the years 2016, 2015 and 2014:

in £'000

Gross

Impairment

Total

At 1 January 2014

2,229

2,229

Additions

Currency translation

(145)

(145)

At 31 December 2014

2,083

2,083

Additions/(disposals)

6,917

6,917

Currency translation

(25)

(25)

At 31 December 2015

8,974

8,974

Additions/(disposals)

(419)

(419)

Currency translation

1,403

1,403

At 31 December 2016

9,958

9,958

 

In addition to currency translation effects the goodwill balance increased as a result of the Esteve business combination in 2015 with £6,917k and decreased as a result of the disposal of Nutriscience Ltd in 2016 with £(419)k (see Note 4).

As of 31 December 2016 goodwill allocated to the Pharmaceuticals CGU includes goodwill recognized as a result of past business combinations of Esteve, Equipharma NV, Ecuphar BV and Cardon Chemicals NV. As of 31 December 2016 goodwill allocated to the Wholesale CGU includes goodwill recognized as a result of the past business combinations of Medini NV and Orthopaedics NV.

The Ecuphar Group has performed an impairment test based on a discounted cash flow model including cash flows derived from the three year budget plan and residual value as of the fourth year.

Both the Pharmaceuticals and Wholesale CGU are included in their respective reportable segment Pharmaceuticals and Wholesale.

CGU Pharmaceuticals

The recoverable amount of this cash-generating unit is determined based on a value in use calculation which uses cash flow projections based on financial budgets approved by management covering a 5-year period. The cash flows beyond that five-year period have been extrapolated using a steady 2% per annum growth rate. The main assumptions used for the goodwill impairment testing include a pre-tax discount rate based on a weighted average cost of capital ("WACC") of 10.56%. Other assumptions include the year-on-year growth rate of the revenue, gross margin and the operating costs which has been determined by management based on past experience. It was concluded that the recoverable amount of £61,892k is approximately £43,804k higher than the carrying value of the cash generating unit. If the year-on-year growth rate of the revenue, gross margin and the operating costs would be zero, the headroom would decrease by approximately £16,784k. If the discount rate would increase by 1%, the headroom would decrease by

approximately £8,349k. In both sensitivity analyses, the net recoverable amount is significantly higher than the carrying value of the cash generating units.

CGU Wholesale

The recoverable amount of this cash-generating unit is determined based on a value in use calculation which uses cash flow projections based on financial budgets approved by management covering a 5-year period. The cash flows beyond that five-year period have been extrapolated using a steady 2% per annum growth rate. The main assumptions used for the goodwill impairment testing include a pre-tax discount rate (based on WACC) of 10.56%. Other assumptions include the year-on-year growth rate of the revenue, gross margin and the operating costs which has been determined by management based on past experience. It was concluded that the recoverable amount of £5,895k is approximately £4,127k higher than the carrying value of the cash generating unit. If the year-on-year growth rate of the revenue, gross margin and the operating costs would be zero, the headroom would decrease by approximately £1,345k. If the discount rate would increase by 1%, the headroom would decrease by approximately £628k. In both sensitivity analyses, the net recoverable amount is higher than the carrying value of the cash generating units.

6           Intangible assets

The changes in the carrying value of the intangible assets can be presented as follows for the years 2016, 2015 and 2014:

in £'000

Acquisition value

In Process R&D

Patents,
distribution
rights &
licenses

Product
portfolios &

product
development

costs

Capitalized software

Total






At 1 January 2014

1,580

10,325

11,905

Additions

(11)

1,999

543

2,531

Change due to business combinations

Disposals

(1,211)

(1,211)

Exchange differences

(127)

(690)

(817)

Other

11

11

At 31 December 2014

-------

2,241

-------

10,178

-------

-------

12,419

-------

Additions

34

747

781

Change due to business combinations

2,417

8,798

3,367

14,582

Disposals


(15)

(15)

Currency translation

34

(8)

(542)

(516)

Other