Availability of 2014 Annual Report and Accounts

RNS Number : 3489R

Dechra Pharmaceuticals PLC

10 September 2014

 



10 September 2014

Dechra^® Pharmaceuticals PLC

(Dechra or the Company) 

Availability of 2014 Annual Report and Accounts

The 2014 Annual Report and Accounts is now available to view at www.dechra.com.

The following documents are scheduled to be mailed to registered shareholders of the Company on 19 September 2014:

·      2014 Annual Report and Accounts

·      Notice of the 2014 Annual General Meeting; and

·      Proxy Form for the 2014 Annual General Meeting

In accordance with Listing Rule 9.6.1 a copy of each of these documents will be submitted to the National Storage Mechanism and will be available for viewing shortly after posting.

The information below, which is extracted from the 2014 Annual Report and Accounts, is included solely for the purpose of complying with DTR 6.3.5. This information should be read in conjunction with the Company's 8 September 2014 announcement of its 2014 Preliminary Results (available at www.dechra.com). This material is not a substitute for reading the full 2014 Annual Report and Accounts. All page numbers and cross-references in the extracted information below refer to page numbers and notes to the financial statements, in the 2014 Annual Report and Accounts.

Key Performance Indicators

The Group utilises the following KPIs to assess our progress against our strategic, financial and operational objectives. Their relevance to our strategy and their definitions are explained below.

Some KPIs are also used as a measure in the long term incentive arrangements for the remuneration of the Executives.

These are identified with an asterisk.

Sales Growth 1.6% Definition Year-on-year sales growth including new products but excluding revenue from acquired businesses in the year of acquisition. 2014: £193.6m 2013: £189.2m 2012: £116.5m	Relevance to Strategy A key driver of our strategy is to deliver sustainable sales growth through delivering our pipeline, maximising our existing portfolio and expanding geographically. Performance Sales increased by 1.6% at CER (2.3% at reported rates). Our growth was impacted by the decline in FAP, particularly in the Netherlands, and the slowdown in Vetoryl® sales due to the phasing of sales in Italy and the shortage of the accompanying diagnostics drug.
Underlying diluted EPS Growth* 23.9% Definition Underlying profit after tax divided by the diluted average number of shares, calculated on the same basis as note 10 of the Accounts. 2014: 36.32p 2013:  29.07p 2012: 21.28p	Relevance to Strategy Underlying EPS is a key indicator of our performance and the return we generate for our shareholders. It is one of the vesting conditions of the LTIP. Performance The increase of 23.9% at CER (24.9% at reported rates) reflects the one time benefits from savings on interest after we repaid part of our debt using the proceeds from the Services Segment divestment. Prior year tax adjustments also contribute to the strong performance.
Return on Capital Employed* 16.4% Definition Underlying operating profit expressed as a percentage of average operating assets (excluding cash and tax assets). 2014: 16.4% 2013: 17.6% 2012: 17.1%	Relevance to Strategy 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 vesting conditions of the LTIPs. Performance This indicator includes profit from the Services Segment for 12 months for the prior financial years but only for 11 weeks in this financial year. As a result, the ROCE declined slightly due to the profit dilution following the disposal. This was in line with our expectations.
Cash Conversion 90.6% Definition Cash generated from operations before tax and interest payments as a % of operating profit before amortisation of acquired intangibles. 2014: 90.6%± 2013: 107.0% 2012 91.7% ± On continuing operations basis	Relevance to Strategy Our stated aim is to be a cash generative business. Performance Our cash conversion for the continuing operations ended at 90.6%. This falls slightly below previous years due to an increase in our working capital, which is further explained on page 43.
New Product Sales 8.6% Definition Revenue from new products as a % of total Group revenue. A new product is defined as any molecule launched in the last five financial years. 2014: 8.6% 2013: 6.5% 2012: 1.0%	Relevance to Strategy This measure shows the delivery of sales 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 new products. Performance Sales from new products continue to increase and account for 8.6% of our total sales in 2014. This is mostly due to the successful launches of Forthyron® and Cardisure® in Europe.
Lost Time Accident Frequency Rate (LTAFR) 0.21 Definition 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. 2014: 0.21 2013: 0.22 2012: 0.55	Relevance to Strategy The safety of our employees is core to everything we do. We are committed to a strong culture of safety in all our workplaces. Performance Including the Services Segment, the LTAFR remained relatively the same as in the previous year. Considering continuing operations only, the LTAFR fell to 0.08% as reported in page 109, which reflects our focus on employee safety.
Employee Turnover 16.8% Definition Number of leavers during the period as a percentage of the average total number of employees in the period. 2014: 16.8% 2013: 16.1% 2012: 14.9%	Relevance to Strategy Attracting and retaining the best employees is critical to the successful execution of our strategy. Performance The increase in employee turnover to 16.8% reflects a major change in the business as we completed the closure of the factory in Uldum, Denmark, as previously reported. The impact of the Services divestment has been excluded from this calculation.

How the Business Manages Risk

Risk Agenda

Effective risk management is key to the achievement of our business strategy. In October 2013 the Board commenced a review of the Group's risk management process in order to assess whether there was scope for improvement. Deloitte LLP were retained to assist with the review, which formed part of their wider remit to assist in the review of the Group's internal financial controls. More detail in relation to this review can be found on pages 81 to 82 of the Audit Committee Report.

The review confirmed that, overall, the risk management process was appropriate for the size of the Group and provided validation of the existing risks. However, the following areas of improvement were suggested:

·      ownership of the risks should be created at Senior Executive Team (SET) level;

·      amendments to both the process and documentation, including the introduction of half-yearly risk interviews with the SET; and

·      the proposed appointment of the Internal Audit Function should encompass a risk assurance remit.

It is considered by the Board that these changes to the current risk system and framework will ensure that:

·      the SET provides a platform for reviewing and assessing risk from both a bottom up and top down level, and acts as a link between the Board and the business units ensuring that risk management is embedded within the business;

·      any risks identified in relation to the achievement of the Group strategy are correctly captured and monitored;

·      the risk appetite is correctly assessed and understood; and

·      there is a strong governance framework clearly linking our risk management and internal controls framework. For information on the Internal Control Framework see pages 76 to 77.

Risk Framework

The SET is now a pivotal platform responsible for the overall risk framework. It drives the identification of risks, establishes the owners of each of those risks and ensures that they are correctly mitigated and monitored. The SET reports the risks to the Board. Each SET member owns one or more of the risks and is scheduled to attend Board meetings during the course of the financial year to conduct a detailed review of their risks. For the purpose of the year end disclosure each SET member has met with the Chief Financial Officer and Company Secretary to discuss their risks and controls.

The discussions have focused on a number of areas including:

·      understanding the possible root causes of the risk;

·      reviewing what controls are currently in place; and

·      assessing whether additional controls should be added in order to ensure that the risk is appropriately mitigated.

The SET will also ensure that ongoing monitoring is embedded in their business units or function.

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, IT failure and non-compliance with legislation. The table below therefore details the eight principal risks which are bespoke to our business and provides information on:

·      how they link to the Group strategy;

·      how they could potentially impact the business; and

·      what controls have been put in place to mitigate them.

Key of trend compared to prior year:

↔ No Change                

↑Increased Risk           

↓Reduced Risk

Link to Strategy	Risk	Potential Impact	Mitigation	Trend
Pipeline Delivery Portfolio Focus Geographical Expansion	Competitor Risk: Competitor products launched against one of our leading brands (e.g. generics or 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, we recognise that our unique products, like Vetoryl and Felimazole®, have built a market which may be attractive to competitors. We need to ensure that, should competitors enter the market, we create additional unique selling points which allow us to maintain our market share.	Revenues and margins may be materially adversely affected upon the expiry or early loss of patents, or by generic entrants/competitors into the market for one of our leading brands. Costs may increase due to defensive marketing activity.	We focus on lifecycle management strategies of our key products to ensure that our products fulfil evolving customer requirements. Product patents are monitored and consideration is given to the formulation of a defensive strategy towards the end of the patent life or the data exclusivity period. We monitor market activity so that prior to competitor products being launched, a response strategy can be established and executed by our marketing team. This defence plan is intended to minimise competitor impact.	↔
Pipeline Delivery	Product Development Risk: Failure to deliver major products either due to pipeline delays or newly launched products not meeting revenue expectations. Delivery of our pipeline is key to the achievement of our strategy and our future success. We commit substantial resources to development. However, we may be unable to develop or get new products approved. It may 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. Our reputation and relationship, not only with our shareholders, but also with veterinarians, could be damaged. Our positioning in the market may be affected and could reduce our leading position in key therapeutic areas. Reduced revenue and profitability may mean we are unable to recoup the costs incurred in developing and launching the product, resulting in impairment of intangible assets.	Potential new development candidates are assessed from a commercial, financial and scientific perspective by a multi-functional team to allow senior management to make go/no go decisions. 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 a dedicated clinical project manager who chairs a monthly project team meeting. Before major costly efficacy studies are initiated, smaller proof of concept studies are conducted to assess the effects of the drug on the 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 ensures that it has a detailed market knowledge and retains close contact with customers through its management and sales teams which are consistently trained to a high standard.	↔
Pipeline Delivery Portfolio Focus Geographical Expansion	Regulatory Risk: Failure to meet regulatory requirements. We perform our business in a highly regulated environment, not only from a manufacturing perspective but also in respect of product approvals. Failure to adhere to, or maintain, regulatory standards could ultimately affect our manufacturing capability and our ability to deliver products to market on time.	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 disruption. Failure to achieve regulatory requirements may result in operational closures which in turn increases expenditure and delays to production.	The Group strives to exceed regulatory requirements and ensures that its employees have detailed experience and knowledge of the regulations. Manufacturing and PDRA 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 ensure good communication lines. The regulatory and legal teams remain 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. External consultants are utilised to audit our manufacturing quality systems.	↓
Pipeline Delivery Portfolio Focus	Regulatory Risk: Continuing pressure on reducing antibiotic use. The issue of the potential transfer of increased 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 pressure.	Regular contact is made with all relevant veterinary authorities to ensure that we have a comprehensive understanding of regulatory changes. We strive to develop new products that minimise antimicrobial resistance concerns.	↑
Pipeline Delivery Portfolio Focus	Reliance On Third Parties Risk: Failure of a major supplier resulting in loss of raw materials or product supply or delay in clinical trials. We rely on third parties for the supply of all our raw materials. Failure to supply these raw materials will affect our manufacturing and development capabilities. It is important that we manage our stock levels of key raw materials and are able quickly to identify and obtain materials from a second source.	This may lead to significant delays and/or difficulties in obtaining goods and services on commercially acceptable terms potentially increasing the cost of production. Disruption in production may result in product shortages and significant delays, which may lead to lost sales.	The performance of our suppliers is monitored. As a result, if we identify a potential issue, we source promptly from either an identified alternative supplier or a new supplier. Where a manufacturing transfer is required, stock is built up in order to avoid/mitigate an out of stock situation. In respect of Dechra Pharmaceuticals Manufacturing (DPM), a 'second sourcing' project for key materials has established our approach for all components. In addition the top ten Group products are continually risk assessed in order to identify the key suppliers of materials or finished products. All contracts with suppliers are reviewed from both a commercial and legal perspective to ensure that assignment of the contract is allowed should there be a change of control of either of the contracting parties. Risk mitigation strategies are in place such as maintenance of buffer stocks and dual sourcing.	↔
Portfolio Focus	Reliance On Third Parties Risk: Loss of key third party customers from DPM. Contract manufacturing represents approximately 9% of Group revenues and 46% of our manufacturing volume.  Contract manufacturing is a significant part of our revenue.	Loss of a key customer can impact manufacturing revenues and lead to an increase in the cost of goods of the remaining portfolio.	Robust supply agreements are in place with each of our key customers and are regularly reviewed. Close, regular contact is maintained through the sales director with key customers Monthly service level monitoring and reporting is in place. We have an experienced sales team which focuses on bringing in new customers.	↔
Pipeline Delivery Portfolio Focus Geographical Expansion Acquisition	People Risk: Failure to have robust succession plans in place leading to gaps in knowledge and experience in key roles in the business. We pride ourselves on the low turnover of staff in senior and other key positions.  However we must ensure that we have plans in place should we lose key personnel on whose capabilities we depend.	Loss of knowledge, skills and experience could erode our competitive advantage. Inability to attract and retain key personnel may weaken succession planning and could have an adverse  impact on results.	Succession planning is driven by the Nomination Committee and the Group HR Director. Where deemed necessary Key Man Insurance is in place. A new HR plan is being implemented to strengthen our talent management and succession planning. Remuneration packages are reviewed on an annual basis in order to ensure that the Group can continue to retain, incentivise and motivate its employees.	↔
Pipeline Delivery Portfolio Focus Geographical Expansion Acquisition	People Risk: Risk of failure to adequately resource the business to meet strategic ambitions (e.g. knowledge and investment). We have a clear focus on our four strategic growth drivers. As Dechra expands we need to ensure that we have the necessary skills to execute our strategy and that we allocate sufficient resources where required.	Implementation of our strategy may be delayed and we may not meet shareholders' expectations. We have failed to identify potential capability gaps. We may be unable successfully to integrate acquisitions.  Resources are too stretched, leading to potential personnel issues.	The Group HR Director is in the process of commencing a capability study in order to ensure that we have the correct level of skill, knowledge and experience internally to deliver our strategic goals, and to identify where to attract and recruit skills if they are not already present in the Group.	↑

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 for the year ended 30 June 2014.  Certain parts of that Report are not included with this announcement.

We confirm to the best of our knowledge:

a)    the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

b)    the Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a  description of the principal risks and uncertainties that they face; and

b)    the management report, which comprises the Directors' Report, includes a fair review of the development and performance of the Business and the position of the Company and the undertakings included in the consolidation taken as a whole, 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	Anne-Francoise Nesmes
Chief Executive Officer	Chief Financial Officer
8 September 2014	8 September 2014

For further information, please contact:

Zoe Goulding, Company Secretary and Solicitor                      

Telephone number: 01606 814730

About Dechra

Dechra is an international specialist veterinary pharmaceuticals and related products business.  Our 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

Trademarks

Trademarks appear throughout this document in italics. Dechra and the Dechra "D" logo are registered trademarks of Dechra Pharmaceuticals PLC.

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 involving a degree of uncertainty.  Therefore, nothing in this document should be construed as a profit forecast by the Company.

 

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