Annual Financial Report

RNS Number : 4654Q

Hikma Pharmaceuticals Plc

09 April 2009

 



Hikma Pharmaceuticals PLC

Annual Report & Accounts and Notice of 2009 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 2008

• Notice of 2009 Annual General Meeting

• Proxy forms for the 2009 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/financialreports/?year=2008.

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 2008 and should be read in conjunction with the preliminary announcement made on 17 March 2009, 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

Peter Laing, 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 pharmaceutical products.  Hikma's operations are conducted through three businesses: 'Branded', 'Injectables' and 'Generics'.  Hikma's operations are based principally in the Middle East and North Africa ('MENA') region, where it is a market leader and sells across 17 countries, the United States and Europe.  In 2008, the Group achieved revenues of $580.7 million (2007 $449 million) and profit attributable to shareholders was $57.1 million (2007 $63 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. The directors are required to prepare financial statements for the group in accordance with International Financial Reporting Standards as adopted by the EU (IFRSs) and have also elected to prepare financial statements for the company in accordance with IFRSs. Company law requires the directors to prepare such financial statements in accordance with IFRSs, the Companies Act 1985 and Article 4 of the IAS Regulations.

International Accounting Standard 1 requires that financial statements present fairly for each financial year the company's financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and condition in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's 'Framework for the Preparation and Presentation of Financial Statements'. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. Directors are also 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 is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance.

The directors responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company, for safeguarding the assets, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of a directors' report and director's remuneration report which comply with the requirements of the Companies Act 1985.

The directors are responsible for the maintenance and integrity of the company website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements differs from legislation in other jurisdictions.

We confirm to the best of our knowledge:

• 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

• The business review, 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 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.

Risk Management

Operational risks

Regulatory

Hikma is subject to extensive regulation on the approval, manufacture and distribution of its products in all its markets. There is no single worldwide harmonised set of regulations relating to the development, manufacture and sale of pharmaceutical products and the Group is therefore subject to different laws, regulations and codes depending on the regions or countries in which products are marketed. This is particularly relevant in the MENA region where there is no mutually-recognized regional regulatory body. Specific jurisdictions can therefore refuse to register a product or may require additional information even though it approved in another jurisdiction. This can create significant compliance costs, and can also increase the time it takes to realize the full penetration of products into all markets. 

The Group operates in diverse markets and geographic regions and is therefore subject to a broad range of industry, economic and political dynamics. The laws and regulations governing the manufacture and supply of our products are subject to change, which may lead to unanticipated business interruption or increased costs for compliance. Whilst the cost of such disruption of compliance can be significant, we believe that the wide geographic spread of our operations gives the Group the strength and flexibility to lessen the impact on the Group's results and financial condition of any such disruption.

Economic and political dynamics

The Group operates in emerging markets, some of which have less developed political and legal systems, or which have a history of political volatility and therefore present greater challenges to the conduct of business than more developed markets. Whilst the Group has a wide geographical spread of operations, the failure of control, a change in the economic conditions or political environment or sustained civil unrest in any particular market or country could adversely affect the financial condition of the Group.

Risk of interruption of production

Product manufacture is subject to continual regulatory control, and products must be produced in accordance with good manufacturing practice regulations. Our manufacturing sites are subject to approval and ongoing inspection by a large number of regulatory agencies. In addition, small changes in manufacturing processes may require further regulatory approval. These issues could result in additional compliance expense, and compliance failure could result in interruptions to production, product recalls, closure of manufacturing sites and other sanctions, which could adversely affect our business and its financial condition. 

Regulated and other suppliers

A compliance failure by any of our regulated suppliers - for both active and bulk ingredients - could lead to delays in production, product recalls, the potential for product liability claims and other regulatory sanctions. The business undertakes supply chain planning, and alternative sourcing of key products. However, for some components we may have to rely on single sourcing, which creates a greater risk of disruption to production in the event of regulatory non-compliance or interruption of supply. While the Group does not believe that any third-party supplier relationship is individually significant in terms of the entire Group, a failure in supply could disrupt production and restrict sales. 

Government tender bids

Whilst the majority of Group sales are to the private sector, each of our three businesses participates in government tenders. The timing and outcome of these tenders are unpredictable, and the Group's results could be affected by the gain or loss of a significant government contract.  

Research and development and commercialisation of new products

The Group's results of operations may be impacted significantly by the timeliness of its research and development and product commercialisation activities. In order to bring a pharmaceutical product to market successfully, the Group must identify products for which it can generate attractive margins and growth, undertake the required research and development and obtain regulatory approvals. Additional costs may be incurred, and sales opportunities lost, if there is any significant delay in any of these steps. Given the importance of research and development, Hikma has expanded its investment in research and development, particularly in Jordan where it can benefit from lower labour and bio-equivalency costs. 

API and other raw material costs

Raw material costs represented over 30% of the Group's net sales in the year ended 31 December 2008, with the most significant portion of these costs relating to APIs. Whilst the prices of the APIs that the Group uses have in general fallen in recent years, these prices are volatile and can vary significantly from supplier to supplier. In some cases, increase in API and other raw material costs may not be able to be passed on to customers and can therefore have a significant impact on the Group's results of operations. Hikma has a dedicated API sourcing function that has been successful in sourcing lower cost API's through more competitive suppliers in Asia.

Seasonality

The Group's business, in particular the Branded Pharmaceuticals business, is seasonal, and it generally experiences higher net sales and net profit in the first half of each financial year, as compared to the second half of its financial year. Accordingly, the Group's outstanding borrowings historically have been higher during the first half of the financial year in order to finance the working capital requirements of the Group.  

Acquisitions and strategic alliances

Acquisitions remain a key part of the Group's strategy to develop and grow it's business. The Group also seeks long-term licensing arrangements and strategic alliances to expand its product portfolio and geographical presence. The risks associated with this strategy include the availability of suitable acquisition candidates and assimilating and integrating acquired companies into the Group. Other risks include delays in implementation or unexpected costs or liabilities. The Group may also risk of failing to realise operating benefits or synergies from completed acquisitions. The Group mitigates these risks by implementing a structured integration process which can include placing experienced management into the acquired company to effect the swift installation of internal controls and by subjecting management processes to close monitoring and review by internal audit and senior management.  In respect of long-term licensing arrangements, a failure to agree appropriate commercial terms on renewal of such agreements could lead to a reduction in revenues as replacement products are sourced. 

Financial risks

Group Treasury is responsible for Financial Risk Management and setting the appropriate controls and risk policies. Group Treasury is supported by treasury departments at the operating company and segmental levels and reports to the Chief Financial Officer.

Foreign exchange risk

The Group uses the US Dollar as its reporting currency and is therefore exposed to foreign exchange movements, primarily in the European, Algerian, Sudanese and Egyptian currencies that could materially affect the Group's financial results. Group Treasury attempts to mitigate this risk through various methods: entering into currency derivative contracts where possible, foreign currency borrowing and matching foreign currency revenues and costs. Using these methods has not had a material impact on the Group's financial position at 31 December 2008. See Note 29 to the Group's consolidated financial statements for a description of the Group's Foreign Exchange risks.

Interest rate risk 

The Group manages its exposures to interest rate risks by changing the proportion of fixed rate debt and variable rate debt in its total debt portfolio. To manage this mix the Group may enter into interest rate swap agreements, in which it exchanges the periodic payments based on notional amounts and agreed upon fixed and variable interest rates. Using these swap agreements has not had a material impact on the Group's financial position at 31 December 2008. See Note 29 to the Group's consolidated financial statements for a description of the Group's interest rate risks.

Credit Risk 

In most cases, the Group grants its buyers credit terms for settlement of sales invoices. Credit risk is managed through the Group Credit policy and the use of various financial instruments such as letters of credit, factoring and credit insurance arrangements. Further details are set out in Note 29 of the Group's consolidated financial statements.  

Liquidity Risk

The Group has constant financing requirements, both for short-term working capital needs and for long term strategic plans. Corporate Treasury ensures the Group debt/capital structure and banking arrangements can accommodate these financing needs. Corporate Treasury also endeavours to efficiently utilise excess liquidity from one subsidiary to another, while complying with any foreign currency, legal or tax restrictions.

Going Concern

Although, the current economic conditions may affect short term demand for our products, as well as place pressure on customers and suppliers which may face liquidity issues, 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 $229 million of banking facilities of which $121 million were undrawn as at 31 December 2008. These facilities are well diversified across the operating subsidiaries of the Group with a number of financial institutions. The majority of these facilities are short term, uncommitted working capital related.  See notes 24, 27 and 29 for details.  However, we continue to expect them to be renewed annually. In addition the Group maintained cash balances of $63.5 million as at 31 December 2008. 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. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts, as stated in the Directors report.

Inflation risk

Hikma believes it is not subject to material risk due to inflation in any of its core markets at present.

Taxation
Almost all of the Group's earnings are derived in jurisdictions other than the United Kingdom and are taxed there. Some of these overseas countries offer more favorable tax rates in comparison to each other and the United Kingdom. In addition to the United Kingdom, tax laws and regulations in many of the countries where the Group operates include international rules that aim to protect the tax base of such country. Any change to such rules could negatively affect the effective tax rate of the Group or could create costly compliance requirements. Therefore, the management maintains close observation of any intended or proposed changes to such rules, both in the United Kingdom and in other key countries where the Group operates.

Critical accounting policies and estimates

The Group's accounting policies are more fully described in Note [X] of 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 represents sales of products to external third parties and excludes inter-company income and value added taxes. Sales of goods are recognised when the risk of loss and title are transferred to customers and reliable estimates can be made of relevant deductions. The Group's revenue recognition policies require management to make a number of estimates, with the most significant relating to charge backs, product returns, rebates and price adjustments which vary by product arrangements and buying groups.

Charge backs

The provision for charge backs is the most significant and complex estimate used in the recognition of revenue. In the US, the Group sells its products directly to wholesalers, 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 'charge back'. The provision for charge backs 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 wholesalers, the Group continually monitors the reserve for charge backs and makes adjustments when it believes that actual charge backs 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 Group has significant investments in goodwill and intangible assets as a result of acquisitions of businesses and purchases of assets such as product development and marketing rights.  

Under IFRS, goodwill and intangibles with indefinite useful economic lives are held at cost and tested annually for impairment, whilst the remaining intangibles are amortised over their estimated useful lives. Estimated useful lives are reviewed annually and impairment reviews are undertaken if events occur which indicate impairment to the carrying values of the assets. 

Purchases of intellectual property and product rights to supplement our R&D portfolio are capitalised as intangible assets. Such intangible assets are amortised from the launch of the underlying products and are tested for impairment. This policy is in line with practice adopted by other major pharmaceutical companies. The critical area of judgement is in relation to the useful economic life of these product-related intangibles and the impairment tests for that are performed at least annually.

Contingent liabilities

In the normal course of business, contingent liabilities may arise from product-specific and general legal proceedings, from guarantees or from environmental liabilities connected with our current or former sites. These potential liabilities are considered to have a remote probability of crystallising and are therefore treated as contingent liabilities in the Group financial statements, and accordingly disclosed in Note 36. Although there can be no assurance regarding the outcome of legal proceedings, we do not expect them to have a materially adverse effect on our financial position or profitability. 

Tax

The Group provides for income tax according to the laws and regulations prevailing in the countries where it operates and the likelihood of settlement. The tax expense represents the sum of the current and deferred tax and the tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement 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 30.2% at the end of 2008 (2007: 30.8%). Further details on the relationship between Mr. Samih Darwazah and Darhold Limited are given in the Remuneration 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 two board members of the Bank were also board members at Hikma Pharmaceuticals PLC. As at 31 December 2008, those two board members were no longer board members of the Capital Bank. Total cash balances at Capital Bank - Jordan were USD 217,000 (2007: USD 155,000). Loans and overdrafts granted by Capital Bank to the Group amounted to USD 207,000 (2007: USD 389,000) with interest rates ranging between 8.75% and LIBOR + 1. Total interest expense and bank charges incurred against Group facilities was USD 86,000 (2007: USD 47,000). Total interest income received was USD 1,500 (2007: USD 10,000) and total commission paid in the year was 11,300 (2007: USD 9,000)

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 1,351,000 (2007: USD 1,107,000). The Group's insurance expense for Jordan International Insurance Company contracts in the year 2008 was USD 1,490,000 (2007: USD 1,360,000). The amounts due to Jordan International Insurance Company at the year end were USD 93,000 (2007: USD 143,000).

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 1,000 (2007: USD 76,000). 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 (2007: USD Nil).

Tunisian Companies: Amounts due from the two Tunisian companies the Group has invested in net of provisions are USD 474,000 (2007: USD 270,000) and USD 793,000 (2007: USD 486,000) 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 303,000 (2007: USD 154,000).

West-ward Pharmaceuticals Corp: In prior years, certain expenses of the Chairman were paid in the USA by West-ward Pharmaceuticals Corp and reimbursed by the Chairman. This practice has now ceased, and at 31 December 2008, the Group has no outstanding balance with the Chairman (2007: USD 11,000). 

Mr. Yousef Abd Ali:   Mr. Yousef Abd Ali is a related party of the Group because he holds a minority interest in Hikma Lebanon of 33%. The amount owed to Mr. Yousef by the Group as at 31 December 2008 was USD 161,000 (2007: Nil).

Labatec Pharma SA: is a related party of the Group because it is owned the by Mr. Samih Darwazah. During 2008 the Group total sales to Labatec Pharma amounted to USD 30,000 (2007: Nil). At 31 December 2008 the Group had no outstanding balance with Labatec Pharma (2007: Nil).

Remuneration of key management personnel: The remuneration of the key management personnel (comprising the executive and non-executive director's and the members of senior management as set out in the Director's 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 Directors' Remuneration Report on pages 89 to 91.

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 announcement. 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 announcement. 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 announcement.

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

 

END

 

 

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