Annual Report and Accounts

RNS Number : 5850Y

Dechra Pharmaceuticals PLC

09 September 2015

 



9 September 2015

Dechra^® Pharmaceuticals PLC

(Dechra or the Company) 

Availability of 2015 Annual Report and Accounts

The 2015 Annual Report and Accounts is now available to view at www.dechra.com.

The following documents are scheduled to be mailed to registered shareholders of the Company on 21 September 2015:

·      2015 Annual Report and Accounts

·      Notice of the 2015 Annual General Meeting; and

·      Proxy Form for the 2015 Annual General Meeting

In accordance with Listing Rule 9.6.1 a copy of each of these documents will be submitted to the National Storage Mechanism and will be available for viewing shortly after posting.

The information below, which is extracted from the 2015 Annual Report and Accounts, is included solely for the purpose of complying with DTR 6.3.5. This information should be read in conjunction with the Company's 7 September 2015 announcement of its 2015 Preliminary Results (available at www.dechra.com). This material is not a substitute for reading the full 2015 Annual Report and Accounts. All page numbers and cross-references in the extracted information below refer to page numbers and notes to the financial statements, in the 2015 Annual Report and Accounts.

Key Performance Indicators

The Group utilises the following KPIs to assess our progress against our strategic, financial and operational objectives. Their relevance to our strategy and their definitions are explained below.

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

These are identified with an asterisk.

KPI	Definition	Relevance to Strategy	Performance	Strategic Link
Sales Growth 10.0%	Year-on-year sales growth including new products but excluding revenue from acquired businesses in the year of acquisition. 2015 £203.5m 2014 £193.6m 2013 £189.2m	A key driver of our strategy is to deliver sustainable sales growth through delivering our pipeline, maximising our existing portfolio and expanding geographically.	Sales increased by 10.0% at CER (5.1% at AER).  Our growth was driven by the continued commitment and execution of our four pillars, allowing us to see growth through the acquisition effect of PSPC, new products, geographical expansion in Italy and Canada and the organic growth of the portfolio. This offset the impact of the FAP decline and strong currency headwinds.	Pipeline Delivery Portfolio Focus Geographical Expansion Acquisition
Underlying Diluted EPS Growth* 16.9%	Underlying profit after tax divided by the diluted average number of shares, calculated on the same basis as note 10 to the Accounts. 2015 39.90p 2014 36.32p 2013 29.07p	Underlying EPS is a key indicator of our performance and the return we generate for our shareholders. It is one of the performance conditions of the LTIP.	EPS increased by 16.9% at CER (9.9% at AER). Organic growth and interest savings from repaying part of our debt in September 2014 accounted for most of the increase. Additionally, the EPS benefited from the impact of translational exchange gains accounted for as finance income (see note 3 to the Accounts).	Pipeline Delivery Portfolio Focus Geographical Expansion Acquisition
Return on Capital Employed* 20.0%	Underlying operating profit expressed as a percentage of average operating assets (excluding cash/debt and net tax liabilities). 2015 20.0% 2014 16.4% 2013 17.6%	As we look to grow the business, it is important that we use our capital efficiently to generate returns superior to our cost of capital in the medium to long term. It underpins the performance conditions of the LTIPs.	Our ROCE has improved as we deliver more profits and maintain working capital levels. However, the increase is also a result of the reduction in value of our net assets base due to movements in exchange rates (see pages 44 and 45).	Pipeline Delivery Portfolio Focus Geographical Expansion Acquisition
Cash Conversion 107.1%	Cash generated from operations before tax and interest payments as a percentage of operating profit before amortisation of acquired intangibles. 2015 107.1% 2014 90.6%± 2013 107.0% ± On continuing operations basis	Our stated aim is to be a cash generative business.	Cash conversion was strong in 2015 reflecting good growth in profits combined with steady working capital levels which are discussed further on page 44.	Pipeline Delivery Portfolio Focus Geographical Expansion
New Product Sales 13.8%	Revenue from new products as a percentage of total Group revenue. A new product is defined as any molecule launched in the last five financial years. 2015 13.8% 2014 8.6% 2013 6.5%	This measure shows the delivery of sales in each year from new products launched in the prior five years, on a rolling basis. It shows the performance of our R&D and sales and marketing organisations when launching newly developed or in-licensed products.	Sales from new products continue to increase and accounted for 13.8% of our total sales in 2015. This is due to the continued success in the EU of Forthyron and Cardisure and the launch of Osphos in the UK and US during 2015.	Pipeline Delivery Portfolio Focus Acquisition
Lost Time Accident Frequency Rate (LTAFR)	All accidents resulting in the absence or inability of employees to conduct the full range of their normal working activities for a period of more than three working days after the day when the incident occurred, normalised per 100,000 hours worked. 2015 0.07* 2014 0.08± 2013 0.22 ± On continuing operations basis	The safety of our employees is core to everything we do. We are committed to a strong culture of safety in all our workplaces.	LTAFR for continuing operations fell from 0.08 to 0.07 illustrating our continued commitment to employee safety.	Manufacturing and Supply Chain People
Employee Turnover 12.2%	Number of leavers during the period as a percentage of the average total number of employees in the period. 2015 12.2% 2014 16.8% 2013 16.1%	Attracting and retaining the best employees is critical to the successful execution of our strategy.	Employee turnover reduced to 12.2%, which is reflective of the steady state in which the business operated in 2015. In 2014 we completed the closure of a factory in Uldum, Denmark.	People

How the Business Manages Risk

Effective risk management and control is key to the delivery of our business strategy and objectives. Our risk management and control processes are designed to identify, assess, mitigate and monitor significant risks, and can only provide reasonable and not absolute assurance that the Group will be successful in delivering its objectives.

The Board is responsible for the oversight over how the Group's strategic, operational, financial and compliance risks are managed and for assessing the effectiveness of the risk management and internal control framework.

Our Senior Executive Team (SET) owns the risk management process and is responsible for managing specific Group risks. The SET is also responsible for embedding sound risk management in strategy, planning, budgeting, performance management, and operational processes within their respective Operating Segments and business units.

The Board and the SET together set the tone and decide the level of risk and control to be taken in achieving Group and business unit objectives.

Risk Management Process

Our strategy informs the setting of the objectives across the business and is widely communicated. Strategic risks and opportunities are identified as an integral part of the strategy setting process.

The SET provides a pivotal platform for evaluating and managing risk from both a bottom up and top down level and acts as a link between the Board and the business units to ensure management of operational risks is embedded in the business. Each SET member owns one or more Group risks and also maintains an operational risk register for their business unit.

For the risks which they own, each SET member identifies how the risks are currently controlled, what additional mitigating actions are required, and what monitoring and assurance mechanisms are in place.

The Board conducts a review of the risk management and internal control framework and the SET presents the most significant Group risks, controls and mitigation plans to the Board for review twice a year. The Audit Committee reviews the effectiveness of internal financial controls annually.

Internal Control Framework

Our internal control framework is designed to ensure:

·      proper financial records are maintained;

·      the Company's assets are safeguarded;

·      compliance with laws and regulations; and

·      effective and efficient operation of business processes.

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

Management Structure

Our management structure has clearly defined reporting lines, accountabilities and authority levels.

The Group is organised as business units. Each business unit is led by a SET member and has its own management team.

Strategy and Business Planning

We have a five year strategic plan which is updated and reviewed by the Board twice a year. Business objectives and performance measures are defined annually together with budgets and forecasts. Monthly business performance reviews are conducted at both Group and business unit levels.

The product pipeline is reviewed regularly to:

·      assess whether products in development are progressing according to schedule;

·      identify new product ideas and assess fit with our product portfolio; and

·      assess the expected commercial return on new products.

Policies and Procedures

Our key financial, legal and compliance policies that apply across the Group are:

·      Code of Business Conduct;

·      Delegated Authorities;

·      Anti-Bribery and Anti-Corruption;

·      Whistleblowing;

·      Sanctions; and

·      Charitable Donations.

Operational Controls

Our key operational control processes are as follows:

·      Quality Assurance: All our manufacturing sites have an established Quality Management System. These systems are designed to ensure that our products are manufactured to a high standard and in compliance with the relevant regulatory requirements.

·      Pharmacovigilance: Our regulatory team operates a robust system with a view to ensuring that any adverse reactions related to the use of our products are reported and dealt with promptly.

·      Information Technology: Our business units currently use a number of different local financial, manufacturing and warehouse management systems to support their operations. We are in the process of implementing Oracle across the Group.

·      Financial Controls: Our financial controls are designed to prevent and detect financial misstatement or fraud and operate at three levels:

o  Entity Level Controls performed by senior managers at Group and business unit level;

o  Month-end and Year-end procedures performed as part of our regular financial reporting and management processes; and

o  Transactional Level Controls operated on a day-to-day basis.

Improvements in 2015

The Board appointed Deloitte to undertake an assessment of the Group's risk management process and a review of internal financial controls in the second half of the previous financial year.

During the current financial year we implemented a number of improvements to the Group's risk management and review processes and to the business units' financial controls based on Deloitte's recommendations.

Each quarter, business units formally report to Group Finance on the operation of their key financial controls. They also submit and discuss progress reports on the implementation of agreed control improvements. These form the basis of financial controls assurance reports presented to the Audit Committee.

In April 2015, a Head of Internal Audit and Risk Assurance was appointed and has presented to the Audit Committee on the key changes required to comply with the revised UK Corporate Governance Code which becomes effective for the 2016 financial year.

Plans for 2016

We plan to implement a number of changes to our risk management process and internal control framework to ensure compliance with the changes introduced in the revised UK Corporate Governance Code.

The new Internal Audit and Risk Assurance function will provide independent assurance that major business risks are being managed appropriately, and that the internal control framework is robust and operating effectively.

We also plan to conduct pre-implementation assurance work on the Oracle system configuration and control design.

Understanding Our Key Risks

Dechra is the only veterinary pharmaceuticals company in the FTSE 350 and we therefore believe it is important to summarise the key distinctions between the animal and human pharmaceutical industries in order to provide a better understanding of our risk profile.

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

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

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

·     Stronger customer relationships and brand loyalty: The animal health industry uses a combination of sales representatives to promote their products and technical veterinary specialists to provide support and advice on animal health. These relationships result in better access to customers and sales visits are typically longer and more meaningful. Companion Animal Products are often directly prescribed and dispensed by veterinarians which contributes to brand loyalty, which often continues after the loss of patent protection or regulatory exclusivity.

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

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

The SET has identified and agreed key risks with the Board. Of these, a number are deemed to be generic risks facing every business including failure to comply with financial reporting regulation, foreign exchange, IT systems failure and non-compliance with legislation. The table below therefore details the ten principal risks that are specific to our business and provides information on:

·     how they link to Group strategy;

·     their potential impact on the business; and

·     what controls are in place to mitigate them.

Key of trend compared to prior year:

↔ No Change                

↑ Increased Risk           

↓ Reduced Risk

Link to Strategic Pillar and Enabler	Risk	Potential Impact	Controls and Mitigating Actions	Trend
Pipeline Delivery Portfolio Focus Geographical Expansion	Competitor Risk:  Competitor products launched against one of our leading brands (e.g. generics or a superior product profile). We depend on data exclusivity periods or patents to have exclusive marketing rights for some of our products. Although we maintain a broad portfolio of products, our unique products like Vetoryl and Felimazole have built a market which may be attractive to competitors.	Revenues and margins may be adversely affected should competitors launch a novel or generic product that competes with one of our unique products upon the expiry or early loss of patents. Costs may increase due to defensive marketing activity.	We focus on lifecycle management strategies for our key products to ensure they fulfil evolving customer requirements. Product patents are monitored and defensive strategies are developed towards the end of the patent life or the data exclusivity period. We monitor market activity prior to competitor products being launched, and develop a marketing response strategy to mitigate competitor impact.	↔
Portfolio Focus	Market Risk:  The emergence of veterinary buying groups, corporate customers and internet pharmacies. We sell and promote primarily to veterinary practices and distribute our products through wholesaler and distributor networks in most markets. In a number of mature markets, veterinarians are establishing buying groups to consolidate their purchasing, and corporate and internet customers are also emerging.	The emergence of corporate customers and buying groups represents an opportunity to increase sales volumes and revenue but may result in reduced margins. Our reputation and relationships with veterinary practices could also be adversely affected.	We manage and monitor our national and European pricing policies to ensure equitable pricing for each customer group. Our relationships with larger customers are managed by key account managers. Our marketing strategy is designed to support veterinarians in retaining customers by promoting the benefits of our product portfolio in our major therapeutic areas.	↑ Growth in buying groups, corporate customers and internet pharmacies.
Acquisition	Acquisition Risk:  Identification of acquisition candidates and their potential integration. Identification of suitable candidates and securing a successful approach involves a high degree of uncertainty. Acquired products or businesses may fail to deliver expected returns due to over-valuation or integration challenges.	Failure to identify or secure suitable targets could slow the pace at which we can expand into new markets or grow our portfolio. Acquisitions could deliver lower profits than expected or result in intangible assets impairment.	We have defined criteria for screening acquisition targets and we conduct commercial, clinical, financial and legal due diligence. The Board reviews acquisition plans and progress regularly and approves all potential transactions. The SET manages post-acquisition integration and monitors the delivery of benefits and returns.	↑ Increased acquisition activity in animal health sector.
Pipeline Delivery	Product Development Risk: Failure to deliver major products either due to pipeline delays or newly launched products not meeting revenue expectations. The development of pharmaceutical products is a complex, risky and lengthy process involving significant financial, R&D and other resources.  Products that initially appear promising may be delayed or fail to meet expected clinical or commercial expectations or face delays in regulatory approval. It can also be difficult to predict whether newly launched products will meet commercial expectations.	A succession of clinical trial failures could adversely affect our ability to deliver shareholder expectations and could also damage our reputation and relationship with veterinarians. Our market position in key therapeutic areas could be affected, resulting in reduced revenues and profits. Where we are unable to recoup the costs incurred in developing and launching a product this would result in impairment of intangible assets.	Potential new development candidates are assessed from a commercial, financial and scientific perspective by a multi-functional team to allow senior management to make decisions on which ones to progress. The pipeline is discussed regularly by senior management, including the Chief Executive Officer and Chief Financial Officer. Regular updates are also provided to the Board. Each development project is managed by co-project leaders who chair project team meetings. Before costly pivotal studies are initiated, smaller proof of concept pilot studies are conducted to assess the effects of the drug on target species and for the target indication. In respect of all new product launches a detailed marketing plan is established and progress against that plan is regularly monitored. The Group ensures that it has a detailed market knowledge and retains close contact with customers through its management and sales teams w are trained to a high standard.	↑ Some projects in the feasibility phase have taken longer than projected.
Pipeline Delivery Portfolio Focus Geographical Expansion	Regulatory Risk:  Failure to meet regulatory requirements. We conduct our business in a highly regulated environment, which is designed to ensure the safety, efficacy quality, and ethical promotion of pharmaceutical products. Failure to adhere to regulatory standards or to implement changes in those standards could affect our ability to register, manufacture or promote our products.	Delays in regulatory reviews and approvals could impact the timing of a product launch and have a material effect on sales and margins. Any changes made to the manufacturing, distribution, marketing and safety surveillance processes of our products may require additional regulatory approvals, resulting in additional costs and/or delays. Non-compliance with regulatory requirements may result in delays to production or lost sales.	The Group strives to exceed regulatory requirements and ensures that its employees have detailed experience and knowledge of the regulations. Manufacturing and regulatory have established quality systems and standard operating procedures in place. Regular contact is maintained with all relevant regulatory bodies in order to build and strengthen relationships and ensure good communication lines. The regulatory and legal teams keep updated in respect of changes with a view to ensuring that the business is equipped to deal with, and adhere to, such changes. Where changes are identified which could affect our ability to market and sell any of our products, a response team is created in order to mitigate the risk. External consultants are used to audit our manufacturing quality systems.	↔
Portfolio Focus Geographical Expansion	Regulatory Risk:  Continuing pressure on reducing antibiotic use. The issue of the potential transfer of increased antibacterial resistance from food producing animals to humans is subject to regulatory discussions. In some countries this has led to government recommendations on reducing the use of antibiotics in food producing animals.	Reduction in sales of our antimicrobial product range. Our reputation could be adversely impacted if we do not respond appropriately to government recommendations.	Regular contact is maintained with relevant veterinary authorities to ensure that we have a comprehensive understanding of regulatory changes. We strive to develop new products and minimise antimicrobial resistance concerns.	↑ Reduction of antibiotic use in Germany has accelerated.
Pipeline Delivery Portfolio Focus Manufacturing and Supply Chain	Reliance on Third Parties Risk:  A supply failure on a key product may affect our ability to develop, make, or sell our products. We rely on third parties for the supply of all raw materials for products that we manufacture in-house. We also purchase many of our finished products from third party manufacturers.	Raw material supply failures may cause: increased product costs due to difficulties in obtaining scarce materials on commercially acceptable terms; product shortages due to manufacturing delays; delays in clinical trials due to shortage of trial products. Shortages in manufactured products and third party supply failures on finished products may result in lost sales.	We monitor the performance of our key suppliers and act promptly to source from alternative suppliers where potential issues are identified. The top ten Group products are regularly reviewed in order to identify the key suppliers of materials or finished products. We maintain buffer stocks and dual sourcing arrangements for key products. All contracts with suppliers are reviewed from both a commercial and legal perspective to try to ensure that assignment of the contract is allowed should there be a change of control of either of the contracting parties.	↔
Portfolio Focus Manufacturing and Supply Chain	Reliance on Third Parties Risk:  Loss of key third party manufacturing customers from DPM. Third party manufacturing represents approximately 10% of Group revenues.	Loss of a key customer can impact manufacturing revenues and lead to an increase in the cost of goods of the remaining portfolio.	The DPM Sales Director manages relationships with key customers and we have an experienced sales team which focuses on bringing in new customers. Robust supply agreements are in place with each of our key customers and are regularly reviewed. Monthly customer service level monitoring and reporting is in place.	↔
Portfolio Focus Pipeline Delivery People	People Risk:  Failure to retain high calibre, talented senior managers and other key roles in the business. Our growth plans and future success are dependent on retaining knowledgeable and experienced senior managers and key staff.	Loss of key skills and experience could erode our competitive advantage and could have an adverse impact on results. Inability to attract and retain key personnel may weaken succession planning.	The Nomination Committee oversees succession planning for the Board and the SET.  Succession plans are in place for the SET together with development plans for key senior managers. Key person insurance is in place where appropriate. Remuneration packages are reviewed on an annual basis in order to help ensure that the Group can continue to retain, incentivise and motivate its employees.	↔
Geographical Expansion Acquisition People	People Risk:  Failure to resource the business to achieve our strategic ambitions, particularly on geographical expansion and acquisition. As Dechra expands into new markets and acquires new businesses or science we recognise that we may need new people with different skills, experience and cultural knowledge to execute our strategy successfully in those markets and business areas.	Failure to recruit or develop good quality people could result in: capability gaps in new markets; challenges in integrating new acquisitions; or overstretched resources This could delay implementation of our strategy and we may not meet shareholders' expectations.	The Group HR Director reviews the organisational structure with the SET twice a year to aim to ensure that the organisation is fit for purpose and to assess the resourcing implications of planned changes or strategic imperatives. A development programme is in place to identify opportunities to recruit new talent and develop existing potential.	↔

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 2015.  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;

b)    the Strategic 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; and

c)    the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.

Approved by the Board and signed on its behalf by:

Ian Page	Anne-Francoise Nesmes
Chief Executive Officer	Chief Financial Officer
7 September 2015	7 September 2015

For further information, please contact:

Rob Lamb, Company Secretary                     

Telephone number: 01606 814730

About Dechra

Dechra is an international specialist veterinary pharmaceuticals and related products business.  Our expertise is in the development, manufacture, and sales and marketing of high quality products exclusively for veterinarians worldwide. Dechra's business is unique as the majority of its products are used to treat medical conditions for which there is no other effective solution or have a clinical or dosing advantage over competitor products.  For more information please visit: www.dechra.com

Trademarks

Trademarks appear throughout this document in italics. Dechra and the Dechra "D" logo are registered trademarks of Dechra Pharmaceuticals PLC.

Forward Looking Statement

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

 

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