Preliminary Results

RNS Number : 2443S
Dechra Pharmaceuticals PLC
07 September 2010
 



 

Issued by Citigate Dewe Rogerson Ltd, Birmingham

Date: Tuesday, 7 September 2010

 

Dechra® Pharmaceuticals PLC

("Dechra")

An International Veterinary Pharmaceutical Business

Preliminary Results for the year ended 30 June 2010

 

Year ended

June 2010

Year ended

June 2009

 


·      Revenue

£369.4m

£350.0m

+5.5%

·      Adjusted operating profit*

£28.2m

£25.0m

+12.9%

·      Operating profit

£19.9m

£17.7m

+12.4%

·      Adjusted profit before taxation*

£26.1m

£23.4m

+11.3%

·      Profit before tax

£17.7m

£16.1m

+10.1%

·      Adjusted earnings per share*




Basic

29.50p

25.61p

+15.2%

Diluted

29.39p

25.40p

+15.7%

·      Earnings per share




Basic

19.97p

17.27p

+15.6%

Diluted

19.89p

17.13p

+16.1%

·      Dividend




Final

7.20p

6.10p

+18.0%

Total

10.50p

9.10p

+15.4%

·      Net borrowings

£6.7m

£15.5m

 

 


·      Solid growth in revenue and profitability

 

·      Increased investment in product pipeline of 35.9%

 

·      Strong cash flow - cash conversion rate of 100.8%

 

·      Significant reduction in net borrowings - down from £15.5 million to £6.7 million

 

·      Dividend increase of 15.4%

 

* adjusted for amortisation of acquired intangibles and exceptional costs.

 

Enquiries:


Ian Page, Chief Executive


Simon Evans, Group Finance Director

Fiona Tooley

Dechra Pharmaceuticals PLC

Keith Gabriel

Today: +44(0) 207 638 9571

Citigate Dewe Rogerson

Mobile: + 44(0) 7775 642222 (IP) or

Today: +44(0) 207 638 9571

Mobile: + 44(0) 7775 642220 (SE)

Mobile: +44(0) 7785 703523 (FMT) or

Thereafter: +44(0) 1782 771100

Mobile: +44(0) 7770 788624 (KG)

www.dechra.com

Thereafter: +44(0) 121 362 4035

corporate.enquiries@dechra.com




-2-

 

Dechra Pharmaceuticals PLC

Preliminary Results for the year ended 30 June 2010

 

STATEMENT BY THE CHAIRMAN, MICHAEL REDMOND

 

Introduction

I am pleased to report the Group has continued to deliver against its clear strategy and has performed solidly with increases in revenue and profitability.

 

We have increased investment in our product pipeline and have continued to strengthen our international businesses which, combined with our established infrastructure, will ensure growth is maintained in the future.

 

Financial Highlights

Group revenue increased 5.5% from £350.0 million to £369.4 million.

 

Adjusted operating profit increased by 12.9% to £28.2 million (2009: £25.0 million).  Adjusted profit before taxation rose 11.3% to £26.1 million (2009: £23.4 million).  Operating profit after deducting exceptional costs and amortisation of acquired intangibles was £19.9 million (2009: £17.7 million).  Profit before taxation on the same basis was £17.7million (2009: £16.1 million).

 

Adjusted basic earnings per share was 29.50 pence, up 15.2% from the 25.61 pence achieved in 2009.  Earnings per share after exceptional costs and amortisation of acquired intangibles was 19.97 pence (2009: 17.27 pence).

 

Total cash investment in product development was £5.6 million (2009: £4.2 million), of which £4.7 million was charged to the income statement (2009: £3.4 million).  In addition, a payment of £418,000 (2009: £470,000) was made to acquire technology for our product development programme.

 

During the year, Group cash flow was strong with cash flow from operations being 134.2% of operating profit (2009: 156.0%).  This figure was 100.8% (2009: 112.5%) when amortisation of acquired intangibles is added back. Group net borrowings were reduced by £8.8 million in the year from £15.5 million at 30 June 2009 to £6.7 million at 30 June 2010. The Group has committed bank facilities totalling £47.5 million; £10 million of which is renewable on 30 September 2010.

 

Net debt to EBITDA on an adjusted basis was 0.22 times (2009: 0.57 times).  Interest cover on adjusted operating profit was 13.2 times (2009: 16.0 times).

 

Dividend

In line with our progressive dividend policy and our confidence in the business, the Directors are recommending an increase in the final dividend to 7.20 pence per share (2009: 6.10 pence per share).  This, together with the interim dividend of 3.30 pence per share (2009: 3.00 pence per share), makes a total dividend for the year of 10.50 pence per share (2009: 9.10 pence per share), a 15.4 % increase.

 

The total dividend is covered 2.6 times (2009: 2.8 times) by profit after taxation but after adding back amortisation of acquired intangibles.

 

The final dividend, which is subject to Shareholder approval at our Annual General Meeting to be held on Friday 5 November 2010, will be paid on 10 December 2010 to Shareholders on the Register at 12 November 2010. The date shares become ex-dividend is 10 November 2010.

 

 

continued…

-3-

 

People

On behalf of the Board and our Shareholders I welcome all new employees to the Group.  I would also like to thank all employees for their hard work, dedication and innovation in contributing to our successful year.

 

Prospects

Although continuing to show growth, most of the markets in which we trade remain competitive with the impact of any future general economic weakness being uncertain.  Despite this, our product development pipeline delivers new products year on year, our international pharmaceutical and diets businesses are delivering good growth and our established UK service business continues to increase its profitability.  We anticipate that in the long-term market growth will return to historic levels.  We therefore remain confident about our future growth prospects.

-4-

 

Dechra Pharmaceuticals PLC

Preliminary Results for the year ended 30 June 2010

 

DIRECTORS' BUSINESS REVIEW

 

Introduction

Against a backdrop of economic uncertainty and a slowdown in the global veterinary markets, Dechra Pharmaceuticals PLC ("Dechra") has once again performed in line with management's expectations and has outperformed the majority of markets in which it trades.  Our continued strong growth can be attributed to the consistent long-term execution of our clear strategy, ongoing innovation, strong effective brands and the dedication and hard work of all the Group's employees.

 

The Business and its Markets

Dechra operates under four segments:

 

-        European Pharmaceuticals which comprises Dechra Veterinary Products Europe ("DVP EU") and Dales® Pharmaceuticals ("Dales");

-        US Pharmaceuticals comprising Dechra Veterinary Products USA ("DVP USA");

-        Product Development; and

-        Services comprising National Veterinary Services ("NVS®") and our laboratories, NationWide Laboratories ("NWL") and Cambridge Specialist Laboratory Services ("CSLS").

 

The business employs 1,029 people, operates out of 11 countries and exports products globally.

 

The Group's strategy is to:

 

-        sustain growth from our core businesses;

-        deliver medium to long-term growth through the development, organically and by way of in-licensing and acquisition, of our branded veterinary pharmaceutical portfolio of both novel and generic products;

-        formulate and develop specialist pet diets; and

-        license and market key products into international markets.

 

Our branded products business, DVP, is unique in having its sole area of specialisation in companion animal products; our product development pipeline is focused solely on providing products for dogs, cats and horses, the major species within this category.

 

Our Service businesses in the UK operate in the companion animal, equine and livestock sectors.

 

The veterinary market for companion animal products has grown strongly over the last ten years, although growth in the last 18 months has slowed reflecting current economic trends.  Prevailing growth in the UK veterinary market, which still represents the majority of Dechra's overall sales, has over the years consistently outperformed and still remains ahead of the Retail Price Index.

 

 

 

 

 

 

 

 

 

continued…

-5-

 

Veterinary care is the fastest growing sector of the pet industry, albeit at a lower rate than historically.  There is currently minimal volume growth; however, inflation remains at 2% - 3%.  The key drivers within the companion animal market are the increasing medical and surgical capabilities of veterinary surgeons and increased life expectancy of pets.  The consumers' passion for their animals has maintained growth within the marketplace as animal welfare is one of the last areas of a household budget to be sacrificed.

 

The North American, Western European and Japanese markets are the most established companion animal markets in the world, with pet ownership in over 50% of households and with a high level of spend per animal.  The following chart provides details of companion animal populations in the markets in which Dechra currently has a sales and marketing operation:

 

Companion Animal Populations in Dechra Territories

Territory

Dogs (millions)

Cats (millions)

Horses (millions)

USA

75

82

10

France

8

10

1

UK and Ireland

8

8.4

1

Spain

5.5

4

0.6

Scandinavia

2.1

3.1

0.5

Netherlands

2

4

0.4

 

In addition to its established trading presence in Europe and the USA, the business currently sells products in other countries through marketing partners and has new products in registration in several other important companion animal markets, the most significant of which are detailed below:

 

Companion Animal Populations in Important Non-Subsidiary Countries

Territory

Dogs (millions)

Cats (millions)

Horses (millions)

Japan

12.5

12

0.1

Italy

6.9

6.1

0.3

Canada

6

8

1

Germany

5.3

7.9

1

Australia

3.7

2.4

1.2

 

Product Development

Strategy

The Group focuses on solid organic growth within all its businesses.

 

The key strategic aim, which has delivered excellent growth for several years and will continue to provide significant revenues in the future, is through the development and acquisition of our own branded veterinary product portfolio of novel and generic pharmaceuticals and specialist pet diets and the marketing of these key products into international markets.  Our product development is concentrated in two areas:

 

-        Prescription only veterinary medicines ("POMs") for dogs, cats and horses.  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 and not research based.

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

 

 

continued…

-6-

 

Development Achievements

There has been a marked increase in the activity within our Product Development Department during the year.

 

We have completed several, and implemented many new, licensing and registration projects and have also advanced the development of novel products, new generic pharmaceuticals and specialist pet diets.  Furthermore, several new opportunities have been evaluated as we continually strengthen our product portfolio and pipeline.

 

The key achievements have been:

 

-           mutual recognition of Malaseb® in 17 countries in November 2009;

-           mutual recognition of Urilin® in 20 countries in April 2010;

-           the approval of Clavudale®, a generic antibiotic, in the UK in January 2010.  This product has now been submitted for mutual recognition in Europe; and

-           the approval of Felimazole® in Canada in August 2009.

 

We have also successfully implemented the regulatory changes required to bring Felimazole sales back in-house and into Dechra livery following the termination of the license agreements across Europe.

 

The Vetoryl® dossier has been accepted by the Japanese authorities and we are hopeful that the product will reach the market in early 2011.  In Japan the product will be branded Adrestan.

 

Following last year's successful introduction of innovative diets within our Specific® range, two new second generation therapeutic diets for dogs have been launched: Specific CIW for digestive support in December 2009 and Specific CKD for kidney and heart support in March 2010.  Quality, palatability and packaging improvements have also been made.

 

Dechra has a proven track record of consistently delivering new products year on year.  We continue to identify and evaluate new opportunities and have continued to make progress on the majority of products in development.  As previously notified to Shareholders, to support this burgeoning pipeline, product development expense has increased by 35.9% in the financial year being reported from £3.4 million to £4.7 million.

 

Product Pipeline

Significant progress has been made on the development of our novel product portfolio. 

 

Equidone®, an equine endocrine product, is now only awaiting final approval by the FDA.  The product is targeted for marketing in time to take advantage of its peak sales opportunity in spring next year.

 

Priority has been given to an equine lameness product with the efficacy trials making excellent progress with good results.  We have recently received notification that the patent application for this product has been successful in Europe.

 

Following a small field-based trial of an equine respiratory product, we have decided to terminate this project due to inconclusive data and the resultant significant increase in the number of horses which would need to be tested and the accompanying unacceptable costs which would be incurred in a clinical trial.

 

We have, however, added an additional feline gastrointestinal pharmaceutical product to the novel products development list and are at an advanced stage of creating a suitable formula to commence trials.

 

continued…

-7-

 

The pharmaceutical pipeline has been enhanced further by the signing of a number of development and licensing agreements with:

 

-           Piedmont Pharmaceuticals LLC to develop soft chew technology for a pharmaceuticals product;

-           Peptech to extend our marketing agreement for Ovuplant® into the United States and Canada; and

-           A major European generics company to in-license two approved veterinary generics.

 

The development of our Specific dog and cat diet range has made excellent progress; quality, palatability and packaging improvements are an ongoing process.  Additionally, the whole feline dry range is being prepared for re-launch with improved palatability.  We have two novel products at an advanced stage of development and are also working on a full range of both feline and canine organic products which are targeted to be launched this calendar year.

 

The following tables outline the major in-house development projects:

 

New Chemical Entities

 

Species

Therapeutic Category

Manufacturing

Safety

Efficacy

Regulatory

Target Launch Date

Equine

Endocrine

 

100%

100%

100%

95%

2010

Equine

Lameness

 

100%

25%

75%


2012

Canine

Endocrine

 

75%


25%


2013

Feline

Gastrointestinal

 

75%




2014

Feline

Endocrine

 

50%




2015

Equine

Respiratory

 

Failed in efficacy evaluations

 

Generics / Line Extensions

 

Species

Therapeutic Category

Manufacturing

Bioequivalence

Regulatory

Target Launch Date

Canine/Feline

Antibiotic

 

100%

100%

Launched UK. 

2011

Canine

Urinary Disease

 

2010

Canine

Pain Management

 

100%

100%

100%

2010

Canine/Feline

Pain Management

 

75%



2013

Canine

Dermatological

 

50%



2013

Canine

Cardiac

 

25%



2014

Feline

Endocrine

 

25%

25%


2013

 

 

 

 

 

 

 

continued…

-8-

 

Diets

 

Species

Product

Project

Target Launch Date

Feline

 

Full range

 

Improved palatability

Q1, 2011

Canine/Feline

 

Full range

 

New range of organic wet diets

Q4, 2010

Canine

 

Novel

 

New therapeutic category dry diet

Q3, 2011

Feline

 

Gastrointestinal

 

Second generation dry diet

Q4 2011

 

European Pharmaceuticals

This segment comprises DVP EU and Dales Pharmaceuticals.

 

Dechra Veterinary Products EU

DVP EU, with regional offices in several European countries and its head office and logistics in Uldum, Denmark employs 206 people.  The business markets and sells our own branded, licensed veterinary products within ten European countries and manages the relationships with our worldwide marketing partners.

 

Sales Structure

 

France

19

Netherlands

7

UK

22

Norway

3

Spain

9

Finland

2

Denmark

4

Portugal

1

Sweden

4

Eire

2

 

There has been a considerable amount of activity throughout the year.  Our UK pre-wholesale warehouse in Shrewsbury was closed in February 2010 with the products being integrated into our central European warehouse in Denmark.  A new warehouse management IT system has been successfully implemented at this facility to further improve our stock management and distribution capabilities.

 

We have consolidated our distribution agreements in Italy, have further strengthened our partnership in Germany and are in the process of restructuring our Dutch business to create a Benelux unit which will take responsibility for our pharmaceutical and diets sales into this region.  We have commenced the process of implementing an ERP system across our European subsidiaries which is targeted to go live within two years.

 

There has been a major re-launch of the DVP websites which now provide easily accessible data and information on all of our products, including clinical data sheets, client information, COSHH data sheets, technical specifications and marketing information.  We have also developed online continuing professional development ("CPD") programmes for veterinarians.  Our Fluid Knowledge Programme, launched in April 2009, has proved very successful with over 6,000 veterinary professionals registering.  This has played a major part in increasing sales of our Vetivex® range.  An online Felimazole CPD programme is now operational and a programme to further enhance this learning medium into our other key therapeutic categories has been instigated.

 

 

 

 

 

 

continued…

-9-

 

Pharmaceuticals

European pharmaceutical sales increased by 8.4% over the period.

 

There were two major pharmaceutical launches within the year:

 

-        Malaseb was launched across all territories following its approval through the Mutual Recognition procedure; and

-        Felimazole was re-launched into The Netherlands, France, Spain, Germany and Portugal under the Dechra label following the termination of our major European marketing contract in December 2009.

 

We have also launched a new strength 2.5mg presentation across these territories.  An agreement has been made for the early termination with our marketing partner in Scandinavia which will allow for both Vetoryl and Felimazole to be marketed through our own subsidiaries from 1 January 2011.  We have also terminated an agreement which was in place in Germany, Belgium and Italy to bring in-house a number of other products which were acquired through our acquisition of VetXX® in January 2008.

 

All major product categories have shown growth throughout the year.  We have reversed the downward trend reported in our Half Yearly Report on Canaural® and are now seeing growth within the year.  We have also reversed the position on Vetivex seen last year, increasing market share from 35% to 47%.  Our established product, Equipalazone®, has seen double digit growth and our dermatological products continue to perform well.

 

We have continued to develop relationships with our international partners with whom we are working closely to increase our sales across non-subsidiary territories.  We have provided expertise in both Canada and Australia to ensure the successful launch of Vetoryl into these countries.

 

Diets

Sales of both our therapeutic and life stage pet diets have outperformed the market; therapeutics growing at 12.7% and maintenance diets, including treats, growing at 12.2%.  This success can be attributed to new product launches, competitive pricing, a veterinary exclusive marketing position and a focused sales and marketing effort.

 

The launch of the new best in class diets, Specific CID and Specific CKD, have proved to be successful.  We have also continued to focus closely on marketing Specific CJD our joint support diet which was launched at the end of the previous financial year.

 

The complete Specific range has been launched into Germany through our partner, Selectavet.  

 

We have been successful in transferring all the canine dry diets to a new manufacturer in Sweden and are now focusing on the transfer of the feline diets into this facility which will be completed by the end of the 2010 calendar year.  This manufacturing partner has worked closely with us to ensure the successful launch of our new products and to accelerate our development capabilities.  This partnership also offers numerous other benefits including improved quality control and modern, flexible packaging capabilities.

 

 

 

 

 

 

 

 

continued…

-10-

 

Dales

Dales, located in Skipton, England, employing 206 people, is a fully Medicines and Healthcare Regulatory Agency ("MHRA") approved pharmaceutical manufacturer with multi-competence in both scale and dose form.  Dales manufactures the vast majority of our own branded licensed pharmaceutical products, which are marketed through DVP, but also derives approximately 50% of revenues from third party toll manufacture, predominantly for human pharmaceutical companies.  This is Dechra's only significant source of revenue not derived from the veterinary market.

 

Dales has had another excellent year which is reflected in the continued increase in production of our own licensed products, 11% growth from contract manufacturing and over £800,000 worth of new annualised contract business gained during the year.  We have also continued with our product rationalisation programme and are now in a position to either increase prices or to cease contracts which have low value return or have been identified as inefficiently manufactured products.  This can be demonstrated by an average increase in unit added value of over 12% and through significant gains in productivity.

 

Dales are in the second phase of staff training in lean manufacturing techniques.  Lean techniques have been applied to the business and have already brought about significant improvements in working practices and efficiencies, an example of its success being the year on year reduction of the average processing time to manufacture a batch of product.

 

Fuciderm®, a product acquired during the VetXX acquisition in 2008, which was previously outsourced, has now been fully integrated into Dales on a new high speed production line.  Canaural, another major product from the acquisition, is now at the stage of planning and preparation for transfer into Skipton.

 

The Dales Management team has taken control of our Danish manufacturing unit and have implemented the Oracle manufacturing IT system into this site to enable better production control and improve management information.

 

Dechra's Product Development and Regulatory team have submitted a line extension for Vetoryl to the US FDA with Dales named as the manufacturer.  This is the trigger for an FDA approval inspection of the site for solid oral dosage forms.  A mock audit has been completed and we believe we are on schedule to demonstrate our compliance to all Good Manufacturing Practice ("GMP") regulations.

 

US Pharmaceuticals

This segment comprises DVP USA.

 

Dechra Veterinary Products USA

This business employs 18 people, 10 of whom are in sales.  The financial, logistics and HR functions are currently outsourced.

 

US pharmaceutical sales increased by 37% over the period.  The main focus of activity has been on establishing Vetoryl as the treatment of choice for Cushing's Disease.  Sales of US$6.6 million were achieved in the period, as we continue to gain strong market penetration.  This is in a market where there is the continued sale of illegally compounded Vetoryl and the continued use of the unlicensed treatment, Lysodren.  Approximately 9,900 clinics, equivalent to over 40% of companion animal practices, have now purchased the product and over 4,500 veterinarians have attended educational presentations.  In addition, www.dechra.CE.com, has been developed to provide ongoing education on the diagnosis and treatment of Cushing's Disease.

 

 

continued…

-11-

 

Growth in the USA and Canada is marginally below that of the European territories, however it is following the same trend.  We therefore remain confident of our long-term targets for this unique product.

 

Towards the end of 2009 Felimazole was launched into the American market.  Initial take up of the product has been promising as we educate veterinarians in the merits of prescribing our licensed product instead of human generics which are currently used.

 

Supply problems with our dermatological, ophthalmic and otic ranges, which are outside of our control, have detracted from the overall sales growth in the US.  Our sterile ophthalmic products, with annual sales of over US$2.0 million, have been taken off the market following the closure of our suppliers' sterile facility and we are in the process of transferring these products into a new contract manufacturer.  We have also had supply problems with Animax® cream and Vetromax throughout the year.  We currently have little control over these products as we only have a long-term marketing agreement and are not the license holders.  We are, however, in negotiations to address this issue.

 

Our equine portfolio will be significantly enhanced in 2011 with the targeted launch of Equidone and with the re-launch of Ovuplant following the acquisition of the marketing rights from Peptech.

 

Services

This segment comprises National Veterinary Services ("NVS") and our laboratories, NationWide Laboratories ("NWL") and Cambridge Specialist Laboratory Services ("CSLS").

 

NVS

NVS, located in Stoke-on-Trent, England, employing 490 people, 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.  This business competes with two major full line competitors on the UK mainland, Centaur Services and Dunlops, both of which are under American ownership.

 

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 which are branded Vetcom®.  Vetcom's principle objective is to collect orders electronically; 85% of NVS's orders arrive automatically with no human input required.  NVS distributes to 1,800 customers daily utilising its own fleet of vans and HGVs.  The centralised inventory in Stoke-on-Trent is picked and packed throughout the afternoon and evening and then distributed overnight to nine trunking depots by HGVs.  Van drivers are then employed locally at these depots who distribute the goods to our customers.

 

Although the National Office of Animal Health ("NOAH") reported that the veterinary pharmaceutical market was flat within the year, the overall veterinary wholesale market grew by 4.6%.  NVS's growth in the period of 3.6% was below this figure due to our underweight market share of low margin internet pharmacy and agricultural merchant business.  NVS maintained its operating margin throughout the year at the same level achieved in the financial year ended 30 June 2009.  This excellent cost control and improved operational efficiencies resulted in a solid performance from the business.

 

 

continued…

-12-

 

A newly appointed Operations Director identified various additional operational efficiencies and has also instigated plans for further changes including modifications to shift patterns which should ensure continued operational prudence in the forthcoming year.  The renewal of our Transit and trunker fleet has also resulted in improvements in fuel efficiency.  The planned expansion of the NVS facility has been shelved temporarily as we have found improved methods of utilising existing available space.

 

NVS continues to focus on high levels of customer service with our service level consistently achieving over 99%.  The vast majority of our dedicated vehicle fleet also managed to make deliveries to schedule throughout the bad weather in January when our competitors often failed.  This was very well received by our customers.

 

We are at the final stage of planning and testing for a new ERP system.  We intend to "go live" prior to the end of the current financial year ending June 2011.

 

Laboratories

NWL operates out of three UK locations, Poulton-le-Fylde, Leeds and Swanscombe and employs 70 people.  As first referral veterinary laboratories, they provide histology, pathology, haematology, chemistry and microbiology services to veterinary practices.  Whilst a certain amount of simple chemistry is performed at veterinary practices, nearly all veterinary practices will outsource more advanced analytical tests, often requiring expert interpretation of results. 

 

CSLS, located in Sawston, England employs seven people.  It operates as a first and second referral laboratory, with a key area of expertise being endocrinology.  The second referral work, i.e. providing services for NWL and some of NWL's competitors, is mainly derived from a key area of specialisation in radio-immuno assays.  The business also provides precise assays which support the dosage regimes and patient monitoring of our key products, Vetoryl and Felimazole.

 

Sales across our laboratories were 1.6% down reflecting a significant account loss due to a competitor cross-selling in-house analysers with external laboratory work.  There were, however, a number of achievements resulting in the year ending on a positive note.  We have secured the rights to market a Fuji in-practice chemistry analyser which should generate additional revenue and improve our competitive position.  We have also successfully retained our largest account, the PDSA, for two more years following a competitive tender.  Operationally, we have unified the IT system across two of our major sites, Leeds and Poulton, and have also maintained our UKAS ISO17025 status at these two sites.

 

CSLS has been relocated in the year into a new custom-built laboratory which provides additional space, improved facilities and better working conditions.

 

Human Resources

As the Group continues to grow it is important that the leadership capability is strengthened through the continuous development of its most senior people.  To this effect throughout 2009 we embarked upon a specific programme of leadership development, where each of the senior managers underwent a 360 degree appraisal of their leadership abilities together with an analysis of their personal profiles.  This was followed by a 12 month individually tailored personal development plan which included access to a personal coach.

 

 

 

continued…

-13-

 

The Group first started benchmarking labour turnover in July 2008 and found that this figure was high, at 30.2%, compared to national averages.  During the following year, managers and supervisors took part in a performance management training programme, gaining the skills needed to better engage their staff.  In April 2010, a Works Council was established at NVS which lead to improved communications and employee engagement.  At the end of June 2010, total labour turnover has almost halved to 15.9%.

 

The stability of the Groups' senior management team is of paramount importance in ensuring strong and consistent leadership in the pursuit of our strategic aims.  To this end only one member of the senior management team, Tony Scott, Operations Director at NVS, has left the business during the financial year, retiring after serving for 16 years.  Replacing him in this role is Steven Williams, who brings with him a wealth of Logistics and Supply Chain experience.  The senior Dechra team has been further strengthened during the year by the appointment of a fourth independent Non Executive Director, Bryan Morton and by the creation of a new role of Group Financial Controller, to which Paul Sandland has been appointed.

 

  

 

 

continued…


-14-

 

Key Performance Indicators

 

Method of Calculation

Target

2010 Performance

Five Year Record

Revenue from key pharmaceutical products

Global revenue from Vetoryl, Felimazole, Equipalazone, Canaural and Fuciderm

To achieve annual revenue growth of at least 10%

An annual growth rate of 24.5% was achieved in the year with particularly strong growth being achieved by Vetoryl, Felimazole and Equipalazone

 

2010: £29.4m

2009: £23.6m

2008: £15.3*

2007: £10.6m*

2006: £8.0m*

* 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%

Revenue growth of 12.5% was achieved in the year.  This growth rate was accelerated by additions to the range

2010: £25.6m

2009: £22.7m

2008: £9.9m*

2007: n/a*

2006: n/a*

* diets range acquired in January 2008

 

Adjusted operating margin before product development cost

Group operating profit before amortisation of acquired intangibles, exceptional items and product development expenditure as a percentage of Group revenue

 

To achieve an adjusted operating margin before product development costs of 10% in the medium-term

2010 showed further progress towards the medium-term goal with adjusted operating margin increasing to 8.9% compared to 8.1% in 2009

2010: 8.9%

2009: 8.1%

2008: 7.1%

2007: 6.1%

2006: 6.0%

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 target was achieved for four of the last five years

2010: 100.8%

2009: 112.5%

2008: 94.2%

2007: 103.3%

2006: 113.7%

Return on capital employed ("ROCE")

Adjusted 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 reduced following the acquisition of VetXX in January 2008.  In the current year, ROCE has improved strongly and is significantly ahead of the pre-tax WACC of the Group of 11%

2010: 22.6%

2009: 19.4%

2008: 23.3%

2007: 37.5%

2006: 34.9%

 

 

 

 

 

 

continued…

-15-

 

Non-Financial

Method of Calculation

Target

2010 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 pharmaceuticals products registered and launched in EU.  Two pharmaceutical products in-licensed.  Two novel diets launched

2010: 6 products

2009: 5 products

2008: 3 products

2007: 3 products

2006: 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 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 16 to 14. None of these accident have resulted in a work related fatality

2010: 0.75

2009: 0.94

2008: n/a*

2007: n/a*

2006: n/a*

* information not collected for these years

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 rate ("MAT") of less than 15%

The target was nearly achieved this financial year, with the MAT rate reducing from 19.81% to 15.88%

2010: 15.88

2009: 19.81

2008: 29.7

2007: n/a*

2006: n/a*

* information not collected for these years

 

 

  

 

 

continued…


-16-

 

Group Performance

During the financial year being reported, the majority of markets that we serve continued to experience a slowdown compared to the previous period.  For example, in the UK, market growth (measured at wholesaler level) fell from 6.8% in the prior twelve-month period to 4.6% this year.

 

Despite this backdrop, the Group performed solidly during the financial year driven, in particular, by continued strong performances from our key products.

 

The following Review focuses on adjusted figures (before amortisation of acquired intangibles and exceptional items) as the Directors believe that these give a clearer indication of underlying performance.

 

Group Revenue increased by 5.5% from £350.0 million to £369.4 million whilst adjusted Operating Profit increased by 12.9% from £25.0 million to £28.2 million.  Adjusted Pre-tax profit was £26.1 million compared to £23.4 million last year, an increase of 11.3%.

 

European Pharmaceuticals

2010

£'000

2009

£'000

Revenue



Own branded pharmaceuticals

44,695

41,221

Diets

25,559

22,716

Third party contract manufacturing

11,524

10,369

Instruments, consumables and equipment

2,859

3,105

Total revenue

84,637

77,411

Adjusted operating profit

21,412

17,964

Adjusted operating margin

25.3%

23.2%

 

Total revenue increased by 9.3% over last year with all core areas achieving good growth.

 

Own branded pharmaceuticals grew by 8.4% compared to last year.  Global performance of our key pharmaceutical brands is discussed later in this Review.

 

Diets performed strongly, growing by 12.5% compared to last year.  During the year there have been additions to the range and our veterinary exclusive stance has served us well.

 

Our contract manufacturing activity continued to expand, increasing by 11.1% in the period with new contract gains contributing to this performance.

 

Revenue from instruments, consumables and equipment fell by 7.9% as the market became increasingly competitive.

 

The adjusted operating margin of this segment showed a pleasing increase from 23.2% to 25.3% as increased leverage of our overseas sales and marketing resource was achieved.

 

In February 2010, the logistics and finance functions of our DVP UK operation in Shrewsbury were integrated into our central logistics and shared service centre in Uldum, Denmark.  The cost was £1.1 million which is shown as an exceptional item.  This rationalisation will yield significant cost savings in the future and, equally importantly, means that we now have a fully integrated European operation.

 

continued…

-17-

 

US Pharmaceuticals

2010

£'000

2009

£'000

Revenue

10,634

7,779

Adjusted operating profit

1,311

815

Adjusted operating margin

12.3%

10.5%

 

Our US operation recorded revenue growth of 36.7% compared to last year.  Revenue from Vetoryl increased from US$2.2 million to US$6.6 million whilst revenue of US$0.6 million was achieved by Felimazole since its US launch in September 2009.  As already indicated, revenue was negatively impacted by supply problems with our dermatological, ophthalmic and otic range due to circumstances beyond our control.

 

Significant investment in personnel and infrastructure has been made since the launch of Vetoryl in January 2009 and this resulted in the cost base increasing by £1.1 million compared to last year.  In addition, there was an amortisation charge of £537,000 (2009: £210,000) in respect of the development costs of US Vetoryl and Felimazole.

 

Because of these cost increases, the operating margin of this segment only increased from 10.5% to 12.3%.  We anticipate operating margin to further improve in the medium-term as our US operation gains critical mass.

 

Key Pharmaceutical Brands

All of our key brands showed growth in the year with our lead product, Vetoryl, achieving revenue growth of 47.8% compared to last year.

 

Felimazole continued to be under competitive pressure in the UK but performed strongly in the rest of Europe.  In most European territories, the product came back in-house from our marketing partner in January of this year.  We also achieved our first US revenues.

 

Equipalazone, which is a mature product, showed extremely strong growth whilst Canaural and Fuciderm, after poor performances in the first half of the year, recovered in the second half

 

Services

2010

£'000

2009

£'000

Revenue



Veterinary wholesaling

280,385

270,772

Laboratories

5,285

5,369

Total revenue

285,670

276,141

Adjusted operating profit

13,103

12,334

Adjusted operating margin

4.6%

4.5%

 

Overall, segment revenue grew by 3.5% with NVS increasing by 3.6% and the Laboratories being flat.

 

With the wholesaling market showing a further slowdown compared to last year and opportunities to enhance gross margin being fewer, NVS controlled costs extremely tightly in order to slightly improve operating margin compared to last year.  Operating costs were, in fact, lower than last year in absolute terms.

 

 

 

 

continued…

-18-

 

The performance of the Laboratories reflects the current market where, due to economic conditions, veterinary practices are sending fewer samples to external laboratories.

 

Product Development

Product development expenditure increased by 35.9% from £3.4 million to £4.7 million. 

 

Unallocated Central Costs

Unallocated Central costs increased from £2.7 million to £3.0 million which includes the strengthening of the Group Finance and Legal and Secretarial functions.

 

Exceptional Items

The following items have been disclosed separately as exceptional items:

 

-           Rationalisation of our logistics and finance functions within our European Pharmaceuticals segment (£1.1 million)

-           Impairment of the carrying value of acquired patent rights and trademarks following the termination of the development of an equine respiratory product (£0.2 million)

-           Payment to in-license technology for our research and development programme (£0.4 million)

 

Net Finance Expense

Although net finance expense increased from £1.6 million in the previous year to £2.1 million this year, last year's figure was flattered by a £1.1 million gain on the              re-translation of foreign currency loans and fair value gains on derivatives.  The net gain this year was just £0.2 million.

 

The interest payable on our bank borrowings was increased by £0.9 million due to a floor and ceiling hedge taken out before interest rates fell to their current low levels.  This hedge unwinds in December 2010 following which the Group will benefit from lower interest rates.

 

Impact of Foreign Exchange

The major foreign currencies that the Group trades in are Danish Krone, Euro, US dollar and, to a lesser extent, Norwegian and Swedish Krone.  The following table shows the impact on revenue and operating profit of movements in foreign currency in the current year:

 

Revenue

Operating Profit


£'000

£'000

European Pharmaceuticals

1,387

(112)

US Pharmaceuticals

228

(117)

 

The Services segment has no significant foreign currency exposure.

 

Taxation

The effective tax rate was 25.8% compared to 29.8% last year and a standard UK rate of 28.0%.  The reasons for the lower than standard charge were the utilisation of trading losses in overseas subsidiaries and adjustments in respect of prior periods.  The total charge in future years is likely to be closer to the standard UK rate.

 

  

continued…

-19-

 

Earnings per Share and Dividend

Adjusted earnings per share increased from 25.61p to 29.50p, a rise of 15.2%.  The Board is proposing a final dividend of 7.20p per share which, when added to the interim dividend of 3.30p per share already paid, gives a total dividend for the year of 10.50p, a 15.4% increase on the 2009 figure of 9.10p.

 

The total dividend is covered 2.6 times (2009: 2.8 times) by profit after tax after adding back amortisation of acquired intangibles.

 

Cash Flow

The cash conversion rate (defined as cash generated from operations as a percentage of operating profit) was 134.2% (2009: 156.0%). When amortisation of acquired intangibles is added back, the cash conversion rate is 100.8% (2009: 112.5%).  This was the fourth year out of the last five that the cash conversion rate measured on this basis has exceeded 100%.

 

Financial Position at the Year End

2010

£'000

2009

£'000

Non-current assets



Intangible assets

80,371

89,565

Property, plant and equipment

7,673

8,040


88,044

97,605

Working capital

21,486

17,548

Current tax liability

(4,105)

(4,756)

Deferred tax liability

(12,496)

(14,184)

Net borrowings

(6,701)

(15,527)

Net assets

86,228

80,686

 

The strong cash flow of the Group has again resulted in a substantial reduction in net borrowings, down from £15.5 million at 30 June 2009 to £6.7 million at 30 June 2010.  Net borrowings at 30 June 2008, following the acquisition of VetXX Holdings A/S, were £27.0 million.

 

As normal, due to the working capital cycle of the Group, we expect net borrowings to increase at the next reporting date of 31 December 2010.

 

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. 

 

The table on the next page highlights the main potential risks to the Group strategy, as identified by the Board, and the controls put in place in order to mitigate the said risks:

  

 

continued…


-20-

 

Strategy

 

Risk

Controls

To sustain growth from our core businesses

The failure of a major customer or supplier

The business unit monitors the financial status of both key customers and suppliers and maintains regular contact with them

·     

Where it becomes evident that issues in relation to manufacturing / supply may arise alternative suppliers are identified and detailed plans drafted which, inter alia, ensure that where a manufacturing transfer is required existing stock is built up in order to avoid/mitigate an out of stock situation

 

All contracts with suppliers and customers are reviewed from both a commercial and legal angle and to ensure that assignment of the contract is allowed should there be a change of control of either of the contracting parties

 

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 which allow the marketing team to position our products defensively and highlight any unique selling points or competitive advantages

 

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

 

Failure to meet regulatory requirements under which we operate thereby disrupting our operations and our product manufacture pipeline / loss of key products due to regulatory changes

The Group always strives to exceed regulatory requirements and ensures that 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

 

Fuel shortage / logistics failure

Particularly in our services division standard operating procedures have been drafted in respect of fuel emergencies / failure of the courier company (the latter in respect of the Laboratories only) 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

 


Loss of key personnel

Succession planning is given consideration by the Board and, where, deemed necessary Key Man insurance is in place

 

The Group HR director has developed and implemented a leadership development course for the senior management team in order to further strengthen the retention of the individuals

 

A competitive benefits package and salary is offered to senior management in order to assist with their motivation and retention

 

To develop veterinary pharmaceutical portfolio

 

Failure of clinical trials

 

Before major efficacy studies are initiated, smaller proof of concept studies are conducted to study the effects of the drug in the target species and for the target indication

 

Pharmacokinetics of the proposed final formulation of the drug are studied in the target species

 

 

To develop specialist diets

Failure to maintain competitive advantage in terms of palatability and nutritional value

 

 

 

 

 

 

Increase in market cost of ingredients

 

Manufacturing being transferred to a new supplier with increased development and quality control procedures

 

Weekly telephone meetings are held with the manufacturing, quality and research & development departments

 

Product prices are reviewed on a regular basis and all new products are evaluated from a technical perspective in order to ensure that these advantages can be utilised to assist in selling the diet products

 

Supplier of ingredients is owned by the biggest producer of cereals in Scandinavia thereby guaranteeing competitive prices

 

 

To license and market key products into international markets

Revenue from recently launched new products failing to meet expectations

The Group ensures that it has detailed market knowledge and retains close contact with customers through its sales teams which are consistently trained to a high standard

 

In respect of all new product launches a detailed marketing plan is established.  Progress against the plan is constantly monitored

 

Alongside the marketing plan the sales team is trained in relation to the new product, its benefits and all available technical information


-21-

 

Consolidated Income Statement

for the year ended 30 June 2010

 


2010

2009



 

 

 

 

 

 

Adjusted

£'000

Amortisation

of acquired

intangibles

and

exceptional

items

(note 5)

£'000

 

 

 

 

 

 

Total

£'000

 

 

 

 

 

 

Adjusted

£'000

Amortisation

of acquired

intangibles

and

exceptional

items

(note 5)

£'000

 

 

 

 

 

 

Total

£'000

 


Note







 

Revenue

 

2

 

369,369

 

-

 

369,369

 

349,964

 

-

 

349,964

Cost of sales


(288,744)

-

(288,744)

(276,292)

-

(276,292)

 

Gross profit


 

80,625

 

-

 

80,625

 

73,672

 

-

 

73,672

Distribution costs


(16,242)

(300)

(16,542)

(15,981)

-

(15,981)

Administrative expenses


(36,193)

(8,024)

(44,217)

(32,720)

(7,303)

(40,023)

 

Operating profit

 

2

 

28,190

 

(8,324)

 

19,866

 

24,971

 

(7,303)

 

17,668

Finance income

3

1,632

-

1,632

3,211

-

3,211

Finance expense

4

(3,766)

-

(3,766)

(4,776)

-

(4,776)

 

Profit before taxation


 

26,056

 

(8,324)

 

17,732

 

23,406

 

(7,303)

 

16,103

Income tax expense

6

(6,619)

2,044

(4,575)

(6,647)

1,847

(4,800)

 

Profit for the year

 attributable to owners

 of the parent


 

 

 

19,437

 

 

 

(6,280)

 

 

 

13,157

 

 

 

16,759

 

 

 

(5,456)

 

 

 

11,303

 

Earnings per share (pence)








Basic

8



19.97p



17.27p

 

Diluted

 

8



 

19.89p



 

17.13p

 

Dividend per share

 (interim paid and final

 proposed for the year)

 

 

 

7



 

 

 

10.50p

 

 

 

 

 

 

 

 

 

 

 

9.10p


-22-

 

Consolidated Statement of Comprehensive Income

for the year ended 30 June 2010

 

2010

£'000

2009

£'000

 

Profit for the period

13,157

11,303

 

Other comprehensive income:



Effective portion of changes in fair value of cash flow hedges

593

(1,423)

Foreign currency translation differences for foreign operations

(1,949)

4,568

Net loss on hedge of net investment in foreign operations

(1,300)

(1,532)

Recycled to intangible assets

-

40

Recycled to income statement

(512)

(256)

Income tax relating to components of other comprehensive income

249

697

Total comprehensive income for the period attributable to owners of the parent

10,238

13,397


-23-

 

Consolidated Statement of Financial Position

 

Note

2010

£'000

2009

£'000

 

ASSETS

 




Non-current assets




Intangible assets

9

80,371

89,565

Property, plant & equipment

10

7,673

8,040

 

Total non-current assets


 

88,044

 

97,605

 

Current assets




Inventories

12

34,819

31,534

Trade and other receivables

13

51,162

47,717

Cash and cash equivalents

14

31,502

26,817

 

Total current assets


 

117,483

 

106,068

 

Total assets


 

205,527

 

203,673

 

LIABILITIES




 

Current liabilities




Borrowings

17

(20,441)

(19,263)

Trade and other payables

15

(64,495)

(61,703)

Current tax liabilities

16

(4,105)

(4,756)

 

Total current liabilities


 

(89,041)

 

(85,722)

 

Non-current liabilities




Borrowings

17

(17,762)

(23,081)

Deferred tax liabilities

11

(12,496)

(14,184)

 

Total non-current liabilities


 

(30,258)

 

(37,265)

 

Total liabilities


 

(119,299)

 

(122,987)

 

Net assets


 

86,228

 

80,686

 

EQUITY




Issued share capital

18

661

656

Share premium account


63,021

62,437

Hedging reserve


(276)

(703)

Foreign currency translation reserve


1,340

4,686

Merger reserve


1,770

1,770

Retained earnings


19,712

11,840

 

Total equity attributable to owners of the parent


 

86,228

 

80,686


-24-

 

Consolidated Statement of Changes in Shareholders' Equity

for the year ended 30 June 2010

 

 

 

 

 

Year ended 30 June 2009

 

 

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 2008

652

62,166

281

1,608

1,770

5,322

71,799

Profit for the period

-

-

-

-

-

11,303

11,303

Effective portion of changes in fair value of

 cash flow hedges, net of tax

 

-

 

-

 

(1,024)

 

-

 

-

 

-

 

(1,024)

Foreign currency translation differences for

 foreign operations, net of tax

 

-

 

-

 

-

 

4,552

 

-

 

-

 

4,365

Net loss on hedge of net investment in

 foreign operations, net of tax

 

-

 

-

 

-

 

(1,290)

 

-

 

-

 

(1,103)

Recycled to intangible assets

-

-

40

-

-

-

40

Recycled to income statement, net of tax

-

-

-

(184)

-

-

(184)

 

Total recognised income and expense for

 the period

 

 

-

 

 

-

 

 

(984)

 

 

3,078

 

 

-

 

 

11,303

 

 

13,397

Dividends paid

-

-

-

-

-

(5,565)

(5,565)

Share-based payments

-

-

-

-

-

780

780

Shares issued

4

271

-

-

-

-

275

 

At 30 June 2009

 

656

 

62,437

 

(703)

 

4,686

 

1,770

 

11,840

 

80,686

 

Year ended 30 June 2010

 








At 1 July 2009

656

62,437

(703)

4,686

1,770

11,840

80,686

Profit for the period

-

-

-

-

-

13,157

13,157

Effective portion of changes in fair value of

 cash flow hedges, net of tax

 

-

 

-

 

427

 

-

 

-

 

-

 

427

Foreign currency translation differences for

 foreign operations, net of tax

 

-

 

-

 

-

 

(2,041)

 

-

 

-

 

(2,041)

Net loss on hedge of net investment in

 foreign operations, net of tax

 

-

 

-

 

-

 

(936)

 

-

 

-

 

(936)

Recycled to income statement

-

-

-

(369)

-

-

(369)

 

Total recognised income and expense for

 the period

 

 

-

 

 

-

 

 

427

 

 

(3,346)

 

 

-

 

 

13,157

 

 

10,238

Dividends paid

-

-

-

-

-

(6,195)

(6,195)

Share-based payments

-

-

-

-

-

910

910

Shares issued

5

584

-

-

-

-

589

 

At 30 June 2010

 

661

 

63,021

 

(276)

 

1,340

 

1,770

 

19,712

 

86,228

 

Hedging Reserve

The hedging reserve represents the cumulative fair value gains or losses on derivative financial instruments for which 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.

-25-

 

Consolidated Statement of Cash Flows

for the year ended 30 June 2010

 

2010

£'000

2009

£'000

 

Cash flows from operating activities



Profit for the period

13,157

11,303

Adjustments for:



Depreciation

1,509

1,477

Amortisation and impairment

7,908

7,427

Gain on sale of property, plant and equipment

-

(33)

Finance income

(1,632)

(3,211)

Finance expense

3,766

4,776

Equity-settled share-based payment expense

817

643

Income tax expense

4,575

4,800

Operating cash flow before changes in working capital

30,100

27,182

(Increase)/decrease in inventories

(3,126)

1,340

Increase in trade and other receivables

(3,833)

(593)

Increase/(decrease) in trade and other payables

3,521

(372)

Cash generated from operations

26,662

27,557

Interest paid

(3,214)

(3,996)

Income taxes paid

(6,124)

(3,227)

Net cash from operating activities

17,324

20,334

Cash flows from investing activities



Proceeds from sale of property, plant and equipment

-

42

Interest received

1,006

2,145

Purchase of property, plant and equipment

(1,243)

(881)

Capitalised development expenditure

(955)

(785)

Purchase of other intangible non-current assets

(523)

(2,010)

Net cash from investing activities

(1,715)

(1,489)

Cash flows from financing activities



Proceeds from the issue of share capital

589

288

Repayment of borrowings

(5,671)

(5,658)

Movement of foreign currency borrowings

456

(3,473)

Dividends paid

(6,195)

(5,565)

Net cash from financing activities

(10,821)

(14,408)

Net increase in cash and cash equivalents

4,788

4,437

Cash and cash equivalents at start of period

26,817

22,219

Exchange differences on cash and cash equivalents

(103)

161

Cash and cash equivalents at end of period

31,502

26,817

 

Reconciliation of net cash flow to movement in net borrowings

Note

2010

£'000

2009

£'000

 

Net increase in cash and cash equivalents


4,788

4,437

Repayment of borrowings


5,671

5,658

New finance leases


-

(248)

Exchange differences on cash and cash equivalents


(103)

161

Retranslation of foreign borrowings


(1,230)

1,821

Other non-cash changes


(300)

(359)

Movement in net borrowings in the period


8,826

11,470

Net borrowings at start of period


(15,527)

(26,997)

Net borrowings at end of period

20

(6,701)

(15,527)


-26-

 

Notes to the Preliminary Results

For the year ended 30 June 2010

 

1.         Status of Accounts

The 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 7 September 2010.

 

2.         Segmental Analysis

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.

 

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

 

The European Pharmaceuticals segment comprises Dechra Veterinary Products EU and Dales Pharmaceuticals. Dales manufactures the vast majority of own branded licensed pharmaceutical products, which are marketed through DVP.  The 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.

 

 

 

 

continued…

-27-

 

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

2010

£'000

2009

£'000

 

Revenue by segment



Services

- total

285,670

276,141


- intersegment

(195)

(266)

European Pharmaceuticals

- total

84,637

77,411


- intersegment

(11,377)

(11,101)

US Pharmaceuticals

10,634

7,779


369,369

349,964

Operating profit/(loss) by segment



Services

13,103

12,334

European Pharmaceuticals

21,412

17,964

US Pharmaceuticals

1,311

815

Pharmaceuticals research and development

(4,666)

(3,433)

Segment operating profit

31,160

27,680




Corporate and other unallocated costs

(2,970)

(2,709)

Amortisation of acquired intangibles

(6,580)

(6,833)

Rationalisation costs

(1,096)

-

Impairment of intangible asset

(230)

-

Payment to acquire technology for research and development programme

(418)

(470)

Total operating profit

19,866

17,668




Finance income

1,632

3,211

Finance expense

(3,766)

(4,776)

Profit before taxation

17,732

16,103




Total assets by segment



Services

103,324

93,385

European Pharmaceuticals

117,741

123,783

US Pharmaceuticals

5,472

5,296

Pharmaceuticals research and development

1,958

2,448

Unallocated

(22,968)

(21,239)


205,527

203,673

Total liabilities by segment



Services

(51,386)

(48,607)

European Pharmaceuticals

(11,954)

(12,422)

US Pharmaceuticals

(557)

(389)

Pharmaceuticals research and development

(567)

-

Unallocated

(54,835)

(61,569)


(119,299)

(122,987)

Additions to intangibles by segment



Services

136

84

European Pharmaceuticals

497

396

US Pharmaceuticals

-

-

Pharmaceuticals research and development

845

888


1,478

1,368

 

 

 

 

 

 

continued…

-28-

 

2010

£'000

2009

£'000

 

Additions to Property, Plant and Equipment by segment



Services

142

300

European Pharmaceuticals

813

724

US Pharmaceuticals

288

33

Pharmaceuticals research and development

-

29


1,243

1,086

Depreciation and amortisation by segment



Services

448

578

European Pharmaceuticals

8,251

7,954

US Pharmaceuticals

182

197

Pharmaceuticals research and development

306

175


9,187

8,904

 

Geographical Information

The following table shows revenue based on the geographical location of customers:

2010

Revenues

£'000

2010

Non-current

assets

£'000

2009

Revenues

£'000

2009

Non-current

assets

£'000

UK

305,992

20,981

300,081

21,550

Rest of Europe

49,451

67,033

39,017

76,024

USA

10,634

30

7,779

31

Rest of world

3,292

-

3,087

-


369,369

88,044

349,964

97,605

 

There are no significant revenue streams other than from the sale of goods.

 

3.         Finance Income

2010

£'000

2009

£'000

 

Recognised in profit or loss



Finance income arising from:



- Cash and cash equivalents

894

1,854

- Derivatives at fair value through profit or loss

-

38

- Loans and receivables

112

291

- Foreign exchange gains

626

1,028


1,632

3,211

 

Finance income arising from cash and cash equivalents and loans and receivables is not at fair value through profit and loss.  Finance income arising from derivatives at fair value through profit or loss relates to fair value gains on forward foreign currency contracts.

 

 

 

 

continued…

-29-

 

2010

£'000

2009

£'000

 

Recognised directly in other comprehensive income



Foreign currency translation differences for foreign operations

(1,949)

4,568

Net loss on hedge of net investment in foreign operations

(1,300)

(1,532)

Amount recycled to income statement*

(512)

(256)

Income tax credit on above

415

298

Recognised in foreign currency translation reserve

(3,346)

3,078


 

2010

£'000

 

2009

£'000

 

Fair value gains/(losses) on interest rate floor and ceiling

593

(1,423)

Income tax (expense)/credit on above

(166)

399

Amount recycled to intangible assets

-

40

Recognised in hedging reserve

427

(984)

Total recognised in other comprehensive income

(2,919)

2,094

 

* Gains and losses previously included in equity as a result of net investment hedging are recycled to the Income Statement to the extent that the hedged item is disposed of.

 

4.         Finance Expense

2010

£'000

2009

£'000

 

Finance expense arising from:



- Financial liabilities at amortised cost

3,365

4,776

- Derivatives at fair value through profit or loss

401

-


3,766

4,776

 

Finance expense arising from financial liabilities at amortised cost is not at fair value through profit or loss.  Finance expense arising from derivatives at fair value through profit or loss relates to fair value losses on forward foreign currency contracts.

 

 

 

 

continued…

-30-

 

5.         Adjusted Operating Profit and Profit before Taxation

Adjusted operating profit is calculated as follows:

 

Operating profit

2010

£'000

2009

£'000

 

Operating profit

19,866

17,668

Amortisation of intangible assets acquired as a result of

 business combinations

 

6,580

 

6,833

Rationalisation costs

1,096

-

Payment to acquire technology for research and development

 Programme

 

418

 

470

Impairment of intangible asset

230

-

 

Adjusted operating profit

 

28,190

 

24,971

 

 

Adjusted profit before taxation is calculated as follows:


 

Profit before taxation

2010

£'000

2009

£'000

 

Profit before taxation

17,732

16,103

Amortisation of intangible assets acquired as a result of

 business combinations

 

6,580

 

6,833

Rationalisation costs

1,096

-

Payment to acquire technology for research and development

 programme

 

418

 

470

Impairment of intangible asset

230

-

Adjusted profit before taxation

26,056

23,406

 

Rationalisation costs relate to the closure of our pharmaceutical warehouse in Shrewsbury and transfer of all pre-wholesale logistics to our facility in Uldum, Denmark.

 

6.         Income Tax Expense

2010

£'000

2009

£'000

 

Current tax

- charge for current year

6,304

5,707


- adjustment in respect of prior years

(92)

(53)

Total current tax expense

6,212

5,654

 

Deferred tax

 

- origination and reversal of temporary differences

 

(1,637)

 

(1,008)


- adjustment in respect of prior years

-

154

Total deferred tax expense

(1,637)

(854)




Total income tax expense in the income statement

4,575

4,800

 

 

  

continued…

-31-

 

Of the current tax expense of £6,212,000 an amount of £2,940,000 (2009: £139,000) was in respect of foreign territories.

 

The tax on the Group's profit before tax differs from the standard rate of UK corporation tax of 28% (2009: 28%).  The differences are explained below:

2010

£'000

2009

£'000

 

Profit before taxation

17,732

16,103

Tax at 28% (2009: 28%)

4,965

4,509

Effect of:



- depreciation on assets not eligible for tax allowances

8

53

- disallowable expenses

48

144

- overseas trading losses

-

39

- under-recovery of deferred tax on share-based payments

40

14

- research and development tax credits

(60)

(200)

- differences on overseas tax rates

(334)

140

- adjustments in respect of prior years

(92)

101

Total income tax expense

4,575

4,800

 

 

Tax asset\(liability) recognised directly in equity

2010

£'000

2009

£'000

 

Deferred tax on effective portion of changes in fair value of cash

 flow hedges

 

(166)

 

398

Corporation tax on net loss on hedge of net investment in foreign

 operations

 

364

 

242

Deferred tax on currency translation

(92)

(15)

Corporation tax on amount recycled to income statement

143

72

Tax recognised in statement of comprehensive income

249

697

Corporation tax on equity settled transactions

313

180

Deferred tax on equity settled transactions

(220)

(43)

Total tax recognised in equity

342

834

 

The Emergency Budget on 22 June 2010 announced that the UK corporation tax rate will reduce from 28% to 24% over a period of four years from 2011.  The first reduction in the UK corporation tax rate from 28% to 27% was substantively enacted on 20 July 2010 and will be effective from 1 April 2011.  This will reduce the Company's future current tax charge accordingly.  If the rate change from 28% to 27% had been substantively enacted on or before the balance sheet date it would have had the effect of reducing the deferred tax liability recognised at that date by £7,000.

  

 

 

continued…

-32-

 

7.         Dividends

2010

£'000

 

2009

£'000

Final dividend paid in respect of prior year but not recognised as a

 liability in that year: 6.10p per share (2009: 5.50p)

 

4,000

 

3,600

 

Interim dividend paid: 3.30p per share (2009: 3.00p)

2,195

1,965

 

Total dividend 9.40p per share (2009: 8.50p) recognised as

 distributions to equity holders in the period

 

 

6,195

 

 

5,565

 

Proposed final dividend for the year ended

 30 June 2010: 7.20p per share (2009: 6.10p)

 

 

4,758

 

 

4,000

 

Total dividend paid and proposed for the year ended

 30 June 2010: 10.50p per share (2009: 9.10p)

 

 

6,953

 

 

5,965

 

In accordance with IAS10 'Events After the Balance Sheet Date', the proposed final dividend for the year ended 30 June 2010 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 2011.

 

The proposed final dividend for the year ended 30 June 2009 is shown as a deduction from equity in the year ended 30 June 2010.

 

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.

2010

Pence

2009

Pence

 

Basic earnings per share



- Adjusted basic

29.50

25.61

- Basic

19.97

17.27

 

Diluted earnings per share


 

 

- Adjusted diluted

29.39

25.40

- Diluted

19.89

17.13

 

The calculations of basic and diluted earnings per share are based

 upon:




£'000

£'000

Earnings for adjusted basic and adjusted diluted earnings per share

 calculations

 

19,437

 

16,759

Earnings for basic and diluted earnings per share figures

13,157

11,303


 

No.

 

No.

Weighted average number of ordinary shares for basic earnings per share

65,896,462

65,431,902

Impact of share options

241,438

550,580

 

Weighted average number of ordinary shares for diluted earnings per

 share

 

 

66,137,900

 

 

65,982,482

 

 

 

continued…

-33-

 

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 2008

19,844

1,816

4,108

2,925

853

64,468

94,014

Additions

-

273

785

310

-

-

1,368

Disposals

-

-

-

(452)

-

-

(452)

Foreign exchange adjustments

1,261

8

21

-

-

4,411

5,701

At 30 June 2009 and 1 July 2009

21,105

2,097

4,914

2,783

853

68,879

100,631

Additions

-

447

955

76

-

-

1,478

Disposals

-

(1)

-

-

-

-

(1)

Foreign exchange adjustments

(609)

(21)

(13)

-

-

(2,120)

(2,763)

At 30 June 2010

20,496

2,522

5,856

2,859

853

66,759

99,345

Amortisation








At 1 July 2008

-

281

356

-

-

3,002

3,639

Charge for the year

-

216

267

111

-

6,833

7,427

At 30 June 2009 and 1 July 2009

-

497

623

111

-

9,835

11,066

Charge for the year

-

257

611

230

-

6,580

7,678

Impairment loss

-

-

-

230

-

-

230

At 30 June 2010

-

754

1,234

571

-

16,415

18,974

Net book value








At 30 June 2010

20,496

1,768

4,622

2,288

853

50,344

80,371

At 30 June 2009 and 1 July 2009

21,105

1,600

4,291

2,672

853

59,044

89,565

At 30 June 2008

19,844

1,535

3,752

2,925

853

61,466

90,375

 

Development costs are internally generated.  All other additions to intangible assets were acquired outside the Group and have been measured at cost or fair value at the time of acquisition.

 

The amortisation charge is recognised within administrative expenses in the income statement.  The impairment loss is recognised within 'exceptional items' in the income statement.

 

 

 

 

 

continued…

-34-

 

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 2008

2,169

2,772

431

8,556

13,928

Additions

-

160

-

926

1,086

Disposals

-

-

(230)

(17)

(247)

Foreign exchange adjustments

157

-

-

59

216

At 30 June 2009 and 1 July 2009

2,326

2,932

201

9,524

14,983

Additions

-

395

-

848

1,243

Disposals

-

-

-

-

-

Foreign exchange adjustments

(70)

-

-

(31)

(101)

At 30 June 2010

2,256

3,327

201

10,341

16,125

Depreciation






At 1 July 2008

61

851

431

4,361

5,704

Charge for the year

135

168

-

1,174

1,477

Disposals

-

-

(230)

(8)

(238)

At 30 June 2009 and 1 July 2009

196

1,019

201

5,527

6,943

Charge for the year

138

231

-

1,140

1,509

Disposals

-

-

-

-

-

At 30 June 2010

334

1,250

201

6,667

8,452

Net book value






At 30 June 2010

1,922

2,077

-

3,674

7,673

At 30 June 2009 and 1 July 2009

2,130

1,913

-

3,997

8,040

At 30 June 2008

2,108

1,921

-

4,195

8,224

Net book value of assets held under finance leases






At 30 June 2010

-

47

-

751

798

At 30 June 2009 and 1 July 2009

-

55

-

970

1,025

At 30 June 2008

-

84

-

938

1,022

 

11.      Deferred Taxes

Deferred tax assets and liabilities are attributable to the following:

Assets

Liabilities

Net


2010

£'000

2009

£'000

2010

£'000

2009

£'000

2010

£'000

2009

£'000

 

Intangible assets

-

-

(13,217)

(15,391)

(13,217)

(15,391)

Property, plant and equipment

-

-

(556)

(521)

(556)

(521)

Inventories

548

520

-

-

548

520

Receivables

49

44

-

(142)

49

(98)

Payables

173

427

(93)

-

80

427

Trading losses

-

91

-

-

-

91

Share-based payments

600

788

-

-

600

788


1,370

1,870

(13,866)

(16,054)

(12,496)

(14,184)

 

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.

 

 

 

 

 

 

continued…

-35-

 

12.      Inventories

2010

£'000

2009

£'000

 

Raw materials and consumables

4,129

3,493

Work in progress

336

412

Finished goods and goods for resale

30,354

27,629


34,819

31,534

 

13.      Trade and Other Receivables

2010

£'000

2009

£'000

 

Trade receivables

48,293

44,950

Other receivables

1,524

1,064

Derivative financial instruments

-

205

Prepayments and accrued income

1,345

1,498


51,162

47,717

 

14.      Cash and Cash Equivalents

2010

£'000

2009

£'000

 

Cash at bank and in hand

26,502

26,817

Short-term deposits

5,000

-


31,502

26,817

 

The short-term deposits are repayable on demand.

 

15.      Trade and Other Payables

2010

£'000

2009

£'000

 

Trade payables

56,465

49,191

Other payables

2,991

4,643

Derivative financial instruments

573

977

Other taxation and social security

2,707

3,862

Accruals and deferred income

1,759

3,030


64,495

61,703

 

16.      Current Tax Liabilities

2010

£'000

2009

£'000

 

Corporation tax payable

4,105

4,756

 

  

 

continued…

-36-

 

17.      Borrowings

2010

£'000

2009

£'000

 

Current liabilities:



Bank loans

20,000

18,648

Finance lease obligations

441

615


20,441

19,263

Non-current liabilities:



Bank loans

17,500

22,500

Finance lease obligations

729

1,231

Arrangement fees netted off

(467)

(650)


17,762

23,081

Total borrowings

38,203

42,344

 

The Group's borrowing facilities comprise a term loan of £22.5 million repayable in equal instalments of £2.5 million each 30 June and 31 December, a £15 million revolving credit facility committed until 31 December 2012, an overdraft facility of £10 million renewable on 30 September 2010 and various finance lease obligations.

 

At the year end, the Group had the following unutilised borrowing facilities:

2010

£'000

2009

£'000

 

Bank overdraft facility

10,000

10,000

 

18.      Share Capital

Ordinary shares of 1p each


2010

2009


£'000

No.

£'000

No.

 

Allotted, called up and fully

 paid at start of year

 

656

 

65,581,924

 

652

 

65,241,909

New shares issued

5

508,151

4

340,015

Allotted, called up and fully

 paid at end of year

 

661

 

66,090,075

 

656

 

65,581,924

 

The Companies Act 2006 abolishes the requirement for a company to have an authorised share capital.  At the 2009 Annual General Meeting 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 508,151 new ordinary shares of 1p (2009: 340,015 new ordinary shares of 1p) were issued following the exercise of options under the Executive Incentive Plan, and the Approved, Unapproved and SAYE Share Options Schemes.  The consideration received was £589,000 (2009: £275,000).  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.

  

 

continued…

-37-

 

19.      Share-based Payments

2010

£'000

2009

£'000

 

Equity-settled share-based transactions

817

643

Cash-settled share-based transactions

93

98


910

741

 

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

 

20.      Analysis of Net Borrowings

2010

£'000

2009

£'000

 

Bank loans

(37,033)

(40,498)

Finance leases and hire purchase contracts

(1,170)

(1,846)

Cash and cash equivalents

31,502

26,817

Net borrowings

(6,701)

(15,527)

 

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 2009

Average rate

Closing rate at

30 June 2010

 

Danish Krone

8.7572

8.4693

9.0983

Euro

1.1760

1.1379

1.2214

US Dollar

1.6520

1.5810

1.4961

 

22.      Contingency

The Danish tax authorities have opened an investigation into the tax return of Dechra Veterinary Products Holdings A/S (formerly Vetxx Holdings A/S) for the period ended 31 December 2005, a period prior to the acquisition of the company.  They are seeking to reduce the tax losses arising in this year by DKK17.5 million.  They have also indicated that they will be investigating the tax returns for 2006, 2007 and 2008.  The Directors believe that there are strong arguments to resist this claim.  However, should the dispute be lost, the deferred tax asset recognised on acquisition would be reduced by approximately £1.3 million.

 

23.      Other Information

The financial information set out above does not constitute the company's statutory accounts for the years ended 30 June 2010 or 2009 but is derived from the 2010 accounts. Statutory accounts for 2009 have been delivered to the Registrar of Companies and those for 2010 will be delivered in due course. The Auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their 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 2010 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: corporate.enquiries@dechra.com.  Copies are also available on the Company website www.dechra.com.

 

 

 

 

 

continued…

-38-

 

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 2010.  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

 

Trademarks

Trademarks appear throughout this document in italics.  Dechra and the Dechra 'D' logo are registered Trademarks of Dechra Pharmaceuticals PLC.  The Malaseb Trademark is used under licence from Dermcare-Vet Pty. Ltd.

 

Forward-Looking 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.


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