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Alliance Pharma PLC (APH)

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Tuesday 26 March, 2019

Alliance Pharma PLC

Full Year Results

RNS Number : 9539T
Alliance Pharma PLC
26 March 2019
 

For immediate release

                                                  26 March 2019

 

ALLIANCE PHARMA PLC

("Alliance" or the "Group")

Results for the year ended 31 December 2018

STRONG PERFORMANCE WITH SEE-THROUGH* REVENUE UP 22%

Alliance Pharma plc (AIM: APH), the international healthcare group, is pleased to announce its preliminary results for the year ended 31 December 2018.

 

HIGHLIGHTS

·      Revenues on a see-through* basis up 22% at £124.0m (up 23% on a constant currency* basis), with like-for-like revenue up 4% (4% on a constant currency* basis), in line with expectations

Continued strong performance from International Star brands, led by Kelo-cote™

For the first time, overseas sales exceeded those from the UK

·      Statutory revenues up 16%, to £118.2m (2017 restated**: £101.6m)

·      Underlying EBITDA* up 19% to £32.4m (2017 restated**: £27.2m)

·      Nizoral™ acquired from Johnson & Johnson for the Asia Pacific region in June 2018 for £60m; revenues in line with expectations; integration progressing well

·      Vamousse™ integration completed and Alliance subsidiary fully established in the US; Vamousse revenues up 16% year on year under Alliance management

·      Xonvea™, for nausea and vomiting of pregnancy where conservative management has failed, approved in the UK in July 2018 and launched in October - now starting to gain formulary inclusions

·      Continued strong cash generation, with leverage falling to 2.33x from 2.46x (2017), including £28m of new borrowings for the Nizoral acquisition

·      Proposed final dividend increased 10% to 0.977p, giving a total dividend of 1.464p. Covered 3.1x by underlying earnings

 

FINANCIAL SUMMARY

Year ended 31 December

2018

£m

2017

£m

(restated**)

Growth

Revenue (see-through basis)*

124.0

101.6

22%

Revenue (statutory basis)

118.2

101.6

16%

Gross profit

72.6

59.1

23%

Underlying EBITDA*

32.4

27.2

19%

Underlying profit before taxation*

28.1

23.9

17%

Reported profit before taxation

22.8

28.3

-19%

Adjusted underlying basic earnings per share*

4.54p

4.05p

12%

Reported basic earnings per share

3.69p

6.08p

-39%

Free cash flow*

16.1

22.0

-27%

Leverage

2.33x

2.46x

 

Net debt*

85.8

72.3

 

Final dividend per share

0.977p

0.888p

10%

 

* The performance of the Group is assessed using Alternative Performance Measures ("APMs"), which are measures that are not defined under IFRS, but are used by management to monitor ongoing business performance against both shorter term budgets and forecasts and against the Groups longer term strategic plans. APMs are defined in note 18.

Specifically, see-through revenue includes sales from Nizoral™ as if they had been invoiced by Alliance. Under the terms of the transitional services agreement with Johnson & Johnson (J&J), Alliance receives the benefit of the net profit on sales of Nizoral from the date of acquisition up until the product licences in the Asia-Pacific territories transfer from J&J to Alliance, which is expected to occur during 2019 and 2020. For statutory accounting purposes the product margin on Nizoral sales is included within Revenue, in line with IFRS 15.

 ** The adoption of IFRS 15 Revenue from Contracts with Customers has resulted in the reclassification of certain rebates as a deduction from revenue; previously these rebates were included within cost of sales. To ensure comparability, the 2017 comparatives have been restated following the adoption of IFRS 15 and IFRS 16 Leases. The impact of this restatement is set out in notes 2 and 3.

 

Commenting on the results, Peter Butterfield, Alliance Pharma's Chief Executive Officer, said:

"In 2018 we continued to deliver on our strategy, with strong sales and profit growth, led by our International Star brands and acquisitions. 2018 marked a milestone in the internationalisation of Alliance in that, for the first time, our overseas sales exceeded those in the UK. The acquisition of Nizoral brings increased scale and opportunities for us in the Asia Pacific region and, together with the creation of a trading operation in the US, further increases our international footprint, whilst the UK approval of Xonvea offers further organic growth prospects for the Group.

 

"2019 has started well and we look forward to continuing on our growth path in the year ahead and to deploying the Group's strong cashflow to further develop as a leading international healthcare business."

 

 

ANALYST MEETING AND WEBCAST

 

A meeting for analysts will be held at 11.00am this morning at the offices of Buchanan, 107 Cheapside, London EC2V 6DN. Please contact Buchanan for further details on 020 7466 5000 or email [email protected].

 

To access a live webcast of the analyst presentation, please log on to the following web address several minutes before 11.00am: http://webcasting.buchanan.uk.com/broadcast/5c6e8e68e6e1d92d38f4f7e1

 

A replay of the webcast will be made available at the Investors section of Alliance's website, www.alliancepharmaceuticals.com.

 

 

For further information

 

Alliance Pharma plc

+ 44 (0)1249 466966

Peter Butterfield, Chief Executive Officer

 

Andrew Franklin, Chief Financial Officer

 

www.alliancepharma.co.uk

 

Buchanan

+ 44 (0)20 7466 5000

Mark Court / Sophie Wills / Hannah Ratcliff

 

 

 

Numis Securities Limited

+ 44 (0)20 7260 1000

Nominated Adviser: Michael Meade / Freddie Barnfield

 

Corporate Broking: James Black

 

 

Investec Bank plc

+ 44 (0)  20 7597 5970

Corporate Finance: Daniel Adams / Ed Thomas

 

Corporate Broking: Patrick Robb / Tejas Padalkar

 

 

About Alliance

Alliance Pharma plc (AIM: APH) is an international healthcare group, headquartered in the UK with subsidiaries in Europe, the Far East and the US and wide international reach through an extensive network of distributors, generating sales in more than 100 countries.

We currently own or license the rights to more than 90 pharmaceutical and consumer healthcare products, which are managed on a portfolio basis according to their growth potential. Promotional investment is focused on a small number of brands with significant international or multi-territory reach. The remainder of the portfolio comprises products which are sold in a limited number of local markets and require little or no promotional investment.

Our strategy allows us to benefit both from organic growth opportunities and from enhancing our growth rate through carefully selected acquisitions.

For more information on Alliance, please visit our websitewww.alliancepharmaceuticals.com  

 

CHIEF EXECUTIVE'S STATEMENT

Overview

Alliance is an international healthcare business which owns or licenses the rights to more than 90 pharmaceutical and consumer healthcare products.

The Group operates an outsourced business model in support of its proven strategy, combining organic growth with a selective programme of acquisitions.

Organic growth comes primarily from our International Star brands.  These comprise a select number of promoted products which are considered to offer significant benefit to patients and have international growth potential:

·      Kelo-cote™ (unique patent-protected treatment for scar reduction)

·      Nizoral™ (medicated anti-dandruff shampoo)

·      MacuShield™ (eye health supplement)

·      Vamousse™ (prevention & treatment of head lice)

·      Xonvea™ (licensed medicine for the treatment of nausea and vomiting of pregnancy where conservative management has failed)

As International Stars, these brands benefit from the provision of central strategic oversight, direction and campaign generation, ensuring marketing activities are aligned across all territories whilst allowing for local customisation where appropriate.

Also important to our business is a broad portfolio of Local brands. These products either occupy established therapeutic niches or have strong brand heritage and as such are well established in their local markets without necessarily having wider international potential.  We currently have around 90 Local brands in our portfolio.

We complement our organic growth with acquisitions and have completed more than 35 deals over the past 20 years, the most recent being the £60m acquisition from Johnson & Johnson ("J&J") of the rights to Nizoral for the Asia Pacific region in June 2018. This significant acquisition, part funded by a £34m share placing, enabled us to increase both our geographic footprint and scale in our fast-growing Asia Pacific business.

Geographically, we now have a direct presence across Western Europe, the US and the Far East, with additional reach secured through an extensive network of around 100 international distributors.

Trading performance

The Group continued to trade well in 2018 with revenues on a see-through basis up 22% to £124.0m and up 16% on a statutory basis to £118.2m (2017 restated: £101.6m). Like-for-like revenues, which exclude acquisitions in the year under review, were up 4% on the prior year (4% on a constant currency basis) and, with improving gross profit margins, gross profit increased by 23% to £72.6m (2017 restated: £59.1m). As expected, the growth in underlying EBITDA and underlying profit before tax was slightly lower as we continue with our planned investment in our International Star brands and continue to build our business in the Asia Pacific region; underlying EBITDA was up 19% to £32.4m (2017 restated: £27.2m) and underlying profit before tax up 17% to £28.1m (2017 restated: £23.9m).

Recent acquisitions, integration and disposals

During the first half of 2018, we completed the integration of Vamousse, the pesticide-free treatment for head lice, acquired in December 2017, establishing a new US subsidiary to manage the sales of this product in its largest market. We also completed the integration of Ametop™, the local anaesthetic gel acquired from Smith & Nephew in December 2017, with sales of this product forming part of our Local brand sales in 2018.

We have made a positive start with the integration of Nizoral, the medicated anti-dandruff shampoo acquired from J&J for the Asia Pacific region in June 2018. The acquisition included product licences covering 17 Asia Pacific territories in which the brand is registered, which are expected to transfer to Alliance over time, beginning in H2 2019. Under the terms of the transitional services agreement with J&J, we receive the net profit on sales of Nizoral from the date of acquisition up until the point at which the licence in each territory transfers to Alliance. 

China remains a key territory for the Group, and we have had a local presence there since 2007 when we acquired the rights to Forceval in China. As part of the strategic repositioning of our China business to prepare for strong future organic growth, in April 2018 we completed the disposal of our 60% joint venture holding in Unigreg Limited and we impaired our 20% stake in the Synthasia joint venture - the Chinese distributor of Suprememil infant milk formula.

Our Shanghai trading company will continue to market our local nutraceutical products and maintain close links to the Shanghai-based distributor of Kelo-cote. It is also well placed to manage the Triatop (Nizoral) relationship in China, a key territory for the product, following the transition from J&J.

 

OPERATIONAL REVIEW

International Star brands

Kelo-cote

Kelo-cote, our scar treatment product, delivered an outstanding performance in 2018, with sales up 68% to £22.5m (2017: £13.3m) due to strong growth across the Asia Pacific region and in mainland Europe.

In October we were pleased to be a leading sponsor of the first world congress of the G-Scar Society in Shanghai. Over 400 healthcare professionals attended the event which featured lectures given by prominent Key Opinion Leaders in scar treatment from around the world.

We plan to continue to support the growth of this key brand in 2019 through further range enhancement, with marketing support being maintained at a similar level to 2018.

Nizoral

Nizoral, the medicated anti-dandruff shampoo acquired from J&J in June 2018, performed in line with expectations, generating see-through sales of £10.9m in the second half of 2018. We have made a good start on integration activities, which are progressing to plan, and expect the first of the product licences to transfer to Alliance during the second half of 2019.

MacuShield

MacuShield, our eye health supplement, performed well in this period, generating sales of £7.0m, up 6% year on year (2017: £6.6m, restated following the adoption of IFRS 15). Growth came primarily from the UK, where the product was awarded 'Best Eye Health Product 2018' by Boots.

Growth was somewhat tempered by delays to the launches planned for the second half of 2018 in both European and international territories. These countries are now expected to come on stream in the first half of 2019.

Vamousse

Vamousse, for the prevention and treatment of head lice, performed in line with expectations achieving sales of £5.8m, up 16% on 2017 (when it was under previous ownership) and up 18% on a constant currency basis.

We continue to evaluate opportunities to introduce Vamousse into new markets.

Xonvea

Xonvea, for the treatment of nausea and vomiting of pregnancy where conservative management has failed, gained UK marketing approval in July 2018 and was launched in the UK in October 2018. Early signs are encouraging, with the product having achieved its first sales and formulary inclusions.

UK approval paves the way for further licence approvals in the EU in 2019 and beyond, and as such the product is considered to offer good growth prospects in the medium term.

 

Local brands

Our Local brands comprise a wide portfolio of products that collectively generate significant profit and cashflow for the business and, as such, represent a key component of our business model. Most of our Local brands occupy well-established niches in their respective market segments and provide stable cashflows with little or no promotional effort. Occasionally competition may emerge in a segment, or we may be advised by a supplier that they are no longer able to manufacture the product and in 2018 we experienced this with our anti-malarials portfolio.

After a slower first half, the second half of the year saw a recovery in sales of our Local brands, as some of the timing differences in order placement we experienced in the first half of the year reversed, and most, but not all, of the manufacturing delays were resolved. Second half sales of £40.6m were up 9% on first half sales (H1 2018 £37.2m), although 2% lower than sales in the second half of 2017 (H2 2017 restated: £41.4m). Total sales for the year were £77.8m, down 5% on the previous year (2017 restated: £81.6m), £0.6m of which related to the anti-malarials portfolio. Further detail is provided in the UK and Republic of Ireland section below. Going forwards, we expect sales across this portfolio to remain broadly stable and in line with the second half 2018 sales on an annualised basis.

Performance by region

For the first time, sales generated outside of the UK exceeded those from within the UK.

International

Our international distributor business continued to perform strongly and, with the recent acquisition of Nizoral and continued growth of Kelo-cote, represents an increasing part of our revenue generation, with see-through sales increasing 59% to £41.8m in 2018 and reported sales increasing 37% to £36.0m (2017 restated: £26.3m).

The performance of our Chinese business was particularly pleasing, with sales more than doubling to £11.2m (2017 restated: £5.3m), due to strong performances from Kelo-cote and our nutraceutical products, coupled with the inclusion of second half revenues from Nizoral.

UK and Republic of Ireland

Sales in the UK and Republic of Ireland, which combined, have historically been our largest market, were down 5% on the previous year at £52.3m (2017: £54.9m) due to a slow start in the first half of the year, with only limited recovery in H2. Second half sales were £26.5m, up 3% on H1 2018 sales, but down 8% on H2 2017 (H2 2017 restated: £28.8m).

As noted above, we experienced some manufacturing and ordering delays, notably on a manufacturing transfer of Menadiol™ (a prescription medicine, initiated in hospitals), which we expected to normalise during the second half of 2018 to 2017 levels. However, this normalisation is now expected in the first half of 2019. UK sales were also impacted by the discontinuation of ImmuCyst™, as expected, a fall in sales of our anti-malarial products, as outlined above, and a mandated increase in the UK NHS rebate (the Pharmaceutical Price Regulation Scheme) from 4.75% to 7.8%.

However, these challenges were partially offset by strong performances from our UK consumer products, with our key consumer brands, MacuShield, Ashton & Parsons, Aloclair, Anbesol™ and Vamousse all delivering good sales growth following investment, a trend which we expect to see continuing into 2019.

Mainland Europe

Our Mainland Europe business saw strong top-line growth in 2018, with sales increasing by 25% to £25.4m (2017 restated: £20.3m), largely due to growth in Kelo-cote sales, which were up by more than £5.0m across the region.

US

In the US, we were particularly encouraged by the performance of Vamousse which, compared with the same period last year under its previous ownership, saw a 10% (14% on a constant currency basis*)   increase in sales to £4.6m.

 

Operations

Falsified Medicines Directive ("FMD") and Medical Device Regulation ("MDR")

We have successfully implemented the FMD, the purpose of which is to prevent counterfeit medicines from reaching patients in Europe and have released our first individually serialised packs to the UK market.

We are also working to ensure our technical documentation and processes meet the new requirements of the MDR, which will start to apply from May 2020. The new regulation places stricter requirements on clinical information for products registered as medical devices and requires enhanced traceability and transparency.

Brexit

Only a limited amount of our business is reliant on the movement of goods between the UK and EU, however to mitigate potential risk, we have implemented our Brexit strategy, which includes: building additional inventory in order to maintain sufficient supply of key products; establishing a subsidiary company in the Republic of Ireland to host certain registrations; and duplicating key statutory roles in the UK and EU albeit on a limited basis. 

Cost implications

As previously announced, we incurred a small amount of one-off costs in preparing for FMD and Brexit in 2018. Going forward, we expect to absorb the costs of operating under these new compliance regimes without any further impact on margins. We increased our stockholdings ahead of FMD and Brexit by £2m - £3m at the end of 2018, with a consequential impact on cash flow.  Whilst we expect this increased holding to substantially unwind during 2019, the impact of this is likely to be balanced by the requirement for us to build stock for Nizoral as we start to exit the transitional service arrangements with J&J and by further increases in the scale of our business operations.

ERP implementation

We are making good progress with the installation of our new enterprise resource planning ("ERP") system, Microsoft Dynamics AX, and now expect this to become operational in the second half of 2019, a few months later than previously advised. The potential business benefit is significant, as we will be moving all our legacy systems onto a single platform, which can handle all our financial and supply chain planning and fulfilment activities, enabling us to streamline our processes and increase operational efficiency, whilst also providing a scalable platform to support further growth and future acquisitions.

People

During 2018 and the early part of 2019, we saw a number of changes to the composition of the Alliance Board.

On 1 March 2018, David Cook, who had been a Non-executive Director at Alliance for almost four years, succeeded Andrew Smith as Chairman. On 1 May 2018, I took over from John Dawson as the Group's Chief Executive Officer, although John continues to serve on the Board as a Non-executive Director. On 30 May 2018, Thomas Casdagli stepped down as a Non-executive Director.

On behalf of the Board, and personally, I would like to thank Andrew, John and Thomas for their invaluable contributions to the development of the Alliance business to date, particularly John who, as the Group's founder, led the business for over 20 years from start-up to a profitable, AIM-listed business with a turnover of £100m+. I was very pleased that John decided to stay on as a Non-executive Director.

On 17 December 2018, we announced the appointment of two new independent Non-executive Directors with effect from 1 January 2019. Jo LeCouilliard and Richard Jones both have substantial pharmaceutical and healthcare experience gained in listed companies and they bring further international business experience and capital markets expertise into the Group. We are delighted to welcome them both to the Alliance Board.

Alliance currently employs more than 200 people in 10 locations around the world, the majority of whom hold share options in the business. 2018 saw the highest-ever employee satisfaction results across the business as we continue to invest in our working environments and in personal development. We are currently scaling up our existing operations in Singapore and Shanghai in order to support the integration and ongoing management of Nizoral. Our resourcing requirements will continue to evolve as the business grows and diversifies, generating requirements for additional specialist or local market expertise.

We recognise that great results can only be achieved through the combined efforts of our dedicated team of colleagues across the globe, our partners and customers, and the strong collaborative culture that we have built within Alliance. On behalf of the Board, I would like to take this opportunity to extend my thanks to all who have contributed to another successful year for Alliance.

Current trading and outlook

After a strong performance in 2018, which also saw the introduction of two new International Star brands into the Group (Nizoral and Xonvea), we start 2019 well-positioned for further growth.

Strategically, the priorities for the Group continue to be the delivery of organic growth, primarily from our International Star brands; maintaining our progress with the integration of Nizoral; and continuing to support Xonvea as it progresses through its important post-launch phase by building relationships with healthcare professionals and driving formulary inclusions and prescribing.

The acquisition of Nizoral and the continued strong performance of Kelo-cote leave us well-placed to leverage opportunities for further organic growth, particularly in the fast-growing Asia Pacific region, and we are currently scaling-up our local infrastructure and resources to facilitate this.

The UK launch of Xonvea marks an important strategic milestone and, with further EU launches planned, the product offers an opportunity for further growth in the medium term.

Trading in 2019 has started well and the Group is trading in line with expectations for the full year.

Our strong cash generation in 2019 and planned increase in debt facilities mean that, as the year progresses, we will be well-placed to continue to invest in our International Star brands to drive expected strong organic growth, supplemented by targeted acquisitions to take advantage of operational leverage and to enhance our geographical reach.

 

FINANCIAL REVIEW

 

Financial metrics summary

Year ended 31 December

2018

£m

2017

(restated**)

£m

Growth

Revenue (see-through basis)*

124.0

101.6

22%

Revenue (statutory basis)

118.2

101.6

16%

Gross profit

72.6

59.1

23%

Administration and marketing expenses

(41.9)

(31.9)

(31%)

Underlying EBITDA*

32.4

27.2

19%

Depreciation & amortisation

(3.5)

(1.4)

(150%)

Underlying EBIT*

28.9

25.8

12%

Finance costs

(0.9)

(1.9)

54%

Underlying profit before taxation*

28.1

23.9

17%

Adjusted underlying basic earnings per share*

4.54p

4.05p

12%

Final dividend per share

0.977p

0.888p

10%

 

Note: Underlying profitability metrics are presented as we believe this provides investors with useful information about the performance of the business. For 2018, underlying results exclude £1.5m of profit on the disposal of the Group's interest in Unigreg Limited, a £2.5m impairment charge in relation to the Group's interest in Synthasia International Co. Ltd and a £4.3m impairment charge in relation to the anti-malarial asset; for 2017, underlying results exclude £4.4m of compensation received from Sinclair Pharma plc in connection with the material reduction of business in Kelo-stretch™. Further detail can be found in note 5.

* The performance of the Group is assessed using Alternative Performance Measures ("APMs"), which are measures that are not defined under IFRS, but are used by management to monitor ongoing business performance against both shorter term budgets and forecasts and against the Groups longer term strategic plans. APMs are defined in note 18.

Specifically, see-through revenue includes sales from Nizoral™ as if they had been invoiced by Alliance. Under the terms of the transitional services agreement with J&J, Alliance receives the benefit of the net profit on sales of Nizoral from the date of acquisition up until the product licences in the Asia-Pacific territories transfer from J&J to Alliance, which is expected to occur during 2019 and 2020. For statutory accounting purposes the product margin on Nizoral sales is included within Revenue, in line with IFRS 15.

** The adoption of IFRS 15 Revenue from Contracts with Customers has resulted in the reclassification of certain rebates as a deduction from Revenue; previously these rebates were included within Cost of Sales. To ensure comparability, the 2017 comparatives have been restated following the adoption of IFRS 15 and IFRS 16 Leases. The impact of this restatement is set out in note 2.

 

The Group delivered a robust financial performance in 2018, with see-through revenues increasing 22% to £124.0m and statutory revenues increasing 16% to £118.2m (2017 restated: £101.6m).  The increase was largely driven by a strong performance from our International Star brands, particularly Kelo-cote, and by the inclusion of post-acquisition revenues from Nizoral. Overall underlying profit before taxation increased by 17% to £28.1m (2017 restated: £23.9m).

The Group's revenue was adversely impacted by approximately £0.6m due to the strengthening of Sterling, primarily against the US Dollar, during the first half of the year. However, the effect on operating profits was much smaller.

Gross profit increased at a slightly higher rate than revenue, up 23% to £72.6m (2017 restated: £59.1m), resulting in a 0.4% increase in gross margin, from 58.2% to 58.6% of see-through revenue, due to the increasing contribution from some of our higher margin International Star brands. 

The Group continued its planned increase in sales and marketing expenditure during 2018, supporting the sales growth of our International Star brands, particularly Kelo-cote, and the UK launch of Xonvea. This, together with the transitional service fees payable to J&J for the management of Nizoral, partially offset by the release of future payments in relation to Macuhealth (see below), resulted in an increase in operating costs (excl. depreciation and amortisation of £3.5m but including the IFRS2 share options charge of £1.8m) of £8.3m to £40.3m. Excluding the IFRS2 share option charge of £1.8m, this represents 31.0% of see-through sales (2017 restated: 30.0%). The depreciation and amortisation charge of £3.5m includes a £1.9m non-cash write down in respect of the termination of the supply agreement with Macuhealth, for the guaranteed supply of raw materials for MacuShield. The Group has implemented alternative arrangements resulting in no interruption to the supply of MacuShield.

Taking account of the planned increase in operating costs, underlying earnings before interest, taxes, depreciation and amortisation (EBITDA) increased by 19% to £32.4m (2017 restated: £27.2m). 

Finance costs

Overall, net finance costs reduced by £1.0m on the prior year to £0.9m (2017 restated: £1.9m), the interest payable being offset by a reduction in estimated deferred consideration payable in relation to the Vamousse acquisition, together with favourable currency movements (see note 6).

The average interest charge on gross debt during the period was 2.92%.

Reconciliation of underlying profit before tax to reported profit before tax

Year ended 31 December

2018

£m

2017

(restated**)

£m

 

Underlying profit before taxation

28.1

23.9

 

Non-underlying items:

 

 

 

    Profit on disposal of Unigreg Joint Venture

1.5

 

 

    Impairment and write-down of Synthasia Joint Venture assets

(2.5)

 

 

    Impairment of Anti-malarial intangible asset

(4.3)

 

 

    Exceptional compensation income (from Sinclair)

 

4.4

 

Total

(5.3)

4.4

 

Reported profit before taxation

22.8

28.3

 

 

Unigreg JV disposal

On 18 April 2018 the Group sold its 60% interest in its non-core investment in Unigreg Limited to its joint venture partner, Pacific Glory Development Limited, for a consideration of £2.9m. We received an initial payment of £2.4m at completion and a deferred payment of £0.5m is due on or before 16 April 2019. In addition, all outstanding shareholder loans made by the Group to Unigreg, totalling £1.5m, were repaid in full prior to completion.

Synthasia JV asset impairment and receivables provision

As previously announced, in May 2018 we received notification from the import licence partner of Suprememil, the infant milk formula brand in which we have a 20% interest with our joint venture partner Synthasia, that the import licence will not be renewed. The Board has therefore decided to fully impair the joint venture investment of £0.3m and to fully provide for the associated receivables balances of £2.2m.  This generates a non-cash, non-underlying impairment charge and receivables provision of £2.5m.

Anti-malarial products impairment

Sales of our anti-malarial products reduced by £0.6m in 2018 to £0.7m (2017 restated: £1.3m) due to competition in the UK market. As previously announced, in mid-August 2018, Alliance was notified by the manufacturer of these products of its intention to cease supply due to lower volumes.  After due consideration, the Board concluded that, due to the cost of the transfer when compared with the benefit of continued sales, it is not economic to transfer the product to an alternative manufacturer and therefore it is appropriate to write down in full the value of the £4.3m intangible asset associated with these products.  This write-down has been recognised as a non-cash, non-underlying impairment charge in the 2018 accounts.

Alliance acquired the anti-malarial products in 2012, since which time these products have generated a cumulative gross profit of £6.3m to 31 December 2018.

Taxation

The total tax charge for the period was £4.4m (2017 restated: £0.5m tax credit), resulting in an effective tax rate (ETR) of 19.5% (2017 restated: -1.9%). Excluding non-underlying items, which generated a tax credit of £1.0m in 2018 (2017 restated: £0.8m tax charge), the underlying tax charge was £5.5m (2017 restated: £1.3m tax credit) and the adjusted underlying tax charge was £5.5m (2017 restated: £4.8m), representing an adjusted underlying ETR of 19.6% (2017 restated: 19.9%).  For a definition of adjusted underlying effective tax rate, please see note 18.

Earnings per share

Adjusted underlying basic earnings per share for 2018 was 4.54p, an increase of 12% (2017 restated; 4.05p). This measure excludes the earnings benefit from the substantive enactment of US and French tax reforms in 2017, which resulted in a reduction in the deferred tax balances relating to intangible assets held in these jurisdictions and led to a significant credit to the 2017 tax charge.  Excluding the impact of these one-off tax rate changes gives a better measure of the underlying performance of the Group and is the measure used by the Board in assessing earnings performance. Including these one-off tax benefits, underlying basic earnings per share for 2017 (restated) was 5.33p.

Reported basic earnings per share was 3.69p (2017 restated: 6.08p) due to non-underlying items reducing earnings in 2018, and the Sinclair settlement income and US and French tax reform increasing earnings in 2017.

Dividend

The Board remains committed to a progressive dividend policy and is recommending a final dividend payment of 0.977p per ordinary share to give a total for the year of 1.464p, which represents an increase of 10% on 2017.

The final dividend, subject to approval at the Company's AGM on 23 May 2019, will be paid on 11 July 2019 to shareholders on the register on 14 June 2019.

The level of dividend cover in 2018 remained ample at over three times on an underlying basis. The total dividend payment for the 2018 financial year will be £7.6m, including the £2.5m interim payment (2017: £6.3m).

Balance sheet

Intangible assets increased in 2018 by £56.6m to £335.2m (2017 restated: £278.6m), primarily due to the Nizoral acquisition (£60.3m) in June 2018, and foreign exchange movements of £2.7m partially offset by impairments of £6.2m.

Working capital

Growth within the business, coupled with the planned increase in inventory in preparation for the FMD and Brexit, resulted in an increase in total inventory at 31 December 2018 of £4.5m. This increase in the scale of the Group's activities and year-end inventory build, in preparation for the FMD and Brexit, also impacted payables, which increased by £5.1m, whilst receivables increased by £5.5m, again reflecting the increased scale of activities and the remittance arrangements which apply for Nizoral during the transition period.

Cash flow and net debt

Free cash flow (see note 18 for definition) for the year remained strong at £16.1m (2017 restated: £22.0m) after allowing for costs associated with the implementation of the FMD, Brexit (including inventory build) and UK launch costs for Xonvea.

Net debt increased by £13.5m to £85.8m at 31 December 2018 (2017: £72.3m), including the £28m of new borrowing to part-fund the Nizoral acquisition and reflects the Group's strong underlying cash generation, together with the £3.9m receipt from the Unigreg disposal and the final £1.0m cash settlement receipt from Sinclair, in relation to Kelo-stretch.

Consequently, adjusted net debt/EBITDA leverage fell to 2.33x (2017: 2.46x), comfortably within our covenant limit of 3.0x.

In 2019 we expect to generate strong free cash flow, in excess of 2017 levels and, in the absence of further acquisitions, expect leverage to reduce to below 2.0 times during the second half of 2019.

Treasury and capital management

The Group's operations are financed by retained earnings and bank borrowings, with additional equity being raised on a periodic basis to finance larger acquisitions.

The Group manages its exposure to currency fluctuations on translation by managing currencies at Group level using bank accounts denominated in its primary trading currencies: Sterling, Euro and US Dollars.

In June 2018, the Group extended its Revolving Credit Facility (RCF) by £35.0m and raised new equity of £34.0m (gross) to fund the £60m acquisition of Nizoral. 

The Group now has total bank facilities of £135.0m which comprise a Term Loan of £65.0m and an RCF of £70.0m; borrowings are denominated in Sterling, Euro and US Dollars. As at 31 December 2018, £39.1m (2017: £50.3m) was outstanding on the Term Loan and £58.5m (2017: £34.0m) drawn under the RCF. Unutilised borrowings as at 31 December 2018 amounted to £11.5m.

The Group's current facility runs through to December 2020. The Group plans to extend both the term and size of its existing credit facility in 2019, to allow it to further develop the business.

 

Consolidated Income Statement

 

 

 

 

 

 

 

Year ended 31 December 2018

     

 

 

 

Year ended 31 December 2017

 

Note

 

Underlying

£000s

Non-Underlying £000s

(Note 5)

 

Total

£000s

 

Underlying

£000s

restated

Non-Underlying

£000s

(Note 5)

 

Total

£000s

restated

Revenue

3,18

118,208

-

118,208

101,644

-

101,644

Cost of sales

 

(45,560)

-

(45,560)

(42,496)

-

(42,496)

Gross profit

 

72,648

-

72,648

59,148

-

59,148

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

Administration and marketing expenses

 

(41,934)

-

(41,934)

(31,893)

-

(31,893)

Share-based employee remuneration

 

(1,790)

-

(1,790)

(1,453)

-

(1,453)

Share of Joint Venture profits

 

13

-

13

19

-

19

Profit on disposal of Unigreg Joint Venture

5

-

1,508

1,508

-

-

-

Impairment and write down of Synthasia Joint Venture assets

5

-

(2,460)

(2,460)

-

-

-

Impairment of Anti-malarial intangible asset

5

-

(4,318)

(4,318)

-

-

-

Exceptional compensation income

5

-

-

-

-

4,356

          4,356

 

 

 

 

 

 

 

 

Operating profit

 

28,937

(5,270)

23,667

25,821

4,356

30,177

 

 

 

 

 

 

 

 

Finance costs

 

 

 

 

 

 

 

Interest payable and similar charges

6

(3,457)

-

(3,457)

(3,144)

-

(3,144)

Change in deferred contingent consideration

6

1,966

-

1,966

618

-

618

Finance income

6

627

 

627

638

-

638

 

 

(864)

-

(864)

(1,888)

-

(1,888)

 

 

 

 

 

 

 

 

Profit before taxation

4

28,073

(5,270)

22,803

23,933

4,356

28,289

Taxation

7

(5,491)

1,044

(4,447)

1,305

(764)

541

Profit for the period attributable to equity shareholders

 

22,582

(4,226)

18,356

 

25,238

 

3,592

 

28,830

Earnings per share

 

 

 

 

 

 

 

Basic (pence)

8

4.54

 

3.69

5.33

 

6.08

Diluted (pence)

8

4.42

 

3.60

5.27

 

6.02

 

 

All of the activities of the Group are classed as continuing.

 

Consolidated Statement of Comprehensive Income

 

 

 

 

Year ended
31 December

2018

Year ended

31 December 2017

 

 

 

£000s

£000s

restated

 

 

 

 

 

Profit for the year

 

 

18,356

28,830

 

Other comprehensive income

 

Items that may be reclassified to profit or loss

 

 

 

 

Net foreign exchange gain/(loss) on investment in foreign subsidiaries (net of hedged items)

 

 

1,101

(1,718)

Interest rate swaps - cash flow hedge (net of deferred tax)

 

 

113

202

Total comprehensive income for the year

 

 

19,570

27,314

 

 

 

 

 

 

Consolidated Balance Sheet

 

 

 

31 December 2018

 

31 December 2017

 

Note

 

£000s

 

£000s

 

 

 

 

 

restated

Assets

 

 

 

 

 

Non-current assets

 

 

 

 

 

Goodwill and intangible assets

9

 

335,243

 

278,623

Property, plant and equipment

 

 

7,594

 

5,685

Joint Venture investment

 

 

-

 

1,483

Joint Venture receivable

 

 

-

 

1,462

Deferred tax

 

 

1,845

 

2,174

Other non-current assets

 

 

180

 

229

 

 

 

344,862

 

289,656

Current assets

 

 

 

 

 

Inventories

10

 

18,706

 

14,248

Trade and other receivables

11

 

29,148

 

23,695

Cash and cash equivalents

 

 

10,893

 

11,184

 

 

 

58,747

 

49,127

Total assets

 

 

403,609

 

338,783

 

 

 

 

 

 

Equity

 

 

 

 

 

Ordinary share capital

15

 

5,182

 

4,750

Share premium account

 

 

144,639

 

110,252

Share option reserve

 

 

6,121

 

5,073

Other reserve

 

 

(329)

 

(329)

Cash flow hedging reserve

 

 

(4)

 

(117)

Translation reserve

 

 

1,491

 

390

Retained earnings

 

 

95,099

 

83,089

Total equity

 

 

252,199

 

203,108

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

Loans and borrowings

13

 

28,667

 

41,780

Other liabilities

14

 

2,352

 

5,523

Deferred tax liability

 

 

28,663

 

26,920

Derivative financial instruments

 

 

5

 

63

 

 

 

59,687

 

74,286

Current liabilities

 

 

 

 

 

Loans and borrowings

13

 

68,035

 

41,719

Corporation tax

 

 

1,457

 

2,436

Trade and other payables

12

 

22,231

 

17,155

Derivative financial instruments

 

 

-

 

79

 

 

 

91,723

 

61,389

 

 

 

 

 

 

Total liabilities

 

 

151,410

 

135,675

 

 

 

 

 

 

Total equity and liabilities

 

 

403,609

 

338,783

 

 

 

 

 

 

 

 

 

Consolidated Statement of Changes in Equity

 

Ordinary share capital

Share premium account

 Other reserve

Cash flow hedging reserve

Translation reserve 

Share option reserve

Retained earnings 

Total equity

 

£000s

£000s

£000s

£000s

£000s

£000s

£000s

£000s

Balance 1 January 2017  restated

4,726

109,594

(329)

(319)

2,108

3,306

59,988

179,074

Issue of shares

24

-

-

-

-

-

-

24

Share premium

-

658

-

-

-

-

-

658

Dividend paid

-

-

-

-

-

-

(5,729)

(5,729)

Share options charge (including deferred tax)

-

-

-

-

-

1,767

-

1,767

Transactions with owners

24

658

-

-

-

1,767

(5,729)

(3,280)

Profit for the period restated

-

-

-

-

-

-

28,830

28,830

Other comprehensive income

 

 

 

 

 

 

 

 

Interest rate swaps - cash flow hedge (net of deferred tax)

-

-

-

202

-

-

-

202

Foreign exchange translation differences

-

-

-

-

(1,718)

-

-

(1,718)

Total comprehensive income for the period

-

-

-

202

(1,718)

-

28,830

27,314

Balance 31 December 2017

4,750

110,252

(329)

(117)

390

5,073

83,089

203,108

 

 

 

 

 

 

 

 

 

Balance 1 January 2018

4,750

110,252

(329)

(117)

390

5,073

83,089

203,108

Issue of shares

432

-

-

-

-

-

-

432

Share premium

-

34,387

-

-

-

-

-

34,387

Dividend paid

-

-

-

-

-

-

(6,346)

(6,346)

Share options charge (including deferred tax)

-

-

-

-

-

1,048

-

1,048

Transactions with owners

432

34,387

-

-

-

1,048

(6,346)

29,521

Profit for the period

-

-

-

-

-

-

18,356

18,356

Other comprehensive income

 

 

 

 

 

 

 

 

Interest rate swaps - cash flow hedge (net of deferred tax)

-

-

-

113

-

-

-

113

Foreign exchange translation differences

-

-

-

-

1,101

-

-

1,101

Total comprehensive income for the period

-

-

-

113

1,101

-

18,356

19,570

Balance 31 December 2018

5,182

144,639

(329)

(4)

1,491

6,121

95,099

252,199

 

 

Consolidated Cash Flow Statements

 

 

 

Year ended

31 December 2018

Year ended

 31 December 2017

 

Note

£000s

£000s

 

 

 

restated

 

 

 

 

Cash flows from operating activities

 

 

 

Cash generated from operations

16

26,111

30,765

Tax paid

 

(3,941)

(3,728)

Cash flows from/(used in) operating activities

 

22,170

27,037

 

 

 

 

Investing activities

 

 

 

Interest received

 

36

104

Dividend received

 

-

-

Investment in subsidiary

 

-

-

Development expenditure

9

(43)

(459)

Purchase of property, plant and equipment

 

(2,891)

(2,236)

Repayment of loan to Joint Venture on disposal

5

1,426

154

Proceeds from disposal of Joint Venture Investment

5

2,196

-

Exceptional compensation income

5

1,000

4,000

Consideration on acquisitions

9

(60,307)

(15,314)

Payment of deferred and contingent consideration on acquisitions

 

(500)

(2,161)

Net cash (used in)/from investing activities

 

(59,083)

(15,912)

 

 

 

 

Financing activities

 

 

 

Interest paid and similar charges

 

(3,197)

(2,678)

Loan issue costs

 

(362)

(80)

Capital lease payments

 

(512)

(374)

Net proceeds from issue of shares

15

32,755

-

Proceeds from exercise of share options

 

2,063

682

Dividend paid

 

(6,346)

(5,729)

Proceeds from borrowings

 

28,000

16,000

Repayment of borrowings

 

(15,813)

(14,730)

Net cash received from/(used in) financing activities

 

36,588

(6,909)

 

 

 

 

Net movement in cash and cash equivalents

 

(325)

4,216

 

 

 

 

Cash and cash equivalents at 1 January

 

11,184

7,221

Exchange gains/(losses) on cash and cash equivalents

 

34

(253)

Cash and cash equivalents at 31 December

 

10,893

11,184

         

 

 

1. Basis of preparation

 

The financial information set out in the announcement does not constitute the Group's statutory accounts for the year ended 31 December 2018 or 31 December 2017. The auditors reported on those accounts; their report was (i) unqualified, (ii) did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain statements under section 498 (2) or (3) of the Companies Act 2006. The statutory accounts for the year ended 31 December 2018 have not yet been delivered to the Registrar of Companies. The statutory accounts for the year ended 31 December 2017 were delivered to the Registrar of Companies on 01 June 2018.

 

2. Changes in accounting policies

 

This is the first set of the Group's financial statements where IFRS 15 Revenue from Contracts with Customers, IFRS 16 Leases and IFRS 9 Financial Instruments have been applied. The impact of these changes in accounting policies are described below.

 

2.1 Impact on the financial statements

As a result of the adoption of IFRS 15 and IFRS 16 the prior year comparatives have been restated. Adoption of IFRS 9 had no impact on the prior year comparatives as described in section 2.4 below.

 

Consolidated Income Statement

 

 

2017 before adjustments 

£000s

 

Effect of IFRS 15 adjustments

£000s

 

Effect of IFRS 16 adjustments

£000s

 

2017 post adjustments

 £000s

Revenue

103,315

(1,671)

-

101,644

Cost of sales

(44,354)

1,858

-

(42,496)

Gross profit

58,961

187

-

59,148

 

 

 

 

 

Operating expenses

 

 

 

 

Administration and marketing expenses

(31,706)

(187)

-

(31,893)

Share-based employee remuneration

(1,453)

-

-

(1,453)

Share of Joint Venture profits

19

-

-

19

Exceptional compensation income

4,356

-

-

4,356

 

 

 

 

 

Operating profit

30,177

-

-

30,177

 

 

 

 

 

Finance costs

 

 

 

 

Interest payable and similar charges

(3,064)

-

(80)

(3,144)

Change in deferred contingent consideration

618

-

-

618

Finance income

638

-

-

638

 

(1,808)

-

(80)

(1,888)

 

 

 

 

 

Profit before taxation

28,369

-

(80)

28,289

Taxation

541

-

-

541

Profit for the period attributable to equity shareholders

28,910

-

(80)

28,830

Earnings per share

 

 

 

 

Basic (pence)

6.10

 

 

6.08

Diluted (pence)

6.03

 

 

6.02

 

Summary Consolidated Balance Sheet

 

Adoption of IFRS 15 had no impact on the 31 December 2017 or 1 January 2017 balance sheet as described in section 2.2 below.

 

 

 

 

 

31 December 2017 before adjustments

Effect of

IFRS 16 adjustments

 

31 December 2017 post adjustments

 

 

 

£000s

£000s

£000s

Assets

 

 

 

 

 

Non-current assets

 

 

 

 

 

Other non-current assets

 

 

283,971

-

283,971

Property, plant and equipment

 

 

3,377

2,308

5,685

 

 

 

287,348

2,308

289,656

 

 

 

 

 

 

Current assets

 

 

49,127

-

49,127

Total assets

 

 

336,475

2,308

338,783

 

 

 

 

 

 

Equity

 

 

 

 

 

Other equity reserves

 

 

114,946

-

114,946

Share option reserve

 

 

5,073

-

5,073

Retained earnings

 

 

83,358

(269)

83,089

Total equity

 

 

203,377

(269)

203,108

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

Other non-current liabilities

 

 

68,763

-

68,763

Other liabilities

 

 

3,525

1,998

5,523

 

 

 

72,288

1,998

74,286

Current liabilities

 

 

 

 

 

Other current liabilities

 

 

41,798

-

41,798

Corporation tax

 

 

2,436

-

2,436

Trade and other payables

 

 

16,576

579

17,155

 

 

 

60,810

579

61,389

 

 

 

 

 

 

Total liabilities

 

 

133,098

2,577

135,675

 

 

 

 

 

 

Total equity and liabilities

 

 

336,475

2,308

338,783

 

2.2 Adoption of IFRS 15 Revenue from Contracts with Customers

 

IFRS 15 Revenue from Contracts with Customers was adopted by the Group on 1 January 2018. IFRS 15 is a converged standard from the IASB and FASB on revenue recognition. The standard aims to improve the financial reporting of revenue and improve comparability of the top line in financial statements globally. It introduces a five-step model to determine the nature, timing and amount of revenue recognised.  These steps are:

 

-      Identify contract(s) with customers

-      Identify the separate performance obligations in the contract

-      Determine the transaction price of the contract

-      Allocate the transaction price to each of the separate performance obligations, and

-      Recognise the revenue as each performance obligation is satisfied

 

The Group has opted to apply the retrospective approach under IFRS 15 meaning the prior period has been restated to show the impact of adoption from 1 January 2017.  During the comprehensive analysis undertaken as part of the Group's transitional review certain rebates were identified within Cost of sales. These have been reclassified against Revenue on transition to IFRS 15. In addition, certain Administration expenses were reclassified to Cost of sales. The adjustments are shown in the column "Effect of IFRS 15 adjustments" and are presentational within the Income Statement only. They have no effect on reported profit or equity for the Group.

 

2.3 Adoption of IFRS 16 Leases

 

IFRS 16 Leases was adopted by the Group on 1 January 2018. The new standard requires lessees to recognise a lease liability reflecting future lease payments and a 'right-of-use' asset for virtually all lease contracts, excluding certain short-term leases and leases of low-value assets. The Group has applied the retrospective approach which restates comparative information as if IFRS 16 has always applied.

 

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. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right of use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.

 

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. These liabilities were measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate. The weighted average incremental borrowing rate applied to the lease liabilities is 3.0%. The associated right-of-use assets for leases have been measured on a retrospective basis.

 

As a result of retrospective adoption, property, plant and equipment increased by £2.7m on 1 January 2017 and trade and other payables increased by £2.9m. The net impact on retained earnings on 1 January 2017 was £0.2m.

 

2.4 Adoption of IFRS 9 Financial Instruments

 

IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting.

 

Classification and measurement

On 1 January 2018 (the date of initial application of IFRS 9), the Group's management has assessed the financial assets held by the Group and has classified these into the appropriate IFRS 9 categories. This has resulted in Cash and cash equivalents and Trade and other receivables being re-designated to "Amortised cost" from "Loans and receivables". The Group's liabilities classified under "Other financial liabilities" remain consistently designated on adoption of IFRS 9.

 

Consistent with IAS 39, under IFRS 9 the effective portion of changes in the fair value of derivative financial instruments that are designated as cash flow hedges is recognised in other comprehensive income, while the gain or loss relating to the ineffective portion is recognised immediately in the Income statement.

 

The Group's derivatives continue to qualify as cash flow hedges and no changes to classification or measurement are required under IFRS 9. The derivatives are classified under "Derivative financial instruments".

 

Impairment of financial assets

The Group's trade receivables are subject to the IFRS 9 expected credit loss model. The Group has applied the simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance based on historic default rates. No additional IFRS 9 expected credit loss provision has been recognised from this change in accounting policy.

 

3. Revenue

 

Revenue information By Brand

 

 

Year ended

31 December

2018

Year ended

31 December

2017

 

 

£000s

£000s

 restated

International Star brands:

 

 

 

Kelo-cote

 

22,467

13,340

Nizoral *

 

5,037

-

MacuShield

 

6,982

6,580

Vamousse

 

5,756

125

Xonvea

 

204

-

 

 

40,446

20,045

 

Local brands:

 

 

 

Flamma Franchise

 

7,858

7,974

Aloclair

 

7,207

5,692

Hydromol

 

6,671

6,819

Forceval

 

3,874

3,543

Haemopressin

 

2,702

3,145

Optiflo

 

2,645

2,538

Oxyplastine

 

2,640

2,512

Ashton & Parsons

 

2,225

2,005

Ametop

 

2,181

101

Other Local brands

 

39,759

47,270

 

 

77,762

81,599

 

 

 

 

Total Revenue (from contracts with customers)

 

118,208

101,644

 

*Nizoral is shown on a net profit basis in statutory revenue. Nizoral revenue presented on a see-through income statement basis is included as an alternative performance measure in Note 18.

 

Revenue information By Geography

 

 

Year ended

31 December

2018

Year ended

31 December

2017

 

 

£000s

£000s

 restated

UK and Republic of Ireland

 

52,266

54,899

Mainland Europe

 

25,386

20,327

International including USA

 

40,556

26,418

Total Revenue

 

118,208

101,644

 

Major customers

The revenue from the Group's two largest customers is as follows. One customer separately comprised 10% or more of revenue (2017: two).

 

 

 

Year ended

31 December

2018

 

Year ended

31 December

2017

 

 

£000s

 

£000s

 restated

Major customer 1

 

22,135

 

22,542

Major customer 2

 

9,178

 

10,597

 

 

31,313

 

33,139

 

 

 

4. Profit before taxation

 

Profit before taxation is stated after charging/(crediting):

Year ended

31 December 2018

Year ended

31 December 2017

 

£000

£000

 restated

Amounts receivable by the Company's auditor and its associates in respect of

 

 

- The audit of these financial statements

36

26

- The audit of the financial statements of subsidiaries

141

105

- Corporate finance services

114

57

- Other assurance services

5

5

Amortisation of intangible assets

211

276

Impairment of intangible assets

6,244

507

Share options charge

1,790

1,453

Depreciation of plant, property and equipment

1,335

1,111

Research and development

131

169

Gain on foreign exchange transactions

(575)

(534)

 

5. Non-underlying items

 

Non-underlying items are those significant items which the Directors have judged, by their nature, are not related to the normal trading activities of the Group. They are therefore separately disclosed as their significant, non-recurring nature does not allow a true understanding of the Group's underlying financial performance. This assessment requires judgement to be applied by the directors as to which transactions are non-underlying and whether this classification enhances the understanding of the users of the financial statements.

 

 

Year ended

31 December 2018

 

Year ended

31 December 2017

 

 

 £000s

£000s

Unigreg Joint Venture profit on disposal

              1,508

-

Impairment and write down of Synthasia Joint Venture assets

            (2,460)

-

(4,318)

-

Exceptional compensation income, less associated costs and impairment

-

4,356

Total non-underlying items before taxation

(5,270)

4,356

Taxation

1,044

(764)

Total non-underlying items after taxation

(4,226)

3,592

 

In April 2018 the Group sold its 60% interest in Unigreg Limited to its joint venture partner, Pacific Glory Development Limited, for a consideration of £2.9m. The consideration was settled with an initial payment of £2.4 million cash at completion and an outstanding deferred payment of £0.5 million due on or before 16 April 2019. In addition, all outstanding shareholder loans made by the Group to Unigreg, totalling £1.5 million, were repaid in full prior to completion. As at 18 April 2018 the Alliance Pharma Group's investment in Unigreg was £1.2 million, representing the initial investment of £0.5 million, together with unremitted profits of £0.7 million. The Group profit on disposal was £1.5 million (net of fees).

 

In May 2018 the Group was notified that the import licence partner was not going to receive the required approval to import Suprememil, the infant milk formula brand owned by Synthasia. Following subsequent discussions with the import licence partner and Synthasia management, the Board has concluded to fully impair the joint venture investment of £0.3m and to fully provide for the associated receivables balances of £2.2m.  This generates a non-cash, non-underlying impairment charge and receivables provision of £2.5m.

 

Sales of anti-malarial products fell to £0.7m in 2018 (2017: £1.3m) due to competition in the UK market. In mid-August 2018, Alliance was notified by the manufacturer of these products of its intention to cease supply due to lower volumes.  After due consideration, the Board has concluded that, due to the decline in demand, it is not economic to transfer the product to an alternative manufacturer and therefore it is appropriate to write down the value of the £4.3m intangible asset associated with these products in full. Alliance acquired the anti-malarial products in 2012, since which time they have generated a cumulative gross profit of £6.3m. This acquisition also served as our strategic entry point into Europe through the establishment of our French affiliate.

 

In March 2017, the Group reached a settlement agreement with Sinclair Pharma plc, in connection with the material reduction of business in Kelo-stretch, which was acquired in 2015. The terms of the agreement included a sum of £5.0m of which £4.0m was received in April 2017 and £1.0m was received in June 2018. This settlement less associated costs and impairment are shown as non-underlying items.

 

6. Finance costs

 

Year ended

31 December 2018

 

Year ended

31 December 2017

 

 

£000s

£000s

 restated

Interest payable and similar charges

 

 

        On loans and overdrafts

(2,964)

(2,719)

(384)

(303)

(35)

(42)

        Interest on lease liabilities

(74)

(80)

 

(3,457)

(3,144)

 

 

 

Change in fair value of contingent consideration

1,966

618

 

 

 

Finance income

 

 

         Interest income

52

104

         Foreign exchange gain

575

534

 

627

638

 

 

 

Finance costs - net

(864)

(1,888)

 

Unwinding of discount on deferred and contingent consideration is in respect of amounts payable from the Macuhealth and Vamousse acquisitions.

 

The current year decrease in contingent consideration relates to changes in the original estimated amounts payable for the acquisition of the Vamousse brand. The previous year decrease in contingent consideration relates to changes in the original estimated amounts payable for the acquisitions of MacuVision and Nutraceutical brands. These changes are caused by revisions to financial forecasts following acquisitions and are not considered to be measurement period adjustments.

 

The unwinding of discount and change in fair value of contingent consideration relate to liabilities held at fair value through profit and loss. All of the remaining finance costs arise from assets and liabilities held at amortised cost.

 

 

7. Taxation

 

Analysis of the charge/(credit) for the period is as follows:

 

Year ended

 31 December 2018

Year ended

 31 December 2017

 

£000s

£000s

Corporation tax

 

 

  In respect of current period

3,003

3,573

  Adjustment in respect of prior periods

7

44

 

3,010

3,617

Deferred tax

 

 

  Origination and reversal of temporary differences

1,110

(5,101)

  Adjustment in respect of prior periods

327

943

Taxation

4,447

(541)

 

 

 

       

The difference between the total tax charge/(credit) shown above and the amount calculated by applying the standard rate of UK corporation tax to the profit before tax is as follows:

 

Year ended

 31 December 2018

Year ended

 31 December 2017

 

£000s

£000s

Profit before taxation

22,803

28,289

Profit before taxation multiplied by standard rate of corporation tax in the United Kingdom of 19.00% (2017: 19.25%)

4,332

5,446

Effect of:

 

 

Non-deductible expenses

259

145

Non-taxable income

(794)

(1,216)

Adjustment in respect of prior periods

334

987

Impact of reduction in UK tax rate on deferred tax

(142)

(101)

Impact of reduction in US and French tax rate on deferred tax

-

(5,958)

Differing tax rates on overseas earnings

310

182

Share options

(135)

(15)

Other differences and Foreign exchange

283

(11)

Total taxation

4,447

(541)

 

 

 

 

Changes to the UK corporation tax rate were announced in Finance Act (No 2) 2015 and Finance Act 2016, reducing the UK's main rate to 17% from 1 April 2020. As the change was substantively enacted at the balance sheet date the effect is included in these financial statements.

 

During 2017 US and French tax reform were both substantively enacted.  The deferred tax rates applied to US and French timing differences have hence changed from 35.0% to 24.0% and from 33.3% to 25.0% respectively.

 

To exclude the impact of tax rate changes and non-underlying tax charges the Group has calculated "adjusted underlying effective tax rate" as an alternative performance measure in note 18.

 

 

8. Earnings per share (EPS)

 

Basic EPS is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year.  For diluted EPS, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. There are no differences in earnings used to calculate each measure as a result of the dilutive employee share options.

 

A reconciliation of the weighted average number of ordinary shares used in the measures is given below:

 

 

 

 

Year ended

31 December 2018

Year ended

31 December 2017

Basic EPS calculation

 

 

497,199,620

473,842,765

Employee share options

 

 

13,223,152

5,281,174

Diluted EPS calculation

 

 

510,422,772

479,123,939

 

The underlying basic EPS is intended to demonstrate recurring elements of the results of the Group before non-underlying items.  A reconciliation of the earnings used in the different measures is given below:

 

 

 

 

Year ended

31 December 2018

Year ended

31 December 2017

 

 

 

£000s

£000s

 restated

Earnings for basic EPS

 

 

18,356

28,830

Non-underlying items (note 5)

 

 

4,226

(3,592)

Earnings for underlying basic EPS

 

 

22,582

25,238

 

The resulting EPS measures are:

 

 

 

 

Year ended

31 December 2018

Year ended

31 December 2017

 

 

 

Pence

Pence

 restated

Basic EPS

 

 

3.69

6.08

Diluted EPS

 

 

3.60

6.02

Underlying basic EPS

 

 

4.54

5.33

Underlying diluted EPS

 

 

4.42

5.27

 

To exclude the impact of tax rate changes the Group has calculated "adjusted underlying basic EPS" as an alternative performance measure in note 18.

 

9. Goodwill and intangible assets

 

 Goodwill

 

 

Brands and distribution rights

Development costs

 

 

Assets under development

Total

The Group

£000s

£000s

£000s

£000

£000s

Cost

 

 

 

 

 

At 1 January 2018

16,565

263,560

725

2,500

283,350

Additions

-

60,307

43

-

60,350

Disposals

-

(18)

-

-

(18)

Transfer

-

1,500

-

(1,500)

-

Exchange adjustments

-

2,743

-

-

2,743

At 31 December 2018

16,565

328,092

768

1,000

346,425

Amortisation and impairment

 

 

 

 

 

At 1 January 2018

-

4,727

-

-

4,727

Underlying impairment for the year

-

1,926

-

-

1,926

Non-underlying impairment for the year

-

4,318

-

-

4,318

Amortisation for the year

-

211

-

-

211

At 31 December 2018

-

11,182

-

-

11,182

Net book amount

 

 

 

 

 

At 31 December 2018

16,565

316,910

768

1,000

335,243

At 1 January 2018

16,565

258,833

725

2,500

278,623

 

Goodwill and the majority of brands and distribution rights are considered to have indefinite useful economic lives and are therefore subject to an impairment review at least annually.

 

Brands and distribution rights

Key judgement - useful economic lives

 

The Directors believe applying indefinite lives to certain acquired brands is appropriate due to the stable long-term nature of the business and the enduring nature of the brands. These brands are assessed on acquisition to ensure they meet set criteria including an established and stable sales history.

 

Where distribution rights are deemed to have a finite life they are amortised accordingly. Amortisation is included in administration and marketing expenses. The remainder of the distribution rights have no defined time period or there is evidence to support the renewal of distribution rights without disproportionate cost. These assets are therefore treated the same as acquired brands.

 

It is the opinion of the Directors that the indefinite life assets meet the criteria set out in IAS 38. This assessment is made on an asset by asset basis taking into account:

 

•     How long the brand has been established in the market and subsequent resilience to economic and social changes;

•     Stability of the industry in which the brand is used;

•     Potential obsolescence or erosion of sales;

•     Barriers to entry;

•     Whether sufficient marketing promotional resourcing is available; and

•     Dependency on other assets with defined useful economic lives.

 

Certain brands were acquired with patent protection, which lasts for a finite period of time. It is the opinion of the Directors that these patents do not provide any incremental value to the value of the brand and therefore no separate value has been placed on these patents. This assessment is based on a view of future profitability after patent expiry and past experience with similar brands.

 

 

Development costs

 

Capitalised costs relate to clinical development and regulatory plans expected to be commercialised in the future.

 

Assets under development

 

On 6 July 2018 the Medicines and Healthcare products Regulatory Agency (MHRA) approved the UK Marketing Authorisation Application for Diclectin®, a prescription product for the treatment of nausea and vomiting of pregnancy where conservative management has failed. The MHRA also approved the brand name Xonvea®, which will be used for marketing Diclectin in the UK.

 

Following licence approval, contingent consideration of £0.5m was paid to Duchesnay Inc. in July 2018 (note 12). The related asset under development of £1.5m was reclassified to Brands and distribution rights and is being amortised over 7 years.

 

The remaining £1.0m asset under development relates to Xonvea in-licences for a further nine European territories acquired from Duchesnay in 2016. In the event these licences for Xonvea are not approved, the amounts paid to Duchesnay (£0.5m) are fully refundable and the contingent consideration (£0.5m) would not fall due resulting in no net financial impact in the Income Statement.

 

Goodwill

 

The net book value of brand and distribution rights and goodwill which are considered to have indefinite useful lives are allocated to CGUs in the following table. Goodwill relating to the acquisition of certain assets and businesses from Sinclair IS Pharma plc is allocated to the group of related product CGUs. Other Goodwill amounts are allocated to the product CGU with which they were originally acquired.

 

 

Year ended 31 December 2018

      Goodwill

Brands and distribution rights

Total

 

£000s

£000s

£000s

Nizoral

-

60,307

60,307

Menadiol, Vitamin E & Others

598

12,876

13,474

Forceval, Amantadine & Others

-

12,931

        12,931

Vamousse

-

11,596

        11,596

MacuShield

1,748

8,740

        10,488

Nu-Seals

-

9,100

          9,100

SkinSafe, Dansac & Others

1,849

8,043

          9,892

Timodine & Buccastem

-

7,697

          7,697

Syntometrine (excluding UK)

-

7,527

          7,527

Ametop

-

5,575

          5,575

Others

            1,147

27,229

        28,376

Products acquired from Sinclair

 

 

 

Kelo-cote (non EU, excluding US)

-

43,075

43,075

Oxyplastine, Fazol & Others

-

26,567

        26,567

Haemopressin, Optiflo & Others

-

25,000

        25,000

Kelo-cote (EU)

-

17,800

        17,800

Flamma Franchise

-

17,400

        17,400

Aloclair

-

14,000

        14,000

Goodwill

11,223

-

11,223

 

          16,565

315,463

332,028

 

 

Recent acquisitions

 

The following acquisition activities took place in the year:

 

On 21 June 2018, the Group acquired the exclusive marketing rights to Nizoral, a medical anti-dandruff shampoo, in Asia-Pacific from Janssen Pharmaceutica NV (a member of the Johnson & Johnson group of companies) for a total consideration of £60.0m. Associated legal and due diligence costs were £0.3m. The acquisition was funded by an underwritten equity placing of new ordinary shares in the capital of the Company to raise gross proceeds of £34.0m (net proceeds: £32.8m after deduction of £1.2m directly attributable expenses), and by the draw-down of £28.0m from a £35.0m extension of the Group's debt facilities.

 

In respect of Nizoral, the amounts included in the consolidated statement of comprehensive income since 21 June 2018 are revenues of £5.0m and net profit of £3.6m. Had the transaction occurred on 1 January 2018 estimated contribution to Group revenues would have been £10.7m and net profit of £7.6m.

 

In the prior year the following acquisition activities took place:

 

On 1 December 2017, the Group acquired the worldwide rights to Ametop from global medical technology business Smith & Nephew for a consideration of US$7.5m (£5.6m).

 

On 28 December 2017, the Group acquired the worldwide rights to Vamousse from TyraTech Inc in a business combination. This was for an initial cash consideration of US$13.0m (£9.7m) and contingent consideration of between US $nil and U$4.5m. Up to US$2.0m of this consideration is payable in 2020, and up to US$2.5m is payable in 2021, both dependent on the revenue growth of Vamousse. The Group does not currently anticipate any amounts will be payable based on the current forecasts.

 

Impairment

All intangible assets are stated at the lower of cost less accumulated amortisation and impairment or the recoverable amount.

 

Assets with indefinite useful economic lives and those that are not yet available for use are tested for impairment at least annually, or more frequently if there are indicators that amounts might be impaired. These assets are tested at CGU level (or at group of CGUs level in the case of goodwill relating to the acquisition of certain assets and businesses from Sinclair IS Pharma plc) as the Directors believe these CGUs generate largely independent cash inflows.

 

The impairment test involves determining the recoverable amount of the relevant cash-generating unit, which corresponds to the higher of the fair value less costs to sell or its value in use.

                                                   

The value in use calculation uses cash flow projections based on financial forecasts for the next year extrapolated to perpetuity. Financial forecasts for the next year are based on the approved annual budget for 2019 representing the best estimate of future performance. Margins are based on past experience and cost estimates.

 

Key source of estimation uncertainty - value in use assumptions

The key assumptions on which cash flow projections are made are as follows (including our assessment of the estimation uncertainty arising):

 

Discount rates

•  Methodology: Cash flows are discounted at an appropriate rate, based on the Group's post-tax Weighted Average Cost of Capital (WACC) adjusted where appropriate for country specific risks, of between 7.9% and 10.5% (pre-tax 9.6% to 12.8%).

•  Estimation uncertainty: The assumptions included in the compilation of the CGU specific discount rates are designed to approximate the discount rate that a potential market participant would adopt. Given the nature of the Group's business model, the discount rate necessarily includes estimation uncertainty.

 

 

 

Forecast cash-flows

•  Methodology: Approved budgets and forecasts for 2019, based on management's best estimate of cash flows by individual CGU. These forecasts are then uplifted to perpetuity using the growth rates between -4.0% and 5.0% from 2020 onwards based on the Group's long-term growth projections. Growth rates at the higher end of our range have been applied to certain International Star brands in order to reflect the Group's view of the strong long-term growth prospects of these products, taking into account the growth since acquisition and intended marketing investment.

•  Estimation uncertainty: The growth rates assumed in the Group's budgets and forecasts inherently include estimation uncertainty relating to the achievement of commercial initiatives and external factors such as competition.

 

The Group has conducted sensitivity analysis on the impairment tests. The valuations indicate sufficient headroom such that a reasonably possible change in a key assumption is unlikely to result in an impairment for all intangibles except Nu-seals as detailed below.

 

Development projects are reviewed as to the likelihood of their completion and valued using a discounted cash flow, using appropriate risk factors, to assess whether the project is impaired.

 

Nu-seals

 

Nu-seals is a low dose aspirin sold mainly in Ireland. In recent years it has seen significant competition from generic alternatives.

 

The recoverable amount of this CGU is based on a value in use calculation with the following key assumptions:

 

 

%

Pre-tax discount rate

10.3

Terminal margin growth rate

(1.0)

 

 

The cash flow projections included specific estimates for five years and a terminal growth rate thereafter. The terminal growth rate was determined based on management's estimate of the long-term prospects for Nu-seals.

 

The estimated recoverable amount of the CGU exceeded its carrying amount of £9.1m by £1.8m. Management has identified that a reasonably possible change in the two key assumptions could cause the carrying amount to exceed the recoverable amount. The following table shows the individual assumptions required for the estimated recoverable amount to be equal to the carrying amount whilst other assumptions are held constant.

 

 

%

 

Pre-tax discount rate

15.5

 

Terminal margin growth rate

(3.6)

 

 

 

Recent impairments

 

The Group had a £4.3m intangible asset included within Brands and distribution rights for the anti-malarial products Paludrine, Avloclor and Savarine. The brands were acquired in 2012. These brands have been subject to recent competitor activity in the UK, its largest market, and, in August 2018, the Group was formally notified by the supplier of the anti-malarial products of their intention to terminate the supply contract. 

 

Sales of anti-malarial products fell to £0.7m in 2018 (2017: £1.3m) due to competition in the UK market. Due to this decline in demand, the Board have concluded that it is not economic to enter a technical transfer project to an alternative manufacturer and therefore have elected to write down the value of the £4.3m intangible asset in full. Remaining inventory of £0.3m at 31 December 2018 is forecast to be sold in 2019 and 2020.

 

The Group had a £1.9m intangible asset within Brands and distribution rights representing the value of the agreement with Macuhealth to guarantee supply of MacuShield API. In September 2018 the Group was notified by Macuhealth of their intention to end this supply agreement. As a result of the notification the £1.9m intangible asset has been written down in full, and related deferred consideration of £1.1m released to the income statement (notes 12 and 14). The net impact on underlying profit before tax is therefore a charge of £0.8m. The Group has implemented alternative arrangements resulting in no interruption to the supply of MacuShield.

 

Kelo-stretch was impaired in the prior year by £0.5m. An indicator of impairment on this product was identified due to the material reduction in the business and resulting exceptional compensation income received (note 5). The value in use was compared against the carrying value of the asset to calculate the impairment.

 

10. Inventories

 

 

31 December 2018

 

31 December 2017

 

The Group

£000s

 

£000s

 

Finished goods and materials

20,544

 

16,077

 

Inventory provision

(1,838)

 

(1,829)

 

 

18,706

 

14,248

 

 

Inventory costs expensed through the income statement during the year were £44,349,000 (2017: £36,575,000).   During the year £1,983,000 (2017: £442,000) was recognised as an expense relating to the write-down of inventories to net realisable value.

 

 

11. Trade and other receivables

 

31 December 2018

31 December 2017

 

£000s

£000s

Trade receivables

23,407

17,347

Other receivables

1,083

1,759

Prepayments and accrued income

4,658

2,465

Amounts owed by Joint Venture

-

2,124

 

29,148

23,695

 

The ageing of trade receivables of the Group at 31 December is detailed below:

 

31 December 2018

£000s

31 December 2017

£000s

 

Not past due

20,482

15,479

Due 30-31 December

871

782

Past due 3 days to 91 days

1,459

511

Past 91 days

595

575

 

23,407

17,347

                                                                                                                 

Trade and other receivables are stated net of estimated allowances for doubtful debts. As at 31 December 2018, trade and other receivables of £868,000 (2017: £254,000) were past due and impaired.

 

Our policy requires customers to pay us in accordance with agreed payment terms.  Depending on the geographical location, our settlement terms are generally due within 30 or 60 days from the end of the month of sale and do not bear any effective interest rate. 

 

At 31 December 2018 there were no contract assets or liabilities outstanding as defined under IFRS 15 (2017: £nil).

 

12. Trade and other payables

 

 

The Group

 

31 December 2018

31 December 2017

 

£000s

£000s

Trade payables

8,978

6,662

Other taxes and social security costs

1,808

326

Accruals and deferred income

10,301

8,159

Other payables

197

776

Deferred consideration

-

153

Contingent consideration

500

500

Lease liabilities

447

579

Amounts owed to Group undertakings

-

-

 

22,231

17,155

 

Deferred consideration of £nil (2017: £0.2m) related to an agreement with MacuHealth to guarantee supply of MacuShield API and secure additional territories to be able to distribute in. In September 2018 the Group was notified by Macuhealth of their intention to end this supply agreement. This resulted in the release of the balance to the income statement.

 

Contingent consideration of £0.5m relates to the Licence and Supply Agreement for the product Xonvea with Duchesnay Inc. and is payable in 2019 if the relevant European licensing applications are approved (note 9). This balance was transferred from non-current liabilities during the year (note 14). The 2017 balance of £0.5m was paid following UK approval in July 2018 (note 9).

 

 

13. Loans and borrowings

 

 

 

 

 

 

 

31 December 2018

31 December 2017

Current

 

 

£000s

£000s

Bank loans due within one year or on demand:

 

 

 

Secured

 

 

68,500

42,000

Finance issue costs

 

 

(465)

(281)

 

 

 

68,035

41,719

             

 

 

 

 

31 December 2018

31 December 2017

Non-current

 

 

£000s

£000s

Bank loans:

 

 

 

 

Secured

 

 

29,100

42,338

Finance issue costs

 

 

(433)

(558)

 

 

 

28,667

41,780

 

 

 

 

The bank facility is secured by a fixed and floating charge over the Group's assets registered with companies house.

 

14. Other non-current liabilities

 

 

 

31 December 2018

31 December 2017

 

 

 

£000s

£000s

Contingent consideration

 

 

-

2,355

Deferred consideration

 

 

-

896

Lease liabilities

 

 

1,972

1,998

Other non-current liabilities

 

 

380

274

 

 

 

2,352

5,523

 

 

 

 

 

Contingent consideration of £nil (2017: £0.5m) related to the Licence and Supply Agreement for the product Xonvea with Duchesnay Inc. This has been transferred to current liabilities and is payable during 2019 if the relevant licensing applications are approved (note 12).

 

Contingent consideration of £nil (2017: £1.9m) relates to the acquisition of the worldwide rights to Vamousse from TyraTech Inc. Up to US$2.0m is payable in 2020, and up to US$2.5m is payable in 2021, both dependent on the revenue growth of Vamousse. The current year decrease in deferred contingent consideration relates to changes in the original estimated amounts payable based on the latest sales forecasts.

 

Deferred consideration of £nil (2017: £0.9m) related to the MacuHealth agreement to guarantee supply of MacuShield API and extend the territories in which MacuShield can be sold.  In September 2018 the Group was notified by Macuhealth of their intention to end this supply agreement. This resulted in the release of the balance to the income statement.

 

15. Share capital

 

                              Allotted, called and fully paid

 

No. of shares

£000s  

At 1 January 2017 - ordinary shares of 1p each

472,568,462

4,726

Issued during the year

2,421,526

24

At 31 December 2017 - ordinary shares of 1p each

474,989,988

4,750

Issued during the year

43,224,238

432

At 31 December 2018 - ordinary shares of 1p each

518,214,226

5,182

 

Between 1 January 2018 and 31 December 2018 5,861,601 shares were issued on the exercise of employee share options (2017: 2,421,536).

 

On 21 June 2018 37,362,637 shares were issued at 91.0p in the underwritten equity placing used for the acquisition of Nizoral (note 9). This raised gross proceeds of £34.0m before expenses. The net addition to equity was £32.8m after the deduction of £1.2m directly attributable expenses.

 

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.

 

Managing Capital

Our objective in managing the business' capital structure is to ensure that the Group has the financial capacity, liquidity and flexibility to support the existing business and to fund acquisition opportunities as they arise.

 

The capital structure of the Group consists of net bank debt and Shareholders' equity. At 31 December 2018, net debt was £85.8m (note 18), whilst Shareholders' equity was £252.2m.

 

The business is profitable and cash generative. The main financial covenants applying to bank debt are that leverage (the ratio of net bank debt to EBITDA) should not exceed 3.0 times, interest cover (the ratio of EBITDA to finance charges) should be no less than 4.0 times, and Group cash flows must remain in excess of agreed ratios to debt service cash flows. The Group complied with these covenants in 2018 and 2017.

 

Smaller acquisitions are typically financed using bank debt, while larger acquisitions typically involve a combination of bank debt and additional equity. The mixture of debt and equity is varied, taking into account the desire to maximise the shareholder returns while keeping leverage at comfortable levels.

 

 

16. Cash generated from operations

 

 

 

 

Year ended

31 December

2018

£000s

 

Year ended

31 December

2017

£000s

restated

 

 

 

Profit for the year

18,356

28,830

 

Taxation

4,447

(541)

 

Interest payable and similar charges

3,457

3,144

 

Change in contingent consideration

(1,966)

(618)

 

Change in deferred consideration

(1,048)

-

 

Interest income

(52)

(104)

 

Foreign exchange gain

(575)

(534)

 

Profit on disposal of Unigreg Joint Venture

(1,508)

-

 

Net exceptional compensation income

-

(4,356)

 

Depreciation of property, plant and equipment

1,335

1,111

 

Amortisation and impairment of intangibles

6,455

276

 

Impairment of Synthasia Joint Venture assets

2,460

-

 

Change in inventories

(4,458)

1,108

 

Share of post-tax Joint Venture profits

(13)

(19)

 

Change in trade and other receivables

(7,628)

4,011

 

Change in trade and other payables

5,059

(2,996)

 

Share based employee remuneration

1,790

1,453

 

Dividends received

-

-

 

Cash generated from operations

26,111

30,765

 

 

17. Contingent liabilities

 

Contingent liabilities are possible obligations that are not probable. The Group operates in a highly regulated sector and in markets and geographies around the world each with differing requirements.  As a result, and in the normal course of business, the Group can be subject to a number of regulatory inspections/investigations on an ongoing basis. It is therefore possible that the Group may incur penalties for non-compliance.  In addition, a number of the Group's brands and products are subject to pricing and other forms of legal or regulatory restrictions from both governmental/regulatory bodies and also from third parties. Assessments as to whether or not to recognise a provision in respect of these matters are judgemental as the matters are often complex and rely on estimates and assumptions as to future events. 

 

The Group's assessment at 31 December 2018 based on currently available information is that there are no matters for which a provision is required (2017: £nil). However, given the inherent uncertainties involved in assessing the outcomes of such matters there can be no assurance regarding the outcome of any ongoing inspections/investigations and the position could change over time as a result of the factors referred to above.

 

18. Alternative performance measures

 

The performance of the Group is assessed using Alternative Performance Measures ("APMs"). The Group's results are presented both before and after non-underlying items. Adjusted profitability measures are presented excluding non-underlying items as we believe this provides both management and investors with useful additional information about the Group's performance and aids a more effective comparison of the Group's trading performance from one period to the next and with similar businesses.

 

In addition, the Group's results are described using certain other measures that are not defined under IFRS and are therefore considered to be APMs. These measures are used by management to monitor ongoing business performance against both shorter term budgets and forecasts but also against the Groups longer term strategic plans.

 

APMs used to explain and monitor Group performance:

 

Measure

Definition

Reconciliation to GAAP measure

Underlying

EBIT and EBITDA

Earnings before interest, tax and non-underlying items (EBIT), then depreciation, amortisation and underlying impairment (EBITDA).

Calculated by taking profit before tax and financing costs, excluding non-underlying items and adding back depreciation and amortisation.

EBITDA margin is calculated using see-though revenue.

Note A below

Free cash flow

Free cash flow is defined as cash generated from operations less cash payments made for financing costs, capital expenditure and tax.

Note B below

Net debt

Net debt is defined as the group's gross bank debt position net of finance issue costs and cash.

Note C below

Adjusted

underlying

basic EPS

Adjusted underlying basic EPS is calculated by dividing underlying

earnings attributable to ordinary shareholders less impact of tax

rate changes, by the weighted average number of shares in issue

during the year.

Note D below

Adjusted

underlying

effective tax rate

Adjusted underlying effective tax rate is calculated by dividing total

taxation for the year less impact of tax rate changes and

non-underlying charges, by the underlying profit before tax for the

year.

Note E below

See-through

income statement

Under the terms of the transitional services agreement with J&J, Alliance receives the benefit of the net profit on sales of Nizoral from the date of acquisition up until the product licences in the Asia-Pacific territories transfer from J&J to Alliance, which is expected to occur during 2019 and 2020. The net product margin arising in the year ended 31 December 2018 has been recognised as part of statutory revenue.

The see-through income statement recognises the underlying sales and cost of sales which give rise to the net product margin, as management consider this to be a more meaningful representation of the underlying performance of the business, and to reflect the way in which it is managed.

 

Note F below

Constant currency

basis revenue

Revenue stated so that the portion denominated in non-sterling currencies is retranslated using foreign exchange rates from the previous financial year.

Note G below

Like-for-like

revenue

Revenue stated excluding the impact of acquisitions in both the current and prior years. This therefore excludes revenue from Ametop, Vamousse and Nizoral to ensure comparability.

Note 3 includes

revenue by brand

 

 

A.    Underlying EBIT and EBITDA

 

 

Year Ended 31 December 2018

 

Year Ended 31 December 2017

Reconciliation of Underlying EBIT and EBITDA

 

£000s

 

£000s

 restated

Profit before tax

 

22,803

 

28,289

Non-underlying items (note 5)

 

5,270

 

(4,356)

Finance costs (note 6)

 

864

 

1,888

Underlying EBIT

 

28,937

 

25,821

Depreciation

 

1,335

 

1,111

Underlying impairment (note 9)

 

1,926

 

-

Amortisation (note 9)

 

211

 

276

Underlying EBITDA

 

32,409

 

27,208

           

 

B.    Free cash flow

 

 

Year Ended 31 December 2018

 

Year Ended 31 December 2017

Reconciliation of free cash flow

 

£000s

 

£000s

 restated

Cash generated from operations (note 16)

 

26,111

 

30,765

Financing costs

 

(3,197)

 

(2,758)

Capital expenditure

 

(2,891)

 

(2,236)

Tax paid

 

(3,941)

 

(3,728)

Free cash flow

 

16,082

 

22,043

 

C.    Net debt

 

Reconciliation of net debt

 

31 December 2018

 

31 December 2017

 

 

£000s

 

£000s

Loans and borrowings - current (note 13)

 

(68,035)

 

(41,719)

Loans and borrowings - non-current (note 13)

 

(28,667)

 

(41,780)

Cash and cash equivalents

 

10,893

 

11,184

Net debt

 

(85,809)

 

(72,315)

 

D. Adjusted underlying basic EPS

 

 

Year Ended 31 December 2018

 

Year Ended 31 December 2017

Reconciliation of adjusted underlying basic EPS

 

£000s

 

£000s

 restated

Underlying profit after tax for the year

 

22,582

 

25,238

Impact of reduction in UK tax rate on deferred tax

 

-

 

(101)

Impact of reduction in US and French tax rate on deferred tax

 

-

 

(5,958)

Adjusted underlying profit for the year

 

22,582

 

19,179

 

Weighted average number of shares (note 8)

             497,199,620

473,842,765

 

Adjusted underlying basic EPS

4.54

4.05

 

During 2017 US and French tax reform were both substantively enacted.  The deferred tax rates applied to US and French timing differences in 2017 were hence changed from 35.0% to 24.0% and from 33.3% to 25.0% respectively. Changes to the UK corporation tax rate were announced in Finance Act (No 2) 2015 and Finance Act 2016, reducing the UK's main rate to 17% from 1 April 2020.

 

 

E. Adjusted underlying effective tax rate

 

 

Year Ended 31 December 2018

 

Year Ended 31 December 2017

Reconciliation of adjusted underlying effective tax rate

 

£000s

 

£000s

Total taxation (charge)/credit for the year

 

(4,447)

 

541

Impact of reduction in UK tax rate on deferred tax

 

-

 

(101)

Impact of reduction in US and French tax rate on deferred tax

 

-

 

(5,958)

Non-underlying tax (credit)/charge

 

(1,044)

 

764

Adjusted underlying taxation charge for the year

 

(5,491)

 

(4,754)

 

Underlying profit before tax for the year

28,073

23,933

 

Adjusted underlying effective tax rate

19.6%

19.9%

 

F. See-through income statement

 

 

 

 

2018 statutory values 

£000s

 

 

See-through adjustment

£000s

 

 

2018 see-through values

 £000s

Revenue

118,208

5,834

124,042

Cost of sales

(45,560)

(5,834)

(51,394)

 

 

 

 

Gross profit

72,648

-

72,648

 

 

 

 

Gross profit margin

61.5%

 

58.6%

 

There is no impact from the see-through adjustment on income statement lines below gross profit.

 

G. Constant currency revenue

 

 

 

 

 

2018  

£000s

 

 

Foreign exchange impact

£000s

 

 

2018 constant currency revenue

 £000s

See-through revenue (Note F)

124,042

516

124,558

Vamousse product revenue

5,756

138

5,894

 

 

 

 

 

 


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