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Dechra Pharmaceuticals PLC   -  DPH   

Audited preliminary results - year ended 30.6.19

Released 07:00 02-Sep-2019

RNS Number : 7978K
Dechra Pharmaceuticals PLC
02 September 2019
 

Monday, 2 September 2019

 

Dechra Pharmaceuticals PLC

(Dechra, Company or the Group)

 

Preliminary Results Announcement

 

Global veterinary pharmaceutical business, Dechra issues audited preliminary results for the year ended 30 June 2019

 

 

"Sustaining Growth Through Expertise"

 

 

"The Group has delivered another strong performance throughout the financial year. We have continued to outperform in almost all markets in which we operate and strategically it has also been an excellent year."

Ian Page, Chief Executive Officer

 

Highlights

 

Strategic progress made:

·      Recent acquisitions performing ahead of expectations.

·      CAP outperformance in all key markets.

·      FAP growth continuing.

·      Numerous product registrations achieved, and new development opportunities secured.

 

Strong financial performance:

·      Revenue growth of 17.5% to £481.8 million.

·      Underlying operating profit growth of 27.3% to £127.4 million.

·      Underlying EBIT margin expansion of 200 bps to 26.4%.

·      Underlying diluted EPS increased by 16.6% to 90.01 pence.

·      Reported operating profit growth of 13.5%.

·      Full year dividend increased by 23.9% to 31.60 pence.

 

All of the above measures are at constant exchange rate (CER).

 

Financial Summary

 


2019

£m

2018

£m

Growth at AER

Growth at CER

 Revenue

481.8

407.1

18.3%

17.5%

 Underlying





 Underlying Operating profit

127.4

99.2

28.4%

27.3%

 Underlying EBIT %

26.4%

24.4%

 200 bps

200 bps

 Underlying EBITDA

137.2

106.6

28.7%

27.7%

 Underlying diluted EPS (p)

90.01

76.45

17.7%

16.6%

Reported





 Operating profit

39.0

34.1

14.4%

13.5%

 Diluted EPS (p)

30.07

37.04

(18.8%)

(19.6%)

Cash generated from operations before interest/taxation

108.3

81.2

33.4%


 Dividend per Share

31.60

25.50

23.9%

23.9%

 

Underlying results excludes items associated with areas such as rationalisation, acquisition and disposal related expenses and income (including amortisation and impairment on acquired intangibles, non-cash inventory adjustments, and the remeasurement and other movements on deferred and contingent consideration), Brexit costs, debt refinancing including any loss on extinguishment of debt, impairment of investments and the rationalisation of the manufacturing organisation and tax rate changes.

AER is defined as Actual Exchange Rate.

 

Results Briefing today:

A presentation of the Annual Result's will be held today at 10.30am at the office of Investec Bank plc, 30 Gresham Street, London,

EC2V 7QP.

 

Dial in: Ref: Dechra - Standard International Access London +44 (0)20 3003 2666.

 

For assistance please contact Fiona Tooley on +44 (0) 7785 703 523 or at Investec on + 44 (0) 20 7597 5970.

 

Enquiries:

Dechra Pharmaceuticals PLC

 

Ian Page, Chief Executive Officer

 

Office:  +44 (0) 1606 814 730

 

 

 

Paul Sandland, Acting Chief Financial Officer

e-mail: corporate.enquiries@dechra.com

Office:  +44 (0) 1606 814 730

 

 

 

TooleyStreet Communications Ltd

 

Fiona Tooley, Director

e-mail: fiona@tooleystreet.com

Office:  +44 (0) 121 309 0099

Mobile: +44 (0) 7785 703 523

 

Notes: Foreign Exchange Rates:

FY2019 Average: EUR 1.1345: GBP 1.0; USD 1.2945: GBP 1.0

FY2019 Closing: EUR 1.1154: GBP 1.0; USD 1.2693: GBP 1.0

FY2018 Average: EUR 1.1286: GBP 1.0; USD 1.3465: GBP 1.0

FY2018 Closing: EUR 1.1286: GBP 1.0; USD 1.3157: GBP 1.0

 

About Dechra

Dechra is a global specialist veterinary pharmaceuticals and related products business.  Its expertise is in the development, manufacture and sales and marketing of high quality products exclusively for veterinarians worldwide. Dechra's business is unique as the majority of its products are used to treat medical conditions for which there is no other effective solution or have a clinical or dosing advantage over competitor products.  For more information, please visit: www.dechra.com

 

Stock Code: Full Listing (Pharmaceuticals): DPH

 

Trademarks

Trademarks appear throughout this document in italics. Dechra and the Dechra 'D' logo are registered trademarks of Dechra Pharmaceuticals PLC. The Malaseb® trademark is used under licence from Dermcare-Vet Pty. Ltd. StrixNB® and DispersinB® are trademarks licensed from Kane Biotech Inc. Redonyl® is a trademark licensed from Innovet Italia S.r.l.

Forward Looking Statement

This document contains certain forward-looking statements.  The forward-looking statements reflect the knowledge and information available to the Company during the preparation and up to the publication of this document.  By their very nature, these statements depend upon circumstances and relate to events that may occur in the future thereby involve a degree of uncertainty.  Therefore, nothing in this document should be construed as a profit forecast by the Company.

 

Market Abuse Regulation (MAR)

The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014.  Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

 

 

Dechra Pharmaceuticals PLC

Preliminary Results for the year ended 30 June 2019

 

Chief Executive Officer's Statement

I am pleased to report that the Group has delivered another strong performance throughout the financial year (the Period). Financially we have continued to outperform in almost all markets in which we operate, especially in the USA where we have delivered another year of exceptional organic growth. Strategically it has also been an excellent year; our pipeline has delivered new products and has been significantly enhanced with new technology; geographically we have extended our footprint through the acquisition of Laboratorios Vencofarma do Brasil Ltda (Venco) and we have successfully integrated the acquisitions completed in the previous financial year.

 

Portfolio Focus

EU Pharmaceuticals Segment

In the Period our European (EU) Pharmaceuticals Segment reported revenues increased by 18.7% at CER (17.5% at AER). Excluding third party contract manufacturing and acquisitions, revenues increased by 7.8% at CER (6.9% at AER). This growth was partly offset by the ongoing decline in non-core business, such as agrochemicals. Although market growth in European countries has been very slow or flat, all of Dechra's major markets outperformed and delivered solid growth on the previous year.

 

International Business

Our Australian, New Zealand and recently acquired Brazilian businesses are outperforming our expectations. Sales through third party marketing partners have been marginally slower than expected; clearly demonstrating our ability to drive products under our control and under the Dechra brand to a higher level. This supports our international expansion strategy which can be demonstrated through the acquisitions in Australia, New Zealand and Brazil over the last few years.

 

NA Pharmaceuticals Segment

Total North America (NA) Pharmaceuticals Segment revenues increased by 15.4% at CER (19.8% at AER). This strong performance was driven by further market penetration of our key, unique brands such as Vetoryl and Zycortal and also by increased market share of our generics portfolio. We continue to benefit from the full year effect of the sales team that was significantly enlarged in the prior financial year. As the team is now the correct scale relative to our size, new headcount will only be added commensurate to growth. The USA is the main driver of this sales growth; however, we have also had a solid performance in Canada. Whilst not material to the Group, the strategic restructuring and repositioning of our Mexican business is behind schedule; however, at the end of the Period we were beginning to see real traction from new, core product introductions and from the additional expertise added through the recently appointed, experienced management team.

 

Product Group Performance

In the commentary which follows, all references will be to CER movement unless otherwise stated.

 

CAP

Companion Animal Products (CAP), which represent 70.7% of Group turnover, grew by 23.1% (14.6% organically) in the Period with all therapeutic categories performing well. We have developed a broad portfolio, especially in internal medicine and critical care products such as anaesthesia and analgesia, where we have a wide range providing the veterinarian with an optimal solution for every case. We recently developed a mobile application by which a veterinarian can evaluate the optimum anaesthetic or analgesic protocol for many species of animals in numerous clinical conditions.

 

FAP

Food producing Animal Products (FAP), which represent 11.9% of Group turnover, grew by 19.1% (4.2% organically). This growth was driven by a strong organic performance in our EU business (as we are not in the FAP sector in NA) and by the acquisition of Venco, whose product portfolio is mainly FAP vaccines. Whilst the overall market in Europe is still seeing a decline in antibiotic usage, we are no longer being affected as our range is aligned to best prescribing practice.

 

Equine

Equine, which represents 7.1% of Group turnover, grew by 21.1% (3.1% organically). This growth was mainly driven by the EU and by acquisition. Performance in NA was a little disappointing, predominantly due to some concerns about the risk of bisphosphonates (Osphos) when administered incorrectly and off-label. We have reinforced the need to use medicines as directed and have run an extensive marketing campaign and believe we have now addressed all concerns.

 

Nutrition

Nutrition represents 6.0% of Group turnover. Sales on the year were flat; however, we have arrested the decline seen last year and in the first half of this financial year. We have changed the management structure of this business unit to provide better focus. Following on from the launch of the refreshed cat diets, the dog diets are about to be relaunched in improved livery, new pack sizes and improved formulations.

 

Product Development

Achievements

We have restructured the global clinical department with a new organisational strategy into which we have integrated the vaccine development team and the regulatory control of the recent acquisitions: AST Farma, Le Vet and Venco.

We have implemented and rolled out a new project management software platform utilising Microsoft Project Server which will improve transparency, planning and delivery of our product pipeline.

 

Product Approvals

There have been numerous marketing authorisations received throughout the year, which included:

•     Carbifusion® Solution for Infusion, an electrolyte solution for cattle and horses, approved in four EU territories;

•     Cardisure Liquid, a cardiovascular treatment for dogs, approved in 23 EU territories;

•     Clindabactin® Flavoured Tablets, an antibiotic for dogs and cats, approved in 28 EU territories;

•     Cyclosporine Soft Gel Capsules, for allergic dermatitis in dogs, approved in the US;

•     Dormazolam® Injection, a sedative for horses, approved in 18 EU territories;

•     Equibactin® Oral Powder, an antibiotic for horses, approved in 20 EU territories;

•     EquiShield® EHV Vaccine, a herpes virus vaccine for horses, approved in 15 EU territories;

•     Intubeaze® Oromucosal Spray, an anaesthetic pre-treatment for cats, approved in 14 additional EU territories;

•     Laxatract® Syrup, a laxative for cats and dogs, approved in 28 EU territories;

•     Rominervin Injection, a sedative for horses, approved in 27 EU territories;

•     Solacyl® Powder, an antibiotic for cattle and pigs, approved in six additional EU territories;

•     Solupam® Solution, for the management of convulsion disorders and skeletal muscle spasm or sedation for dogs and cats, approved in 28 EU territories;

•     Sympagesic® Injection, an analgesic and for the treatment of smooth muscle spasms in horses, cattle, pigs and dogs, approved in 28 EU territories;

•     Domidine® Solution, a sedative for horses, approved in Canada;

•     Sedator® Solution and Atipam® Solution, a sedative and a reversal agent for dogs, Domidine, a sedative for horses, HY-50® for equine lameness and Felimazole® for hyperthyroidism, approved in Mexico; and

•     Panapex Ear Ointment for dogs, Intubeaze Oromucosal Spray an anaesthetic pre-treatment for cats, Meloxicam Oral Suspension an anti-inflammatory for dogs and Pimobendan Oral Solution a cardiovascular treatment for dogs, approved in Australia.

Also, the International Regulatory Affairs team achieved 43 product registrations across Israel, South Korea, Macau, Macedonia, Malaysia, Malta, Namibia, Serbia, Ukraine, United Arab Emirates, and Zambia.

 

Filling the Pipeline

We consider that it is important to our market position, as an innovative company, that we retain a balance of both novel and generic products in our portfolio and are conscious that as a consequence of the acquisitions we have made over the last two years, the balance of our pipeline has a greater generic and generic plus weighting than we have had historically. We have therefore increased resources and placed greater emphasis into screening opportunities, and have subsequently secured numerous development agreements for new technologies, the most significant of which are detailed below:

•     Post year-end we are delighted to have completed a significant agreement with Akston Biosciences who have developed a unique version of insulin with a sustained duration of activity;

•     We have entered into three agreements to evaluate two products for equine lameness and one product for equine gastric ulcers;

•     We have signed a licensing agreement with Vetcare Ltd for a combination, novel canine sedative; and

•     We have also entered into multiple agreements to evaluate new vaccine technologies against viral and bacterial diseases in pigs; proof of concept studies are commencing with these vaccines.

 

Acquisitions

AST Farma B.V. and Le Vet Beheer B.V.

AST Farma B.V. and Le Vet Beheer B.V., which were acquired in the previous financial year, are both performing well. AST Farma has significantly increased our presence in the Dutch market where we now offer a wider range of products, both existing Dechra and AST Farma, on a direct to vet basis. The commercial teams and product ranges of both Dechra and AST Farma have been combined with both businesses benefiting from the leverage of the enlarged company. Le Vet has started to deliver significant growth to Dechra in the second half of the financial year following the disintermediation of their previous distribution agreements which were held by a number of Dechra's competitors. Significant synergies are now being realised as Dechra branded products are sold through our own sales and marketing organisations which provide a better focus on sales and we capture the full margin chain. To date we have terminated approximately two thirds of these distribution agreements where there were change of ownership clauses; synergies from the remaining third are expected to be delivered over the next two years.

 

Caledonian Holdings Ltd

In October 2018 we acquired the trade and assets of a small bolt-on business, Caledonian Holdings Ltd (Caledonian) for a cash consideration of £4.4 million. The business, which had sales of £1.8 million to the end of June 2017, was entirely equine products, which are sold across Australia and New Zealand and also in Hong Kong. The acquisition was made to strengthen our market position in the equine sector in these territories and to complement our existing equine product portfolio and pipeline.

 

Laboratorios Vencofarma do Brasil Ltda

In December 2018 we acquired Laboratorios Vencofarma do Brasil Ltda (Venco) for a consideration of £34.8 million. This acquisition gives us a foothold within the third largest FAP market in the world, Brazil. It is also an important expansion to our FAP vaccine portfolio, the fastest growth sector of the global market. As with all of our acquisitions, we had a clear vision and strategic plan of how to integrate the business into Dechra which we shared with the management team on the first day of ownership. We have subsequently strengthened the team with a new Finance Director, a new HR Manager and a new Regulatory Manager. The team have integrated well with our culture and Values and to date have outperformed our expectations. Over the next two years we will invest in the manufacturing facility and in new product registrations to extend our presence in Brazil and will look at opportunities to increase further our presence in the wider South American market.

 

Animal Ethics Pty Ltd

Post the year end we acquired an additional 15% of the shares of Medical Ethics Pty Ltd, the parent company of Animal Ethics Pty Ltd, for a consideration of AUD$13.5 million (£8.0 million). Following the acquisition of 33% for AUD$18 million in 2017 this takes our total holding to 48%. The strong progress made on the global development of Tri-Solfen® for pigs, cattle and sheep and the ongoing trials for its application for debriding of venous leg ulcers in humans has resulted in separate independent valuations of the business, both in excess of AUD$100 million. Following recent trials in South-East Asia, Tri-Solfen® has also been found to be highly effective in alleviating the clinical signs of Foot and Mouth Disease in cattle. Given the effectiveness in the trials and the catastrophic problem that this disease causes, the government in Laos has already approved the product for use in their country. We anticipate that other countries in South-East Asia will shortly follow suit. This could represent a significant revenue opportunity as the disease is endemic in many parts of the world and affects millions of cattle annually.

 

Strategic Enablers

Manufacturing and Supply Chain

At the half-year we announced the appointment of Simon Francis, formerly of Novartis, as our new Director of Manufacturing and Supply Chain. Simon immediately undertook and completed a full review of our facilities and capabilities to make improvements, including the strengthening of the Manufacturing and Supply Chain management team. The improvements needed to be implemented as we were experiencing a number of supply issues from our own sites and contract manufacturers. These issues are now in the process of being mitigated.

As planned within our strategic capital expenditure programme we have made infrastructure improvements at our three main European sites. In Skipton, UK, we have completely upgraded the packaging, manufacturing and washing facilities. In Zagreb, Croatia, we have built and commissioned a new solid dose facility and in Bladel, Netherlands, we are close to completing an upgrade of our sterile facility hopefully to achieve FDA status in 2020. In conjunction with grants from the Croatian government, we have implemented the largest green solar energy installation in the country at our Zagreb facility which will provide the site with 30% of its energy requirements from this natural resource.

 

Technology

Following the successful roll out of Oracle across DVP EU in May 2018, we have subsequently implemented and completed phase two of the project which deals with new legislation changes, improved reporting and post go-live system efficiencies. We have commenced a number of development projects and interfaces to deal with recent logistics changes to Oracle in the USA.

The IT team has also implemented numerous other IT developments, including improvements to the Group network, overseeing the installation of the project management software in Product Development, a regulatory information system for Regulatory Affairs, the deployment of a new AI-based cyber defence solution and the support of a pilot for a new cash management solution for our Treasury Department. Our Digital team has also been very productive with new modules in the Dechra Academy for veterinarians and veterinary nurses, new training courses in Delta, the in-house educational programme, and an upgrade and relaunch of Insite, the Group's intranet.

 

People

In April 2019 we announced the resignation of Richard Cotton, Group Chief Financial Officer. The process to identify a suitable replacement is continuing. Since April, Paul Sandland, who has been with the Group for nine years, and has demonstrated strong financial and commercial skills as both Group Financial Controller and DVP EU Finance Director, has been Acting Chief Financial Officer.

 

In February 2019 we announced the appointment of Lisa Bright as a new Non-Executive Director to complement the strong skills already in existence on the Board. Lisa's appointment strengthens the Board through her strategic and operational leadership knowledge in pharmaceutical and biotechnology companies; her experience and strong interpersonal skills will be invaluable in our international expansion strategy and the development of our employee engagement programme.

 

Operationally we have developed a pilot for a new approach to performance management that is currently being trialled in North America.

For a number of years we have offered a Save As You Earn scheme in the UK which has proved very successful in providing additional reward and retention of UK employees. We will soon be rolling out similar schemes across the Group, with the first launch being in North America in 2019 prior to further roll out in 2020.

 

On behalf of the Board I would like to thank all employees for their hard work, determination, skill and ambition. They are the main driving force behind Dechra's success.

 

Brexit

In preparation for a potential hard Brexit, we have changed the ownership of all UK marketing authorisations to a newly established subsidiary in the Netherlands. We have also transferred all the analytical testing methods for products manufactured at our Skipton site to a new laboratory in Zagreb, Croatia, and to our existing laboratory at our Bladel manufacturing site; this will allow us to perform batch release within the EU in the likely event that there will be no mutual recognition of quality standards. We have increased inventory in the supply chain to mitigate the potential delays at ports. We do not expect any material effect from the potential import or export tariffs.

 

Dividend

The Board is proposing a final dividend of 22.10 pence per share (2018: 18.17 pence per share). Added to the interim dividend of 9.50 pence per share, this brings the total dividend for the financial year ended 30 June 2019 to 31.60 per share, representing 23.9% growth over the previous year.

Subject to shareholder approval at the Annual General Meeting to be held on 18 October 2019, the final dividend will be paid on 15 November 2019 to shareholders on the Register at 25 October 2019. The shares will become ex-dividend on 24 October 2019.

 

Outlook

Our strong growth, both organic and through acquisition, and our broadening product portfolio and increasing geographic reach positions us well for continued growth in this new financial year and beyond. Despite the challenges from the supply chain issues, outlined earlier in this report, the outlook for the year ahead remains in line with management expectations. We continue to identify and deliver opportunities for growth in line with our strategy and remain confident in our current and future prospects.

 

Ian Page

Chief Executive Officer

2 September 2019

 

 

Financial Review

 

Overview of Reported Financial Results

To assist with understanding our reported financial performance, the consolidated results below are split between existing and acquired businesses; acquisition includes the incremental effect of those businesses acquired in the current and prior year, reported on a 'like-for-like' basis. Additionally, the table below shows the growth at both reported actual exchange rates (AER), and constant exchange rates (CER) to identify the impact of foreign exchange movements. The acquisition loss includes underlying operating profit of £14.6 million and non-underlying items of £38.9 million. These non-underlying items are comprised of amortisation of acquired intangibles of £30.1 million, non-cash uplift on acquired inventory of £5.1 million and acquisition costs of £3.7 million.

 

Including non-underlying items, the Group's consolidated operating profit increased by 13.5% at CER (14.4% at AER) whilst consolidated profit before tax decreased by 4.8% at CER (3.8% at AER) due to the increased finance charges arising from the financing of prior and current year acquisitions.

 

As Reported

2019

Existing

£m

2019

Acquisition

£m

2019

Consolidated

£m

2018

£m

Growth at AER

Growth at CER

 Consolidated

%

Consolidated

%

Revenue

447.6

34.2

481.8

407.1

18.3%

17.5%

Gross profit

258.8

14.3

273.1

222.4

22.8%

21.9%

Gross profit %

57.8%

41.8%

56.7%

54.6%

210bps

200bps

Operating profit/(loss)

63.3

(24.3)

39.0

34.1

14.4%

13.5%

EBIT %

14.1%

(71.1%)

8.1%

8.4%

(30bps)

(30bps)

Profit/(loss) before tax

53.7

(25.9)

27.8

28.9

(3.8%)

(4.8%)

Diluted EPS (p)



30.07

37.04

(18.8%)

(19.6%)

 

Overview of Underlying Financial Results

When presenting our financial results, we use a number of adjusted measures which are considered by the Board and management in reporting, planning and decision making. Underlying results reflect the Group's trading performance excluding non-underlying items. A reconciliation of underlying results to reported results in the year to 30 June 2019 is provided in the table below. In the commentary which follows, all references will be to CER movement unless otherwise stated.



Non-underlying Items


2019

Underlying Results

£m

Non-cash uplift on acquired inventory

£m

Amortisation and related costs of acquired intangibles

£m

Acquisition, impairments and restructuring costs

£m

Tax rate changes and finance expenses

£m

2019 Reported Results

£m

Revenue

481.8

-

-

-

-

481.8

Gross profit

278.2

(5.1)

-

-

-

273.1

Selling, general and administrative expenses

(125.7)

-

(70.0)

(6.5)

-

(202.2)

R&D expenses

(25.1)

-

(6.8)

-

-

(31.9)

Operating profit

127.4

(5.1)

(76.8)

(6.5)

-

39.0

Net finance costs

(9.8)

-

-

-

(1.0)

(10.8)

Share of associate loss

(0.2)

-

(0.2)

-

-

(0.4)

Profit before tax

117.4

(5.1)

(77.0)

(6.5)

(1.0)

27.8

Taxation

(24.9)

1.5

17.4

1.5

7.6

3.1

Profit after tax

92.5

(3.6)

(59.6)

(5.0)

6.6

30.9

Diluted EPS (p)

90.01

-

-

-

-

30.07

 

In the year, Dechra delivered consolidated revenue of £481.8 million, representing an increase of 17.5% on the prior year. This included £447.6 million from its existing business, an increase of 8.9%, and a £34.2 million contribution from acquired businesses.

 

Consolidated underlying operating profit of £127.4 million, represents a 27.3% increase on the prior year. This included £112.8 million from Dechra's existing business, an increase of 12.2% on a like-for-like basis, and a £14.6 million contribution from acquired businesses.

 

Underlying EBIT margin increased by 200 bps to 26.4%, with the accretion coming from both the existing and acquired businesses in EU Pharmaceuticals.

 

Underlying diluted EPS grew by 16.6% to 90.01 pence reflecting the profit growth from the existing and acquired businesses, partially offset by higher finance charges from the increase in debt and equity issuance to fund the 2018 and 2019 acquisitions, adjusted by the change in mix of the applicable tax rates.

 

Underlying

2019

Existing

£m

2019

Acquisition

£m

2019

Consolidated

£m

2018

£m

Growth at CER

Existing

%

Consolidated

%

Revenue

447.6

34.2

481.8

407.1

8.9%

17.5%

Gross profit

258.8

19.4

278.2

227.5

12.7%

21.5%

Gross profit %

57.8%

56.7%

57.7%

55.9%

190bps

180bps

Underlying Operating profit

112.8

14.6

127.4

99.2

12.2%

27.3%

Underlying EBIT %

25.2%

42.7%

26.4%

24.4%

80bps

200bps

Underlying EBITDA

122.2

15.0

137.2

106.6

13.2%

27.7%

Underlying Diluted EPS (p)

-

-

90.01

76.45

-

16.6%

 

Reported Segmental Dividend per share

-

-

31.60

25.50

-

23.9%

 

Performance

Reported segmental performance is presented in note 2. The effect of acquisitions in the year was material; the reported segmental performance is analysed between existing and acquired businesses, and at AER and CER in the table below. The acquisition elements capture the additional base business coming into the Group up to the first anniversary of their acquisition, including the growth Dechra generated in them during the year, and the synergies that have already been realised by the Group since acquisition. This analysis becomes less definitive the further in time from the completion of the acquisition, as the acquired business is progressively integrated with the existing business.

Reported

2019

Existing

£m

2019

Acquisition

£m

2019

Consolidated

£m

2018

£m

Growth at AER

Growth at CER

Existing

%

Consolidated

%

Existing

%

Consolidated

%

Revenue by segment









 EU Pharmaceuticals

269.8

34.2

304.0

258.7

4.3%

17.5%

5.2%

18.7%

 NA Pharmaceuticals

177.8

-

177.8

148.4

19.8%

19.8%

15.4%

15.4%

Total

447.6

34.2

481.8

407.1

9.9%

18.3%

8.9%

17.5%










Operating profit/(loss) by segment









 EU Pharmaceuticals

84.5

15.8

100.3

77.0

9.7%

30.3%

10.6%

31.7%

 NA Pharmaceuticals

59.2

-

59.2

48.3

22.6%

22.6%

17.8%

17.8%

 Pharmaceuticals Research

  and Development

(23.9)

(1.2)

(25.1)

(18.3)

(30.6%)

(37.2%)

(30.1%)

(36.6%)

Segment operating profit

119.8

14.6

134.4

107.0

12.0%

25.6%

10.6%

24.6%

Corporate and unallocated costs

(7.0)

-

(7.0)

(7.8)

10.3%

10.3%

10.3%

10.3%

Underlying operating profit

112.8

14.6

127.4

99.2

13.7%

28.4%

12.2%

27.3%

Non-underlying operating items

(49.5)

(38.9)

(88.4)

(65.1)





Reported operating profit

63.3

(24.3)

39.0

34.1

-

14.4%

-

13.5%

 

Underlying Segmental Performance

European Pharmaceuticals

Revenue in European (EU) Pharmaceuticals grew by 18.7%. The existing business grew by 5.2% including like-for-like year-on-year RxVet Limited revenue, and AST Farma B.V. and Le Vet Beheer B.V. revenue; excluding third party contract manufacturing, which is being reduced in line with our strategy and replaced with own product manufacturing, revenues increased by 7.8%. This growth was achieved through the robust performance of our core business and through the realisation of significant synergies from Le Vet. The acquisitions of RxVet, AST Farma and Le Vet, Laboratorios Vencofarma do Brasil Ltda (Venco) and the trade and assets of Caledonian Holdings Ltd (Caledonian) contributed a combined £34.2 million to revenue for the period where there is no comparative and are reported within EU Pharmaceuticals.

 

Operating Profit from existing business grew 10.6%, with operating margin expanding to 31.3% and consolidated operating margin increasing to 33.0%. This was principally due to operating leverage, the accretive operating margin of Le Vet and the curtailment of our Dutch defined benefit pension scheme which resulted in a £3.5 million non-cash credit (presented on a consistent basis as underlying given previous curtailments and current service costs which substantially gave rise to this balance).

 

Underlying

2019

Existing

£m

2019

Acquisition

£m

2019

Consolidated

£m

2018

£m

Growth at CER

Existing

%

Consolidated

%

Revenue

269.8

34.2

304.0

258.7

5.2%

18.7%

EBITDA

92.4

16.2

108.6

82.9

12.3%

32.3%

EBITDA %

34.2%

47.4%

35.7%

32.0%

220bps

370bps

Operating Profit

84.5

15.8

100.3

77.0

10.6%

31.7%

Operating Profit %

31.3%

46.2%

33.0%

29.8%

150bps

320bps

 

North American Pharmaceuticals

Revenue from North American (NA) Pharmaceuticals grew by 15.4% to £177.8 million. All of the growth was in the existing business, with no acquisitions in NA Pharmaceuticals within the current or prior year. The growth was driven by our CAP portfolio and represents strong outperformance of the market. This was partially offset by a reduction in Equine as there was confusion in the market about the use of bisphosphonates and the discontinuation of a human product which was non-core and a legacy of the Putney business acquired in April 2016.

 

Operating Profit from the business grew by 17.8% with the operating margin growing 70 bps to 33.3% as further investments were made in the commercial team to drive future growth.

Underlying

2019

Existing

£m

2019

Acquisition

£m

2019

Consolidated

£m

2018

£m

Growth at CER

Existing

%

Consolidated

%

Revenue

177.8

-

177.8

148.4

15.4%

15.4%

EBITDA

60.0

-

60.0

49.1

17.5%

17.5%

EBITDA %

33.7%

-

33.7%

33.1%

60bps

60bps

Operating Profit

59.2

-

59.2

48.3

17.8%

17.8%

Operating Profit %

33.3%

-

33.3%

32.5%

70bps

70bps

 

Pharmaceuticals Research and Development

Pharmaceuticals Research and Development (R&D) expenses increased by 36.6% from £18.3 million to £25.1 million, with existing business research and development increasing by 30.1%. R&D activities of the acquisitions of AST Farma and Le Vet, and Venco added £1.2 million. Overall R&D expenses as a percentage of revenue increased from 4.5% to 5.2%, excluding the acquired R&D expenses, the increase was from 4.5% to 5.3%. This was in line with the previously communicated strategic intent to expand the Group's product pipeline and to increase investment in more novel opportunities to drive enhanced future growth.


2019

Existing

£m

2019 Acquisition

£m

2019 Consolidated

£m

2018

£m

Growth at CER

Existing

%

Consolidated

%

R&D expenses

(23.9)

(1.2)

(25.1)

(18.3)

(30.1%)

(36.6%)

% of Revenue

5.3%

3.5%

5.2%

4.5%



 

Revenue by Product Category

CAP revenue continues to be the largest proportion of Dechra's business at 70.7%, up from 67.0% in the prior year. CAP grew 23.1% in the year from market penetration, product launches and the addition of the AST Farma and Le Vet portfolio. Equine revenue grew strongly by 21.1% in the year, with growth driven by the EU and by acquisition. FAP revenue accelerated by 19.1% driven by strong core growth in the EU and the acquisition of Venco. Nutrition revenue was broadly flat on the prior year; however, performance in the second half of the year improved with increased focus and the relaunch of the cat diet range.

Other revenue reduced by 25.1% to £20.8 million, now representing only 4.3% of the business as we continue our planned exit from third party contract manufacturing in line with our manufacturing strategy, to improve the production efficiency of Dechra's own products.


2019

£m

2018

£m

% Change at AER

% Change at CER

CAP

340.2

272.7

24.8%

23.1%

Equine

34.4

28.4

21.1%

21.1%

FAP

57.3

48.7

17.7%

19.1%

Subtotal Pharmaceutical

431.9

349.8

23.5%

22.4%

Nutrition

29.1

29.4

(1.0%)

0.0%

Other

20.8

27.9

(25.4%)

(25.1%)

Total

481.8

407.1

18.3%

17.5%

 

Underlying Gross Profit

Underlying Gross Margin for the existing business increased by 190 bps to 57.8% and the consolidated Underlying Gross Margin grew by 180 bps to 57.7%, reflecting the greater proportion of CAP sales and also the realisation of accretive Gross Margin in the acquired AST Farma and Le Vet business.

 

Underlying Selling, General and Administrative Expenses (SG&A)

SG&A costs at AER grew from £110.0 million in the prior year to £125.7 million in the current year, an increase of 14.3% (at AER). This represents growth from both acquired and the existing businesses, and infrastructure cost added to manage the acquisitions and drive further growth.

We also benefited from a £3.5 million non-cash credit through the income statement as a result of the curtailment of our Dutch defined benefit pension scheme.

SG&A as a percentage of revenue contracted in the year from 27.0% in 2018 to 26.1% (26.8% excluding the pension credit) in 2019.

 

Non-underlying Items

Non-underlying items incurred in the year are fully described in note 5. In summary, they relate to the following:

•     Amortisation of acquired intangibles of £76.8 million - the amortisation of the acquired intangibles has grown significantly in the year from £54.1 million following the acquisitions in the 2018 and 2019 financial years;

•     Remeasurement of contingent consideration gain of £0.1 million - this relates to the excess release to the income statement of the contingent consideration on remeasurement of milestone and sales performance liabilities;

•     Non-cash inventory adjustment of £5.1 million - the non-cash inventory adjustment which increases the value of acquisition inventory sold relates to the acquisitions of AST Farma and Le Vet, Caledonian and Venco. It is the result of the fair value exercise carried out in accordance with IFRS 3 'Business Combinations' on acquisition;

•     Expenses relating to acquisition and subsequent integration activities of £3.7 million - this includes the transaction and integration costs associated with the acquisitions of AST Farma and Le Vet, Caledonian and Venco;

•     Rationalisation of manufacturing organisation of £2.0 million - this comprises the costs associated with this strategic programme;

•     Brexit preparation costs of £0.9 million - this represents regulatory and technology transfer costs incurred in advance of Brexit;

•     Finance expense of £1.0 million - this represents the unwinding of the present value discounts relating to deferred consideration due and associated foreign exchange;

•     Taxation credit of £28.0 million - this represents the tax impact of the above, as well as the revaluation of deferred tax balance sheet items following changes in corporate tax rates, most notably the reduction in the Netherlands tax rate from 25.0% to 22.5% in 2020 and 20.5% in 2021.

 

Taxation

The reported effective tax rate (ETR) for the year is a credit of 11.2% (2018: credit of 24.9%), primarily reflecting the one-off impact of the reduction in the Netherlands tax rates on deferred tax balances; this includes both the underlying and non-underlying business. On an underlying basis the ETR is 21.2% (2018: 20.5%); the main differences to the UK corporation tax rate applicable of 19.0% (2018: 19.0%) relate to patent box allowances, and differences in overseas tax rates, particularly in NA Pharmaceuticals.

The underlying ETR is expected to remain broadly similar in the current year, due to the anticipated mix of profits from different countries.

We continue to monitor relevant tax legislation internationally as it may affect our future ETR. Further details can be found in Understanding Our Key Risks detailed below.

 

Reported Profit

Reported profit before tax decreased by 3.8% at AER reflecting the reported operating profit growth of 14.4% at AER offset by the increase in the finance charges arising from the financing of prior and current year acquisitions.

 

Earnings per Share and Dividend

Underlying diluted EPS for the year was 90.01 pence, a 16.6% growth on the prior year. The EBIT growth of 27.3% was partially offset by higher interest costs from the increase in debt and the impact of the shares issued to fund the acquisitions of Venco, AST Farma and Le Vet. The weighted average number of shares for the year was 102.8 million (2018: 97.5 million).

The reported diluted EPS for the year was 30.07 pence (2018: 37.04 pence). This 18.8% reduction (at AER) in reported EPS reflects significantly higher intangible amortisation as a result of recent acquisitions.

The Board is proposing a final dividend of 22.10 pence per share (2018: 18.17 pence), added to the interim dividend of 9.50 pence, the total dividend per share for the year ended 30 June 2019 is 31.60 pence. This represents 23.9% growth over the prior year. Dividend cover based on underlying diluted EPS is 2.8 times (2018: 3.0 times). The Board continues to operate a progressive dividend policy recognising investment opportunities as they arise.

 

Currency Exposure

The average rate for £/€ increased by 0.5%, and the £/$ rate has decreased by 3.9% during the financial year. The effect in the Consolidated Income Statement and Statement of Financial Position is analysed in the above paragraphs of this review between performance at AER and CER. CER analysis compares the performance of the business on a like-for-like basis applying constant exchange rates.


Average rates


2019

2018

% Change

£/€

1.1345

1.1286

0.5%

£/$

1.2945

1.3465

(3.9%)

 

Currency Sensitivity

Euro €: a 1% variation in the £/€ exchange rate affects underlying diluted EPS by approximately +/- 0.8%.

US Dollar $: a 1% variation in the £/$ exchange rate affects underlying diluted EPS by approximately +/- 0.5%.

Current exchange rates are £/€ 1.1010 and £/$ 1.2203 as at 28 August 2019. If these rates had applied throughout the year, the underlying diluted EPS would have been approximately 5.6% higher.

 

Statement of Financial Position

The Statement of Financial Position is summarised in the table below.

•     Non-current assets decreased from £765.6 million to £755.5 million mainly due to the acquisition of Venco and Caledonian being more than offset by amortisation of acquired intangibles, most notably AST Farma and Le Vet.

•     Working capital has increased from £92.5 million to £108.4 million partly due to a planned increase in inventory to support the potential disruption arising as a result of Brexit and also the growth of the Group.

•     Net Debt has increased in the year by £16.4 million from £211.4 million to £227.8 million; this includes cash generation from operations at £108.3 million and £39.7 million of outflows relating to the acquisitions of Venco and Caledonian. Exchange rate variations adversely affected the Net Debt position by £5.4 million.

•     Current and deferred tax has reduced from £98.9 million to £89.0 million principally due to the reduction in deferred tax liabilities following the reduction in the Netherlands rate and also the release relating to the amortisation of acquired intangibles.

 


2019

£m

2018

£m

Total non-current assets

755.5

765.6

Working capital

108.4

92.5

Net debt

(227.8)

(211.4)

Current and deferred tax

(89.0)

(98.9)

Other liabilities

(38.0)

(42.8)

Total net assets

509.1

505.0

 

Cash Flow, Financing and Liquidity

The Group enjoyed strong cash generation during the year, with the EBITDA margin strengthening from 26.2% to 28.5%. However, as mentioned above, working capital has increased by £19.5 million, mainly due to increases in inventory as a result of Brexit and growth of the Group's trading activities. This resulted in net cash generated from operations of £108.3 million, representing cash conversion of 85.0%. It is expected that the increased working capital levels will unwind to a certain extent during the forthcoming year.

 


2019

£m

2018

£m

Underlying operating profit

127.4

99.2

Depreciation and amortisation

9.8

7.4




Underlying EBITDA

137.2

106.6

Underlying EBITDA %

28.5%

26.2%

Working capital movement

(19.5)

(23.4)

Other

(2.0)

2.4

Cash generated from operations before interest, taxation and non-underlying items

115.7

85.6

Non-underlying items

(7.4)

(4.4)

Net cash generated from operations

108.3

81.2

Cash conversion (%)

85.0%

81.9%

 

Net Debt Bridge

Notable cash items are listed below in the Net Debt reconciliation table:

•     Net capital expenditure on tangible and intangible assets increased to £22.2 million (2018: £12.6 million), representing 2.3 times depreciation and amortisation.

•     Acquisition of subsidiaries of £39.7 million includes the acquisition of Caledonian and Venco. Further details are provided in note 16.


£m

Net Debt 30 June 2018

(211.4)

Net cash generated from operations before non-underlying items

115.7

Non-underlying items

(7.4)

Net capital expenditure

(22.2)

Acquisition of subsidiaries

(39.7)

Acquisition of subsidiary borrowings

(2.8)

Interest and tax

(26.5)

Net equity issued

1.2

Dividend paid

(28.4)

Other non-cash movements

(0.9)

Foreign exchange on net debt

(5.4)

Net Debt 30 June 2019

(227.8)

•     The Net Debt/underlying EBITDA leverage ratio per the borrowing facilities' leverage covenant, which includes the proforma adjustment to full year EBITDA for the acquisitions, was 1.64 times (2018: 1.75 times) versus a covenant of 3 times.

 

Borrowing Facilities

Revolving Credit Facility

The Group has committed facilities to July 2024 under a Revolving Credit Facility (RCF) for £235.0 million, through seven banks: Bank of Ireland, BNP Paribas, Fifth Third, HSBC, Lloyds, Raiffeisen and Santander. The RCF has an Accordion facility of a further £125.0 million. The total drawn at 30 June 2019 is £128.8 million.

There are two covenants governing the RCF:

•     Leverage: Net Debt to underlying EBITDA not greater than 3:1 (30 June 2019: 1.64); and

•     Interest Cover: underlying EBITDA to Net Finance Charges not less than 4:1 (30 June 2019: 13:1).

The current RCF is committed and has a non-utilisation fee of 35.0% of the applicable margin. The margin over LIBOR (or equivalent) ranges from 1.3% for leverage below 1.0 times, up to 2.2% for leverage above 2.5 times.

 

Term Loan Facility

On 24 January 2018, the Group put in place a Term Loan facility of £350.0 million to provide funding for acquisitions. The committed facility has an availability period to 31 December 2019 and a termination date of 31 December 2020. A sum of €150.0 million was drawn on 12 February 2018 to fund part of the consideration paid for the AST Farma and Le Vet acquisition and further drawings were made to finance the acquisition of Venco. The total drawn at 30 June 2019 is £179.3 million.

The facility has the same covenants as the RCF above.

 

Return on Capital Employed (ROCE)

ROCE grew to 15.5% in the year (2018: 15.4%) as the Group continues to benefit from consolidation of the acquisitions and by further leveraging the asset base.

 

Acquisitions

The Group has made several acquisitions in recent years. Performance of the acquisitions made during the 2018 and 2019 financial years is separately summarised compared to the existing business in the sections above.

In October 2018, the Group acquired the trade and assets of Caledonian, an equine veterinary pharmaceuticals sales and distribution company based in New Zealand and Australia for a total consideration of £4.4 million. The business has been successfully integrated into the Group and is outperforming our expectations. The acquisition was financed from the Group's existing working capital resources.

In December 2018, the Group completed the acquisition of Venco for a total consideration of £34.8 million. The business has been successfully integrated into the Group and is outperforming our expectations. The acquisition was financed from an additional draw down from the Group's RCF.

 

Accounting Standards

The accounting policies adopted are outlined in note 1 to the 2019 Annual Report and Accounts. There are no accounting policy changes which have materially impacted the 2019 financial year.

Note 1 to the 2019 Annual Report and Accounts outlines the impact of adopting IFRS 9 (financial instruments) and IFRS 15 (revenue recognition) in 2019 and also the Group's impact assessment of IFRS 16 (leases) which will be adopted in 2020.

 

Summary

Our existing business performed strongly this year and was further enhanced by the realisation of significant Le Vet revenue synergies which have resulted in improved operating leverage.

We have increased our R&D expenditure enabling us to expand the number of pipeline projects, novel opportunities and overseas product registrations we invest in and our acquisitions of Caledonian and Venco strengthen both our geographical and market presence.

The Group's balance sheet is strong, enabling us to continue to consider further relevant acquisition and investment opportunities as they arise.

 

Ian Page

Chief Executive Officer

2 September 2019

 

 

Key Performance Indicators

 

KPI and Definition

Performance

Commentary

Relevance to Strategy

Revenue Growth

Year-on-year CER sales growth including new products and excluding revenue from acquired businesses.

up 8.9%

 

2019: £447.6m

2018: £407.1m

2017: £359.3m

Dechra's existing business grew by 7.8% in EU Pharmaceuticals (excluding third party contract manufacturing which declined), and by 15.4% in NA Pharmaceuticals.

Pipeline Delivery

Portfolio Focus

Geographical Expansion

Acquisition

A key driver of our strategy is to deliver sustainable sales growth through delivering our pipeline, maximising our existing portfolio and expanding geographically.

Underlying Diluted EPS Growth

Underlying profit after tax divided by the diluted average number of shares, calculated on the same basis as note 9.

 

Long Term Incentive Plan (LTIP) performance condition

up 16.6%

 

2019: 90.01p

2018: 76.45p

2017: 64.33p

This includes a 27.3% increase in underlying operating profit partially offset by higher finance costs from the increase in debt and equity issuance to fund acquisitions.

Pipeline Delivery

Portfolio Focus

Geographical Expansion

Acquisition

Underlying diluted EPS is a key indicator of our performance and the return we generate for our stakeholders. It is one of the performance conditions of the LTIP.

Return on Capital Employed

Underlying operating profit

expressed as a percentage of the average of the opening and closing operating assets (excluding cash/ debt and net tax liabilities).

 

Long Term Incentive Plan (LTIP) performance condition

up 10bps

 

2019: 15.5%

2018: 15.4%

2017: 17.7%

 

There was a small improvement in ROCE during the year as we continue to consolidate acquisitions and leverage the asset base.

Pipeline Delivery

Portfolio Focus

Geographical Expansion

Acquisition

As we look to grow the business, it is important that we use our capital efficiently to generate returns superior to our cost of capital in the medium to long term. It underpins the performance conditions of the LTIP.

 

Cash Conversion

Cash generated from operations before tax and interest payments as a percentage of underlying operating profit.

up 310bps

 

2019: 85.0%

2018: 81.9%

2017: 115.9%

Cash conversion improved during the year despite the increase in inventory as a result of Brexit and also the growth of the Group.

Pipeline Delivery

Portfolio Focus

Geographical Expansion

Our stated aim is to be a cash generative business. Cash generation supports investment in the pipeline, acquisition and people.

New Product Revenue

Revenue from new products as a percentage of total Group revenue. A new product is defined as any molecule launched in the last five financial years.

up 480bps

 

2019: 16.7%

2018: 11.9%

2017: 7.9%

New product revenues reflect the strong market penetration of products launched in the year to 30 June 2019 and the previous four years.

Pipeline Delivery

Portfolio Focus

Acquisition

This measure shows the delivery of revenue in each year from new products launched in the prior five years, on a rolling basis. It shows the performance of our R&D and sales and marketing organisations when launching newly developed or in-licensed products.

Lost Time Accident Frequency Rate (LTAFR)

All accidents resulting in the absence or inability of employees to conduct the full range of their normal working activities for a period of more than three working days after the day when the incident occurred, normalised per 100,000 hours worked.

2019: 0.21*

2018: 0*

2017: 0.26

 

*excludes AST Farma and Le Vet

The LTAFR increased from nil to 0.21. None of these incidents resulted in a work-related fatality or disability.

People

Manufacturing and Supply Chain

The safety of our employees is core to everything we do. We are committed to a strong culture of safety in all our workplaces.

 

Employee Turnover

Number of leavers during the period as a percentage of the average total number of employees in the period.

down 230bps

 

2019: 13.6%

2018: 15.9%*

2017: 15.7%

 

*excludes RxVet, AST Farma and Le Vet

excludes Venco

We saw a decrease in employee turnover in the period despite operating in competitive markets.

 

 

People

Attracting and retaining the best employees is critical to the successful execution of our strategy.





 

How the Business Manages Risk

Effective risk management and control is key to the delivery of our business strategy and objectives.

Our risk management and control processes are designed to identify, assess, mitigate and monitor significant risks, and provide reasonable but not absolute assurance that the Group will be successful in delivering its objectives.

 

Risk Management Process

Our strategy informs the setting of objectives across the business and is widely communicated. Strategic risks and opportunities are identified as an integral part of the strategy setting process.

The Board oversees the risk management and internal control framework and the Audit Committee reviews the effectiveness of the risk management process and the internal control framework.

Our Senior Executive Team (SET) owns the risk management process and is responsible for managing specific Group risks. The SET members are also responsible for embedding sound risk management in strategy, planning, budgeting, performance management, and operational processes within their respective Operating Segments and business units.

The Board and the SET together set the tone and decide the level of risk and control to be taken in achieving the Group's objectives.

SET members present their risks, controls and mitigation plans to the Board for review on a rolling programme throughout the year. The SET is responsible for conducting self-assessments of their risks and the effectiveness of their control processes. Where control weaknesses are identified, remedial action plans are developed, and these are included in the risk reports presented to the Board.

Internal Audit co-ordinates the risk reporting process and provides independent assurance on the internal control framework.

 

Dechra Culture

The Dechra Values are the foundation of our entire business culture including our approach to risk management and control. The Board expects that these Values should drive the behaviours and actions of all employees. We encourage an open communication style where it is normal practice to escalate issues promptly so that appropriate action can be taken quickly to minimise any impact on the business.

 

Internal Control Framework

Our internal control framework is designed to ensure:

•     proper financial records are maintained;

•     the Group's assets are safeguarded;

•     compliance with laws and regulations; and

•     effective and efficient operation of business processes.

 

Management Structure

Our management structure has clearly defined reporting lines, accountabilities and authority levels. The Group is organised into business units. Each business unit is led by a SET member and has its own management team.

 

Policies and Procedures

Our key financial, legal and compliance policies that apply across the Group are:

•     Code of Business Conduct and How to Raise a Concern;

•     Delegation of Authorities;

•     Dechra Finance Manual, including Tax and Treasury policies;

•     Anti-Bribery and Anti-Corruption;

•     Data Protection;

•     Sanctions; and

•     Charitable Donations.

 

Strategy and Business Planning

We have a five year strategic plan which is developed by the SET and endorsed by the Board annually. Business objectives and performance measures are defined annually, together with budgets and forecasts. Monthly business performance reviews are conducted at both Group and business unit levels.

 

Operational Controls

Our key operational control processes are as follows:

•     Product Pipeline Reviews: We review our pipeline regularly to identify new product ideas and assess fit with our product portfolio, review whether products in development are progressing according to schedule; and assess the expected commercial return on new products.

•     Lifecycle Management: We manage and monitor lifecycle management activities for our key products to meet evolving customer needs.

•     Pricing Policies: We manage and monitor our national and European pricing policies to deliver equitable pricing for each customer group.

•     Quality Assurance: Each of our manufacturing sites have an established Quality Management System. These systems are designed to ensure that our products are manufactured to a high standard and in compliance with the relevant regulatory requirements.

•     Pharmacovigilance: Our regulatory team operates a robust system with a view to ensuring that any adverse reactions related to the use of our products are reported and dealt with promptly.

•     Financial Controls: Our controls are designed to prevent and detect financial misstatement or fraud and operate at three levels:

     •     Entity Level Controls performed by senior managers at Group and business unit level;

•     Month-end and year-end procedures performed as part of our regular financial reporting and management processes; and

•     Transactional Level Controls operated on a day-to-day basis.

 

The key controls in place to manage our principal risks are described in Understanding Our Key Risks below.

Internal Audit provides independent and objective assurance and advice on the design and operation of the Group's internal control framework. The internal audit plan seeks to provide balanced coverage of the Group's material financial, operational and compliance control processes.

 

Improvements in 2019

We have continued to strengthen and improve our governance and control processes and the following changes have been implemented:

•     a Strategic Portfolio Prioritisation Committee has been established to prioritise better our product development projects and new project management tools have been implemented to improve the planning and delivery of our product pipeline;

•     a Treasury management system and Zero Balancing processes have been implemented to enable more effective cash pooling;

•     our Third Party Code of Conduct and online training have been communicated to our higher risk third parties as part of our ongoing Anti-Bribery and Anti-Corruption (ABC) compliance programme;

•     changes to the leadership team in our Manufacturing and Supply organisation and additional investments to strengthen our manufacturing and supply capabilities; and

•     we are in the process of embedding our financial control framework and have implemented our ABC compliance programme in Venco, our recent acquisition in Brazil.

 

Plans for 2020

We will continue to refine and strengthen our internal control framework where required in response to changes in our risk profile and improvement opportunities identified by business management, quality assurance and internal audit. Our Manufacturing and Supply processes are the primary focus area for 2020.

Our business growth and the continued expansion of our product portfolio through acquisition, has contributed to increased complexity in our Manufacturing and Supply network. We have experienced challenges with the production and supply of some products from both our internal and external network in 2019, but these have not had a material impact on the Group's performance. The majority of issues have now been remedied with all but two products to be back in supply in the first six months of the year.

We are committed to maintaining a robust network that complies with rigorous product quality and regulatory standards, in order to provide a reliable supply of high quality products to our worldwide customer base.

To continue to meet this commitment, we plan to make further investments in our people, manufacturing, quality and supply processes, and production facilities. We are also making improvements to the governance and oversight processes and the performance measures to monitor our internal and external network.

 

Understanding Our Key Risks

Principal Risks

The SET has identified and agreed key risks with the Board. Of these, a number are deemed to be generic risks facing every business, including failure to comply with financial reporting regulation, foreign exchange, IT systems failure and non-compliance with legislation. The risk profile on page 64 of the 2019 Annual Report and Accounts, therefore, details the nine principal risks that are specific to our business and provides information on:

•     their prioritisation;

•     how they link to Group strategy;

•     their potential impact on the business; and

•     what controls are in place to mitigate them.

The risk profile is shown post mitigation.

 

Emerging Risks

Given current geopolitical uncertainty we have identified three emerging risks as detailed below:

Taxation

·     The Group's effective tax rate (ETR) is subject to taxation policy in the territories in which it operates. The Group has benefited in the year from the reduction in corporate tax rate in the USA for the Tax Cuts and Jobs Act and is expected to benefit from the reduction in the Netherlands corporate tax rate in 2020. We continue to monitor developments in the tax reform globally which may cause future movements in the Group's ETR.

·     The EU is currently challenging the legality of the UK Controlled Foreign Company (CFC) tax legislation from which the Group benefits. We continue to monitor developments.

·     The Group currently benefits from patent and innovation box tax incentives. The Group's ETR will increase as qualifying patents expire.

Brexit

·     The decision by the UK to leave the European Union (EU) has created volatility in markets and uncertainty about how future trading relationships, regulatory processes and supply chains will operate. Our priority is to maintain continuity of supply of our products to our customers in the UK and the EU, and we have increased inventory accordingly.

·     We have established a cross-functional team to assess and monitor the situation and have completed the implementation of a hard Brexit mitigation plan as outlined below:

We have transferred our UK registered Marketing Authorisations for products that are sold in the EU to a subsidiary in the Netherlands; and

We have transferred the analytical testing methods for products manufactured at our Skipton facility to our laboratories in Bladel and Zagreb.

·     These changes will enable us to batch release UK manufactured products within the EU in the event that there will be no mutual recognition of quality standards.

Iran

·     We continue to monitor the potential impact of US sanctions on our existing business with Iran, the world's fourth largest poultry market, where we currently sell approximately £1.0 million per annum of products that are on the UN exempt sanctions list.

 

Link to Strategic Growth Driver and Enabler

Risk

Potential Impact

Control and Mitigating Actions

Trends

Portfolio Focus

1 Market Risk:

The emergence of veterinary buying groups and corporate customers.

We sell and promote primarily to veterinary practices and distribute our products through wholesaler and distributor networks in most markets.

In a number of mature markets, veterinarians are establishing buying groups to consolidate their purchasing, and corporate customers are also emerging.

The emergence of corporate customers and buying groups represents an opportunity to increase sales volumes and revenue but may result in reduced margins.

 

We manage and monitor our national and European pricing policies to deliver equitable pricing for each customer group.

Our relationships with larger customers are managed by key account managers.

Our marketing strategy is designed to support veterinarians in retaining customers by promoting the benefits of our product portfolio in our major therapeutic areas.

Increased risk following continuing customer consolidation in our EU markets

Pipeline Delivery

2 Product Development and Launch Risk:

Failure to deliver major products either due to pipeline delays or newly launched products not meeting revenue expectations.

The development of pharmaceutical products is a complex, risky and lengthy process involving significant financial, R&D and other resources.

Products that initially appear promising may be delayed or fail to meet expected clinical or commercial expectations or face delays in regulatory approval.

It can also be difficult to predict whether newly launched products will meet commercial expectations.

A succession of clinical trial failures could adversely affect our ability to deliver shareholder expectations and could also damage our reputation and relationship with veterinarians.

Our market position in key therapeutic areas could be affected, resulting in reduced revenues and profits.

Where we are unable to recoup the costs incurred in developing and launching a product this would result in impairment of any intangible assets recognised.

Potential new development opportunities are assessed from a commercial, financial and scientific perspective by a multi-functional team to allow senior management to make decisions on which ones to progress.

The pipeline is discussed regularly by senior management, including the Chief Executive Officer and Chief Financial Officer. Regular updates are also provided to the Board.

Each development project is managed by co-project leaders who chair project team meetings.

Before costly pivotal studies are initiated, smaller proof of concept pilot studies are conducted to assess the effects of the drug on target species and for the target indication.

In respect of all new product launches a detailed marketing plan is established and progress against that plan is regularly monitored.

The Group has a detailed market knowledge and retains close contact with customers through its management and sales teams which are trained to a high standard.

Increased risk

Delay in delivery of some projects

Pipeline Delivery

Portfolio Focus

Manufacturing and Supply Chain

3 Supply Chain Risk:

Inability to maintain supply of key products due to manufacturing, quality or product supply problems in our own facilities or from third party suppliers.

We rely on third parties for the supply of all raw materials for products that we manufacture in-house. We also purchase many of our finished products from third party manufacturers.

Raw material supply failures may cause:

•     increased product costs due to difficulties in obtaining scarce materials on commercially acceptable terms;

•     product shortages due to manufacturing delays; or

•     delays in clinical trials due to shortage of trial products.

Shortages in manufactured products and third party supply failures on finished products may result in lost sales.

We monitor the performance of our key suppliers and act promptly to source from alternative suppliers where potential issues are identified.

The top ten Group products are regularly reviewed in order to identify the key suppliers of materials or finished products.

We maintain buffer stocks and/or dual sourcing arrangements of key products.

Contracts with suppliers are reviewed from both a commercial and legal perspective to enable reassignment of the contract should there be a change of control of any of the contracting parties.

Processes are in place to monitor and improve product robustness, including Quality and Technical analyses of key products and engagement with internal and external Regulatory stakeholders.

A business continuity plan is in place at Skipton and similar plans are being developed for other sites.

A project is in progress to review and improve our supply planning processes.

Increased risk

Growth in our product portfolio and increased complexity in our supply network

Pipeline Delivery

Geographical Expansion

Portfolio Focus

4 Competitor Risk:

Competitor products launched against one of our leading brands (e.g. generics or a superior product profile).

We depend on data exclusivity periods or patents to have exclusive marketing rights for some of our products.

Although we maintain a broad portfolio of products, our unique products like Vetoryl and Felimazole have built a market which may be attractive to competitors.

Revenues and margins may be adversely affected should competitors launch a novel or generic product that competes with one of our unique products upon the expiry or early loss of patents.

Costs may increase due to defensive marketing activity.

We focus on lifecycle management strategies for our key products such that they can fulfil evolving customer requirements.

Product patents are monitored and defensive strategies are developed towards the end of the patent life or the data exclusivity period.

We monitor market activity prior to competitor products being launched, and develop a marketing response strategy to mitigate competitor impact.

Decreased risk

Impact of competitor launches on our key products reduced

Pipeline Delivery

Geographical Expansion

Portfolio Focus

5 Regulatory Risk:

Failure to meet regulatory requirements.

We conduct our business in a highly regulated environment, which is designed to ensure the safety, efficacy, quality, and ethical promotion of pharmaceutical products.

Failure to adhere to regulatory standards or to implement changes in those standards could affect our ability to register, manufacture or promote our products.

Brexit presents uncertainty regarding the regulatory standards and transitional arrangements between the UK and the EU.

Delays in regulatory reviews and approvals could impact the timing of a product launch and have a material effect on sales and margins.

Any changes made to the manufacturing, distribution, marketing and safety surveillance processes of our products may require additional regulatory approvals, resulting in additional costs and/or delays.

Brexit transition may result in additional regulatory and quality control requirements and associated costs.

Non-compliance with regulatory requirements may result in delays to production or lost sales.

 

The Group strives to exceed regulatory requirements and ensure that its employees have detailed experience and knowledge of the regulations.

Manufacturing and Regulatory teams have established quality systems and standard operating procedures in place.

Regular contact is maintained with all relevant regulatory bodies in order to build and strengthen relationships and facilitate good communication lines.

The Regulatory and Legal teams keep updated in respect of changes with a view to ensuring that the business is equipped to deal with, and adhere to, such changes.

Where changes are identified which could affect our ability to market and sell any of our products, a response team is created in order to mitigate the risk.

We have appointed a new Global Quality Director with additional resources to improve oversight and performance monitoring across our end-to-end supply chain.

External consultants are used to audit our manufacturing quality systems.

No change

 

Geographical Expansion

Acquisition

People

6 People Risk:

Failure to resource the business to achieve our strategic ambitions, particularly on geographical expansion and acquisition.

As Dechra expands into new markets and acquires new businesses or science, we recognise that we may need new people with different skills, experience and cultural knowledge to execute our strategy successfully in those markets and business areas.

In the UK, the uncertainty created by Brexit could impact the hiring and retention of staff in some areas.

Failure to recruit or develop good quality people could result in:

•     capability gaps in new markets;

•     challenges in integrating new acquisitions; or

•     overstretched resources.

This could delay implementation of our strategy and we may not meet shareholders' expectations.

The Group HR Director reviews the organisational structure with the SET and the Board twice a year to aim to ensure that the organisation is fit for purpose and to assess the resourcing implications of planned changes or strategic imperatives.

A development programme is in place to identify opportunities to recruit new talent and develop existing potential.

No change

 

Portfolio Focus

Geographical Expansion

7 Antibiotic Regulatory Risk:

Continuing pressure on reducing antibiotic use.

The issue of the potential transfer of antibacterial resistance from food producing animals to humans is subject to regulatory discussions.

In some countries this has led to government recommendations on reducing the use of antibiotics in food producing animals.

Reduction in sales of our antimicrobial product range.

Our reputation could be adversely impacted if we do not respond appropriately to government recommendations.

Regular contact is maintained with relevant veterinary authorities to enable us to have a comprehensive understanding of regulatory changes.

We strive to develop new products and minimise antimicrobial resistance concerns.

Decreased risk

Antibiotic sales are stable or growing in most EU markets

Acquisition

8 Acquisition Risk:

Identification of acquisition opportunities and their potential integration.

Identification of suitable opportunities and securing a successful approach involves a high degree of uncertainty.

Acquired products or businesses may fail to deliver expected returns due to over-valuation or integration challenges.

Failure to identify or secure suitable targets could slow the pace at which we can expand into new markets or grow our portfolio.

Acquisitions could deliver lower profits than expected or result in intangible assets impairment.

We have defined criteria for screening acquisition targets and we conduct commercial, clinical, financial and legal due diligence.

The Board reviews acquisition plans and progress regularly and approves all potential transactions.

The SET manages post acquisition integration and monitors the delivery of benefits and returns.

Decreased risk

Implementation of standard integration planning, resourcing and execution processes

Pipeline Delivery

Portfolio Focus

People

9 Retention of People Risk:

Failure to retain high calibre, talented senior managers and other key roles in the business.

Our growth plans and future success are dependent on retaining knowledgeable and experienced senior managers and key staff.

Loss of key skills and experience could erode our competitive advantage and could have an adverse impact on results.

Inability to attract and retain key personnel may weaken succession planning.

The Nomination Committee oversees succession planning for the Board and the SET.

Succession plans are in place for the SET together with development plans for key senior managers.

Remuneration packages are reviewed on an annual basis in order to help ensure that the Group can continue to retain, incentivise and motivate its employees.

Increased risk

Challenges in attracting talent for key roles in some geographies and specialist functions

 

 

Consolidated Income Statement

For the year ended 30 June 2019


Note

2019

2018

Underlying

£m

Non-

underlying*

(notes

4 & 5)

£m

Total

£m

Underlying

£m

Non-

underlying*

(notes

4 & 5)

£m

Total

£m

Revenue

2

481.8

-

481.8

407.1

-

407.1

Cost of sales


(203.6)

(5.1)

(208.7)

(179.6)

(5.1)

(184.7)

Gross profit


278.2

(5.1)

273.1

227.5

(5.1)

222.4

Selling, general and administrative expenses


(125.7)

(76.5)

(202.2)

(110.0)

(52.0)

(162.0)

Research and development expenses


(25.1)

(6.8)

(31.9)

(18.3)

(8.0)

(26.3)

Operating profit

2

127.4

(88.4)

39.0

99.2

(65.1)

34.1

Finance income

3

0.7

-

0.7

1.5

-

1.5

Finance expense

4

(10.5)

(1.0)

(11.5)

(6.9)

0.5

(6.4)

Share of loss of investments accounted for using the equity method

6

(0.2)

(0.2)

(0.4)

(0.1)

(0.2)

(0.3)

Profit before taxation


117.4

(89.6)

27.8

93.7

(64.8)

28.9

Income taxes

7

(24.9)

28.0

3.1

(19.2)

26.4

7.2

Profit for the year


92.5

(61.6)

30.9

74.5

(38.4)

36.1

Attributable to:








Owners of the parent


92.5

(61.6)

30.9

74.5

(38.4)

36.1

Non-controlling interests


-

-

-

-

-

-

Profit for the year


92.5

(61.6)

30.9

74.5

(38.4)

36.1

Earnings per share








Basic

9



30.15p



37.24p

Diluted

9



30.07p



37.04p

Dividend per share (interim paid and final proposed for the year)

8



31.60p



25.50p

*     The Group presents a number of non-GAAP Alternative Performance Measures (APMs). This allows investors to understand better the underlying performance of the Group, by excluding non-underlying items as set out in note 5.

 

 

Consolidated Statement of Comprehensive Income

For the year ended 30 June 2019


2019

£m

2018

£m

Profit for the year

30.9

36.1




Other comprehensive income/(expense):






Items that will not be reclassified subsequently to profit or loss:



Remeasurement of defined benefit pension scheme

-

-

Income tax relating to components of other comprehensive income/(expense)

-

-


-

-




Items that may be reclassified subsequently to profit or loss:



Foreign currency translation differences for foreign operations

3.8

(0.4)

Income tax relating to components of other comprehensive income/(expense)

-

-


3.8

(0.4)

Total comprehensive income for the period

34.7

35.7

Attributable to:



Owners of the parent

34.7

35.7

Non-controlling interests

-

-


34.7

35.7

 

 

Consolidated Statement of Financial Position

At 30 June 2019


Note

2019

£m

Restated*

2018

£m

ASSETS




Non-current assets




Intangible assets

10

687.0

709.8

Property, plant and equipment


58.4

45.3

Investments

6

10.1

10.5

Deferred tax assets

11

0.9

3.8

Total non-current assets


756.4

769.4

Current assets




Inventories


104.0

86.6

Current tax receivables


7.9

-

Trade and other receivables


99.9

81.6

Cash and cash equivalents


80.3

79.7

Total current assets


292.1

247.9

Total assets


1,048.5

1,017.3

LIABILITIES




Current liabilities




Borrowings

12

(1.2)

(1.2)

Trade and other payables


(95.5)

(75.7)

Deferred and contingent consideration

17

(5.1)

(8.8)

Current tax liabilities


(16.3)

(5.9)

Total current liabilities


(118.1)

(91.6)

Non-current liabilities




Borrowings

12

(306.9)

(289.9)

Deferred income


-

(0.2)

Deferred and contingent consideration

17

(30.9)

(28.0)

Employee benefit obligations


-

(3.0)

Provisions

 13

(2.0)

(2.8)

Deferred tax liabilities

11

(81.5)

(96.8)

Total non-current liabilities


(421.3)

(420.7)

Total liabilities


(539.4)

(512.3)

Net assets


509.1

505.0

EQUITY




Issued share capital


1.0

1.0

Share premium account


277.9

276.7

Own shares


-

(0.4)

Foreign currency translation reserve


21.6

17.8

Merger reserve


84.4

84.4

Retained earnings


124.2

125.5

Total equity attributable to equity holders of the parent


509.1

505.0

Non-controlling interests

14

-

-

Total equity


509.1

505.0

*     Restated as detailed in note 1 to the 2019 Annual Report and Accounts.

The financial statements were approved by the Board of Directors on 2 September 2019 and are signed on its behalf by:

 

Ian Page

Chief Executive Officer

2 September 2019

Tony Rice

Non-Executive Chairman

2 September 2019

Company number: 3369634

 

 

Consolidated Statement of Changes in Shareholders' Equity

For the year ended 30 June 2019

Year ended 30 June 2018

Attributable to owners of the parent



Issued

share

capital

£m

Share

premium

account

£m

Own shares

£m

Foreign

currency

translation

reserve

£m

Merger

reserve

£m

Retained

earnings

£m

Total

£m

Non-controlling interests

£m

Total

equity

£m

At 1 July 2017

0.9

173.4

(0.7)

18.2

1.8

107.4

301.0

1.6

302.6

Profit for the period

-

-

-

-

-

36.1

36.1

-

36.1

Foreign currency translation differences for foreign operations, net of tax

-

-

-

(0.4)

-

-

(0.4)

-

(0.4)

Total comprehensive income

-

-

-

(0.4)

-

36.1

35.7

-

35.7

Transactions with owners:










Dividends paid

-

-

-

-

-

(21.8)

(21.8)

-

(21.8)

Share-based payments

-

-

-

-

-

4.3

4.3

-

4.3

Shares issued (Restated)*

0.1

103.3

-

-

82.6

-

186.0

-

186.0

Recycle of own shares to retained earnings

-

-

0.3

-

-

(0.3)

-

-

-

Acquisition of non-controlling interests

-

-

-

-

-

(0.2)

(0.2)

(1.6)

(1.8)

Total contributions by and distributions to owners

0.1

103.3

0.3

-

82.6

(18.0)

168.3

(1.6)

166.7

At 30 June 2018 (Restated)*

1.0

276.7

(0.4)

17.8

84.4

125.5

505.0

-

505.0

Year ended 30 June 2019










At 1 July 2018

1.0

276.7

(0.4)

17.8

84.4

125.5

505.0

-

505.0

Change in accounting policy

-

-

-

-

-

(4.9)

(4.9)

-

(4.9)

At 1 July 2018 (Restated)†

1.0

276.7

(0.4)

17.8

84.4

120.6

500.1

-

500.1

Profit for the period

-

-

-

-

-

30.9

30.9

-

30.9

Foreign currency translation differences for foreign operations, net of tax

-

-

-

3.8

-

-

3.8

-

3.8

Total comprehensive income

-

-

-

3.8

-

30.9

34.7

-

34.7

Transactions with owners:










Dividends paid

-

-

-

-

-

(28.4)

(28.4)

-

(28.4)

Share-based payments

-

-

-

-

-

1.5

1.5

-

1.5

Shares issued

-

1.2

-

-

-

-

1.2

-

1.2

Recycle of own shares to retained earnings

-

-

0.4

-

-

(0.4)

-

-

-

Total contributions by and distributions to owners

-

1.2

0.4

-

-

(27.3)

(25.7)

-

(25.7)

At 30 June 2019

1.0

277.9

-

21.6

84.4

124.2

509.1

-

509.1

*     Restated as detailed in note 1 to the 2019 Annual Report and Accounts Accounting Policies.

†    Restated as detailed in note 18 Changes in Accounting Policies.

 

Foreign Currency Translation Reserve

The foreign currency translation reserve contains exchange differences on the translation of subsidiaries with a functional currency other than Sterling and exchange gains or losses on the translation of liabilities that hedge the Company's net investment in foreign subsidiaries.

 

Merger Reserve

The merger reserve represents the excess of fair value over nominal value of shares issued in consideration for the acquisition of subsidiaries where statutory merger relief has been applied in the financial statements of the Parent Company.

 

 

Consolidated Statement of Cash Flows

For the year ended 30 June 2019


Note

2019

£m

2018

£m

Cash flows from operating activities




Operating profit


39.0

34.1

Non-underlying items


88.4

65.1

Underlying operating profit


127.4

99.2

Adjustments for:




Depreciation


5.7

4.8

Amortisation and impairment

2

4.1

2.6

Release of government grant


(0.5)

-

Profit on disposal of tangible assets


(0.3)

-

Gain on curtailment of pension scheme


(3.5)

-

Equity settled share-based payment expense


2.3

2.4

Underlying operating cash flow before changes in working capital


135.2

109.0

Increase in inventories


(14.1)

(22.5)

Increase in trade and other receivables


(11.7)

(9.5)

Increase in trade and other payables


6.3

8.6

Cash generated from operating activities before interest, taxation and non-underlying items


115.7

85.6

Cash outflows in respect of non-underlying items


(7.4)

(4.4)

Cash generated from operating activities before interest and taxation


108.3

81.2

Interest paid


(9.2)

(5.7)

Income taxes paid


(17.3)

(11.5)

Net cash inflow from operating activities


81.8

64.0

Cash flows from investing activities




Proceeds from disposal of tangible assets


0.3

-

Acquisition of subsidiaries (net of cash acquired)


(39.7)

(227.3)

Acquisition of non-controlling interests

14

-

(1.8)

Purchase of property, plant and equipment


(12.0)

(4.9)

Capitalised development expenditure

10

(1.0)

(1.3)

Purchase of other intangible non-current assets

10

(9.5)

(6.4)

Net cash outflow from investing activities


(61.9)

(241.7)

Cash flows from financing activities




Proceeds from the issue of share capital


1.2

103.3

New borrowings


44.1

133.4

Expenses of raising borrowing facilities


(0.2)

(3.9)

Repayment of borrowings


(36.8)

(17.2)

Dividends paid

8

(28.4)

(21.8)

Net cash (outflow)/inflow from financing activities


(20.1)

193.8

Net (decrease)/increase in cash and cash equivalents


(0.2)

16.1

Cash and cash equivalents at start of period


79.7

61.2

Exchange differences on cash and cash equivalents


0.8

2.4

Cash and cash equivalents at end of period


80.3

79.7





Reconciliation of net cash flow to movement in net borrowings




Net (decrease)/increase in cash and cash equivalents


(0.2)

16.1

New borrowings


(44.1)

(133.4)

Repayment of borrowings


36.8

17.2

Expenses of raising borrowing facilities


0.2

3.9

Acquisition of subsidiary borrowings


(2.8)

-

Exchange differences on cash and cash equivalents


0.8

2.4

Retranslation of foreign borrowings


(6.2)

3.3

Other non-cash changes


(0.9)

(0.9)

Movement in net borrowings in the period


(16.4)

(91.4)

Net borrowings at start of period


(211.4)

(120.0)

Net borrowings at end of period


(227.8)

(211.4)

 

Cash conversion is defined as cash generated from operating activities before interest and taxation as a percentage of underlying operating profit.

 

 

Notes to the Preliminary Results

For the year ended 30 June 2019

 

1. Status of Accounts

These summary financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (adopted IFRS).  These summary financial statements have also been prepared in accordance with the Companies Act 2006.

 

The Board of Directors approved the preliminary announcement on 2 September 2019.

 

2. Operating Segments

The Group has three reportable segments, as discussed below, which are based on information provided to the Board of Directors, which is deemed to be the Group's chief operating decision maker. Several operating segments which have similar economic characteristics have been aggregated into the reporting segments. In undertaking this aggregation the assessment determined that the aggregated segments have similar products, production processes, customers and overall regulatory environment.

The European Pharmaceuticals Segment comprises Dechra Veterinary Products EU, Dechra Veterinary Products International and Dechra Pharmaceuticals Manufacturing. This Segment operates internationally and manufactures and markets Companion Animal, Equine, Food producing Animal Products and Nutrition. This Segment also includes third party manufacturing and other non-core activities sales. The Segment expanded during the year with the acquisition of Laboratorios Vencofarma do Brasil Ltda (Venco) and the trade and assets of Caledonian Holdings Ltd.

The North American Pharmaceuticals Segment consists of Dechra Veterinary Products US, Putney, Dechra Veterinary Products Canada, and Dechra-Brovel, which sells Companion Animal, Equine Products and Food producing Animal Products in those territories. The Segment also includes our manufacturing unit based in Melbourne, Florida.

The Pharmaceuticals Research and Development Segment includes all of the Group's pharmaceutical research and development activities. From a Board perspective, this Segment has no revenue income.

Reconciliation of reportable segment revenues, profit or loss and liabilities and other material items:


2019

£m

Restated*

2018

£m

Revenue by segment



European Pharmaceuticals    - total

304.0

258.7

NA Pharmaceuticals                - total

177.8

148.4


481.8

407.1

Operating profit/(loss) by segment



European Pharmaceuticals

100.3

77.0

NA Pharmaceuticals

59.2

48.3

Pharmaceuticals Research and Development

(25.1)

(18.3)

Segment operating profit

134.4

107.0

Corporate and other unallocated costs

(7.0)

(7.8)

Underlying operating profit

127.4

99.2

Amortisation of acquired intangibles

(76.8)

(54.1)

Remeasurement of contingent consideration

0.1

0.1

Expenses relating to Brexit

(0.9)

-

Fair value uplift of inventory acquired through business combinations

(5.1)

(5.1)

Rationalisation of manufacturing organisation

(2.0)

(2.9)

Expenses relating to acquisitions and subsequent integration activities

(3.7)

(3.1)

Total operating profit

39.0

34.1

Finance income

0.7

1.5

Finance expense

(11.5)

(6.4)

Share of losses in investment accounted for using the equity method

(0.4)

(0.3)

Profit before taxation

27.8

28.9

Total liabilities by segment



European Pharmaceuticals

(80.9)

(79.6)

NA Pharmaceuticals

(44.0)

(31.0)

Pharmaceuticals Research and Development

(2.1)

(1.4)

Segment liabilities

(127.0)

(112.0)

Corporate loans and revolving credit facility

(308.1)

(291.1)

Corporate accruals and other payables

(6.5)

(6.5)

Current and deferred tax liabilities

(97.8)

(102.7)


(539.4)

(512.3)

Revenue by product category



CAP*

340.2

272.7

Equine*

34.4

28.4

FAP

57.3

48.7

Nutrition

29.1

29.4

Other

20.8

27.9


481.8

407.1

Additions to intangible non-current assets by segment (including through business combinations)



European Pharmaceuticals

48.6

370.2

NA Pharmaceuticals

-

6.9

Pharmaceuticals Research and Development

0.3

0.4

Corporate and central costs

0.5

0.5


49.4

378.0

*     Restated for the reallocation of £6.0 million of revenue from the Equine category to the CAP category in 2018.


2019

£m

2018

£m

Additions to Property, Plant and Equipment by segment (including through business combinations)



European Pharmaceuticals

17.4

4.9

NA Pharmaceuticals

0.3

0.2

Pharmaceuticals Research and Development

0.4

0.2

Corporate and central costs

0.1

0.2


18.2

5.5

Depreciation and amortisation by segment



European Pharmaceuticals

68.1

41.8

NA Pharmaceuticals

17.8

19.0

Pharmaceuticals Research and Development

0.3

0.3

Corporate and central costs

0.4

0.4


86.6

61.5

The total depreciation, amortisation and impairment charge is made up of the following:



Non-underlying



Amortisation - selling, general and administrative expenses

70.0

46.1

Amortisation - research and development expenditure

6.8

8.0


76.8

54.1

Underlying



Amortisation and impairment

4.1

2.6

Depreciation

5.7

4.8


9.8

7.4

 

Geographical Information

The following table shows revenue based on the geographical location of customers and non-current assets based on the country of domicile of the entity holding the asset:

 


2019

Revenue

£m

2019

Non-

current

assets

£m

2018

Revenue

£m

2018

Non-

current

assets

£m

UK

56.4

20.1

56.1

18.9

Germany

48.2

3.7

40.4

2.4

Rest of Europe

163.5

443.8

138.3

493.9

USA

169.1

175.8

139.8

180.1

Rest of World

44.6

113.0

32.5

74.1


481.8

756.4

407.1

769.4

 

3. Finance Income


2019

£m

2018

£m

Finance income arising from:



- Cash and cash equivalents

-

0.2

- Foreign exchange gains

0.7

1.3


0.7

1.5

 

4. Finance Expense

Underlying

2019

£m

2018

£m

Finance expense arising from:



- Financial liabilities at amortised cost

10.5

6.8

- Net Interest on net defined benefit obligations

-

0.1

Underlying finance expense

10.5

6.9

 

Non-underlying

2019

£m

2018

£m

Loss on extinguishment of debt

-

0.4

Fair value and other movements on deferred and contingent consideration

1.0

(0.9)

Non-underlying finance expense/(income)

1.0

(0.5)

Total finance expense

11.5

6.4

 

5. Non-underlying Items

Non-underlying items charged/(credited) comprise:


2019

£m

2018

£m

Amortisation of acquired intangibles



- classified within selling, general and administrative expenses

70.0

46.1

- classified within research and development expenses

6.8

8.0

Remeasurement of contingent consideration

(0.1)

(0.1)

Fair value uplift of inventory acquired through business combinations

5.1

5.1

Expenses relating to Brexit

0.9

-

Expenses relating to acquisitions and subsequent integration activities

3.7

3.1

Rationalisation of manufacturing organisation

2.0

2.9

Non-underlying operating profit items

88.4

65.1




Amortisation in relation to Medical Ethics Pty Ltd

0.2

0.2

Loss on extinguishment of debt

-

0.4

Fair value and other movements on deferred and contingent consideration

1.0

(0.9)

Non-underlying profit before tax items

89.6

64.8




Tax on non-underlying profit before tax items

(20.0)

(16.4)

Revaluation of deferred tax balances following the change in Dutch tax rates/US tax rates

(8.0)

(10.0)

Non-underlying profit after tax items

61.6

38.4

 

Amortisation of acquired intangibles reflects the amortisation of the fair values of future cash flows recognised on acquisition in relation to the identifiable intangible assets acquired, including a full year impact in 2019 of the amortisation of the acquired intangible relating to AST Farma and Le Vet Beheer BV.

The remeasurement of the contingent consideration balance relates to the net credit to the income statement on the reassessment of future milestone and royalty payments on a licensing agreement.

The fair value uplift of inventory acquired through business combinations is recognised in accordance with IFRS 3 'Business Combinations' to record the inventory acquired at fair value and its subsequent release into the income statement.

Expenses relating to Brexit represent regulatory and technology transfer costs incurred in advance of Brexit that are not expected to be recurring.

Expenses relating to acquisitions and subsequent integration activities relates to costs incurred during the acquisitions of Venco (£1.3 million), Caledonian (£0.1 million), and AST Farma and Le Vet (£2.1 million).

Rationalisation of manufacturing organisation relates to the income statement cost associated with this strategic programme. Costs since the inception of the programme have been £4.9 million. The total planned spend on this project is now £7.6 million.

 

6. Interests in Associate


2019

£m

 

2018

£m

1 July

10.5

10.8

Share of underlying loss after tax

(0.2)

(0.1)

Share of amortisation of intangible asset identified on acquisition

(0.2)

(0.2)

30 June

10.1

10.5

 

In 2017 the Group acquired a 33.0% interest in Medical Ethics Pty Ltd, which is the holding company of Animal Ethics Pty Ltd. The company is incorporated in Australia, which is also the principal place of business. The registered address is c/o Level 3, 649 Bridge Road, Richmond, Victoria 3121, Australia. The company has share capital consisting solely of ordinary shares, which are directly owned by the Group. Medical Ethics Pty Ltd is a private company and there is no quoted market price available for its shares. There are no contingent liabilities relating to the Group's interest in the associate.

The Group's share of the loss arising from its investment in Medical Ethics includes the effect of amortising the fair value adjustments, which are treated as non-underlying.

On 5 July 2019 the Group acquired a further 15.0% of the issued share capital of Medical Ethics Pty Ltd for a total consideration of AUD13.5 million (£8.0 million). Following the acquisition the Group will hold 48.0% of the issued share capital of Medical Ethics. Please also refer to note 20.

 

7. Income Tax Expense


2019

£m

2018

£m

Current tax            - UK corporation tax

1.0

2.3

                                - overseas tax at prevailing local rates

16.5

11.5

                                - adjustment in respect of prior years

1.6

(0.4)

Total current tax expense

19.1

13.4

Deferred tax          - origination and reversal of temporary differences

(14.0)

(9.2)

                                - adjustment in respect of tax rates

(8.0)

(11.2)

                                - adjustment in respect of prior years

(0.2)

(0.2)

Total deferred tax credit

(22.2)

(20.6)

Total income tax credit in the Consolidated Income Statement

(3.1)

(7.2)

 

The tax on the Group's profit before taxation differs from the standard rate of UK corporation tax of 19.0% (2018: 19.0%). The differences to this rate are explained below:


2019

£m

2018

£m

Profit before taxation

27.8

28.9

Tax at 19.0% (2018: 19.0%)

5.3

5.5

Effect of:



- expenses not deductible

1.2

0.5

- acquisition expenses

0.4

0.7

- research and development related tax credits

(0.1)

(0.1)

- patent box tax credits

(2.6)

(2.6)

- impact of financing (income not taxable)

(0.9)

(0.5)

- share in results of associates

(0.1)

-

- effects of overseas tax rates

0.4

1.0

- movement in unrecognised deferred tax

-

0.1

- adjustment in respect of prior years

1.3

(0.6)

- change in tax rates

(8.0)

(11.2)

Total income tax credit in the Consolidated Income Statement

(3.1)

(7.2)

 

Recurring items in the tax reconciliation include: research and development related tax credits and patent box incentives; expenses not deductible; and the impact of financing. The effective tax rate is -11.2% (excluding non-underlying items the effective tax rate is 21.2%).

 

Tax (Charge)/Credit Recognised Directly in Equity


2019

£m

2018

£m

Deferred tax on employee benefit obligations

-

-

Tax recognised in Consolidated Statement of Comprehensive Income

-

-




Corporation tax on equity settled transactions

0.4

1.0

Deferred tax on equity settled transactions

(1.2)

0.9

Total tax recognised in Equity

(0.8)

1.9

 

The UK current tax rate used for the period is 19.0% which is the enacted rate from 1 April 2017. Finance Act 2016 which was substantively enacted in September 2016 included provisions to reduce the rate of corporation tax to 17.0% with effect from 1 April 2020. Deferred tax has been calculated using the rate of 19.0% and 17.0% based on the timing of when each individual deferred tax balance is expected to reverse in the future.

The Dutch current tax rate used for the period is 25.0%, however this rate is reducing to 22.5% in 2020 and to 20.5% in 2021. The tax rate applied for deferred tax purposes is based on the timing of when each individual deferred tax balance is expected to reverse in the future. The impact of revaluing the deferred tax balances has been included within non-underlying items.

In the results to 30 June 2018 US tax reform gave rise to a transitional one-off non-underlying tax credit of £10.0 million primarily due to the revaluation of the US deferred tax assets and liabilities following the reduction in the US Federal rate from 35.0% to 21.0%.

Similarly, deferred tax arising in other overseas jurisdictions has been based on the enacted rate.

 

EU CFC Challenge

In October 2017 the European Commission (the Commission) opened a State Aid investigation into the Group Financing Exemption in the UK Controlled Foreign Company (CFC) rules. On 25 April 2019 the Commission issued its decision on the CFC Group Financing Exemption concluding that part of the UK measures were unlawful and incompatible instructing the UK Government to recover the State Aid. The UK Government filed an annulment appeal on 12 June 2019. In common with other UK-based international companies Dechra have financing arrangements in line with the current UK legislation. We have calculated the maximum potential State Aid claimed as £4.0 million excluding penalties and interest.

 

Future Tax Charge

The Group's future tax charge, and its effective tax rate could be affected by several factors including the impact of the implementation of the OECD's Base Erosion and Profit Shifting ('BEPS') actions, and changes in applicable tax rates and legislation in the territories in which it operates.

 

8. Dividends


2019

£m

2018

£m

Final dividend paid in respect of prior year but not recognised as a liability in that year: 18.17 pence per share (2018: 15.33 pence per share)

18.6

14.3

Interim dividend paid: 9.50 pence per share (2018: 7.33 pence per share)

9.8

7.5

Total dividend 27.67 pence per share (2018: 22.66 pence per share) recognised as distributions to equity holders in the period

28.4

21.8

Proposed final dividend for the year ended 30 June 2019: 22.10 pence per share (2018: 18.17 pence per share)

22.7

18.6

Total dividend paid and proposed for the year ended 30 June 2019: 31.60 pence per share (2018: 25.50 pence per share)

32.5

26.1

 

In accordance with IAS 10 'Events After the Balance Sheet Date', the proposed final dividend for the year ended 30 June 2019 has not been accrued for in these financial statements. It will be shown as a deduction from equity in the financial statements for the year ending 30 June 2020. There are no income tax consequences. The final dividend for the year ended 30 June 2018 is shown as a deduction from equity in the year ended 30 June 2019.

 

9. Earnings per Share

Earnings per ordinary share has been calculated by dividing the profit attributable to equity holders of the parent after taxation for each financial period by the weighted average number of ordinary shares in issue during the period.


2019

Pence

2018

Pence

Basic earnings per share



- Underlying*

90.24

76.85

- Basic

30.15

37.24

Diluted earnings per share



- Underlying*

90.01

76.45

- Diluted

30.07

37.04

 

The calculations of basic and diluted earnings per share are based upon:


2019

£m

2018

£m

Earnings for underlying basic and underlying diluted earnings per share

92.5

74.5

Earnings for basic and diluted earnings per share

30.9

36.1

 


Number

Number

Weighted average number of ordinary shares for basic earnings per share

102,504,510

96,942,002

Impact of share options

257,838

509,209

Weighted average number of ordinary shares for diluted earnings per share

102,762,348

97,451,211

*     Underlying measures exclude non-underlying items as defined in note 1 to 2019 Annual Report and Accounts.

At 30 June 2019, there are 421,486 options (2018: 231,551) that are excluded from the EPS calculations as they are not dilutive for the period presented but may become dilutive in the future.

 

10. Intangible Assets


Goodwill

£m

Software

£m

Development

costs

£m

Patent

rights

£m

Marketing

authorisations

£m

Acquired

intangibles

£m

Total

£m

Cost








At 1 July 2017

128.1

12.7

11.7

5.3

1.0

409.4

568.2

Additions

-

4.2

1.7

0.9

-

8.7

15.5

Acquisitions through business combinations

102.3

-

-

(2.1)

-

262.3

362.5

Remeasurement

-

-

-

-

-

(3.1)

(3.1)

Disposals

-

-

(0.2)

(0.2)

-

-

(0.4)

Foreign exchange adjustments

(1.1)

(0.2)

-

-

(0.1)

(3.3)

(4.7)

At 30 June 2018 and 1 July 2018

229.3

16.7

13.2

3.9

0.9

674.0

938.0

Additions

-

2.8

1.2

-

-

7.9

11.9

Acquisitions through business combinations

18.8

0.1

-

0.4

-

18.2

37.5

Remeasurement

-

-

-

-

-

(1.5)

(1.5)

Disposals

-

-

(0.3)

-

-

-

(0.3)

Foreign exchange adjustments

4.0

0.1

(0.1)

-

-

11.2

15.2

At 30 June 2019

252.1

19.7

14.0

4.3

0.9

709.8

1,000.8

Accumulated Amortisation








At 1 July 2017

-

2.9

6.1

3.1

-

159.8

171.9

Charge for the year

-

0.8

1.2

0.5

-

54.1

56.6

Acquisitions through business combinations

-

-

-

(0.4)

-

-

(0.4)

Impairment

-

0.1

-

-

-

-

0.1

Disposals

-

-

(0.2)

(0.2)

-

-

(0.4)

Foreign exchange adjustments

-

(0.1)

-

-

-

0.5

0.4

At 30 June 2018 and 1 July 2018

-

3.7

7.1

3.0

-

214.4

228.2

Charge for the year

-

2.5

1.3

0.3

-

76.8

80.9

Foreign exchange adjustments

-

(0.1)

0.1

-

-

4.7

4.7

At 30 June 2019

-

6.1

8.5

3.3

-

295.9

313.8

Net book value








At 30 June 2019

252.1

13.6

5.5

1.0

0.9

413.9

687.0

At 30 June 2018

229.3

13.0

6.1

0.9

0.9

459.6

709.8

 

The assets within patent rights comprises the rights to Equidone (which was launched in the USA during 2011, and has a carrying value of £0.3 million with a remaining amortisation period of 2 years), and the in-licensed products within Canada (acquired in 2016 with a carrying value of £0.3 million and has a remaining amortisation period of 7.5 years). During the year, £0.4 million was added to patent rights within EU Pharmaceuticals Segment from the acquisition of Venco.

£0.8 million of the marketing authorisations relate to the Vetivex® range of products. Ownership of the marketing authorisations rests with the Group in perpetuity. There are not believed to be any legal, regulatory or contractual provisions that limit their useful lives. Vetivex is an established range of products which are relatively simple in nature and there are a limited number of players in the market. Accordingly, the Directors believe that it is appropriate that the marketing authorisations are treated as having indefinite lives for accounting purposes.

Goodwill is allocated across cash generating units that are expected to benefit from that business combination. Key assumptions made in this respect are given in note 14 to the 2019 Annual Report and Accounts.

During the year, the contingent consideration in relation to development milestones and sales milestones of the acquired intangibles has been remeasured and to the extent possible remeasured against the intangibles.

In accordance with the disclosure requirements of IAS 38 'Intangible Assets', the components of acquired intangibles are summarised below:


Commercial relationships

£m

Pharmacological process

£m

Brand

£m

Capitalised

development

costs

£m

Product

rights

£m

Total

£m

Cost







At 1 July 2017

1.7

50.5

13.3

114.5

229.4

409.4

Additions

-

-

-

-

8.7

8.7

Acquisitions through business combinations

4.9

-

2.4

255.0

-

262.3

Remeasurement

-

-

-

-

(3.1)

(3.1)

Foreign exchange adjustments

0.1

(0.9)

(0.3)

(2.2)

-

(3.3)

At 30 June 2018 and 1 July 2018

6.7

49.6

15.4

367.3

235.0

674.0

Additions

-

-

-

-

7.9

7.9

Reclassification*

-

-

-

2.9

(2.9)

-

Acquisitions through business combinations

-

-

0.6

17.6

-

18.2

Remeasurement

-

-

-

-

(1.5)

(1.5)

Foreign exchange adjustments

0.1

1.8

0.3

5.8

3.2

11.2

At 30 June 2019

6.8

51.4

16.3

393.6

241.7

709.8

Accumulated Amortisation







At 1 July 2017

0.6

12.2

2.3

20.4

124.3

159.8

Charge for the year

0.7

8.0

2.1

26.9

16.4

54.1

Foreign exchange adjustments

-

-

-

0.1

0.4

0.5

At 30 June 2018 and 1 July 2018

1.3

20.2

4.4

47.4

141.1

214.4

Charge for the year

2.3

6.8

1.6

55.0

11.1

76.8

Reclassification*

-

-

-

0.2

(0.2)

-

Foreign exchange adjustments

0.1

0.9

0.1

1.7

1.9

4.7

At 30 June 2019

3.7

27.9

6.1

104.3

153.9

295.9

Net book value







At 30 June 2019

3.1

23.5

10.2

289.3

87.8

413.9

At 30 June 2018

5.4

29.4

11.0

319.9

93.9

459.6

*     Apex IPR&D acquired October 2016 has been reclassified from Patent rights to Capitalised development costs.

The table below provides further detail on the acquired intangibles and their remaining amortisation period.

Significant assets

Description

Carrying value £m

Sub-Total carrying value £m

Remaining amortisation period

Intangible assets arising from the acquisition of Dermapet

Product, marketing and distribution rights

20.4

20.4

6 ½ years

Intangible assets arising from the acquisition of Genetrix

Product, marketing and distribution rights

0.8

0.8

1 ½ years

Intangible assets arising from the acquisition of Eurovet

Technology, product, marketing and distribution rights

25.3

25.3

3 years

Intangible assets arising from the acquisition of PSPC Inc

Product, marketing and distribution rights

3.2

3.2

5 years

Intangible asset acquired from Pharmaderm Animal Health

Marketing and distribution rights

0.5

0.5

3 years

HY-50 intangible asset acquired from Bexinc Limited

Marketing and distribution rights

1.3

1.3

2 ½ years

Intangible assets arising from the acquisition of Genera

Product, brand, technology, marketing and distribution rights

0.8


3 ½ years

0.4


6 ½ years

7.4


11 ½ years


8.6

Genera - total

Intangible assets arising from the acquisition of Putney

Product, brand, technology, pharmacological process, marketing and distribution rights

6.8


7 years

23.9


7 years

46.8


9 years


77.5

Putney - total

Intangible asset arising from the acquisition of Apex

Product and technology

13.4


14 years



2.1


11 years



0.2


2 years




15.7

Apex - total

Intangible asset related to Animal Ethics

Marketing and distribution rights

27.3

27.3

10 years

Intangible asset related to a US dental licensing agreement

Marketing and distribution rights

0.6

0.6

8 years

Intangible asset related to Bioveta

Marketing and distribution rights

2.1

2.1

10 years

Intangible asset related to an injectable solution licensing agreement

Marketing and distribution rights

6.1

6.1

10 years

Intangible assets arising from the acquisition of RxVet

Brand

0.1

0.1

½ year

Intangible assets arising from the acquisition

Product, brand, technology,

72.1


8 ½ years

of AST Farma and Le Vet

marketing and distribution rights

108.3


7 ½ years



15.3


9 years



1.4


1 ½ years



1.8


 3 ½ years




198.9

AST Farma and

Le Vet - total

Intangible asset related to Premune

Product

0.1

0.1

2 years

Intangible assets related to an injectible solution licensing agreement

Marketing and distribution rights

7.9

7.9

15 years

Intangible assets arising from the acquisition of Caledonian

Product, brand, technology, marketing and distribution rights

3.9

3.9

 4 ½ years

Intangible assets arising from the acquisition of Venco

Product, brand, technology, marketing and distribution rights

11.9


9 ½ years

0.7


4 ½ years

0.6


7 ½ years

0.4


1 ½ years


13.6

Venco -total




413.9


 

11. Deferred Taxes

Recognised Deferred Tax Assets and Liabilities

Deferred tax assets and liabilities are attributable to the following:


Assets

Liabilities

Net

2019

£m

2018

£m

2019

£m

2018

£m

2019

£m

2018

£m

Intangible assets

-

-

(80.8)

(98.4)

(80.8)

(98.4)

Property, plant and equipment

-

-

(5.2)

(3.4)

(5.2)

(3.4)

Inventories

1.1

0.9

-

-

1.1

0.9

Receivables/payables

1.4

1.2

-

-

1.4

1.2

Share-based payments

1.0

2.4

-

-

1.0

2.4

Losses

1.6

2.1

-

-

1.6

2.1

R&D tax credits

-

1.2

-

-

-

1.2

Employee benefit obligations

0.3

1.0

-

-

0.3

1.0


5.4

8.8

(86.0)

(101.8)

(80.6)

(93.0)

Deferred tax assets and liabilities are analysed in the Statement of Financial Position after offset, to the extent there is a legally enforceable right, of balances within countries.

 

12. Borrowings


2019

£m

2018

£m

Current liabilities:



Bank loans

1.2

1.2


1.2

1.2

Non-current liabilities:



Bank loans

309.6

293.3

Arrangement fees netted off

(2.7)

(3.4)


306.9

289.9

Total borrowings

308.1

291.1

 

At 30 June 2019, £128.8 million was drawn against the £235.0 million Revolving Credit Facility maturing 25 July 2024. The facility is not secured on any specific assets of the Group but is supported by a joint and several cross guarantee structure. Interest is charged on this facility at a minimum of 1.30% over LIBOR and a maximum of 2.20% over LIBOR, dependent upon the Leverage (the ratio of Total Net Debt to Adjusted EBITDA) of the Group. As at 30 June 2019, interest being charged on this facility is 1.70% above LIBOR. All covenants were met during the year ended 30 June 2019.

At 30 June 2019, £179.3 million was drawn against the £350.0 million Term Loan Facility maturing 31 December 2020. The facility is not secured on any specific assets of the Group but is supported by a joint and several cross guarantee structure. Interest is charged on this facility at a minimum of 1.10% over LIBOR and a maximum of 2.00% over LIBOR, dependent upon the Leverage (the ratio of Total Net Debt to Adjusted EBITDA) of the Group. As at 30 June 2019, interest being charged on this facility is 1.50% above LIBOR. All covenants were met during the year ended 30 June 2019. The availability period of the Term Loan Facility expires on 31 December 2020.

Arrangement fees of £0.2 million were incurred on the two facilities during the year, these being released to the income statement over the life of the facility.

No interest has been capitalised during the year (2018: £nil).

Genera also has borrowing facilities of £5.8 million, of which £2.7 million was drawn down at 30 June 2019. Interest is fixed at 3.1%.

The maturity of the bank loans and overdrafts is as follows:


2019

£m

2018

£m

Payable:



Within one year

1.2

1.2

Between one and two years

180.5

1.3

Between two and five years

129.1

292.0


310.8

294.5

 

Further information on the interest profile of borrowings is shown in note 24 to the 2019 Annual Report and Accounts.

 

13. Provisions


Deferred Rent

£m

Provision for PPE grant

£m

Environmental Health & Safety

£m

Total

£m

At start of period

(0.5)

(1.8)

(0.5)

(2.8)

Provision recognised

-

-

-

-

Provision utilised

-

0.5

0.2

0.7

Foreign exchange differences

-

0.1

-

0.1

At end of period

(0.5)

(1.2)

(0.3)

(2.0)

 

The Group has received advanced payment for rental income on its facilities in Portland. This has been recognised at amortised cost and is being utilised over the period of the rental contract.

Genera has received advanced funding (PPE grant) for the refurbishment of the manufacturing facility for a third party manufacturing contract. The funding has been recognised at amortised cost and is being utilised over the life of the property, plant and equipment.

On the acquisition of Genera, the Group established a fair value provision to address existing legal and environmental compliance. A provision is recognised at the present value of the costs to be incurred for the remediation of the manufacturing site.

 

14. Non-Controlling Interests

Following the acquisition of Genera in October 2015, the following non-controlling interest has been recorded in the Group financial statements:


2019

£m

2018

£m

At start of period

-

1.6

Additional consideration paid to non-controlling interests

-

(1.8)

Loss on acquisition of remaining non-controlling interests

-

0.2

Profit/(loss) for the period

-

-

Foreign exchange differences

-

-

At end of period

-

-

 

On 1 February 2018, the Group completed the buy-out of the remaining minority interest (4.87% of the voting shares) in Genera for HRK14.8 million (£1.8 million).

 

15. Foreign Exchange Rates

The following primary exchange rates have been used in the translation of the results of foreign operations:


Average rate

for 2018

Closing rate

at 30 June

2018

Average rate

for 2019

Closing rate

at 30 June

2019

Danish Krone

8.4010

8.4109

8.4651

8.3248

Euro

1.1286

1.1286

1.1345

1.1154

US Dollar

1.3465

1.3157

1.2945

1.2693

Australian Dollar

1.7372

1.7817

1.8097

1.8118

 

16. Acquisitions

Acquisition of Venco

On 17 December 2018, Dechra acquired the entire share capital of Laboratorios Vencofarma do Brasil Ltda (Venco), a company with a large portfolio of vaccines and other Food producing Animal Products which it sells predominantly in Brazil. The Group paid £34.8 million (BRL163.8 million) consideration in cash.


Fair Value

£m

Recognised amounts of identifiable assets acquired


Identifiable assets


Property, plant and equipment

6.7

Inventory

6.1

Trade and other receivables

4.5

Trade and other payables

(6.4)

Cash

0.5

Borrowings

(2.8)

Intangible assets

14.7

Current tax liabilities

(0.5)

Deferred taxation

(6.0)

Net identifiable assets

16.8

Goodwill

18.0

Total consideration

34.8

Satisfied by:


Cash

34.8

Total consideration transferred

34.8

Net cash outflow arising on acquisition


Cash consideration

34.8

Less cash and cash equivalents

(0.5)

Net cash outflow arising on acquisition

34.3

 

The fair values shown above are provisional and may be amended if information not currently available comes to light. The provisional fair value adjustments made principally relate to harmonisation with Group IFRS accounting policies, including the application of fair values on acquisition, principally the recognition of fair value uplift on acquired inventory and intangibles in accordance with IFRS 3.

The goodwill of £18.0 million arising from the acquisition consists of geographical expansion in the Brazilian and South American markets, cross-selling synergies with other Dechra products, and the technical expertise of the assembled workforce.

Acquisition related costs (included in non-underlying operating expenses) amounted to £1.3 million. Venco's results are reported within the EU Pharmaceuticals Segment.

Venco contributed £8.3 million revenue and £2.1 million underlying operating profit for the period between the date of acquisition and the balance sheet date. If the acquisition had been completed on the first date of the financial year, the contribution to Group revenues for the period would have been £15.7 million and the contribution to Group underlying operating profit would have been £3.8 million. The reported operating profit after taking into account non-underlying items for the amortisation of intangible assets and the fair value uplift on inventory would be £0.1 million.

The fair value of the assets and liabilities acquired have been reconsidered since the Half Yearly Report at 31 December 2018 as part of the measurement period. Hindsight adjustments have been made in relation to consideration for the completion payment (£1.6 million), cash (£0.6 million), inventory (£1.5 million), intangibles (£0.1 million), tangible assets (£0.4 million) following an independent valuation of the land and buildings acquired, payables predominantly due to the reclassification of other taxes from the current tax liabilities (£3.5 million), borrowings (£0.8 million), current tax liabilities (£3.1 million) and deferred tax (£0.3 million) predominantly due to fair value adjustments.

 

Acquisition of Caledonian

On 8 October 2018, Dechra acquired the trade and assets of Caledonian Holdings Ltd, an equine veterinary pharmaceuticals sales and distribution company based in New Zealand and Australia. The Group paid £4.4 million (NZD8.7 million) consideration in cash.


Fair value

£m

Recognised amounts of identifiable assets acquired and liabilities assumed


Inventory

0.8

Trade and other receivables

0.3

Trade and other payables

(0.3)

Intangible assets

4.0

Deferred taxation

(1.2)

Net identifiable assets

3.6

Goodwill

0.8

Total consideration

4.4

Satisfied by:


Cash

4.4

Total consideration transferred

4.4

Net cash outflow arising on acquisition


Cash consideration

4.4

Net cash outflow arising on acquisition

4.4

 

The fair values shown above are provisional and may be amended if information not currently available comes to light. The provisional fair value adjustments made principally relate to harmonisation with Group IFRS accounting policies, including the application of fair values on acquisition, principally the recognition of fair value uplift on acquired inventory and intangibles in accordance with IFRS 3.

The goodwill of £0.8 million arising from the acquisition consists of continued geographic expansion into Australia and New Zealand, and also enables Dechra to grow its market penetration of equine products in the Asian market. None of the goodwill is expected to be deductible for income tax purposes.

Acquisition related costs (included in non-underlying operating expenses) amounted to £0.1 million. Caledonian's results are reported within the EU Pharmaceuticals Segment.

Caledonian contributed £1.5 million revenue and £0.8 million to the Group's underlying operating profit for the period between the date of acquisition and the balance sheet date. If the acquisition had been completed on the first date of the financial year, the contribution to Group revenues for the period would have been £2.0 million and the contribution to Group underlying operating profit would have been £1.0 million. The reported operating profit after taking into account non-underlying items for the amortisation of intangible assets and the fair value uplift on inventory would be £0.2 million.

 

Prior Year Acquisitions

Following the acquisition of RxVet in December 2017, and AST Farma and Le Vet in February 2018, the disclosure of the final fair values of the assets and liabilities acquired has been included in the financial statements for the year ended 30 June 2018.

 

17. Deferred and Contingent Consideration Liabilities


2019

£m

2018

£m

Deferred consideration - less than one year

-

1.8

Deferred consideration - more than one year

-

-


-

1.8




Contingent consideration - less than one year

5.1

7.0

Contingent consideration - more than one year

30.9

28.0


36.0

35.0


36.0

36.8

 

The consideration for certain acquisitions and licensing agreements includes amounts contingent on future events such as development milestones or sales performance. The Group has provided for the fair value of this contingent consideration as follows:


Tri-Solfen®

StrixNB® & DispersinB®

Injectable Solution 1

Injectable Solution 2

Phycox®

Other

Total

As at 1 July 2017

25.5

3.6

-

-

3.1

0.5

32.7

Additions

-

-

6.5

-

-

2.4

8.9

Remeasurement through intangibles

(0.9)

(2.2)

-

-

-

-

(3.1)

Remeasurement through income statement

-

(0.1)

-

-

-

-

(0.1)

Cash payments: investing activities

-

-

-

-

(0.6)

(1.1)

(1.7)

Finance expense

-

-

-

-

0.4

0.2

0.6

Foreign exchange adjustments

(1.8)

(0.2)

0.1

-

(0.1)

-

(2.0)

Other movements

-

-

-

-

-

(0.3)

(0.3)

At 30 June 2018

22.8

1.1

6.6

-

2.8

1.7

35.0

Additions

-

-

-

7.9

-

-

7.9

Remeasurement through intangibles

(1.0)

(0.3)

(0.3)

-

-

0.1

(1.5)

Remeasurement through income statement

-

(0.1)

-

-

-

-

(0.1)

Cash payments: investing activities

-

(0.1)

(2.1)

(3.0)

(0.7)

(0.4)

(6.3)

Finance expense

0.6

0.1

0.2

-

0.1

-

1.0

Foreign exchange adjustments

(0.4)

-

-

0.3

-

0.1

-

Other movements

-

-

-

-

-

-

-

At 30 June 2019

22.0

0.7

4.4

5.2

2.2

1.5

36.0

 

The consideration payable for Tri-Solfen® is expected to be payable over a number of years, and relates to development milestones and sales performance. During the year, the development milestones have been remeasured and consequently are now expected to happen later than initially anticipated. A delay in the timing of contingent cash flows of one year would result in a decrease of the liability and intangible asset of £3.5 million.  An increase in the discount rate by 1% would result in a decrease of the deferred consideration and associated intangible of £1.1 million.

The consideration payable for StrixNB® and DispersinB® is expected to be payable over a number of years, and relates to development milestones and sales performance. During the year the contingent consideration has been remeasured and consequently one of the development milestones is no longer expected to be achieved. To the extent possible this has been remeasured through intangibles with the excess being credited to the income statement, and treated as non-underlying.

The consideration for two separate licensing agreements for injectable solutions both relate to development milestones, and Phycox relates to sales performance. The consideration payable is expected to be payable for these agreements within the next five years.

Where a liability is expected to be payable over a number of years the total estimated liability is discounted to present values.

 

18. Changes in Accounting Policies

This note explains the impact of the adoption of IFRS 9 'Financial Instruments' and IFRS 15 'Revenue from Contracts with Customers' on the Group's Financial Statements and also discloses the new accounting policies that have been applied from 1 July 2018, where they are different to those applied in prior periods.

The table below shows the impact on the opening balance sheet retained earnings as at 1 July 2018, from the adoption of IFRS 15; note only the line items affected by the change have been included:

Statement of Financial Position (extract)

Reported

30.06.18

£m

IFRS 15

£m

Restated 01.07.18

£m

Current Liabilities




Trade and other payables

(75.7)

(6.5)

(82.2)

Non-Current Liabilities




Deferred tax liabilities

(96.8)

1.6

(95.2)

Equity




Retained Earnings

125.5

(4.9)

120.6

 

IFRS 15 Revenue from Contracts with Customers

The Group has adopted IFRS 15 'Revenue from Contracts with Customers' from 1 July 2018 which resulted in changes in accounting policies and adjustments to the amounts recognised in the financial statements. In accordance with the transition provisions of IFRS 15, the Group have adopted the modified retrospective approach, recognising a cumulative adjustment to decrease equity at 1 July 2018. This adjustment represents the earlier recognition of rebates and discounts based on the most likely method of calculation, and the associated tax impact.

Following the clarification IFRS 15 provides over the treatment of variable consideration, the timing of rebates and the deductions and discounts recognition has been refined through adoption of the most likely amount method.

The adoption of IFRS 15 has resulted in revenue and profit being £0.2 million higher in the current period compared to IAS 18. There is a corresponding deferred tax debit of £0.04 million recognised in relation to this.

 

IFRS 9 Financial Instruments - Impact of Adoption

IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting. The adoption of IFRS 9 'Financial Instruments' from 1 July 2018 resulted in a change in accounting policies. In accordance with transitional provisions in IFRS 9, comparative figures have not been restated.

The Group has trade receivables for sales of inventory that are subject to IFRS 9's new expected credit loss model. The Group was required to revise its impairment methodology under IFRS 9 for this class of asset which uses a lifetime expected loss allowance for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. The impact of the change in impairment methodology on the Group's retained earnings was immaterial and therefore no adjustment has been made. Trade receivables are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the Group, and a failure to make contractual payments for a period of greater than 120 days past due.

Cash and cash equivalents are also subject to the impairment requirements of IFRS 9; however, the identified impairment loss of this financial asset was immaterial.

 

19. Contingent Liabilities

In October 2017 the European Commission (the Commission) opened a State Aid investigation into the Group Financing Exemption in the UK Controlled Foreign Company (CFC) rules. On 25 April 2019 the Commission issued its decision on the CFC Group Financing Exemption concluding that part of the UK measures were unlawful and incompatible instructing the UK Government to recover the State Aid. The UK Government filed an annulment appeal on 12 June 2019. In common with other UK-based international companies Dechra have financing arrangements in line with the current UK legislation. We have calculated the maximum potential State Aid claimed as £4.0 million excluding penalties and interest. Given the current position no provision has been recognised in the Financial Statements.

At 30 June 2019, contingent liabilities arising in the normal course of business amounted to £15.0 million relating to license and distribution agreements entered into during the year. The stage of development of the projects underpinning the agreements dictates that a commercially stable product is yet to be achieved, and accordingly an intangible asset and contingent liability have not been recognised.

 

20. Subsequent Events

On 5 July 2019 the Group acquired a further 15.0% of the issued share capital of Medical Ethics Pty Ltd, the parent company of Animal Ethics, for a total consideration of AUD13.5 million (£8.0 million) from the current shareholders. Following this acquisition the Group will hold 48.0% of the issued share capital of Medical Ethics Pty Ltd, and this has not resulted in a change of control or accounting treatment of the entity.

On 2 August 2019 the Group announced the signature of a licensing and supply agreement with Akston Biosciences Corporation for a patent pending long acting protein for the treatment of diabetes in dogs. Following the initial upfront payment of USD2.0 million there are subsequent milestone payments totalling USD14.0 million due on the achievement of major milestones in the development process which should be completed within five years.

On 28 August 2019 the Group acquired Ampharmco LLC and its associated holding companies, Dragon Fire Holdings LLC and Black Griffin Holdings LLC together with its manufacturing site based in Fort Worth, Texas, for a cash consideration of USD 30.0 million (£24.5 million).

 

21. Underlying Operating Profit and Profit Before Taxation


2019

£m

2018

£m

Operating profit



Underlying operating profit/EBIT is calculated as follows:



Operating profit

39.0

34.1

Non-underlying operating expenses (note 5)

88.4

65.1

Underlying operating profit/EBIT

127.4

99.2

Depreciation

5.7

4.8

Amortisation and impairment

4.1

2.6

Underlying earnings before interest, tax, depreciation and amortisation (EBITDA)

137.2

106.6

 




Profit before taxation



Underlying profit before taxation is calculated as follows:



Profit before taxation

27.8

28.9

Non-underlying operating expenses

88.4

65.1

Amortisation of fair value adjustments relating to Medical Ethics

0.2

0.2

Fair value and other movements on deferred and contingent consideration

1.0

(0.9)

Loss on extinguishment of debt

-

0.4

Underlying profit before taxation

117.4

93.7

 

22. Other information

The financial information set out above does not constitute the Company's statutory accounts for the years ended 30 June 2019 or 2018 but is derived from the 2019 and 2018 accounts. Statutory accounts for 2018 have been delivered to the Registrar of Companies and those for 2019 will be delivered in due course. The external auditor has reported on those accounts; the report was (i) unqualified, (ii) did not include references to any matters to which the external auditor drew attention by way of emphasis without qualifying the reports and (iii) did not contain statements under section 498(2) or (3) of the Companies Act 2006.

 

23. Preliminary Statement

This Preliminary statement is not being posted to Shareholders.  The Annual Report and Accounts for the year ended 30 June 2019 will be sent to shareholders shortly.  Further copies will be available from the Company's Registered Office: 24 Cheshire Avenue, Cheshire Business Park, Lostock Gralam, Northwich CW9 7UA.  Email: corporate.enquiries@dechra.com.  Copies are also available on the Company website www.dechra.com.

 

24. Directors' Responsibility Statement Required under the Disclosure and Transparency Rules

The responsibility statement below has been prepared in connection with the Company's full Annual Report and Accounts for the year ended 30 June 2019.  Certain parts of that Report are not included within this announcement.

 

We confirm to the best of our knowledge:

a)            the Company Financial Statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 'Reduced Disclosure Framework', and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the Company;

b)            the Group Financial Statements, prepared in accordance with the IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of Group; and

c)             the Strategic Report includes a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that they face.

 

Approved by the Board and signed on its behalf by:

 

Ian Page

Chief Executive Officer

 

Tony Rice

Non-Executive Chairman

 

2 September 2019

 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
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Audited preliminary results - year ended 30.6.19 - RNS