Preliminary Results Announcement

RNS Number : 4920Z

Dechra Pharmaceuticals PLC

03 September 2018

 

 

Monday, 3 September 2018

Dechra Pharmaceuticals PLC

(Dechra, Company or the Group)

Preliminary Results Announcement

International veterinary pharmaceutical business, Dechra issues audited preliminary results for the year ended 30 June 2018

"Sustaining Growth"

"Dechra has delivered another successful year from both a financial and strategic perspective."

Ian Page, Chief Executive Officer

Highlights

Strategic progress made: ·      Acquired AST Farma and Le Vet in the Netherlands/EU and RxVet in New Zealand. ·      Outperformance in the majority of our countries and therapeutic sectors. ·      Several new global product registrations, and new opportunities secured.

Strong financial performance: ·      Revenue growth of 13.9% to £407.1 million. ·      Underlying operating profit growth of 24.0% to £99.2 million. ·      Underlying EBIT margin expansion of 200 bps to 24.4%. ·      Underlying diluted EPS increased by 20.9% to 76.45 pence. ·      Full year dividend of 25.50 pence.

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

Financial Summary

	2018 £m	2017 £m	Growth at AER	Growth at CER
Revenue	407.1	359.3	13.3%	13.9%
Underlying
Underlying Operating profit	99.2	81.3	22.0%	24.0%
Underlying EBIT %	24.4%	22.6%	180 bps	200 bps
Underlying profit before tax	93.7	77.0	21.7%	23.6%
Underlying EBITDA	106.6	88.2	20.9%	22.6%
Underlying diluted EPS (p)	76.45	64.33	18.8%	20.9%
Reported
Operating profit	34.1	33.2	2.7%	6.3%
Diluted EPS (p)	37.04	27.93	32.6%	38.5%
Dividend per Share	25.50	21.44	18.9%	18.9%

Underlying results excludes items associated with areas such as amortisation and related costs of acquired intangibles, impairment of investments, remeasurement and other movements on deferred and contingent consideration, non-cash inventory adjustments, rationalisation of manufacturing organisation costs, rationalisation and acquisition expenses, loss on extinguishment of debt and taxation credits.

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 [phone]. For assistance please contact Fiona Tooley on [phone] or at Investec on + 44 (0) 20 7597 5004.

Enquiries:
Dechra Pharmaceuticals PLC
Ian Page, Chief Executive Officer	Office:  [phone]
Richard Cotton, Chief Financial Officer e-mail: [e-mail]	Office:  [phone]
TooleyStreet Communications Ltd
Fiona Tooley, Director e-mail: [e-mail]	Mobile: [phone]

Notes: Foreign Exchange Rates:

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

FY2017 Average: EUR 1.1681: GBP 1.0; USD 1.2735: GBP 1.0

FY2017 Closing: EUR 1.1372: GBP 1.0; USD 1.2978: GBP 1.0

About Dechra Dechra is an international 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. 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 2018

 

Non-Executive Chairman's and Chief Executive Officer's Statement

Dechra has delivered another successful year from both a financial and strategic perspective, the highlights of which are:

·     the European (EU) Pharmaceuticals Segment has continued to deliver above market growth;

·     the North American (NA) Pharmaceuticals Segment has delivered another exceptional performance;

·     the International business is beginning to gain traction;

·     the pipeline has delivered numerous international registrations;

·     licensing deals have been signed or are in negotiation to strengthen our pipeline of novel, innovative products;

·     we are at an advanced stage of integrating the AST Farma, Le Vet and RxVet acquisitions; and

·     we have achieved the successful implementation and go live of the Oracle integrated ERP system in Europe.

Market Changes

The veterinary market is seeing faster change than at any time in its history. European practice corporate consolidation is increasing, especially in the UK and some Northern European countries. A recent significant move is the leading USA company taking a small presence in the UK and a significant presence in mainland Europe. Furthermore, veterinary distributors who operate in the majority of major countries in Western Europe and North America are changing and are beginning to increase focus on the sales and marketing of their own products, which is often in conflict with their core historic suppliers. We are also seeing ongoing consolidation of distributors, especially within the USA. The Board of Dechra believes that we are well positioned to support the needs of the larger veterinary practice groups alongside independent practices and that we also have the flexibility to respond quickly to any ongoing changes within the distribution network.

Portfolio Focus

EU Pharmaceuticals Segment

In the year ended 30 June 2018 (the Period) total EU Pharmaceuticals Segment revenues increased by 11.4% at CER (14.0% at AER). Existing business reported revenues increased by 3.7% at CER (6.0% at AER). Excluding third party contract manufacturing and treating Apex on a like for like basis, revenues increased by 4.4% at CER (6.9% at AER). This performance was in line with our expectations, with the majority of countries in which we operate performing ahead of the markets. With the consolidation of veterinary practices we are starting to adapt the support model with an increase in key account managers and resource for the technical support team aimed at supporting these corporate groups in growing their business. Whilst consolidators put pressure on margins they deliver volume. We believe we have strong relationships with the majority of the key players whom we clearly regard as important customers.

Companion Animal Products (CAP) continues to perform well with our key therapeutic sectors, especially endocrinology and anaesthesia and analgesia, delivering good growth. Food producing Animal Products (FAP) also continues to deliver growth of 0.4%, despite the ongoing pressure on antibiotic reduction. We believe our FAP antibiotic range is now aligned for best prescribing practice and the overall portfolio is in a strong position to continue to deliver future growth. Our range of in-house developed poultry vaccines will enhance this position. Equine products have performed well, and sales of Osphos^® have continued to grow as its clinical merits are more widely appreciated. The performance from Nutrition is pleasing as we have addressed historic supply and palatability issues by delivering growth of 4.4%. We have now launched our refreshed cat diets with a new modern packaging design, a Velcro^® type sealing system to keep the product fresh once opened and significantly improved palatability. Additionally, we have reduced the number of stocking units which will decrease the amount of plastic we use and reduce distribution costs. We are currently embarking on a similar programme for our dog diets.

NA Pharmaceuticals Segment

Total NA Segment revenues increased by 18.2% at CER (12.1% at AER). The USA was the main driver of this growth, although Canada also performed well. With the exception of our Carprofen chews and caplets, where sales and margin were affected by distributors marketing their own brands, growth was delivered across our entire range. Strong performers were Amoxi-Clav, following the launch of the smallest tablet size which completes the range, Vetivex^® IV critical care fluids and Zycortal^® suspension, which benefited from increased market share and additional demand in the fourth quarter due to a competitor product being out of stock. Sales leverage is being realised from the enlarged sales team which has benefited from a significant amount of investment over recent years. The team now comprises 107 sales professionals and they provide good geographical coverage across all the major regions of the USA. To mitigate the activity of distributors selling their own competitive products we have realigned our terms. Incorporation of veterinary practices in the USA continues. These groups are an important customer base to Dechra and we have therefore increased our focus on corporate account management. Over the two years of ownership of Dechra-Brovel, our Mexican subsidiary, we have made significant changes. We have recruited a completely new management team which has been finalised with the recent appointment of Adrian Dominguez as Country Manager. Following the successful registration of several Dechra products, the details of which are outlined in the Pipeline Delivery section of this report, we are now able to transform the business into the Dechra brand, focusing on our key products and delisting a number of the original, low value Brovel FAP range. We anticipate Mexico making a more meaningful contribution to our NA Pharmaceuticals Segment performance in the financial year ending June 2019.

Product Pipeline

Integrated Team

The Development and Regulatory teams that have been brought together by the acquisitions made over recent years have integrated well and are forming a cohesive unit. We have also strengthened the team with the appointment of new Regulatory Affairs Managers in Mexico and Canada and by the appointment of an additional Group Pharmaceutical Business Development Manager. A new project management structure and improved reporting systems for both financial and key milestone progress have been implemented. The development work of 20 plus projects acquired through the acquisition of AST Farma B.V. and Le Vet Beheer B.V. will continue to be conducted by a third party contract organisation as they are providing an excellent service.

Pipeline Delivery

Numerous new product registrations, line extensions and international registrations were achieved in the Period with many of these new products already launched. Significant new product registrations achieved in Europe include:

·     Solacyl^® water soluble powder, an anti-inflammatory for turkeys;

·     Diatrim^®, an antibiotic for the treatment of a wide range of infections, including cattle mastitis;

·     Avishield IBH120, our second EU registered poultry vaccine;

·     Avishield ND B1, our third EU registered poultry vaccine; and

·     Tiasol^®, a solution to treat various infections such as swine dysentery and colitis in pigs and treatment of chronic respiratory disease in turkeys and chickens.

Additionally, over 60 registrations were achieved for existing products in new EU territories as we increase our geographical footprint and standardise the range.

Internationally there have been over 20 product registrations achieved across Australia, Kazakhstan, Malaysia, New Zealand, Russia, South Korea and Thailand. This is as a result of our increasing focus on geographical expansion and the dedicated regulatory resource committed to the Dechra Veterinary Products (DVP) International team.

In North America, we have extended the range of Vetivex critical care fluids and have launched the full range of Amoxi-Clav tablets. We have also developed in-house Redonyl^® Ultra, a soft chew dermatological supplement incorporating ultra micronised PEA, an active supplement, sourced through a licensing agreement with Premune AB. In Mexico, Osphos, Vetoryl^®, Canaural^® and Forthyron^® have all been approved.

In addition to our pipeline we have in-licensing deals with:

·     Redonyl^® Ultra, a dermatological supplement from Premune AB which has been launched in the EU, and as detailed above as a soft chew for the USA;

·     Vetradent, a water additive to combat biofilms from Kane Biotech Inc., extending our dental range, has been launched in the USA; and

·     BioEquin^®, our first equine vaccine from Bioveta, a.s., for herpes, has been launched in Germany. We have an agreement in place to access additional equine vaccines from the Bioveta, a.s. pipeline for the major EU markets.

Filling the Pipeline

Our recent acquisitions have extended the range of products in development extensively; however, this is predominantly in the generic or generic plus arena. We have been proactively working on signing licensing agreements to obtain early stage technology to develop novel products and have been successful in gaining access to two molecules which are currently undergoing proof of concept studies and an additional molecule that is in full development. The extra resources in business and product development will help us to identify further opportunities; negotiations are ongoing which will hopefully lead to further pipeline projects. We continue to work closely with Animal Ethics Pty Ltd who are making good progress on the international registration and promotion of their farm animal pain relief product, Tri-Solfen^®.

Acquisitions

In December 2017, we completed the acquisition of RxVet Limited, a small CAP business in New Zealand. RxVet had been Dechra's distributor since 2010, with revenue in the year to March 2017 of £0.8 million (NZ$1.4 million); sales of Dechra products accounted for approximately half of this. The former owner managers have remained with the business and are working to increase market share and build Dechra's presence in the region. Operationally the business is now integrated into our Australian business and rebranding into Dechra livery has commenced.

In February 2018, we completed the acquisition of AST Farma B.V. and Le Vet Beheer B.V. for a total consideration of £307.3 million
(€340.0 million) on a debt-free and cash-free basis. The total consideration was satisfied by approximately 75% in cash and 25% in new Dechra shares, which are subject to a two year lock-in. AST Farma and Le Vet together own approximately 90 generic, generic plus and novel products. AST Farma is one of the leading companion animal pharmaceutical companies in the Netherlands which offers a wide range of products on a direct-to-vet basis, with the majority of its sales bypassing the distributors. They achieve their market position with a quality product range and by offering high levels of customer care and added value services to veterinarians. Since acquisition, we have merged our existing Dutch sales team into the AST Farma team and have differentiated the sales function with the majority of representatives focused on gaining market penetration and with four providing technical and educational support across the country. This enlarged sales team is already leveraging sales of Dechra's existing portfolio. We are now in the process of making the Dechra portfolio available to order directly through the AST Farma network with the full service targeted to be available from 1 January 2019.

Le Vet has focused on the European markets outside of the Netherlands. Selecting products from the AST Farma range, Le Vet has developed a strong portfolio of registrations which it has sold through an established network of marketing partners across Europe, which included Dechra. There are significant revenue synergies available to Dechra by bringing the Le Vet products in-house to sell through our existing European sales and marketing organisations. The majority of the most valuable third party contracts have been terminated and the resultant value is in line with our pre-acquisition expectations.

Le Vet has a substantial pipeline with a number of product registrations already having been achieved since acquisition and an additional 20 plus projects which have been evaluated in detail and which will be progressed. The majority are expected to be approved within the next two to three years. The acquisition was a rare opportunity to consolidate and strengthen our market position in Europe and had been identified by the Dechra management team as a primary target for several years.

We continue to explore relevant acquisition opportunities and are engaging with a number of target companies and believe we are well placed to make further acquisitions.

Geographical Expansion

At the beginning of the year we established DVP International with its own management team and specific targets orientated around generating a material presence in markets outside of Western Europe and North America. Good progress has been made in establishing the business; one clear strategic objective has been targeting the registration of our existing portfolio into target markets. Our historic view of developing countries was orientated around the registration of FAP products; however, new research has provided us with a list of opportunities and a programme which has commenced to register a number of our higher margin CAP and Equine products. Furthermore, our increasing presence in international markets is providing us with a closer insight into potential future acquisition targets. Our Australian business, created through the acquisition of Apex, has performed well with sales growth in line with the market. We have made significant improvements to our manufacturing facility to improve efficiency and we have sufficient capacity to deliver future growth. We have strengthened the management team with the appointment of three veterinarians to assist in technical marketing. Currently, International revenues are reported within our EU Pharmaceuticals Segment; however, we anticipate that its materiality will increase to merit separate segmental reporting over time.

Strategic Enablers

Manufacturing

Increasing efficiency and creating centres of excellence at our main manufacturing sites continues to be a priority for the Group. We are investing in both capital equipment and additional inventory to deliver our strategic objectives within Manufacturing. Substantial progress has been made at both Bladel, Netherlands, where we are investing to achieve FDA approval for our aseptic facility, and in Zagreb, Croatia, where improvements in infrastructure and quality systems have been made across the site. In line with our strategic plan, we continue to move away from third party contract manufacturing to allow us to focus on manufacturing the increasing volumes of our own brands. It is very pleasing to report that we have had 12 months without a lost time accident in any of our manufacturing facilities.

Technology

At the beginning of May we went live across the majority of our European markets with an Oracle integrated ERP system which replaces several unsupported legacy systems. We built additional inventory across the EU to mitigate any risk of failure; however, following go live we experienced only minor teething problems. This has been a major achievement by our EU team who, over the next 12 months, will look to utilise the system to improve management information and deliver operational efficiencies. The Hyperion financial system is also now fully operational; this will allow us to simplify and automate the reporting and consolidation of accounts and financial planning processes in the future.

We have continued to update both of our e-learning platforms, the Dechra Academy and the internal Delta system. The Dechra Academy is an online learning and educational tool that is available to veterinarians and veterinary nurses; several new courses have been developed this year, predominantly in the strategic therapeutic areas of endocrinology and dermatology.  Delta is an internal system that provides over 130 modules designed to ensure Dechra employees are up-to-date with current policy and legislation. It enables them to have detailed knowledge on the business and its products to ensure that we offer the best possible support and advice to the veterinary profession.

People

Our people strategy remains important to the success of the Group. We have instigated numerous initiatives within the year, including ongoing leadership and management development programmes, several apprenticeship schemes as well as offering ongoing training across all levels of employment within the Group. We have also launched wellness and wellbeing initiatives and have had an independent company conduct an employee engagement survey which was completed by 87% of all Group staff with the vast majority stating that Dechra is a great place to work. We would not be able to achieve anything without the commitment, hard work and dedication of our team and we would like to thank all employees for their contribution to the ongoing success of the business.

Brexit

We have engaged in contingency planning and are implementing a hard Brexit mitigation plan. We expect the financial impact to be immaterial. Details of the mitigation plan can be found in Emerging Risks.

Dividend

The Board is proposing a final dividend of 18.17 pence per share (2017: 15.33 pence per share). Added to the interim dividend of 7.33 pence per share, this brings the total dividend for the financial year ended 30 June 2018 to 25.50 per share, representing 18.9% growth over the previous year.

Subject to shareholder approval at the Annual General Meeting to be held on 19 October 2018, the final dividend will be paid on
16 November 2018 to shareholders on the Register at 26 October 2018. The shares will become ex-dividend on 25 October 2018.

Outlook

Following a strong set of results in 2018, the new financial year has started well and in line with management expectations.  Good progress is being made on all parts of our strategy, with several new opportunities being realised and recent acquisitions delivering the expected returns. Whilst there are many challenges in the market, which is developing faster than at any time in its history, we believe that our strategy and flexibility to adapt to change positions us well to continue to outperform.

 

Financial Review

Dechra has delivered another strong set of financial results, from both existing business and acquisitions. We continue to invest both organically and through acquisitions to deliver enhanced shareholder value.

 

Overview of Reported Financial Results

To assist with understanding our reported financial performance, the consolidated results below are split between existing business and acquisition; acquisition includes 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 £9.0 million and non-underlying items of £26.6 million. These non-underlying items are comprised of amortisation of acquired intangibles of £18.7 million, non-cash uplift on acquired inventory of £5.1 million and acquisition costs of £2.8 million

Including non-underlying items, the Group's consolidated profit before tax increased by 4.9% at CER (1.0% at AER). Dechra existing business grew by 66.4% at CER (65.4% at AER), with reported profit before tax of £47.3 million.

As Reported	2018 Existing £m	2018 Acquisition £m	2018 Consolidated £m	2017 £m	Growth at AER		Growth at CER
					Existing %	Consolidated %	Existing %	Consolidated %
Revenue	389.0	18.1	407.1	359.3	8.3%	13.3%	9.0%	13.9%
Gross profit	215.7	6.7	222.4	191.7	12.5%	16.0%	13.8%	17.1%
Gross profit %	55.4%	37.0%	54.6%	53.4%	200bps	120bps	230bps	150bps
Operating profit/(loss)	51.7	(17.6)	34.1	33.2	55.7%	2.7%	57.8%	6.3%
EBIT %	13.3%	(97.2%)	8.4%	9.2%	490bps	(80bps)	420bps	(60bps)
Profit/(loss) before tax	47.3	(18.4)	28.9	28.6	65.4%	1.0%	66.4%	4.9%
Diluted EPS (p)			37.04	27.93	-	32.6%	-	38.5%

 

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 2018 is provided in the table below. In the commentary which follows, all references will be to CER unless otherwise stated.

		Non-underlying Items
	2018 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	2018 Reported Results £m
Revenue	407.1	-	-	-	-	407.1
Gross profit	227.5	(5.1)	-	-	-	222.4
Selling, general and administrative expenses	(110.0)	-	(46.1)	(5.9)	-	(162.0)
R&D expenses	(18.3)	-	(8.0)	-	-	(26.3)
Operating profit	99.2	(5.1)	(54.1)	(5.9)	-	34.1
Net finance costs	(5.4)	-	-	-	0.5	(4.9)
Share of associate loss	(0.1)	-	(0.2)	-	-	(0.3)
Profit before tax	93.7	(5.1)	(54.3)	(5.9)	0.5	28.9
Taxation	(19.2)	1.3	13.5	0.7	10.9	7.2
Profit after tax	74.5	(3.8)	(40.8)	(5.2)	11.4	36.1
Diluted EPS (p)	76.45	-	-	-	-	37.04

In the year, Dechra delivered consolidated revenue of £407.1 million, representing an increase of 13.9% on the prior year. This included £389.0 million from its existing business, an increase of 9.0%, and a £18.1 million contribution from acquisition business.

Consolidated underlying operating profit of £99.2 million, represents a 24.0% increase on the prior year. This included £90.2 million from Dechra's existing business, an increase of 13.3%, and a £9.0 million contribution from acquisition business.

Underlying EBIT margin increased by 200bps to 24.4%, with the accretion coming from both the existing and acquisition business in EU Pharmaceuticals.

Underlying diluted EPS grew by 20.9% to 76.45p reflecting the profit growth from the existing and acquired businesses, offset by higher finance charges from the increase in debt and equity issuance to fund the acquisitions, adjusted by the change in mix of the applicable tax rates.

Underlying	2018 Existing £m	2018 Acquisition £m	2018 Consolidated £m	2017 £m	Growth at CER
					Existing %	Consolidated %
Revenue	389.0	18.1	407.1	359.3	9.0%	13.9%
Gross profit	215.7	11.8	227.5	195.9	11.3%	17.1%
Gross profit %	55.4%	65.2%	55.9%	54.5%	120bps	160bps
Underlying Operating profit	90.2	9.0	99.2	81.3	13.3%	24.0%
Underlying EBIT %	23.2%	49.7%	24.4%	22.6%	90bps	200bps
Underlying EBITDA	97.4	9.2	106.6	88.2	12.5%	22.6%
Underlying Diluted EPS (p)	-	-	76.45	64.33	-	20.9%
Dividend per share	-	-	25.50	21.44	-	18.9%

 

Reported Segmental Performance

Reported segmental performance is presented in note 2. The effect of acquisitions made in the year was material: the reported segmental performance is analysed between existing and acquisition businesses, and at AER and CER in the table below. The acquisition elements capture the additional base business coming into the Group, 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 acquisition business is progressively integrated with the existing business.

Reported	2018 Existing £m	2018 Acquisition £m	2018 Consolidated £m	2017 £m	Growth at AER		Growth at CER
					Existing %	Consolidated %	Existing %	Consolidated %
Revenue by segment
EU Pharmaceuticals	240.6	18.1	258.7	226.9	6.0%	14.0%	3.7%	11.4%
NA Pharmaceuticals	148.4	-	148.4	132.4	12.1%	12.1%	18.2%	18.2%
Total	389.0	18.1	407.1	359.3	8.3%	13.3%	9.0%	13.9%
Operating profit/(loss) by segment
EU Pharmaceuticals	67.5	9.5	77.0	60.7	11.2%	26.9%	9.7%	24.9%
NA Pharmaceuticals	48.3	-	48.3	43.2	11.8%	11.8%	18.3%	18.3%
Pharmaceuticals Research      and Development	(17.8)	(0.5)	(18.3)	(15.0)	(18.7%)	(22.0%)	(18.7%)	(22.0%)
Segment operating profit	98.0	9.0	107.0	88.9	10.2%	20.4%	12.4%	22.2%
Corporate and unallocated costs	(7.8)	-	(7.8)	(7.6)	(2.6%)	(2.6%)	(2.6%)	(2.6%)
Underlying operating profit	90.2	9.0	99.2	81.3	10.9%	22.0%	13.3%	24.0%
Non-underlying operating items	(38.5)	(26.6)	(65.1)	(48.1)
Reported operating profit	51.7	(17.6)	34.1	33.2	55.7%	2.7%	57.2%	6.3%

 

Underlying Segmental Performance

European Pharmaceuticals

Revenue in European (EU) Pharmaceuticals grew by 11.4%. The existing business grew by 3.7% including like for like Apex revenue: excluding third party contract manufacturing, which is being reduced in line with our strategy and replaced with own product manufacturing, revenues increased by 4.4%. This growth was driven by the strong contribution from market penetration and new product launches in the Companion Animal Products (CAP), Equine, Food producing Animal Products (FAP) and Nutrition. The acquisitions of Apex (like for like year on year, acquired in October 2016) and RxVet Limited (Dechra Veterinary Products International business), acquired in December 2017, and AST Farma B.V. and Le Vet Beheer B.V. (acquired in February 2018) contributed a combined £18.1 million to revenue and are reported within EU Pharmaceuticals.

Operating Profit from existing business grew 9.7%, with operating margin expanding to 28.1% and consolidated operating margin increasing to 29.8% as a result of operating leverage and the accretive operating margin of AST Farma  and Le Vet, partially offset by increased investment in our Dechra Veterinary Products International business to drive growth in new international markets.

Underlying	2018 Existing £m	2018 Acquisition £m	2018 Consolidated £m	2017 £m	Growth at CER
					Existing %	Consolidated %
Revenue	240.6	18.1	258.7	226.9	3.7%	11.4%
EBITDA	72.3	9.7	82.0	65.0	10.0%	24.5%
EBITDA %	30.0%	53.6%	31.7%	28.6%	180bps	340bps
Operating Profit	67.5	9.5	77.0	60.7	9.7%	24.9%
EBIT %	28.1%	52.5%	29.8%	26.8%	150bps	320bps

 

North American Pharmaceuticals

Revenue from North American (NA) Pharmaceuticals grew by 18.2% to £148.4 million. All of the growth was in the existing business, with no acquisitions in NA Pharmaceuticals within the current or prior year. The growth came from market penetration and product launches in CAP and Equine, slightly offset by a reduction in FAP as older non-strategic (ex-Brovel) FAP products were withdrawn from the market in Mexico, and replaced with Dechra CAP portfolio products which have been successfully registered.

Operating Profit from the business grew by 18.3% with the EBIT margin constant at 32.5%, as further investments were made in the commercial team to drive future growth.

Underlying	2018 Existing £m	2018 Acquisition £m	2018 Consolidated £m	2017 £m	Growth at CER
					Existing %	Consolidated %
Revenue	148.4	-	148.4	132.4	18.2%	18.2%
EBITDA	48.6	-	48.6	43.6	17.9%	17.9%
EBITDA %	32.7%	-	32.7%	32.9%	(10bps)	(10bps)
Operating Profit	48.3	-	48.3	43.2	18.3%	18.3%
EBIT %	32.5%	-	32.5%	32.6%	10bps	10bps

 

Pharmaceuticals Research and Development

Pharmaceuticals Research and Development (R&D) expenses increased by 22.0% from £15.0 million to £18.3 million, with existing business research and development increasing by 18.7%. R&D activities of the acquisitions of Apex, RxVet, AST Farma and Le Vet added £0.5 million. Overall R&D expenses as a percentage of sales increased from 4.2% to 4.5%, excluding the acquired R&D expenses, the increase was from 4.2% to 4.6%. This was in line with the previously communicated strategic intent to expand the Group's product pipeline to drive enhanced future growth.

					Growth at CER
	2018 Existing £m	2018 Acquisition £m	2018 Consolidated £m	2017 £m	Existing %	Consolidated %
R&D expenses	(17.8)	(0.5)	(18.3)	(15.0)	(18.7%)	(22.0%)
% of Sales	4.6%	2.8%	4.5%	4.2%

 

Revenue by Product Category

CAP revenue continues to be the largest proportion of Dechra's business at 65.5%, up from 62.3% in the prior year. CAP grew 21.1% in the year from market penetration, product launches and the addition of the acquisition revenues. Equine revenue grew strongly by 28.3% in the year, with growth in both EU Pharmaceuticals and NA Pharmaceuticals. Equine now represents 8.5% of the business (2017: 7.6%). FAP revenue contracted slightly over the prior year by 0.4%, whilst delivering growth in EU Pharmaceuticals: this was due to the intentional withdrawal of older (ex-Brovel) non-strategic FAP products from the market (as described under NA Pharmaceuticals above). FAP now represents 12.0% of the business (2017: 13.2%). Nutrition revenue grew 4.4% on the prior year: this pleasing growth follows the launch of the refreshed cat range with new improved packaging.

Other revenue contracted by 17.9% to £27.9 million, now representing only 6.8% 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.

	2018 £m	2017 £m	% Change at AER	% Change at CER
CAP	266.7	223.8	19.2%	21.1%
Equine	34.4	27.2	26.5%	28.3%
FAP	48.7	47.3	3.0%	(0.4%)
Subtotal Pharmaceuticals	349.8	298.3	17.3%	18.3%
Nutrition	29.4	27.5	6.9%	4.4%
Other	27.9	33.5	(16.7%)	(17.9%)
Total	407.1	359.3	13.3%	13.9%

 

Underlying Gross Profit

Underlying Gross Margin for the existing business increased by 120 bps to 55.4%. The consolidated Underlying Gross Margin grew by 160 bps to 55.9%, reflecting the accretive Gross Margin in the acquisition businesses, in particular AST Farma and Le Vet.

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

SG&A costs at AER grew from £99.6 million in the prior year to £110.0 million in the current year, a growth of 10.6%. This represents growth from both acquisitions and the existing business, and infrastructure cost added to manage the acquisitions. It represents an increased investment within overall SG&A to drive further growth. Within this, Corporate and unallocated costs rose slightly to £7.8 million; this represents a slowing down in the historical rate of investment in central infrastructure in Corporate costs.

More significantly, SG&A as a percentage of revenue declined in the year from 27.7% in 2017 to 27.0% in 2018, as the revenue growth in the business generated operating leverage from the cost base.

Non-underlying Items

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

·     Amortisation and related costs of acquired intangibles of £54.1 million - this includes the amortisation of the acquired intangibles, and has grown significantly in the year from £40.4 million following the acquisitions in the current year;

·     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 RxVet, AST Farma and Le Vet. It is the result of the fair value exercise carried out in accordance with IFRS 3 'Business combinations' on acquisition;

·     Expenses relating to acquisition activities of £3.1 million - this includes the transaction costs associated with the acquisitions of RxVet, AST Farma and Le Vet;

·     Rationalisation of manufacturing footprint reorganisation of £2.9 million - this includes the costs associated with this strategic programme;

·     Finance income of £0.5 million - this represents the unwinding of the present value discounts relating to deferred consideration due and associated foreign exchange. This is offset by the acceleration of arrangement fees in relation to the existing financing facility on refinance in July 2018;

·     Taxation credit of £26.4 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, notably following the Tax Cuts and Jobs Act in the USA.

Taxation

The reported effective tax rate (ETR) for the year is a credit of 24.9% (2017: 8.6%), primarily reflecting the one off impact of the reduction in USA tax rates on deferred tax balances; this includes both the underlying and non-underlying business. On an underlying basis the ETR is 20.5% (2017: 21.9%): the main differences to the UK corporation tax rate applicable of 19.0% (2017: 19.75%) relate to patent box allowances, and differences in overseas tax rates particularly by the extent of growth in NA Pharmaceuticals, though this effect has moderated to an extent due to corporate tax rate reductions in USA from the Tax Cuts and Jobs Act.

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 Emerging Risks.

Earnings per Share and Dividend

Underlying diluted EPS for the year was 76.45 pence, a 20.9% growth on the prior year. The EBIT growth of 24.0% was slightly offset by higher interest costs from increased debt to part fund the acquisition of AST Farma and Le Vet. The weighted average number of shares for the year was 97.5 million (2017: 93.5 million).

The reported diluted EPS for the year was 37.04 pence (2017: 27.93 pence).

The Board is proposing a final dividend of 18.17 pence per share (2017: 15.33 pence), added to the interim dividend of 7.33 pence, the total dividend per share for the year ended 30 June 2018 is 25.50 pence. This represents 18.9% growth over the prior year. Dividend cover based on underlying diluted EPS is 3.0 times (2017: 3.0 times). The Board continues to operate a progressive dividend policy recognising investment opportunities as they arise.

 

Currency Exposure

Currency rate movements have been less significant in the year than in 2017. The average rate for £/€ has declined by 3.4%, and the £/$ rate has increased by 5.7% 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 comparable basis.

	Average rates
	2018	2017	% Change
£/€	1.1286	1.1681	(3.4%)
£/$	1.3465	1.2735	5.7%

 

Currency Sensitivity

Euro €: a 1% variation in the £/€ exchange rate affects underlying diluted EPS by approximately +/- 0.7%.

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

Current exchange rates are £/€ 1.1028 and £/$ 1.2914 as at 28 August 2018. If these rates had applied throughout the year, the underlying diluted EPS would have been approximately 3.7% higher.

Statement of Financial Position

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

·     Non-current assets increased from £453.2 million to £765.6 million mainly due to the acquisition of AST Farma and Le Vet (£307.3 million). 

·     Working capital has increased from £62.5 million to £92.5 million following the acquisition of AST Farma and Le Vet. This was also impacted by a planned increase in inventory to support the shutdown of production lines at the Bladel facility during their manufacturing site upgrade, and to increase service levels in North America.

·     Net debt has increased in the year by £91.4 million from £120.0 million to £211.4 million; net of cash generation by the business, this includes £133.4 million of additional debt drawn to part fund the acquisition of AST Farma and Le Vet. Exchange rate variations favourably affected the Net Debt position by £5.7 million.

·     Corporate and deferred tax has increased from £51.0 million to £98.9 million mostly as a result of the acquisition of intangible fixed assets associated with AST Farma and Le Vet.

	2018 £m	2017 £m
Total non-current assets	765.6	452.3
Working capital	92.5	62.5
Net debt	(211.4)	(120.0)
Corporate and deferred tax	(98.9)	(51.0)
Other liabilities	(42.8)	(41.2)
Total net assets	505.0	302.6

 

Cash Flow, Financing and Liquidity

The Group enjoyed strong cash generation during the year, with the EBITDA margin strengthening from 24.5% to 26.2%. However, as mentioned above, working capital has increased by £23.4 million, mainly due to planned increases in inventory at Bladel and in North America and increased working capital to support the Oracle implementation which occurred in the last quarter of the financial year. This resulted in net cash generated from operations before non-underlying items of £85.6 million, representing cash conversion of 81.9%. It is expected that the increased working capital levels will unwind to a certain extent during the forthcoming year as these strategic projects conclude.

	2018 £m	2017 £m
Underlying operating profit	99.2	81.3
Depreciation and amortisation	7.4	6.9
EBITDA	106.6	88.2
EBITDA %	26.2%	24.5%
Working capital movement	(23.4)	6.9
Other	2.4	2.8
Net cash generated from operations before interest, taxation and non-underlying items	85.6	97.9
Non-underlying items	(4.4)	(3.7)
Net cash generated from operations	81.2	94.2
Cash conversion (%)	81.9%	115.9%

 

Net Debt Bridge

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

·     Capital expenditure on tangible and intangible assets was broadly similar at £12.6 million (2017: £10.7 million), representing 1.7 times depreciation and amortisation, which includes sums for the ongoing Manufacturing remodelling project.

·     Acquisition of subsidiaries, associates and minority interests of £229.1 million includes the acquisition of RxVet, AST Farma and Le Vet. Further details in note 16.

·     Net equity issued of £103.3 million, includes the proceeds of the equity placement and issue of new shares as consideration for the acquisition of AST Farma and Le Vet, and the settlement of vested employee share schemes.

	£m
Net Debt 30 June 2017	(120.0)
Net cash generated from operations before non-underlying items	85.6
Non-underlying items	(4.4)
Capital expenditure	(12.6)
Acquisition of subsidiaries, associates and minority interests	(229.1)
Interest and tax	(17.2)
Net equity issued	103.3
Dividend paid	(21.8)
Foreign exchange on net debt and other non-cash movements	4.8
Net Debt 30 June 2018	(211.4)
Net Debt: underlying EBITDA ratio	1.75

 

·     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 1.75 times (2017: 1.4 times). This is broadly in line with the guidance provided at the time of the acquisition of AST Farma and Le Vet of 1.7 times, the bulk of the difference being attributable to adverse currency exchange rate movements since completion in February 2018.

 

Borrowing Facilities

Revolving Credit Facility

On 25 July 2017, the Group signed a new credit agreement, refinancing its previous £205.0 million Revolving Credit Facility (RCF). The committed facilities are a new five year multi-currency RCF with two one year extension options 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. 

There are two covenants governing the RCF:

·     Leverage: Net Debt to underlying EBITDA not greater than 3:1 (30 June 2018: 1.75) compared to the previous covenant of 2.5:1; and

·     Interest Cover: underlying EBITDA to Net Finance Charges not less than 4:1, unchanged from the previous facility (30 June 2018: 15.4). 

There is 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.

The first of the two one year extension options was exercised on 25 June 2018. The termination date for the RCF is now 25 July 2023.

Term Loan Facility

On 24 January 2018, the Group signed a new Term Loan facility of £350.0 million to provide funding for acquisitions. The committed
facility has a termination date of 31 December 2020. It has an initial availability period of 30 June 2018 which was subsequently extended to 31 December 2018 on 25 June 2018. 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.

The facility has the same covenants as the RCF above. However the Leverage covenant on both facilities was increased from 3:1 to 3.25:1 for the measurement period ending on 30 June 2018, after which it moves back to 3:1 on both facilities.

Return on Capital Employed (ROCE)

ROCE fell to 15.4% in the year (2017: 17.7%). This is largely due to the inclusion in the metric of 100% of the assets acquired from
AST Farma and Le Vet in mid February in the Capital Employed element, but only 4.5 months' profit in the Return element. We expect this to rise in the coming year as the Group consolidates a full year of profit from the acquisition.

Acquisitions

The Group has made several acquisitions in recent years. Performance of the acquisitions made during the 2018 and 2017 financial years is separately summarised compared to the existing business in the sections above.

In December 2017, the Group acquired the entire issued share capital of RxVet Limited, a small CAP business in New Zealand. RxVet has been Dechra's distributor in New Zealand since 2010, with revenue in the year to March 2017 of NZ$1.4 million; sales of Dechra products account for about half of this. The business has been successfully integrated into the Group, has been renamed Dechra Veterinary Products NZ Limited, and is performing in line with management expectations. The acquisition was financed from the Group's existing working capital resources.

In February 2018, we completed the acquisition of AST Farma B.V. and Le Vet Beheer B.V. for a total consideration of £307.3 million (€340.0 million) on a debt-free and cash-free basis. The combined revenue in the year ended 31 December 2016, excluding business with Dechra prior to the acquisition, was €36.9 million. The total consideration was satisfied as to approximately 75% in cash and 25% in new Dechra shares, which are subject to a two year lock-in. The acquisition was financed from the £102.3 million proceeds of an equity placing, issuance of new consideration ordinary shares, and debt drawn from a new Term Loan facility (see Borrowing Facilities above). Integration has proceeded in line with plan, and the ongoing synergy realisation programme is on schedule.

Accounting Standards

The accounting policies adopted are outlined in note 1 to the 2018 Report and Accounts. There are no accounting policy changes which have impacted the 2018 financial year.

Note 1 to the 2018 Report and Accounts identifies the evaluation of the impact of IFRS 9 (financial instruments) and IFRS 15 (revenue recognition) which the Group will adopt in 2019, and the effect on the 2018 accounts when they are realigned with the new standard, which is not material. The status of the Group's impact assessment of IFRS 16 (leases) which will be adopted in 2020 is also outlined in Note 1.

Summary

The existing business has performed well in the year, with above market growth rates and operating leverage. This has produced additional resources to invest more intensively in R&D, the newly formed International business and the North American commercial
team, to provide future organic growth, whilst still growing the operating margin.

We are very excited by our investments in the acquisitions of RxVet, AST Farma and Le Vet and the future growth and breadth which they will deliver, as well as the ongoing investments in the Manufacturing remodelling programme which are proceeding to plan.

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

 

 

Key Performance Indicators

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

These are identified with ≠

KPI and Definition	Performance	Commentary	Relevance to Strategy
Sales Growth Year-on-year sales growth including new products and excluding revenue from acquired businesses.	UP 9.0% 2018: £389.0m 2017: £269.6m 2016: £225.9m	Dechra's existing business in EU Pharmaceuticals grew by 4.4%, excluding third party contract manufacturing, and in NA Pharmaceuticals by 18.2%.	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.	UP 20.9% 2018: 76.45p 2017: 64.33p 2016: 42.65p	This includes a 24.0% increase in underlying operating profit offset by an increase in finance charges from the increase in debt and equity issuance to fund acquisitions.	Underlying 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).	DOWN 230bps 2018: 15.4% 2017: 17.7% 2016: 16.1%	The decline is largely due to the inclusion of 100% of the assets acquired from AST Farma and Le Vet in February in the Capital employed element, but only 4.5 months' profit in the Return element.	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.

KPI and Definition	Performance	Commentary	Relevance to Strategy
Underlying Cash Conversion Cash generated from underlying operations before tax and interest payments as a percentage of underlying operating profit.	DOWN 3,400bps 2018: 81.9% 2017: 115.9% 2016: 106.8%	Underlying cash conversion was weaker in the year due to the planned temporary increase in inventory to support the shutdown of production lines at our Bladel facility during the site upgrade, and to increase customer service levels in North America.	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 720bps 2018: 15.4% 2017: 8.2% 2016: 14.4%	New product revenues reflect the strong market penetration of products launched in the current and previous four years.	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.	DOWN 100% 2018: Nil 2017: 0.26 2016: 0.35	There have been no lost time accidents during the year. None of the previous year's incidents resulted in a work-related fatality or disability.	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.	UP 20bps 2018: 15.9%** 2017: 15.7% 2016: 13.1%* *excludes Apex, Brovel, Genera and Putney ** excludes RxVet, AST Farma and Le Vet	The increase relates to the restructuring of our manufacturing business.	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.

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

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.

The Dechra Values are the foundation of the control framework and it is the Board's aim that these values should drive the behaviours and actions of all employees. The key elements of the control framework are described below:

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, assess 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: All 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 further detail on pages •• to ••.

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 2018

We have continued to strengthen and improve a number of key control processes and the following changes have been implemented:

·     our Group Code of Conduct and Third Party Code of Conduct have been developed to improve our ability to comply with existing and emerging legislation;

·     a new Data Protection Policy and supporting procedures have been developed to support compliance with the EU General Data Protection Regulation (GDPR);

·     we have made further enhancements to our manufacturing Quality Management Systems to continue to meet relevant regulatory standards; and

·     our Tax and Treasury policies and procedures have been updated to comply with new tax regulations and to reflect a number of improvements in our Treasury processes, respectively.

Plans for 2019

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.

Understanding Our Key Risks

Dechra is one of only a handful of listed veterinary pharmaceuticals companies in the FTSE. We therefore believe it is important to summarise the key distinctions between the animal and human pharmaceutical industries in order to provide a better understanding of our risk profile.

The business of developing and marketing animal pharmaceuticals shares a number of characteristics with human pharmaceutical businesses. These similarities include the need to conduct clinical trials to prove product safety and efficacy, obtain regulatory approval for new products, complex and highly regulated product manufacturing, and market products based on approved clinical claims. However, there are also significant differences between animal and human pharmaceutical businesses, including: 

·     Product development is generally faster, cheaper, more predictable and sustainable: Development of animal medicines typically requires fewer clinical studies with fewer subjects and is conducted directly in the target species. Decisions on product safety, efficacy and likelihood of success can therefore be made more quickly.

·     Diversified product portfolios: Animal pharmaceuticals businesses are generally less reliant on a small number of 'blockbuster' products. Animal health products are sold across different regions which may have distinct product requirements. As a result, animal health products often have a smaller market size and the performance of any single product typically has less impact on overall business performance.

·     Stronger customer relationships and brand loyalty: Companion Animal Products are directly prescribed and often dispensed and sold by veterinarians which contributes to building brand loyalty, which continues after the loss of patent protection or regulatory exclusivity.

·     Lower pricing pressure: Livestock producers and pet owners generally pay for animal healthcare themselves. Pricing decisions are not influenced by government payors that are involved in product and pricing decisions for human medicines. 

·     Less price erosion by generic competition: Generic competition in animal healthcare, whilst playing an important role, has a lower impact on prices compared to human pharmaceuticals because of the smaller average market size of each product opportunity, stronger customer relationships and brand loyalty.

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. We continue to monitor developments in the USA tax reform which may cause adverse movements in the Group's ETR.

The EU is currently challenging the legality of the UK Control 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. We have established a cross-functional team to assess and monitor the situation and determine which actions need to be taken.

Our primary focus is on addressing Brexit risk in our supply chain. This includes transferring UK registered Marketing Authorisations for products that are sold in the EU to an EU entity and duplication of product release testing for products that are transferred between the UK and the EU.

The Group has implemented a hard Brexit mitigation plan which will provide an EU based laboratory testing facility and staff for batch testing if this is required and the transfer of product registrations to an EU domiciled legal entity within the Group. This will entail an upfront investment of £0.2 million in capital and £1.0 million in one-off expenses. If EU batch testing and increased customs duties is required this will result in additional operating costs of approximately £0.8 million.

Our current view on the potential changes that may result from Brexit is:

·     in terms of manufacturing and product registration, Dechra is accustomed to trading with multiple countries and different rules and legislation;

·     despite the possible additional administrative burden, our distribution model can adapt to changes in tariffs and duties;

·     our business is naturally hedged and diversified, which helps in a period of economic uncertainty and exchange rate volatility; and

·     we will monitor the impact on workforce and global mobility to maintain an effective system for resource planning.

The Board reviews the potential impact of Brexit as an integral part of the review of the Principal Risks, rather than as a stand alone risk. The Board will continue to assess the potential impacts of Brexit as the process evolves.

Iran

We continue to monitor the potential impact of US sanctions on our existing business with Iran, where we currently sell £1.3 million of products that are on the UN exempt sanctions list.

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 below 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.

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 Continuing customer consolidation in USA and major EU markets
Portfolio focus Geographical expansion	2 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.	No change
Pipeline delivery Portfolio focus Geographical expansion	3 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 to ensure they 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.	Increased risk Competitor product launches against some of our key products
Pipeline delivery	4 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 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 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.	No change
Geographical expansion Acquisition People	5 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.	Increased risk Increasingly competitive labour market with particular challenges in recruiting quality and technical capabilities
Pipeline delivery Portfolio focus Geographical expansion	6 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 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. Work is in progress to transfer UK registered Marketing Authorisations for products sold in the EU to an EU entity and to establish duplicate product release testing for products transferred between the UK and the EU. External consultants are used to audit our manufacturing quality systems.	Increased risk Increasing regulatory standards and additional complexity due to Brexit
Acquisition	7 Acquisition Risk:  Identification of acquisition candidates and their potential integration. Identification of suitable candidates 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.	No change
Pipeline delivery Portfolio focus Manufacturing and supply line	8 Reliance on Third Parties Risk: A supply failure on a key product may affect our ability to develop, make, or sell our products. 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. All contracts with suppliers are reviewed from both a commercial and legal perspective to try to ensure that assignment of the contract is allowed should there be a change of control of either of the contracting parties. We have recruited a dedicated team to manage our third party supplier network.	No change
Pipeline delivery Portfolio focus People	9 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. Key person insurance is in place where appropriate. 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.	Decreased risk Board and SET succession planning managed successfully

 

 

Consolidated Income Statement

For the year ended 30 June 2018

	Note	2018			2017
		Underlying £m	Non- underlying* (notes 4 & 5) £m	Total £m	Underlying £m	Non- underlying* (notes 4 & 5) £m	Total £m
Revenue	2	407.1	-	407.1	359.3	-	359.3
Cost of sales		(179.6)	(5.1)	(184.7)	(163.4)	(4.2)	(167.6)
Gross profit		227.5	(5.1)	222.4	195.9	(4.2)	191.7
Selling, general and administrative expenses		(110.0)	(52.0)	(162.0)	(99.6)	(32.5)	(132.1)
Research and development expenses		(18.3)	(8.0)	(26.3)	(15.0)	(11.4)	(26.4)
Operating profit	2	99.2	(65.1)	34.1	81.3	(48.1)	33.2
Finance income	3	1.5	-	1.5	0.8	-	0.8
Finance expense	4	(6.9)	0.5	(6.4)	(5.1)	(0.2)	(5.3)
Share of loss of investments accounted for using the equity method	6	(0.1)	(0.2)	(0.3)	-	(0.1)	(0.1)
Profit before taxation		93.7	(64.8)	28.9	77.0	(48.4)	28.6
Income taxes	7	(19.2)	26.4	7.2	(16.9)	14.4	(2.5)
Profit for the year		74.5	(38.4)	36.1	60.1	(34.0)	26.1
Attributable to:
Owners of the parent		74.5	(38.4)	36.1	60.1	(34.0)	26.1
Non-controlling interests	14	-	-	-	-	-	-
Profit for the year		74.5	(38.4)	36.1	60.1	(34.0)	26.1
Earnings per share
Basic	9			37.24p			28.09p
Diluted	9			37.04p			27.93p
Dividend per share (interim paid and final proposed for the year)	8			25.50p			21.44p

*     Non-underlying items comprise items associated with areas such as amortisation and related costs of acquired intangibles, impairment of investments, remeasurement and other movements on deferred and contingent consideration, non-cash inventory adjustments, rationalisation of manufacturing organisation costs, rationalisation and acquisition expenses, loss on extinguishment of debt and fair value and taxation credits.

Consolidated Statement of Comprehensive Income

For the year ended 30 June 2018

	2018 £m	2017 £m
Profit for the year	36.1	26.1
Other comprehensive income/(expense):
Items that will not be reclassified subsequently to profit or loss:
Remeasurement of defined benefit pension scheme	-	2.1
Income tax relating to components of other comprehensive income/(expense)	-	(0.5)
	-	1.6
Items that may be reclassified subsequently to profit or loss:
Recycle of profit arising on available for sale financial assets	-	0.3
Foreign currency translation differences for foreign operations	(0.4)	12.9
Income tax relating to components of other comprehensive income	-	-
	(0.4)	13.2
Total comprehensive income for the period	35.7	40.9
Attributable to:
Owners of the parent	35.7	40.7
Non-controlling interests	-	0.2
	35.7	40.9

 

Consolidated Statement of Financial Position

At 30 June 2018

	Note	2018 £m	2017 £m
ASSETS
Non-current assets
Intangible assets	10	709.8	396.3
Property, plant and equipment		45.3	45.2
Investments	6	10.5	10.8
Deferred tax assets	11	3.8	0.8
Total non-current assets		769.4	453.1
Current assets
Inventories		86.6	56.5
Trade and other receivables		81.6	67.3
Cash and cash equivalents		79.7	61.2
Total current assets		247.9	185.0
Total assets		1,017.3	638.1
LIABILITIES
Current liabilities
Borrowings	12	(1.2)	(1.0)
Trade and other payables		(75.7)	(61.3)
Deferred and contingent consideration	17	(8.8)	(1.6)
Current tax liabilities		(5.9)	(2.5)
Total current liabilities		(91.6)	(66.4)
Non-current liabilities
Borrowings	12	(289.9)	(180.2)
Deferred income		(0.2)	-
Deferred and contingent consideration	17	(28.0)	(33.4)
Employee benefit obligations		(3.0)	(3.0)
Provisions	13	(2.8)	(3.2)
Deferred tax liabilities	11	(96.8)	(49.3)
Total non-current liabilities		(420.7)	(269.1)
Total liabilities		(512.3)	(335.5)
Net assets		505.0	302.6
EQUITY
Issued share capital		1.0	0.9
Share premium account		359.3	173.4
Own shares		(0.4)	(0.7)
Foreign currency translation reserve		17.8	18.2
Merger reserve		1.8	1.8
Retained earnings		125.5	107.4
Total equity attributable to equity holders of the parent		505.0	301.0
Non-controlling interests	14	-	1.6
Total equity		505.0	302.6

 

Consolidated Statement of Changes in Shareholders' Equity

For the year ended 30 June 2018

Year ended 30 June 2017	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 2016	0.9	172.5	(0.1)	5.5	1.8	94.0	274.6	2.0	276.6
Profit for the period	-	-	-	-	-	26.1	26.1	-	26.1
Recycle of losses arising on available for sale financial assets	-	-	-	-	-	0.3	0.3	-	0.3
Foreign currency translation differences for foreign operations, net of tax	-	-	-	12.7	-	-	12.7	0.2	12.9
Remeasurement of defined benefit pension scheme, net of tax	-	-	-	-	-	1.6	1.6	-	1.6
Total comprehensive income	-	-	-	12.7	-	28.0	40.7	0.2	40.9
Transactions with owners:
Dividends paid	-	-	-	-	-	(17.7)	(17.7)	-	(17.7)
Share-based payments	-	-	-	-	-	3.1	3.1	-	3.1
Shares issued	-	0.9	-	-	-	-	0.9	-	0.9
Acquisition of non-controlling interests	-	-	-	-	-	-	-	(0.6)	(0.6)
Own shares purchased	-	-	(0.6)	-	-	-	(0.6)	-	(0.6)
Total contributions by and distributions to owners	-	0.9	(0.6)	-	-	(14.6)	(14.3)	(0.6)	(14.9)
At 30 June 2017	0.9	173.4	(0.7)	18.2	1.8	107.4	301.0	1.6	302.6
Year ended 30 June 2018
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	0.1	185.9	-	-	-	-	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	185.9	0.3	-	-	(18.0)	168.3	(1.6)	166.7
At 30 June 2018	1.0	359.3	(0.4)	17.8	1.8	125.5	505.0	-	505.0

 

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 2018

	Note	2018 £m	2017 £m
Cash flows from operating activities
Operating profit		34.1	33.2
Non-underlying items		65.1	48.1
Underlying operating profit		99.2	81.3
Adjustments for:
Depreciation		4.8	4.9
Amortisation and impairment	10	2.6	2.0
Loss on disposal of intangible assets		-	0.3
Loss on disposal of tangible assets		-	0.2
Equity settled share-based payment expense		2.4	2.3
Underlying operating cash flow before changes in working capital		109.0	91.0
Increase in inventories		(22.5)	(1.6)
(Increase)/decrease in trade and other receivables		(9.5)	6.4
Increase in trade and other payables		8.6	2.1
Cash generated from operating activities before interest, taxation and non-underlying items		85.6	97.9
Cash outflows in respect of non-underlying items		(4.4)	(3.7)
Cash generated from operating activities before interest and taxation		81.2	94.2
Interest paid		(5.7)	(4.8)
Income taxes paid		(11.5)	(12.0)
Net cash inflow from operating activities		64.0	77.4
Cash flows from investing activities
Acquisition of subsidiaries (net of cash acquired)		(227.3)	(35.0)
Acquisition of non-controlling interests	14	(1.8)	(0.6)
Acquisition of investments in associates	6	-	(11.0)
Purchase of property, plant and equipment		(4.9)	(4.2)
Capitalised development expenditure	10	(1.3)	(1.2)
Purchase of other intangible non-current assets	10	(6.4)	(5.2)
Net cash outflow from investing activities		(241.7)	(57.2)
Cash flows from financing activities
Proceeds from the issue of share capital		103.3	0.9
Own shares purchased		-	(0.6)
New borrowings		133.4	25.0
Expenses of raising borrowing facilities		(3.9)	(0.1)
Repayment of borrowings		(17.2)	(5.9)
Dividends paid	8	(21.8)	(17.7)
Net cash inflow from financing activities		193.8	1.6
Net increase in cash and cash equivalents		16.1	21.8
Cash and cash equivalents at start of period		61.2	39.1
Exchange differences on cash and cash equivalents		2.4	0.3
Cash and cash equivalents at end of period		79.7	61.2
Reconciliation of net cash flow to movement in net borrowings
Net increase in cash and cash equivalents		16.1	21.8
New borrowings		(133.4)	(25.0)
Repayment of borrowings		17.2	5.9
Expenses of raising borrowing facilities		3.9	0.1
Exchange differences on cash and cash equivalents		2.4	0.3
Retranslation of foreign borrowings		3.3	(6.3)
Other non-cash changes		(0.9)	(0.2)
Movement in net borrowings in the period		(91.4)	(3.4)
Net borrowings at start of period		(120.0)	(116.6)
Net borrowings at end of period		(211.4)	(120.0)

 

Notes to the Preliminary Results

For the year ended 30 June 2018

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 3 September 2018.

 

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 RxVet Limited, AST Farma B.V. and Le Vet Beheer B.V.

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:

	2018 £m	2017 £m
Revenue by segment
European Pharmaceuticals              - total	258.7	226.9
NA Pharmaceuticals             - total	148.4	132.4
	407.1	359.3
Operating profit/(loss) by segment
European Pharmaceuticals	77.0	60.7
NA Pharmaceuticals	48.3	43.2
Pharmaceuticals Research and Development	(18.3)	(15.0)
Segment operating profit	107.0	88.9
Corporate and other unallocated costs	(7.8)	(7.6)
Underlying operating profit	99.2	81.3
Amortisation of acquired intangibles	(54.1)	(40.4)
Remeasurement of contingent consideration	0.1	-
Impairment of assets available for sale	-	(0.6)
Fair value uplift of inventory acquired through business combinations	(5.1)	(4.2)
Rationalisation costs on business acquisitions	-	(0.8)
Rationalisation of manufacturing organisation	(2.9)	-
Expenses relating to acquisition activities	(3.1)	(2.1)
Total operating profit	34.1	33.2
Finance income	1.5	0.8
Finance expense	(6.4)	(5.3)
Share of losses in investment accounted for using the equity method	(0.3)	(0.1)
Profit before taxation	28.9	28.6
Total liabilities by segment
European Pharmaceuticals	(79.6)	(73.7)
NA Pharmaceuticals	(31.0)	(20.2)
Pharmaceuticals Research and Development	(1.4)	(0.4)
Segment liabilities	(112.0)	(94.3)
Corporate loans and revolving credit facility	(291.1)	(181.2)
Corporate accruals and other payables	(6.5)	(8.2)
Current and deferred tax liabilities	(102.7)	(51.8)
	(512.3)	(335.5)
Revenue by product category
CAP	266.7	223.8
Equine	34.4	27.2
FAP	48.7	47.3
Nutrition	29.4	27.5
Other	27.9	33.5
	407.1	359.3
Additions to intangible non-current assets by segment (including through business combinations)
European Pharmaceuticals	370.2	64.5
NA Pharmaceuticals	6.9	4.4
Pharmaceuticals Research and Development	0.4	1.4
Corporate and central costs	0.5	0.1
	378.0	70.4

	2018 £m	2017 £m
Additions to Property, Plant and Equipment by segment (including through business combinations)
European Pharmaceuticals	4.9	10.1
NA Pharmaceuticals	0.2	0.5
Pharmaceuticals Research and Development	0.2	0.1
Corporate and central costs	0.2	-
	5.5	10.7
Depreciation and amortisation by segment
European Pharmaceuticals	40.9	22.7
NA Pharmaceuticals	18.6	23.4
Pharmaceuticals Research and Development	0.5	0.5
Corporate and central costs	1.5	0.7
	61.5	47.3
The total depreciation, amortisation and impairment charge is made up of the following;
Non-underlying
Amortisation - selling, general and administrative expenses	46.1	29.0
Amortisation - research and development expenditure	8.0	11.4
	54.1	40.4
Underlying
Amortisation and impairment	2.6	2.0
Depreciation	4.8	4.9
	7.4	6.9

 

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:

	2018 Revenue £m	2018 Non- current assets £m	2017 Revenue £m	2017 Non- current assets £m
UK	56.1	18.9	56.3	15.6
Germany	40.4	2.4	37.4	2.4
Rest of Europe	138.3	493.9	113.1	192.4
USA	139.8	180.1	124.1	193.2
Rest of World	32.5	74.1	28.4	49.5
	407.1	769.4	359.3	453.1

 

3. Finance Income

	2018 £m	2017 £m
Finance income arising from:
- Cash and cash equivalents	0.2	0.2
- Foreign exchange gains	1.3	0.6
	1.5	0.8

 

4. Finance Expense

Underlying	2018 £m	2017 £m
Finance expense arising from:
- Financial liabilities at amortised cost	6.8	5.0
- Net Interest on net defined benefit obligations	0.1	0.1
Underlying finance expense	6.9	5.1

Non-underlying	2018 £m	2017 £m
Loss on extinguishment of debt (note 12)	0.4	-
Fair value and other movements on deferred and contingent consideration	(0.9)	0.2
Non-underlying finance (income)/expense	(0.5)	0.2
Total finance expense	6.4	5.3

 

5. Non-underlying Items

Non-underlying items charged to operating profit comprise:

	2018 £m	2017 £m
Amortisation of acquired intangibles
- classified within selling, general and administrative expenses	46.1	29.0
- classified within research and development expenses	8.0	11.4
Impairment of assets available for sale	-	0.6
Remeasurement of contingent consideration	(0.1)	-
Fair value uplift of inventory acquired through business combinations	5.1	4.2
Rationalisation costs	-	0.8
Expenses relating to acquisition activities	3.1	2.1
Rationalisation of manufacturing organisation	2.9	-
	65.1	48.1

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.

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 acquisition activities includes legal and professional fees incurred during the acquisitions of AST Farma and Le Vet (£2.8 million) and Other (£0.3 million). Other is offset with the profit on the sale of human marketing authorisations acquired from previous acquisitions of £0.4 million.

Rationalisation of manufacturing organisation relates to the cost associated with this strategic programme.

Impairment of assets available for sale in the prior year relates to the impairment of the investment in Jaguar Animal Heath Inc.

Rationalisation costs relate to the integration and restructuring programmes implemented subsequent to acquisitions.

 

6. Interests in Associate

 

	£m	£m
1 July 2017	10.8	-
Additions	-	11.0
Share of underlying loss after tax	(0.1)	(0.1)
Share of amortisation of intangible asset identified on acquisition	(0.2)	(0.1)
30 June 2018	10.5	10.8

On 30 March 2017 the Group acquired a 33.0% interest in Medical Ethics Pty Ltd for AUD$18.0 million (£11.0 million), 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.

Following the acquisition of Medical Ethics Pty Ltd, the disclosure of the final fair values of the assets and liabilities acquired were included in the financial statements for the year ended 30 June 2017. The Group's share of the loss arising from its investment in Medical Ethics includes the effect of amortising the fair value adjustments. 

 

7. Income Tax Expense

	2018 £m	2017 £m
Current tax            - UK corporation tax	2.3	4.5
- overseas tax at prevailing local rates	11.5	7.8
- adjustment in respect of prior years	(0.4)	(0.9)
Total current tax expense	13.4	11.4
Deferred tax          - origination and reversal of temporary differences	(9.2)	(9.5)
- adjustment in respect of tax rates	(11.2)	-
- adjustment in respect of prior years	(0.2)	0.6
Total deferred tax credit	(20.6)	(8.9)
Total income tax (income)/expense in the Consolidated Income Statement	(7.2)	2.5

The tax on the Group's profit before taxation differs from the standard rate of UK corporation tax of 19.00% (2017: 19.75%). The differences to this rate are explained below:

	2018 £m	2017 £m
Profit before taxation	28.9	28.6
Tax at 19.00% (2017: 19.75%)	5.5	5.6
Effect of:
- expenses not deductible	0.5	0.2
- acquisition expenses	0.7	0.6
- research and development related tax credits	(0.1)	(0.1)
- patent box tax credits	(2.6)	(2.1)
- impact of financing (income not taxable)	(0.5)	(0.7)
- effects of overseas tax rates	1.0	(0.7)
- movement in unrecognised deferred tax	0.1	-
- adjustment in respect of prior years	(0.6)	(0.3)
- change in tax rates	(11.2)	-
Total income tax (income)/expense in the Consolidated Income Statement	(7.2)	2.5

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 -24.9% (excluding non-underlying items the effective tax rate is 20.5%).

Tax Credit/(Charge) Recognised Directly in Equity

	2018 £m	2017 £m
Deferred tax on employee benefit obligations	-	(0.5)
Tax recognised in Consolidated Statement of Comprehensive Income	-	(0.5)
Corporation tax on equity settled transactions	1.0	0.7
Deferred tax on equity settled transactions	0.9	0.1
Total tax recognised in Equity	1.9	0.8

The UK current tax rate used for the period is 19.00% 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% with effect from 1 April 2020. Deferred tax has been calculated using the rate of 19% and 17% based on the timing of when each individual deferred tax balance is expected to reverse in the future. Similarly, deferred tax arising in overseas jurisdiction has been based on the enacted rate.

US Tax Reform and EU CFC Challenge

The United States Tax Cuts and Jobs Act was signed on 22 December 2017 and included a broad range of tax reform measures including a reduction in the Federal rate of corporate income tax from 35% to 21% (effective 1 January 2018) as well as significant changes to business deductions and other international tax provisions including changes to the rules governing interest deductibility. In the results to 30 June 2018 US tax reform gave rise to a transitional one-off non-underlying non-cash tax credit of £10.0 million primarily due to the revaluation of the Group's aggregate US deferred tax assets and deferred tax liabilities following the reduction in the US Federal rate from 35% to 21%.

Finance arrangements are in place to fund the acquisition of business operations in overseas territories. This finance is provided primarily to US operations through intragroup loans which provide a benefit to the Group effective tax rate. In addition, the Group claims a partial exemption under the UK Controlled Foreign Companies legislation for profits from 'qualifying loan relationships'. The Group is monitoring the developments in relation to EU state aid investigations into this exemption, noting that at this stage the final outcome of any investigation is not certain. As such, no quantification of the potential tax liability has been calculated, as the basis for this calculation is currently unclear.

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

	2018 £m	2017 £m
Final dividend paid in respect of prior year but not recognised as a liability in that year: 15.33 pence per share (2017: 12.91 pence per share)	14.3	12.0
Interim dividend paid: 7.33 pence per share (2017: 6.11 pence per share)	7.5	5.7
Total dividend 22.66 pence per share (2017: 19.02 pence per share) recognised as distributions to equity holders in the period	21.8	17.7
Proposed final dividend for the year ended 30 June 2018: 18.17 pence per share (2017: 15.33 pence per share)	18.6	14.3
Total dividend paid and proposed for the year ended 30 June 2018: 25.50 pence per share (2017: 21.44 pence per share)	26.1	20.0

In accordance with IAS 10 'Events After the Balance Sheet Date', the proposed final dividend for the year ended 30 June 2018 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 2019. There are no income tax consequences. The final dividend for the year ended 30 June 2017 is shown as a deduction from equity in the year ended 30 June 2018.

At 30 June 2018, the distributable reserves of Dechra Pharmaceuticals PLC as determined under UK company law is £120.4 million (2017: £66.4 million).

 

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.

	2018 Pence	2017 Pence
Basic earnings per share
- Underlying*	76.85	64.68
- Basic	37.24	28.09
Diluted earnings per share
- Underlying*	76.45	64.33
- Diluted	37.04	27.93

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

	2018 £m	2017 £m
Earnings for underlying basic and underlying diluted earnings per share	74.5	60.1
Earnings for basic and diluted earnings per share	36.1	26.1

	Number	Number
Weighted average number of ordinary shares for basic earnings per share	96,942,002	92,962,967
Impact of share options	509,209	516,032
Weighted average number of ordinary shares for diluted earnings per share	97,451,211	93,478,999

* Underlying measures exclude non-underlying items as defined in the Consolidated Income Statement on page ••.

At 30 June 2018, there are 231,551 options (2017: 294,848) 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 2016	113.2	9.2	10.3	5.0	0.8	340.2	478.7
Additions	-	3.2	1.2	0.3	0.2	34.2	39.1
Acquisitions through business combinations	9.9	0.1	-	-	-	21.3	31.3
Disposals	-	(0.1)	(0.3)	-	-	-	(0.4)
Foreign exchange adjustments	5.0	0.3	0.5	-	-	13.7	19.5
At 30 June 2017 and 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	229.3	16.7	13.2	3.9	0.9	674.0	938.0
Accumulated Amortisation
At 1 July 2016	-	2.5	5.1	2.6	-	113.2	123.4
Charge for the year	-	0.5	1.0	0.5	-	40.4	42.4
Disposals	-	(0.1)	-	-	-	-	(0.1)
Foreign exchange adjustments	-	-	-	-	-	6.2	6.2
At 30 June 2017 and 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	-	3.7	7.1	3.0	-	214.4	228.2
Net book value
At 30 June 2018	229.3	13.0	6.1	0.9	0.9	459.6	709.8
At 30 June 2017	128.1	9.8	5.6	2.2	1.0	249.6	396.3

	2018 £m	2017 £m
Software assets in the course of construction included above	-	9.4

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 2016	1.6	48.8	12.4	93.1	184.3	340.2
Additions	-	-	-	-	34.2	34.2
Acquisitions through business combinations	-	-	0.4	17.9	3.0	21.3
Foreign exchange adjustments	0.1	1.7	0.5	3.5	7.9	13.7
At 30 June 2017 and 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	6.7	49.6	15.4	367.3	235.0	674.0
Accumulated Amortisation
At 1 July 2016	0.2	0.8	0.3	10.7	101.2	113.2
Charge for the year	0.4	11.4	2.0	9.1	17.5	40.4
Foreign exchange adjustments	-	-	-	0.6	5.6	6.2
At 30 June 2017 and 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	1.3	20.2	4.4	47.4	141.1	214.4
Net book value
At 30 June 2018	5.4	29.4	11.0	319.9	93.9	459.6
At 30 June 2017	1.1	38.3	11.0	94.1	105.1	249.6

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	22.7	22.7	7 ½ years
Intangible assets arising from the acquisition of Genetrix	Product, marketing and distribution rights	1.4	1.4	2 ½ years
Intangible assets arising from the acquisition of Eurovet	Technology, product, marketing and distribution rights	33.5	33.5	4 years
Intangible assets arising from the acquisition of PSPC Inc	Product, marketing and distribution rights	3.9	3.9	6 years
Intangible asset acquired from Pharmaderm Animal Health	Marketing and distribution rights	0.7	0.7	4 years
HY-50 intangible asset acquired from Bexinc Limited	Marketing and distribution rights	1.8	1.8	3 ½ years
Intangible assets arising from the acquisition of Genera	Product, brand, technology, marketing and distribution rights	1.1		4 ½ years
		0.4		7 ½ years
		8.0		12 ½ years
			9.5	Genera - total
Intangible assets arising from the acquisition of Putney	Product, brand, technology, pharmacological process, marketing and distribution rights	8.2		8 years
		29.7		8 years
		50.3		10 years
			88.2	Putney - total
Intangible asset arising from the acquisition of Apex	Product and technology	14.5		15 years
		2.4		12 years
		0.2		3 years
			17.1	Apex - total
Intangible asset related to Animal Ethics	Marketing and distribution rights	28.2	28.2	10 years
Intangible assets related to a US dental licensing agreement	Marketing and distribution rights	1.0	1.0	9 years
Intangible asset related to Bioveta	Marketing and distribution rights	2.0	2.0	10 years
Intangible asset related to an injectable solution licensing agreement	Marketing and distribution rights	6.5	6.5	10 years
Intangible assets related to RxVet	Brand	0.2	0.2	1 ½ years
Intangible assets arising from the acquisition of AST	Product, brand, technology,	86.2		9 ½ years
Farma and Le Vet	marketing and distribution rights	136.6		8 ½ years
		15.6		10 years
		2.2		2 ½ years
		2.2		4 ½ years
			242.8	AST Farma and Le Vet - total
Intangible asset related to Premune	Product	0.1	0.1	3 years
			459.6

 

11. Deferred Taxes

Recognised Deferred Tax Assets and Liabilities

Deferred tax assets and liabilities are attributable to the following:

	Assets		Liabilities		Net
	2018 £m	2017 £m	2018 £m	2017 £m	2018 £m	2017 £m
Intangible assets	-	-	(98.4)	(61.3)	(98.4)	(61.3)
Property, plant and equipment	-	-	(3.4)	(3.8)	(3.4)	(3.8)
Inventories	0.9	0.8	-	-	0.9	0.8
Receivables/payables	1.2	3.5	-	-	1.2	3.5
Share-based payments	2.4	1.6	-	-	2.4	1.6
Losses	2.1	8.4	-	-	2.1	8.4
R&D tax credits	1.2	1.3	-	-	1.2	1.3
Employee benefit obligations	1.0	1.0	-	-	1.0	1.0
	8.8	16.6	(101.8)	(65.1)	(93.0)	(48.5)

Deferred tax assets and liabilities are offset to the extent that there is a legally enforceable right to offset current tax assets against current tax liabilities.

12. Borrowings

	2018 £m	2017 £m
Current liabilities:
Bank loans	1.2	1.0
	1.2	1.0
Non-current liabilities:
Bank loans	293.3	180.6
Arrangement fees netted off	(3.4)	(0.4)
	289.9	180.2
Total borrowings	291.1	181.2

In July 2017 the Group replaced its existing facility of £205.0 million with a multi-currency revolving credit facility of £235.0 million, with an accordion of £125.0 million until 2022. During the year the termination date was extended to 2023 with the possibility of further extending to 2024. At the year end £157.7 million was drawn down against this facility. The facility is not secured on any specific assets of the Group but is supported by a joint and several cross guarantee structure. Interest will be charged at a minimum of 1.3% over LIBOR and at a maximum of 2.2% over LIBOR, dependent upon the Leverage (the ration of Total Net Debt to Adjusted EBITDA) of the Group.  At 30 June 2018, interest being charged on this facility is 1.5% above LIBOR. All covenants were met during the year ended 30 June 2018. On replacement of the existing facility, arrangement fees of £0.4 million were written off as non-underlying in relation to this facility.

In January 2018 the Group entered into a new multi-currency Term Loan facility of £350.0 million until 31 December 2020. At the year end £132.9 million was drawn against this facility. The facility is not secured on any specific assets of the Group but is supported by a joint and several cross guarantee structure. Interest will be charged at a minimum of 1.1% over LIBOR and at a maximum of 2.0% over LIBOR, dependent upon the Leverage (the ration of Total Net Debt to Adjusted EBITDA) of the Group.  At 30 June 2018, interest being charged on this facility is 1.5% above LIBOR. All covenants were met during the year ended 30 June 2018. Arrangement fees of £3.9 million were incurred on the new facilities during the year, these are being released to the income statement over the life of the facility.

Genera also has borrowing facilities of £6.9 million, of which £3.9 million was drawn down at 30 June 2018. Interest is fixed at 3.1%.

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

	2018 £m	2017 £m
Payable:
Within one year	1.2	1.0
Between one and two years	1.3	1.2
Between two and five years	292.0	179.4
	294.5	181.6

 

13. Provisions

	Deferred Rent £m	Provision for PPE grant £m	Environmental Health & Safety £m	Total £m
At start of period	(0.5)	(2.3)	(0.4)	(3.2)
Provision recognised	-	-	-	-
Provision utilised	-	0.5	-	0.5
Foreign exchange differences	-	-	(0.1)	(0.1)
At end of period	(0.5)	(1.8)	(0.5)	(2.8)

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;

	2018 £m	2017 £m
At start of period	1.6	2.0
Additional consideration paid to non-controlling interests	(1.8)	(0.6)
Loss on acquisition of remaining non-controlling interests	0.2	-
Profit/(loss) for the period	-	-
Foreign exchange differences	-	0.2
At end of period	-	1.6

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

	Average rate for 2017	Closing rate at 30 June 2017	Average rate for 2018	Closing rate at 30 June 2018
Danish Krone	8.6901	8.4571	8.4010	8.4109
Euro	1.1681	1.1372	1.1286	1.1286
US Dollar	1.2735	1.2978	1.3465	1.3157

 

16. Acquisitions

Acquisition of AST Farma and Le Vet

On 13 February 2018, Dechra acquired 100% of the share capital of AST Farma B.V. (AST Farma) and Le Vet Beheer B.V. (Le Vet), developers of generic, generic plus and niche animal pharmaceutical products predominately for companion animals. Both companies are based in the Netherlands. The Group paid £229.0 million (€257.5 million) consideration in cash and £82.7 million (€ 92.9 million) consideration in shares.

	Fair value £m
	AST Farma B.V.A	Le Vet Beheer B.V.	Total £m
Recognised amounts of identifiable assets acquired and liabilities assumed
Identifiable assets
Property, plant and equipment	0.1	-	0.1
Inventories	9.9	2.3	12.2
Trade and other receivables	0.9	3.0	3.9
Trade and other payables	(0.9)	(1.4)	(2.3)
Intangible Assets	62.7	197.7	260.4
Deferred income	-	(0.2)	(0.2)
Cash and cash equivalents	0.4	2.9	3.3
Current tax liability	-	(2.5)	(2.5)
Net deferred tax liability	(17.4)	(49.2)	(66.6)
Net identifiable assets	55.7	152.6	208.3
Goodwill			102.3
Total consideration			310.6
Satisfied by:
Cash			229.0
Settlement of balances with owners			(1.1)
Shares			82.7
Total consideration transferred			310.6
Net cash outflow arising on acquisition
Cash consideration			229.0
Less cash and cash equivalents			(3.3)
Net cash outflow arising on acquisition			225.7

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

The goodwill of £102.3 million arising from the acquisition consists of future sales growth expected to be achieved, continued geographical expansion in the Netherlands, and the technical expertise of the assembled workforce. None of the goodwill is expected to be deductible for income tax purposes.

Acquisition related costs (included in operating expenses) amounted to £2.8 million. AST Farma and Le Vet's results are reported within the EU Pharmaceuticals Segment.

AST Farma and Le Vet contributed £14.5 million revenue and an underlying operating profit of £7.4 million to the Group's pre-tax 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 £44.9 million and the Group underlying operating profit would have been £17.3 million.

Acquisition of RxVet

On 13 December 2017, Dechra acquired 100% of the share capital of RxVet Limited (RxVet), a veterinary pharmaceuticals company based in New Zealand. The Group paid £0.3 million (NZ$ 0.6 million) consideration in cash, with a further NZ$ 0.04 million deferred payment.

	Fair value £m
Recognised amounts of identifiable assets acquired and liabilities assumed
Identifiable intangible assets	0.3
Inventories	0.2
Trade and other payables	(0.2)
Net identifiable assets	0.3
Goodwill	-
Total consideration	0.3
Satisfied by:
Cash	0.3
Deferred consideration	-
Total consideration transferred	0.3
Net cash outflow arising on acquisition
Cash consideration	0.3
	0.3

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

Acquisition related costs (included in operating expenses) amounted to £25,000. RxVet's results are reported within the EU Pharmaceuticals Segment.

RxVet contributed £0.5 million revenue and underlying operating profit of £11,000 to the Group's pre-tax profit for the period between the date of acquisition and the balance sheet date. If the acquisition of RxVet had been completed on the first date of the financial year, the contribution to Group revenues for the period would have been £0.9 million and the Group underlying operating profit would have been £0.1 million.

Prior Year Acquisitions

Following the acquisition of Apex in October 2016, the disclosure of the final fair values of the assets and liabilities acquired have been included in the financial statements for the year ended 30 June 2017.

17. Deferred and Contingent Consideration Liabilities

	2018 £m	2017 £m
Deferred consideration - less than one year	1.8	-
Deferred consideration - more than one year	-	2.3
	1.8	2.3
Contingent consideration - less than one year	7.0	1.6
Contingent consideration - more than one year	28.0	31.1
	35.0	32.7
	36.8	35.0

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 (R)	StrixNB & DispersinB	Injectable Solution	Phycox	Other	Total
As at 1 July 2016	-	-	-	3.0	0.6	3.6
Additions	26.4	3.6	-	-	-	30.0
Cash payments: investing activities	-	-	-	(0.5)	-	(0.5)
Finance expense	-	-	-	0.5	(0.1)	0.4
Foreign exchange adjustments	(0.9)	-	-	0.1	-	(0.8)
At 30 June 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

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 re-measured and consequently are now expected to happen later than initially anticipated.

The consideration payable for StrixNB and Dispersin B is expected to be payable over a number of years, and relates to developments 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 a new licensing agreement for an lfate sodium injectable solution (PPS) relates to development milestones, and Phycox relates to sales performance.

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

18. Other information

The financial information set out above does not constitute the Company's statutory accounts for the years ended 30 June 2018 or 2017 but is derived from the 2018 accounts. Statutory accounts for 2017 have been delivered to the Registrar of Companies and those for 2018 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.

19. Preliminary Statement

This Preliminary statement is not being posted to Shareholders.  The Report and Accounts for the year ended 30 June 2018 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: [e-mail].  Copies are also available on the Company website www.dechra.com.

20. 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 2018.  Certain parts of that Report are not included with 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

Richard Cotton Chief Financial Officer

3 September 2018

 

END

 

 

FR UGUBUBUPRGRP