Annual Financial Report

RNS Number : 9942J

Hikma Pharmaceuticals Plc

09 April 2010

 



Hikma Pharmaceuticals PLC

Annual Report & Accounts and Notice of 2010 Annual General Meeting

In compliance with Listing Rule 9.6.1 Hikma Pharmaceuticals PLC has submitted to the UK Listing Authority two copies of the following documents:

·        Annual Report & Accounts 2009

·        Notice of 2010 Annual General Meeting

·        Proxy forms for the 2010 Annual General Meeting

·        Sterling and Jordanian Dinar dividend election forms

Copies of the above documents will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility which is situated at:

The Financial Services Authority

25 The North Colonnade

Canary Wharf

London

E14 5HS

Copies of the Annual Report and Notice of Meeting will also be available on our website www.hikma.com/investorrelations.

This announcement contains additional information for the purposes of complying with Rules 4.1.3 and 6.3.5 of the Disclosure and Transparency Directive. The information in the attached appendix, consisting of risk factors, details of related party transactions and the directors responsibility statement, has been extracted unedited from the Annual Report and Accounts for the year ended 31 December 2009 and should be read in conjunction with the preliminary announcement made on 17 March 2010, which is available on the company website www.hikma.com.

Enquiries:

Hikma Pharmaceuticals PLC                               Tel: [phone]

Said Darwazah, Chief Executive

Bassam Kanaan, Chief Financial Officer

Susan Ringdal, Investor Relations

Brunswick Group                                                Tel: [phone]

Jon Coles / Justine McIlroy

About Hikma

Hikma Pharmaceuticals PLC is a fast growing multinational group focused on developing, manufacturing and marketing a broad range of both branded and non-branded generic and in-licensed products.  Hikma's operations are conducted through three businesses: "Branded", "Injectables" and "Generics" based principally in the Middle East and North Africa ("MENA") region, where it is a market leader, the United States and Europe.  In 2009, Hikma achieved revenues of $637 million and profit attributable to shareholders of $78 million.  For news and other information, please visit www.hikma.com.

Appendix

Directors Responsibility Statement

The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable laws and regulations.

Company law requires the directors to prepare such financial statements for each financial year. Under that law the directors are required to prepare group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation and have also chosen to prepare the parent company financial statements under IFRS as adopted by the European Union. Under company law the directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing these financial statements, the directors are required to:

properly select and apply accounting policies;

·      present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and

·      provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and

·      make an assessment of the company's ability to continue as a going concern.

The directors are responsible for keeping proper accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website.  Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

We confirm to the best of our knowledge:

1.      the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, 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

2.      the management report, which is incorporated into 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.

By order of the Board

Said Darwazah

Chief Executive Officer

Risk Factors

Principal Risks and Uncertainties

The Group's business faces risks and uncertainties. 

The section below includes the principal risks and uncertainties that the Group considers could have a significant effect on its financial condition, results of operations or future performance.  The list is not set out in order of priority and other risks, currently unknown or not considered material, could have a similar effect.

Operational risks

Risk	Potential impact	Mitigation
Compliance with cGMP
>      Non-compliance with manufacturing standards (often referred to as 'Current Good Manufacturing Practices' or cGMP)	>      Delays in supply or an inability to market or develop the Group's products >      Delayed or denied approvals for the introduction of new products >      Product complaints or recalls >      Bans on product sales or importation >      Disruptions to operations >      Litigation	>      Commitment to maintain the highest levels of quality across all manufacturing facilities >      Strong global compliance function that oversees compliance across the Group >      Remuneration and reward structure that helps retain experienced personnel >      Continuous staff training
Regulation
>      Unanticipated legislative and other regulatory actions and developments concerning various aspects of the Group's operations and products	>      Restrictions on the sale of one or more of our products  >      Restrictions on our ability to sell our products at a profit >      Unexpected additional costs required to produce, market or sell our products >      Increased compliance costs	>      Local operations in most of our key markets >      Strong oversight of local regulatory requirements to help anticipate potential changes to the regulatory environments in which we operate >      Representation and/or affiliation with local industry bodies
Commercialisation of new products
>      Delays in the receipt of marketing approvals, the authorisation of price and re-imbursement >      Lack of approval and acceptance  of new products by physicians, patients and other key decision-makers >      Inability to confirm safety, efficacy, convenience and/or  cost-effectiveness of our products as compared to competitive products >      Inability to participate in tender sales	>      Slowdown in revenue growth from new products >      Inability to deliver a positive return on investments in R&D, manufacturing and sales and marketing	>      Experienced regulatory teams able to accelerate submission  processes across all of our markets >      Highly qualified sales and marketing teams across all markets >      A diversified product pipeline with over 60 new compounds pending approval, covering a broad range of therapeutic areas >      A systematic commitment to quality that helps to secure approval and acceptance of new products and mitigate potential safety issues
Product development
>      Failure to secure new products or compounds for development, either through internal research and development efforts, in-licensing, or acquisition	>      Inability to grow sales and increase profitability for the Group >      Lower return on investment in research and development	>      Experienced and successful in-house research and development team >      Strong business development team >      Track record of building in-licensed brands
Partnerships
>      Inability to renew or extend in-licensing or other partnership  agreements  with a third-party	>      Loss of products from our portfolio >      Revenue interruptions >      Failure to recoup sales and marketing and business development costs	>      Long-term relationships with existing in-licensing partners >      Experienced legal team capable of negotiating robust agreements with our licensing partners >      Continuous development of new licensing partners >      Diverse revenue model with in-house research and development capabilities
Disruptions in the manufacturing supply chain
>      Inability to procure active ingredients from approved sources >      Inability to procure active ingredients on commercially viable terms >      Inability to procure the quantities of active ingredients  needed to meet market requirements >      Inability to supply finished product to our customers in a timely fashion	>      Inability to develop and/or commercialise new products >      Inability to market existing products as planned >      Lost  revenue streams on short notice >      Reduced service levels and damage to customer relationships	>      Alternate approved suppliers of  active ingredients >      Long-term relationships with reliable raw material suppliers >      Corporate auditing team continuously monitors regulatory compliance of API suppliers >      Focus on improving service levels and optimising our supply chain
Economic and political and unforeseen events
>      The failure of control, a change in the economic conditions or political environment or sustained civil unrest in any particular market or country >      Unforeseen events such as fire or flooding could cause disruptions to manufacturing or supply	>      Disruptions to manufacturing and marketing plans >      Lost revenue streams >      Inability to market or supply products	>      Geographic diversification, with [12 manufacturing facilities and sales in more than 40 countries >      Product diversification, with 382products and 795 dosage strengths and forms
Litigation
>      Commercial, product liability and other claims brought against the Group	>      Financial impact on Group results from damages awards >      Reputational damage	>      In-house legal counsel with relevant jurisdictional experience

Financial risks

Risk	Impact	Mitigation
Foreign exchange risk
>      Exposure to foreign exchange movements, primarily in the European, Algerian, Sudanese and Egyptian currencies	>      Fluctuations in the Group's net asset values and profits upon translation into US dollars	>      Entering into currency derivative contracts where possible >      Foreign currency borrowing >      Matching foreign currency revenues to costs
Interest rate risk
>      Volatility in interest rates	>      Fluctuating impact on profits before taxation	>      Optimisation of fixed and variable rate debt as a proportion of our total debt >      Use of interest rate swap agreements
Credit Risk
>      Inability to recover trade receivables >      Concentration of significant trade balances with key customers in the MENA region and the US	>      Reduced working capital funds >      Risk of bad debt or default	>      Clear credit terms for settlement of sales invoices >      Group Credit policy limiting credit exposures >      Use of various financial instruments such as letters of credit, factoring and credit insurance arrangements
Liquidity Risk
>      Insufficient free cash flow and borrowings headroom	>      Reduced liquidity and working capital funds >      Inability to meet short-term working capital needs and, therefore, to execute our long term strategic plans	>      Continual evaluation of headroom and borrowing >      Committed debt facilities >      Diversity of institution, subsidiary and geography of borrowings
Tax
>      Changes to tax laws and regulations in any of the markets in which we operate	>      Negative impact on the Group's effective tax rate >      Costly compliance requirements	>      Close observation of any intended or proposed changes to tax rules, both in the UK and in other key countries where the Group operates

Going Concern

Although the current economic conditions may affect short-term demand for our products, as well as place pressure on our customers and suppliers in terms of liquidity issues, we believe that the Group's geographic spread, product diversity and large customer and supplier base substantially mitigate these risks. In addition, the Group operates in the relatively defensive generic pharmaceuticals industry which we expect to be less affected compared to other industries that are subject to greater cyclical changes.

The Group has $378 million of banking facilities of which $193 million were undrawn as at 31 December 2009. These facilities are well diversified across the operating subsidiaries of the Group and are with a number of financial institutions. 44% of the Group's short term and undrawn long term facilities are of committed nature. See Notes 24, 27 and 29 for details. We continue to expect the short term facilities to be renewed upon maturity. In addition the Group maintained cash balances of $67.9 million as at 31 December 2009. The Group's forecasts, taking into account reasonable possible changes in trading performance, facility renewal sensitivities and maturities of long-term debt, show that the Group should be able to operate well within the levels of its facilities and their related covenants.

After making enquiries, the Directors believe that the Group is adequately placed to manage its business and financing risks successfully despite the current uncertain economic outlook. The directors have formed a judgement that there is reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The directors therefore continue to adopt the going concern basis in preparing the financial statements.

Critical accounting policies and estimates

The Group's accounting policies are more fully described in Note 2 to the Group's consolidated financial statements.  However, certain of the Group's accounting policies are particularly important to the presentation of the Group's results and require the application of significant judgement by the Group's management. 

In applying these policies, the Group's management uses its judgement to determine the appropriate assumption to be used in the determination of certain estimates used in the preparation of the Group's results.  These estimates are based on the Group's previous experience, the terms of existing contracts, information available from other outside sources and other factors, as appropriate. 

The Group's management believes that, among others, the following accounting policies that involve management judgements and estimates are the most critical to understanding and evaluating the Group's financial results.

Revenue recognition

Revenue is recognised in the statement of comprehensive income when goods or services are supplied or made available to external customers against orders received and when title and risk of loss has passed.  Revenue represents the amounts receivable after the deducation of discounts, value added tax, other sales taxes, and allowances given, provisions for chargebacks and accruals for estimated future rebates and returns.  The methodology and assumptions used to estimate rebates and returns are monitored and adjusted regularly in light of contractual and historical information and past experience.  

Chargebacks

The provision for chargebacks is the most significant and complex estimate used in the recognition of revenue.  In the USA, the Group sells its products directly to wholesale distributors, generic distributors, retail pharmacy chains and mail-order pharmacies.  The Group also sells its products indirectly to independent pharmacies, managed care organisations, hospitals, and group purchasing organisations, collectively referred to as "indirect customers."  The Group enters into agreements with its indirect customers to establish pricing for certain products.  The indirect customers then independently select a wholesaler from which they purchase the products at agreed-upon prices.  The Group will provide credit to the wholesaler for the difference between the agreed-upon price with the indirect customer and the wholesaler's invoice price.  This credit is called a "chargeback".  The provision for chargebacks is based on historical sell-through levels by the Group's wholesale customers to the indirect customers, and estimated wholesaler inventory levels.  As sales are made to the large wholesaler customers, the Group continually monitors the reserve for chargebacks and makes adjustments when it believes that actual chargebacks may differ from estimated reserves.

Accounts receivable and bad debts

The Group estimates, based on its historical experience, the level of debts that it believes will not be collected.  Such estimates are made when collection of the full amount of the debt is no longer probable.  These estimates are based on a number of factors including specific customer issues and industry, economic and political conditions.  Bad debts are written off when identified.

Goodwill and intangible assets

The critical areas of judgment in relation to goodwill and intangible assets are the useful economic lives of the product-related intangibles and the growth rates used in the impairment tests for goodwill. 

Impairment of tangible and intangible assets excluding goodwill

The Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss.  If such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss.  An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired.  Recoverable amount is the higher of the fair value less costs to sell and value in use.  In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessements of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.  If the recoverable amount of an asset (or income-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (income-generating unit) is reduced to the recoverable amount.  An impairment loss is recognised as an expense immediately.  When an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years.  A reversal of an impairment loss is recognised as income immediately.

Contingent liabilities

The Group is involved in various legal proceedings considered typical to its business relating to employment, product liability and other commercial disputes.  Often this litgation is subject to substantial uncertainties, and therefore the probability of a loss, if any, being sustained or an estimate of the amount of any loss is difficult to ascertain.  Consequently, it is often not practicable to make a reasonable estimate of the possible financial effect, if any, that could arise from the ultimate resolution of legal proceedings. In such cases, where the Group believes that a disclosure is required, information regarding the nature and facts of the case is disclosed.  For current matters see Note 35 to the Group consolidated financial statements.  Although there can be no assurance regarding the outcome of the disclosed legal proceedings, based on management's current and considered view, the Group does not expect it to have a materially adverse effect on our finacial position.  This position could change over time.

Tax

The Group provides for income tax according to the laws and regulations prevailing in the countries where the Group operates.  Furthermore, the group computes and records deferred tax assets and liabilities according to IAS 12 "Income Taxes" .  The tax expense represents the sum of the current and deferred tax.  The tax currently payable is based on taxable profit for the year.  Taxable profit differs from net profit as reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.  The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Related Party Transactions

During the year, Group companies entered into the following transactions with related parties:

Darhold Limited: is a related party of the Group because it is considered one of the major shareholders of Hikma Pharmaceuticals PLC with ownership percentage of 29.8% at the end of 2009 (2008: 30.2%). Further details on the relationship between Mr. Samih Darwazah, Mr Said Darwazah, Mr Mazen Darwazah and mr Ali Al-Husry, and Darhold Limited are given in the Directors' Report.

Other than dividends (as paid to all shareholders), there were no transactions between the Group and Darhold Limited in the year.

Capital Bank - Jordan: is a related party of the Group because during the year one board member of the Bank is also board member at Hikma Pharmaceuticals PLC.  Total cash balances at Capital Bank - Jordan were USD 3,294,000 (2008: USD 217,000).  Loans and overdrafts granted by Capital Bank to the Group amounted to USD 77,000 (2008: USD 207,000) with interest rates ranging between 8.75% and 3MLIBOR + 3. Total interest expense incurred against Group facilities was USD 28,000 (2008: USD 86,000). Total interest income received was USD 37,000 (2008: USD 1,500) and total commission paid in the year was 17,000 (2007: USD 11,300).

Jordan International Insurance Company:is a related party of the Group because one board member of the company is also a board member at Hikma Pharmaceuticals PLC. Total insurance premiums paid by the Group to Jordan International Insurance Company during the year were USD 1,686,000 (2008: USD 1,351,000). The Group's insurance expense for Jordan International Insurance Company contracts in the year 2009 was USD 2,006,000 (2008: USD 1,490,000). The amounts due to Jordan International Insurance Company at the year end were USD 129,000 (2008: USD 93,000).

Mena Innovative Technology: is a related party because the Group holds a minority stake in this company (see note 18) and because the majority shareholder is the wife of Mr. Nabil Rizk - a chairman of West-ward Pharmaceuticals. Total purchases during the year were USD nil (2008: USD 1,000). Purchases were made at market price discounted to reflect the quantity of goods purchased. At 31 December 2008, the Group had no outstanding balance with Mena Innovation Technology (2008: USD Nil).

Tunisian Companies: Amounts due from the two Tunisian companies the Group has invested in net of provisions are USD 491,000 (2008: USD 474,000) and USD 1,052,000 (2008: USD 793,000) due from Societe Hikma Medicef Limited-Tunisia and Societe D'Industries Pharmaceutiques Ibn Al Baytar S.A. - Tunisia, respectively. The provision for doubtful debts related to balances above was USD 327,000 (2008: USD 303,000).

Mr. Yousef Abd Ali:  Mr. Yousef Abd Ali is a related party of the Group because he holds a non-controlling interest in Hikma Lebanon of 33%. The amount owed to Mr. Yousef by the Group as at 31 December 2009 was USD 279,000 (2008: 161,000).

Labatec - Pharma SA: is a related party of the Group because it is owned by Mr. Samih Darwazah. During 2009 the Group total sales to Labatec amounted to USD 42,000 (2008: 30,000) and the Group total purchases from Labatec amounted to USD 393,000.  At 31 December 2009 the amount owed to Labatec by the Group was USD 149,000 (2008: Nil).

King and Spalding: is a related party of the Group because a partner of the firm is a board member and company secretary of West-ward. King and Spalding is an outside counsel firm that handles general legal matters for West-ward.  During 2009 fees of USD 55,000 (2008: 217,000) were paid for legal services provided.

Remuneration of key management personnel: The remuneration of the key management personnel (comprising the Executive and Non-Executive Directors and certain of senior management as set out in the Directors' Report) of the Group is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. Further information about the remuneration of the individual Directors is provided in the audited part of the Remuneration Committee Report on pages 64 to 70.

	2009 $000's	2008 $000's
Short-term employee benefits	5,918	5,363
Share-based payments	2,002	1,312
Post employment benefits	31	61
	7,951	6,736

Basis of Preparation and Forward-looking statements

Certain statements in this announcement are forward-looking statements - using words such as "intends", "believes", anticipates" and "expects".  Where included, these have been made by the Directors in good faith based on the information available to them up to the time of their approval of this report.  By their nature, forward-looking statements are based on assumptions and involve inherent risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements, and should be treated with caution.  These risks, uncertainties or assumptions could adversely affect the outcome and financial effects of the plans and events described in this review.  Forward-looking statements contained in this announcement regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future.  You should not place undue reliance on forward-looking statements, which speak as only of the date of the approval of this report.

Except as required by law, the Company is under no obligation to update or keep current the forward-looking statements contained in this review or to correct any inaccuracies which may become apparent in such forward-looking statements.

 

END

 

 

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