Preliminary Results Announcement-year end 30.6.20
Monday, 7 September 2020
Dechra Pharmaceuticals PLC
(Dechra, Company or the Group)
Preliminary Results Announcement
Global veterinary pharmaceutical business, Dechra, issues audited preliminary results for the year ended 30 June 2020
"Improving Global Animal Health and Welfare"
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"I am pleased to report that Dechra has remained resilient throughout a challenging year. This is testament to our strategy, the strength of our product portfolio and through the innovation and dedication of our people." |
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Ian Page, Chief Executive Officer |
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Highlights
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Strategic progress made: · Ampharmco integration progressing well, Mirataz® acquisition completed in April 2020 and Osurnia® completed in July 2020. · CAP performance robust. · FAP growth accelerating. · Numerous product registrations achieved, and significant progress made on Akston and Tri-Solfen®.
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Strong financial performance: · Revenue growth of 6.8% to £515.1 million. · Underlying operating profit increased to £128.3 million. · Underlying EBIT margin (excluding the impact of pension credit) reduced by 80 bps to 24.9% due to mix effect. · Underlying diluted EPS increased by 1.7% to 92.19 pence. · Reported operating profit growth of 33.6%. · Full year dividend increased by 8.5% to 34.29 pence. · Strong cash generation with cash conversion of 99.4%.
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All of the above measures are at constant exchange rate (CER).
Financial Summary
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2020 £m |
2019 £m |
Growth at AER |
Growth at CER |
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Revenue |
515.1 |
481.8 |
6.9% |
6.8% |
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Underlying |
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Underlying Operating profit |
128.3 |
127.4 |
0.7% |
0.4% |
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Underlying EBIT % |
24.9% |
26.4% |
(150bps) |
(150bps) |
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Underlying EBITDA |
142.5 |
137.2 |
3.9% |
3.7% |
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Underlying diluted EPS (p) |
92.19 |
90.01 |
2.4% |
1.7% |
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Reported |
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Operating profit |
52.2 |
39.0 |
33.8% |
33.6% |
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Diluted EPS (p) |
32.76 |
30.07 |
8.9% |
7.3% |
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Cash generated from operations before interest/taxation |
127.5 |
108.3 |
17.7% |
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Dividend per Share |
34.29 |
31.60 |
8.5% |
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Underlying results excludes items associated with areas such as amortisation of acquired intangibles, acquisition expenses and subsequent integration costs, fair value of uplift of inventory acquired through business combinations, rationalisation costs, loss on extinguishment of debt, and fair value and other movements on deferred and contingent consideration. Further details provided in notes 5 and 21.
IFRS16 has been adopted in the period using the modified retrospective approach and accordingly comparatives have not been restated. The impact of adopting IFRS16 is disclosed in note 18.
AER is defined as Actual Exchange Rate.
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Results Briefing today: A presentation of the Annual Results will be held today at 9.00 am (UK time) via https://webcasting.brrmedia.co.uk/broadcast/5f3e65e9b14d87262643a5ec.
This will also be available on the Dechra website later today.
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Enquiries: |
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Dechra Pharmaceuticals PLC |
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Ian Page, Chief Executive Officer |
Office: +44 (0) 1606 814 730 |
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Paul Sandland, Chief Financial Officer |
Office: +44 (0) 1606 814 730 |
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e-mail: corporate.enquiries@dechra.com |
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TooleyStreet Communications Ltd |
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Fiona Tooley, Director e-mail: fiona@tooleystreet.com |
Office: +44 (0) 121 309 0099 Mobile: +44 (0) 7785 703 523 |
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Notes: Foreign Exchange Rates: FY2020 Average: EUR 1.1396: GBP 1.0; USD 1.2601: GBP 1.0 FY2020 Closing: EUR 1.0960: GBP 1.0; USD 1.2273: GBP 1.0 FY2019 Average: EUR 1.1345: GBP 1.0; USD 1.2945: GBP 1.0 FY2019 Closing: EUR 1.1154: GBP 1.0; USD 1.2693: GBP 1.0
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About Dechra Dechra is a global specialist veterinary pharmaceuticals and related products business. Its expertise is in the development, manufacture, marketing and sales 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
Stock Code: Full Listing (Pharmaceuticals): DPH
Trademarks Trademarks appear throughout this document in italics. Dechra and the Dechra 'D' logo are registered trademarks of Dechra Pharmaceuticals PLC. StrixNB® and DispersinB® are trademarks licensed from Kane Biotech Inc. 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.
Market Abuse Regulation (MAR) The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.
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Dechra Pharmaceuticals PLC
Preliminary Results for the year ended 30 June 2020
Chief Executive Officer's Statement
I am pleased to report that Dechra has remained resilient throughout a challenging year. This is testament to our strategy, the strength of our product portfolio and through the innovation and dedication of our people. Our portfolio focus on prescription only medicines, our continued international expansion and the delivery of targeted acquisitions have ensured that we have, yet again, outperformed the market.
COVID-19
Throughout the pandemic we have successfully managed to remain operational. We took the decision that we would not furlough any of our employees and therefore did not take advantage of, or utilise, any government assistance in any country. There is no doubt that this has provided job security to our people which has enhanced their loyalty and commitment. All manufacturing, logistics and front line laboratories have remained open and operational throughout the period and our employees in these areas have been awarded a one-off bonus payment; all other employees have functionally operated from home. Many of our sales teams created new and innovative ways to communicate with and support our veterinary customer base.
Sadly, we were all touched by the loss to COVID-19 of our Group Manufacturing and Supply Chain Director, Simon Francis. In the 18 months that he was with the Group, Simon had implemented a robust strategy and significantly strengthened the management team who will continue to deliver this strategy as his legacy.
Across the world the majority of veterinary practices have still operated; however, service provision varied on a country-by-country basis, further details of which will be provided later in this report. Our sales have remained robust because of our strategy to focus on essential and chronic prescription medicines, this has served us well, as veterinarians have worked to ensure that sick animals have continued to be treated.
Operational Review
EU Pharmaceuticals Segment
During the financial year our European (EU) Pharmaceuticals Segment reported net revenues increased by 7.8% at CER (6.4% at AER). The Segment includes our International business, which is detailed below. It also includes non-core business, such as third party contract manufacturing, which we continue to exit as strategically planned. Existing revenues, excluding third party contract manufacturing and including the like-for-like impact of recent acquisitions, increased by 6.4% at CER (5.0% at AER).
This growth has been driven across all our key therapeutic sectors, due to veterinary educational programmes on our existing portfolio and the continued delivery of synergies from the AST Farma and Le Vet acquisition completed in February 2018. Two of the products from this acquisition, Tralieve® and Prevomax®, have performed exceptionally well.
Performance by country is varied with the COVID-19 effect being particularly prevalent in the UK and France, both of which have underperformed. The UK was subject to more practice closures than any other country and also appears to have been affected by wholesalers reducing Brexit contingency stock. The UK started to show signs of recovery in June and returned to near normal in July. Performance in France showed a marked improvement in June. All other territories performed well in this difficult COVID-19 affected environment.
Five years ago we had a greenfield start-up of a new Dechra subsidiary in Poland, focusing entirely on FAP products. In line with our strategy, we started to introduce CAP products there. It is pleasing to report that we have more than quadrupled our total in-market revenues in this territory since formation and it is now our fastest growing CAP market.
International Business
Our international expansion strategy continues to deliver growth, especially in Australia, New Zealand and Brazil where we have our own Dechra branded organisations. Core performance in Australia has been strong and will be enhanced in the new financial year as our key endocrine brands, Vetoryl®, Felimazole® and Zycortal®, revert to Dechra following the termination of the prior distribution agreement. The Venco team in Brazil have transitioned the business to the Dechra brand and our capital investment programme continues as we modernise and improve the facilities. The vaccine portfolio in Brazil will be diversified as we start to introduce Dechra products with Vetoryl now being marketed and Felimazole and Zycortal in the fast track approval process. Our distribution business continues to be extended through product registrations and by stronger relationships with these key marketing partners.
NA Pharmaceuticals Segment
Our North America (NA) Pharmaceuticals Segment net revenues increased by 5.1% at CER (7.8% at AER). This is an excellent second half performance given the decline seen in the first half due to supply issues and a strong comparable period in the previous year which benefited from exceptional sales of Zycortal.
On the whole, the US market has been reasonably robust with veterinary practices offering kerbside and online consultations.
Following the acquisition of Mirataz, we appointed 11 talented members of the Kindred Biosciences Incorporated (Kindred Bio) team which extended our overall sales capabilities and added to our digital marketing skills.
Performance in Mexico continues to improve as we now have several key Dechra products registered in the territory which provide a higher margin than the legacy products.
Performance in Canada remains solid; however, it has been partly offset by an ongoing supply issue with Canaural®, an older product produced in-house that we are in the process of modernising to bring testing methods up to current standards.
Product Group Performance
CAP
Companion Animal Products (CAP), which represent 70.1% of Group turnover, grew by 5.5% at CER. This steady performance benefitted from the launch of Mirataz but was impacted by lower sales rates in the UK and France in the last quarter.
FAP
Food producing Animal Products (FAP), which represents 14.5% of Group turnover, grew by 33.5% at CER, a strong performance benefitting from a full year of sales from Dechra Brazil (Venco) and with a lower impact from COVID-19 disruptions.
Equine
Equine, which represents 7.1% of Group turnover, grew by 6.1% at CER benefitting from a full year of the Caledonian acquisition portfolio.
Nutrition
Nutrition represents 5.6% of Group turnover and declined by 0.7%. This is a solid performance as these nutritional diets are subject to discretionary spend unlike much of the rest of the portfolio which is predominantly clinically necessary pharmaceuticals. Following the relaunch of the cat diets last year, the dog diets have now also all been refreshed with improved formulation, packaging and presentation and have been positioned at a lower price point to give us an additional competitive advantage.
Product Development
Structural Changes
As reported at the half year, Dr Susan Longhofer, who has been with the Group for 15 years, was promoted to a new position of Group Chief Scientific Officer. Following this promotion, we have restructured product development, regulatory affairs and pharmaceutical business development teams. Nancy Zimmerman, formerly head of Companion Animal Marketing, was promoted to Group Director of Pharmaceutical Business Development, a role predominantly focused around identifying and screening new development opportunities. Trish Logie, a recent appointment within the EU, who has industry and regulatory agency experience, has been promoted to Group Director, Regulatory Affairs. Anthony Lucas remains as the Group Product Development Director.
Our product development laboratory in Zagreb has been completely refurbished to GMP standards; with double the amount of space, new equipment and the appointment of new analysts. This investment enables us to increase the amount of analytical and formulation work conducted at this facility significantly.
Product Approvals
Numerous marketing authorisations have been achieved throughout the year. Although none is material in its own right, they all strengthen the existing portfolio in Dechra territories and enhance our International portfolio, an increasing area of strategic importance. Major approvals in Dechra territories were:
• Cosacthen for the diagnosis of Cushing's Disease and Addison's Disease (which Vetoryl and Zycortal treat) was approved in 23 EU territories and Canada;
• Avishield IB Plus and Avishield IB GI-13, both poultry vaccines, were approved in the EU territories;
• Marboquin tablets, a companion animal antibiotic, were approved in the USA;
• eight new products were registered in Australia and New Zealand, two in Mexico and one in Brazil;
• a number of established products already registered in the EU have now received approval in new territories, including Clavudale®, Felimazole, Isathal®, Spectrabactin and Octacillin®. Our market leading equine non-steroidal anti-inflammatory, Equipalazone®, has been reformulated with the addition of a flavouring agent, which has now been approved in 13 European territories; and
• Internationally we have received 34 approvals across our key brands in countries including Indonesia, Korea, Myanmar, Nicaragua, Oman, Tanzania, Thailand, United Arab Emirates, Uruguay and Vietnam.
Filling the Pipeline
At the beginning of the financial year, in August 2019, we announced the signing of a licensing and supply agreement with Akston Biosciences to co-develop a long acting treatment for diabetes in dogs. Subsequently we have exercised our rights to evaluate the cat product. The initial proof of concept study in dogs was positive with high efficacy rates and satisfied dog owners who only had to administer an injection once a week as opposed to twice daily. We still have many significant hurdles to cross but initial indications look positive for what could be a huge opportunity for the Group. We continue to screen numerous other opportunities and are hoping shortly to commence another proof of concept study for a novel ophthalmic product.
Acquisitions
In July 2019, we acquired an additional 15.0% of the shares of Medical Ethics Pty Ltd, the parent company of Animal Ethics Pty Ltd, for a consideration of AUD13.5 million (£7.6 million). Following the acquisition of 33.0% for AUD18.0 million in 2017 this takes our total holding to 48%. Strong progress continues to be made on the global development of Tri-Solfen® for pigs, cattle and sheep. I am pleased to report that the Committee for Veterinary Medicinal Products (CVMP) has recommended that a maximum residue limit (MRL) be granted for the topical use of the two local anaesthetic constituents of Tri-Solfen® for use in cattle and pigs. This is a major positive step forward towards gaining market approvals in the EU and UK with submission of the dossier for approval for use in pigs expected to be made through the European decentralised process before the end of the calendar year. The ongoing trials for its application for debriding of venous leg ulcers in humans have been delayed due to COVID-19.
In August 2019, we announced the acquisition of Ampharmco LLC in Fort Worth, Texas, USA for a cash consideration of USD29.6 million (£24.3 million). Ampharmco, an FDA registered facility, was acquired to support our manufacturing strategy and to provide us with a US base to manufacture solid dose, liquids, creams and ointments for the American market. It also had three FDA approved generic products: Gentamicin-Betamethasone Topical Spray was already marketed by Dechra; Carprofen Chewable Tablets have now been launched under the Dechra brand; and Carprofen Flavoured Tablets have recently been approved but not yet launched.
In April 2020, we completed the acquisition of the worldwide rights and assets of the Mirataz product portfolio from Kindred Bio for a cash consideration of USD43.0 million (£34.9 million) and a royalty on future sales. Mirataz is the first and only FDA and EMA approved transdermal medication for the management of weight loss in cats, a major problem encountered by veterinarians and owners when treating other underlying medical conditions. The product is an excellent fit with Dechra's existing portfolio as many of the conditions our products treat are complicated by weight loss in cats. It is a product that will need our technical expertise, marketing capabilities and educational tools to drive sales. It is currently sold in the USA and has recently been approved in the EU with an expected launch towards the end of the 2020 calendar year. We are also planning registration in several other territories.
In July 2020, post the year end, we completed the acquisition of the worldwide rights to the Osurnia product portfolio from Elanco Animal Health Incorporated for consideration of USD135.0 million (£104.7 million). Osurnia is a long acting treatment for otitis externa (inflammation of the outer ear) in dogs. The addition of Osurnia to our dermatology portfolio will significantly enhance our presence in this key therapeutic area and increase the range of solutions we offer to veterinarians in treating otitis. Osurnia is sold in all our main markets, North America and the EU and also in a number of our International markets including Brazil and Australia.
Strategic Enablers
Manufacturing and Supply Chain
It has been an extremely challenging year for the Manufacturing and Supply Chain team, especially with the loss to COVID-19 of the head of the team. The strong management team has been further enhanced in the year, especially in the areas of quality control and quality assurance. We have also added further personnel to the team that manage our network of third party suppliers, who currently make more than 50% of all the products we sell. There has been a huge amount of activity to resolve in-house quality control problems, mainly revolving around older products at our facility in Skipton. We are also accelerating our strategic plan to increase the in-house manufacture of our products and also to secure stronger, long term relationships with Contract Manufacturing Organisations for the balance. We are developing a team and infrastructure to enable us to exceed the ever increasing and exacting standards expected in pharmaceutical manufacturing and also to deal with the external work streams involved in the technical transfer of products to new manufacturing sites. Although the majority of in-house issues have been remedied, with only a few of our older products out of stock, it will be several months before some of our outsourced products are back in full supply.
We have continued to invest in the development and in the infrastructure at our sites:
• Skipton, UK has been refreshed and refurbished;
• Bladel, Netherlands is being prepared for FDA inspection for the sterile facility;
• Zagreb, Croatia has efficiently increased capacity and infrastructure throughout;
• Londrina, Brazil continues improvements in its upstream vaccine production; and
• Sydney, Australia is investing to gain Therapeutic Goods Administration (TGA) approval, a higher quality standard, which will allow us to export products outside Australia and New Zealand.
Technology
Technology is a major enabler and support function for the Group. Numerous projects are being delivered including the:
• continued roll out and development of the Group ERP network;
• standardisation of systems and hardware across the world, including integration of recent acquisitions; and
• support and strengthening of the network to provide enhanced security and good connectivity for increased numbers of home workers.
Technology for education continues to be developed providing training modules for employees through an in-house system branded Delta and educational tools for veterinarians and veterinary nurses through the Dechra Academy. Throughout the COVID-19 pandemic our digital capabilities have proven to be very successful tools. In Europe 15,000 unique users completed Dechra Academy courses; several thousand veterinarians attended webinars during the pandemic; and there were over 230,000 views of Dechra YouTube content. In the US we held 500 webinar presentations in the year with approximately 20,000 attendees.
People
In March 2020 we announced the appointment of Alison Platt as an additional Non-Executive Director. Alison has extensive experience of leadership in both Executive and Non-Executive roles and will strengthen the Board and provide continuity through our next phase of growth, especially as both the Senior Independent Director and the Audit Committee Chairman are on nine year terms which expire in 2022.
After ten years with the Group and several months as Acting Chief Financial Officer, in October 2019 Paul Sandland was appointed to the role on a permanent basis and joined the Board.
In February 2020, Clint Morris, an experienced finance lead, was appointed to Paul Sandland's previous role as DVP EU Finance Director.
Following the retirement of a long-serving senior EU Manager, Jan Jaap Korevaar, we have appointed Nathalie Miara, who has extensive industry experience, to Director of European Marketing.
Within the year we have rolled out a Save As You Earn (SAYE) scheme in the United States; the launch exceeded all our expectations with over 50% of employees demonstrating their commitment to the success of Dechra by enrolling on the scheme. We are looking to launch similar schemes in the EU and other major territories where regulations permit.
In line with our CSR programme, we have encouraged our people to get involved in community projects and volunteer services and have given all employees the opportunity to participate in local schemes during working days, further details are provided in the Corporate Social Responsibility section of the Annual Report and Accounts.
The level of commitment and dedication to Dechra has always been evident; however, throughout the COVID-19 pandemic it has been truly exceptional. I would like to thank all employees for their hard work, dedication, innovation and commitment throughout the year.
Dividend
The Board is proposing a final dividend of 24.00 pence per share (2019: 22.10 pence per share). Added to the interim dividend of 10.29 pence per share (2019: 9.50 pence per share), this brings the total dividend for the financial year ended 30 June 2020 to 34.29 pence per share (2019: 31.60 pence per share), representing 8.5% growth over the previous year.
Subject to shareholder approval at the Annual General Meeting to be held on 27 October 2020, the final dividend will be paid on 27 November 2020 to shareholders on the Register at 6 November 2020. The shares will become ex-dividend on 5 November 2020.
Outlook
Trading in the first few weeks of the new financial year has been encouraging. However, the underlying COVID-19 affected longer term trend cannot yet be ascertained as there is a degree of correction in current sales as markets, such as the UK, return to growth and wholesaler stocks return to more normalised levels. The indications at this stage, however, are positive. A key area of focus over the coming months will be the sales and marketing of our recently acquired brands, Osurnia and Mirataz, which offer solid growth prospects and strengthen our portfolio. We believe in the capability of our people and our ability to execute our strategy and therefore remain confident in our future growth prospects.
Ian Page
Chief Executive Officer
7 September 2020
Financial Review
Overview of Reported Financial Results
To assist with understanding our reported financial performance, the consolidated results below are split between existing and acquired businesses; acquisition includes the incremental effect of those businesses acquired in the current and prior year, reported on a 'like-for-like' basis. Additionally, the table below shows the growth at both reported actual exchange rates (AER), and constant exchange rates (CER) to identify the impact of foreign exchange movements. The acquisition operating loss includes underlying operating profit of £1.6 million and non-underlying charges of £6.9 million. These non-underlying charges comprise amortisation of acquired intangibles of £2.6 million and acquisition costs of £4.3 million.
Including non-underlying items, the Group's consolidated operating profit increased by 33.6% at CER (33.8% at AER) whilst consolidated profit before tax increased by 45.3% at CER (47.1% at AER). Diluted EPS growth was restricted to 7.3% at CER (8.9% at AER) primarily reflecting the one-off impact in the prior year of the reduction in the Netherlands tax rates on deferred tax balances.
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As Reported |
2020 Existing £m |
2020 Acquisition £m |
2020 Consolidated £m |
2019 £m |
Growth at AER |
Growth at CER |
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Consolidated % |
Consolidated % |
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Revenue |
502.1 |
13.0 |
515.1 |
481.8 |
6.9% |
6.8% |
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Gross profit |
285.4 |
6.2 |
291.6 |
273.1 |
6.8% |
6.7% |
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Gross profit % |
56.8% |
47.7% |
56.6% |
56.7% |
(10bps) |
(10bps) |
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Operating profit/(loss) |
57.5 |
(5.3) |
52.2 |
39.0 |
33.8% |
33.6% |
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EBIT % |
11.5% |
(40.8%) |
10.1% |
8.1% |
200bps |
200bps |
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Profit/(loss) before tax |
47.3 |
(6.4) |
40.9 |
27.8 |
47.1% |
45.3% |
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Diluted EPS (p) |
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32.76 |
30.07 |
8.9% |
7.3% |
Overview of Underlying Financial Results
When presenting our financial results, we use a number of adjusted measures which are considered by the Board and management in reporting, planning and decision making. Underlying results reflect the Group's trading performance excluding non-underlying items. A reconciliation of underlying results to reported results in the year to 30 June 2020 is provided in the table below. In the commentary which follows, all references will be to CER movement unless otherwise stated.
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Non-underlying Items |
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2020 Underlying Results £m |
Amortisation and related costs of acquired intangibles £m |
Acquisition, impairments and restructuring costs £m |
Tax rate changes and finance expenses £m |
2020 Reported Results £m |
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Revenue |
515.1 |
- |
- |
- |
515.1 |
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Gross profit |
291.6 |
- |
- |
- |
291.6 |
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Selling, general and administrative expenses |
(134.9) |
(63.9) |
(6.5) |
- |
(205.3) |
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R&D expenses |
(28.4) |
(5.7) |
- |
- |
(34.1) |
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Operating profit |
128.3 |
(69.6) |
(6.5) |
- |
52.2 |
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Net finance costs |
(8.5) |
- |
- |
(2.5) |
(11.0) |
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Share of associate profit/(loss) |
0.3 |
(0.6) |
- |
- |
(0.3) |
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Profit before tax |
120.1 |
(70.2) |
(6.5) |
(2.5) |
40.9 |
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Taxation |
(24.7) |
17.0 |
0.9 |
(0.2) |
(7.0) |
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Profit after tax |
95.4 |
(53.2) |
(5.6) |
(2.7) |
33.9 |
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Diluted EPS (p) |
92.19 |
- |
- |
- |
32.76 |
In the year, Dechra delivered consolidated revenue of £515.1 million, representing an increase of 6.8% on the prior year. This included £502.1 million from its existing business, an increase of 4.1%, and a £13.0 million contribution from acquired businesses.
Consolidated underlying operating profit of £128.3 million represents a 0.4% increase on the prior year. This included £126.7 million from Dechra's existing business, a reduction of 0.8% on a like-for-like basis, and a £1.6 million contribution from acquired businesses.
Underlying EBIT margin reduced by 150 bps to 24.9%, with the erosion attributable to a combination of the £3.5 million curtailment credit of our Dutch defined benefit pension scheme in the prior year, the dilutive impact of acquired businesses and increased Research and Development expenses. Excluding the credit relating to the curtailment of the Dutch defined benefit pension scheme in the prior year, the EBIT margin reduction would be 80 bps.
Underlying diluted EPS grew by 1.7% to 92.19 pence reflecting the profit growth from the existing and acquired businesses.
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Underlying |
2020 Existing £m |
2020 Acquisition £m |
2020 Consolidated £m |
2019 £m |
Growth at CER |
|
|
Existing % |
Consolidated % |
|||||
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Revenue |
502.1 |
13.0 |
515.1 |
481.8 |
4.1% |
6.8% |
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Gross profit |
285.4 |
6.2 |
291.6 |
278.2 |
2.5% |
4.7% |
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Gross profit % |
56.8% |
47.7% |
56.6% |
57.7% |
(90bps) |
(110bps) |
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Underlying Operating profit |
126.7 |
1.6 |
128.3 |
127.4 |
(0.8%) |
0.4% |
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Underlying EBIT % |
25.2% |
12.3% |
24.9% |
26.4% |
(120bps) |
(150bps) |
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Underlying EBITDA |
140.2 |
2.3 |
142.5 |
137.2 |
2.0% |
3.7% |
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Underlying Diluted EPS (p) |
- |
- |
92.19 |
90.01 |
- |
1.7% |
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Dividend per share (p) |
- |
- |
34.29 |
31.6 |
- |
8.5% |
Reported Segmental Performance
Reported segmental performance is presented in note 2. The effect of acquisitions in the year was material; the reported segmental performance is analysed between existing and acquired businesses, and at AER and CER in the table below. The acquisition elements capture the additional base business coming into the Group up to the first anniversary of their acquisition, including the growth Dechra generated in them during the year, and the synergies that have already been realised by the Group since acquisition. This analysis becomes less definitive the further in time from the completion of the acquisition, as the acquired business is progressively integrated with the existing business.
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Reported |
2020 Existing £m |
2020 Acquisition £m |
2020 Consolidated £m |
2019 £m |
Growth at AER |
Growth at CER |
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|
Existing % |
Consolidated % |
Existing % |
Consolidated % |
|||||
|
Revenue by segment |
|
|
|
|
|
|
|
|
|
EU Pharmaceuticals |
314.3 |
9.2 |
323.5 |
304.0 |
3.4% |
6.4% |
4.7% |
7.8% |
|
NA Pharmaceuticals |
187.8 |
3.8 |
191.6 |
177.8 |
5.6% |
7.8% |
3.0% |
5.1% |
|
Total |
502.1 |
13.0 |
515.1 |
481.8 |
4.2% |
6.9% |
4.1% |
6.8% |
|
Operating profit/(loss) by segment |
|
|
|
|
|
|
|
|
|
EU Pharmaceuticals |
98.6 |
1.4 |
100.0 |
100.3 |
(1.7%) |
(0.3%) |
(0.6%) |
0.8% |
|
NA Pharmaceuticals |
62.9 |
0.8 |
63.7 |
59.2 |
6.2% |
7.6% |
3.4% |
4.7% |
|
Pharmaceuticals Research and Development |
(27.8) |
(0.6) |
(28.4) |
(25.1) |
(10.8%) |
(13.1%) |
(10.0%) |
(12.4%) |
|
Segment operating profit |
133.7 |
1.6 |
135.3 |
134.4 |
(0.5%) |
0.7% |
(0.8%) |
0.4% |
|
Corporate and unallocated costs |
(7.0) |
- |
(7.0) |
(7.0) |
0.0% |
0.0% |
0.0% |
0.0% |
|
Underlying operating profit |
126.7 |
1.6 |
128.3 |
127.4 |
(0.5%) |
0.7% |
(0.9%) |
0.4% |
|
Non-underlying operating items |
(69.2) |
(6.9) |
(76.1) |
(88.4) |
|
|
|
|
|
Reported operating profit |
57.5 |
(5.3) |
52.2 |
39.0 |
47.4% |
33.8% |
47.2% |
33.3% |
Underlying Segmental Performance
European Pharmaceuticals
Revenue in European (EU) Pharmaceuticals grew by 7.8%. The existing business grew by 4.7% including like-for-like year-on-year Dechra Brazil (Venco) revenue, and Caledonian Holdings Ltd (Caledonian) revenue; excluding third party contract manufacturing, which is being reduced in line with our strategy and replaced with own product manufacturing, revenues increased by 6.4%. This growth was driven by a strong performance in a number of countries, including Germany, Iberia, Poland and Italy, and through the continued realisation of synergies from Le Vet partly offset by COVID-19 related weakness driving lower sales in the UK. The acquisitions of Venco and Caledonian contributed a combined £9.2 million to revenue for the period where there is no comparative and are reported within EU Pharmaceuticals.
Operating Profit from existing business declined by 0.6%, with operating margin reducing to 31.4% and consolidated operating margin declining to 30.9%. This was principally due to the prior year curtailment of our Dutch defined benefit pension scheme which resulted in a £3.5 million non-cash credit in addition to the adverse product mix impact from the acceleration of our lower margin FAP business. Excluding the curtailment gain, operating profit from existing business grew by 3.0% with operating margins reducing by 50 bps.
|
Underlying |
2020 Existing £m |
2020 Acquisition £m |
2020 Consolidated £m |
2019 £m |
Growth at CER |
|
|
Existing % |
Consolidated % |
|||||
|
Revenue |
314.3 |
9.2 |
323.5 |
304.0 |
4.7% |
7.8% |
|
EBITDA |
109.6 |
1.8 |
111.4 |
108.6 |
1.9% |
3.7% |
|
EBITDA % |
34.9% |
19.6% |
34.4% |
35.7% |
(90bps) |
(130bps) |
|
Operating Profit |
98.6 |
1.4 |
100.0 |
100.3 |
(0.6%) |
0.8% |
|
Operating Profit % |
31.4% |
15.2% |
30.9% |
33.0% |
(170bps) |
(220bps) |
North American Pharmaceuticals
Revenue from North American (NA) Pharmaceuticals grew by 5.1% to £191.6 million. The existing business grew by 3.0% due to a strong second half of the year which benefitted from the resolution of most of our internal supply issues and the retention of market share for Zycortal. The acquisitions of Ampharmco and Mirataz added £3.8 million to revenue for the period.
Operating Profit from existing business grew 3.4% with operating margin increasing slightly by 10 bps to 33.5%. Further margin expansion was hampered by the loss of our sterile ophthalmic range for the entire financial year. We expect to be back in supply of this range in the second half of the 2021 financial year. Acquisitions did not impact significantly on segmental performance in the period with a small contribution from Ampharmco relating to third party contract sales in addition to the initial sales of Mirataz in the last two months of the financial year.
|
Underlying |
2020 Existing £m |
2020 Acquisition £m |
2020 Consolidated £m |
2019 £m |
Growth at CER |
|
|
Existing % |
Consolidated % |
|||||
|
Revenue |
187.8 |
3.8 |
191.6 |
177.8 |
3.0% |
5.1% |
|
EBITDA |
64.3 |
1.1 |
65.4 |
60.0 |
4.3% |
6.2% |
|
EBITDA % |
34.2% |
28.9% |
34.1% |
33.7% |
50bps |
40bps |
|
Operating Profit |
62.9 |
0.8 |
63.7 |
59.2 |
3.4% |
4.7% |
|
Operating Profit % |
33.5% |
21.1% |
33.2% |
33.3% |
10bps |
(10bps) |
Pharmaceuticals Research and Development
Pharmaceuticals Research and Development (R&D) expenses increased by 12.4% from £25.1 million to £28.4 million, with existing business research and development increasing by 10.0%. R&D activities from the acquisition of Ampharmco and Venco added £0.6 million. Overall R&D expenses as a percentage of revenue increased from 5.2% to 5.5%. This included £2.2 million of spend in relation to Akston, and was in line with the previously communicated strategic intent to expand the Group's product pipeline and to increase investment in more novel opportunities to drive enhanced future growth.
|
|
2020 Existing £m |
2020 Acquisition £m |
2020 Consolidated £m |
2019 £m |
Growth at CER |
|
|
Existing % |
Consolidated % |
|||||
|
R&D expenses |
(27.8) |
(0.6) |
(28.4) |
(25.1) |
(10.0%) |
(12.4%) |
|
% of Revenue |
5.5% |
4.6% |
5.5% |
5.2% |
|
|
Revenue by Product Category
CAP revenue continues to be the largest proportion of Dechra's business at 70.1%, down from 70.6% in the prior year. CAP grew 5.5% in the year from market penetration, product launches and the addition of Mirataz. Equine revenue grew by 6.1% in the year, with growth driven by the Caledonian acquisition. FAP revenue accelerated by 33.5% driven by strong core growth in the EU and the acquisition of Venco. Nutrition revenue slightly declined on the prior year.
Other revenue reduced by 34.1% to £13.7 million, now representing only 2.7% of the business as we continue our planned exit from third party contract manufacturing in line with our manufacturing strategy, to improve the production efficiency of Dechra's own products.
|
|
2020 £m |
2019 £m |
% Change at AER |
% Change at CER |
|
CAP |
361.6 |
340.2 |
6.3% |
5.5% |
|
Equine |
36.4 |
34.4 |
5.8% |
6.1% |
|
FAP |
74.8 |
57.3 |
30.5% |
33.5% |
|
Subtotal Pharmaceutical |
472.8 |
431.9 |
9.5% |
9.3% |
|
Nutrition |
28.6 |
29.1 |
(1.7%) |
(0.7%) |
|
Other |
13.7 |
20.8 |
(34.1%) |
(34.1%) |
|
Total |
515.1 |
481.8 |
6.9% |
6.8% |
Underlying Gross Profit
Underlying Gross Profit for the existing business declined by 90 bps to 56.8% and the consolidated Underlying Gross Profit declined by 110 bps to 56.6%, reflecting the greater proportion of FAP sales.
Underlying Selling, General and Administrative Expenses (SG&A)
SG&A costs grew from £125.7 million in the prior year to £134.9 million in the current year, an increase of 7.3% (at AER). This represents growth from both acquired and the existing businesses, and infrastructure cost added to manage the acquisitions and drive further growth.
For the 2019 financial year the SG&A costs included a £3.5 million non-cash credit through the income statement as a result of the curtailment of our Dutch defined benefit pension scheme.
SG&A as a percentage of revenue at 26.2% remained in line with 2019 at 26.1% (26.8% excluding the pension credit).
Non-underlying Items
Non-underlying items incurred in the year are fully described in note 5. In summary, they relate to the following:
• Amortisation of acquired intangibles of £69.6 million - the amortisation of the acquired intangibles has declined from £76.8 million principally due to a lower charge from the AST Farma and Le Vet acquisition;
• Expenses relating to acquisition and subsequent integration activities of £4.3 million (2019: £3.7 million) - this includes the transaction and integration costs associated with the acquisitions made in recent years including AST Farma and Le Vet, Caledonian, Venco, Ampharmco, Mirataz and the prospective acquisition of Osurnia which completed in July 2020;
• Rationalisation of manufacturing organisation of £2.2 million (2019: £2.0 million) - this comprises the costs associated with this strategic programme;
• Finance expense of £2.5 million (2019: £1.0 million) - this represents the charge arising on the acceleration of the amortisation of arrangement fees relating to the Term Loan on termination (see Borrowing Facilities section below) and also unwinding of the present value discounts relating to contingent consideration due and associated foreign exchange; and
• Taxation credit of £17.7 million (2019: £28.0 million) - this represents the tax impact of the above, as well as the revaluation of deferred tax balance sheet items following changes in corporate tax rates including a further revision to the 2021 Netherlands tax rate which will now decrease to 21.7% in 2021 (previously this was expected to be 20.5%).
Taxation
The reported effective tax rate (ETR) for the year is 17.1% (2019: credit of 11.2%). The significant credit in the prior year reflected the one-off impact of the reduction in the Netherlands tax rates on deferred balances. On an underlying basis the ETR is 20.6% (2019: 21.2%); the main differences to the UK corporation tax rate applicable of 19.0% (2019: 19.0%) relate to patent box allowances and differences in overseas tax rates.
The underlying ETR is expected to remain broadly similar in the current year, due to the anticipated mix of profits from different countries.
We continue to monitor relevant tax legislation internationally as it may affect our future ETR. Further details can be found in Understanding Our Key Risks detailed below.
Reported Profit
Reported profit before tax increased by 47.1% at AER reflecting the reported operating profit growth of 33.8% at AER and the proportionate decrease in the finance charges arising from the financing of prior and current year acquisitions.
Earnings per Share and Dividend
Underlying diluted EPS for the year was 92.19 pence, a 1.7% growth on the prior year in line with the EBIT growth of 0.4%. The weighted average number of shares for the year was 103.5 million (2019: 102.8 million).
The reported diluted EPS for the year was 32.76 pence (2019: 30.07 pence). This represents an increase of 8.9% (at AER) in reported EPS much lower than the reported EBIT growth of 33.8% (at AER) and reflects an increase in the reported tax charge due to the year on year impact of rate changes, which gave rise to a tax credit in the previous year.
The Board is proposing a final dividend of 24.00 pence per share (2019: 22.10 pence), added to the interim dividend of 10.29 pence, the total dividend per share for the year ended 30 June 2020 is 34.29 pence. This represents 8.5% growth over the prior year. Dividend cover based on underlying diluted EPS is 2.7 times (2019: 2.8 times). The Board continues to operate a progressive dividend policy recognising investment opportunities as they arise.
Currency Exposure
The average rate for £/€ increased by 0.4%, and the £/$ rate has decreased by 2.7% during the financial year. The effect in the Consolidated Income Statement and Statement of Financial Position is analysed in the above paragraphs of this review between performance at AER and CER. CER analysis compares the performance of the business on a like-for-like basis applying constant exchange rates.
|
|
Average rates |
|
|
|
2020 |
2019 |
% Change |
|
|
£/€ |
1.1396 |
1.1345 |
0.4% |
|
£/$ |
1.2601 |
1.2945 |
(2.7%) |
Currency Sensitivity
Euro €: a 1% variation in the £/€ exchange rate affects underlying diluted EPS by approximately +/- 0.4%.
US Dollar $: a 1% variation in the £/$ exchange rate affects underlying diluted EPS by approximately +/- 0.4%.
Current exchange rates are £/€ 1.1256 and £/$ 1.3351 as at 2 September 2020. If these rates had applied throughout the year, the underlying diluted EPS would have been approximately 2.1% lower.
Statement of Financial Position
The Statement of Financial Position is summarised in the table below.
• Non-current assets (excluding deferred tax) increased from £750.0 million to £788.7 million and includes the intangible assets recognised on the acquisitions of Ampharmco and Mirataz and the additional investment in Medical Ethics being partly offset by amortisation of acquired intangibles.
• Working capital has increased from £107.8 million to £116.5 million partly due to an increase in inventory to enable service levels to be maintained whilst customer inventory levels fluctuate due to COVID-19 uncertainty but also due to the growth of the Group.
• Net debt has decreased in the year by £100.2 million from £227.8 million to £127.6 million; this includes cash generation from operations at £127.5 million, the net proceeds from the share placing of £131.5 million, outflows of £66.8 million relating to the acquisitions of Ampharmco, Mirataz and the additional investment in Medical Ethics along with £33.3 million in dividends. Exchange rate variations adversely affected the net debt position by £3.0 million.
• Current and deferred tax has reduced from £82.0 million to £78.7 million principally due to the realisation of deferred tax liabilities relating to the amortisation of acquired intangibles.
|
|
2020 £m |
2019 £m |
|
Non-current assets |
786.0 |
749.1 |
|
Working capital |
116.5 |
107.8 |
|
Net debt |
(127.6) |
(227.8) |
|
Current and deferred tax |
(78.7) |
(82.0) |
|
Other liabilities |
(58.7) |
(38.0) |
|
Total net assets |
637.5 |
509.1 |
Cash Flow, Financing and Liquidity
The Group enjoyed strong cash generation during the year, with a strong EBITDA margin of 27.7% (2019: 28.5%). However, as mentioned above, working capital has increased by £8.7 million, mainly due to increases in inventory as a result of additional stock cover during COVID-19 and growth of the Group's trading activities. This resulted in net cash generated from operations of £127.5million, representing cash conversion of 99.4%.
|
|
2020 £m |
2019 £m |
|
Underlying operating profit |
128.3 |
127.4 |
|
Depreciation and amortisation |
14.2 |
9.8 |
|
|
|
|
|
Underlying EBITDA |
142.5 |
137.2 |
|
Underlying EBITDA % |
27.7% |
28.5% |
|
Working capital movement |
(8.7) |
(19.5) |
|
Other |
1.0 |
(2.0) |
|
Cash generated from operations before interest, taxation and non-underlying items |
134.8 |
115.7 |
|
Non-underlying items |
(7.3) |
(7.4) |
|
Cash generated from operations before interest and taxation |
127.5 |
108.3 |
|
Cash conversion (%) |
99.4% |
85.0% |
Net Debt Bridge
Notable cash items are listed below in the net debt reconciliation table:
• Net capital expenditure on tangible and intangible assets (excluding the Mirataz acquisition) decreased to £14.2 million (2019: £22.2 million), representing 1.0 times depreciation and amortisation.
• Acquisitions of subsidiaries, intangible assets and investment in associates of £67.6 million includes the acquisitions of Ampharmco and Mirataz, the additional investment in Medical Ethics and the royalty payment for Phycox. Further details are provided in notes 6 and 15.
|
|
£m |
|
Net Debt 30 June 2019 |
(227.8) |
|
Net cash generated from operations before non-underlying items |
134.8 |
|
Non-underlying items |
(7.3) |
|
Net capital expenditure |
(14.2) |
|
Acquisition of subsidiaries & Mirataz product rights |
(60.0) |
|
Investment in associates |
(7.6) |
|
Acquisition of subsidiary borrowings |
(0.1) |
|
New borrowing (finance leases ) |
(5.5) |
|
Interest and tax |
(20.4) |
|
Net equity issued |
131.5 |
|
Dividend paid |
(33.3) |
|
Changes in accounting policy for leases |
(12.7) |
|
Other non-cash movements |
(2.0) |
|
Foreign exchange on net debt |
(3.0) |
|
Net Debt 30 June 2020 |
(127.6) |
· The net debt/underlying EBITDA leverage ratio per the borrowing facilities' leverage covenant, which includes the proforma adjustment to full year EBITDA for the acquisitions, was 0.80 times (2019: 1.64 times) versus a covenant of 3 times.
Borrowing Facilities
As reported in preceding Annual Reports, the Group completed a refinancing and entered into a multi-currency facilities agreement in July 2017 (the Facility Agreement) with a group of banks comprising Bank of Ireland (UK) plc, BNP Paribas, Fifth Third Bank, HSBC Bank plc, Lloyds Bank plc (replaced by Credit Industriel et Commercial, London branch (CIC) in August 2019), Raiffeisen Bank International AG and Santander UK plc (the Banks). The Facility agreement included a committed revolving credit facility (the RCF) of £235.0 million, together with an 'Accordion' facility of £125.0 million. The RCF is committed until July 2024.
On 1 October 2019 the Accordion on the RCF was invoked, removing the Accordion facility and increasing the committed facilities on the RCF to £340.0 million.
In January 2018, the Group also entered into a £350.0 million multi-currency term loan facility (Term Loan) with BNP Paribas Fortis SA/NV, Fifth Third Bank, HSBC Bank plc, Banco Santander SA, London branch and Lloyds Bank plc, with the loans made or to be made under the Term Loan to be applied towards the acquisition of AST Farma and Le Vet and any other permitted acquisitions. All parties' terms and conditions were the same as in the RCF. The maturity date on the Term Loan was 31 December 2020 with a drawdown period expiring on 31 December 2019.
In January 2020 the Group undertook a Private Placement raising €50.0 million and USD 100.0 million (under seven and ten year new senior secured notes respectively), the proceeds of which were used to repay existing debt and enabled the Term Loan to be fully repaid and cancelled. The placement achieved the Group's aims of diversifying the sources of debt financing and extending the debt maturity profile.
On 4 June 2020 the Group successfully completed a share placing of 5,132,500 new ordinary shares, representing approximately 5% of the existing issued share capital of the Company, at a price of 2600 pence per placing share, raising gross proceeds of £133.4 million which were largely deployed to fund the Osurnia acquisition upon its completion on 27 July 2020.
Covenants
There are two covenants governing the RCF and the Private Placement:
• Leverage: Net Debt to underlying EBITDA not greater than 3:1 for the RCF and 3.5:1 for the Private Placement (30 June 2020: 0.80:1); and
• Interest Cover: underlying EBITDA to Net Finance Charges not less than 4:1 (30 June 2020: 14.5:1).
The current RCF is committed and has a non-utilisation fee of 35.0% of the applicable margin. The margin over LIBOR (or equivalent) ranges from 1.3% for leverage below 1.0 times, up to 2.2% for leverage above 2.5 times.
The weighted average coupon of the Private Placement fixed rate notes will equate to 2.8%.
Return on Capital Employed (ROCE)
ROCE reduced to 15.4% in the year (2019: 15.6%) reflecting the lower initial contribution in the year from the investments made in Ampharmco and Medical Ethics.
Acquisitions
The Group has made several acquisitions in recent years. The incremental performance during the first year of ownership of the acquisitions made during the 2019 and 2020 financial years is separately summarised compared to the existing business in the sections above.
In July 2019, the Group acquired an additional 15.0% of the shares of Medical Ethics Pty Ltd for a consideration of £7.6 million. This takes our total holding to 48.0%. The acquisition was financed from the Group's existing working capital resources.
In August 2019, we announced the acquisition of Ampharmco LLC, an FDA registered facility in Fort Worth, Texas for a cash consideration of £24.3 million. The business has been successfully integrated into the Group and will support our manufacturing strategy to produce more in-house. The acquisition was financed from the Group's existing working capital resources.
In April 2020, the Group completed the acquisition of the worldwide rights and assets of the Mirataz product portfolio from Kindred Biosciences Incorporated for consideration of £34.9 million plus a royalty on future revenues. The addition of Mirataz significantly enhances the Dechra portfolio and is complementary to its existing product offering to veterinarians. The acquisition was financed from an additional drawdown from the Group's RCF.
Accounting Standards
The accounting policies adopted are outlined in note 1 to the Accounts. IFRS16 'Leases' was adopted in the period and resulted in a lease liability of £12.7 million with a corresponding fixed asset increase of £12.7 million. There are no other accounting policy changes which have materially impacted the 2020 financial year.
Going Concern
The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis of accounting in preparing these annual financial statements.
In reaching this conclusion the Directors have given due regard to the following:
• The Group's business activities together with factors likely to impact the future growth and operating performance;
• The financial position of the Group, its cash flows, available debt facilities and compliance with the financial covenants associated with the Group's borrowings, which are described in the financial statements; and
• The cash generated from operations, available cash resources and committed bank facilities and their maturities, which taken together provide confidence that the Group will be able to meet its obligations as they fall due.
As at 30 June 2020 the Group had net debt of £127.6 million (2019: net debt of £227.8 million), and had available cash balances and unutilised committed borrowings facilities of £353.2 million. The Group acquired the worldwide product rights to Osurnia after the year end in July 2020 for USD135.0 million (£104.7 million). Inventory of USD6.6 million (£5.1 million) was also acquired as part of the transaction. Further information on available resources and committed bank facilities is provided in note 12.
Summary
Our existing business performed robustly despite the disruption caused by first half supply issues and COVID-19 in the second half. In-house manufacturing issues were mostly resolved by the end of the calendar year resulting in our performance being more second half weighted than is typical for Dechra.
Our acquisition of Ampharmco strengthens our in-house manufacturing capabilities, while Mirataz and Osurnia increase our geographical and market presence. We have increased our R&D expenditure enabling us to expand the number of pipeline projects, novel opportunities and overseas product registrations we invest in.
The Group's balance sheet is strong, enabling us to continue to consider further relevant acquisition and investment opportunities as they arise.
Paul Sandland
Chief Financial Officer
7 September 2020
Key Performance Indicators
|
KPI and Definition |
Performance |
Commentary |
Relevance to Strategy |
|
Revenue Growth Year-on-year CER sales growth including new products and excluding revenue from acquired businesses. |
up 4.1%
2020: £502.1m 2019: £481.8m 2018: £407.1m |
Dechra's existing business grew by 6.4% in EU Pharmaceuticals (excluding third party contract manufacturing which declined), and by 3.0% in NA Pharmaceuticals. |
Pipeline Delivery Portfolio Focus Geographical Expansion
A key driver of our strategy is to deliver sustainable sales growth through delivering our pipeline, maximising our existing portfolio and expanding geographically. |
|
Underlying Diluted EPS Growth Underlying profit after tax divided by the diluted average number of shares, calculated on the same basis as note 9 to the Accounts.
Long Term Incentive Plan (LTIP) performance condition |
up 1.7%
2020: 92.19p 2019: 90.01p 2018: 76.45p |
This includes a 0.4% increase in underlying operating profit, further improved by lower net finance costs attributable to foreign exchange gains and a lower tax charge driven by tax rate impact of a change in geographical mix of profit. |
Pipeline Delivery Portfolio Focus Geographical Expansion Acquisition Underlying diluted EPS is a key indicator of our performance and the return we generate for our stakeholders. It is one of the performance conditions of the LTIP. |
|
Return on Capital Employed Underlying operating profit expressed as a percentage of the average of the opening and closing operating assets (excluding cash/debt and net tax liabilities).
Long Term Incentive Plan (LTIP) performance condition |
down 20bps
2020: 15.4% 2019: 15.6% 2018: 15.4% |
There was a small decline in ROCE during the year. The reduction is due to the increased investments in acquisitions during the year without the corresponding increase in underlying operating profit in the period. This still exceeds our target |
Pipeline DeliveryPortfolio FocusGeographical ExpansionAcquisition 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 LTIP. |
|
Cash Conversion Cash generated from operations before tax and interest payments as a percentage of underlying operating profit. |
up 1440bps
2020: 99.4% 2019: 85.0% 2018: 81.9%
|
Cash conversion increased sharply during the year as a result of strong cash collection in quarter four following the sales spike in quarter three. |
Pipeline Delivery Portfolio Focus Geographical Expansion
Our stated aim is to be a cash generative business. Cash generation supports investment in the pipeline, acquisition and people. |
|
New Product Revenue 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. |
No change
2020: 16.7% 2019: 16.7% 2018: 11.9% |
New product revenues reflect the strong market penetration of products launched in the year to 30 June 2020 and the previous four years. |
Pipeline Delivery Portfolio Focus Acquisition This measure shows the delivery of revenue 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. |
|
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. |
down 19.0%
2020: 0.17 2019: 0.21 2018: 0 |
The LTAFR decreased from 0.21 to 0.17. None of these incidents resulted in a work-related fatality or disability. |
People Manufacturing and Supply Chain The safety of our employees is core to everything we do. We are committed to a strong culture of safety in all our workplaces. |
Employee TurnoverNumber of leavers during the period as a percentage of the average total number of employees in the period. |
down 120bps
2020: 12.4% 2019: 13.6% 2018: 15.9% |
We saw a decrease in employee turnover in the period despite operating in competitive markets. |
People
Attracting and retaining the best employees is critical to the successful execution of our strategy. |
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 provide reasonable but not absolute assurance that the Group will be successful in delivering its objectives.
Risk Management Process
Our strategy informs the setting of objectives across the business and is widely communicated. Strategic risks and opportunities are identified as an integral part of the strategy setting process. Operational, financial, compliance and emerging risks are identified as an integral part of our functional planning and budget setting processes.
The Board oversees the risk management and internal control framework and the Audit Committee reviews the effectiveness of the risk management process and the internal control framework.
Our Senior Executive Team (SET) owns the risk management process and is responsible for managing specific Group risks. The SET members are 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 the Group's objectives.
SET members present their risks, controls and mitigation plans to the Board for review on a rolling programme throughout the year. The SET is responsible for conducting self-assessments of their risks and the effectiveness of their control processes. Where control weaknesses are identified, remedial action plans are developed, and these are included in the risk reports presented to the Board.
Internal Audit coordinates the risk reporting process and provides independent assurance on the internal control framework.
COVID-19
We have continued to operate our normal risk management and control processes throughout the COVID-19 pandemic, including a formal assessment of emerging risks, climate risk and the potential longer term impact of COVID-19 on the business.
The operational impact of COVID-19 on the business during the last quarter of the financial year and the actions we have taken in response are described in various parts of the Strategic and Governance Reports. Whilst the virus has had a significant impact on how we conduct our day-to-day activities, we have continued to operate successfully throughout the pandemic in all of our worldwide locations. Following record demand in March as veterinarians stocked up on essential medicines, trading softened in the last quarter, but we have seen demand recover in most markets as lockdown restrictions are eased.
We have disclosed COVID-19 as an emerging risk and have also considered its impact on the principal risk profile. Given the uncertainty about the potential lifecycle of the virus and the impact of future events we will continue to monitor and respond to further changes where needed.
Dechra Culture
The Dechra Values are the foundation of our entire business culture including our approach to risk management and control. The Board expects that these Values should drive the behaviours and actions of all employees. We encourage an open communication style where it is normal practice to escalate issues promptly so that appropriate action can be taken quickly to minimise any impact on the business.
Internal Control Framework
Our internal control framework is designed to ensure:
• proper financial records are maintained;
• the Group'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 into business units. Each business unit is led by a SET member and has its own management team.
Policies and Procedures
Our key financial, legal and compliance policies that apply across the Group are:
• Code of Business Conduct and How to Raise a Concern;
• Delegation of Authorities;
• Dechra Finance Manual, including Tax and Treasury policies;
• Anti-Bribery and Anti-Corruption;
• Data Protection;
• Sanctions; and
• Charitable Donations.
Strategy and Business Planning
We have a five year strategic plan which is developed by the SET and endorsed by the Board annually. 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.
Operational Controls
Our key operational control processes are as follows:
• Product Pipeline Reviews: We review our pipeline regularly to identify new product ideas and assess fit with our product portfolio, prioritise development projects, review whether products in development are progressing according to schedule, and assess the expected commercial return on new products.
• Lifecycle Management: We manage and monitor lifecycle management activities for our key products to meet evolving customer needs.
• Pricing Policies: We manage and monitor our national and European pricing policies to deliver equitable pricing for each customer group.
• Product Supply: We continue to develop our demand forecasting and supply planning processes, with monthly reviews of demand and production forecasts, inventory controls, and remediation plans for products that are out of supply.
• Quality Assurance: Each of our manufacturing sites has 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 and product complaints related to the use of our products are reported and dealt with promptly.
• Financial Controls: Our controls are designed to prevent and detect financial misstatement or fraud and operate at three levels:
− Entity Level Controls performed by senior managers at Group and business unit level;
− Month end and year end procedures performed as part of our regular financial reporting and management processes; and
− Transactional Level Controls operated on a day-to-day basis.
The key controls in place to manage our principal risks are described in Understanding Our Key Risks below.
Internal Audit provides independent and objective assurance and advice on the design and operation of the Group's internal control framework. The internal audit plan seeks to provide balanced coverage of the Group's material financial, operational and compliance control processes.
Improvements in 2020
We have continued to strengthen and improve our governance and control processes and the following changes have been implemented:
• New governance and oversight processes to provide transparency of performance, decisions and actions across the manufacturing and supply network;
• Recruitment of a new External Network Director and expansion of the external network team, including the appointment of a dedicated External Network Quality Director to improve our ability to manage the increased scale and complexity of our external supply network;
• Recruitment of a new Internal Network Director to strengthen the management of our internal manufacturing sites;
• We have continued to make improvements to our manufacturing, quality and supply processes, with additional investments in people and production facilities;
• Our financial control framework in Dechra Brazil has been completed; and
• Our Environmental, Social and Governance (ESG) strategy has been developed and a team to monitor its implementation has been established.
Plans for 2021
We will continue to refine and strengthen our internal control framework where required in response to changes in our risk profile and improvement opportunities identified by business management, quality assurance and internal audit.
Our Manufacturing and Supply processes continue to be the primary focus area for 2021.
We also plan to make further improvements and enhancements to our financial control framework and our Group policies.
Principal Risks
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, cybersecurity, IT systems failure and non-compliance with legislation. The risk profile below therefore details the nine principal risks that are specific to our business and provides information on:
• their prioritisation;
• how they link to Group strategy;
• their potential impact on the business; and
• what controls are in place to mitigate them.
Understanding Our Key Risks
|
Link to Strategic Growth Driver and Enabler |
Risk |
Potential Impact |
Control and Mitigating Actions |
Trends |
|
Portfolio Focus |
1 Market Risk:The growth of veterinary buying groups and corporate customers. 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 have established buying groups to consolidate their purchasing, and corporate customers are continuing to expand. |
The growth of corporate customers and buying groups represents an opportunity to increase sales volumes and revenue but may result in reduced margins.
|
We manage and monitor our national and European pricing policies to deliver 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. |
No change |
|
Pipeline Delivery Portfolio Focus Geographical Expansion
|
2 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 such that they can 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. |
Increased Risk Increasing competition on a number of our key products |
|
Pipeline Delivery |
3 Product Development and Launch 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 any intangible assets recognised. COVID-19 may cause some clinical trial delays due to challenges in recruiting patients. |
Potential new development opportunities 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 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 has a detailed market knowledge and retains close contact with customers through its management and sales teams which are trained to a high standard. |
No change
|
|
Pipeline Delivery Portfolio Focus Manufacturing and Supply Chain |
4 Supply Chain Risk:Inability to maintain supply of key products due to manufacturing, quality or product supply problems in our own facilities or from third party suppliers. 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; or • delays in clinical trials due to shortage of trial products.
Shortages in manufactured We have now addressed the majority of our in-house quality and supply challenges which contributed to an increased supply chain risk last year. However, the risk level has maintained because COVID-19 may impact our product supply due to: • unexpected fluctuations in demand; • reduced output in manufacturing sites; • challenges in securing raw materials; and • increased product costs due to scarce supply. |
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. A dedicated external network team who manage and support our CMOs to deliver quality products to our regulatory specifications. Demand forecasting and supply planning processes, with monthly reviews of demand and production forecasts, inventory levels, and remediation plans for products that are out of supply. We plan to increase our working capital and carry higher levels of safety stock on critical raw materials, and finished products. Processes are in place to monitor and improve product robustness, including Quality and Technical analyses of key products and engagement with internal and external Regulatory stakeholders. A business continuity plan is in place at Skipton, Zagreb and Uldum, and similar plans are being developed for other sites. A project is in progress to review and improve our supply planning processes. |
No change |
|
Pipeline Delivery Portfolio Focus Geographical Expansion
|
5 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 ensure that its employees have detailed experience and knowledge of the regulations. Manufacturing and Regulatory teams have established quality systems and standard operating procedures in place. A dedicated External Network Quality Director has been appointed to support our CMOs in complying with our regulatory specifications. Regular contact is maintained with all relevant regulatory bodies in order to build and strengthen relationships and facilitate good communication lines. The Regulatory and Quality teams update their knowledge of regulatory developments and implement changes in business procedures to comply with new requirements. 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. |
Increased Risk Increasing regulatory requirements and CMO compliance with our regulatory specifications |
|
Acquisition |
6 Acquisition Risk:Identification of acquisition opportunities and their potential integration. Identification of suitable opportunities 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, environmental 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 Risk Managing the integration of new product acquisitions |
|
Geographical Expansion Acquisition People |
7 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 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 and the Board twice a year to confirm 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. |
No change
|
|
Portfolio Focus Geographical Expansion |
8 Antibiotic Regulatory Risk:Continuing pressure on reducing antibiotic use. The issue of the potential transfer of 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 enable us to have a comprehensive understanding of regulatory changes. We strive to develop new products and minimise antimicrobial resistance concerns. We communicate appropriate antibiotic use in line with best practice. |
No change
|
|
Pipeline Delivery Portfolio Focus People |
9 Retention of 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. 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. |
No change
|
Emerging Risks
Given current macroeconomic and geopolitical uncertainty we have identified the following emerging risks:
|
COVID-19 |
The following key actions have been taken in response to the pandemic: • We reacted immediately to government guidance by introducing changes to shift patterns and staffing rotas in our manufacturing and logistics facilities to enable our employees to continue to produce and supply essential medicines safely; • We provided office workers with the technology required to work from home; • At a leadership level, the SET met weekly to review and discuss the business impact of the pandemic with regular updates provided to the Board; • A Corona Committee was established to provide health and safety guidance and procedures for our employees and to prepare office locations to enable employees to return as lockdown restrictions are eased; • Following the sad loss of Simon Francis, our Group Manufacturing and Supply Director to the virus, we implemented our emergency succession planning procedures to appoint Milton McCann as the Interim Group Manufacturing and Supply Director; • We increased our communication and engagement with investors and have raised equity through a share placing in order to maintain a prudent balance sheet and provide increased financial flexibility; and • We have conducted additional viability stress testing to assess the impact of a severe and sustained reduction in demand. Longer Term ImpactThe pandemic may result in a global recession and increased trade restrictions, which could impact demand for our products and increase costs. However, the pharmaceutical industry is resilient to economic downturns and many products are not subject to tariffs under the World Trade Organisation Pharmaceutical Tariff Elimination Agreement. |
|
Climate Change |
• Our governance and approach to climate change, including our first voluntary disclosure using recommendations of the Taskforce for Climate-related Financial Disclosure (TCFD) are set out in our Corporate Responsibility report in the 2020 Annual Report. • We have assessed the impact of climate change and concluded that there is likely to be some financial risks which would need to be managed, but none that would materially impact our business model. This assessment is consistent with the Sustainability Accounting Standards Board's (SASB) Materiality Map which indicates that the issue is not likely to be material for the pharmaceutical sector. • The expected impacts are likely to be weather related disruption at internal and external manufacturing sites, and increased cost of fossil fuels. • We plan to continue to develop our business continuity plans and CMO second sourcing strategy to mitigate these impacts. |
|
Taxation |
• The Group's effective tax rate (ETR) is subject to taxation policy in the territories in which it operates. We continue to monitor developments in tax reform globally which may cause future movements in the Group's ETR. • The EU is currently challenging the legality of the Group Financing Exemption in the UK Controlled Foreign Company tax legislation from which the Group has previously benefitted. We continue to monitor developments. Please also see Note 7. • The Group currently benefits from patent and innovation box tax incentives in the UK and the Netherlands. The Group's ETR will increase as qualifying patents expire. |
|
Brexit |
• We have completed our Brexit preparations and continue to monitor the advice from the UK and EU governing bodies. Our priority is to maintain continuity of supply of our products to our customers in the UK and EU, and we have increased inventory accordingly. • The changes outlined below will enable us to batch release UK manufactured products within the EU in the event that there will be no mutual recognition of quality standards. We have: • transferred our UK registered Marketing Authorisations for products that are sold in the EU to a subsidiary in the Netherlands; • transferred the analytical testing methods for products manufactured at our Skipton facility to our laboratories in Bladel and Zagreb; and • established a bonded customs warehouse at our EU distribution in Uldum, so that UK products do not require EU testing on entry to the facility. |
Viability Statement
Assessment of Prospects
Dechra has consistently delivered on its strategic objectives resulting in a strong track record of growth. The Group's strategy remains unchanged and is set out in the Strategic Report of the 2020 Annual Report. The key factors supporting the Group's prospects are explained throughout the Annual Report and are summarised below:
• a clear strategic focus;
• a growing global animal health market;
• a clear portfolio focus with strong market positions in a number of key therapeutic areas;
• a strong development pipeline and a track record of pipeline delivery;
• manufacturing flexibility, with a wide range of dosage forms, small and large-scale production batches;
• an entrepreneurial and experienced management team;
• a recognised brand with a strong reputation for providing high quality products with technical support;
• an expanding international focus;
• talented people and expertise; and
• a sound track record of successful acquisitions to expand our product portfolio and geographic reach.
The Board believes that the business model is sustainable and the Group has adequate resilience due to its diversified product portfolio, its geographic footprint, a strong balance sheet, healthy cash generation and access to external financing, which includes committed facilities.
The Assessment Process and Key Assumptions
The Group's prospects are assessed primarily through its strategic and financial planning processes over a five year time period. The strategic plan is supported by a five year financial plan, both of which are updated annually by the SET and reviewed by the Board. The Board also reviews the Group's principal risks on a rolling basis throughout the year, based on updates from SET members.
The strategic planning process is conducted over a five year time horizon and is updated annually. It:
• assesses market and environmental changes and the opportunities and threats such changes may present;
• considers risks to sales and cost forecasts for each part of the Group; and
• includes key assumptions to support longer term projections.
The financial plans are reviewed to confirm that adequate financing facilities are in place. The revolving credit facility is currently committed to July 2024, the Euro placement to January 2027 and the US dollar placement to January 2030.
Progress against financial budgets, forecasts and key business objectives are reviewed through monthly business performance reviews at both Group and business unit levels. Mitigating actions are taken to address underperformance. The latest updates to the plans were reviewed in June 2020 and considered the Group's current position, its future prospects and reaffirmed the Group's stated strategy.
Assessment of Viability and Time Period
The Board has determined that a three year period to 30 June 2023 is an appropriate period over which to provide its viability statement. This time period is supported by the Group's budget process, which includes detailed projections for the next two financial years, and broader projections from the third year of the five year strategic planning process. The Board believes this provides a sound framework for providing reasonable assurance on the Group's viability given the inherent uncertainty associated with longer term forecasts.
The Board's assessment has considered the Group's current position, its future prospects, adequacy of financing facilities, the strategic plan and the management of the Group's principal risks. The viability assessment takes account of all the committed expenditure of the Group.
Although the output of the Group's strategic and financial planning processes reflects the Board's best estimate of the future prospects of the business, the Group has also conducted stress testing to assess the liquidity impact of a range of alternative scenarios.
These scenarios have been developed by considering those principal risks that could have a material impact on viability. The potential impact of each principal risk is described above in Understanding Our Key Risks. A number of severe but plausible stress tests have been conducted on these areas including a significant pipeline delay; significant profit reduction on top ten products; and loss of key high margin products. A combination of the individual scenarios and an overall reverse stress test on the Group's borrowing facilities and covenant commitments have also been considered. In response to the COVID-19 pandemic, additional stress tests have been conducted to assess the impact of a severe and sustained reduction in demand should a significant global economic downturn occur.
The Board believes the results of the stress testing demonstrate that the Group should be able to withstand the impact in each case due to its strong cash generation, strong balance sheet, and existing financing arrangements.
Viability Statement
Based on the results of this analysis and the assumptions used in the Group's planning process, the Board has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three year period from 30 June 2020.
Consolidated Income Statement
For the year ended 30 June 2020
|
|
Note |
2020 |
2019 |
||||
|
Underlying £m |
Non- underlying* (notes 4 & 5) £m |
Total £m |
Underlying £m |
Non- underlying* (notes 4 & 5) £m |
Total £m |
||
|
Revenue |
2 |
515.1 |
- |
515.1 |
481.8 |
- |
481.8 |
|
Cost of sales |
|
(223.5) |
- |
(223.5) |
(203.6) |
(5.1) |
(208.7) |
|
Gross profit |
|
291.6 |
- |
291.6 |
278.2 |
(5.1) |
273.1 |
|
Selling, general and administrative expenses |
|
(134.9) |
(70.4) |
(205.3) |
(125.7) |
(76.5) |
(202.2) |
|
Research and development expenses |
|
(28.4) |
(5.7) |
(34.1) |
(25.1) |
(6.8) |
(31.9) |
|
Operating profit |
2 |
128.3 |
(76.1) |
52.2 |
127.4 |
(88.4) |
39.0 |
|
Finance income |
3 |
3.0 |
- |
3.0 |
0.7 |
- |
0.7 |
|
Finance expense |
4 |
(11.5) |
(2.5) |
(14.0) |
(10.5) |
(1.0) |
(11.5) |
|
Share of profit/(loss) of investments accounted for using the equity method |
6 |
0.3 |
(0.6) |
(0.3) |
(0.2) |
(0.2) |
(0.4) |
|
Profit before taxation |
|
120.1 |
(79.2) |
40.9 |
117.4 |
(89.6) |
27.8 |
|
Income taxes |
7 |
(24.7) |
17.7 |
(7.0) |
(24.9) |
28.0 |
3.1 |
|
Profit for the year |
|
95.4 |
(61.5) |
33.9 |
92.5 |
(61.6) |
30.9 |
|
Earnings per share |
|
|
|
|
|
|
|
|
Basic |
9 |
|
|
32.87p |
|
|
30.15p |
|
Diluted |
9 |
|
|
32.76p |
|
|
30.07p |
|
Dividend per share (interim paid and final proposed for the year) |
8 |
|
|
34.29p |
|
|
31.60p |
* The Group presents a number of non-GAAP Alternative Performance Measures (APMs). This allows investors to understand better the underlying performance of the Group, by excluding non-underlying items as set out in note 5.
Consolidated Statement of Comprehensive Income
For the year ended 30 June 2020
|
|
2020 £m |
2019 £m |
|
Profit for the year |
33.9 |
30.9 |
|
|
|
|
|
Other comprehensive (expense)/ income: |
|
|
|
|
|
|
|
Items that may be reclassified subsequently to profit or loss: |
|
|
|
Foreign currency cash flow hedges |
|
|
|
- fair value movements |
0.1 |
- |
|
Foreign currency translation differences for foreign operations |
(7.1) |
3.8 |
|
Income tax relating to components of other comprehensive income |
1.8 |
- |
|
|
(5.2) |
3.8 |
|
Total comprehensive income for the period |
28.7 |
34.7 |
Consolidated Statement of Financial Position
At 30 June 2020
|
|
Note |
2020 £m |
Restated* 2019 £m |
|
ASSETS |
|
|
|
|
Non-current assets |
|
|
|
|
Intangible assets |
10 |
692.2 |
680.6 |
|
Property, plant and equipment |
|
76.4 |
58.4 |
|
Investments |
6 |
17.4 |
10.1 |
|
Deferred tax assets |
11 |
2.7 |
0.9 |
|
Total non-current assets |
|
788.7 |
750.0 |
|
Current assets |
|
|
|
|
Inventories |
|
120.8 |
103.5 |
|
Current tax receivables |
|
6.8 |
7.9 |
|
Trade and other receivables |
|
93.9 |
99.8 |
|
Cash and cash equivalents |
|
227.4 |
80.3 |
|
Total current assets |
|
448.9 |
291.5 |
|
Total assets |
|
1,237.6 |
1,041.5 |
|
LIABILITIES |
|
|
|
|
Current liabilities |
|
|
|
|
Borrowings and lease liabilities |
12 |
(4.6) |
(1.2) |
|
Trade and other payables |
|
(98.2) |
(95.5) |
|
Contingent consideration |
16 |
(8.9) |
(5.1) |
|
Current tax liabilities |
|
(25.6) |
(16.3) |
|
Total current liabilities |
|
(137.3) |
(118.1) |
|
Non-current liabilities |
|
|
|
|
Borrowings and lease liabilities |
12 |
(350.4) |
(306.9) |
|
Deferred income |
|
- |
- |
|
Contingent consideration |
16 |
(47.3) |
(30.9) |
|
Employee benefit obligations |
|
- |
- |
|
Provisions |
13 |
(2.5) |
(2.0) |
|
Deferred tax liabilities |
11 |
(62.6) |
(74.5) |
|
Total non-current liabilities |
|
(462.8) |
(414.3) |
|
Total liabilities |
|
(600.1) |
(532.4) |
|
Net assets |
|
637.5 |
509.1 |
|
EQUITY |
|
|
|
|
Issued share capital |
|
1.1 |
1.0 |
|
Share premium account |
|
409.3 |
277.9 |
|
Own shares |
|
- |
- |
|
Hedging reserve |
|
- |
- |
|
Foreign currency translation reserve |
|
16.3 |
21.6 |
|
Merger reserve |
|
84.4 |
84.4 |
|
Retained earnings |
|
126.4 |
124.2 |
|
Total equity attributable to equity holders of the parent |
|
637.5 |
509.1 |
* Restated as detailed in note 15 Acquisitions.
The financial statements were approved by the Board of Directors on 7 September 2020 and are signed on its behalf by:
|
|
|
Ian Page Chief Executive Officer 7 September 2020 |
|
|
|
Paul Sandland
Company number: 3369634
|
Consolidated Statement of Changes in Shareholders' Equity
For the year ended 30 June 2020
|
|
Issued share capital £m |
Share premium account £m |
Own shares £m |
Hedging reserve £m |
Foreign currency translation reserve £m |
Merger reserve £m |
Retained earnings £m |
Total equity £m |
|
Year ended 30 June 2019 |
|
|
|
|
|
|
|
|
|
At 1 July 2018 |
1.0 |
276.7 |
(0.4) |
- |
17.8 |
84.4 |
125.5 |
505.0 |
|
Change in accounting policy |
- |
- |
- |
- |
- |
- |
(4.9) |
(4.9) |
|
At 1 July 2018 |
1.0 |
276.7 |
(0.4) |
- |
17.8 |
84.4 |
120.6 |
500.1 |
|
Profit for the period |
- |
- |
- |
- |
- |
- |
30.9 |
30.9 |
|
Foreign currency translation differences for foreign operations |
- |
- |
- |
- |
3.8 |
- |
- |
3.8 |
|
Total comprehensive income |
- |
- |
- |
- |
3.8 |
- |
30.9 |
34.7 |
|
Transactions with owners: |
|
|
|
|
|
|
|
|
|
Dividends paid |
- |
- |
- |
- |
- |
- |
(28.4) |
(28.4) |
|
Share-based payments |
- |
- |
- |
- |
- |
- |
1.5 |
1.5 |
|
Shares issued |
- |
1.2 |
- |
- |
- |
- |
- |
1.2 |
|
Recycle of own shares to retained earnings |
- |
- |
0.4 |
- |
- |
- |
(0.4) |
- |
|
Total contributions by and distributions to owners |
- |
1.2 |
0.4 |
- |
- |
- |
(27.3) |
(25.7) |
|
At 30 June 2019 |
1.0 |
277.9 |
- |
- |
21.6 |
84.4 |
124.2 |
509.1 |
|
Year ended 30 June 2020 |
|
|
|
|
|
|
|
|
|
At 1 July 2019 |
1.0 |
277.9 |
- |
- |
21.6 |
84.4 |
124.2 |
509.1 |
|
Profit for the period |
- |
- |
- |
- |
- |
- |
33.9 |
33.9 |
|
Foreign currency cash flow hedge |
|
|
|
|
|
|
|
|
|
- fair value movements |
- |
- |
- |
0.1 |
- |
- |
- |
0.1 |
|
Foreign currency translation differences for foreign operations |
- |
- |
- |
- |
(7.1) |
- |
- |
(7.1) |
|
Income tax relating to components of other comprehensive income |
- |
- |
- |
- |
1.8 |
- |
- |
1.8 |
|
Total comprehensive (expense)/income |
- |
- |
- |
0.1 |
(5.3) |
- |
33.9 |
28.7 |
|
Reclassified to cost of acquired intangibles |
|
|
|
(0.1) |
|
|
|
(0.1) |
|
Transactions with owners: |
|
|
|
|
|
|
|
|
|
Dividends paid |
- |
- |
- |
- |
- |
- |
(33.3) |
(33.3) |
|
Share-based payments |
- |
- |
- |
- |
- |
- |
1.6 |
1.6 |
|
Shares issued |
0.1 |
131.4 |
- |
- |
- |
- |
- |
131.5 |
|
Total contributions by and distributions to owners |
0.1 |
131.4 |
- |
- |
- |
- |
(31.7) |
99.8 |
|
At 30 June 2020 |
1.1 |
409.3 |
- |
- |
16.3 |
84.4 |
126.4 |
637.5 |
Hedging Reserve
The hedging reserve represents the cumulative fair value gains or losses on derivative financial instruments for which cash flow hedge accounting has been applied, net of tax.
Foreign Currency Translation Reserve
The foreign currency translation reserve contains exchange differences on the translation of subsidiaries with a functional currency other than Sterling and exchange gains or losses on the translation of liabilities that hedge the Company's net investment in foreign subsidiaries.
Merger Reserve
The merger reserve represents the excess of fair value over nominal value of shares issued in consideration for the acquisition of subsidiaries where statutory merger relief has been applied in the financial statements of the Parent Company.
Consolidated Statement of Cash Flows
For the year ended 30 June 2020
|
|
Note |
2020£m |
2019£m |
|
Cash flows from operating activities |
|
|
|
|
Operating profit |
|
52.2 |
39.0 |
|
Non-underlying items |
|
76.1 |
88.4 |
|
Underlying operating profit |
|
128.3 |
127.4 |
|
Adjustments for: |
|
|
|
|
Depreciation |
2 |
9.9 |
5.7 |
|
Amortisation and impairment |
2 |
4.3 |
4.1 |
|
Release of government grant |
|
(0.5) |
(0.5) |
|
Profit on disposal of tangible assets |
|
- |
(0.3) |
|
Gain on curtailment of pension scheme |
|
- |
(3.5) |
|
Equity settled share-based payment expense |
|
1.5 |
2.3 |
|
Underlying operating cash flow before changes in working capital |
|
143.5 |
135.2 |
|
Increase in inventories |
|
(15.7) |
(14.1) |
|
Decrease/(increase) in trade and other receivables |
|
6.9 |
(11.7) |
|
(Decrease)/increase in trade and other payables |
|
0.1 |
6.3 |
|
Cash generated from operating activities before interest, taxation and non-underlying items |
|
134.8 |
115.7 |
|
Cash outflows in respect of non-underlying items |
|
(7.3) |
(7.4) |
|
Cash generated from operating activities before interest and taxation |
|
127.5 |
108.3 |
|
Interest paid |
|
(7.8) |
(9.2) |
|
Interest on lease liabilities |
|
(0.4) |
- |
|
Income taxes paid |
|
(12.9) |
(17.3) |
|
Net cash inflow from operating activities |
|
106.4 |
81.8 |
|
Cash flows from investing activities |
|
|
|
|
Proceeds from disposal of tangible assets |
|
0.2 |
0.3 |
|
Interest received |
|
0.3 |
- |
|
Acquisition of subsidiaries (net of cash acquired) |
|
(25.2) |
(39.7) |
|
Acquisition of investment in associates |
|
(7.6) |
- |
|
Purchase of property, plant and equipment |
|
(7.8) |
(12.0) |
|
Capitalised development expenditure |
10 |
(1.3) |
(1.0) |
|
Purchase of other intangible non-current assets |
10 |
(40.1) |
(9.5) |
|
Net cash outflow from investing activities |
|
(81.5) |
(61.9) |
|
Cash flows from financing activities |
|
|
|
|
Proceeds from the issue of share capital |
|
131.5 |
1.2 |
|
New borrowings |
|
297.3 |
44.1 |
|
Expenses of raising borrowing facilities |
|
(1.7) |
(0.2) |
|
Repayment of borrowings |
|
(271.7) |
(36.8) |
|
Principal elements of lease payments |
|
(3.2) |
- |
|
Dividends paid |
8 |
(33.3) |
(28.4) |
|
Net cash inflow/ (outflow) from financing activities |
|
118.9 |
(20.1) |
|
Net increase/ (decrease) in cash and cash equivalents |
|
143.8 |
(0.2) |
|
Cash and cash equivalents at start of period |
|
80.3 |
79.7 |
|
Exchange differences on cash and cash equivalents |
|
3.3 |
0.8 |
|
Cash and cash equivalents at end of period |
|
227.4 |
80.3 |
|
Reconciliation of net cash flow to movement in net borrowings |
|
|
|
|
Net increase/ (decrease) in cash and cash equivalents |
|
143.8 |
(0.2) |
|
New borrowings and lease liabilities |
|
(302.8) |
(44.1) |
|
Repayment of borrowings and lease liabilities |
|
275.3 |
36.8 |
|
Expenses of raising borrowing facilities |
|
1.7 |
0.2 |
|
Acquisition of subsidiary borrowings and lease liabilities |
|
(0.1) |
(2.8) |
|
Changes in accounting policy for leases |
|
(12.7) |
- |
|
Exchange differences on cash and cash equivalents |
|
3.3 |
0.8 |
|
Retranslation of foreign borrowings |
|
(6.3) |
(6.2) |
|
Other non-cash changes |
|
(2.0) |
(0.9) |
|
Movement in net borrowings in the period |
|
100.2 |
(16.4) |
|
Net borrowings at start of period |
|
(227.8) |
(211.4) |
|
Net borrowings at end of period |
|
(127.6) |
(227.8) |
Cash conversion is defined as cash generated from operating activities before interest and taxation as a percentage of underlying operating profit.
Notes to the Consolidated Financial Statements
1. Status of Accounts
These summary financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (adopted IFRS). These summary financial statements have also been prepared in accordance with the Companies Act 2006.
The Board of Directors approved the preliminary announcement on 7 September 2020.
2. Operating Segments
The Group has three reportable segments, as discussed below, which are based on information provided to the Board of Directors, which is deemed to be the Group's chief operating decision maker. Several operating segments which have similar economic characteristics have been aggregated into the reporting segments. In undertaking this aggregation the assessment determined that the aggregated segments have similar products, production processes, customers and overall regulatory environments.
The European Pharmaceuticals Segment comprises Dechra Veterinary Products EU, Dechra Veterinary Products International and Dechra Pharmaceuticals Manufacturing. This Segment operates internationally and manufactures and markets Companion Animal, Equine, Food producing Animal Products and Nutrition. This Segment also includes third party manufacturing and other revenues from non-core activities.
The North American Pharmaceuticals Segment consists of Dechra Veterinary Products US, Putney, Dechra Veterinary Products Canada, and Dechra-Brovel, which sells Companion Animal, Equine Products and Food producing Animal Products in those territories. The Segment also includes our manufacturing unit based in Melbourne, Florida and was further expanded during the period with the acquisition of Ampharmco LLC.
The Pharmaceuticals Research and Development Segment includes all of the Group's pharmaceutical research and development activities. From a Board perspective, this Segment has no revenue.
Reconciliation of reportable segment revenues, profit or loss and liabilities and other material items:
|
|
2020 £m |
Restated* 2019 £m |
|
Revenue by segment |
|
|
|
European Pharmaceuticals |
323.5 |
304.0 |
|
NA Pharmaceuticals |
191.6 |
177.8 |
|
|
515.1 |
481.8 |
|
Operating profit/(loss) by segment |
|
|
|
European Pharmaceuticals |
100.0 |
100.3 |
|
NA Pharmaceuticals |
63.7 |
59.2 |
|
Pharmaceuticals Research and Development |
(28.4) |
(25.1) |
|
Segment operating profit |
135.3 |
134.4 |
|
Corporate and other unallocated costs |
(7.0) |
(7.0) |
|
Underlying operating profit |
128.3 |
127.4 |
|
Amortisation of acquired intangibles |
(69.6) |
(76.8) |
|
Remeasurement of contingent consideration |
- |
0.1 |
|
Expenses relating to Brexit |
- |
(0.9) |
|
Fair value uplift of inventory acquired through business combinations |
- |
(5.1) |
|
Rationalisation of manufacturing organisation |
(2.2) |
(2.0) |
|
Expenses relating to acquisitions and subsequent integration activities |
(4.3) |
(3.7) |
|
Total operating profit |
52.2 |
39.0 |
|
Finance income |
3.0 |
0.7 |
|
Finance expense |
(14.0) |
(11.5) |
|
Share of losses in investment accounted for using the equity method |
(0.3) |
(0.4) |
|
Profit before taxation |
40.9 |
27.8 |
|
Total liabilities by segment |
|
|
|
European Pharmaceuticals |
(110.3) |
(80.9) |
|
NA Pharmaceuticals |
(53.1) |
(44.0) |
|
Pharmaceuticals Research and Development |
(5.1) |
(2.1) |
|
Segment liabilities |
(168.5) |
(127.0) |
|
Corporate loans and revolving credit facility |
(340.0) |
(308.1) |
|
Corporate accruals and other payables |
(3.4) |
(6.5) |
|
Current and deferred tax liabilities * |
(88.2) |
(90.8) |
|
|
(600.1) |
(532.4) |
|
Revenue by product category |
|
|
|
CAP |
361.6 |
340.2 |
|
Equine |
36.4 |
34.4 |
|
FAP |
74.8 |
57.3 |
|
Nutrition |
28.6 |
29.1 |
|
Other |
13.7 |
20.8 |
|
|
515.1 |
481.8 |
|
Additions to intangible non-current assets by segment (including through business combinations) |
|
|
|
European Pharmaceuticals * |
22.3 |
42.2 |
|
NA Pharmaceuticals |
47.5 |
- |
|
Pharmaceuticals Research and Development |
0.4 |
0.3 |
|
Corporate and central costs |
1.5 |
0.5 |
|
|
71.7 |
43.0 |
* Restated as detailed in note 15 Acquisitions.
|
|
2020 £m |
2019 £m |
|
Additions to Property, Plant and Equipment by segment |
|
|
|
European Pharmaceuticals |
12.1 |
17.4 |
|
NA Pharmaceuticals |
4.3 |
0.3 |
|
Pharmaceuticals Research and Development |
0.7 |
0.4 |
|
Corporate and central costs |
0.2 |
0.1 |
|
|
17.3 |
18.2 |
|
Depreciation and amortisation by segment |
|
|
|
European Pharmaceuticals |
64.1 |
68.1 |
|
NA Pharmaceuticals |
18.5 |
17.8 |
|
Pharmaceuticals Research and Development |
0.5 |
0.3 |
|
Corporate and central costs |
0.7 |
0.4 |
|
|
83.8 |
86.6 |
|
The total depreciation and amortisation charge is made up of the following: |
|
|
|
Non-underlying |
|
|
|
Amortisation - selling, general and administrative expenses |
63.9 |
70.0 |
|
Amortisation - research and development expenditure |
5.7 |
6.8 |
|
|
69.6 |
76.8 |
|
Underlying |
|
|
|
Amortisation |
4.3 |
4.1 |
|
Depreciation |
9.9 |
5.7 |
|
|
14.2 |
9.8 |
Geographical Information
The following table shows revenue based on the geographical location of customers and non-current assets based on the country of domicile of the entity holding the asset:
|
|
2020 Revenue £m |
2020 Non- current assets £m |
2019 Revenue £m |
Restated* 2019 Non- current assets £m |
|
UK |
45.0 |
30.4 |
56.4 |
20.1 |
|
Germany |
53.9 |
2.8 |
48.2 |
3.7 |
|
Rest of Europe |
173.8 |
419.8 |
163.5 |
443.8 |
|
USA |
181.9 |
213.2 |
169.1 |
175.8 |
|
Rest of World |
60.5 |
122.5 |
44.6 |
106.6 |
|
|
515.1 |
788.7 |
481.8 |
750.0 |
* Restated as detailed in note 15 Acquisitions.
3. Finance Income
|
|
2020 £m |
2019 £m |
|
Finance income arising from: |
|
|
|
- Cash and cash equivalents |
0.1 |
- |
|
- Foreign exchange gains |
2.9 |
0.7 |
|
|
3.0 |
0.7 |
4. Finance Expense
|
Underlying |
2020 £m |
2019 £m |
|
Finance expense arising from: |
|
|
|
- Financial liabilities at amortised cost |
11.1 |
10.5 |
|
- Lease liability interest |
0.4 |
- |
|
Underlying finance expense |
11.5 |
10.5 |
|
Non-underlying |
2020 £m |
2019 £m |
|
Loss on extinguishment of debt |
1.0 |
- |
|
Fair value and other movements on contingent consideration |
1.5 |
1.0 |
|
Non-underlying finance expense |
2.5 |
1.0 |
|
Total finance expense |
14.0 |
11.5 |
5. Non-underlying Items
Non-underlying items charged/(credited) comprise:
|
|
2020 £m |
2019 £m |
|
Amortisation of acquired intangibles |
|
|
|
- classified within selling, general and administrative expenses |
63.9 |
70.0 |
|
- classified within research and development expenses |
5.7 |
6.8 |
|
Remeasurement of contingent consideration |
- |
(0.1) |
|
Fair value uplift of inventory acquired through business combinations |
- |
5.1 |
|
Expenses relating to Brexit |
- |
0.9 |
|
Expenses relating to acquisitions and subsequent integration activities |
4.3 |
3.7 |
|
Rationalisation of manufacturing organisation |
2.2 |
2.0 |
|
Non-underlying operating loss items |
76.1 |
88.4 |
|
|
|
|
|
Amortisation in relation to Medical Ethics Pty Ltd (net of tax) |
0.6 |
0.2 |
|
Loss on extinguishment of debt |
1.0 |
- |
|
Fair value and other movements on contingent consideration |
1.5 |
1.0 |
|
Non-underlying loss before tax items |
79.2 |
89.6 |
|
|
|
|
|
Tax on non-underlying loss before tax items |
(18.0) |
(20.0) |
|
Revaluation of deferred tax balances following the change in Dutch tax rates/US tax rates |
0.3 |
(8.0) |
|
Non-underlying loss after tax items |
61.5 |
61.6 |
Amortisation of acquired intangibles reflects the amortisation of the fair values of future cash flows recognised on acquisition in relation to the identifiable intangible assets acquired.
The remeasurement of the contingent consideration balance relates to the net credit to the income statement on the reassessment of future milestone and royalty payments on a licensing agreement.
The fair value uplift of inventory acquired through business combinations is recognised in accordance with IFRS 3 'Business Combinations' to record the inventory acquired at fair value and its subsequent release into the income statement.
Expenses relating to Brexit represents one-off regulatory and technology transfer costs that were incurred in advance of Brexit.
Expenses relating to acquisitions and subsequent integration activities represents costs incurred during the acquisition and integration of Ampharmco (£1.2 million), AST Farma and Le Vet (£0.7 million), Venco (£0.4 million) and other prospective projects (£0.7 million). Pre-acquisition costs in relation to Osurnia (£1.3 million) which completed in July 2020 are also included.
Rationalisation of manufacturing organisation relates to the income statement cost associated with this strategic programme. Costs since the inception of the programme have been £7.1 million. The total planned spend on this project is now £8.4 million, and will conclude in the year ended 30 June 2021.
The loss on extinguishment of debt relates to the acceleration of the amortisation of arrangement fees relating to the Term Loan on termination.
6. Interests in Associate
Interest in Associate
|
|
2020 £m |
2019 £m |
|
1 July |
10.1 |
10.5 |
|
Additions |
7.6 |
- |
|
Share of underlying profit/(loss) after tax |
0.3 |
(0.2) |
|
Share of amortisation of intangible asset identified on acquisition (net of tax) |
(0.6) |
(0.2) |
|
30 June |
17.4 |
10.1 |
On 5 July 2019 the Group acquired a further 15.0% of the issued share capital of Medical Ethics Pty Ltd for a total consideration of AUD13.5 million (£7.6 million). Following the acquisition the Group holds 48.0% of the issued share capital of Medical Ethics Pty Ltd, which is the holding company of Animal Ethics Pty Ltd. The company is incorporated in Australia, which is also the principal place of business. The registered address is c/o Level 3, 649 Bridge Road, Richmond, Victoria 3121, Australia. The company has share capital consisting solely of ordinary shares, which are directly owned by the Group. Medical Ethics Pty Ltd is a private company and there is no quoted market price available for its shares. There are no contingent liabilities relating to the Group's interest in the associate.
The Group's share of the loss arising from its investment in Medical Ethics includes the effect of harmonising the accounting policies and of amortising the fair value adjustments (net of tax), which are treated as non-underlying.
7. Income Taxes
|
|
2020 £m |
2019 £m |
|
Current tax - UK corporation tax |
3.5 |
1.0 |
|
- overseas tax at prevailing local rates |
18.2 |
16.5 |
|
- adjustment in respect of prior years |
(0.8) |
1.6 |
|
Total current tax expense |
20.9 |
19.1 |
|
Deferred tax - origination and reversal of temporary differences |
(14.5) |
(14.0) |
|
- adjustment in respect of tax rates |
1.4 |
(8.0) |
|
- adjustment in respect of prior years |
(0.8) |
(0.2) |
|
Total deferred tax credit |
(13.9) |
(22.2) |
|
Total income tax charge/(credit) in the Consolidated Income Statement |
7.0 |
(3.1) |
The tax on the Group's profit before taxation differs from the standard rate of UK corporation tax of 19.0% (2019: 19.0%). The differences to this rate are explained below:
|
|
2020 £m |
2019 £m |
|
Profit before taxation |
40.9 |
27.8 |
|
Tax at 19.0% (2019: 19.0%) |
7.8 |
5.3 |
|
Effect of: |
|
|
|
- expenses not deductible |
1.4 |
1.2 |
|
- acquisition expenses |
0.6 |
0.4 |
|
- research and development related tax credits |
(0.4) |
(0.1) |
|
- patent box tax credits |
(2.7) |
(2.6) |
|
- other incentives |
(0.2) |
- |
|
- impact of financing (income not taxable) |
- |
(0.9) |
|
- share in results of associates |
(0.1) |
(0.1) |
|
- effects of overseas tax rates |
(0.3) |
0.4 |
|
- movement in unrecognised deferred tax |
1.1 |
- |
|
- adjustment in respect of prior years |
(1.6) |
1.3 |
|
- change in tax rates |
1.4 |
(8.0) |
|
Total income tax charge/(credit) in the Consolidated Income Statement |
7.0 |
(3.1) |
Recurring items in the tax reconciliation include: research and development related tax credits and patent box incentives; expenses not deductible; and the share of results in associates. The effective tax rate is 17.1% (excluding non-underlying items the effective tax rate is 20.6%).
Tax Credit/ (Charge) Recognised Directly in Equity
|
|
2020 £m |
2019 £m |
|
Deferred tax on employee benefit obligations |
- |
- |
|
Deferred tax on other equity movements |
1.8 |
- |
|
Tax recognised in Consolidated Statement of Comprehensive Income |
1.8 |
- |
|
|
|
|
|
Corporation tax on equity settled transactions |
0.4 |
0.4 |
|
Deferred tax on equity settled transactions |
(0.3) |
(1.2) |
|
Total tax recognised in Equity |
0.1 |
(0.8) |
The UK current tax rate used for the period is 19.0% which is the enacted rate from 1 April 2017. An announcement was made in the Budget on 11 March 2020 (which was substantively enacted on 17 March 2020) for the main rate applicable from 1 April 2020 to remain at 19.0%, removing the previously enacted reduction to 17.0%.The Dutch current tax rate used for the period is 25.0%, however, this rate is reducing to 21.7% effective from 1 January 2021 as per the Dutch Tax Plan 2020 enacted in December 2019. The tax rate applied for deferred tax purposes is based on the timing of when each individual deferred tax balance is expected to reverse in the future.
At 30 June 2020, the Group held a current provision of £5.6 million (2019: £3.8 million) in respect of uncertain tax positions. The resolution of these tax matters may take many years. The range of reasonably possible outcomes within the next financial year is £0.9 million to £7.0 million.
EU CFC Challenge
In October 2017 the European Commission (the Commission) opened a State Aid investigation into the Group Financing Exemption in the UK Controlled Foreign Company (CFC) rules. On 25 April 2019 the Commission issued its decision on the CFC Group Financing Exemption concluding that part of the UK measures were unlawful and incompatible instructing the UK Government to recover the State Aid. The UK Government filed an annulment appeal on 12 June 2019. In common with other UK-based international companies Dechra had financing arrangements in line with the current UK legislation. We have calculated the maximum potential State Aid claimed as £4.0 million excluding penalties and interest. Given the current position no provision has been recognised in the financial statements. We continue to monitor developments.
Future Tax Charge
The Group's future tax charge, and its effective tax rate could be affected by several factors including the impact of the implementation of the OECD's Base Erosion and Profit Shifting ('BEPS') actions, and changes in applicable tax rates and legislation in the territories in which it operates.
8. Dividends
|
|
2020 £m |
2019 £m |
|
Final dividend paid in respect of prior year but not recognised as a liability in that year: 22.10 pence per share (2019: 18.17 pence per share) |
22.7 |
18.6 |
|
Interim dividend paid: 10.29 pence per share (2019: 9.50 pence per share) |
10.6 |
9.8 |
|
Total dividend 32.39 pence per share (2019: 27.67 pence per share) recognised as distributions to equity holders in the period |
33.3 |
28.4 |
|
Proposed final dividend for the year ended 30 June 2020: 24.00 pence per share (2019: 22.10 pence per share) |
25.9 |
22.7 |
|
Total dividend paid and proposed for the year ended 30 June 2020: 34.29 pence per share (2019: 31.60 pence per share) |
37.0 |
32.5 |
In accordance with IAS 10 'Events After the Balance Sheet Date', the proposed final dividend for the year ended 30 June 2020 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 2021. There are no income tax consequences. The final dividend for the year ended 30 June 2019 is shown as a deduction from equity in the year ended 30 June 2020.
9. 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.
|
|
2020 Pence |
2019 Pence |
|
Basic earnings per share |
|
|
|
- Underlying* |
92.50 |
90.24 |
|
- Basic |
32.87 |
30.15 |
|
Diluted earnings per share |
|
|
|
- Underlying* |
92.19 |
90.01 |
|
- Diluted |
32.76 |
30.07 |
The calculations of basic and diluted earnings per share are based upon:
|
|
2020 £m |
2019 £m |
|
Earnings for underlying basic and underlying diluted earnings per share |
95.4 |
92.5 |
|
Earnings for basic and diluted earnings per share |
33.9 |
30.9 |
|
|
Number |
Number |
|
Weighted average number of ordinary shares for basic earnings per share |
103,133,142 |
102,504,510 |
|
Impact of share options |
348,393 |
257,838 |
|
Weighted average number of ordinary shares for diluted earnings per share |
103,481,535 |
102,762,348 |
* Underlying measures exclude non-underlying items as set out in note 5.
At 30 June 2020, there are 373,439 options (2019: 421,486) that are excluded from the EPS calculations as they are not dilutive for the period presented but may become dilutive in the future.
10. Intangible Assets
|
|
Goodwill* £m |
Software £m |
Development costs £m |
Patent rights £m |
Marketing authorisations £m |
Acquired intangibles £m |
Total £m |
|
Cost |
|
|
|
|
|
|
|
|
At 1 July 2018 |
229.3 |
16.7 |
13.2 |
3.9 |
0.9 |
674.0 |
938.0 |
|
Additions |
- |
2.8 |
1.2 |
- |
- |
7.9 |
11.9 |
|
Acquisitions through business combinations (Restated*) |
12.4 |
0.1 |
- |
0.4 |
- |
18.2 |
31.1 |
|
Remeasurement (note 16) |
- |
- |
- |
- |
- |
(1.5) |
(1.5) |
|
Disposals |
- |
- |
(0.3) |
- |
- |
- |
(0.3) |
|
Foreign exchange adjustments |
4.0 |
0.1 |
(0.1) |
- |
- |
11.2 |
15.2 |
|
At 30 June 2019 and 1 July 2019 (Restated*) |
245.7 |
19.7 |
14.0 |
4.3 |
0.9 |
709.8 |
994.4 |
|
Additions |
- |
1.8 |
1.8 |
0.3 |
- |
46.2 |
50.1 |
|
Acquisitions through business combinations |
6.6 |
0.1 |
- |
- |
- |
14.9 |
21.6 |
|
Remeasurement (note 16) |
- |
- |
- |
- |
- |
10.9 |
10.9 |
|
Foreign exchange adjustments |
1.5 |
0.1 |
0.1 |
(0.1) |
- |
9.6 |
11.2 |
|
At 30 June 2020 |
253.8 |
21.7 |
15.9 |
4.5 |
0.9 |
791.4 |
1,088.2 |
|
Accumulated Amortisation |
|
|
|
|
|
|
|
|
At 1 July 2018 |
- |
3.7 |
7.1 |
3.0 |
- |
214.4 |
228.2 |
|
Charge for the year |
- |
2.5 |
1.3 |
0.3 |
- |
76.8 |
80.9 |
|
Foreign exchange adjustments |
- |
(0.1) |
0.1 |
- |
- |
4.7 |
4.7 |
|
At 30 June 2019 and 1 July 2019 |
- |
6.1 |
8.5 |
3.3 |
- |
295.9 |
313.8 |
|
Charge for the year |
- |
2.9 |
1.2 |
0.2 |
- |
69.6 |
73.9 |
|
Foreign exchange adjustments |
- |
- |
0.1 |
- |
- |
8.2 |
8.3 |
|
At 30 June 2020 |
- |
9.0 |
9.8 |
3.5 |
- |
373.7 |
396.0 |
|
Net book value |
|
|
|
|
|
|
|
|
At 30 June 2020 |
253.8 |
12.7 |
6.1 |
1.0 |
0.9 |
417.7 |
692.2 |
|
At 30 June 2019 (Restated*) |
245.7 |
13.6 |
5.5 |
1.0 |
0.9 |
413.9 |
680.6 |
* Restated as detailed in note 15 Acquisitions.
The assets within patent rights include the rights to Equidone® which was launched in the USA during 2011, and has a carrying value of £0.1 million with a remaining amortisation period of 1 year, and the in-licensed products within Canada (acquired in 2016 with a carrying value of £0.2 million and has a remaining amortisation period of 6.5 years). During the year, £0.3 million was added to patent rights within EU Pharmaceuticals Segment.
£0.8 million of the marketing authorisations relate to the Vetivex® range of products. Ownership of the marketing authorisations rests with the Group in perpetuity. There are not believed to be any legal, regulatory or contractual provisions that limit their useful lives. Vetivex is an established range of products which are relatively simple in nature and there are a limited number of players in the market. Accordingly, the Directors believe that it is appropriate that the marketing authorisations are treated as having indefinite lives for accounting purposes.
The software intangible asset includes £10.5 million relating to the ERP system in the EU Pharmaceuticals Segment, this has a remaining amortisation period of 5 years.
Goodwill is allocated across cash generating units that are expected to benefit from that business combination.
In accordance with the disclosure requirements of IAS 38 'Intangible Assets', the components of acquired intangibles are summarised below:
|
|
Commercial relationships £m |
Pharmacological process £m |
Brand £m |
Capitalised development costs £m |
Product rights £m |
Total £m |
|
Cost |
|
|
|
|
|
|
|
At 1 July 2018 |
6.7 |
49.6 |
15.4 |
367.3 |
235.0 |
674.0 |
|
Additions |
- |
- |
- |
- |
7.9 |
7.9 |
|
Reclassification* |
- |
- |
- |
2.9 |
(2.9) |
- |
|
Acquisitions through business combinations |
- |
- |
0.6 |
17.6 |
- |
18.2 |
|
Remeasurement |
- |
- |
- |
- |
(1.5) |
(1.5) |
|
Foreign exchange adjustments |
0.1 |
1.8 |
0.3 |
5.8 |
3.2 |
11.2 |
|
At 30 June 2019 and 1 July 2019 |
6.8 |
51.4 |
16.3 |
393.6 |
241.7 |
709.8 |
|
Additions |
- |
- |
- |
- |
46.2 |
46.2 |
|
Acquisitions through business combinations |
1.9 |
- |
- |
13.0 |
- |
14.9 |
|
Remeasurement |
- |
- |
- |
- |
10.9 |
10.9 |
|
Foreign exchange adjustments |
- |
1.8 |
0.3 |
3.4 |
4.1 |
9.6 |
|
At 30 June 2020 |
8.7 |
53.2 |
16.6 |
410.0 |
302.9 |
791.4 |
|
Accumulated Amortisation |
|
|
|
|
|
|
|
At 1 July 2018 |
1.3 |
20.2 |
4.4 |
47.4 |
141.1 |
214.4 |
|
Charge for the year |
2.3 |
6.8 |
1.6 |
55.0 |
11.1 |
76.8 |
|
Reclassification* |
- |
- |
- |
0.2 |
(0.2) |
- |
|
Foreign exchange adjustments |
0.1 |
0.9 |
0.1 |
1.7 |
1.9 |
4.7 |
|
At 30 June 2019 and 1 July 2019 |
3.7 |
27.9 |
6.1 |
104.3 |
153.9 |
295.9 |
|
Charge for the year |
2.0 |
5.7 |
1.6 |
48.2 |
12.1 |
69.6 |
|
Foreign exchange adjustments |
0.2 |
1.1 |
0.2 |
3.4 |
3.3 |
8.2 |
|
At 30 June 2020 |
5.9 |
34.7 |
7.9 |
155.9 |
169.3 |
373.7 |
|
Net book value |
|
|
|
|
|
|
|
At 30 June 2020 |
2.8 |
18.5 |
8.7 |
254.1 |
133.6 |
417.7 |
|
At 30 June 2019 |
3.1 |
23.5 |
10.2 |
289.3 |
87.8 |
413.9 |
* Apex IPR&D acquired October 2016 has been reclassified from Product rights to Capitalised development costs.
The table below provides further detail on the acquired intangibles and their remaining amortisation period.
|
Significant assets |
Description of acquired intangibles |
Goodwill carrying value £m |
Acquired intangibles carrying value £m |
Sub-Total carrying value £m |
Remaining amortisation period on acquired intangibles |
|
Intangible assets arising from the acquisition of Dermapet |
Product, marketing and distribution rights |
0.4 |
17.7 |
18.1 |
5 ½ years |
|
Intangible assets arising from the acquisition of Genetrix |
Product, marketing and distribution rights |
1.8 |
0.2 |
2.0 |
½ year |
|
Intangible assets arising from the acquisition of Eurovet |
Technology, product, marketing and distribution rights |
40.1 |
17.1 |
57.2 |
2 years |
|
Intangible assets arising from the acquisition of PSPC Inc |
Product, marketing and distribution rights |
0.1 |
3.4 |
3.5 |
4 years |
|
Intangible asset acquired from Pharmaderm Animal Health |
Marketing and distribution rights |
- |
0.3 |
0.3 |
2 years |
|
HY-50 intangible asset acquired from Bexinc Limited |
Marketing and distribution rights |
- |
0.8 |
0.8 |
1 ½ years |
|
Goodwill arising from the acquisition of Brovel |
|
3.0 |
- |
3.0 |
N/A |
|
Goodwill arising from the acquisition of Vetxx |
|
17.4 |
- |
17.4 |
N/A |
|
Goodwill arising from the acquisition of Dales |
|
2.2 |
- |
2.2 |
N/A |
|
Significant assets |
Description |
Goodwill carrying value £m |
Acquired Intangibles carrying value £m |
Sub-Total carrying value £m |
Remaining amortisation period on acquired intangibles |
|
Intangible assets arising from the acquisition of Genera |
Product, brand, technology, marketing and distribution rights |
|
0.6 |
|
2 ½ year |
|
|
0.3 |
|
5 ½ years |
||
|
|
6.7 |
|
10 ½ years |
||
|
5.6 |
|
13.2 |
Genera - total |
||
|
Intangible assets arising from the acquisition of Putney |
Product, brand, technology, pharmacological process, marketing and distribution rights |
|
6.0 |
|
6 years |
|
|
18.9 |
|
6 years |
||
|
|
42.9 |
|
8 years |
||
|
53.4 |
|
121.2 |
Putney - total |
||
|
Intangible asset arising from the acquisition of Apex |
Product and technology |
|
12.6 |
|
13 years |
|
|
2.0 |
|
10 years |
||
|
|
0.1 |
|
1 year |
||
|
8.9 |
|
23.6 |
Apex - total |
||
|
Intangible asset related to Animal Ethics |
Marketing and distribution rights |
- |
37.2 |
37.2 |
10 years |
|
Intangible asset related to a US and Brazilian dental licensing agreement |
Marketing and distribution rights |
- |
0.5 |
0.5 |
7 years |
|
Intangible asset related to Bioveta |
Marketing and distribution rights |
- |
2.1 |
2.1 |
10 years |
|
Intangible asset related to an injectable solution licensing agreement |
Marketing and distribution rights |
- |
6.3 |
6.3 |
10 years |
|
Intangible assets arising from the acquisition of AST Farma and Le Vet |
Product, brand, technology, marketing and distribution rights |
|
60.4 |
|
7 ½ years |
|
|
85.5 |
|
6 ½ years |
||
|
|
15.0 |
|
8 years |
||
|
|
0.5 |
|
½ year |
||
|
|
1.3 |
|
2 ½ years |
||
|
104.9 |
|
267.6 |
AST Farma and Le Vet - total |
||
|
Intangible asset related to Premune |
Product |
- |
0.1 |
0.1 |
1 year |
|
Intangible assets related to an injectable solution licensing agreement |
Marketing and distribution rights |
- |
8.0 |
8.0 |
15 years |
|
Intangible assets arising from the acquisition of Caledonian |
Product, brand, technology, marketing and distribution rights |
0.9 |
3.4 |
4.3 |
3 ½ years |
|
Intangible assets arising from the acquisition of Venco |
Product, brand, technology, marketing and distribution rights |
8.5 |
7.7 0.4 0.4 0.1 |
17.1 |
8 ½ years 3 ½ years 6 ½ years ½ year Venco - total |
|
Intangible assets related to the licensing and distribution of Pimobendan Oral Solution |
Product, marketing and distribution rights |
|
0.2 |
0.2 |
10 years |
|
Intangible assets arising from the acquisition of Ampharmco |
Product and technology rights |
6.6 |
1.4 6.0 0.6 6.0 |
20.6 |
2 ½ years 17 ½ years 14 ½ years 13 years Ampharmco - total |
|
Intangible assets arising from the acquisition of Mirataz |
Product and technology rights |
- |
45.0 |
45.0 |
9 ½ years |
|
|
|
253.8 |
417.7 |
671.5 |
|
11. Deferred Taxes
(a) Recognised Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are attributable to the following:
|
|
Assets |
Liabilities |
Net |
|||
|
2020 £m |
Restated* 2019 £m |
2020 £m |
Restated* 2019 £m |
2020 £m |
Restated* 2019 £m |
|
|
Intangible assets |
- |
- |
(62.4) |
(75.9) |
(62.4) |
(75.9) |
|
Property, plant and equipment |
- |
- |
(4.0) |
(3.8) |
(4.0) |
(3.8) |
|
Inventories |
1.4 |
1.8 |
- |
- |
1.4 |
1.8 |
|
Receivables/payables |
3.2 |
1.4 |
- |
- |
3.2 |
1.4 |
|
Share-based payments |
0.7 |
1.0 |
- |
- |
0.7 |
1.0 |
|
Losses |
0.5 |
1.6 |
- |
- |
0.5 |
1.6 |
|
R&D tax credits |
0.3 |
- |
- |
- |
0.3 |
- |
|
Employee benefit obligations |
0.4 |
0.3 |
- |
- |
0.4 |
0.3 |
|
|
6.5 |
6.1 |
(66.4) |
(79.7) |
(59.9) |
(73.6) |
* Restated as detailed in note 15 Acquisitions
12. Borrowings and lease liabilities
|
|
2020 £m |
2019 £m |
|
Current liabilities: |
|
|
|
Lease liabilities |
3.2 |
- |
|
Bank loans |
1.4 |
1.2 |
|
|
4.6 |
1.2 |
|
Non-current liabilities: |
|
|
|
Lease liabilities |
11.8 |
- |
|
Senior loan notes |
127.1 |
- |
|
Bank loans |
214.2 |
309.6 |
|
Arrangement fees netted off |
(2.7) |
(2.7) |
|
|
350.4 |
306.9 |
|
Total borrowings |
355.0 |
308.1 |
On 1 October 2019 the Accordion facility on the Revolving Credit Facility of £235.0 million was invoked, removing the Accordion facility and increasing the committed facilities on the Revolving Credit Facility to £340.0 million. During the year the drawings on the Revolving Credit Facility have been restructured such that £179.0 million has been drawn on the facility and £143.7 million repaid. At 30 June 2020, £214.2 million was drawn against the £340.0 million Revolving Credit Facility maturing 25 July 2024. The facility is not secured on any specific assets of the Group but is supported by a joint and several cross guarantee structure. Interest is charged on this facility at a minimum of 1.30% over LIBOR and a maximum of 2.20% over LIBOR, dependent upon the Leverage (the ratio of Total Net Debt to Adjusted EBITDA) of the Group. As at 30 June 2020, interest being charged on this facility is 1.70% above LIBOR. All covenants were met during the year ended 30 June 2020.
In January 2020 the Group undertook a Private Placement raising £118.3 million in the form of EUR50.0 million and USD100.0 million (under seven and ten year new senior secured notes respectively). At 30 June 2020, £127.1 million was drawn under the Private Placement. The Private Placement amounts are not secured on any specific assets of the Group, but are supported by a joint and several cross guarantee structure. Interest is charged on the EUR50.0 million amount at a fixed rate of 1.19% until maturity (January 2027). Interest is charged on the USD100.0 million amount at a fixed rate of 3.34% until maturity (January 2030).
The drawings on the Private Placement, together with a restructuring of the drawings on the Revolving Credit Facility, enabled £126.7 million drawn on the £350.0 million Term Loan Facility, due to mature in December 2020, to be fully repaid and cancelled in January 2020.
Arrangement fees of £1.7 million were incurred on the two facilities during the year, these being released to the income statement over the life of the facility.
No interest has been capitalised during the year (2019: £nil).
Genera also has borrowing facilities of £4.6 million, of which £1.4 million (2019: £2.7 million) was drawn down at 30 June 2020. Interest is fixed at 3.1%.
The maturity of the bank loans and overdrafts is as follows:
|
|
2020 £m |
2019 £m |
|
Payable: |
|
|
|
Within one year |
1.4 |
1.2 |
|
Between one and two years |
- |
180.5 |
|
Between two and five years |
214.2 |
129.1 |
|
Over five years |
127.1 |
- |
|
|
342.7 |
310.8 |
The maturity of the lease liabilities is as follows:
|
|
2020 £m |
2019 £m |
|
Payable: |
|
|
|
Within one year |
3.2 |
- |
|
Between one and two years |
2.5 |
- |
|
Between two and five years |
4.0 |
- |
|
Over five years |
5.3 |
- |
|
|
15.0 |
- |
13. Provisions
|
|
Deferred Rent £m |
Provision for PPE grant £m |
Environmental, Health & Safety Grant £m |
Dilapidations £m |
Total £m |
|
At start of period |
(0.5) |
(1.2) |
(0.3) |
- |
(2.0) |
|
Acquired through business combinations |
- |
- |
- |
(0.4) |
(0.4) |
|
Provision recognised |
- |
(0.7) |
- |
- |
(0.7) |
|
Provision utilised |
0.1 |
0.5 |
- |
- |
0.6 |
|
Foreign exchange differences |
- |
- |
- |
- |
- |
|
At end of period |
(0.4) |
(1.4) |
(0.3) |
(0.4) |
(2.5) |
The Group has received advanced payment for rental income on its facilities in Portland. This has been recognised at amortised cost and is being utilised over the period of the rental contract.
Genera has received advanced funding (PPE grant) for the refurbishment of the manufacturing facility for a third party manufacturing contract. The funding has been recognised at amortised cost and is being utilised over the life of the property, plant and equipment.
On the acquisition of Genera, the Group established a fair value provision to address existing legal and environmental compliance. A provision is recognised at the present value of the costs to be incurred for the remediation of the manufacturing site.
On the acquisition of Ampharmco, the Group established a fair value provision for dilapidations of a warehouse property.
14. Foreign Exchange Rates
The following primary exchange rates have been used in the translation of the results of foreign operations:
|
|
Average rate for 2019 |
Closing rate at 30 June 2019 |
Average rate for 2020 |
Closing rate at 30 June 2020 |
|
Australian Dollar |
1.8097 |
1.8118 |
1.8784 |
1.7913 |
|
Brazilian Real |
4.9686 |
4.8532 |
5.6245 |
6.6986 |
|
Danish Krone |
8.4651 |
8.3248 |
8.5080 |
8.1681 |
|
Euro |
1.1345 |
1.1154 |
1.1396 |
1.0960 |
|
US Dollar |
1.2945 |
1.2693 |
1.2601 |
1.2273 |
15. Acquisitions
Acquisition of Ampharmco
On 28 August 2019, Dechra acquired 100% of the share capital of Ampharmco LLC and its associated companies Dragon Fire Holdings LLC and Black Griffin Holdings LLC (collectively Ampharmco), together with its manufacturing site based in Fort Worth, Texas. The Group paid £24.3 million (USD29.6 million) consideration in cash.
|
|
Fair value £m |
|
Recognised amounts of identifiable assets acquired |
|
|
Property, plant and equipment |
3.4 |
|
Inventory |
1.2 |
|
Trade and other receivables |
0.4 |
|
Trade and other payables |
(0.3) |
|
Cash |
- |
|
Lease liabilities |
(0.1) |
|
Provisions |
(0.4) |
|
Intangible assets |
15.0 |
|
Current tax liabilities |
(1.5) |
|
Net identifiable assets |
17.7 |
|
Goodwill |
6.6 |
|
Total consideration |
24.3 |
|
Satisfied by: |
|
|
Cash |
24.3 |
|
Total consideration transferred and net cash outflow arising on acquisition |
24.3 |
The fair value adjustments made principally relate to harmonisation with Group IFRS accounting policies, including the application of fair values on acquisition, principally the recognition of intangible assets in accordance with IFRS 3. The impact of increasing the discount rates used to calculate the acquired intangibles by 1.0% is to reduce the value of the acquired intangibles by £1.0 million, with a corresponding increase in goodwill.
The goodwill of £6.6 million arising from the acquisition predominantly relates to the future benefits of an FDA registered facility to manufacture solid doses, liquids, creams and ointments, which will significantly strengthen the manufacturing capability for the North American market. No deferred tax arises on acquisition because the tax elections available in the US enable a tax base to be recognised for certain assets identified at that point in time.
Acquisition related costs (included in non-underlying operating expenses) amounted to £1.2 million. Ampharmco's results are reported within the NA Pharmaceuticals Segment.
Ampharmco contributed £2.6 million revenue and £0.6 million loss to the Group's underlying operating profit for the period between the date of acquisition and the balance sheet date. If the acquisition had been completed on the first date of the financial year, the contribution to Group revenues for the period would have been £3.4 million and the contribution to the Group's underlying operating profit would have been £0.7 million loss. The reported operating loss after taking into account non-underlying items for the amortisation of intangible assets would have been £1.7 million.
Acquisition of Mirataz
On 16 March 2020, Dechra acquired the worldwide rights to the Mirataz product portfolio from Kindred Biosciences Incorporated for a cash consideration of £34.9 million (USD 43.0 million) and a royalty on future sales. The acquisition completed on 16 April 2020. The Net Present Value of the future sales royalties has been valued at £10.9 million, and is included within the contingent consideration liability at year end (refer to note 16). The Group has early adopted the amendments to IFRS3 'Business Combinations' and applied the optional concentration test for this transaction. Accordingly, it has been concluded that substantially all the value arising from the transaction relates to the product rights which are recognised as an intangible asset. The total intangible asset recognised in relation to this acquisition is £45.8 million (refer to note 10). A payment of £0.6 million was also made for inventory.
Prior Year Acquisitions
Following the acquisition of Dechra Brazil (formerly known as Laboratorios Vencofarma do Brasil Ltda (Venco)) in December 2018, the fair value of the assets and liabilities acquired have been reconsidered since the Annual Report as at 30 June 2019 as part of the measurement period. In relation to the 30 June 2019 balance sheet, hindsight adjustments have been made as detailed in the table below:
|
|
Reported June 2019 £m |
Opening Balance sheet adjustments £m |
Restated June 2019 £m |
|
Intangible assets |
687.0 |
(6.4) |
680.6 |
|
Inventory |
104.0 |
(0.5) |
103.5 |
|
Trade and other receivables |
99.9 |
(0.1) |
99.8 |
|
Deferred tax due after more than one year |
(81.5) |
7.0 |
(74.5) |
A hindsight adjustment has been made within tangible fixed assets to reclassify £0.1 million from Plant & Fixtures to Freehold Land & Buildings.
During the measurement period the deferred tax position in respect of the acquisition has been concluded, taking into account elections available and contemplated at the acquisition date which enable a tax base to be established in Brazil for certain assets identified on acquisition. While enacted during the measurement period, this is based on information and facts that existed at the acquisition date. The disclosure of the final fair values of the assets and liabilities acquired have been included in the financial statements for the year ended 30 June 2020.
Following the acquisition of the trade and assets of Caledonian Holdings Ltd in October 2018, the disclosure of final fair values of the assets and liabilities acquired has been included in the financial statements for the year ended 30 June 2019.
16. Contingent Consideration Liabilities
|
|
2020 £m |
2019 £m |
|
|
|
|
|
Contingent consideration - less than one year |
8.9 |
5.1 |
|
Contingent consideration - more than one year |
47.3 |
30.9 |
|
|
56.2 |
36.0 |
The consideration for certain acquisitions and licensing agreements includes amounts contingent on future events such as development milestones or sales performance. The Group has provided for the fair value of this contingent consideration as follows:
|
|
Tri-Solfen® £m |
StrixNB® & DispersinB® £m |
Injectable Solution 1 £m |
Injectable Solution 2 £m |
Mirataz £m |
Phycox® £m |
Other £m |
Total £m |
|
As at 1 July 2018 |
22.8 |
1.1 |
6.6 |
- |
- |
2.8 |
1.7 |
35.0 |
|
Additions |
- |
- |
- |
7.9 |
- |
- |
- |
7.9 |
|
Remeasurement through intangibles |
(1.0) |
(0.3) |
(0.3) |
- |
- |
- |
0.1 |
(1.5) |
|
Remeasurement through income statement |
- |
(0.1) |
- |
- |
- |
- |
- |
(0.1) |
|
Cash payments: investing activities |
- |
(0.1) |
(2.1) |
(3.0) |
- |
(0.7) |
(0.4) |
(6.3) |
|
Finance expense |
0.6 |
0.1 |
0.2 |
- |
- |
0.1 |
- |
1.0 |
|
Foreign exchange adjustments |
(0.4) |
- |
- |
0.3 |
- |
- |
0.1 |
- |
|
At 30 June 2019 |
22.0 |
0.7 |
4.4 |
5.2 |
- |
2.2 |
1.5 |
36.0 |
|
Additions |
- |
0.2 |
- |
- |
10.9 |
- |
0.2 |
11.3 |
|
Remeasurement through intangibles |
9.9 |
- |
0.2 |
- |
- |
0.8 |
- |
10.9 |
|
Remeasurement through income statement |
- |
- |
- |
- |
- |
- |
- |
- |
|
Cash payments: investing activities |
- |
(0.1) |
(1.5) |
(0.9) |
- |
(0.8) |
(0.2) |
(3.5) |
|
Finance expense |
0.4 |
- |
0.1 |
0.1 |
- |
- |
- |
0.6 |
|
Foreign exchange adjustments |
0.7 |
- |
0.1 |
- |
- |
0.1 |
- |
0.9 |
|
At 30 June 2020 |
33.0 |
0.8 |
3.3 |
4.4 |
10.9 |
2.3 |
1.5 |
56.2 |
The table below shows on an indicative basis the sensitivity to reasonably possible changes in key inputs to the valuations of the contingent consideration liabilities. There will be a corresponding opposite impact on the intangible assets.
|
|
Tri-Solfen® |
StrixNB® & DispersinB® |
Injectable Solution 1 |
Injectable Solution 2 |
Mirataz |
Phycox® |
Other |
|
Increase/(decrease) in financial liability |
|||||||
|
10% increase in royalty forecasts £m |
2.6 |
0.1 |
N/A |
N/A |
1.1 |
0.3 |
N/A |
|
10% decrease in royalty forecasts £m |
(2.6) |
(0.1) |
N/A |
N/A |
(1.1) |
(0.3) |
N/A |
|
1% increase in discount rates £m |
(2.0) |
- |
(0.1) |
(0.1) |
(0.6) |
(0.1) |
- |
|
1% decrease in discount rates £m |
2.0 |
- |
0.1 |
0.1 |
0.6 |
0.1 |
- |
|
5% appreciation in currency £m |
(1.6) |
- |
(0.2) |
(0.2) |
(0.5) |
(0.1) |
(0.1) |
|
5% depreciation in currency £m |
1.6 |
- |
0.2 |
0.2 |
0.5 |
0.1 |
0.1 |
|
Discount rate range in 2020 financial year |
2.5%-16.6% |
10.1%-13.1% |
9.2% |
9.2% |
6.8%-10.2% |
10.1% |
9.4% |
|
Discount rate range in 2019 financial year |
12.5% |
9.5% |
9.0% |
9.0% |
- |
9.5% |
10% |
|
Aggregate cash outflow in relation to royalties (remaining term of royalty agreement) |
|||||||
|
2020 £m (years) |
50.6 (10) |
1.1 (7) |
N/A |
N/A |
17.6 (10) |
2.8 (3.5) |
N/A |
|
2019 £m (years) |
38.0 (10) |
1.1 (8) |
N/A |
N/A |
N/A |
2.8 (4.5) |
N/A |
The consideration payable for Tri-Solfen® is expected to be payable over a number of years, and relates to development milestones and sales performance. During the year, the development milestones have been remeasured and are now expected to happen later than initially anticipated. The sales performance royalties have been remeasured during the year reflecting an increase in management's best estimate of forecasted sales performance.
The consideration payable for Mirataz relates to sales performance and is expected to be payable over a number of years.
The consideration payable for StrixNB® and DispersinB® is expected to be payable over a number of years, and relates to sales performance. During the year the contingent consideration has been remeasured based on management's best estimate of forecasted sales performance. An Addendum to the contract was agreed during the year for a development milestone and sales performance in the Brazilian market.
The consideration for two separate licensing agreements for injectable solutions both relate to development milestones. Phycox relates
to sales performance and arose as part of the acquisition of the trade and assets of PSPC Inc. in 2014.
Where a liability is expected to be payable over a number of years the total estimated liability is discounted to its present value. With the exception of Phycox, all contingent consideration liabilities relate to licensing agreements.
17. Related Party Transactions
Subsidiaries
The Group's ultimate Parent Company is Dechra Pharmaceuticals PLC. A listing of subsidiaries will be shown within the financial statements of the Company 2020 Annual Report.
Transactions with Key Management Personnel
The details of the remuneration, Long Term Incentive Plans, shareholdings, share options and pension entitlements of individual Directors are included in the Directors' Remuneration Report in the 2020 Annual Report.
Associates
The Group holds a 48% stake in Medical Ethics Pty Ltd, which is the holding company of Animal Ethics Pty Ltd. There have been no transactions with the Medical Ethics Group during the year. In the prior year, a milestone payment of £1.4 million (AUD 2.5 million) relating to the licensing agreement with Animal Ethics Pty Ltd was made. Refer to note 6 for further information on the results of the associate in the period.
18. Changes in Accounting Policies
IFRS 16 'Leases'
The Group has adopted IFRS 16 retrospectively from 1 July 2019, but has not restated comparatives for the 2019 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 July 2019.
(a) Adjustments Recognised on Adoption of IFRS 16
On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate as of 1 July 2019. The weighted average lessee's incremental borrowing rate applied to the lease liabilities on 1 July 2019 was 2.9%.
|
|
2019 £m |
|
Operating lease commitments disclosed as at 30 June 2019 |
16.4 |
|
Impact of discounting using the incremental borrowing rate (IBR) on transition |
(2.0) |
|
(Less): short term leases recognised on a straight-line basis as expense |
(0.8) |
|
(Less): contracts reassessed as service agreements |
(0.9) |
|
Lease liability recognised as at 1 July 2019 |
12.7 |
|
Of which are: |
|
|
Current lease liabilities |
2.7 |
|
Non-current lease liabilities |
10.0 |
|
|
12.7 |
The recognised right of use assets relate to the following types of assets:
|
|
30 June 2020 £m |
1 July 2019 £m |
|
Properties |
11.2 |
9.2 |
|
Equipment |
0.3 |
0.4 |
|
Motor vehicles |
3.4 |
3.1 |
|
Total right of use assets |
14.9 |
12.7 |
The change in accounting policy affected the following items in the balance sheet on 1 July 2019:
• right of use assets (reflected in property, plant and equipment) - increase £12.7 million
• lease liability (reflected in borrowings) - increase £12.7 million
The net impact on retained earnings on 1 July 2019 was £Nil. The adoption of IFRS 16 has resulted in EBITDA being £3.7 million higher and EBIT being £0.2 million higher in the current period compared to IAS 17.
Practical Expedients Applied
In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:
• the use of a single discount rate for a portfolio of leases with reasonably similar characteristics;
• the accounting for operating leases with a remaining lease term of less than 12 months as at 1 July 2019 as short term leases;
• the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application; and
• the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
The Group has also elected not to reassess whether a contract is, or contains, a lease at the date of initial application. Instead, for contracts entered into before the transition date the Group relied on its assessment made applying IAS 17 and IFRIC 14 'Determining whether an arrangement contains a lease'.
(b) The Group's Leasing Activities and how these are accounted for
The Group leases various offices, warehouses, equipment and vehicles. Rental contracts are typically made for fixed periods of three to five years, but may have extension options as described below.
Contracts may contain both lease and non-lease components. The Group allocates the consideration in the contract to the lease and non-lease components based on their relative stand-alone prices.
Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants other than the security interests in the leased assets that are held by the lessor. Leased assets may not be used as security for borrowing purposes.
Until the 2020 financial year, leases of property, plant and equipment were classified as operating leases. From 1 July 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group.
Extension and termination options
Extension and termination options are included in a number of property and equipment leases across the Group. These are used to maximise operational flexibility in terms of managing the assets used in the Group's operations. The majority of extension and termination options held are exercisable by both the Group and the respective lessor.
IFRIC 23 'Uncertainty over Income Tax Treatments'
From 1 July 2019, the Group has adopted IFRIC 23 which clarifies the application of recognition and measurement requirements in IAS 12 Income Taxes when there is uncertainty over income tax treatments. Upon adoption of IFRIC 23, there have been no material adjustments to the uncertain tax positions held on the balance sheet as at 30 June 2019. The Group have also reviewed the most appropriate methodology for the uncertain tax positions held at the balance sheet date. Based on the current facts and circumstances in each case, the Group has used both the most likely outcome method and the expected value method in calculating the value of the provision required. This methodology will be reviewed in each case upon the receipt of any new information.
19. Contingent Liabilities
In October 2017 the European Commission (the Commission) opened a State Aid investigation into the Group Financing Exemption in the UK Controlled Foreign Company (CFC) rules. On 25 April 2019 the Commission issued its decision on the CFC Group Financing Exemption concluding that part of the UK measures were unlawful and incompatible instructing the UK Government to recover the State Aid. The UK Government filed an annulment appeal on 12 June 2019. In common with other UK-based international companies Dechra had financing arrangements in line with the current UK legislation. We have calculated the maximum potential State Aid claimed as £4.0 million excluding penalties and interest. Given the current position no provision has been recognised in the financial statements.
At 30 June 2020, contingent liabilities arising in the normal course of business amounted to £11.4 million (2019: £15.0 million) relating to licence and distribution agreements entered into during the year. The stage of development of the projects underpinning the agreements dictates that a commercially stable product is yet to be achieved, and accordingly an intangible asset and a contingent consideration liability have not been recognised.
20. Subsequent Events
On 27 July 2020 the Group completed the acquisition of the worldwide rights of the Osurnia product portfolio from Elanco Animal Health Incorporated for a total consideration of USD135.0 million (£104.7 million). Inventory of USD6.6 million (£5.1 million) was also acquired as part of the transaction.
21. Underlying Operating Profit and Profit Before Taxation
|
|
2020 £m |
2019 £m |
|
Operating profit |
|
|
|
Underlying operating profit/EBIT is calculated as follows: |
|
|
|
Operating profit |
52.2 |
39.0 |
|
Non-underlying operating expenses (note 5) |
76.1 |
88.4 |
|
Underlying operating profit/EBIT |
128.3 |
127.4 |
|
Depreciation |
9.9 |
5.7 |
|
Amortisation |
4.3 |
4.1 |
|
Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) |
142.5 |
137.2 |
|
Profit before taxation |
|
|
|
Underlying profit before taxation is calculated as follows: |
|
|
|
Profit before taxation |
40.9 |
27.8 |
|
Non-underlying operating expenses |
76.1 |
88.4 |
|
Amortisation of fair value adjustments relating to Medical Ethics (net of tax) |
0.6 |
0.2 |
|
Fair value and other movements on contingent consideration |
1.5 |
1.0 |
|
Loss on extinguishment of debt |
1.0 |
- |
|
Underlying profit before taxation |
120.1 |
117.4 |
22. Other information
The financial information set out above does not constitute the Company's statutory accounts for the years ended 30 June 2020 or 2019 but is derived from the 2020 and 2019 accounts. Statutory accounts for 2019 have been delivered to the Registrar of Companies and those for 2020 will be delivered in due course. The external auditor has reported on those accounts; the report was (i) unqualified, (ii) did not include references to any matters to which the external auditor drew attention by way of emphasis without qualifying the reports and (iii) did not contain statements under section 498(2) or (3) of the Companies Act 2006.
23. Preliminary Statement
This Preliminary statement is not being posted to Shareholders. The Annual Report and Accounts for the year ended 30 June 2020 will be sent to shareholders shortly. Further copies will be available from the Company's Registered Office: 24 Cheshire Avenue, Cheshire Business Park, Lostock Gralam, Northwich CW9 7UA. Email: corporate.enquiries@dechra.com. Copies are also available on the Company website www.dechra.com.
24. 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 and Accounts for the year ended 30 June 2020. Certain parts of that Report are not included within this announcement.
We confirm to the best of our knowledge:
a) the Company Financial Statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 'Reduced Disclosure Framework', and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the Company;
b) the Group Financial Statements, prepared in accordance with the IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of Group; and
c) the Strategic Report includes a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that they face.
Signed by the order of the Board:
|
Ian Page Chief Executive Officer 7 September 2020 |
|
|
|
Paul Sandland |
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