Interim Results

Dechra Pharmaceuticals PLC 28 February 2006 Issued by Citigate Dewe Rogerson Ltd, Birmingham Date: Tuesday, 28 February 2006 Embargoed: 7.00am Dechra Pharmaceuticals PLC Interim Results for the six months ended 31 December 2005 'Solid progress across all businesses reflecting both strong market conditions and further penetration of our products and services within the veterinary market' All figures now reported under International Financial Reporting Standards as adopted by the European Union 2005 2004 Revenue Â£116.1m Â£104.3m +11% Operating profit Â£5.8m Â£5.5m +5% Operating profit (pre-product and USA development cost) Â£6.6m Â£5.9m +13% Profit before taxation Â£5.2m Â£4.8m +9% Profit before taxation (pre-product and USA development cost) Â£6.0m Â£5.1m +18% Earnings per share 6.99p 6.49p +8% Interim dividend 1.91p 1.70p +12% Net borrowings Â£10.2m Â£13.2m All businesses continue to make solid progress Approval gained in the EU for Vetoryl(R) capsules NVS has improved its competitive position and gained new accounts Continued increase in own brand pharmaceutical sales 'Market penetration of our veterinary pharmaceutical portfolio into new and existing markets is increasing and we expect to deliver further growth and report positively on the clinical trials in North America in the future.' Ian Page, Chief Executive FULL STATEMENT ATTACHED Enquiries: Ian Page, Chief Executive Fiona Tooley, Director Simon Evans, Group Finance Director Katie Dale, Senior Account Manager Dechra(R) Pharmaceuticals PLC Citigate Dewe Rogerson Today: 0207 638 9571 (until 11.30am) Today: 0207 638 9571 Mobile: 07775 642222 (IP) or 07775 642220 (SE) Mobile: 07785 703523 (FMT) Thereafter: 01782 771100 Thereafter: 0121 455 8370 www.dechra.com -2- Dechra Pharmaceuticals PLC Interim Results for the six months ended 31 December 2005 Introduction The Group continues to make solid progress across all businesses, with revenue growth of 11%. This reflects both strong market conditions and further penetration of our products and services within the veterinary market. In addition to the strong organic growth achieved, the Group has continued to lay the foundations of future growth by, as previously indicated, significantly increased product development expenditure compared to the same period last year, and further investment in the establishment of our USA operation. Therefore, whilst operating profit showed a 5% improvement over the comparable period and pre-tax profit a 9% improvement, these figures rise to 13% and 18% respectively if stated before increased product and USA development cost, both of which will be key drivers of value over the long term. Our strategic focus continues to be the ongoing development of the Group's own veterinary pharmaceutical portfolio for the world's companion animal markets. It is pleasing to report that two milestones have been achieved in the period. Firstly, through the mutual recognition procedure, we have gained approval in the EU for one of our lead products, Vetoryl capsules. Marketing will commence via our European partners in the key territories prior to the end of this financial year. Secondly, the Group continues to make progress on the licensing of both Vetoryl capsules and Felimazole(R) tablets in the USA. Feedback received from the Food and Drug Administration ('FDA') on the safety and efficacy sections of our applications has provided clarity on the specific requirements to licence these key products in the world's largest companion animal market. We remain confident of the potential for substantial sales. Further details are provided later in this report. Financials These interim results are our first to be presented using International Financial Reporting Standards ('IFRS'). The comparative figures for the year ended 30 June 2005 and the six months ended 31 December 2004 have been re-stated accordingly. In the six months ended 31 December 2005, Group revenues were up 11% to Â£116.1 million (2004: Â£104.3 million), whilst operating profit increased by 5% to Â£5.8 million (2004: Â£5.5 million), and profit before taxation rose 9% to Â£5.2 million (2004: Â£4.8 million). Basic earnings per share amounted to 6.99 pence, against 6.49 pence in 2004, up 8%. As normal, inventory levels were at a seasonally high level at the end of the period being reported on and this caused net borrowings to increase compared to 30 June 2005. However, the net borrowings at 31 December 2005 of Â£10.2 million showed a 22% reduction when compared to the Â£13.2 million at the same point last year. We expect by the year-end to have reduced borrowings further, reflecting the Group's strong cash generation. Interest cover remains strong at 9.2 times operating profit (2004: 7.1 times). Dividend In view of the Board's confidence in the future direction of the Group, the Directors are declaring an Interim dividend of 1.91 pence (2004: 1.70 pence), an increase of 12%. The Interim dividend will be paid on 7 April 2006 to shareholders on the Register as at 10 March 2006. This dividend is covered 3.6 times by earnings (2004: 3.8 times). continued... -3- Review Pharmaceutical Division This division comprises Dechra Veterinary Products ('DVP'), Arnolds Veterinary Products ('Arnolds') and Dales Pharmaceuticals ('Dales'). Sales and Marketing The re-branding of our UK pharmaceuticals is progressing to plan with our major strategic products now being marketed under the global 'Dechra Veterinary Products' brand. DVP continues to increase pharmaceutical sales, driven by accelerated growth of one of our lead products, Felimazole, within the UK and EU. This was achieved by launches into new EU territories by our marketing partners and the UK introduction of a new 2.5 mg dosage form. DVP USA, established in April 2005, has successfully launched our own branded Thyroxyl oral solution and Thyroxyl tablets for the treatment of canine hypothyroidism in this important region. DVP, led by our experienced US team, recently presented and exhibited at the North American Veterinary Conference where our introduction to the market and our long term plans were well received by veterinarians. Terms have been agreed with all the major national and regional distributors, a key step in establishing our presence in North America. We continue to develop the Arnolds brand, which is now focussed on instruments, consumables, and critical care products. We have made progress as market leaders in critical care with market share gains and product introductions. The Vetivex (R) range of licensed products used for fluid therapy, which we acquired last year, has seen improvement in market share and pleasing revenue growth. Although our Instruments and Consumables business has suffered from competitive pressures, grey imports and price deflation, it produced a satisfactory performance with volume sales being maintained. Pharmaceutical Manufacturing Dales, our manufacturing facility, enjoyed a positive first half performance through further productivity improvements and investment. Service levels to cus tomers are now at record highs, and we expect this trend to be maintained. A complete revision of our Quality Management Systems is at an advanced stage. Also during the first half, we began the commissioning of a new IT system. These changes will enhance quality procedures and improve efficiency as we work towards achieving FDA compliance. Services Division This division comprises National Veterinary Services ('NVS'), Vetcom Systems ('Vetcom'), NationWide Laboratories ('NWL') and Cambridge Specialist Laboratory Services ('CSLS'). Distribution Despite the continuing competitive market conditions, our wholesaling business NVS has focussed on improving its competitive position and gaining new accounts. This has produced strong sales growth and further strengthened NVS's market share. We have commenced a substantial investment in NVS's central facility, which will increase capacity and further improve operational efficiency. The warehouse has been extended by a new 16,000 square foot mezzanine floor with major extensions and operational improvements also being made to the automatic picking circuit. continued... -4- Vetcom Systems This month has seen the launch of 'Vpod', a hand-held, stand-alone, electronic on-line ordering device. Utilising barcode technology, this fast and easy-to-use ordering system will allow veterinary practices to maintain optimum stock levels and place orders at any time of the day. Laboratory Services Our laboratory businesses, NWL and CSLS, have produced strong results with sales and operating profit significantly ahead of 2004. Organic growth has been achieved from gaining new accounts, by maximising the return from existing customers and by providing new services. Our allergy testing brand, 'Allervet' launched last year, continues to exceed our sales expectations. Product Development As outlined in the introduction, Vetoryl capsules, which are used for the treatment of Cushing's disease in dogs, have received approval for marketing in all 19 European territories which were applied for. This is a major achievement for our Regulatory team and is now the second product we have successfully licensed throughout the key territories of Europe. Guidance has been received on Vetoryl capsules from the US regulators, the FDA, providing clear requirements on the further clinical trial work necessary to satisfy US regulations. Protocols for these trials have been submitted and are awaiting approval. Trial sites have been identified on the East coast of America and implementation will commence shortly. These trials are expected to be completed by the end of 2007. A 10mg strength Vetoryl capsule, which will improve maintenance dosage options, is also under development for introduction to all markets. Felimazole, our own developed tablet for feline hyperthyroidism, is also currently undergoing clinical trials within the USA. The protocol for the efficacy study has been approved by the FDA and the trials have commenced. Felimazole tablets and Vetoryl capsules also represent a sizeable opportunity in other territories. Dossiers have already been submitted to the Australian and Canadian authorities and negotiations are underway to identify partners in other territories where there are significant companion animal markets. Following the recent launch of Urilin, our first UK licensed branded generic product, used for the treatment of canine urinary incontinence, we have been granted a UK marketing authorisation for a further licensed branded generic which will be launched in Q4 of this financial year. People Training and development remain key to the future of the business and we continue to invest in our people. During the period, we have welcomed a number of new staff, including senior appointments: Martin Riley as Managing Director and Caitrina Harrison as Sales & Marketing Director at NVS. During the second half, we will be looking to add to our regulatory team, through the recruitment of a US national to monitor our US based field trials. continued... -5- Prospects and Current Trading Our Group wholesaling business NVS, will continue to build on its solid market share and take advantage of opportunities within a sector that has recently witnessed a significant consolidation. Market penetration of our veterinary pharmaceutical portfolio into new and existing markets is increasing and we expect to deliver further growth and report positively on the clinical trials in North America in the future. Overall, trading continues to be in-line with management expectations and we look forward to the future with confidence. Michael Redmond Ian Page Non-Executive Chairman Chief Executive -6- Consolidated Income Statement for the six months ended 31 December 2005 Six months ended Year ended Note 31.12.05 31.12.04 30.06.05 Â£'000 Â£'000 Â£'000 Revenue 3 116,088 104,263 210,267 Cost of sales (100,015) (90,023) (180,550) --------------------------------- Gross profit 16,073 14,240 29,717 Operating expenses (10,264) (8,705) (18,462) ------------------------------------------------------------------------------- Operating profit before product and USA development cost 6,646 5,873 12,493 Product development costs (680) (310) (1,053) USA development cost (157) (28) (185) ------------------------------------------------------------------------------- Operating profit 3 5,809 5,535 11,255 Finance income 4 378 161 355 Finance expense 5 (1,012) (937) (1,909) ------------------------------- Profit before taxation 5,175 4,759 9,701 Income tax expense 6 (1,595) (1,451) (2,674) ------------------------------- Profit for the period attributable to equity holders of the parent 3,580 3,308 7,027 =============================== Earnings per share (pence) Basic 8 6.99p 6.49p 13.77p =============================== Diluted 8 6.86p 6.38p 13.54p =============================== Dividend per share (declared/proposed) 7 1.91p 1.70p 5.20p =============================== -7- Consolidated Balance Sheet At 31 December 2005 As at As at As at 31.12.05 31.12.04 30.06.05 Â£'000 Â£'000 Â£'000 ASSETS Non-Current Assets Intangible assets - goodwill 4,385 4,385 4,385 - software 226 203 255 - development costs 536 360 510 - other intangibles 1,880 789 1,889 Property, plant & equipment 5,431 5,073 4,946 Deferred taxes 540 155 406 ------------------------------ Total non-current assets 12,998 10,965 12,391 ============================== Current Assets Inventories 27,616 24,394 20,390 Trade and other receivables 32,656 31,466 33,708 Cash and cash equivalents 7,893 6,224 13,924 ------------------------------ Total current assets 68,165 62,084 68,022 ============================== Total assets 81,163 73,049 80,413 ============================== LIABILITIES Current Liabilities Borrowings (2,315) (1,506) (1,502) Trade and other payables (40,367) (37,869) (41,971) Current tax liabilities (2,535) (1,793) (2,057) ------------------------------ Total current liabilities (45,217) (41,168) (45,530) ============================== Non-Current Liabilities Borrowings (15,819) (17,903) (17,281) ------------------------------ Total non-current liabilities (15,819) (17,903) (17,281) ============================== Total liabilities (61,036) (59,071) (62,811) ============================== Net assets 20,127 13,978 17,602 ============================== EQUITY Issued share capital 515 510 511 Share premium account 27,417 26,828 26,953 Hedging reserve (71) - - Merger reserve 1,720 1,720 1,720 Retained earnings (9,454) (15,080) (11,582) ------------------------------ Total equity attributable to equity holders of the parent 20,127 13,978 17,602 ============================== -8- Consolidated Statement of Changes in Shareholders' Equity for the six months ended 31 December 2005 Issued Share Hedging Merger Retained Total Share Premium Reserve Reserve Earnings Capital Account Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Six months ended 31 December 2004 At 1 July 2004 510 26,784 - 1,720 (17,012) 12,002 Profit for the period being total - - - - 3,308 3,308 recognised income and expense for the period Dividends paid - - - - (1,606) (1,606) Share-based payments including deferred tax taken directly - - - - 230 230 to equity Shares issued - 44 - - - 44 -------------------------------------------------------- At 31 December 2004 510 26,828 - 1,720 (15,080) 13,978 ======================================================== Year ended 30 June 2005 At 1 July 2004 510 26,784 - 1,720 (17,012) 12,002 Profit for the period being total - - - - 7,027 7,027 recognised income and expense for the period Dividends paid - - - - (2,473) (2,473) Share-based payments including deferred tax taken directly - - - - 876 876 to equity Shares issued 1 169 - - - 170 -------------------------------------------------------- At 30 June 2005 511 26,953 - 1,720 (11,582) 17,602 ======================================================== Six months ended 31 December 2005 At 1 July 2005 as previously stated 511 26,953 - 1,720 (11,582) 17,602 Impact of adoption of IAS32 and IAS39 on 1 - - (71) - - (71) July 2005 -------------------------------------------------------- At 1 July 2005 - re-stated 511 26,953 (71) 1,720 (11,582) 17,531 Profit for the period being total - - - - 3,580 3,580 recognised income and expense for the period Dividends paid - - - - (1,794) (1,794) Share-based payments including deferred tax taken - - - - 342 342 directly to equity Shares issued 4 464 - - - 468 -------------------------------------------------------- At 31 December 2005 515 27,417 (71) 1,720 (9,454) 20,127 ======================================================== -9- Consolidated Statement of Cash Flows for the six months ended 31 December 2005 Six months ended Year ended Note 31.12.05 31.12.04 30.06.05 Â£'000 Â£'000 Â£'000 Cash flows from operating activities ------------------------------------ Profit for the period 3,580 3,308 7,027 Adjustments for: Depreciation 431 489 935 Amortisation 68 18 41 Gain on sale of property, plant and equipment (10) (32) (42) Finance income (378) (161) (355) Finance expense 1,012 937 1,909 Equity-settled share-based payment expenses 199 (34) 488 Income tax expense 1,595 1,451 2,674 ------------------------------ Operating profit before changes in working capital 6,497 5,976 12,677 Increase in inventories (7,226) (7,415) (3,411) Decrease/(increase) in trade and other receivables 970 1,427 (787) (Decrease)/increase in trade and other payables (1,711) 884 5,070 ------------------------------ Cash generated from operations (1,470) 872 13,549 Interest paid (967) (1,101) (2,022) Income taxes paid (1,078) (909) (1,996) ------------------------------ Net cash from operating activities (3,515) (1,138) 9,531 Cash flows from investing activities ------------------------------------ Proceeds from sale of property, plant and equipment 10 130 140 Interest received 334 161 355 Purchase of property, plant and equipment (821) (283) (644) Capitalised development expenditure (56) (148) (321) Purchase of other intangible fixed assets - - (1,100) ------------------------------ Net cash from investing activities (533) (140) (1,570) Cash flows from financing activities ------------------------------------ Proceeds from the issue of share capital 500 40 138 New borrowings 66 13,160 13,160 Repayment of borrowings (755) (768) (1,538) Dividends paid (1,794) (1,606) (2,473) ------------------------------- Net cash from financing activities (1,983) 10,826 9,287 Net (decrease)/increase in cash and cash equivalents (6,031) 9,548 17,248 Cash and cash equivalents at start of period 13,924 (3,324) (3,324) ------------------------------- Cash and cash equivalents at end of period 7,893 6,224 13,924 =============================== Reconciliation of net cash to movement in net borrowings -------------------------------------------------------- Net (decrease)/increase in cash and cash equivalents (6,031) 9,548 17,248 Repayment of borrowings 755 768 1,538 New borrowings (66) (13,160) (13,160) New finance leases - (346) (438) Other non-cash changes (40) 115 63 ------------------------------ Movement in net borrowings in the period (5,382) (3,075) 5,251 Net borrowings at start of period (4,859) (10,110) (10,110) ------------------------------ Net borrowings at end of period 9 (10,241) (13,185) (4,859) ============================== -10- Notes to the Financial Statements For the six months ended 31 December 2005 1. Transition to International Financial Reporting Standards The attached interim financial statements are the first Group interim financial statements following the adoption of International Financial Reporting Standards as adopted by the European Union 'adopted IFRS'. These interim financial statements have been prepared in accordance with the accounting policies set out below and are consistent with the policies the Group expects to follow at the year-end, taking into account the requirements and options in IFRS 1 'First-time adoption of International Financial Reporting Standards'. The transition date for the Group's application of adopted IFRS is 1 July 2004 and the comparative figures for 31 December 2004 and 30 June 2005 have been restated accordingly. Reconciliations of the income statement, balance sheet and net equity from previously reported UK GAAP to IFRS are shown in note 10. The consolidated interim statements are prepared on the basis of adopted IFRS published by the International Accounting Standards Board ('IASB') that are currently in issue. The adopted IFRS that will be effective (or available for early adoption) in the annual financial statements to 30 June 2006 are still subject to change and additional interpretations. Therefore, the accounting policies set out below may be updated by the time the Group prepares its first full set of financial statements under IFRS for the year ending 30 June 2006. The information relating to the six months ended 31 December 2005 and 31 December 2004 is unaudited and does not constitute statutory accounts. The comparative figures for the year ended 30 June 2005 are not the Company's statutory accounts for that financial year. The statutory accounts for the year ended 30 June 2005, prepared under UK GAAP, have been reported on by the Company's auditors and delivered to the Registrar of Companies. The report of the auditors was unqualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985. The interim financial statements are unaudited but have been reviewed by the auditors and their report to Dechra Pharmaceuticals PLC is set out at the end of this document. 2. Accounting Policies The Group's significant accounting policies are listed below: (a) First Time Adoption The Group has applied IFRS1 'First time adoption of International Financial Reporting Standards' in its initial application of IFRS. The Group is required to select appropriate accounting policies under IFRS and, subject to a few exemptions detailed below, apply them retrospectively to its financial statements such that all comparative information is presented on the same basis. Accordingly this necessitates the restatement of the balance sheet at 1 July 2004, the date of transition (this being the date of the beginning of the earliest financial year for which full comparative information is required) as well as at 30 June 2005. IFRS1 permits certain exemptions to the full retrospective restatement. The exemptions that have been adopted by the Group are as follows: Business combinations - business combinations made prior to 1 July 2004 have not been restated in accordance with IFRS3 'Business Combinations'. Share based payments - IFRS2 'Share-based payments' has only been applied to awards of share options granted after 7 November 2002 which had not vested by 1 January 2005. continued... -11- Financial instruments - IAS32 'Financial Instruments : Disclosure and Presentation' and IAS 39 'Financial Instruments : Recognition and Measurement' have been adopted prospectively from 1 July 2005 with no restatement of comparative information which continues to be presented in accordance with UK GAAP. (b) Basis of Preparation The financial statements are presented in Sterling, rounded to the nearest thousand. They are prepared on the historical cost basis except for derivative financial instruments that are stated at fair value. The restated financial information for the transition to IFRS at 1 July 2004, the interim period ended 31 December 2004, the year ended 30 June 2005 and the adoption of IAS 32 and IAS 39 at 1 July 2005 has been prepared in accordance with adopted IFRS and in accordance with the accounting policies as set out below. The preparation of financial statements in conformity with adopted IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. (c) Basis of Consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. (ii) Transactions Eliminated on Consolidation Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. (d) Foreign Currency Foreign Currency Transactions Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Sterling at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Sterling at the foreign exchange rates ruling at the dates the fair value was determined. continued... -12- (e) Derivative Financial Instruments (applicable from 1 July 2005) The Group uses derivative financial instruments to manage its exposure to foreign exchange and interest rate risks. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for speculative purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. On adoption of IAS32 and IAS39, the comparative financial statements have not been restated. As permitted under IFRS1 'First time adoption of International Financial Reporting Standards' the comparative statements continue to hedge account under UK GAAP. On 1 July 2005, the fair values of derivatives used for hedging were included in a hedging reserve. The corresponding adjustments were to increase trade and other payables by Â£102,000 and the deferred tax asset by Â£31,000. As the Group has not adopted hedge accounting under IAS39 from 1 July 2005 the hedging reserve is frozen and will only be released to the income statement when the related forecast transactions occur. Derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in the income statement. The fair value of interest rate swaps, floors and ceilings, is the estimated amount that the Group would receive or pay to terminate the instrument at the balance sheet date. The fair value of forward exchange contracts and options is their quoted market price at the balance sheet date, being the present value of the quoted forward price. (f) Property, Plant and Equipment (i) Owned Assets Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses (see accounting policy k). (ii) Leased Assets Leases under the terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Assets acquired by finance leases are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses. (iii)Subsequent Costs The Group recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other costs are recognised in the income statement as an expense as incurred. (iv) Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land is not depreciated. The estimated useful lives are as follows: leasehold improvements period of lease fixtures, fittings and equipment 10% - 33% motor vehicles 25% The residual value, if not insignificant, is reassessed annually. continued... -13- (g) Intangible Assets (i) Goodwill All business combinations are accounted for by applying the purchase method. Goodwill represents amounts arising on acquisition of subsidiaries, associates and joint ventures. In respect of business acquisitions that have occurred since 1 July 2004, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. In respect of acquisitions prior to this date, goodwill is included on the basis of its deemed cost, which represents the amount recorded under previous GAAP. The classification and accounting treatment of business combinations that occurred prior to 1 July 2004 has not been reconsidered in preparing the Group's opening IFRS balance sheet at 1 July 2004. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is not amortised but is allocated to cash generating units and is tested annually for impairment. (ii) Research and Development Costs Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the income statement as an expense is incurred. The Group is also engaged in development activity with a view to bringing new pharmaceutical products to market. Costs of development are capitalised in the balance sheet unless those costs cannot be measured reliably or it is not probable that future economic benefits will flow to the Group, in which case the relevant costs are expensed to the income statement as incurred. Due to the strict regulatory process involved, there is inherent uncertainty as to the technical feasibility of development projects often until regulatory approval is achieved, with the possibility of failure even at a late stage. The Group considers that this uncertainty means that the criteria for capitalisation are not met unless it is probable that regulatory approval will be achieved and the project is commercially viable. Where development costs are capitalised, the expenditure includes the cost of materials, direct labour and an appropriate proportion of overheads. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses. (iii) Other Intangible Assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Expenditure on internally generated goodwill and other intangibles is recognised in the income statement as an expense as incurred. (iv) Subsequent Expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. continued... -14- (v) Amortisation Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Goodwill and intangible assets with an indefinite useful life are systematically tested for impairment at each balance sheet date. Other intangible assets are amortised from the date that they are available for use. The estimated useful lives are as follows: software 5 years capitalised development costs 5 - 10 years patent rights Period of patent marketing authorisations Indefinite life product rights Period of product rights (h) Trade and Other Receivables Trade and other receivables are stated at their amortised cost. (i) Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of inventories is based on the first-in first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity. (j) Cash and Cash Equivalents Cash and cash equivalents comprises cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. (k) Impairment The carrying amounts of the Group's assets, other than inventories and deferred tax assets, are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated. The recoverable amount of assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. For goodwill, assets that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date and, in the case of goodwill, at the date of transition to IFRS. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units (group of units) and then, to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. continued... -15- An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (l) Dividends Dividends are recognised in the period in which they are approved by the Company's shareholders or, in the case of an interim dividend, when the dividend is paid. (m) Interest-Bearing Borrowings Interest-bearing borrowings are recognised at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of borrowings on an effective interest basis. (n) Employee Benefits (i) Pensions The Group operates a defined contribution pension plan for certain employees. Obligations for contributions are recognised as an expense in the income statement as incurred. (ii) Share Based Payment Transactions The Group operates a number of equity-settled share based payment programmes that allow employees to acquire shares of the Company. The Group also operates a Long Term Incentive Plan for Directors and Senior Executives. The fair value of shares or options granted is recognised as an employee expense on a straight line basis in the income statement with a corresponding movement in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the shares or options (the vesting period). The fair value of the shares or options granted is measured using a valuation model, taking into account the terms and conditions upon which the shares or options were granted. For schemes with no market related performance conditions, the amount recognised as an expense in the income statement is adjusted to take into account an estimate of the number of shares or options that are expected to vest together with an adjustment to reflect the number of shares or options that actually do vest. In the case of schemes that already contain market related performance criteria no such adjustments are necessary. The fair value of grants under the Long Term Incentive Plan has been determined using the Monte Carlo simulation model. The fair values of options granted under all other share option schemes have been determined using the Black-Scholes option pricing model. (o) Trade and Other Payables Trade and other payables are stated at their amortised cost. continued... -16- (p) Revenue (i) Goods Sold Revenue from the sale of goods is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the buyer. Appropriate provision is made, based on past experience, for the possible return of goods and discounts given to customers. (ii) Milestone Payments Milestone payments received from the granting of distribution and marketing rights for products are recognised in the income statement over the period in which the Company fulfils all of its obligations relating to such payments. (q) Expenses (i) Operating Lease Payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement evenly over the period of the lease, as an integral part of the total lease expense. (ii) Finance Lease Payments Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. (iii) Net Financing Costs Net financing costs comprise interest payable on borrowings, interest receivable on funds invested, foreign exchange gains and losses, and gains and losses on hedging instruments that are recognised in the income statement (see accounting policy e). Interest income is recognised in the income statement as it accrues. The interest expense component of finance lease payments is recognised in the income statement using the effective interest rate method. (r) Income Tax Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method and represents the tax payable or recoverable on most temporary differences which arise between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes (the tax base). Temporary differences are not provided on: goodwill that is not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit and do not arise from a business combination; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates expected to apply in the period in which the liability is settled or the asset is realised and is based upon tax rates enacted or substantively enacted at the balance sheet date. continued... -17- A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is not probable that the related tax benefit will be realised against future taxable profits. The carrying amounts of deferred tax assets are reviewed at each balance sheet date. (s) Segment Reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. (t) Operating Profit and Operating Cash Flow Operating profit and operating cash flow is stated before investment income and finance costs. 3. Segmental Analysis The Group's primary reporting segment is business divisions which correspond with the way the operating businesses are organised and managed within the Group and its secondary segment is geographical origin. The following table analyses revenue and operating profit accordingly: Six months ended Year ended 31.12.05 31.12.04 30.06.05 Â£'000 Â£'000 Â£'000 Business Segment ---------------- Revenue Pharmaceuticals 11,179 9,949 21,381 Services 108,101 97,230 194,611 Inter division (3,192) (2,916) (5,725) ---------------------------------------------- 116,088 104,263 210,267 ============================================== Operating Profit Pharmaceuticals 2,047 2,081 4,292 Services 4,275 3,910 7,973 Central costs (513) (456) (1,010) ----------------------------------------------- 5,809 5,535 11,255 =============================================== Geographical Origin Revenue United Kingdom 115,945 104,263 210,267 USA 143 - - ---------------------------------------------- 116,088 104,263 210,267 ============================================== Operating Profit United Kingdom 6,479 6,019 12,450 USA (157) (28) (185) Central costs (513) (456) (1,010) ----------------------------------------------- 5,809 5,535 11,255 =============================================== continued... -18- 4. Finance Income Six months ended Year ended 31.12.05 31.12.04 30.06.05 Â£'000 Â£'000 Â£'000 Bank interest receivable 318 161 355 Other interest receivable 36 - - Fair value gains on derivative financial instruments 24 - - ------------------------------------ 378 161 355 ==================================== 5. Finance Expense Six months ended Year ended 31.12.05 31.12.04 30.06.05 Â£'000 Â£'000 Â£'000 Bank loans and overdrafts 928 873 1,774 Amortisation of arrangement fees 53 51 103 Finance charges payable on finance leases and 19 13 32 hire purchase contracts Fair value losses on derivative financial instruments 12 - - --------------------------------- 1,012 937 1,909 ================================= 6. Taxation The tax charge for the six months ended 31 December 2005 has been based on the estimated effective rate for the year ending 30 June 2006 of 30.8% (six months ended 31 December 2004: 30.5%). All taxation is in the United Kingdom. 7. Dividends The Directors have declared an interim dividend of 1.91p per share (2004: 1.70p) costing Â£983,000 (2004: Â£867,000). It is payable on 7 April 2006 to shareholders whose names are on the Registrar of Members at close of business on 10 March 2006. The ordinary shares will become ex-dividend on 8 March 2006. As the dividend was declared after the end of the period being reported and in accordance with IAS10 'Events After the Balance Sheet Date', the interim dividend 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 2006. continued... -19- 8. Earnings per Share Earnings per ordinary share have been calculated by dividing the profit attributable to equity holders of the parent on ordinary activities after taxation for each financial period by the weighted average number of ordinary shares in issue during the period. Six months ended Year ended 31.12.05 31.12.04 30.06.05 Pence Pence Pence Basic earnings per share 6.99 6.49 13.77 ================================= Diluted earnings per share 6.86 6.38 13.54 ================================= The calculation of basic and diluted earnings per share is based upon: Â£'000 Â£'000 Â£'000 Earnings for basic and diluted earnings per share calculations 3,580 3,308 7,027 ================================= No. No. No. Weighted average number of ordinary shares for basic earnings per share 51,229,294 50,997,064 51,022,645 Impact of share options 938,907 832,674 879,018 ---------------------------------- Weighted average number of ordinary shares for diluted earnings 52,168,201 51,829,738 51,901,663 per share ================================== 9. Analysis of Net Borrowings As at As at As at 31.12.05 31.12.04 30.06.05 Â£'000 Â£'000 Â£'000 Bank loans and overdraft (17,750) (19,058) (18,410) Finance leases and hire purchase contracts (384) (351) (373) Cash and cash equivalents 7,893 6,224 13,924 --------------------------------- (10,241) (13,185) (4,859) ================================= 10. Explanation of Transition to IFRS The accounting policies set out in note 2 have been applied in preparing the consolidated interim financial statements for the six months ended 31 December 2005, the comparative information for the six months ended 31 December 2004 and the year ended 30 June 2005 and the preparation of the opening IFRS balance sheet at 1 July 2004 (the Group's date of transition). In preparing its opening balance sheet, comparative information for the six months ended 31 December 2004 and the year ended 30 June 2005 the Group has adjusted amounts reported previously in financial statements prepared in accordance with UK GAAP. A full explanation of the principal changes in accounting policies and how the transition from UK GAAP to IFRS has affected the Group's income statement, balance sheet and net equity was published on 19 October 2005 and is summarised below. A copy of the full document can be obtained from the Company's Corporate web-site www.dechra.com by clicking on the press releases section. continued... -20- (a) IFRS Reconciliation of Income Statement Comparatives Six months ended Year ended 31 December 2004 30 June 2005 Restated Restated Notes Published IFRS under Published IFRS under UK GAAP adjustments IFRS UK GAAP adjustments IFRS Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Revenue a 103,263 1,000 104,263 208,197 2,070 210,267 Cost of a (89,023) (1,000) (90,023) (178,480) (2,070) (180,550) sales ------------------------------------------------------------------------------- Gross 14,240 - 14,240 29,717 - 29,717 profit Operating expenses b, c, (9,097) 392 (8,705) (19,305) 843 (18,462) d, e ------------------------------------------------------------------------------- Operating profit 5,143 392 5,535 10,412 843 11,255 Finance 161 - 161 355 - 355 income Finance expense (937) - (937) (1,909) - (1,909) ------------------------------------------------------------------------------ Profit before 4,367 392 4,759 8,858 843 9,701 taxation Income tax expense (1,418) (33) (1,451) (2,590) (84) (2,674) ============================================================================== Profit attributable to 2,949 359 3,308 6,268 759 7,027 equity holders of the parent ============================================================================== Earnings per share (pence) Basic 5.78p 0.71p 6.49p 12.28p 1.49p 13.77p ============================================================================== Diluted 5.69p 0.69p 6.38p 12.08p 1.46p 13.54p ============================================================================== continued... -21- (b) IFRS Reconciliation of Balance Sheet Comparatives 31 December 2004 30 June 2005 Notes Published IFRS Restated Published IFRS Restated UK GAAP adjustments under UK GAAP adjustments under IFRS IFRS Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Non-current assets ------------------ Intangible assets - goodwill a 4,103 282 4,385 3,821 564 4,385 - software b - 203 203 - 255 255 - other intangibles c 789 360 1,149 1,889 510 2,399 Property plant b 5,276 (203) 5,073 5,201 (255) 4,946 and equipment Deferred d - 155 155 - 406 406 taxes ------------------------------------------------------------------------- Total non-current assets 10,168 797 10,965 10,911 1,480 12,391 Current assets -------------- Inventories 24,394 - 24,394 20,390 - 20,390 Trade and other receivables 31,466 - 31,466 33,708 - 33,708 Deferred d - - - 4 (4) - taxes Cash and cash equivalents 6,224 - 6,224 13,924 - 13,924 ------------------------------------------------------------------------- Total current assets 62,084 - 62,084 68,026 (4) 68,022 ------------------------------------------------------------------------- Total 72,252 797 73,049 78,937 1,476 80,413 assets ------------------------------------------------------------------------- Current liabilities ------------------- Borrowings (1,506) - (1,506) (1,502) - (1,502) Trade and other e (37,726) (143) (37,869) (41,826) (145) (41,971) payables Current tax liabilities (1,793) - (1,793) (2,057) - (2,057) Proposed dividend f (867) 867 - (1,789) 1,789 - -------------------------------------------------------------------------- Total current liabilities (41,892) 724 (41,168) (47,174) 1,644 (45,530) Non-current liabilities ----------------------- Borrowings (17,903) - (17,903) (17,281) - (17,281) Provisions - - - - - - Deferred d (174) 174 - - - - taxes -------------------------------------------------------------------------- Total non-current liabilities (18,077) 174 (17,903) (17,281) - (17,281) -------------------------------------------------------------------------- Total liabilities (59,969) 898 (59,071) (64,455) 1,644 (62,811) -------------------------------------------------------------------------- Net assets 12,283 1,695 13,978 14,482 3,120 17,602 ========================================================================== Equity ------ Called up share capital 510 - 510 511 - 511 Share premium account 26,828 - 26,828 26,953 - 26,953 Merger 1,720 - 1,720 1,720 - 1,720 reserve Retained earnings g (16,775) 1,695 (15,080) (14,702) 3,120 (11,582) --------------------------------------------------------------------------- Equity holders 12,283 1,695 13,978 14,482 3,120 17,602 funds attributable to the =========================================================================== parent continued... -22- c) Reconciliation of Equity 1 July 2004 31 December 2004 30 June 2005 Â£'000 Â£'000 Â£'000 Equity under UK GAAP 10,157 12,283 14,482 Write-back of proposed dividend 1,606 867 1,789 Deferred tax 98 329 402 Lease incentive (89) (143) (145) Capitalisation of development costs 230 360 510 Write-back of goodwill amortisation - 282 564 ---------------------------------------------- Equity under IFRS 12,002 13,978 17,602 ============================================== Explanatory notes to the UK GAAP to IFRS Reconciliations Income Statement a. Under IAS18 'Revenue' certain items, such as the sale of trading data to suppliers, have been reclassified to revenue from cost of sales. There is no impact on profit, earnings per share or net assets. b. Under UK GAAP, goodwill was amortised over its estimated useful life. Under IFRS3 'Business Combinations', goodwill is not amortised but is subject to annual impairment review. This has resulted in a credit to the income statement of Â£282,000 for the six months ended 31 December 2004 and Â£564,000 for the year ended 30 June 2005. c. Under UK GAAP the accounting policy of the Group was, in general, to write off all development expenditure to the income statement as incurred. Under IAS38 'Intangible Assets' development expenditure meeting the required criteria must be capitalised. This has resulted in a credit to the income statement of Â£130,000 for the six months ended 31 December 2004 and Â£280,000 for the year ended 30 June 2005. d. Under IFRS2 'Share-based Payments', the cost of employee share options recognised in the income statement is based upon the excess of the fair value of the option over the exercise price at the date of grant. Under UK GAAP, the cost recognised was generally the intrinsic value being the difference in exercise price and market price at the date of grant of the option. The change in method of calculation has resulted in a net credit to the income statement of Â£34,000 in respect of the six months ended 31 December 2004 and Â£55,000 in respect of the year ended 30 June 2005. e. Under UK GAAP, the benefit of lease incentives received (in the form of rent free periods) was spread over the period until the rent reverts to market rates. Under IAS17 'Leases', the benefit must be spread over the entire lease period. This change has resulted in an additional charge to the income statement of Â£54,000 for the six months ended 31 December 2004 and Â£56,000 for the year ended 30 June 2005. f. The income tax expense has been adjusted to reflect the tax effect of the above adjustments. Balance Sheet a. The increase in goodwill reflects the write-back of amortisation previously charged under UK GAAP. b. Under IAS38 'Intangible Assets', software costs are classed as intangible assets. They have therefore been reclassified from property, plant and equipment. There is no impact on the income statement or net assets. continued... -23- c. The increase in other intangible assets represents capitalised development costs under IAS38 'Intangible Assets'. d. The calculation of deferred tax under IAS12 'Income Taxes' can be different from UK GAAP, under which deferred tax is calculated based upon income statement timing differences. The principal reason for the increase in the deferred tax asset is that deferred tax in respect of share-based payments is calculated by reference to a figure which differs from the charge for such payments in the income statement. Deferred tax in respect of share-based payments charged directly to the income statement is also taken to the income statement but any excess tax relief over this amount is taken directly to equity. e. The increase in trade and other payables represents the balance of lease incentives received that are being spread over the remaining lease periods. f. Under IAS10 'Events After the Balance Sheet Date' dividends are recognised when they are paid or approved by the shareholders. This generally results in a later recognition in the financial statements than under UK GAAP. g. The increase in retained earnings at 31 December 2004 is made up as follows: - net adjustments to the income statement of Â£359,000 - reduction to credit to equity in respect of share-based payments of (Â£34,000) - capitalised development costs at 1 July 2004 of Â£230,000 - increase in lease incentives carried forward at 1 July 2004 of (Â£89,000) - de-recognition of the interim dividend of Â£867,000 - credit to deferred tax recognised directly in equity of Â£362,000 The increase in retained earnings at 30 June 2005 is made up as follows: - net adjustments to the income statement of Â£759,000 - reduction to credit to equity in respect of share based payments of (Â£55,000) - capitalised development costs at 1 July 2004 of Â£230,000 - increase in lease incentives carried forward at 1 July 2004 of (Â£89,000) - de-recognition of the final dividend of Â£1,789,000 - credit to deferred tax recognised directly in equity of Â£486,000 -24- Independent review report to Dechra Pharmaceuticals PLC Introduction We have been engaged by the Company to review the financial information set out on pages 6 to 23 and we have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Listing Rules of the Financial Services Authority. Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other that the Company for our review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the interim report in accordance with the Listing Rules which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual financial statements except where any changes and the reason for them are disclosed. As disclosed in note 1 to the financial information, the next annual financial statements of the Group will be prepared in accordance with IFRSs as adopted by the European Union. The accounting policies that have been adopted in preparing the financial information are consistent with those that the Directors currently intend to use in the next annual financial statements. There is, however, a possibility that the Directors may determine some changes to these policies are necessary, when preparing the full annual financial statements for the first time in accordance with those IFRSs adopted by the European Union. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/ 4: Review of Interim Financial Information issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of Group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review is substantially less in scope than an audit performed in accordance with Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 31 December 2005. KPMG Audit Plc Chartered Accountants Birmingham 28 February 2006 This information is provided by RNS The company news service from the London Stock Exchange

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