Preliminary Results for year ended June 2012

RNS Number : 4026L

Dechra Pharmaceuticals PLC

04 September 2012

 

Date: Tuesday, 4 September 2012

Dechra^® Pharmaceuticals PLC

("Dechra")

Dechra announces ninth successive year of double digit underlying pre-tax profit growth

Preliminary Results for the year ended 30 June 2012

	Year ended 30 June 2012	Year ended 30 June 2011
·      Group revenue Reported** Constant currency**	£426.0m £427.0m	£389.2m £389.2m	+9.5% +9.7%
·      Underlying operating profit* Reported** Constant currency**	£36.6m £36.8m	£31.8m £31.8m	+15.0% +15.8%
·      Underlying profit before taxation* Reported** Constant currency**	£33.0m £34.1m	£30.1m £29.1m	+9.6% +17.3%
·      Operating profit	£20.9m	£21.7m
·      Profit before tax	£16.8m	£18.5m
·      Underlying earnings per share*
Basic	32.37p†	31.53p†	+2.7%
Diluted	32.27p†	31.43p†	+2.7%
·      Earnings per share
Basic	15.65p†	19.59p†
Diluted	15.60p†	19.53p†
·      Dividend
Final (proposed)	8.50p	7.72p†	+10.1%
Total	12.27p†	11.12p†	+10.3%
·      Net borrowings	£86.7m	£34.1m
·      €135 million acquisition of Eurovet® Animal Health B.V. ("Eurovet") completed, funded by successful Rights Issue and debt re-financing
·      Strong performance from Pharmaceuticals in both Europe and the USA
·      NVS® operating margin stabilised in second half
·      Investment in product pipeline increased by 10%
·      Strong second half cash inflow resulted in 92% full year conversion rate

* Non-underlying items comprise amortisation of acquired intangibles, acquisition expenses, rationalisation costs, loss on extinguishment of debt and the unwinding of discounts on deferred and contingent consideration.

** The Company produces its accounts in Sterling. To give the reader better visibility of the performance of the Group, it also produces certain measures at constant exchange rates. This information is calculated by applying the exchange rates used in the translation of consolidated results in the prior year to retranslate the results for the current year.

† Restated to reflect the impact of the bonus element of the Rights Issue.

Enquiries:
Dechra Pharmaceuticals PLC  Sector: Premium Listing (Pharmaceuticals): DPH		TooleyStreet Communications Limited
Ian Page, Chief Executive		Fiona Tooley, Director
Simon Evans, Group Finance Director		Graeme Cull, Consultant
Today:	[phone] (until 2.00pm)	Today:	[phone]
Mobile:	[phone] (IP) or [phone] (SE)	Mobile:	[phone] (FMT) or [phone](GC)
Office:	[phone]	Office:	[phone]
www.dechra.com       [e-mail]

Result's Briefing: 9.30 am in Room 701 at Investec. Dial in details contact Fiona Tooley on [phone]

Forward-Looking Statements

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

Dechra Pharmaceuticals PLC

Preliminary Results for the year ended 30 June 2012

STATEMENT BY THE CHAIRMAN, MICHAEL REDMOND

Introduction

The year has proved very successful with strong underlying growth delivered and a significant strategic acquisition completed.  The underlying growth has been generated from a solid performance by our licensed veterinary pharmaceuticals across all our major brands.  Good revenue growth was delivered in both our Services segment and from our third party manufacturing.  Solid progress has also been made on our product pipeline.  Furthermore, our UK based manufacturer, Dales^® Pharmaceuticals ("Dales"), has achieved a significant milestone in gaining US Food and Drug Administration ("FDA") approval to manufacture Vetoryl^® for the US market.  The strategic acquisition of Eurovet^® Animal Health B.V. ("Eurovet") increases the strength and depth of the countries in which we trade; increases our manufacturing competencies; provides complementary companion animal products and introduces Dechra into the farm animal products sector.  Eurovet will deliver significant synergies throughout the integration process and will be earnings enhancing in the first full year of ownership, furthermore it will be materially earnings enhancing in the financial year ending 30 June 2014.  The acquisition was funded by way of a fully subscribed Rights Issue and a new debt facility, details of which are provided within the Financial Review.

Financial Highlights

Group revenue increased by 9.5% from £389.2 million to £426.0 million.  7.9% of this growth was organic whilst 1.8% of the growth was contributed by Eurovet.  Currency movements had a negative impact of 0.2%.

Underlying operating profit increased by 15.0% from £31.8 million to £36.6 million with Eurovet contributing £0.9 million to this figure.  Underlying operating margin rose from 8.2% to 8.6%.  This increase was due to strong pharmaceutical sales both in Europe and the USA which more than offset the effect of a reduction in margin at our wholesaler, National Veterinary Services ("NVS").

The underlying net finance expense was £3.6 million compared to £1.8 million in 2011.  The current year figure includes a foreign exchange loss of £0.9 million (2011: gain of £1.0 million).  Excluding this, the charge was broadly consistent with last year.

Underlying profit before taxation increased by 9.6% from £30.1 million to £33.0 million.  At constant currency and excluding foreign currency gains and losses, underlying profit before taxation was £34.1 million, an increase of 17.3%. 

Underlying earnings per share after taking into account the bonus element of the Rights Issue increased from 31.53 pence to 32.37p pence, up 2.7%.

Reported operating profit was £20.9 million (2011: £21.7 million) whilst profit before taxation was £16.8 million (2011: £18.5 million).  Reported earnings per share was 15.65 pence (2011:19.59 pence).

Net borrowings at 30 June 2012 stood at £86.7 million which equates to 1.8 times pro-forma EBITDA of the enlarged Group.  This represents a significant reduction from the pro-forma net borrowings of £105.2 million shown in the Eurovet Prospectus.

In order to partially fund the Eurovet acquisition, the Group entered into a new
£120 million debt facility, provided by a syndicate of four banks.  The facility matures in October 2016 and further details are included within the Financial Review.

Dividend

In line with our progressive dividend policy and after taking into account the recent Rights Issue, the Directors are recommending an increase in the final dividend to
8.50 pence per share (2011: 7.72 pence, adjusted for the bonus element of the Rights Issue).  This, together with the interim dividend of 3.77 pence per share (2011: 3.40 pence per share), makes a total dividend for the year of 12.27 pence per share (2011: 11.12 pence per share), a 10.3% increase.  All figures have been adjusted for the bonus element of the Rights Issue.

The total dividend is covered 2.4 times by underlying profit after taxation
(2011: 2.8 times).

The final dividend, which is subject to Shareholder approval at the Annual General Meeting to be held on Friday 19 October 2012, will be paid on 23 November 2012 to Shareholders on the Register at 9 November 2012. The date shares become ex-dividend is 7 November 2012.

People

The senior management team has been strengthened in the year by the acquisition of Eurovet.  Furthermore, there have been a number of senior management appointments which are outlined in the Chief Executive's Review.  Bryan Morton, one of our Non-Executive Directors, has decided to step down from his role; we are currently in the process of recruiting his successor.  On behalf of the Board and Shareholders I would like to welcome all the Eurovet employees to the Group and wish our new employees every success in their future roles.  I would also like to thank all employees for their continued hard work and dedication throughout the year.

Prospects

The integration of Eurovet is progressing to plan and is delivering the expected synergies; the enhanced product range is robust; our pipeline is at an advanced stage to deliver future significant products and the Group has identified other product, geographical and service opportunities.  Current trading is in line with the Board's expectations.  We are conscious of the ongoing global economic uncertainties, but remain confident that our strategy will continue to deliver future solid growth and enhanced Shareholder value.

Dechra Pharmaceuticals PLC

Preliminary Results for the year ended 30 June 2012

REVIEW BY THE CHIEF EXECUTIVE, IAN PAGE

Introduction

The Group has delivered strong growth throughout the financial year and continues to progress its strategic objective of building a high margin, cash generative veterinary products business.  Both revenue and profit growth have been driven by the performance of our Pharmaceutical segments; predominantly from the solid organic growth of our licensed pharmaceuticals.  Specific^® branded specialist pet diets achieved modest growth at constant currency.  Third party manufacturing revenues and profitability increased in the year; Dales, our main manufacturing site, achieved its first FDA approval to manufacture product for the US market.  Good revenue growth was seen in our Services segment although gross margin remained under pressure due to product mix and increased discounting in a highly competitive market.  However, as previously reported, there was an improvement in margin in the second half of the financial year compared to that achieved in the first half.  There have been two acquisitions during the year (for, in aggregate £117.3 million): an equine product,
HY-50^®; and a Dutch based business, Eurovet. Both are detailed later in this report.  These acquisitions will be earnings enhancing in the first full year of ownership, Eurovet is expected to be materially enhancing in the financial year ending 30 June 2014.

Our Strategy for Delivering and Maintaining Value

Historically the majority of the Group's turnover and profitability were derived from our Services segment.  However, due to our clear strategic objective to develop a high growth, cash generative veterinary products business, Group profits are now predominantly derived from our Pharmaceutical segments. 

Products

In the Group's Pharmaceutical segments growth will be delivered by:

·      maintaining and, where possible, increasing market share of existing products;

·      development of innovative, high margin, intellectually protected, international novel pharmaceutical products;

·      approval of pharmaceutical differentiated and standard generic products;

·      the continued development of Specific pet diets;

·      in-licensing of high end products which can be marketed through existing sales and customer channels;

·      increased geographical coverage through the creation of our own sales and marketing businesses;

·      improving and developing sales growth via our export partners in non-subsidiary territories; and

·      the selective acquisition of assets which either bring new products to the Group, or accelerate global expansion.

Services

With respect to the Services segment, specifically NVS, the strategic objective remains:

·      to continue improving logistics excellence;

·      to reduce operating costs as a percentage of sales;

·      to, at a minimum, maintain operating margins; and

·      to deliver new innovative customer services.

Manufacturing

The key strategic objective of manufacturing is to effectively and economically produce our own veterinary pharmaceutical product range.  However, we have been successful in developing a contract manufacturing business by strategic implementation of:

·      therapeutic sector specialisation;

·      provision of a full service, from formulation and development through to manufacturing and packaging; and

·      the ability to offer our customers a wide range of scale, dosage forms and packaging formats.

Acquisitions

HY-50

The worldwide rights (excluding Canada) to HY-50 were acquired in January 2012 from Bexinc Limited for a cash consideration of 8.0 million Canadian Dollars (approximately £5.1 million), funded from the Group's existing cash resources.

HY-50 is used for intra-articular ("IA") or intravenous ("IV") treatment of lameness in horses caused by joint dysfunction.  It is unique in Europe as being the only single injection to deliver 50mg of Sodium Hyaluronate and having both IA and IV indications.  This product acquisition strengthens our specialist equine portfolio and will be earnings enhancing in the first full year of ownership.

It is currently approved and marketed by various companies in the UK, Belgium, the Netherlands, Sweden, Finland, Denmark, Norway, Italy, Germany and Spain.  Furthermore, registrations are being considered for France and Ireland.  Dechra already markets the product in the UK as the marketing rights were acquired as part of the Genitrix^® acquisition.  Marketing rights for all other territories return to Dechra by July 2013.

Eurovet Animal Health B.V.

On 23 May 2012, Eurovet was acquired from A.U.V. Holdings B.V. for €135 million in cash, on a debt free cash free basis.  The acquisition was funded by a £60 million Rights Issue and a new £120 million debt facility, details of which are provided in the financial section of this report.  Eurovet is a profitable European business, very similar in structure to Dechra Veterinary Products EU ("DVP EU").  It has targeted niche differentiated products in both companion animals and farm animals and has highly complementary products, geographies, manufacturing competencies and markets to Dechra.  There are a number of benefits to the acquisition:

Complementary Geographies

·      It creates a strong presence in Germany where Dechra historically sold its products through a distributor;

·      It considerably strengthens our sales and marketing infrastructure in Denmark, the Netherlands, Belgium and the UK, where synergies have already been realised through cost savings as duplicated sales offices have been rationalised; and

·      There will also be some margin benefit from Eurovet products that can be distributed through Dechra's other European subsidiaries once Eurovet's third party contracts are terminated.

Product Range

·      Eurovet has a successful line of specialised generics that deliver technical or economic added value to end users;

·      There is no significant overlap with Dechra's companion animal product portfolio with the range being complementary and enhancing to Dechra's own portfolio; and

·      It provides an entry to the farm animal market which has been one of Dechra's strategic objectives.

Manufacturing Capabilities

·      Eurovet brings a sterile facility providing a new manufacturing competency for Dechra.  The facility is modern, having been built in 2007.

·      The site, at Bladel in the Netherlands, also manufactures oral liquids, pre-mixes and water soluble powders which are almost entirely complementary to our existing manufacturing competencies.

Product Development

·      Eurovet has a proven track record of delivering first entrant generics and added value generics with a new dosage form or delivery method.  They have several products at an advanced stage of development with four already in registration.

Synergies

Annualised synergies of €6.0 million are targeted to be delivered within three years, of which €2.0 million is already being realised.  These synergies will be achieved through:

·      The rationalisation of the four duplicated sales and marketing functions with significant cost savings;

·      Revenue synergies from Dechra products being sold through Eurovet's German distributor;

·      Revenue synergies from Eurovet products being sold through Dechra subsidiaries;

·      Cost synergies from rationalisation of administrative expenses; and

·      Margin improvement from in-house manufacturing of some previously outsourced products.

Key Products and Specialisations

Historically Dechra's product range was entirely focused on companion animals and horses.  However, the acquisition of Eurovet has given the Group a significant and strategically important platform in the farm animal product market.  The majority of key products in both the companion animal and farm animal markets are novel or have clear marketing advantages over competitor products.  Several of our branded range have market leading positions in the majority of territories in which we operate.

A list of our key products and specialisations is appended to this announcement.

The Business and its Markets

Dechra operates under four segments:

·      Product Development;

·      European Pharmaceuticalswhich comprises Dechra Veterinary Products Europe (including Eurovet) ("DVP EU") and Dechra Manufacturing;

·      US Pharmaceuticals comprising Dechra Veterinary Products US ("DVP US"); and

·      Services comprising National Veterinary Services ("NVS") and our Laboratories, Dechra Laboratory Services ("DLS") and Dechra Specialist Laboratories ("DSL").

The Group employs 1,237 people, operates out of 14 countries and exports products globally to over 40 countries.

Product Development

The ongoing development of our specialist branded veterinary exclusive products is a key part of the Group's future growth plans.

Development Strategy

The Group has a strategic programme to increase its product portfolio.  The main criteria for assessing a potential product for inclusion in the development pipeline are:

·      risk adjusted return on investment;

·      market potential and future growth opportunities;

·      geographical scope; and

·      the ability to sell and market through existing distributor and veterinary customer channels.

Our product development is concentrated in four areas:

·      Novel Prescription Only Medicines ("POMs") for dogs, cats and horses. We target products in specialist therapeutic areas and focus on novel ideas using new Active Principle Ingredients ("APIs") in underserved markets.  Most of our projects utilise existing pharmaceutical entities that are typically used within the human market and therefore the majority of product creation is development rather than research based.

·      Development of generics in any major species, preferably within one of our areas of therapeutic sector specialisation.  This includes standard generics for any species which are copycat products of an original proprietary veterinary product and differentiated generics, known as Star Products.  Star Products are generic copies of existing veterinary medicines where a marketing advantage has been found, such as an improved delivery system, clinical advantage or improved presentation.

·      Therapeutic pet diets for dogs and cats.  Products are formulated and trialled to provide optimum nutrition for animals diagnosed with various medical conditions.

·      Unlicensed medicines, shampoos and supplements for dogs, cats and horses.  These products, on the whole, are intended for veterinary recommendation and in most cases will complement the therapeutic areas in which our POMs are targeted.

Development Achievements

The Group has continued to increase investment in product development with a 9.8% increase in expenditure over the corresponding period last year.  Dosage form and formulation work is conducted in the UK and the Netherlands; regulatory work is conducted in the UK, Denmark and the Netherlands; safety and efficacy trials are predominantly controlled by our USA team.

Pharmaceuticals

Registrations were achieved in the year for:

·      30mg and 60mg Vetoryl in Brazil;

·      Libromide^®, through the mutual recognition process, in 11 European countries;

·      Malaseb^® for Switzerland; and

·      120mg Vetoryl for the USA.

Since acquisition two Eurovet products have also received approval:

·      Methoxasol^®, an antimicrobial for pigs and poultry for the EU; and

·      Myorelax, an equine muscle relaxant for the EU.

Diets

A number of new diet products have been developed for the EU:

·      Specific CED canine endocrine support for the treatment of endocrine disorders;

·      Specific FID and FIW feline digestive support for cats with acute and chronic gastrointestinal disorders; and

·      Specific FJD and FJW, a diet to support cats with osteoarthritis and reduced joint function.

Product Pipeline

Novel POMs

There are currently five novel products in development.  A feline gastrointestinal project has been terminated prior to any significant costs being incurred due to the market size being immaterial.  A new otic product has been added to the development schedule which has significant global potential.  Two other products are at an advanced stage of review and at least one is likely to be taken forward.  As previously reported, there has been a short delay in the first novel product, an equine lameness medicine, due to external manufacturing issues.  However, it is pleasing to report that FDA completion letters have been received on safety and efficacy for this product.

Novel

Species	Indication	Territory	Manufacturing	2013	2014	2015	2016+
Equine	Lameness	International	Outsourced		•
Canine	Endocrine	International	Own (in-house)			•
Feline	Endocrine	International	Outsourced			•
Canine/Feline	Dermatology	International	Own				•
Canine/Feline	Otic	International	Own				•

In excess of £30 million potential annual revenue and gross margin expectation in excess of 70%.

Generics

Species	Indication	Territory		Manufacturing	2013	2014	2015	2016+
Swine/Poultry	Anti-infective		EU	Own	•
Canine	Sedative		EU	Own	•
Swine/Poultry	Anti-infective		Germany	Own	•
Canine/Feline	Sedative		EU	Own		•
Swine/Poultry	Anti-infective		EU	Outsourced		•
Canine/Feline/Equine	Critical care		EU	Outsourced		•
Canine/Feline/Equine	Sedative		EU	Own		•
Dairy	Anti-infective		EU	Own			•
Swine/Poultry	Anti-infective		EU	Own			•
Cattle	Anti-infective		EU	Outsourced			•
Canine	Sedative		EU	Own				•
Canine	Diuretic		EU	Own				•

In excess of £10 million potential annual revenue and gross margin expectation in excess of 50%.

Diets

Species	Indication	Territory	Manufacturing	2013	2014	2015	2016+
Feline	Orthopaedic	EU	Outsourced	•
Canine/Feline	Critical care	EU	Outsourced	•
Canine/Feline	Urinary	EU	Outsourced	•
Canine/Feline	Dental	EU	Outsourced		•
Canine/Feline	Allergy	EU	Outsourced		•

Development programme maintains competitive position and enhances growth.

Others

In addition, there are several other exploratory projects, line extensions, territory expansions and life cycle management projects.

European Pharmaceuticals

This segment comprises DVP EU (incorporating Eurovet) and Dechra Manufacturing.

DVP EU

What we do

This business unit markets and sells our own branded veterinary products across
13 European countries and manages the relationships with our worldwide marketing partners.

Operational structure

The business has an operating board of seven senior managers.  The business is managed from Bladel, the Netherlands and Sansaw, UK.  Companion animal marketing is located in Sansaw, farm animal marketing in Bladel and Specific pet diets marketing in Uldum, Denmark.

We have nine Country Managers operating out of Denmark, Finland, France, Germany, the Netherlands, Norway, Spain, Sweden and the UK.  Ireland and Portugal are managed out of the UK and Spain and Belgium and Luxembourg are managed out of the Netherlands. 

We currently employ 73 representatives across these territories.  DVP EU, including Eurovet, employs 436 people.

Our market

Our customers are veterinary surgeons, predominantly operating out of commercial veterinary practices.  Before acquiring Eurovet, this was entirely small animal and equine; most European markets are demonstrating growth although, on the whole, this is inflationary.  Although consumers continue to treat sick animals, high levels of historic growth have declined in the current depressed global economy as spend has reduced on discretionary items such as pet diets.  However, this has had minimal effect on DVP as most our products are therapeutic.  Internet pharmacies, predominantly in the UK, but also increasingly in other major European territories, are demonstrating stronger levels of growth as consumers look to reduce the cost of pet and horse ownership.  Through Eurovet the business now supplies large animal practices; these are predominantly pig and poultry practices which are very specialised, and although few in number are high value.  DVP EU also sells into over 40 countries through relationships with distribution partners who themselves sell into veterinary practices in their own country.

Key strengths

Our business is unique as the majority of our products are either novel and are used to treat medical conditions for which there is often no other effective solution or have a clinical or dosing advantage over competitor products.  Our key marketing benefit, especially on diets, is that our products are only marketed and sold to veterinary practices.  Due to the technical nature of many of our products, we invest in state of the art online communication tools.  We are one of the leading companies in the veterinary industry to offer online educational webinars and also approved continued professional development courses through our websites.

Achievements

The main achievement and ongoing priority is the integration of Eurovet into our European operations.  Rationalisation of the four duplicated sales offices has been completed.  Eurovet's Danish and UK offices have been closed and now operate out of Dechra's facilities, whilst Dechra's Dutch and Belgian operation has been closed and now operates out of Eurovet's facility in a consolidated Benelux unit.  A number of key distribution agreements have been amended as we begin to realise revenue synergies on the marketing of Eurovet products through Dechra subsidiaries and through Dechra products being marketed by Eurovet's German operation.

Like for like growth on our pharmaceuticals was 9.0% ahead of last year with good growth seen from our key products, Vetoryl and Felimazole, which were introduced into our own subsidiary sales and marketing teams at the beginning of the financial year.  The DermaPet products, acquired in October 2010 to strengthen our US business, have been launched into several EU territories in Dechra livery with positive initial sales.

Eurovet revenue since acquisition has been in line with our expectations and ahead of their corresponding period last year.  This was achieved despite ongoing pressure to reduce antibiotic usage, especially in the Netherlands, one of the main markets for this range.

Sales of our specialised pet diets grew by 1.9% at constant currency in the financial year.  We have successfully completed the supply change of all feline dry products into our new outsourced manufacturing facility in Sweden following the transfer of our canine diets in the preceding year.  The wet diets have been re-optimised and introduced in new European pack presentation with nine languages.  This has improved operational efficiency as it reduces the number of stocking units from 130 to 19.  Two new diets were launched during the period, Specific CED endocrine support and Specific FID digestive support.

Manufacturing

What we do

We manufacture the vast majority of our own branded, licensed pharmaceutical products which are marketed through DVP; we also derive revenue from third party toll manufacturing for human pharmaceutical and other veterinary companies.  This is Dechra's only significant source of revenue not derived directly from the veterinary market.

Operational structure

The business has an operating board of four senior managers.  The majority of manufacturing is located at Dales in Skipton, England and employs 209 people and at Eurovet in Bladel, the Netherlands which employs 106 people.  There is also a small manufacturing facility in Uldum, Denmark which employs 26 people.

Our market

The primary customer for our manufacturers is DVP EU.  Our toll manufacturing customers are, in the majority, small or mid-sized UK based pharmaceutical companies.  However, we also supply a number of other animal health businesses.

Key strengths

Our ability to be flexible on batch size is a major advantage, especially when introducing new pharmaceuticals.  Another key strength is our ability to produce several dosage formats such as sterile injectables, tablets, capsules, liquids, creams, gels, powders and pre-medicated feeds.  We have the capacity to package these products in numerous formats.  We are also able to provide a full service for third party customers including product formulation, trial batch manufacturing, validation, production and packaging.

Achievements

The biggest single achievement at Dales in the year was the FDA approval in November 2011 to manufacture 120mg Vetoryl for sale in the USA market.  This approval, once extended into other dosage strengths of Vetoryl, will allow us to improve the margin on our leading product.  Work has also commenced to extend FDA approval into other products and dosage forms so we can manufacture other novel products in our pipeline for the USA.  A Medicines and Healthcare Regulatory Agency ("MHRA") audit was conducted over the period which achieved the highest audit standard in our history.  Over £1 million of new contract business has been gained at Dales in the year which resulted in a 6.1% increase compared to the corresponding period last year.  Service levels have improved within the organisation, achieving 95% of lines fulfilled on time.  Furthermore, there has been continued product mix rationalisation, whereby lower value and inefficiently manufactured products have been deleted.  This has resulted in an increase in unit added value of 9%.  Significant investment has been made at the Dales site with an upgrade in the injections facility, including a new replacement autoclave and laboratory expansion in both the quality control laboratory and the product development formulation laboratory.  The key focus of the manufacturing management team in the forthcoming year will be the integration of the Eurovet site at Bladel into the Group.

US Pharmaceuticals

DVP US

What we do

DVP US markets and sells our own veterinary products across the USA.

Operational structure

The business has an operating board of three senior managers, all of whom have
in-depth experience of the American veterinary market.  Accounts, HR and pre-distributor logistics are all currently outsourced.  Our business is located in Kansas City, USA and employs 36 people, 22 of whom are field based sales representatives.

Our market

Our customers are small animal and equine veterinary surgeons, predominantly operating out of commercial veterinary practices.  The USA is the world's largest veterinary market and represents a significant growth opportunity for Dechra.  Over 62% of households own a pet which equates to 73 million homes, with a current estimated population of 86 million cats, 78 million dogs and 7 million horses.

Key strengths

Our key pharmaceuticals, which are the focus of our sales and marketing efforts, are unique and are the first licensed products to treat the conditions for which they are recommended.

Achievements

Revenue across our US product range was approximately 26% higher than last year.  Four new sales representatives and two field veterinarians were added to the organisation within the year.  Further increases in headcount are planned for the future as we continue to increase our one-to-one coverage of the major US veterinary practices.  Our key products, Vetoryl and Felimazole and the DermaPet range showed good growth.  Overall revenue performance was again impacted by continual supply issues related to our historic dermatological, ophthalmic and otic range by a third party manufacturer.  Work continues to improve supply consistency of the licensed dermatological products and the transfer of the sterile ophthalmic range into a new facility is ongoing.  This transfer is targeted to be completed prior to the end of June 2013.  Vetoryl sales achieved our expectations despite the ongoing battle against compounding pharmacies; there has, however, been a significant amount of publicity outlining to veterinarians the risks and lack of quality control associated with buying products from compounding pharmacies.  Throughout the year over 100 regional meetings have been conducted by our technical support veterinarians; these have been attended by over 3,100 veterinarians.

Services

This segment comprises NVS and our Laboratories; DLS and DSL

NVS

What we do

NVS is the UK market leader, as measured in terms of market share, in the supply and distribution of veterinary products to veterinary practices and other approved outlets.  NVS stocks a range of over 14,000 products, including pharmaceuticals, pet products, consumables and accessories.  NVS has also developed a range of IT solutions for veterinary practices.

Operational structure

The business is managed by an operating board of four experienced directors.  NVS employs 426 people across the UK, 111 of whom are delivery drivers.

The centralised inventory held in Stoke-on-Trent, England is picked and packed throughout the afternoon and evening and then distributed overnight to nine trunking depots via HGVs.  Van drivers are employed locally at these depots to distribute the goods directly to our customers.  NVS has developed an advanced communication system for its customers and through this 85% of orders are received automatically without requiring human input.

Our market

Our principal customers are UK veterinary practices of all types: small animal, equine, farm animal and mixed species practices.  Footfall through UK veterinary practices has remained consistent throughout the year; however, increased volumes of unregulated products, such as diets and shampoos, are now being purchased through internet pharmacies as consumers look to reduce the costs of pet health spending.  The consolidation of veterinary practices into large corporate groups seen over recent years has continued within the period, putting pressure on margins and cash flow. 

Key strengths

NVS offers very high levels of service, a large range and depth of stock supplied via our reliable next day national delivery service.  Additionally, NVS supplies a range of business solutions for veterinary practices including practice management software, benchmarking systems and marketing and business support.

Achievements

Services revenue grew by approximately 6.5% compared to the corresponding period last year.  Operating efficiencies were gained in the period; however, operating margin declined in the first half of the financial year at NVS due to an increase in discount allowed and the decline in the proportion of revenue from higher margin product groups.  The increase in discount allowed has been a feature of the highly competitive market over recent years.  The sales mix has been influenced by consumers buying products such as pet diets from internet pharmacies, a sector in which we are currently underweight.  A strong focus by the management team ensured that operating margin showed a small improvement in the second half of the financial year.

Following several years of planning, a new integrated IT system went live at NVS on 1 July 2011, coinciding with the beginning of the financial year being reported.  This system has bedded in and Phase I completed.  This has allowed management to focus more closely on our customer requirements and as a result communication and services have been significantly improved.  Furthermore, the IT platform has allowed us to develop a new range of services to practices, such as an online Web Shop and an
in-depth analytical tool for practices to monitor and manage their business performance.

Laboratories

What we do

DLS is a first referral veterinary laboratory.  We provide histology, pathology, haematology, chemistry and microbiology services to veterinary practices.  DSL provides secondary referral services with our key area of expertise being endocrinology.  DSL also provides precise assays which support the dosage regimes and patient monitoring of DVP's key products, Vetoryl and Felimazole.

Operational structure

The Laboratories, employing 73 people, are run by an operational board of two senior managers and are supported by the Group Financial Controller who also sits on this board.  DLS is located in Poulton-le-Fylde, Leeds and Swanscombe, and DSL is located at Sawston.  Samples are received on a daily basis via post, couriers and our own collection service.  Where the science allows, a same day or next day results service is provided.

Our market

DLS's customers are UK commercial veterinary practices.  We have historically provided support to companion animal practices; in the last two years we have introduced an increased range of farm animal and equine services.  DSL provides some first level support similar to DLS to UK veterinary practices; their major area of specialisation is in very precise endocrine assays which it supplies directly to veterinary practices and other first referral laboratories.

Key strengths

We offer a high quality service with a very experienced team of veterinary pathologists who provide a fully interpreted results service on all samples received.

Achievements

We have rebranded NationWide Laboratories to Dechra Laboratory Services and Cambridge Specialist Laboratories to Dechra Specialist Laboratories; the objective is to better integrate the businesses.  We have implemented a changeover from externally provided logistics to an internal Group solution, utilising the NVS distribution structure to collect samples from veterinary clinics.  This initiative reduces costs and improves customer service.  We are at an advanced stage of the implementation of a new Laboratories information management, accounting and customer relationship software package, with a go-live targeted prior to the end of the 2012 calendar year.  The new system will significantly enhance the Laboratories customer service offering.

HR

The senior management team has been significantly strengthened by the acquisition of Eurovet.  The DVP EU team has been restructured, incorporating senior managers from both businesses.  Tony Griffin, previously Eurovet and AUV CEO, will manage this team and become DVP EU Managing Director.  Furthermore, Tony will be invited to become a PLC Board Director and will be appointed prior to end of the 2012 calendar year.  Ed Torr has stepped down from the role of European Managing Director and reverted to his historic duties in charge of business development, international expansion and product development.  There have been three new senior managers recruited during the year: Allen Mellor has been appointed to a new role as Group IT Director, Peter Cronin has taken over the role of Sales and Marketing Director at NVS and Diane Saffery has been appointed as Commercial Manager of our Laboratories.  Steve Williams, NVS Operations Director, has taken responsibility for Group logistics.  Bryan Morton, who was appointed as a Non-Executive Director in January 2010, has unfortunately decided to step down from the role due to other work commitments.  We are currently in the process of recruiting two new Non-Executive Directors; one to replace Bryan and the second to ensure the Non-Executive Directors are in the majority once Tony Griffin is appointed to the PLC Board of Directors.

The Performance Development Review scheme which incorporates the Dechra Values, outlined in the 2011 Annual Report and Accounts, has been rolled out across all senior management.  The review process will be extended to all middle management throughout 2013 and across the whole Group thereafter, further details will be provided in the Remuneration Report contained in the 2012 Annual Report.

Key Performance Indicators ("KPIs")

Financial	Method of Calculation	Target	2012 Performance	Five Year Record
Revenue from key pharmaceutical products	Global revenue from our top five products	To achieve annual revenue growth of at least 10%	The KPI was exceeded during the year with a growth rate of 17.9% being achieved	12: £39.1m 11: £33.2m 10: £29.4m 09: £23.6m 08: £15.3m* * Canaural and Fuciderm acquired in January 2008
Revenue from specialist pet diets	Global revenue from the Specific brand of pet diets	To achieve annual revenue growth of at least 6%	A growth rate of 1.9% was achieved in 2012 with revenue being impacted by difficult economic conditions in most of our markets	12: £28.1m 11: £27.6m 10: £25.6m 09: £22.7m 08: £9.9m* * Diets range acquired in January 2008
Underlying operating margin before product development cost	Underlying operating profit before product development expenditure expressed as a percentage of Group revenue	To achieve an underlying operating margin before product development costs of 10% in the medium term	Further progress continues to be made towards the medium term target, driven by the increasing proportion of revenue achieved from pharmaceutical products	12: 9.8% 11: 9.5% 10: 8.9% 09: 8.1% 08: 7.1%
Cash conversion rate	Cash generated from operations before tax and interest payments as a percentage of operating profit before amortisation of acquired intangibles	To achieve an annual cash conversion rate of at least 100%	The cash conversion rate showed an improvement compared to the previous year although it remained slightly below the target with the Services segment experiencing continued pressure on payment terms	12: 91.7% 11: 82.8% 10: 100.8% 09: 112.5% 08: 94.2%
Return on capital employed ("ROCE")	Underlying operating profit as a percentage of average operating assets utilised.  Operating assets exclude cash and cash equivalents, borrowings, tax and deferred tax balances	To achieve a return on capital employed which exceeds the pre-tax weighted average cost of capital of the Group ("WACC")	ROCE  significantly ahead of the Group's WACC although it reduced slightly in absolute terms due to the Eurovet acquisition	12: 20.6% 11: 21.6% 10: 22.6% 09: 19.4% 08: 23.3%

Key Performance Indicators ("KPIs")…continued

Non-Financial	Method of Calculation	Target	2012 Performance	Five Year Record
Pharmaceutical product development pipeline	Number of products from the pipeline or in-licensed into at least one major territory with long term revenue potential of at least £0.5 million	One new diet or range extension launched in the EU, two new pharmaceuticals, each launched in at least one key market	Two new diets launched, one pharmaceutical product approved and launched in the EU.  New pharmaceutical registrations achieved in USA, Brazil and Switzerland	12: 6 products 11: 6 products 10: 6 products 09: 5 products 08: 3 products
Health and safety performance	Lost Time Accident Frequency Rate ("LTAFR"): all accidents resulting in absence or the 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	Zero preventable accidents	There has been a reduction in the total number of accidents during the year from 15 to 10.  None of these accidents have resulted in a work related fatality or disability  More detail in relation to this can be found in the Social, Ethical and Environmental Responsibilities Report contained in the 2012 Annual Report	12: 0.55 11: 0.82 10: 0.75 09: 0.94 08: n/a* * Information not collected for this year
Employees	Employee turnover calculated as number of leavers during the period as a percentage of the average total number of employees in the period	Moving Annual Turnover ("MAT") rate of less than 15%	The MAT has shown a significant improvement down to 16.10% from last year's 19.03%.  More detail in relation to this can be found in the Social, Ethical and Environmental Responsibilities Report contained in the 2012 Annual Report	12: 16.10% 11: 19.03% 10: 15.88% 09: 19.81% 08: 29.7%

Dechra Pharmaceuticals PLC

Preliminary Results for the year ended 30 June 2012

FINANCIAL REVIEW BY THE GROUP FINANCE DIRECTOR, SIMON EVANS

Group Performance

Financial Highlights	Underlying Results			Reported Results
	2012	2011		2012	2011
	£'000	£'000		£'000	£'000
Revenue	426,041	389,237	+9.5%	426,041	389,237	+9.5%
Gross profit	99,259	88,361	+12.3%	99,259	88,361	+12.3%
% of revenue	23.3%	22.7%		23.3%	22.7%
Distribution costs	(17,979)	(17,659)	(1.8%)	(17,979)	(17,659)	(1.8%)
Selling, general and administrative expenses	(38,944)	(33,658)	(15.7%)	(54,655)	(43,763)	(24.9%)
Research and development expenses	(5,735)	(5,221)	(9.8%)	(5,735)	(5,221)	(9.8%)
Operating profit	36,601	31,823	+15.0%	20,890	21,718	(3.8%)
% of revenue	8.6%	8.2%		4.9%	5.6%
Profit before taxation	32,966	30,069	+9.6%	16,820	18,514	(9.1%)
Taxation	(8,664)	(7,321)		(5,071)	(4,380)
Profit after tax	24,302	22,748		11,749	14,134
Earnings per share	32.37p	31.53p	+2.7%	15.65p	19.59p	(20.1%)
Operating cash flow before interest and tax payments	29,128	25,374	+14.8%	29,128	25,374	+14.8%
Cash conversion rate	91.7%	82.8%		91.7%	82.8%
Free cash flow	7,905	9,294	(14.9%)	7,905	9,294	(14.9%)
Tax rate	26.3%	24.3%		30.1%	23.7%
Total dividend per share	12.27p+	11.12p+	+10.3%	12.27p+	11.12p+	+10.3%
Net borrowings	86,717	34,091		86,717	34,091

⁺ Restated to reflect the impact of the bonus element of the Rights Issue.

Revenue, Underlying Operating Profit and Underlying Profit Before Tax at Constant Currency

	2012	2011	Change
	£'000	£'000	%
Revenue	426,991	389,237	9.7
Underlying operating profit	36,845	31,823	15.8
Underlying profit before taxation	34,108	29,070	17.3

Analysis of Revenue and Underlying Operating Profit Growth

	Revenue		Underlying Operating Profit
	£'000	%	£'000	%
Year ended 30 June 2011	389,237		31,823
Organic growth at constant currency	30,627	7.9	4,170	13.1
Impact of acquisitions	7,127	1.8	852	2.7
Impact of foreign currency movements	(950)	(0.2)	(244)	(0.8)
Year ended 30 June 2012	426,041	9.5	36,601	15.0

Revenue

At Constant Currency	2012	2011	Change
	£'000	£'000	%
European Pharmaceuticals
Own branded pharmaceuticals	64,322	48,614	32.3
Diets	28,143	27,621	1.9
Third party contract manufacturing	11,431	10,772	6.1
Instruments, consumables and equipment	1,894	2,280	(16.9)
Total European Pharmaceuticals	105,790	89,287	18.5
US Pharmaceuticals	20,287	16,107	26.0
Services
Veterinary wholesaling	310,184	291,180	6.5
Laboratories	5,488	5,078	8.1
Total Services	315,672	296,258	6.6
Inter-segment	(14,758)	(12,415)
Total revenue at constant currency	426,991	389,237	9.7
Currency impact	(950)	-
Reported revenue	426,041	389,237	9.5

Overall Group revenue increased by 9.5% compared to the 2011 financial year.  Of this increase, 7.9% was organic growth, the Eurovet acquisition contributed 1.8% and currency movements had a negative impact of 0.2%.

Within European Pharmaceuticals, own branded pharmaceuticals grew strongly with a constant currency increase of 32.3% compared to the prior year (17.7% excluding Eurovet).  This was the first full year that the marketing of Vetoryl came back in-house from our previous marketing partners.  Our range of specialist pet diets grew by 1.9%.

Third party contract manufacturing grew by 6.1% compared to the 2011 financial year, returning to growth after a small reduction in revenue last year.

Revenue from US Pharmaceuticals grew by 26.0% compared to the prior year with Vetoryl, Felimazole and the DermaPet range all performing strongly.  As with prior reporting periods, continued manufacturing issues with our ophthalmic and otic range had a negative impact of US$1.1 million on revenue.

Within the Services segment, our UK veterinary wholesaler, NVS, recorded growth of 6.5% in the financial year.  This was slightly lower than overall market growth in the period due to NVS being underweight in internet pharmacies.  Revenue from our Laboratories business showed an increase of 8.1%, reflecting a bounce back from the reduction in revenue seen in the 2011 financial year.

Gross Profit

Gross margin for the Group increased from 22.7% to 23.3%. This was driven by increased revenue from higher margin pharmaceuticals which was partially offset by a reduction in the NVS gross margin caused by increased discounting and an adverse sales mix.

Underlying Distribution Costs

Distribution costs increased by 1.8% compared to 2011, if Eurovet is excluded, the increase was only 1.0%.  This below inflation increase was as a result of increased efficiency, particularly in our DVP EU and NVS businesses.

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

SG&A expenses increased by 15.7% (8.1% excluding Eurovet).  This increase reflects, in particular, the continued build of sales and marketing infrastructure within our US business and the additional costs of marketing Vetoryl in-house within our DVP EU operation.

Research and Development Expenses

Research and development expenditure increased by 9.8% from £5.2 million to
£5.7 million.  This increase supports our product development programme which has been enlarged following the acquisition of Eurovet.  Further details are shown on pages 6 to 8.

Underlying Operating Profit

	2012	2011	Change
At Constant Currency	£'000	£'000	%
European Pharmaceuticals	29,166	22,506	29.6
US Pharmaceuticals	5,845	4,838	20.8
Services	11,056	13,087	(15.5)
Research and development	(5,735)	(5,221)	(9.8)
Central costs	(3,487)	(3,387)	(3.0)
Underlying operating profit at constant currency	36,845	31,823	15.8
Currency impact	(244)	-
Reported underlying operating profit	36,601	31,823	15.0

Operating profit for European Pharmaceuticals grew by 29.6% at constant currency (24.3% excluding Eurovet) with the operational leverage effect of higher pharmaceutical revenue being clearly demonstrated.

US Pharmaceuticals achieved a strong increase of 20.8% in operating profit despite the build-up of sales and marketing infrastructure noted earlier.

The Services segment showed a reduction in operating profit compared to 2011 with the reduction in gross margin noted above only partially mitigated by efficiency savings.  Although operating margin for the year fell from 4.4% to 3.5%, the operating margin in the second half of the financial year showed an improvement to 3.6% compared to the 3.4% achieved in the first half.

Underlying Net Finance Expense

The underlying net finance expense in the 2012 financial year was £3.6 million compared to £1.8 million in 2011.  However, the 2011 figure was flattered by a £1.0 million gain on foreign exchange whilst there was a loss of £0.9 million in 2012.  Excluding foreign exchange gains and losses, the charge for 2012 is broadly equivalent to that for 2011.

Underlying Profit Before Taxation

Underlying profit before taxation increased by 9.6% from £30.1 million to £33.0 million.  At constant currency, the increase was 17.3%.

Non-underlying Items

Non-underlying items in the year comprised amortisation of intangibles acquired as a result of acquisitions together with one off costs relating to acquisitions and subsequent reorganisations, principally Eurovet.  Full details are shown in notes 4 and 5 to the financial statements.  The Directors believe that highlighting these items separately gives a better understanding of the performance of the Group.

Taxation

The effective tax rate on underlying earnings was 26.3% compared to 24.3% in 2011.  In 2012 there were certain foreign exchange losses for which there was no tax credit. In 2011 the tax rate benefited from non taxable foreign exchange gains.

Earnings Per Share and Dividend

Underlying earnings per share was 32.37 pence compared to 31.53 pence in 2011, up 2.7%.  Both of these figures have been adjusted to reflect the bonus element of the Rights Issue.  The relatively small increase reflects the additional number of shares in respect of the Eurovet acquisition against the small profit contribution from Eurovet recognised in the period from acquisition to the year end.  Eurovet is expected to be earnings enhancing in the year ending 30 June 2013.

The Board is proposing a final dividend of 8.50 pence per share which, when added to the interim dividend of 3.77 pence (adjusted for the bonus element of the Rights Issue), gives a total dividend of 12.27 pence.  This compares to the Rights Issue adjusted
11.12 pence in 2011.  The cash dividend is up by 25.9% from £8.0 million to
£10.1 million.

The total dividend is covered 2.4 times by underlying profit after tax (2011: 2.8 times).

Cash Flow

	2012	2011
	£'000	£'000
EBITDA	35,238	33,616
Share-based payments charge	1,001	830
Changes in working capital	(7,111)	(9,072)
Cash generated from operations	29,128	25,374
Net interest	(2,426)	(2,629)
Taxes paid	(7,241)	(5,034)
Capital expenditure	(3,278)	(4,090)
Proceeds of asset sales	50	2
Repayment of borrowings	(8,328)	(4,329)
Free cash flow	7,905	9,294
Acquisitions	(117,335)	(33,047)
Net new borrowings	61,400	29,556
Issue of share capital	59,288	541
Dividends	(8,325)	(7,221)
Foreign currency effects	(994)	(129)
Net cash flow	1,939	(1,006)

The cash conversion rate in 2012 was 91.7% compared to 82.8% in 2011.  A strong cash inflow in the second half resulted in an improvement of 14.8% compared to last year.

Free cash flow was slightly below the 2011 level due to higher debt repayments in the year.

Financial Position at the Year End

	2012	2011
	£'000	£'000
Non-current assets
Intangible assets	225,872	125,098
Property, plant and equipment	16,720	7,721
	242,592	132,819
Working capital	49,531	32,494
Deferred and contingent consideration	(13,863)	(14,055)
Current tax liability	(8,155)	(5,391)
Deferred tax liability	(29,343)	(13,443)
Employee benefit obligations	(363)	-
Net borrowings	(86,717)	(34,091)
Net assets	153,682	98,333

The balance sheet at 30 June 2012 is enlarged due to the acquisition of Eurovet on
23 May 2012 together with the consequent Rights Issue.

Net borrowings at the year end represented 1.8 times underlying pro-forma EBITDA compared to 2.3 times at the time of the Eurovet Prospectus.  Of the increase in working capital, £11.0 million was as a result of Eurovet with the remainder reflecting increased trading activity.

Bank Facilities

The Group's bank facilities were re-financed and increased during the year in order to partially fund the acquisition of Eurovet.  The new facilities have been provided by a syndicate of four banks and comprise:

·      a £55 million term loan payable in instalments through to October 2016.  The first repayment of £5 million is due on 31 March 2013

·      a £65 million revolving credit facility committed until October 2016.

The main covenants are:

·      cash flow cover no less than 1.25:1

·      interest cover no less than 4:1

·      the ratio of net borrowings to annualised EBITDA no higher than 2.75:1 up until 30 June 2013 and 2.50:1 thereafter

·      consolidated net worth no less than £120 million

There was substantial headroom on all covenants during the year.

The Group also has a £10 million overdraft facility which is currently unutilised.

Risks and Uncertainties

As we have stated in previous reports, the Group, like every business, faces risks and uncertainties in both its day-to-day operations and through events relating to the achievement of its long term strategic objectives.  The Board has ultimate responsibility for risk management within the Group and there is an ongoing and embedded process of assessing, monitoring, managing and reporting on significant risks faced by the separate business units and by the Group as a whole.

Risks and Uncertainties…..continued

The table below highlights the main potential risks to the Group strategy, as identified by the Board, and the controls put in place to mitigate the risks:

Strategy	Risk	How we mitigate the risk
To  develop a high growth, cash generative specialist veterinary products business	Competitor product launched against one of our leading brands	·        Product improvement plans and marketing strategies are reviewed on a regular basis ·        Where competitor products are launched a response strategy is established and followed by our marketing team to highlight any unique selling points or competitive advantages or to position our products defensively to minimise competitor impact ·        Market research is conducted in order to allow the marketing team to better understand customer needs and ensure that our products fulfil the identified requirements ·        Any product patents are monitored and consideration given to the formulation of a defensive strategy towards the end of the life of the patent
	Revenue from recently launched new products failing to meet expectations	·        In respect of all new product launches a detailed marketing plan is established.  Progress against the plan is constantly monitored ·        The Group ensures that it has detailed market knowledge and retains close contact with customers through its sales team ·        Alongside the marketing plan the sales team receive training on the product, its benefits and all technical information
	Failure of clinical trials	·        Before major costly efficacy studies are initiated, smaller proof concept studies are conducted to study the effects of the drug on target species and for the target indication
	Prescribing pressure on veterinarians to reduce antibiotic use	·        Regular contact is made with all relevant veterinary authorities to ensure that we have a comprehensive understanding of anticipated regulatory changes ·        Programme of development of new products that minimise antimicrobial resistance concerns
	Failure to meet regulatory requirements under which we operate	·        The Group always strives to exceed regulatory requirements and ensures that's its employees have detailed experience and knowledge of the regulations ·        All businesses have clearly established quality systems and procedures in place ·        Regular contact is maintained with all relevant regulatory bodies in order to build/strengthen relationships and ensure good  communication lines ·        The regulatory and legal teams remain constantly updated in respect of proposed/actual changes in order to ensure that the business is equipped to deal with and adhere to such changes ·        Where any changes are identified which could affect our ability to continue to market and sell any of our products a response team is created in order to mitigate such risk and to retain effective communication with the relevant regulators ·        External consultants are utilised to audit our manufacturing systems prior to any inspection
To sustain growth and innovate in our Services business	Loss of key personnel*	·        Succession planning is given consideration by the Board and, where deemed necessary, Key Man Insurance is in place ·        In 2009 the Group HR director developed and implemented a leadership development programme for the senior management team in order to further strengthen the retention of the individuals.  This programme is ongoing and includes the involvement of personal coaches ·        As stated earlier in this report Performance and Development Review process is in the early stages of implementation
	The failure of a major customer or supplier*	·        The business units monitor the financial status of both key customers and maintain regular contact with them (including face to face meetings) ·        All contracts with customers are reviewed from both a commercial and legal perspective to ensure that assignment of the contract is allowed should there be a change of control of either of the contracting parties
	Fuel shortage/logistics failure	·        Standard operating procedures have been drafted in respect of fuel emergencies to provide a daily service.  Such standard operating procedures are regularly reviewed in order to ensure they remain effective ·        Delivery routes are constantly monitored by the operations department in order to ensure that they remain effective, economic and efficient ·        Routine ongoing maintenance of the automated picking circuit at NVS and ensuring that all critical components are held on site

* These risks apply across all trading segments.

Consolidated Income Statement

for the year ended 30 June 2012

		2012			2011
		Underlying £'000	Non- underlying items* (notes 4 & 5) £'000	Total £'000	Underlying £'000	Non- underlying items* (notes 4 & 5) £'000	Total £'000
	Notes
Revenue	2	426,041	-	426,041	389,237	-	389,237
Cost of sales		(326,782)	-	(326,782)	(300,876)	-	(300,876)
Gross profit		99,259	-	99,259	88,361	-	88,361
Distribution costs		(17,979)	-	(17,979)	(17,659)	-	(17,659)
Administrative expenses		(44,679)	(15,711)	(60,390)	(38,879)	(10,105)	(48,984)
Operating profit	2	36,601	(15,711)	20,890	31,823	(10,105)	21,718
Finance income	3	219	-	219	2,144	-	2,144
Finance expense	4	(3,854)	(435)	(4,289)	(3,898)	(1,450)	(5,348)
Profit before taxation		32,966	(16,146)	16,820	30,069	(11,555)	18,514
Income tax expense	6	(8,664)	3,593	(5,071)	(7,321)	2,941	(4,380)
Profit for the year  attributable to owners  of the parent		24,302	(12,553)	11,749	22,748	(8,614)	14,134
Earnings per share
Basic	8			15.65p†			19.59p†
Diluted	8			15.60p†			19.53p†
Dividend per share  (interim paid and final  proposed for the year)	7			12.27p†			11.12p†

* Non-underlying items comprise amortisation of acquired intangibles, acquisition expenses, rationalisation costs, loss on extinguishment of debt and the unwinding of discounts on deferred and contingent consideration.

† Restated to reflect the impact of the bonus element of the Rights Issue.

Consolidated Statement of Comprehensive Income

for the year ended 30 June 2012

	2012 £'000	2011 £'000
Profit for the year	11,749	14,134
Other comprehensive income:
Effective portion of changes in fair value of cash flow hedges	(419)	(684)
Cash flow hedges recycled to income statement	429	670
Foreign currency translation differences for foreign operations	(8,434)	3,411
Income tax relating to components of other comprehensive income	(2)	(4)
Total comprehensive income for the period attributable to owners of the parent	3,323	17,527

Consolidated Statement of Financial Position

at 30 June 2012

	Notes	2012 £'000	2011 £'000
ASSETS
Non-current assets
Intangible assets	9	225,872	125,098
Property, plant & equipment	10	16,720	7,721
Total non-current assets		242,592	132,819
Current assets
Inventories	12	57,281	40,760
Trade and other receivables	13	72,113	66,293
Cash and cash equivalents	14	32,435	30,496
Total current assets		161,829	137,549
Total assets		404,421	270,368
LIABILITIES
Current liabilities
Borrowings	17	(5,106)	(8,502)
Trade and other payables	15	(79,863)	(74,559)
Deferred and contingent consideration		(10,337)	(500)
Current tax liabilities	16	(8,155)	(5,391)
Total current liabilities		(103,461)	(88,952)
Non-current liabilities
Borrowings	17	(114,046)	(56,085)
Deferred and contingent consideration		(3,526)	(13,555)
Employee benefit obligations	18	(363)	-
Deferred tax liabilities	11	(29,343)	(13,443)
Total non-current liabilities		(147,278)	(83,083)
Total liabilities		(250,739)	(172,035)
Net assets		153,682	98,333
EQUITY
Issued share capital	19	869	664
Share premium account		122,642	63,559
Hedging reserve		(286)	(294)
Foreign currency translation reserve		(3,683)	4,751
Merger reserve		1,770	1,770
Retained earnings		32,370	27,883
Total equity attributable to equity holders of the parent		153,682	98,333

Consolidated Statement of Changes in Shareholders' Equity

for the year ended 30 June 2012

	Attributable to owners of the parent
Year ended 30 June 2011	Issued Share capital £'000	Share premium account £'000	Hedging reserve £'000	Foreign currency translation reserve £'000	Merger reserve £'000	Retained earnings £'000	Total £'000
At 1 July 2010	661	63,021	(276)	1,340	1,770	19,712	86,228
Profit for the period	-	-	-	-	-	14,134	14,134
Effective portion of changes in fair value of  cash flow hedges, net of tax	-	-	(506)	-	-	-	(506)
Foreign currency translation differences for foreign operations, net of tax	-	-	-	3,411	-	-	3,411
Cash flow hedges recycled to income  statement, net of tax	-	-	488	-	-	-	488
Total comprehensive income	-	-	(18)	3,411	-	14,134	17,527
Transactions with owners
Dividends paid	-	-	-	-	-	(7,221)	(7,221)
Share-based payments	-	-	-	-	-	1,258	1,258
Shares issued	3	538	-	-	-	-	541
Total contributions by and distributions to  owners	3	538	-	-	-	(5,963)	(5,422)
At 30 June 2011	664	63,559	(294)	4,751	1,770	27,883	98,333
Year ended 30 June 2012
At 1 July 2011	664	63,559	(294)	4,751	1,770	27,883	98,333
Profit for the period	-	-	-	-	-	11,749	11,749
Effective portion of changes in fair value of  cash flow hedges, net of tax	-	-	(335)	-	-	-	(335)
Foreign currency translation differences for foreign operations, net of tax	-	-	-	(8,434)	-	-	(8,434)
Cash flow hedges recycled to income  statement, net of tax	-	-	343	-	-	-	343
Total comprehensive income	-	-	8	(8,434)	-	11,749	3,323
Transactions with owners
Dividends paid	-	-	-	-	-	(8,325)	(8,325)
Share-based payments	-	-	-	-	-	1,063	1,063
Shares issued	205	59,083	-	-	-	-	59,288
Total contributions by and distributions to  owners	205	59,083	-	-	-	(7,262)	52,026
At 30 June 2012	869	122,642	(286)	(3,683)	1,770	32,370	153,682

Hedging Reserve

The hedging reserve represents the cumulative fair value gains or losses on derivative financial instruments for which cash flow hedge accounting has been applied.

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 2012

	Note	2012 £'000	2011 £'000
Cash flows from operating activities
Profit for the period		11,749	14,134
Adjustments for:
Depreciation		1,584	1,535
Amortisation and impairment		12,762	10,362
Loss on disposal of intangible assets		47	-
(Gain)/Loss on sale of property, plant and equipment		(45)	1
Finance income		(219)	(2,144)
Finance expense		4,289	5,348
Equity settled share-based payment expense		1,001	830
Income tax expense		5,071	4,380
Operating cash flow before changes in working capital		36,239	34,446
Increase in inventories		(4,846)	(4,814)
Increase in trade and other receivables		(1,827)	(12,408)
(Decrease)/increase in trade and other payables		(438)	8,150
Cash generated from operating activities before interest and taxation		29,128	25,374
Interest paid		(2,645)	(3,586)
Income taxes paid		(7,241)	(5,034)
Net cash inflow from operating activities		19,242	16,754
Cash flows from investing activities
Proceeds from sale of property, plant and equipment		50	2
Interest received		219	957
Acquisition of subsidiaries	22	(112,221)	(33,047)
Purchase of property, plant and equipment		(1,645)	(1,280)
Capitalised development expenditure		(447)	(1,025)
Purchase of other intangible non-current assets		(6,300)	(1,785)
Net cash outflow from investing activities		(120,344)	(36,178)
Cash flows from financing activities
Proceeds from the issue of share capital		60,575	541
Share issue expenses		(1,287)	-
New borrowings		120,000	68,000
Expenses of raising new borrowings		(2,600)	(944)
Repayment of borrowings		(64,328)	(41,829)
Resetting of foreign currency borrowings		(327)	320
Dividends paid		(8,325)	(7,221)
Net cash inflow from financing activities		103,708	18,867
Net increase/(decrease) in cash and cash equivalents		2,606	(557)
Cash and cash equivalents at start of period		30,496	31,502
Exchange differences on cash and cash equivalents		(667)	(449)
Cash and cash equivalents at end of period		32,435	30,496
Reconciliation of net cash flow to movement in net borrowings
Net increase/(decrease) in cash and cash equivalents		2,606	(557)
Repayment of borrowings		64,328	41,829
New borrowings		(120,000)	(68,000)
Expenses of raising new borrowings		2,600	944
New finance leases		(1,010)	-
Exchange differences on cash and cash equivalents		(667)	(449)
Retranslation of foreign borrowings		(429)	254
Other non-cash changes		(54)	(1,411)
Movement in net borrowings in the period		(52,626)	(27,390)
Net borrowings at start of period		(34,091)	(6,701)
Net borrowings at end of period	17	(86,717)	(34,091)

Notes to the Preliminary Results

for the year ended 30 June 2012

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 4 September 2012.

2.         Operating Segments

The Group has four 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.

The Services segment comprises National Veterinary Services, Dechra Laboratory Services and Dechra Specialist Laboratories.  This segment services UK veterinary practices in both the companion animal and livestock sectors.

The European Pharmaceuticals segment comprises Dechra Veterinary Products EU, Eurovet and Dechra Manufacturing.  Dechra Manufacturing manufactures the vast majority of our own branded licensed pharmaceutical products, which are marketed through DVP EU and Eurovet.  This segment operates internationally and is unique in having its sole area of specialisation in companion animal products.

The US Pharmaceuticals segment consists of Dechra Veterinary Products US which sells companion animal pharmaceuticals into that territory.

The Pharmaceuticals research and development segment includes all of the Group's pharmaceutical research and development activities.

There are varying levels of intersegment trading.  Intersegment pricing is determined on an arm's length basis.

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

		2012 £'000	2011 £'000
Revenue by segment
Services	- total	315,672	296,258
	- intersegment	(518)	(190)
European Pharmaceuticals	- total	104,764	89,287
	- intersegment	(13,443)	(12,225)
US Pharmaceuticals                 - total		20,363 (797)	16,107 -
	- intersegment
		426,041	389,237
Operating profit/(loss) by segment
Services		11,056	13,087
European Pharmaceuticals		28,904	22,506
US Pharmaceuticals		5,863	4,838
Pharmaceuticals research and development		(5,735)	(5,221)
Segment operating profit		40,088	35,210
Corporate and other unallocated costs		(3,487)	(3,387)
Underlying operating profit		36,601	31,823
Amortisation of acquired intangibles		(10,871)	(8,938)
Rationalisation costs		(2,525)	(474)
Acquisition costs		(2,315)	(693)
Total operating profit		20,890	21,718
Finance income		219	2,144
Finance expense		(4,289)	(5,348)
Profit before taxation		16,820	18,514
Total liabilities by segment
Services		(55,244)	(58,337)
European Pharmaceuticals		(22,058)	(14,465)
US Pharmaceuticals		(14,221)	(13,837)
Pharmaceuticals research and development		(685)	(654)
Segment liabilities		(92,208)	(87,293)
Corporate loans and revolving credit facility		(118,229)	(63,814)
Corporate accruals and other payables		(2,804)	(2,094)
Current and deferred tax liabilities		(37,498)	(18,834)
		(250,739)	(172,035)
Additions to intangible non-current assets by segment
Services		211	158
European Pharmaceuticals		121,140	8,244
US Pharmaceuticals		-	40,056
Pharmaceuticals research and development		447	1,212
		121,798	49,670

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

	2012 £'000	2011 £'000
Additions to Property, Plant and Equipment by segment
Services	484	280
European Pharmaceuticals	10,469	874
US Pharmaceuticals	10	63
Pharmaceuticals research and development	136	86
	11,099	1,303
Depreciation and amortisation by segment
Services	700	438
European Pharmaceuticals	10,524	9,091
US Pharmaceuticals	2,800	1,961
Pharmaceuticals research and development	322	407
	14,346	11,897

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:

	2012 Revenue £'000	2012 Non-current assets £'000	2011 Revenue £'000	2011 Non-current assets £'000
UK	322,063	24,164	305,737	29,156
Rest of Europe	72,358	180,654	56,452	66,954
USA	25,857	37,774	16,107	36,709
Rest of World	5,763	-	10,941	-
	426,041	242,592	389,237	132,819

No customer accounted for more than 10% of total Group revenues.

3.         Finance Income

	2012 £'000	2011 £'000
Recognised in profit or loss
Finance income arising from:
- Cash and cash equivalents	120	1,113
- Loans and receivables	89	32
- Foreign exchange gains	-	999
- Return on employee benefit scheme assets	10	-
	219	2,144

4.         Finance Expense

Underlying	2012 £'000	2011 £'000
Finance expense arising from:
- Financial liabilities at amortised cost	2,944	3,898
- Interest cost in relation to employee benefit obligations	12	-
- Foreign exchange losses	898	-
Underlying finance expense	3,854	3,898
Non-underlying
Loss on extinguishment of debt	158	1,256
Unwinding of discounts on deferred and contingent consideration	277	194
Non-underlying finance expense	435	1,450
Total finance expense	4,289	5,348

5.         Non-Underlying Items

Non-underlying items comprise:

	2012 £'000	2011 £'000
Amortisation of intangible assets acquired as a result of acquisitions	10,871	8,938
Rationalisation costs	2,525	474
Expenses of the acquisition of DermaPet Inc.	-	585
Expenses of the acquisition of Genitrix Limited	-	108
Expenses of the acquisition of Eurovet Animal Health B.V.	2,315	-
	15,711	10,105

Rationalisation costs in 2012 relate to the integration of Eurovet Animal Health B.V. This consists primarily of the costs incurred in relation to the rationalisation of the four duplicated sales offices and associated sales teams.

Rationalisation costs in 2011 relate to the integration of DermaPet Inc. and Genitrix Limited.

6.         Income Tax Expense

		2012 £'000	2011 £'000
Current tax	- UK corporation tax	5,034	4,551
	- overseas tax at prevailing local rates	2,937	2,134
	- adjustment in respect of prior years	126	(728)
Total current tax expense		8,097	5,957	5,957
Deferred tax	- origination and reversal of temporary differences	(3,695)	(1,874)
	- adjustment in respect of prior years	669	297
Total deferred tax expense		(3,026)	(1,577)	(1,577)
Total income tax expense in the income statement		5,071	4,380	4,380

6.         Income Tax Expense……continued

The tax on the Group's profit before tax differs from the standard rate of UK corporation tax of 25.5% (2011: 27.5%). 

The differences are explained below:

	2012 £'000	2011 £'000
Profit before taxation	16,820	18,514
Tax at 25.5% (2011: 27.5%)	4,289	5,091
Effect of:
- depreciation on assets not eligible for tax allowances	-	8
- disallowable expenses	369	450
- over-recovery of deferred tax on share-based payments	-	(28)
- research and development tax credits	(181)	(50)
- differences on overseas tax rates	(175)	(165)
- adjustments in respect of prior years	795	(431)
- non-taxable foreign exchange losses/(gains)	304	(495)
- change in UK tax rate	(330)	-
Total income tax expense	5,071	4,380

Tax Recognised Directly in Equity	2012 £'000	2011 £'000
Deferred tax on effective portion of changes in fair value of cash  flow hedges	(2)	(4)
Tax recognised in statement of comprehensive income	(2)	(4)
Corporation tax on equity settled transactions	143	193
Deferred tax on equity settled transactions	(77)	166
Deferred tax movement on foreign exchange translation	(1,682)	-
Total tax recognised in equity	(1,618)	355

The Budget on 21 March 2012, announced that the UK corporation tax rate will reduce to 22% by 2014.  A reduction in rate from 26% to 25% (effective from 1 April 2012) was substantively enacted on 5 July 2011, and further reductions to 24% (effective from 1 April 2012) and 23% (effective from 1 April 2013) were substantively enacted on 26 March 2012 and 3 July 2012 respectively.

This will reduce the Company's future current tax charge accordingly and further reduce the deferred tax liability at 30 June 2012 (which has been calculated based on the rate of 24% substantively enacted at 30 June 2012) by £100,000.

It has not yet been possible to quantify the full anticipated effect of the announced further 1% rate reduction, although this will further reduce the Company's future current tax charge and reduce the Company's deferred tax liability accordingly.

7.         Dividends

	2012 £'000	2011 £'000
Final dividend paid in respect of prior year but not recognised as a liability in that year: 7.72p† per share (2011: 6.61p†)	5,584	4,764
Interim dividend paid: 3.77p† per share (2011: 3.40p†)	2,741	2,457
Total dividend 11.49p† per share (2011: 10.01p†) recognised as distributions to equity holders in the period	8,325	7,221
Proposed final dividend for the year ended 30 June 2012: 8.50p per share (2011: 7.72p†)	7,384	5,582
Total dividend paid and proposed for the year ended 30 June 2012: 12.27p† per share (2011: 11.12p†)	10,125	8,039

† Restated to reflect the impact of the bonus element of the Rights Issue

In accordance with IAS 10 'Events After the Balance Sheet Date', the proposed final dividend for the year ended 30 June 2012, 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 2013.

The proposed final dividend for the year ended 30 June 2011, is shown as a deduction from equity in the year ended 30 June 2012.

8.         Earnings per Share

Earnings per ordinary share have 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.

	2012 Pence	2011 Pence
Basic earnings per share
- Underlying*	32.37†	31.53†
- Basic	15.65†	19.59†
Diluted earnings per share
- Underlying*	32.27†	31.43†
- Diluted	15.60†	19.53†
The calculations of basic and diluted earnings per share are based upon:
	£'000	£'000
Earnings for underlying basic and underlying diluted earnings per share	24,302	22,748
Earnings for basic and diluted earnings per share	11,749	14,134
		No.
Weighted average number of ordinary shares for basic earnings per share	75,082,169	72,138,011†
Impact of share options	224,690	240,643†
Weighted average number of ordinary shares for diluted earnings per  share	75,306,859	72,378,654†

* Underlying measures exclude non-underlying items as defined on the Consolidated Income Statement

† Restated to reflect the impact of the bonus element of the Rights Issue

9.         Intangible Assets

Cost	Goodwill £'000	Software £'000	Development Costs £'000	Patent Rights £'000	Marketing Authorisations £'000	Acquired Intangibles £'000	Total £'000
At 1 July 2010	20,496	2,522	5,856	2,859	853	66,759	99,345
Additions	-	964	1,025	821	-	-	2,810
Acquisitions through business combinations	2,171	-	184	-	-	44,505	46,860
Disposals	-	-	-	-	-	-	-
Foreign exchange adjustments	1,582	62	37	-	-	3,738	5,419
At 30 June 2011 and 1 July 2011	24,249	3,548	7,102	3,680	853	115,002	154,434
Additions	-	1,186	447	-	-	5,114	6,747
Acquisitions through business combinations	36,348	74	-	-	-	78,629	115,051
Disposals	-	-	(61)	-	-	-	(61)
Foreign exchange adjustments	(2,676)	(152)	(48)	-	-	(5,339)	(8,215)
At 30 June 2012	57,921	4,656	7,440	3,680	853	193,406	267,956
Amortisation
At 1 July 2010	-	754	1,234	571	-	16,415	18,974
Charge for the year	-	316	881	227	-	8,938	10,362
At 30 June 2011 and 1 July 2011	-	1,070	2,115	798	-	25,353	29,336
Charge for the year	-	551	1,005	335	-	10,871	12,762
Disposals	-	-	(14)	-	-	-	(14)
At 30 June 2012	-	1,621	3,106	1,133	-	36,224	42,084
Net book value
At 30 June 2012	57,921	3,035	4,334	2,547	853	157,182	225,872
At 30 June 2011 and 1 July 2011	24,249	2,478	4,987	2,882	853	89,649	125,098
At 30 June 2010	20,496	1,768	4,622	2,288	853	50,344	80,371
						2012 £'000	2011 £'000
Contracted capital commitments						616	609
Software assets in the course of construction included above						638	857

Goodwill is allocated across cash-generating units that are expected to benefit from that business combination.

10.      Property, Plant and Equipment

	Freehold land and buildings £'000	Short leasehold buildings £'000	Motor vehicles £'000	Plant and fixtures £'000	Total £'000
Cost
At 1 July 2010	2,256	3,327	201	10,341	16,125
Additions	1	65	-	1,214	1,280
Acquisitions through business combination	-	-	4	19	23
Disposals	-	(10)	-	(240)	(250)
Foreign exchange adjustments	190	-	-	93	283
At 30 June 2011 and 1 July 2011	2,447	3,382	205	11,427	17,461
Additions	34	77	-	1,534	1,645
Acquisitions through business combinations	6,749	-	14	2,691	9,454
Disposals	-	-	(2)	(218)	(220)
Foreign exchange adjustments	(353)	-	-	(158)	(511)
At 30 June 2012	8,877	3,459	217	15,276	27,829
Depreciation
At 1 July 2010	334	1,250	201	6,667	8,452
Charge for the year	137	216	-	1,182	1,535
Disposals	-	(10)	-	(237)	(247)
At 30 June 2011 and 1 July 2011	471	1,456	201	7,612	9,740
Charge for the year	176	219	2	1,187	1,584
Disposals	-	-	-	(215)	(215)
At 30 June 2012	647	1,675	203	8,584	11,109
Net book value
At 30 June 2012	8,230	1,784	14	6,692	16,720
At 30 June 2011 and 1 July 2011	1,976	1,926	4	3,815	7,721
At 30 June 2010	1,922	2,077	-	3,674	7,673
Net book value of assets held under finance leases
At 30 June 2012	-	32	-	371	403
At 30 June 2011 and 1 July 2011	-	40	-	568	608
At 30 June 2010	-	47	-	751	798
				2012 £'000	2011 £'000
Contracted capital commitments				366	77

11.      Deferred Taxes

Deferred tax assets and liabilities are attributable to the following:

	Assets		Liabilities		Net
	2012 £'000	2011 £'000	2012 £'000	2011 £'000	2012 £'000	2011 £'000
Intangible assets	-	-	(29,984)	(14,204)	(29,984)	(14,204)
Property, plant and equipment	-	-	(1,691)	(550)	(1,691)	(550)
Inventories	1,178	478	-	-	1,178	478
Receivables	-	41	-	-	-	41
Payables	435	161	(168)	(230)	267	(69)
Share-based payments	813	861	-	-	813	861
Employee benefit obligations	74	-	-	-	74	-
	2,500	1,541	(31,843)	(14,984)	(29,343)	(13,443)

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.      Inventories

	2012 £'000	2011 £'000
Raw materials and consumables	7,732	5,170
Work in progress	1,661	371
Finished goods and goods for resale	47,888	35,219
	57,281	40,760

13.      Trade and Other Receivables

	2012 £'000	2011 £'000
Trade receivables	69,596	62,212
Other receivables	965	2,492
Prepayments and accrued income	1,552	1,589
	72,113	66,293

14.      Cash and Cash Equivalents

	2012 £'000	2011 £'000
Cash at bank and in hand	32,435	30,496

15.      Trade and Other Payables

	2012 £'000	2011 £'000
Trade payables	63,559	63,213
Other payables	6,745	4,770
Derivative financial instruments	387	397
Other taxation and social security	3,402	3,827
Accruals and deferred income	5,770	2,352
	79,863	74,559

16.      Current Tax Liabilities

	2012 £'000	2011 £'000
Corporation tax payable	8,155	5,391

17.      Borrowings

	2012 £'000	2011 £'000
Current liabilities:
Bank loans	5,000	8,000
Finance lease obligations	695	502
Arrangement fees netted off	(589)	-
	5,106	8,502
Non-current liabilities:
Bank loans	115,757	55,746
Finance lease obligations	246	339
Arrangement fees netted off	(1,957)	-
	114,046	56,085
Total borrowings	119,152	64,587

On 4 April 2012, the Group refinanced its existing bank facility, which gave rise to a loss on extinguishment of debt of £158,000.  The Group's revised borrowing facilities comprise a term loan of £55 million payable over 4 ½ years, a £65 million revolving credit facility committed until

31 October 2016, an overdraft facility of £10 million (currently unutilised) renewable on 1 April 2013 and various finance lease obligations.

At the year end, the Group had the following unutilised borrowing facilities:	2012 £'000	2011 £'000
Bank overdraft facility	10,000	10,000
Revolving credit facility	-	254

The term loan, revolving credit and overdraft facilities are secured by a fixed and floating charge of assets of the Group.  Interest is charged at 2.50% over LIBOR in respect of the term loan and revolving credit facility and 2.50% over base rate in respect of the overdraft facility.  No covenants have been breached during the year ended 30 June 2012.

The maturity of the bank loans and overdrafts is as follows:	2012 £'000	2011 £'000
Payable:
Within one year	5,000	8,000
Between one and two years	10,000	8,000
Between two and five years	105,757	47,746
Due after five years	-	-
	120,757	63,746

Analysis of Net Borrowings	2012 £'000	2011 £'000
Bank loans	(118,211)	(63,746)
Finance leases and hire purchase contracts	(941)	(841)
Cash and cash equivalents	32,435	30,496
Net borrowings	(86,717)	(34,091)

18        Employee Benefit Obligations

The Group sponsors certain defined benefit arrangements in certain countries, the most material being a defined benefit pension plan in the Netherlands.  This is a funded career average pay arrangement, where pensionable salary is subject to a cap.  The arrangement is financed through an insurance contract.

The other defined benefit pension arrangements operated by the Group are unfunded: Jubilee awards of £61,000 for employees in the Netherlands and Germany and early retirement plan provisions in Germany of £2,000 are recognised within other payables in the Statement of Financial Position as at 30 June 2012.

The pension cost relating to the defined benefit pension arrangement in the Netherlands is assessed in accordance with the advice of an independent qualified actuary using the projected unit method.

The major actuarial assumptions used by the actuary were:

	2012
Discounted rate			4.60%
Expected return on assets					4.60%
Inflation assumption					1.90%
Salary growth					2.40%
Rate of increase in accrued pensions of active members					1.90%
Rate of increase in pensions in payment					0.00%
Rate of increase in pensions in deferment					0.00%

In valuing the liabilities of the pension scheme at 30 June 2012, mortality assumptions have been made as indicated below.

The mortality assumption follows the AG Prognosetafel 2010-2060 mortality tables with an experience adjustment in line with the ES-P2 tables as published by the Dutch Alliance of Insurers.

The assumptions used by the Group are the best estimates chosen by the Directors from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily be borne out in practice.

		2012 £'000
Present value of funded defined benefit obligations		(2,801)
Fair value of scheme assets		2,438
Net pension scheme deficit		(363)

Movements in Present Value of Defined Benefit Obligations		2012 £'000
Defined benefit obligation at acquisition		2,745
Service cost		37
Interest cost		12
Employee contributions		7
Defined benefit obligation at the end of the period		2,801

Movements in Fair Value of Scheme Assets		2012 £'000
Fair value of scheme assets at acquisition		2,404
Expected return on scheme assets		10
Additional charges		(23)
Employer contributions		40
Employee contributions		7
Fair value of scheme assets at the end of the period		2,438

Analysis of the Amount Charged to the Income Statement		2012 £'000
Service cost		37
Expected return on assets		(10)
Interest on liabilities		12
Insurance charges		23
Net pension expense		62

Scheme Assets

The Group's defined benefit pension scheme in the Netherlands is financed through an insurance contract.  Under this contract, a market price for the assets in respect of this insurance contract is not available.  In accordance with IAS 19 for such insurance policies, an asset value has been calculated by discounting expected future cash flows.  The discount rate used for this calculation reflects the risk associated with the scheme assets and the maturity or expected disposal date of those assets.

The fair value of the scheme's assets are as follows:

	2012 £'000
Discount rate used to value assets	4.60%
Total fair value of assets	2,438
Actual return on scheme assets	10

The long term rate of return on pension plan assets is determined by aggregating the expected return for each asset class over the strategic asset allocation as at 30 June 2012.  This rate of return is then adjusted for any expected profit sharing based on market related returns on notional loans.

The scheme's assets do not include any of the Group's own financial instruments or any property occupied by or other assets used by the Group.

The employer contributions expected to be paid into the scheme for the next financial period amount to £480,000.

History of Amounts in the Current Period		2012 £'000
Present value of funded defined benefit obligations		(2,801)
Fair value of scheme assets		2,438
Deficit in the scheme		(363)

19.      Share Capital

	Ordinary shares of 1p each
	2012		2011
	£'000	No.	£'000	No.
Allotted, called up and fully paid at  start of year	664	66,449,659	661	66,090,075
Rights issue	201	20,040,653	-	-
New shares issued	4	379,864	3	359,584
Allotted, called up and fully paid  at end of year	869	86,870,176	664	66,449,659

The Companies Act 2006 abolishes the requirement for a company to have an authorised share capital.  At the 2009 Annual General Meeting the Shareholders approved a resolution whereby all provisions relating to the Company's authorised share capital were removed from the Company's constitutional documents.

During the year 379,864 new ordinary shares of 1p (2011: 359,584 new ordinary shares of 1p) were issued following the exercise of options under the Long Term Incentive Plan, and the Approved, Unapproved and SAYE Share Options Schemes.  The consideration received was £452,782 (2011: £542,000).  The holders of ordinary shares are entitled to receive dividends as declared or approved at General Meetings from time to time and are entitled to one vote per share at such meetings of the Company.

The Company issued 20,040,653 shares of 1p each by way of a 3 for 10 rights issue at a price of 300p per share on 16 May 2012.  The Rights Issue generated net proceeds of £58,835,110 after costs of £1,286,849.  The issue price represented a discount of 35.3% to the closing price of 464p per share on 4 April 2012, being the last business day before the announcement of the Rights Issue.

20.      Share-based Payments

	2012 £'000	2011 £'000
Equity settled share-based transactions	1,001	830
Cash settled share-based transactions	(24)	118
	977	948

The above charge to the Income Statement is included within administrative expenses.

21.      Foreign Exchange Rates

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

	Closing rate at 30 June 2011	Average rate	Closing rate at 30 June 2012
Danish Krone	8.256	8.7165	9.21
Euro	1.1070	1.1716	1.2389
US Dollar	1.6073	1.5686	1.5681

22.      Acquisitions

Acquisition of Eurovet Animal Health B.V.

On 23 May 2012, the Group acquired 100 per cent of the issued share capital of Eurovet Animal Health B.V. ("Eurovet") obtaining control of Eurovet.  Eurovet is a veterinary pharmaceuticals business based in mainland Europe with its head office, manufacturing facility, research and development team and central sales and marketing office located in the Netherlands.  Additionally, it has operations in Germany, Belgium, Denmark and the United Kingdom.

It has highly complementary products, geographies, manufacturing competencies and is similar in structure to Dechra Veterinary Products.

	Book value £'000	Provisional fair value £'000
Recognised amounts of identifiable assets acquired and liabilities assumed
Financial assets
Property, plant and equipment	9,454	9,454
Trade and other receivables	6,600	6,596
Inventory	12,795	12,507
Cash & cash equivalents	3,989	3,989
Identifiable intangible assets	14,620	78,703
Financial liabilities
Trade and other payables	(8,354)	(8,825)
Employee benefit obligations	(341)	(341)
Current tax	(1,041)	(1,690)
Deferred tax	(858)	(20,531)
Total net identifiable assets	36,864	79,862
Goodwill		36,348
Total consideration		116,210
Satisfied by:
Cash		116,210
Total consideration transferred		116,210
Net cash outflow arising on acquisition
Cash consideration		116,210
Less: cash and cash equivalent balances acquired		(3,989)
		112,221

The fair values shown above are provisional and may be amended if information not currently available comes to light. The fair value of the financial assets includes trade receivables with a fair value of £5,669,000.

The provisional fair value adjustments principally relate to harmonisation with Group IFRS accounting policies, including the application of fair values on acquisition, principally the recognition of product rights in accordance with IFRS 3.

The goodwill of £36,348,000 arising from the acquisition consists of the synergies, assembled workforce, technical expertise and increased geographical presence in Germany and the Netherlands.  None of the goodwill is expected to be deductible for income tax purposes.

Acquisition related costs (included in operational expenses) amounted to £2,315,000. Eurovet's results are reported within the European Pharmaceuticals segment. 

Eurovet contributed £7,127,000 revenue and £852,000 to the Group's underlying pre-tax profit for the period between the date of acquisition and the balance sheet date.  If the acquisition of Eurovet had been completed on the first day of the financial year, Group revenue for the period would have been £500,775,000 and Group underlying pre-tax profit would have been £40,898,000.

Acquisition of Genitrix Limited

On 1 December 2010, the Group acquired 100% of the share capital of Genitrix Limited.

The acquisition of Genitrix Limited, a veterinary pharmaceuticals company based in Billingshurst, UK,

is consistent with our strategy to grow our domestic and international pharmaceutical business.

	Book value £'000	Fair value £'000
Recognised amounts of identifiable assets acquired and liabilities assumed
Identifiable assets
Intangible assets	184	184
Property, plant and equipment	27	23
Trade and other receivables	326	326
Inventory	217	217
Cash and cash equivalents	59	59
Identifiable intangible assets	-	5,596
Identifiable liabilities
Trade and other payables	(318)	(318)
Deferred tax liabilities	(36)	(1,546)
Net identifiable assets	459	4,541
Goodwill		1,845
Total consideration		6,386
Satisfied by:
Cash		5,586
Contingent consideration arrangement		800
Total consideration transferred		6,386
Net cash outflow arising on acquisition
Cash consideration		5,586
Less: cash and cash equivalent balances acquired		(59)
		5,527

The fair value of the financial assets includes trade receivables with a fair value of £290,000.  The fair value adjustment in relation to intangible assets recognises product rights in accordance with IFRS 3.

The goodwill of £1,845,000 arising from the acquisition consists of the assembled workforce and associated technical expertise. None of the goodwill is expected to be deductible for income tax purposes.

The contingent consideration arrangement, which has been reassessed between the date of acquisition and the year end and remains unadjusted, requires payment of £800,000 to be paid on the achievement of specific milestones. An amount of £500,000 was paid during the year ended 30 June 2012 leaving a remaining potential payment of £300,000.

Acquisition related costs (included in non-underlying operating expenses) amounted to £108,000.

Acquisition of DermaPet Inc.

On 22 October 2010, the Group acquired 100% of the share capital of DermaPet Inc., a Florida based business which develops and markets a range of dermatological preparations, including shampoos, conditioners and ear products, for the US and overseas companion animal markets. These veterinary products are marketed and distributed through the same channels as Dechra's current US product portfolio.

The acquisition of DermaPet Inc. increases Dechra's US presence and complements its EU range in this key strategic therapeutic category.

	Book value £'000	Fair value £'000
Recognised amounts of identifiable assets acquired and liabilities assumed
Identifiable assets
Trade and other receivables	1,084	1,084
Inventory	384	384
Identifiable intangible assets	-	38,909
Identifiable liabilities
Overdraft	(1)	(1)
Trade and other payables	(216)	(216)
Net identifiable assets	1,251	40,160
Goodwill		326
Total consideration		40,486
Satisfied by:
Cash		27,519
Deferred consideration		1,163
Contingent consideration arrangement		11,804
Total consideration transferred		40,486
Net cash outflow arising on acquisition
Cash consideration		27,519
Add: bank overdraft		1
		27,520

The fair value of the financial assets includes trade receivables with a fair value of £1,076,000.  The fair value adjustment in relation to intangible assets recognises product rights in accordance with

IFRS 3.

The goodwill of £326,000 arising from the acquisition consists of the assembled workforce and increased geographical presence in the US. The goodwill and identified intangibles are expected to be deductible for income tax purposes.

The deferred consideration arrangement requires payments of US$1,000,000 to be paid on the second and fourth anniversaries of the completion date. The contingent consideration arrangement requires that if DermaPet Inc. achieves revenue in excess of US$15,000,000 in any rolling 12 month period commencing on the first anniversary of completion and ending on the sixth anniversary of completion, contingent consideration of US$15,000,000, which has been reassessed between the date of acquisition and the year end and remains unadjusted, will become payable. If revenue on the same criteria exceeds US$20,000,000, a further US$5,000,000 will become due.

Acquisition related costs (included in non-underlying operating expenses) amounted to £585,000.

23.      Other Information

The financial information set out above does not constitute the Company's statutory accounts for the years ended 30 June 2012 or 2011 but is derived from the 2012 accounts. Statutory accounts for 2011 have been delivered to the Registrar of Companies and those for 2012 will be delivered in due course. The Auditor has reported on those accounts; the report was (i) unqualified, (ii) did not include references to any matters to which the 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.

24.     Preliminary Statement

This Preliminary statement is not being posted to Shareholders.  The Report & Accounts for the year ended 30 June 2012 will be posted to Shareholders shortly.  Further copies will be available from the Company's Registered Office: Dechra House, Jamage Industrial Estate, Talke Pits, Stoke on Trent,
ST7 1XW.  Email: [e-mail].  Copies are also available on the Company website www.dechra.com.

25.     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 2012.  Certain parts of that Report are not included with this announcement.

We confirm to the best of our knowledge:

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

b)       the management report, which comprises the Directors' Report, includes a fair review of the development and performance of the Business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

Approved by the Board and signed on its behalf by:

Ian Page	Simon Evans
Chief Executive	Group Finance Director
4 September 2012

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.

Appendix

Dechra - Key Products and Specialisations:

Dermatology

Dermatology represents approximately 20% of veterinarians' clinical time and is currently a major focus area for the industry.  Best practice and management techniques look to adopt more topical products, as opposed to oral treatments, with the aim of utilising antibiotics more appropriately.  Dechra's product portfolio, with its range of licensed and non-licensed topical products, is well positioned for this approach.

Canaural^® was first licensed in 1975 and is still the leading first line treatment for otitis externa in cats and dogs in several EU territories. Canaural, which is now registered in 27 countries, can also be used in conjunction with our leading ear cleaning product CleanAural^®.

Fuciderm^®, licensed in 1995, is the only licensed product for the treatment of surface pyoderma in dogs, such as acute moist dermatitis and intertrigo. It is a key product within our dermatology range, selling into 23 countries.

Malaseb^® was first licensed in 1996 and is still the market leading medicated shampoo for cats and dogs. It is used to treat skin diseases caused by Malassezia and staphylococcal infections.

Animax^®, licensed for the treatment of skin conditions in dogs and cats, is only approved in the United States.  The marketing rights for this product were acquired in May 2007.

DermaPet^®, acquired in October 2010, is a range of shampoos, conditioners and ear products to treat numerous skin and ear conditions in dogs and cats.  Key brands are Triz, MalAcetic and Malaket.

Endocrinology

Endocrine disorders are also a key focus for the business with a number of licensed products treating a range of chronic diseases. The three leading brands are Vetoryl, Forthyron^® and Felimazole^®.

Vetoryl is a novel product for the treatment of Cushing's syndrome (excess cortisol or hyperadrenocorticism) in dogs.  It is marketed internationally and is the only recognised licensed efficacious veterinary product for the treatment of Cushing's syndrome around the world.

Forthyron is licensed to treat the most widely recognised endocrine disorder, canine hypothyroidism.  It is the only mutually recognised levothyroxine treatment in Europe and is marketed in all the major European countries.

Felimazole was the first veterinary licensed product for the treatment of feline hyperthyroidism.  Originally licensed in the UK in 2002, Felimazole was then licensed in the EU in 2005, the US in 2009 and has subsequently been approved in Canada.

Equine Medicine

The Group has a wide range of licensed products supporting the equine veterinarian. The leading product with the highest sales is Equipalazone^® which is licensed in five major EU countries.

Equipalazone was first licensed in a sachet presentation in 1972 and subsequently in a paste and injection.  It continues to be the leading non-steroidal anti-inflammatory drug (NSAID) for the treatment of musculoskeletal disorders, such as lameness arising from acute and chronic laminitis in horses.

Equidone^® Gel was approved in 2010 for the treatment of fescue toxicity in horses.  This niche product is targeted specifically at the USA market.

HY-50 is used for intra-articular and intravenous treatment of lameness in horses caused by joint dysfunction.  The acquisition of this product strengthened Dechra's position in equine pain management in several major European territories.

Ophthalmology

Ophthalmology is an area of veterinary medicine where we have a number of leading products including licensed pharmaceuticals, unlicensed care products and instruments.

Fucithalmic^® Vet, licensed in 1993, is the only licensed product available for the treatment of conjunctivitis associated with staphylococcal infections.  It is highly effective because of its unique sustained release formulation that ensures prolonged retention within the eye.  It is currently licensed in 21 countries.

Additionally we market a range of ophthalmic and otic products in the USA, the long term marketing rights for were acquired in May 2007.  There are six products in the range, with the majority being the only veterinary licensed products in the American market.

Critical Care

Dechra has a wide range of products that support emergency medicine including licensed pharmaceuticals, wound treatments, consumables and instruments all predominantly sold in the UK. The leading range of products is the Vetivex^® brand.

The Vetivex range of infusion fluids are licensed for the treatment of dehydration.  They are widely used to meet normal fluid and electrolyte requirements when fluids cannot be given orally, such as during surgery.

Sedation and analgesia are major sub-groups of critical care.  Dechra, enhanced by the Eurovet acquisition, markets one of the largest ranges of products in this sector.  The range covers a wide number of species, different degrees of pain intensity management and duration of effect.  Within the range there are a number of unique licenses, Intra Epicaine^®, a local anaesthetic recommended for infiltration, nerve block, intra-articular and epidural anaesthesia in horses, Comfortan^®, the only licensed methadone hydrochloride for analgesia in dogs and Fentadon^®, the only licensed fentanyl for intra-operative analgesia and post-operative pain management.

Libromide^® was approved in 2010 for the UK and mutually recognised in 11 additional territories in 2011/2012.  It is the only licensed product of its type which is used in combination with other pharmaceuticals for the management of canine epilepsy.

Generics

Several generic products are registered within the United Kingdom; this basket of products is marketed under the Dechra Veterinary Essentials^® brand.  A number of products are also registered in Europe; we are in the process of in-licensing and registering additional products to extend our branded generic range within this territory.  The acquisition of Eurovet has significantly strengthened this basket of products with the first differentiated generic of the active principle ingredient, pimobendan, branded Cardisure^®.  Cardisure is a leading treatment for canine congestive heart failure and is marketed throughout Europe.

Farm Animal Antimicrobials

A superior range of antimicrobial treatment products for swine and poultry has been added to the Dechra portfolio through the acquisition of Eurovet.  In a market where there is increased emphasis on reducing the usage of antibiotics in the farm animal sector, it is essential that reliable and effective products are available to veterinarians to support them in the prudent use of antibiotics.  The Solustab^® range has been specifically developed to meet this need and is renowned for its high level of solubility leading to a reliable and stable product when added to drinking water.  This reduces the need for additional enhancing agents widely used by competitor products.

Octacillin^®, marketed since 2003 in the Netherlands, is sold in 15 European countries following approval in 2006 and 2011.  Octacillin is a highly soluble and stable antibiotic powder containing amoxicillin which is added to drinking water in the treatment of diseases in swine and poultry.

Soludox^®, marketed in Benelux since 2002, is a highly soluble antibiotic powder for administration via drinking water and is sold in 16 European Member States as a result of approval for swine and chickens, completed in 2010.  The active ingredient is doxycycline.

Methoxasol^®, is a ready to use liquid medication, which can be easily added to the drinking water of swine and poultry, it has been marketed in the Netherlands since the mid 1990's. Thanks to successful European procedures in 2000, 2009 and most recently in 2012, this highly soluble liquid is marketed in 15 Member States. The active ingredients are sulphamethoxasol and trimethoprim, a proven synergistic combination for antimicrobial effectiveness.

Cyclospray^® is the leading antibiotic spray treatment in Europe for claw/hoof infections, interdigital dermatitis (foot rot) in sheep and digital dermatitis in cattle.  It is widely used in the prevention of infection of superficial traumatic or surgical wounds in cattle, sheep and pigs.  Cyclospray has been marketed since 2000 in 12 European Member States. The active ingredient is chlortetracycline.

Pet Diets

Dechra has two main cat and dog diet product ranges, both branded Specific, which are sold exclusively through veterinary practices.  Therapeutic diets, which represent 70% of overall diet sales, provide optimum levels of nutrition in areas such as diabetes, arthritis and urinary, kidney, liver and heart problems.  Life stage diets, which represent 30% of diet sales, provide premium quality daily nutrition for healthy dogs and cats.

Care

The Care range comprises unlicensed products which complement our pharmaceutical range.  They are available over the counter within veterinary practices.  The three key products are CleanAural, a non-irritant cleaner suitable for frequent use in ears producing excess wax, Neutrale™, a range of specialist shampoos for skin conditions in dogs, and Lubrithal^®, an eye lubricant for cats and dogs.

 

END

 

 

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