Dechra Pharmaceuticals
Annual Report 2008

Plain-text annual report

15400DECHRAcover:Layout 2 9/9/08 17:53 Page 1 Dechra House Jamage Industrial Estate Talke Pits Stoke-on-Trent Staffordshire ST7 1XW England t: +44 (0)1782 771100 f: +44 (0)1782 773366 e: corporate.enquiries@dechra.com Registered in England No. 3369634 www.dechra.com Services Pharmaceuticals D e c h r a P h a r m a c e u t i c a s P L C l A n n u a l R e p o r t a n d A c c o u n t s f o r t h e y e a r e n d e d 3 0 J u n e 2 0 0 8 15400 09/09/2008 Proof 7 15400 09/09/2008 Proof 7 An International Veterinary Pharmaceutical Business Annual Report and Accounts for the year ended 30 June 2008 15400DECHRAcover:Layout 2 9/9/08 18:33 Page 2 Welcome to Dechra Group Strategy To sustain growth from our core businesses. To continue to develop our veterinary pharmaceutical portfolio. To increase our pharmaceutical penetration into international markets. Services Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Advisers Merchant Bank & Financial Advisers NM Rothschild & Sons Limited New Court St Swithins Lane London EC4P 4DU Stockbroker & Financial Advisers Dresdner Kleinwort 30 Gresham Street London EC2P 2XY Principal Bankers Bank of Scotland 55 Temple Row Birmingham B2 5LS Auditors KPMG Audit Plc 2 Cornwall Street Birmingham B3 2DL Lawyers DLA Piper UK LLP Victoria Square House Victoria Square Birmingham B2 4DL Registrars Computershare Investor Services PLC PO Box 82 The Pavilions Bridgwater Road Bristol BS13 8AE Financial PR Citigate Dewe Rogerson Limited 9 The Apex 6 Embassy Drive Edgbaston Birmingham B15 1TP Pharmaceuticals Trademarks Trademarks appear throughout this document in italics. Dechra and the Dechra “D” logo are registered trademarks of Dechra Pharmaceuticals PLC. Contents 01 Financial Highlights 02 Operational Review 08 Chairman’s Statement 10 Directors’ Business Review 28 Board of Directors 29 Senior Management 30 Directors’ Report 33 Corporate Governance 37 Audit Committee Report 38 Directors’ Remuneration Report 45 Social, Ethical and Environmental Responsibilities 47 Statement of Directors’ Responsibilities in respect of the Annual Report and the Financial Statements 48 Independent Auditors’ Report 49 Consolidated Financial Statements 91 Company Financial Statements 100 Glossary of Terms 101 Advisers 15400 09/09/2008 Proof 7 15400 09/09/2008 Proof 7 www.dechra.com stock code: DPH 101 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s (cid:1) (cid:1) (cid:1) 15400DECHRA:Layout 1 9/9/08 17:37 Page 1 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Financial Highlights +20% Revenue £ million 4 . 4 0 3 8 . 3 5 2 5 . 2 3 2 3 . 0 1 2 8 . 6 8 1 +33% Adjusted Profit Before Taxation* £ million 7 . 9 1 . 8 6 . 2 1 0 . 1 1 9 . 6 1 Profit Before Taxation £ million 0 . 1 7 1 . 9 6 . 2 1 7 . 1 1 4 . 7 04 05 06 07 08 04 05 06 07 08 04 05 06 07 08 +23% Adjusted Earnings per Share* pence 1 8 . 0 2 9 8 . 6 1 1 7 . 4 1 7 7 . 3 8 1 2 . 1 1 Earnings per Share pence 6 8 . 6 1 1 7 . 4 1 0 2 . 4 1 7 7 . 3 1 7 9 . 9 +10% Dividend per Share pence 5 2 . 0 8 5 . 7 4 2 . 6 0 2 . 5 0 7 . 4 04 05 06 07 08 04 05 06 07 08 04 05 06 07 08 * Before VetXX® rationalisation costs and amortisation of acquired intangibles. Key Developments Robust organic growth in operating profit. VetXX acquisition fully integrated and performing in line with expectations. Product development progressing to schedule. Vetoryl® US FDA compliance notification received with US launch scheduled for January 2009. Key pharmaceuticals continue to increase market penetration. NVS® grew ahead of strong market growth. Dales continues to show good growth. O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com www.dechra.com stock code: DPH stock code: DPH 15400 09/09/2008 Proof 8 01 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) 15400DECHRA:Layout 1 9/9/08 17:37 Page 2 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Operational Review Our Business Pharmaceuticals Division DVP EU grew strongly throughout the financial year. Both the existing UK and export businesses and the six months’ revenue from VetXX contributed to this performance. Pharmaceuticals Revenue up104% to £54.3m (2007: £26.7m) Share of Total Group Revenue Share of Adjusted Operating Profit 17% 50% Dechra Veterinary Products (“DVP”) Marketing and development of licensed branded pharmaceuticals to the veterinary profession worldwide. Dales Pharmaceuticals (“Dales”) Licensed manufacturer of veterinary and human pharmaceuticals for DVP and third party customers. 02 15400 09/09/2008 Proof 8 154 15400DECHRA:Layout 1 9/9/08 17:37 Page 3 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s Pharmaceuticals Performance (cid:1) KEY PRODUCTS CONTINUE TO GROW STRONGLY (cid:1) SIGNIFICANT INCREASE IN US REVENUE EXCELLENT PERFORMANCE FROM DALES – OPERATING PROFIT UP 36% up76% Adjusted operating profit £m 10.8 6.1 4.9 4.3 3.1 2004 2005 2006 2007 2008 Milestones (cid:1) Successful integration of VetXX (cid:1) Strong EU growth of Vetoryl and Felimazole® (cid:1) Good market penetration by new generic launches in UK (cid:1) Pharmaderm range integrated into US operation Milestones Further new third party contracts gained (cid:1) Successful ‘go live’ on new Oracle integrated IT system Further progress on quality management systems www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 03 (cid:1) (cid:1) (cid:1) 15400DECHRA:Layout 1 9/9/08 17:37 Page 4 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Operational Review Our Business Our Business Pharmaceuticals Division continued Global Operations Pharmaceuticals Dechra Veterinary Products operates in the USA and ten European countries: Norway, Denmark, Finland, Sweden, the Netherlands, Spain, Portugal, France, Ireland and the UK. USA Ireland UK Portugal France Product Type Diets: Specific® life-stage diets for dogs and cats. These are a range of veterinary only diets for healthy dogs and cats. Specific therapeutic diets for dogs and cats. These are a range of diets specifically targeted to assist in the management of clinical conditions such as kidney problems, heart problems and allergies. Pharmaceuticals: Canaural® — first line treatment for otitis externa in the cat and dog in the UK. CleanAural® — leading ear cleaning product. Equipalazone® — the leading non-steroidal anti- inflammatory drug (NSAID) for the treatment of musculoskeletal disorders in the horse. Felimazole — the first veterinary licensed product for the treatment of feline hyperthyroidism. Fuciderm® — for the treatment of surface pyoderma in the dog. Canaural Specific 04 Equipalazone 15400 09/09/2008 Proof 8 154 15400DECHRA:Layout 1 9/9/08 17:37 Page 5 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Norway Finland Sweden Denmark Netherlands Spain A number of our products are also marketed by partners worldwide into important territories, including Germany, Italy, Canada, Australia and Japan. We have also started to develop relationships and have initial sales within Eastern Europe. Annualised Revenue by Product Type Instruments and consumables: 5% Manufacturing: 12% Pharmaceuticals: 53% Diets: 26% Care: 4% Fucithalmic® Vet — the only licensed product for the treatment of conjunctivitis associated with staphylococcal infections. Malaseb® — the only UK licensed medicated shampoo for cats and dogs. The Vetivex® range of infusion fluids — licensed for the treatment of dehydration. Vetoryl — a novel and patented product for the treatment of Cushing’s Disease (excess cortisol or hyperadrenocorticism) in dogs. Felimazole Vetoryl Fucithalmic www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s 05 15400DECHRA:Layout 1 9/9/08 17:37 Page 6 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Operational Review Services Division NVS services both companion animal and livestock practices and agricultural merchants. As with other divisions within Dechra, NVS benefits from the good year-on-year growth in the veterinary market which has seen growth of approximately 10% in the year. Services Revenue Share of Total Group Revenue Share of Adjusted Operating Profit up 11% to £259.4m (2007: £234.2m) 83% 50% National Veterinary Services (“NVS”) UK market leader in the supply of pharmaceuticals and added value services to the veterinary profession, including management information systems and consumer and internet services. NationWide Laboratories (“NWL”) Multi-disciplined independent commercial veterinary laboratory. Cambridge Specialist Laboratory Services (“CSLS”) Primary care and secondary referral specialist veterinary immunoassay laboratory. 06 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:37 Page 7 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Services Services Performance (cid:1) STRONG SALES PERFORMANCE INCREASE IN MARKET SHARE IMPROVED OPERATING MARGIN up12% Adjusted operating profit £m 10.7 9.5 8.7 8.0 7.1 2004 2005 2006 2007 2008 Milestones (cid:1) NVS outperforms the market (cid:1) Successful cold chain distribution of Blue Tongue vaccine (cid:1) Gained customers in new distribution channels Milestones Integrated Leeds Veterinary Laboratories (“LVL”) 23% increase in revenue (cid:1) Allervet® allergy testing exceeds expectations www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 07 S O u r i B u s n e s s O u r P e r f o r m a n c e Pharmace S O u r G o v e r n a n c e O u r A c c o u n t s (cid:1) (cid:1) (cid:1) (cid:1) 15400DECHRA:Layout 1 9/9/08 17:37 Page 8 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Chairman’s Statement I am pleased to report an excellent performance by the Group Financial Highlights during the period. We have achieved good growth in revenue and Group revenue increased 19.9% from £253.8 million to profitability from our UK businesses, increased market share at £304.4 million. NVS, significantly increased US revenues, achieved further penetration of our products in Europe and launched new products in the UK. Furthermore, we have made an acquisition, VetXX Holdings A/S (“VetXX”), which materially increases our pharmaceutical portfolio and provides a strong European footprint to market the enlarged product range and future developed products. The development of our own branded Adjusted operating profit increased by 38.0% to £19.1 million (2007: £13.9 million). Adjusted profit before taxation rose 33.3% to £16.9 million (2007: £12.6 million). Operating profit after deducting rationalisation costs and amortisation of acquired intangibles was £14.1 million (2007: £13.8 million). Profit before taxation on the same basis was £11.7 million (2007: £12.6 million). veterinary pharmaceutical portfolio is progressing to schedule, Adjusted basic earnings per share was 20.81p, up 23.2% from with the launch of a key product for the US market, Vetoryl, the 16.89p achieved in 2007. Earnings per share after planned for January 2009. rationalisation costs and amortisation of acquired intangibles was 14.20p (2007: 16.86p). “We have achieved good growth in revenue and profitability from our UK businesses, increased market share at National Veterinary Services, significantly increased US revenues, achieved further penetration of our products in Europe and launched new products in the UK.” 08 stock code: DPH 15400 09/09/2008 Proof 8 154 15400DECHRA:Layout 1 9/9/08 17:37 Page 9 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O O u u r r A A c c c c o o u u n n t t s s Total cash investment in product development was £3.7 million People (2007: £3.3 million), of which £2.4 million was charged to the On behalf of the Board and all our Shareholders I would like to income statement (2007: £1.6 million). welcome all VetXX and other new employees to the Group. Cash flow continued to be strong with cash flow from operations being 114% of operating profit. As at 30 June 2008, the Group I would also like to thank all employees for their hard work, dedication and innovation in contributing to our successful year. had net borrowings of £27.0 million compared to net funds of Prospects £1.0 million at 30 June 2007, the increase being the new The Group’s current trading is in line with the Board’s borrowings taken out to partially fund the acquisition of VetXX. expectations. International companion animal markets continue Net debt to EBITDA on an adjusted basis was 1.3 times. Interest cover on adjusted operating profit was 8.4 times. Further details are contained in the Business Review. Dividend In line with our progressive dividend policy and our confidence in the business, the Directors are recommending an increase in the final dividend to 5.50p per share (2007: 5.00p per share). This, together with the interim dividend of 2.75p per share (2007: 2.50p per share), makes a total dividend for the year of 8.25p per share (2007: 7.50p per share), a 10% increase. The total dividend is covered 2.0 times by profit after taxation but after adding back amortisation of acquired intangibles. The final dividend, which is subject to Shareholder approval at our Annual General Meeting to be held on Friday 7 November 2008, will be paid on 12 December 2008 to Shareholders on the Register at 14 November 2008. to grow; our core businesses continue to perform well; our acquisition, VetXX, is meeting our expectations; and our key products continue to show good growth. The business will be further enhanced with new product introductions, particularly the launch of Vetoryl and Felimazole in the US in the second half of the 2009 financial year. We therefore remain confident in our future. Michael Redmond Chairman 2 September 2008 www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 09 15400DECHRA:Layout 1 9/9/08 17:37 Page 10 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Directors’ Business Review The Business and its Markets Dechra Pharmaceuticals PLC (“Dechra”) operates under two The veterinary market for companion animal products is dominated by North America, Western Europe and Japan. Key Divisions, Pharmaceuticals and Services. The Pharmaceuticals drivers within the companion animal market are the increasing Division operates internationally and is unique in having its sole medical and surgical capabilities of veterinary surgeons, area of specialisation in companion animal products. The increased life expectancy of pets and ultimately the consumer’s Services Division serves UK veterinary practices in both the passion for their animals. companion animal and livestock sectors. The North American, Western European and Japanese markets Following the acquisition of VetXX in January 2008 (which is are the most significant companion animal markets in the world, detailed later in this review), the Group now employs 970 people with pet ownership in over 50% of households and with a high and operates out of 11 countries. level of spend per animal. The table on the following page provides details of companion animal populations in the markets in which Dechra currently has a sales and marketing operation. “Following the acquisition of VetXX in January 2008, the Group now employs 970 people and operates out of 11 countries.” 10 stock code: DPH 15400 09/09/2008 Proof 8 154 15400DECHRA:Layout 1 9/9/08 17:37 Page 11 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Companion Animal Populations in Dechra Territories Territory USA France UK and Ireland Spain Scandinavia Netherlands Dogs Cats Horses (millions) (millions) (millions) 75 8 8 5.5 2.1 2 82 10 8.4 4 3.1 4 10 1 1 0.6 0.5 0.4 Dechra currently markets products through partners and has products in registration in several other important small animal markets, the most significant of which are detailed below: Companion Animal Populations in Important Non-Subsidiary Countries Territory Japan Italy Canada Germany Australia Dogs Cats Horses (millions) (millions) (millions) 12.5 6.9 6 5.3 3.7 12 6.1 8 7.9 2.4 0.1 0.3 1 1 1.2 The UK veterinary market, which still represents the majority of Dechra’s overall sales, has consistently outperformed the Retail Prices Index over the last ten years of market growth. Pharmaceutical Product Development Strategy The Group focuses on solid organic growth within its Pharmaceuticals and Services Divisions. However, the key strategic focus, which is now delivering excellent growth and will provide significant revenues in the future, is through the development and acquisition of our own branded veterinary pharmaceutical portfolio of both novel and generic products and the licensing of these key products into international markets. Our product development is focused entirely on prescription only veterinary medicines for dogs, cats and horses, with our main area of specialisation being within critical care, endocrinology, dermatology and ophthalmology. Most of our projects utilise existing pharmaceutical entities that are typically used within the human market and therefore the majority of product creation is development and not research based. O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s Number of employees 970 682 698 630 758 As at 30 June 04 05 06 07 08 GB Veterinary Market Growth as measured by GFK Retail Price Index (“RPI”) % 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 00 01 02 03 04 05 06 07 08 Year ended 30 June www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 11 15400DECHRA:Layout 1 9/9/08 17:37 Page 12 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Directors’ Business Review Legislation Key Strengths There are three pieces of legislation that the Directors believe The Directors believe that the Group has the exceptional skills have been implemented to encourage development of and expertise that are necessary for delivering its strategy: specialised veterinary products into markets that are small relative to human pharmaceutical sales: The “Cascade Legislation”: The basic principle of this EU legislation is that the veterinary surgeon must prescribe a veterinary licensed product above any other alternative. Therefore, any products licensed specifically for animals must be used instead of a human ethical or generic product, irrespective of price; EU law gives a novel product ten years’ protection from generic competitors, irrespective of its patent status; and The US FDA (“Food and Drug Administration”) Center for Veterinary Medicine provides five years’ protection from generic competitors for the first approval of a new pharmaceutical, irrespective of its patent status. Subsequent approvals receive three years’ protection. Dechra considers this legislation to be favourable towards its strategy and is essential in providing safe, efficacious products for animal welfare. The recognition of opportunities for specialised and niche pharmaceutical products for the veterinary market achieved through knowledge gained from the Group’s strong market position; In-house formulation of products into preparations suitable for the target species; International experience and proven track record of regulatory and license delivery; Successful design and management of international clinical field trials; Industry leading veterinary and commercial personnel throughout the Group; and (cid:1) We have assembled scientific advisory boards comprising international key opinion leaders. Dechra has a proven track record of delivering licensed products by working closely with regulatory authorities and by complying with the highest standards. Increased investment in product development capabilities has been made throughout the year being reported, and the Directors are planning for a further increase in development spend in the new financial year. 12 stock code: DPH 15400 09/09/2008 Proof 8 1540 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) 15400DECHRA:Layout 1 9/9/08 17:37 Page 13 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Key Products and Specialisations Dermatology — Total annualised sales £10.1 million With the acquisition of the VetXX business Dechra has become a leading veterinary supplier in dermatological treatments. Canaural was first licensed in 1975 and is still the leading first line treatment for otitis externa in the cat and dog in the UK. Canaural, which is now registered in 25 countries and generates annual revenues of £3.9 million, can also be used in conjunction with our leading ear cleaning product CleanAural which generates a further £1.3 million of revenues annually. Fuciderm, licensed in 1995, is the only licensed product for the treatment of surface pyoderma in the dog, such as acute moist dermatitis and intertrigo. It is a key product within our dermatology range, selling into 23 countries, generating annual sales of £2.7 million. Malaseb was first licensed in 1996 and is still the only UK licensed medicated shampoo for cats and dogs. It is used to treat skin diseases caused by malassezia and staphylococcal infections. The current annual product sales are £1.8 million. It is anticipated that there is a significant growth opportunity for the product as it has been submitted for registration in several new European territories. Endocrinology — Total annualised sales £9.2 million Endocrine disorders are a key focus for the business with a number of licensed products treating a range of chronic diseases. The two leading brands are Vetoryl and Felimazole. Vetoryl is a novel and patented product for the treatment of Cushing’s Disease (excess cortisol or hyperadrenocorticism) in dogs. It is marketed within the EU in 21 territories and is the only recognised licensed efficacious veterinary product for the treatment of Cushing’s Disease around the world. Launched in the UK on a provisional marketing authorisation in September 2001, Vetoryl has since achieved full approval in the EU and has consistently increased market penetration. In the USA it is also sold under an FDA waiver scheme and through special import schemes into other territories such as Canada and Australia. Global revenues for Vetoryl in the twelve months were £5.1 million. Felimazole is the first veterinary licensed product for the treatment of feline hyperthyroidism. It competes in the world’s markets Equine Medicine — Total annualised sales £5.7 million We have a wide range of 14 licensed products supporting the equine veterinarian. The lead product with the highest sales is Equipalazone. Equipalazone was first licensed in a sachet presentation in 1972 and subsequently in a paste and injection. It is still the leading non-steroidal anti-inflammatory drug (NSAID) for the treatment of musculoskeletal disorders, such as lameness due to acute and chronic laminitis, in the horse. Ophthalmology — Total annualised sales £2.95 million Ophthalmology is a highly specialised area of veterinary medicine where we have a number of leading products including licensed pharmaceuticals, unlicensed care products and instruments. against human equivalents; however, the Cascade Legislation Fucithalmic Vet, licensed in 1993, is the only licensed product (see Legislation) has supported its growth. Felimazole received available for the treatment of conjunctivitis associated with marketing approval for the UK in 2002 and was approved in the staphylococcal infections. It is highly effective because of its EU in 2005. Global revenues for Felimazole in the 12 months were £3.9 million. unique sustained release formulation that ensures prolonged retention within the eye. It is currently licensed in 21 countries worldwide and delivers sales of £2.5 million. www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 13 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s 15400DECHRA:Layout 1 9/9/08 17:37 Page 14 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Directors’ Business Review Critical Care — Total annualised sales £2.0 million Development Update Dechra has a wide range of products that support emergency medicine including licensed pharmaceuticals, wound treatments, consumables and instruments. The leading range of products is the Vetivex brand. It is pleasing to report that we have received notification of compliance for all parts of the Vetoryl USA application from the FDA. An administration process has now commenced and the product will be launched at the North American The Vetivex range of infusion fluids are licensed for the treatment Veterinary Conference in Florida in January 2009. of dehydration. They are widely used to meet normal fluid and electrolyte requirements when fluids cannot be given orally, such as during surgery. The licenses were purchased from Ivex Ltd, a (cid:1) We continue to make satisfactory progress in our Vetoryl applications for Japan, Canada and Australia. subsidiary of Gambro BCT Inc, in 2005. Since this time, sales Vetoryl has been approved in Switzerland and is being have grown year on year and currently deliver revenue of marketed by our partner, Veterinaria. £1.7 million. The products are only licensed for sale in the UK and Ireland. The completed dossier for Felimazole for the US market has been submitted and we have subsequently had notification of Development Team We have a highly skilled development team of 20 people located approval of the CMC and safety sections. We remain very confident as to the progress of the efficacy section and in the United Kingdom, Denmark and the United States. In the anticipate being in a position to receive approval for this year we have added two scientists to the pharmaceutical product in the first half of the next calendar year. development laboratory located at our manufacturing facility in Skipton, invested in new equipment and have six new regulatory staff through the acquisition of VetXX. This team has now been fully integrated into Dechra. We are currently in the process of adding further skilled personnel into this team as we continue to identify and develop new products. During the year we acquired and successfully implemented a new pharmacovigilance monitoring and reporting database. Trial work for Equidone® for the US market is almost completed and has provided excellent results. Research into other potentially lucrative applications for Equidone has continued at two US universities; initial trial results for one therapeutic indication are very positive. Ovuplant® has been approved and marketing commenced in Germany, Spain, France, Ireland, Italy and the Netherlands. Prednidale 25, a new dosage form of an existing product, has been approved and launched within the United Kingdom. Intraepicaine®, one of our specialist equine products, has been registered and marketed into Ireland. Vetivex No 1 has been approved in Ireland and will be marketed soon. Atipam®, a UK branded generic, has been approved in partnership with the marketing authorisation holders, Eurovet, and has been launched in the UK. Dossiers for two new significant generic products have been submitted for approval. In addition to the above activities, the Group has recognised other novel and generic development opportunities which have satisfied our internal assessment criteria resulting in commencement of development programmes. 14 stock code: DPH 15400 09/09/2008 Proof 8 1540 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) 15400DECHRA:Layout 1 9/9/08 17:37 Page 15 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s Acquisition VetXX In December 2007 we announced the acquisition of VetXX for The business has now been successfully integrated into Dechra £65.2 million including expenses. The acquisition was made on a and expected synergies have been realised by the full integration cash and debt-free basis and was funded by way of a new debt of their UK sales and marketing function into our existing facility and the placing and open offer of 11,624,544 new operation and by the closure of their administration head office in ordinary shares, raising £33.7 million net of expenses. Copenhagen. The French subsidiary has already been rebranded VetXX is a developer, producer and marketer of companion animal veterinary products to veterinary professionals in ten European countries. The acquisition has provided Dechra with a strong European footprint and has materially increased Dechra’s range of licensed veterinary products. It also provides Dechra with a sales and distribution network to market the enlarged product range and future developed products to veterinary practices and wholesalers within eight European countries in addition to the UK and Ireland in which Dechra already operated. as Dechra with the remainder of the organisation being rebranded within the next six months. Further information is provided on the enlarged sales and marketing operation later in this review. www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 15 15400DECHRA:Layout 1 9/9/08 17:37 Page 16 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Directors’ Business Review Pharmaceuticals Division Our Pharmaceuticals Division comprises Dechra Veterinary Products Europe (“DVP EU”), Dechra Veterinary Products USA (“DVP USA”), and Dales Pharmaceuticals. Dechra Veterinary Products EU DVP EU, located in Shrewsbury, England and Uldum, Denmark, employs 212 people. The business markets and sells our own branded, licensed veterinary pharmaceuticals within ten European countries and manages the relationships with our worldwide marketing partners. Sales Personnel France UK Spain Denmark Sweden 16 14 8 5 4 Holland Norway Finland Portugal Eire 4 4 3 1 1 The marketing department, which consists of over 20 people, is coordinated from the UK; however, all major territories have their own local marketing expertise. In addition to the pharmaceuticals outlined earlier in this report which represent 53% of annualised divisional sales, the team also markets the veterinary exclusive range of specialist diets Specific, which represents 26% of annualised divisional turnover, and also a range of unlicensed products branded as the Care range, which represents 4%. “DVP EU, located in Shrewsbury, England and Uldum, Denmark, employs 212 people. The business markets and sells our own branded, licensed veterinary pharmaceuticals within ten European countries and manages the relationships with our worldwide marketing partners.” There are two main pet diet product ranges which are sold exclusively through veterinary practices, these being Specific for dogs and Specific for cats. Each range offers tailored life- stage and therapeutic diets. The therapeutic products represent approximately 70% of diet sales and seek to address issues such as diabetes, arthritis, urinary, kidney, liver and heart problems. The Care range has two key products, CleanAural and Neutrale™. CleanAural is a no sting ear cleaner for frequent use for ears producing excess wax. Neutrale is a range of specialist shampoos for skin conditions in dogs. Additionally, we have a number of marketing agreements: with Virbac Inc. to market Thyroxyl within the UK and Ireland; with Eurovet to market Domidine®, Sedator® and Atipam in the UK and Ireland; with Biopure to market Oxyglobin® within the EU and with Peptech to market Ovuplant in the EU. DVP EU management team DVP UK management team Chris Kingdom Sales Director Bob Parmenter Steve Dewar Operations Director Operations Director Managing Director Left to right: Giles Coley European Pharmaceutical Sales & Export Director, Ed Torr Managing Director, Carsten Jeppesen Chief of Logistics, Roeland Meijers Senior Vice-President, Jørgen Eker Chief Financial Officer Mark Sallin Finance Director Gwenda Bason Marketing Director 16 stock code: DPH 15400 09/09/2008 Proof 8 1540 (cid:1) (cid:1) 15400DECHRA:Layout 1 9/9/08 17:37 Page 17 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s A number of our products are also marketed by partners Sales and Export Director. The remainder of the DVP EU worldwide into important territories including Germany, Italy, operating board comprises three of the retained key VetXX staff, Canada, Australia and Japan. We have also started to develop Carsten Jeppesen, Chief of Logistics, Jørgen Eker, Chief Financial Officer, and Roeland Meijers, Senior Vice-President who has direct responsibility for the Specific diet range. We are also pleased to have retained the VetXX Country Managers who form the basis of the senior management team. Bob Parmenter, who has over 40 years’ veterinary industry experience and an excellent track record, has been appointed as Managing Director for the UK which is currently the largest territory and represents 30% of the Pharmaceutical Division’s annualised sales. relationships and have initial sales within Eastern Europe. Since the acquisition of VetXX we have transferred Equipalazone Powder from our previous marketing partner into Dechra livery and are successfully marketing the product through our subsidiary in France and through a new partner in Germany. Services A number of new and existing Dechra products will be launched into our EU subsidiaries throughout the next 12 months. DVP EU, as outlined in the Financial Review, grew strongly throughout the financial year. Both the existing UK and export businesses and the six months’ revenue from VetXX contributed to this performance. Following the acquisition of VetXX, a number of management changes have been implemented. Ed Torr, previously the Group’s Development Director and Main Board member, has been appointed Managing Director of DVP EU. Giles Coley, previously DVP UK Country Manager, is now European Pharmaceutical Pharmaceuticals Pharmaceuticals www.dechra.com stock code: DPH 15400 Services 09/09/2008 Proof 8 17 15400DECHRA:Layout 1 9/9/08 17:38 Page 18 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Directors’ Business Review Pharmaceuticals Division continued Dechra Veterinary Products USA This business, employing seven people, was established in 2005 and is located in Kansas City, USA, a city in which a significant number of US animal health businesses are located. The business currently markets seven licensed veterinary ophthalmic, otic and dermatological products; the supply and marketing rights of this range were acquired in May 2007. We have successfully increased market share and sales of these products throughout the year. During the year we have also secured two new products through partnerships: with Biopure to market Oxyglobin, a companion animal blood substitute, and with Orthogen to market Irap, an orthopaedic treatment for horses. The imminent launch of Vetoryl and Felimazole into the US market will significantly increase our US revenues; therefore, we are in the process of strengthening our operation. A new Head of Technical Services, Dr Dana Fertig, a Sales and Marketing Director, Doug Hubert, and an Equine Specialist, Bryan Toliver, have already been appointed. We are now in the process of recruiting a sales team with a further eight appointments anticipated prior to the end of the calendar year. The administration and technical services departments will also be strengthened. Logistics and accounts are currently outsourced with established partners. Services The US market remains strategically significant to Dechra, being approximately ten times the size of our current largest market, the UK. New products are under development and opportunities are being reviewed to further strengthen our US portfolio. “We have received notification of compliance for all parts of the Vetoryl USA application from the FDA. An administration process has now commenced and the product will be launched at the North American Veterinary Conference in Florida in January 2009.” Pharmaceuticals Pharmaceuticals “The US market remains strategically significant to Dechra, being approximately ten times the size of our Services current largest market, the UK. New products are under development and opportunities are being reviewed to further strengthen our US portfolio.” Pharmaceuticals 18 stock code: DPH DVP USA management team Chris Huettner Customer Service and Office Manager Mike Eldred Steve Dewar Operations Director Operations Director President Chip Whitlow Sales Manager Doug Hubert US Sales and Marketing Manager Dana Fertig Veterinary Technical Services Manager Bryan Toliver Equine Business Manager 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:38 Page 19 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s Dales party business continues to be attracted from new and existing Dales, located in Skipton, England and employing 193 people, is customers. The business has also continued to benefit from a fully Medicines and Healthcare Regulatory Agency (“MHRA”) greater efficiency and productivity as we build upon the quality approved pharmaceutical manufacturer with multi-competence in systems implemented last year. This had been enhanced by the both scale and dose form. Dales manufactures the vast majority of successful “go live” of a new IT platform, Oracle. The our own branded licensed pharmaceutical products, which are management team has been strengthened with the appointment marketed through DVP, but also derives approximately 50% of of a new Quality Director, Andrew Parkinson, and a revenues from third party toll manufacture, predominantly for Manufacturing Manager, Ernest Ukachu. human pharmaceutical companies. This is Dechra’s only significant source of revenue not derived from the veterinary market. Pharmaceutical manufacturing is also carried out at the VetXX Uldum, Denmark facility where Malaseb, the Care range and a number of minor products are currently manufactured. Potential Dales has had an excellent year with increased production of our synergies with Dales and improved capacity utilisation own licensed products and from growth in third party sales. Third opportunities are being explored. “Dales has had an excellent year with increased production of our own licensed products and from growth in third party sales.” Dales management team Left to right: Gareth Davies Sales & Marketing Director, Steve Dewar Operations Director, Mike Annice Managing Director, Kirsty Ireland Finance Director, Andrew Parkinson Quality Director 19 www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 15400DECHRA:Layout 1 9/9/08 17:38 Page 20 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Directors’ Business Review Services Division Our Services Division comprises National Veterinary Services, NationWide Laboratories and Cambridge Specialist Laboratory Services. NVS NVS, located in Stoke-on-Trent, England, employing 473 people, is the UK market leader, as measured in terms of market share, in the supply and distribution of veterinary products to veterinary practices and other approved outlets. NVS competes with two major full line competitors on the UK mainland, Centaur Services and Dunlop, both of which are under American ownership. NVS stocks a range of over 14,000 products including pharmaceuticals, pet products, consumables and accessories. NVS has also developed a range of IT solutions for veterinary practices which are branded Vetcom®. Vetcom’s principal objective is to collect orders electronically. Approximately 83% of NVS orders arrive automatically with no human input required. This is considered to be a major advantage to our customers and also contributes to our low operating costs as, with over 35,000 invoiced lines per working day, significantly increased numbers of people would be required to handle this business manually. NVS distributes to 1,800 customers daily utilising its own fleet of vans and HGVs. The centralised inventory in Stoke-on-Trent is picked and packed throughout the afternoon and evening and then NVS Network Larkhall Carlisle Wetherby Stoke-on-Trent Mildenhall Gloucester Hertford Bracknell Swanscombe Tiverton distributed overnight to trunking depots by HGVs on large trailers. NVS services both companion animal and livestock practices and Van drivers are then employed locally at these depots who agricultural merchants. As with other divisions within Dechra, distribute the goods to the customers. NVS operates on a NVS benefits from the good year-on-year growth in the veterinary Sunday until Thursday shift which allows customers to place market which has seen growth of approximately 10% in the year orders up until 7.00 pm Monday to Thursday and any time over (see The Business and its Markets). the weekend up to 10.00 am on Sunday for a next working day delivery. Services NVS management team Martin Riley Managing Director Tony Scott Operations Director Caitrina Harrison Sales & Marketing Director Dan Shipman Finance Director Colin Higham Buying Director 20 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:38 Page 21 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s “NVS is the UK market leader, as measured in terms of market share, in the supply and distribution of veterinary products to veterinary practices and other approved outlets.” A strong sales performance from NVS, which has outperformed with whom NVS has good long term relationships. Whilst NVS the market, can be attributed to the successful cold chain has been subject to significant fuel and utility cost increases, distribution of Blue Tongue vaccine, volume growth from existing improved efficiency, solid control of discounts offered, good cost practices and groups and by new business gains. The market control and market share gains have all contributed to the has seen further consolidation of veterinary practices by groups performance. www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 21 15400DECHRA:Layout 1 9/9/08 17:38 Page 22 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Directors’ Business Review Services Division continued “NWL operates out of three locations, Poulton-le-Fylde, Leeds and Swanscombe, and employs 80 people.” Laboratories NWL operates out of three locations, Poulton-le-Fylde, Leeds and Swanscombe, and employs 80 people. As first referral veterinary laboratories, they provide histology, pathology, haematology, chemistry and microbiology services to veterinary practices. Whilst a certain amount of simple chemistry is performed at veterinary practices, nearly all veterinary practices will outsource more advanced analytical tests, often requiring expert interpretation of results. We consider NWL to offer the highest level of service within this sector. We were the first veterinary laboratory to gain UKAS (United Kingdom Accreditation Service) approval. NWL also offers other services such as Allervet, a pet and equine allergy testing programme. Allervet revenues have exceeded our expectations during the year. 22 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:38 Page 23 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s Leeds Veterinary Laboratories, which was acquired in April 2007, CSLS, located in Sawston, England, employs seven people. It has now been fully integrated into NWL. We have invested in operates as a first and second referral laboratory, with a key area LVL’s premises in increasing laboratory capacity and also in new of expertise being endocrinology. The second referral work, i.e. equipment. Overall, the laboratory revenues have seen a good increase; however, the increased infrastructure costs have resulted in a profit performance slightly below last year. providing services for NWL and some of NWL’s competitors, is mainly derived from a key area of specialisation in radio-immuno assays. The business also provides precise assays which support the dosage regimes and patient monitoring of our key products, Vetoryl Capsules and Felimazole Tablets. CSLS has increased sales and improved profitability during the year. Laboratories management team Services 23 Left to right: Dr Peter Graham Managing Director, Jamie Whitwam Food Microbiology and Business Development Manager www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 15400DECHRA:Layout 1 9/9/08 17:38 Page 24 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Directors’ Business Review Key Performance Indicators Revenue — pharmaceuticals — services — inter-division Total revenue Adjusted operating profit before product development cost Product development cost Adjusted operating profit Adjusted operating margin — Before product development cost — After product development cost Cash conversion rate Gearing (i) Return on capital employed (pre-tax) Revenue per employee Inventory days (ii) Receivables days (iii) 2008 £’000 54,302 259,363 (9,294) 304,371 21,550 (2,408) 19,142 7.1% 6.3% 114% 27.3% 23.3% 342 43 39 2007 £’000 26,648 234,207 (7,052) 253,803 15,521 (1,645) 13,876 6.1% 5.5% 103% (3.5%) 37.5% 340 42 40 Financial Ratios Adjusted interest cover Effective tax rate Dividend cover (before amortisation of acquired intangibles) 8.4 times 28.9% 2.0 times 11.3 times 29.9% 2.2 times (i) Gearing is calculated by dividing net borrowings by the sum of Equity Shareholders’ funds and net borrowings. (ii) Inventory days are calculated by determining the number of days’ purchases, counting back, included in the year end inventory figure. (iii) Receivables days are calculated by determining the number of days’ revenue (adjusted for value added tax), counting back, included in the year end receivables figure. Review Of Operating Performance Group Performance The financial year was an exciting one for the Group. Our core businesses produced robust growth and as outlined earlier in this report the Group was significantly enhanced by the acquisition of VetXX in January 2008. The following review focuses on adjusted figures (before VetXX rationalisation costs and amortisation of acquired intangibles) as the Directors believe that these give a clearer indication of underlying performance. Group revenue increased by 19.9% to £304.4 million while adjusted operating profit, at £19.1 million, was ahead of last year by 38%. Adjusted pre-tax profit was £16.9 million, 33.3% up on last year. Pharmaceuticals Division Revenue Own branded pharmaceuticals Diets Third party contract manufacturing Instruments, consumables and equipment Total revenue Adjusted operating profit Adjusted operating margin 2008 £’000 2007 £’000 32,136 9,915 16,599 — 8,677 6,232 3,574 54,302 10,765 19.8% 3,817 26,648 6,102 22.9% 24 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:38 Page 25 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Services Division Revenue Veterinary wholesaling Laboratories Total revenue Adjusted operating profit Adjusted operating margin 2008 £’000 2007 £’000 253,973 229,840 5,390 4,367 259,363 234,207 10,693 4.1% 9,525 4.1% Revenue from the Pharmaceuticals Division grew by 103.8% to Our veterinary wholesaling business, NVS, grew revenue by 10.5% £54.3 million, of which £19.0 million was contributed by VetXX. compared to last year. This was ahead of GB market growth as Within own branded pharmaceuticals, our key products Vetoryl, Felimazole and Equipalazone continued to show forward momentum. measured by GfK of 10.0%. Continued cost efficiencies meant that NVS increased its operating profit by 14.0%. Global revenue from Vetoryl was £5.1 million, 13.1% up on last year Revenue from our Laboratories business grew by 23.4% over last whilst Felimazole grew by 15.6% to £3.9 million and Equipalazone year, including a full year contribution from LVL. However, increased grew by 12.5% to £3.0 million. infrastructure costs meant that the operating profit achieved was Of our other key products, the Vetivex range grew by 13.5% to £1.7 slightly below last year’s level. million whilst Canaural, Fuciderm and Fucithalmic acquired with VetXX Unallocated Central Costs made revenue contributions of £1.9 million, £1.4 million and £1.4 Unallocated central costs increased by £0.5 million to £2.3 million. million respectively in the period since acquisition. This increase was due to salaries and an increase in the charge Revenue from our US operation grew from £374,000 to £4.6 million relating to share-based payments. with a full year of marketing the Pharmaderm range of products. Return on Capital Employed Revenue from instruments, consumables and equipment fell by 6.4% to £3.6 million. This reflects our decision to reduce the range of products sold and focus on the key brands. In the period prior to acquisition, the VetXX Specific range had been in long term decline. However, in the six months since acquisition, growth of 4.6% was achieved compared to the equivalent period last year. Revenue from third party contract manufacturing grew by 39.2% to £8.7 million with the benefit of new contracts being realised. Product development expenditure charged to the income statement was £2.4 million, a 46.4% increase compared to last year. A further £1.3 million of development expenditure was capitalised giving a total cash spend for the year of £3.7 million compared to £3.3 million last year. In future periods, a greater proportion of expenditure will be charged to the income statement rather than being capitalised. Adjusted operating profit for the division increased by 76.4% from £6.1 million to £10.8 million, of which £2.7 million was contributed by VetXX. Return on capital employed reduced from 37.5% to 23.3%. This was due to the acquisition of VetXX and the significant increase in the asset base arising therefrom. Net Finance Expense The adjusted net finance expense increased from £1.23 million to £2.29 million. This was a result of the increased borrowing levels taken on in January 2008 to partially finance the acquisition of VetXX. The adjusted net finance expense was covered 8.4 times by adjusted operating profit (2007: 11.3 times). Taxation The effective tax rate was 28.9%, slightly lower than the standard UK rate for the year of 29.5% with the reduction in the UK corporation tax rate from 30% to 28% being effective for three months of the financial year. The main item contributing to this undercharge was profits from our US subsidiary which were offset by trading losses brought forward. O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 25 15400DECHRA:Layout 1 9/9/08 17:38 Page 26 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Directors’ Business Review Earnings per Share and Dividend Equity Shareholders’ funds have more than doubled compared to the Adjusted earnings per share increased by 23.2% to 20.81p. equivalent point last year. This reflects the issue of new equity and The Board is proposing a final dividend of 5.50p per share which, when added to the interim dividend of 2.75p per share already paid, gives a total dividend for the year of 8.25p, a 10.0% increase over the 2007 figure of 7.50p. This takes into account the new shares issued to partially fund the VetXX acquisition. retained profit for the year. The major additions to intangible assets and property, plant and equipment related to the VetXX acquisition. Of the £4.0 million increase in working capital, £3.0 million was due to VetXX. Inventory days were 43, slightly behind the 42 days for last year. Receivable The total dividend is covered 2.0 times by profit after tax after adding days showed an improvement from 40 days to 39 days. back amortisation of acquired intangibles (2007: 2.2 times). Cash Flow The Group achieved a cash conversion rate (defined as cash generated from operations as a percentage of operating profit) of The large increase in the deferred tax liability relates to the intangible assets recognised on the acquisition of VetXX. The increased borrowings taken on to partially fund the VetXX 114.1% (2007: 103.5%). If amortisation of acquired intangibles is acquisition meant that there were net borrowings at 30 June 2008 of added back to operating profit, then the conversion rate was 94.2% £27.0 million compared to net cash at 30 June 2007 of £1.0 million. (2007: 103.3%). During the year, the Group made a £1.5 million As normal, due to the working capital cycle of the Group, net working capital investment in the US subsidiary and also increased borrowings will increase at the next reporting date of 31 December the inventory of Vetoryl Capsules ahead of the US launch. 2008. The most significant cash outflow during the year was the acquisition of VetXX. The total amount paid (including expenses and repayment of VetXX’s existing borrowings) was £65.2 million. This was funded by the issue of 11,624,544 new ordinary shares raising £33.7 million net of issue costs and a new bank facility. Risks and Uncertainties Like every business, the Group faces risks and uncertainties in both its day-to-day operations and the achievement of its long term strategic objectives. The Group has well-established procedures for identifying and controlling risk. Significant risks and procedures to control them are reviewed at Divisional Board Meetings on a monthly Financial Position at the end of the Year basis and by the Main Board on a quarterly basis. Non-current assets Intangible assets Property, plant and equipment Deferred tax assets Total non-current assets Working capital Current tax liability Deferred tax liabilities Net (borrowings)/cash 2008 £’000 2007 £’000 The main potential risk areas identified by the Directors are as follows: Regulatory 90,375 13,089 Like the human pharmaceutical industry, the veterinary industry is 8,224 1,053 99,652 17,284 (2,824) (15,316) (26,997) 5,739 — 18,828 13,264 (2,464) (147) 1,027 tightly regulated. Our major operational sites are required to be licensed either by the MHRA or the Home Office, and our products by the Veterinary Medicines Directorate (“VMD”) and the equivalent overseas agencies. Inspections by these bodies are carried out regularly. All of our new pharmaceutical products are required to be approved for sale by the relevant Regulatory Authority in each territory. Equity Shareholders’ funds 71,799 30,508 26 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:38 Page 27 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s The main regulatory risks faced by the Group are: General Market Conditions Failing to operate our businesses in accordance with their licenses resulting in disruption to operations; The overall veterinary market has shown robust growth for many years. However, there have in the past been periods when the market has suffered a significant slowdown. This can be caused by external Potential reclassification of major pharmaceutical products from “shocks” such as BSE or general economic conditions. Our past prescription only to a lower category causing loss of revenue; experience has been that these slowdowns have been short term in Failure to satisfy the regulatory authorities on new product submissions causing product launches to be delayed or aborted; nature. However, given the relatively high operational gearing of NVS, in particular, any future market slowdown could have a material effect Changes to laws or adverse reactions causing threat to existing on short term profitability. products. Competitor Products Although there is no evidence as yet that the current general economic slowdown has significantly impacted the veterinary market, such an impact cannot be ruled out if the economic downturn is The launching of competitor products against our key pharmaceutical brands could have an impact on revenues. One such competitor product has been launched during the last financial year. particularly severe. Summary of Risks Corporate Veterinary Practices The growth of corporate veterinary practices has been a feature of the veterinary market over the last few years. Most corporates currently trade with NVS. The rise of corporate practices provides opportunities and risks to the Group. The Group has ongoing and embedded procedures in place to control and, as far as possible, mitigate against the above risk factors. It must be emphasised, however, that these procedures can only control rather than eliminate risk. The opportunities arise when a corporate group acquires veterinary practices not currently trading with NVS. The risks arise from the potential increased buying power of corporates causing pressure on gross margin. Additionally, a payment default could cause a material Ian Page Chief Executive impairment charge. Simon Evans Group Finance Director www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 27 (cid:1) (cid:1) (cid:1) (cid:1) 15400DECHRA:Layout 1 9/9/08 17:38 Page 28 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Board of Directors Michael Redmond Ian Page Simon Evans Ed Torr Neil Warner Malcolm Diamond Executive Directors Non-Executive Directors Ian Page Chief Executive Aged 47, Ian joined the Group’s principal trading subsidiary NVS at its formation in 1989. He was also part of the MBO in 1997. In 1998, he was appointed Managing Director at NVS. He joined the Board in 1997 and became Group Chief Executive in November 2001. Ian has played a key role in the development of the Group’s growth strategy. Prior to joining the Company, he gained extensive knowledge and experience through various positions he held within the pharmaceutical and veterinary arena. Simon Evans BCom, ACA Group Finance Director Aged 44, Simon qualified as a Chartered Accountant in 1988 and spent seven years at KPMG. He joined NVS in 1992 and was appointed Group Finance Director in 1997 following the MBO. He played a major role in the management buy-out of the Group from Lloyds Chemists in 1997 and its subsequent listing on the London Stock Exchange in 2000. Ed Torr Managing Director of Dechra Veterinary Products Europe Aged 48, Ed joined NVS as Sales Director in 1997 and was appointed Managing Director of Arnolds and Dales in 1998. He was appointed Development Director in 2003 and Managing Director of Dechra Veterinary Products Europe in January 2008, following completion of the acquisition of VetXX. Prior to joining the Group, he worked within the animal healthcare sector for a number of companies including ICI, Wellcome and Alfa Laval Agri. Michael Redmond †• Non-Executive Chairman Aged 64, Michael joined the Group as a Non-Executive Director in April 2001, and was appointed Chairman in July 2002. He has extensive pharmaceutical industry experience having begun his career with Glaxo and through senior positions with Schering Plough Corporation. In 1991, he joined Fisons plc and in 1993 was appointed to the Board as Managing Director of the Group’s Pharmaceuticals Division. Michael left Fisons in 1995 following its takeover by RPR. Michael is Chairman of the Nomination Committee. Malcolm Diamond MBE *†• Senior Non-Executive Director Aged 59, Malcolm joined the Board in August 2000. He is also a Non- Executive Director at the Unicorn AIM VCT 11 Investment Fund. His other Directorships include Chairman at CWO Limited and My Marketing Limited. In addition, Malcolm advises a number of private businesses on their strategic planning, management development programmes and marketing initiatives. Malcolm was previously Chief Executive at Trifast plc, a role he held for 18 years. Malcolm is Chairman of the Remuneration Committee. Neil Warner BA, FCA, MCT *†• Non-Executive Director Aged 55, Neil joined the Board in May 2003. He is Finance Director at Chloride Group PLC, a position he has held since 1997. Prior to this, he spent six years at Exel PLC (formerly Ocean Group PLC and acquired by Deutsche Post in December 2005) where he held a number of senior posts in financial planning, treasury and control. He has also held senior positions in Balfour Beatty PLC (formerly BICC Group plc), Alcoa and PricewaterhouseCoopers. Neil is Chairman of the Audit Committee. * Member of the Audit Committee † Member of the Remuneration Committee • Member of the Nomination Committee 28 stock code: DPH 15400 09/09/2008 Proof 8 154 15400DECHRA:Layout 1 9/9/08 17:38 Page 29 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Senior Management Martin Riley Mike Eldred Mike Annice Peter Graham Susan Longhofer Barbara Johnson Zoe Bamford Senior Management Martin Riley Managing Director, National Veterinary Services Aged 44, Martin was appointed Managing Director of National Veterinary Services in 2005. A graduate of the Welsh Agricultural College in Aberystwyth, Martin has extensive knowledge of the animal healthcare and veterinary sectors. Before joining the Group, he previously held several senior positions over an 18 year period with the pharmaceutical manufacturer Merial Animal Health. Mike Eldred BA, MBA President, US Operations, Dechra Veterinary Products Aged 38, Mike was appointed in November 2004 to head up the Group’s sales and marketing drive in the United States. He has over 12 years’ professional experience in the US animal health sector, having held senior positions in business development, sales and operations at Virbac Corporation, and international marketing and operational positions at Fort Dodge Animal Health. Mike began his career with Sanofi Animal Health where he managed the pharmaceutical and biological production planning activities. Mike Annice BSc (Hons), MRPharmS Managing Director, Dales Pharmaceuticals Aged 48, Mike graduated from The School of Pharmacy at Aston University in 1980. Prior to joining Dales in 1990 as Site Manager, he worked within the Hospital Pharmacy Service, Glaxo and SSS International (formerly Cupal Pharmaceuticals). He was appointed Technical Director at the time of the Group’s MBO. Mike was appointed Managing Director at Dales in March 2002. Dr Peter Graham BVMS, PhD, CertVR, DipECVCP, MRCVS Managing Director of NationWide Laboratories and Cambridge Specialist Laboratory Services Aged 40, Peter was appointed Managing Director of NationWide Laboratories and Cambridge Specialist Laboratory Services in 2003. Peter graduated from the University of Glasgow Vet School in 1989, where he remained as Small Animal House Physician and Research Scholar until 1995. During this period he was awarded the RCVS Certificate in Veterinary Radiology and a PhD on the Epidemiology and Management of Canine Diabetes Mellitus. He contributed to the initial commercialisation of biochemistry and endocrinology lab services at the University of Glasgow. Between 1995 and 2002, Peter was Assistant Professor at the world’s largest specialist veterinary endocrinology laboratory in Michigan State University, USA, leading it as Section Chief from 2000. He was awarded Diplomate of the European College of Veterinary Clinical Pathologists in 2002. Dr Susan Longhofer DVM, MS, DipACVIM Product Development and Regulatory Affairs Director Aged 50, Susan joined the Group in June 2005. She has 18 years’ industry experience in development and worldwide registration of animal health pharmaceuticals, having worked for multinational corporations including Virbac Corporation, Heska Corporation and Merck Research Laboratories. Her veterinary degree is from Texas A&M University and her MS is from the University of Wisconsin, Madison. She was awarded Diplomate status in the American College of Veterinary Internal Medicine in 1992. She has held a number of Academic and Professional Honours including membership on the Board of Directors of the American Heartworm Society and the Executive Council of the American Academy of Veterinary Pharmacology and Therapeutics. Barbara Johnson Chartered MCIPD Group HR Director Aged 47, Barbara joined the Group in April 2008. She has 19 years’ human resources management experience within the food and drink industry covering manufacturing, retail, wholesale and distribution. Barbara has previously worked for Allied Domecq plc, Geest plc and most recently Nicholl Food Packaging Limited. Prior to joining private industry, Barbara served for 10 years in the British Army. Company Secretary Zoe Bamford LLB (Hons) Company Secretary and Solicitor Aged 34, Zoe was appointed as Company Secretary in July 2007. She qualified as a solicitor in April 2000. Prior to joining the Group she worked at Eversheds LLP and Brammer plc. www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 29 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s 15400DECHRA:Layout 1 9/9/08 17:38 Page 30 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Directors’ Report The Directors present their report and audited financial statements for the year ended 30 June 2008. Principal Activity, Business Review and Future Developments The Company acts as a holding company to all the Group’s subsidiaries. The Group itself develops, markets and sells veterinary pharmaceuticals and specialist pet diets into international companion animal markets. The Group also distributes veterinary products, including pharmaceuticals, specialist pet diets and instruments to veterinary practices within the United Kingdom. Additionally, the Company manufactures pharmaceuticals for the Group and for third parties and also provides diagnostic services to veterinary practices within the United Kingdom. The Chairman’s Statement and the Directors’ Business Review on pages 8 to 27 provide a review of the Group’s business, likely future developments and includes information in respect of: Development and performance of the Group in the year; Principal risks and uncertainties faced by the Group; and Key Performance Indicators used to measure the Group’s performance. Details of the Group’s policy in relation to its employees, health, safety and environment are disclosed on pages 45 and 46, and details of the Group’s policies in relation to Corporate Governance are disclosed on pages 33 to 36. Share Capital The authorised share capital of the Company as at 30 June 2008 was £1,000,000 divided into 100,000,000 ordinary shares of 1p each. As at the end of the financial year, 65,241,909 fully paid ordinary shares were in issue which included 813,666 ordinary shares issued during the year in connection with the exercise of options under the Company’s share option schemes. Each share carries the right to one vote on a poll at a general meeting of the Company and are all listed on the London Stock Exchange. The rights and obligations attaching to the Company’s shares are contained within the Articles of Association (see following page), a copy of which can be obtained by writing to the Company Secretary. There are no restrictions on transfer or limitations on the holding of shares in the Company, nor are there any requirements to obtain prior approval in respect of any transfers of the shares. At the Annual General Meeting of the Company held on 17 October 2007, the Company was authorised to purchase up to 5,280,370 of its ordinary shares, representing 10% of the issued share capital of the Company at 30 June 2007. No shares were purchased under this policy during the financial year. A resolution will be put to Shareholders at the forthcoming Annual General Meeting to renew this authority for a further period of one year. Results and Dividends The results for the year and financial position at 30 June 2008 are shown in the consolidated income statement on page 50 and balance sheet on page 51. The Directors recommend the payment of a final dividend of 5.50p per share which, if approved by Shareholders, will be paid on 12 December 2008 to Shareholders registered at 14 November 2008. An interim dividend of 2.75p per share was paid on 11 April 2008, making a total dividend for the year of 8.25p (2007: 7.50p). The total dividend payment is £5,368,000 (2007: £3,957,000). Directors The Constitution of the Board and of its Committees, together with biographical notes on the Directors, is shown on page 28. Details of Directors’ attendance at Board and Committee meetings and a statement on Board Evaluation is set out in the Corporate Governance Report on pages 33 to 36. The Company Articles of Association require one-third of the Board to retire by rotation at the Annual General Meeting and also if they have held office for more than 36 months since appointed or last elected. Therefore, Ian Page and Neil Warner retire by rotation and, being eligible, offer themselves for re-election. Further detail in respect of the proposed re-elections can be found in the enclosed Circular to Shareholders. The interests of the Directors in the share capital of the Company are shown in the Remuneration Report on pages 38 to 44. During the year no Director had a disclosable material interest in any contract or arrangement with the Company or any of its subsidiaries. Information in relation to the Directors’ remuneration is disclosed in the Remuneration Report on pages 38 to 44. The Articles of Association state that a Director may be appointed by an ordinary resolution of the Shareholders or by the Directors, either to fill a vacancy or as an addition to the existing Board but so that the total number of Directors does not exceed the maximum number of Directors allowed pursuant to the Articles of Association. The maximum number of Directors currently allowed pursuant to the Articles of Association is ten. The Articles of Association also state that the Board of Directors is responsible for the management of the business of the Company and in doing so may exercise all the powers of the Company subject to the provisions of relevant legislation and the Company’s constitutional documentation. The powers of the Directors set out in the Articles of Association include those in relation to the issue and buy-back of shares. 30 stock code: DPH 15400 09/09/2008 Proof 8 1540 (cid:1) (cid:1) (cid:1) 15400DECHRA:Layout 1 10/9/08 12:45 Page 31 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Articles of Association Details of a resolution to amend the Articles of Association are included in the Circular to Shareholders. A copy of the Articles of Association detailing the proposed amendments will be available for inspection at Hewitt New Bridge Street, 6 More London Place, London, SE1 2DA during normal business hours from 19 September until the date of the Annual General Meeting on 7 November 2008. A copy will also be available at the Annual General Meeting. Political and Charitable Contributions Charitable donations made during the year amounted to £2,040 (2007: £750). No political donations were made during the year (2007: Nil). Research and Development The Group has a structured research and development programme with the aim of identifying and bringing to market new pharmaceutical products. Investment in research and development is seen as key to further strengthen the Group’s competitive position. The expense on this activity for the year ended 30 June 2008 was £2,408,000 (2007: £1,645,000) and a further £1,331,000 less £123,000 amortisation (2007: £1,680,000 less £52,000 amortisation) was capitalised as development costs. Employees The Group has a policy of offering equal opportunities to employees at all levels in respect of conditions of work. Throughout the Group it is the intention of the Directors to provide possible employment opportunities and training for disabled people and employees who become disabled, having due regard to aptitude and abilities. Further details can be found in the Social, Ethical and Environmental Responsibilities Statement on pages 45 and 46. Acquisitions On 15 January 2008 the Group successfully completed the acquisition of VetXX Holdings A/S for a total consideration of £65.2 million (including expenses). VetXX Holdings A/S is based in Denmark and operates in nine other European countries, namely Norway, Finland, Sweden, Holland, Spain, Portugal, France, Ireland and the UK. More information in relation to the acquisition and its integration within the Group can be found in the Business Review on pages 10 to 23. Suppliers The Company does not follow any code of practice or standard regarding the payment of suppliers but seeks to agree the terms of payment with suppliers prior to the placing of business and it is the Company’s policy to settle liabilities by the due date. At 30 June 2008, the Group had an average of 73 days (2007: 74 days) purchases outstanding in creditors. The Company had an average of nil days (2007: nil days) purchases outstanding in creditors. Significant Agreements The Company has entered into a number of significant agreements which ordinarily would be terminable upon a change of control of the Company, such as: — Banking facilities agreement; and — Various distribution agreements. Substantial Shareholdings In accordance with the Disclosure Rules and Transparency Rules of the Financial Services Authority, as at 26 August 2008, the Company had been notified of the following interests exceeding the 3% notification threshold: Schroder Investment Management Legal & General Investment Management Rathbone Unit Trust Management BlackRock Investment Management (UK) Standard Life Investment Management Insight Investment Management Invesco Asset Management No. of Shares % of Shares Held 8,147,749 5,053,820 4,664,601 3,815,060 3,359,279 3,244,427 2,089,080 12.49 7.75 7.15 5.85 5.15 4.97 3.20 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 31 15400DECHRA:Layout 1 9/9/08 17:38 Page 32 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Directors’ Report Audit Information Each of the Directors who held office at the date of the approval of this Directors’ Report confirms that, so far as he is aware, there is no relevant audit information of which the Company’s auditors are unaware, and each Director has taken all the steps that he ought to have undertaken as a Director to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. Auditors A resolution to reappoint KPMG Audit Plc as auditors of the Company and to authorise the Directors to determine their remuneration will be proposed at the forthcoming Annual General Meeting. Statement of Directors’ Responsibilities in respect of the Annual Report and the Financial Statements The statement of Directors’ Responsibilities in respect of the Annual Report and the Financial Statements can be found on page 47. Directors’ and Officers’ Liability The Company maintains an appropriate level of Directors’ and Officers’ insurance whereby Directors are indemnified against liabilities to third parties to the extent permitted by the Companies Act. The Directors also benefited from qualifying third party indemnity provisions in place during the financial year and at the date of this report. A copy of the indemnity provisions will be available for inspection at the Annual General Meeting. Annual General Meeting The 2008 Annual General Meeting of the Company will be held at 9.00 am on 7 November 2008. In accordance with the Combined Code the notice of the meeting together with the Annual Report and financial statements are posted to Shareholders at least 20 working days before the Annual General Meeting. The package sent to Shareholders includes a summary of the business to be covered at the Annual General Meeting. A separate resolution is prepared for each substantive matter. Where a vote is taken on a show of hands, the level of proxies received for and against the resolution and any abstentions are disclosed at the meeting and will be made available as soon as reasonably practicable after the meeting on the Company website at www.dechra.com. The notice of meeting, which includes the special business to be transacted at the Annual General Meeting, is included within the Circular to Shareholders. By order of the Board Zoe Bamford Company Secretary Dechra Pharmaceuticals PLC 2 September 2008 32 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:38 Page 33 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Corporate Governance The Board recognises its accountability to Shareholders and is committed to maintaining high standards of corporate governance. In the opinion of the Directors, the Company has complied throughout the period under review with Section 1 of the 2006 FRC Combined Code on Corporate Governance (the Code) in all aspects. Application of the principles of the Combined Code Section 1 of the Combined Code sets out the main and supporting principles of good governance for companies. The following report details how the Company has applied the principles of Section 1 of the Combined Code to its activities. DIRECTORS The Board The Board is collectively responsible for the success of the Company and provides entrepreneurial leadership within an embedded framework which allows for the ongoing assessment and management of risk. There is a formal schedule of matters reserved to the Board. These include the approval of corporate policies, strategy, plans and budgets, acquisitions and disposals of companies or businesses, major investment and financial decisions and major management or organisational changes. At all Board meetings an agenda is established reflecting the Directors’ responsibilities. This comprises reports from the Chief Executive, Finance Director and Operating Company Directors, reports on the performance of the business, major items of strategic planning, investments and significant policy issues. The Board has formally delegated specific responsibilities to Board Committees, including the Audit, Remuneration and Nomination Committees. The Board will also appoint committees to approve specific processes as deemed necessary. The Board is scheduled to meet eleven times per annum with additional meetings called if necessary, including two meetings where the full year and half year results are dealt with. Attendance at meetings during the year to 30 June 2008 was as follows: Name M Redmond MM Diamond NW Warner ID Page SD Evans ETW Torr Board (11 meetings) Audit (3 meetings) Remuneration (5 meetings) Nomination (1 meeting) 11 11 10 11 11 11 n/a 3 3 n/a n/a n/a 5 5 5 n/a n/a n/a 1 1 1 n/a n/a n/a Note: n/a denotes that the Director is not a member of this committee, but may attend by invitation. The Chairman regularly holds meetings with the Non-Executive Directors without the Executive Directors being present. Led by the Senior Independent Director, the Non-Executive Directors meet without the Chairman present, at least annually, to appraise the Chairman’s performance. Should Directors have any concerns which cannot be resolved about the running of the Company or a proposed action, they have the right to ensure this is recorded in the minutes. Further, on resignation, should a Non-Executive Director have any concerns, the Chairman would invite him to provide a written statement for circulation to the Board. The Company maintains an appropriate level of Directors’ and Officers’ insurance in respect of legal action against Directors. Chairman and Chief Executive There is a clear division of responsibilities between the Chairman and Chief Executive. During the year the Board reviewed and approved new Terms of Reference in respect of the Chairman and the Chief Executive. The Chairman is responsible for the leadership and effective working of the Board and to ensure that each Director, in particular the Non-Executive Directors, are able to make an effective contribution to the Board. The Chief Executive is responsible for the management of the Company, implementing policies and strategies determined by the Board. The Chairman, at the time of his appointment, did meet and continues to meet the independence criteria set out in the Code. His appointment was rigorously reviewed by the Board last year and they considered that he continues to fulfil his role to the highest standard, providing appropriate support and direction to the Company and its Executives. Board Balance and Independence The Board consists of the Non-Executive Chairman, two other Non-Executive Directors and three Executive Directors (including the Chief Executive). Taking into account the provisions of the Code, the Board has determined that each of the Non-Executive Directors is independent and free from any relationships which could compromise their independent judgement. Further, the Board considers it is of sufficient size for the discharge of its duties and that the balance of skills and expertise is appropriate for the requirements of the business. The details of the Board of Directors are shown on page 28 and in the Directors’ Report on page 30. O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 33 15400DECHRA:Layout 1 9/9/08 17:38 Page 34 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Corporate Governance The Board considers MM Diamond to be the Senior Independent Director and he is available to Shareholders if they have concerns which contact through the normal channels have failed to resolve or for which such contact is inappropriate. The Board considers that all the Non-Executive Directors are independent of management and free of any business or other relationship which could materially interfere with or compromise the exercise of their independent judgement. Appointments to the Board The Board has an established Nomination Committee to lead the process for Board appointments and to make recommendations to the Board. The Nomination Committee comprises M Redmond (Chairman), MM Diamond, and NW Warner. The Chairman will not chair the Committee meeting when it is dealing with the appointment of a successor to the Chairman. The Nomination Committee normally meets once a year and its terms of reference are available on the Company website at www.dechra.com. The terms of reference set out the Nomination Committee’s role and the authority delegated to it by the Board. They include the following responsibilities: To oversee the plans for management succession; To recommend appointments to the Board; To evaluate the effectiveness of the Non-Executive Directors; To consider the structure, size and composition of the Board generally. There have been no appointments to the Board during the year to 30 June 2008. Other significant commitments of the Chairman and the Non-Executive Directors were disclosed to the Board before appointment and the Board is notified of any subsequent changes. None of the Executive Directors hold a Non-Executive Directorship. The letters of appointment of the Non-Executive Directors will continue to be available for inspection at the Company’s registered office. Both the letters of appointment of the Non-Executive Directors and the Service Contracts of the Executive Directors will be on display at the forthcoming Annual General Meeting. Information and Professional Development The Directors are supplied in a timely manner with all relevant documentation and financial information to assist them in the discharge of their duties. This includes information on the Company’s operational and financial performance. At least one Board meeting per year is held at one of the Group’s operational sites to enable the Directors to update and maintain their knowledge and familiarity with the Group’s operations. All newly appointed Directors receive an induction programme to the Company including corporate governance training and background to the Company. All Directors are encouraged to keep up to date on all matters relevant to the Group and attend briefings and seminars as appropriate. Each Director is entitled on request to receive information to enable him to make informed judgements and adequately discharge his duties. In addition, all Directors have access to the advice and services of the Company Secretary and senior managers generally, and may take independent professional advice at the Company’s expense in connection with their duties. The Company Secretary is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. Both the appointment and removal of the Company Secretary is a matter for the Board as a whole. The Board has an approved procedure for all Directors to take independent professional advice at the Company’s expense. Performance Evaluation The Board has developed a formal process of reviewing its own effectiveness and the effectiveness of the Board Committees. This is based on a combination of written reviews by individual Directors, discussion with the Chairman and review by the Board as a whole. As part of this process the Board considers the performance of individual Directors. This process has been undertaken during the year. Re-election On appointment, the Directors are required to seek election at the first Annual General Meeting following appointment. One-third of the Board are required to retire from office by rotation at the Annual General Meeting subject to all Directors having submitted themselves for re-election every three years. At the forthcoming Annual General Meeting ID Page and NW Warner retire by rotation in accordance with the Articles of Association. The Board strongly supports their re-election. REMUNERATION Details of Directors’ remuneration are set out in the Directors’ Remuneration Report at pages 38 to 44. This details the Company’s compliance with the Code’s requirements with regard to remuneration matters. The terms of reference of the Remuneration Committee are available on the Company website at www.dechra.com. 34 15400 09/09/2008 Proof 8 1540 (cid:1) (cid:1) (cid:1) (cid:1) 15400DECHRA:Layout 1 9/9/08 17:38 Page 35 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 ACCOUNTABILITY AND AUDIT Financial Reporting The Board seeks to present a balanced and understandable assessment of the Group’s position and prospects, through the Chairman’s Statement, the Directors’ Business Review and the Directors’ Report. The respective responsibilities of the Directors and the auditors in connection with the Financial Statements are explained in the Statement of Directors’ Responsibilities and the Auditors’ Report on pages 47 and 48 respectively. Internal Control The Directors are responsible for maintaining the Group’s system of internal control, and for reviewing its effectiveness. The system of internal control aims to safeguard the Company’s assets, ensure that proper accounting records are maintained, ensure compliance with statutory and regulatory requirements and ensure the effectiveness and efficiency of operations including the assessment and management of risk. The system of internal control is designed to manage rather than eliminate risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance, particularly against material misstatement or loss. The Group has a well-established, ongoing and embedded framework of internal financial and operational control for identifying, evaluating and managing the risks faced by the Group. This framework has been in place throughout the year under review, and has continued up to the date of approval of the Annual Report. In complying with the internal control requirements of the Combined Code, the Directors have taken guidance from the Institute of Chartered Accountants in England and Wales publication “Internal Control: Guidance for Directors on the Combined Code” (the Turnbull Guidance). As a result, the Board prepares and updates a quarterly thorough review of relevant risk areas and systems of internal control. The review is structured by business area and key risk strategy and is based upon a summary of information prepared and reviewed by divisional management on an ongoing basis. The current review was prepared to 30 June 2008. The Group’s key systems of control include: Business Plans Business plans provide a framework from which annual budgets and forecasts are agreed with each business unit, including financial and strategic targets against which business performance is monitored. The plans are reviewed by Executive management, and then by the Board for ultimate approval. Actual performance during the year is monitored monthly against budget, forecast and previous year. Full year forecasts are updated at regular intervals during the year based on trended historical data and realistic forecasts. Investment Approval The Group has clear requirements for the approval and control of expenditure. Strategic investment decisions involving both capital and revenue expenditure are subject to formal detailed appraisal and review according to approval levels set by the Board. Operating expenditure is controlled within each business with approval levels for such expenditure determined by the individual businesses. Management Structure Executive management are responsible for the identification, evaluation and management of the significant risks applicable to their business areas. The risks are assessed on a periodic basis and may be associated with a variety of internal and external sources. The Company and its business units operate control procedures designed to ensure complete and accurate accounting of financial transactions and to limit the loss of assets due to fraud. Measures taken include physical controls, segregation of duties in key areas, and internal reviews and checks. Key functions such as tax, treasury, insurance, legal and personnel are controlled centrally. Audit Committee and Auditors Information relating to the Audit Committee is set out in the Audit Committee Report on page 37. This details the Company’s compliance with the Combined Code’s requirements in respect of audit matters. The terms of reference of the Audit Committee are available on the Company website at www.dechra.com. Responsibility for monitoring the Group’s system of internal control rests with the Board. It is assisted by the Audit Committee, which reviews the interim and annual reports provided to Shareholders, the audit process and the systems of internal control and risk management, the latter by way of consideration of the Board’s updated progress report and action plan regarding internal controls. Whilst the Board recognises this does not constitute an internal audit function, it believes that due to the size of the Group this review provides sufficient comfort as to the controls in place. The Audit Committee reviews the requirement for an internal audit function annually. The Board has reviewed the effectiveness of the Group’s internal control systems for the period from 1 July 2007 to the date of approval of the financial statements which has included quarterly business risk reviews and quarterly internal control reporting. The Board reviews the operation and effectiveness of its control assessment on a regular basis. The external auditors are engaged to express an opinion of the Company’s Annual Report and Accounts. They independently and objectively review management’s reporting of the Group’s consolidated results and financial position. In addition, they review the systems of internal control and the data contained in the Annual Report and Accounts to the level necessary for expressing their audit opinion. O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 35 15400DECHRA:Layout 1 9/9/08 17:38 Page 36 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Corporate Governance continued RELATIONS WITH SHAREHOLDERS Dialogue with Institutional Shareholders Relationships with Shareholders receive high priority and a rolling programme of meetings between institutional Shareholders and Executive Directors is held throughout the year. These meetings are in addition to the annual and interim results presentations and the Annual General Meeting and seek to foster mutual understanding of the Company’s and Shareholders’ objectives. Such meetings are conducted so as to ensure protection of share price sensitive information that has not already been made generally available to the Company’s Shareholders. Similar guidelines also apply to communications between the Company and parties such as financial analysts, brokers and the press. The Company also organises site visits on a periodic basis. Constructive use of the Annual General Meeting All members of the Board usually attend the Annual General Meeting. The Chairmen of the Audit Committee, Remuneration Committee and Nomination Committee will normally be available to answer Shareholders’ questions at that meeting. Notice of the meeting, together with the Annual Report and financial statements, is posted to Shareholders not less than 20 working days prior to the date of the Annual General Meeting. The information sent to Shareholders includes a summary of the business to be covered at the Annual General Meeting, where a separate resolution is prepared for each substantive matter. When a vote is taken on a show of hands, the level of proxies received for and against the resolution and any abstentions are disclosed at the meeting and will be made available as soon as practicable after the meeting on the Company website at www.dechra.com. At the Annual General Meeting there is an opportunity, following the formal business, for informal communications between investors and Directors. Going Concern After consideration of budgets and other financial information, the Directors are satisfied that the Group is in a sound financial position with adequate resources to continue in operation for the foreseeable future. For this reason, the Group’s financial statements have been prepared on the basis that the Group is a going concern. 36 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:38 Page 37 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Audit Committee Report Membership The members of the Audit Committee (the Committee) are currently: NW Warner (Chairman of the Committee) MM Diamond (Senior Independent Director) The Board considers that NW Warner has recent and relevant financial experience gained through his position as Finance Director of Chloride Group PLC, as required by the Combined Code on Corporate Governance. The Company Secretary acts as secretary to the Committee. Responsibilities The main role and responsibilities of the Committee are set out in the written terms of reference which are available on the Company website at www.dechra.com. The main responsibilities are: To monitor the integrity of the financial statements of the Company, reviewing the annual and half year reports in detail to ensure they present a balanced assessment of the Company’s position and prospects which is understandable to Shareholders and potential investors. To review the effectiveness of the Company’s internal controls and risk management systems as described on pages 35 and 36 and, in conjunction with the auditors, consider the accounting policies adopted by the Company. To review the Company’s whistle-blowing arrangements. To oversee the relationship with the external auditors. The Committee makes recommendations to the Board on the appointment of the external auditors, approves their remuneration, monitors their independence and objectivity, and monitors the effectiveness of the audit process and sets the policy for non-audit work. To make recommendations to the Board on the requirement for an internal audit function. In the performance of its duties the Committee had access to the services of the external auditors and is at liberty to obtain outside professional advice as necessary. Further, the external auditors have direct access to the Committee Chairman outside the formal Committee meetings. The Committee monitors and reviews the effectiveness of internal control activities. Given the systems of internal control discussed on page 35, and due to the present size of the Group, the Committee currently believes that an internal audit function is not required. Meetings The Committee met three times during the year, timed to coincide with the financial and reporting timetable of the Company; namely July, August and February. Members’ attendance at the meetings held during the year can be found on page 33. At the meeting in July the Committee considered and agreed with the external auditors the approach and overall scope of the audit to be commenced in respect of the 2007 year end. The Committee also carried out a formal review of its own effectiveness led by the Committee Chairman. A further Committee meeting was held in August which was primarily concerned with a review of the draft financial statements and draft preliminary statement prior to their submission to the Board. The Committee also considered, amongst other matters, a review of internal controls, auditor effectiveness and amendments to the Company’s Whistle-Blowing Policy, a copy of which can be found on the Company website at www.dechra.com. At the meeting in February, in addition to routine matters the Committee also considered the half year results and draft half year announcement. The external auditors attend meetings of the Committee other than when their appointment or performance is being reviewed. The Chief Executive, Chairman, Group Finance Director and other senior finance staff attend as appropriate. The performance, cost and independence of the external auditors is reviewed annually by the Committee, together with a review of the level of service provided by the external auditors to the Group. The Committee has discussions at least once a year with the auditors without the management being present. The scope of the year’s audit is discussed in advance by the Committee and audit fees are reviewed and approved by the Committee. Professional rules require rotation of the Group Audit Engagement Director every five years and this took place during the 2005/2006 financial year. The annual appointment of the auditors by our Shareholders at the Annual General Meeting is a fundamental safeguard but, beyond this, controls are in place to ensure that additional work performed by the auditors is appropriate and subject to proper review as discussed below. Auditor Independence With respect to non-audit assignments undertaken by the external auditors, the Company has developed a policy to ensure that the provision of such services does not impair their independence or objectivity. When considering the use of external auditors to undertake non-audit work, the Chief Executive and Group Finance Director do at all times give consideration to the provisions of the Smith Report with regard to the preservation of independence. The Chief Executive and the Group Finance Director have authority to commission the external auditors to undertake non-audit work where there is a specific project with a cost not exceeding £25,000 and total non-audit fees in any year do not exceed £80,000. This work has to be reported to the Audit Committee at the meeting where the Annual Report is considered. If the cost is expected to exceed the established levels then the prior approval of the Audit Committee is required before the work is commissioned. In all cases, other potential providers are adequately considered. During the current year, the external auditors were commissioned to carry out extensive due diligence, working capital and reporting accountant work in respect of the VetXX acquisition. The external auditors were considered most appropriate to perform this work given both their knowledge of the existing business and the requirement to report on the existing as well as the enlarged Group. The fees paid to the external auditors for this work were in excess of the limits above, and prior Board approval was therefore obtained. The external auditors annually confirm their policies on ensuring audit independence and provide the Committee with a report on their own audit quality procedures. Effectiveness Review During the year, the Committee reviewed its own effectiveness through a process led by the Committee Chairman. The results of the review were advised to the Committee and the Board. Based on the Committee’s review of the performance of the external auditors and on the planning and execution of the annual audit, the Committee has recommended to the Board that a resolution to reappoint KPMG Audit Plc be proposed at the forthcoming Annual General Meeting. NW Warner Chairman — Audit Committee 2 September 2008 www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s 37 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) 15400DECHRA:Layout 1 9/9/08 17:38 Page 38 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Directors’ Remuneration Report The Report is presented in accordance with the relevant provisions of the Combined Code and the Directors’ Remuneration Report Regulations 2002 (the Regulations). The Report is divided into two sections, unaudited and audited information, in accordance with the Regulations. The audited information commences on page 43. The Board is responsible overall for the Group’s remuneration policy and the setting of the Non-Executive Directors’ fees, although the task of determining and monitoring the remuneration packages of the Executive Directors and agreeing the Chairman’s fee level has been delegated to the Committee. This Remuneration Report will be submitted at the 2008 Annual General Meeting for the approval of the Shareholders. The Remuneration Committee The Committee consists exclusively of independent Non-Executive Directors and presently comprises MM Diamond, M Redmond and NW Warner. The Committee is chaired by MM Diamond and met five times during the year. The Chief Executive attended all meetings in order to assist on matters concerning remuneration of other senior Executives within the Group; however, the Chief Executive was not present during the part of the meetings where his own remuneration was discussed. The attendance record of the Committee members is detailed within the Corporate Governance Report on page 33. The Committee may seek any information it requires from any employee or Director, and all employees and Directors are required to co-operate with any request made by the Committee. Z Bamford (Company Secretary) also provided information to the Committee during the year. During the year the Committee also received independent Executive remuneration advice (excluding advice in respect of pensions) from remuneration consultants, Hewitt New Bridge Street (HNBS). The level of advice received is discussed in further detail within this Report. The Committee has its own terms of reference, which are approved by the Board. These were reviewed during the year to ensure compliance with the Combined Code. Copies can be obtained from the Company Secretary or via the Company website at www.dechra.com. MM Diamond and Z Bamford are available to Shareholders to discuss remuneration policy. Role of the Committee The Committee is responsible for determining, on behalf of the Board, the framework of remuneration for the Executive Directors and for ensuring and reviewing the ongoing appropriateness and relevance of the remuneration policy. When setting the Executive Directors’ remuneration packages the Committee always considers (i) remuneration packages payable to Executives employed in comparable companies and (ii) pay increases within the Group more generally. The Committee also monitors remuneration practice amongst other senior Executives and sets the Chairman’s fee level. Remuneration Policy for Executive Directors Dechra’s policy on Executive Directors’ remuneration has been further developed by the Committee during the year. The resultant policy is to provide Directors’ remuneration packages that: attract, retain and incentivise Executives of the calibre required to ensure that the Group is managed successfully to the benefit of Shareholders; provide appropriate alignment between Dechra’s strategic goals, Shareholder returns and Executive reward; have a competitive mix of base salary and short and long-term incentives with a significant proportion of the package determined by stretching targets linked to Dechra’s performance; are consistent with corporate governance best practice guidelines so long as the Committee believes that compliance with such guidelines is in the best interests of Shareholders. Remuneration Review Every two years the Committee obtains an independent review of its Executive Directors’ remuneration packages to assess whether they are consistent with the Company’s remuneration policy. Existing remuneration arrangements comprised: Salary: Ian Page — £300,000, Simon Evans — £175,000, Ed Torr — £160,000 Pension worth 14% of salary Sundry benefits in kind, including fully expensed car and private medical insurance Annual Bonus worth up to 60% of salary based on profit targets and personal objectives Annual share awards under the Executive Incentive Plan (EIP) worth up to 50% of salary based on Total Shareholder Return (TSR) relative to other FTSE Small Cap companies During 2008 HNBS carried out the latest independent review for the Committee and their primary conclusions were that: the value of the Executive Directors’ existing remuneration packages was significantly below market levels both compared to direct peers (being a selection of companies drawn from the Pharmaceuticals/Biotechnology, Health Care Equipment and Services Sectors) and also compared to companies drawn from all sectors of a similar market capitalisation and turnover; existing remuneration arrangements were skewed significantly more towards fixed pay rather than performance-related pay than is standard; the relative simplicity of the existing incentive structure (namely an annual bonus and a single long-term scheme) was valued by Executives; the existing use of a TSR performance target to determine the vesting of EIP awards was felt to be appropriate, particularly so as to provide alignment with Shareholder interests; although the current Executive Directors have considerable shareholdings, the absence of a formal share ownership guideline was noted as being out of step with current best practice. 38 15400 09/09/2008 Proof 8 1540 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) 15400DECHRA:Layout 1 9/9/08 17:38 Page 39 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 In light of the review, the Committee proposed a number of alterations to the remuneration structure which were discussed with the Company’s top ten Shareholders as well as The Association of British Insurers (ABI) and Research, Recommendations and Electronic Voting (RREV). The revised remuneration structure, which results in a relatively balanced split between the fixed and performance-related elements of the ongoing remuneration arrangements, is outlined in the following sections. The revised structure does involve a significant increase in potential pay rewards for the Executive Directors. The Committee felt this was required and appropriate for a number of reasons: The Group has continued to grow rapidly with the result that the value of Executive packages is significantly behind the market. Additionally, individual Executive roles have become larger as a result of the increased complexity and geography of the Group as it evolves into an international business. The Committee is very keen to retain what it regards as a highly marketable Executive team that has been key to recent growth and remains central to the future prospects of the Group. Accordingly, whilst not obsessed with chasing the market, the Committee needs to ensure that packages are suitably competitive to retain these Executives. This has necessitated significant adjustments so as to bring them more into line with mid-market levels. The largest percentage pay increase is attributable to ETW Torr and reflects the significant expansion of his role since the recent acquisition of VetXX when he became the Managing Director of VetXX (now known as DVP EU). Approximately two-thirds of the increase in the potential value of the remuneration packages is performance-related so will only be achievable if Dechra continues to perform strongly. Performance targets have also been made more stretching for the annual bonus and a lower proportion of share awards will vest in future for median TSR performance. In summary, the Committee believes that the proposals will enable the Company to provide a remuneration package that is competitive, challenging and, by rewarding Executives for significant financial and share price out-performance, aligned with the interests of its Shareholders. Base Salary The Committee has agreed that, so as to remain market competitive, base salaries should be increased with effect from 1 July 2008 to: ID Page — £350,000, SD Evans — £220,000 and ETW Torr — £210,000. Pensions The Company operates a Group Stakeholder personal pension scheme which has been effective since 1 July 2005. The Company will continue to contribute 14% of salary on behalf of the Executive Directors. Benefits in Kind The Executive Directors receive other benefits, including the use of a fully expensed car, medical cover and life assurance scheme. Annual Bonus The Executive Bonus Scheme rewards Executive Directors for achieving operating efficiencies and profitable growth in the relevant year by reference to challenging but achievable operational targets determined at the beginning of the financial year. Executive bonuses for the year ended 30 June 2009 are to be calculated as follows: Annual cash bonus potential will be increased from 60% of salary to 100% of salary. As in the current bonus scheme, up to 10% of salary can be earned based on the achievement of personal objectives. The personal objectives of the Chief Executive will be set by the Chairman, and those of the other Executive Directors will be set by the Chief Executive. This element of the bonus is payable at the sole discretion of the Remuneration Committee. Up to 90% of salary (compared to 50% of salary in the current bonus scheme) can be earned based on Group profit targets set at the beginning of the financial year (with payments as outlined in the chart below). ) y r a a s l f o % ( d e n r a e s u n o B New Scheme Old Scheme 100 90 80 70 60 50 40 30 20 10 0 90 95 100 105 110 115 % of profit target The increase in annual bonus potential is part of the overall package of measures that the Committee believes is required in order to provide the Directors with an appropriately competitive and incentivising remuneration package. However, as the chart illustrates, to counterbalance the increase in bonus potential, the revised scheme requires a tougher out-performance of ‘target’ (110% rather than 105% in the existing scheme) in order for the maximum bonus to be payable. As a result, there is only a limited increase in bonus payable for achieving target performance. The Committee considers that this should ensure that incentives at the higher end of the range are payable only for demonstrably superior Group performance. www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 39 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) 15400DECHRA:Layout 1 9/9/08 17:38 Page 40 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Directors’ Remuneration Report continued Long-Term Incentives No further grants can be awarded to Executive Directors under the EIP which was granted approval by Shareholders at the Annual General Meeting on 23 October 2003 and expires in 2008. Shareholder approval will therefore be sought at the forthcoming Annual General Meeting, to be held on 7 November 2008, for a new long-term share scheme (2008 LTIP). As with the EIP, the 2008 LTIP will seek to provide a clear link between the remuneration of the Executive Directors and the creation of value for Shareholders by rewarding the Executive Directors for the Company’s performance in terms of relative TSR. The 2008 LTIP, subject to Shareholder approval, will allow the Executive Directors and selected senior Executives of the Company to receive a conditional award of performance shares worth up to 150% of base salary (200% of salary in exceptional circumstances) although initially no awards worth more than 100% of salary will be granted. Vesting of performance shares will normally occur provided that: (a) the participant is still employed by the Group at the end of the three year vesting period; and (b) to the extent that the pre-set performance targets have been satisfied over the three year performance period which will run from the start of the financial year within which the award is granted. Performance targets for the proposed grant during the financial year ending 30 June 2009 will be determined by: (1) An ‘underpin’ condition based on the Company’s adjusted diluted earnings per share performance — no awards will vest if the Company adjusted diluted earnings per share has not grown by at least RPI + 3% per annum over the performance period. (2) The Company’s TSR performance — assuming that the underpin is achieved, vesting of the awards will be determined by the Company’s TSR performance compared to the other constituents of the FTSE Small Cap sector at the start of the performance period. The TSR will be calculated by comparing average performance over three months prior to the start and end of the performance period. Vesting will be on the following basis: TSR Performance Below Median Median Between Median and Upper Quartile Upper Quartile Vesting Percentage 0% 25% Pro-rata vesting based on the Company’s ranking in the comparator group 100% Further details of the 2008 LTIP are provided in the enclosed Circular to Shareholders for the 2008 Annual General Meeting and a resolution will be put to Shareholders at that meeting to approve the 2008 LTIP. Subject to Shareholder approval, the initial awards under this scheme will be made during 2008. The Company also operates an Approved Share Option Scheme, an Unapproved Share Option Scheme together with a Savings Related Share Options Scheme (SAYE). Executive Directors are entitled to participate in the SAYE scheme but are not entitled to participate in the Approved Share Option Scheme or the Unapproved Share Option Scheme by reason of their participation in the 2008 LTIP. Share Ownership Guideline To be consistent with best practice, a formal share ownership guideline will be introduced for Executive Directors requiring them to retain at least half of any future share awards vesting as shares (after paying any tax due on the shares) until they have a holding of Dechra shares worth at least 100% of their base salary. Currently, all of the Executive Directors’ shareholdings equate to over 100% of their base salary. Contracts of Services Each Executive Director has a service contract with the Company which contains details regarding remuneration, restrictions and disciplinary matters. Executive Directors are appointed on contracts terminable by the Company on not more than 12 months’ notice and by the Director on 6 months’ notice. Non-Executive Directors have a service contract for an initial 12 month period which is thereafter terminated by either party giving 12 months’ notice. Details of Directors’ service contracts and notice periods are set out below. Name M Redmond ID Page SD Evans ETW Torr MM Diamond NW Warner Commencement date 25 April 2001 23 August 2000 23 August 2000 23 August 2000 23 August 2000 2 May 2003 Director 12 months 6 months 6 months 6 months 12 months 12 months Notice Period Company 12 months 12 months 12 months 12 months 12 months 12 months There are no expiry dates applicable to either Executive or Non-Executive Directors’ service contracts. 40 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:38 Page 41 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 The Company may, in its absolute discretion at any time after written notice has been given by either party, lawfully terminate the service contract by paying to the Director an amount equal to his salary entitlement for the unexpired period of notice together with an amount representing the fair value of any other benefits to which the Director is contractually entitled for the unexpired period of notice (subject in either case to a deduction at source of income tax and National Insurance contributions). In the event that the service contract is terminated before the end of any financial year, the Director shall not be entitled to any bonus in respect of that financial year. Non-Executive Directors’ compensation is confined to 12 months’ remuneration. Individual Directors’ eligibility for the various elements of compensation is set out below: Name M Redmond ID Page SD Evans ETW Torr MM Diamond NW Warner Salary Bonus 12 months 12 months 12 months 12 months 12 months 12 months n/a nil nil nil n/a n/a Benefits n/a 12 months 12 months 12 months n/a n/a Where applicable, payment of this compensation would be in full and final settlement of all claims other than in respect of share options or awards and pension arrangements. In an appropriate case the Directors would have regard to the departing Director’s duty to mitigate loss, except in the event of dismissal following a change of control of the Company. Other than as described above, there are no express provisions within the Directors’ service contracts for the payment of compensation or liquidated damages on termination of employment. No compensation payments were made to Executive or Non-Executive Directors during the year. Non-Executive Directors The Board aims to recruit and retain Non-Executive Directors of a high calibre with the requisite experience required to achieve success for the Company and its Shareholders. The fees of the Chairman are determined by the Committee and the fees of the Non-Executive Directors are determined by the Board following a recommendation from both the Chief Executive and the Chairman. It should be noted that neither the Chairman nor the Non-Executive Directors take part in the determination of their own remuneration. Non-Executive Directors are paid a basic fee with additional fees paid for the chairing of Committees. Following a review by HNBS during the year, which benchmarked the current Non-Executive Director fee levels against the same companies used for benchmarking the Executive Directors’ remuneration packages, it was agreed that fee levels should be increased from 1 July 2008. The annual fee level for 2008/09 is as follows: Office Chairman Non-Executive Director Senior Non-Executive additional fee Remuneration Committee Chairmanship additional fee Audit Committee Chairmanship additional fee Non-Executive Directors are not eligible to participate in any of the Company’s share schemes, incentive schemes or pension schemes. www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 Fee £’000 80 31 3 5 8 41 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s 15400DECHRA:Layout 1 9/9/08 17:39 Page 42 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Directors’ Remuneration Report continued Directors’ Shareholdings The beneficial interests of the Directors in office and their families in the share capital of Dechra Pharmaceuticals PLC as at 30 June 2008 were as follows: Shareholdings M Redmond ID Page SD Evans ETW Torr MM Diamond NW Warner Ordinary Shares 2008 Ordinary Shares 2007 41,475 759,332 806,370 426,796 6,100 2,691 35,000 662,819 749,131 390,934 5,000 2,206 There have been no changes in the holdings of the Directors between 30 June and 26 August 2008. Total Shareholder Return The graph below shows the Total Shareholder Return performance of the Company over the past five years compared with the Total Shareholder Return over the same period for the FTSE Small Cap Total Return Index. The FTSE Small Cap Index is considered to be an appropriate index as the Company is a constituent of that index. ) p ( e c i r P e r a h S Dechra Pharmaceuticals TSR FTSE SMALL CAP TSR 500p 450p 400p 350p 300p 250p 200p 150p 100p 50p 0p 3 0 e n u J 3 0 t p e S 3 0 c e D 4 0 r a M 4 0 e n u J 4 0 t p e S 4 0 c e D 5 0 r a M 5 0 e n u J 5 0 t p e S 5 0 c e D 6 0 r a M 6 0 e n u J 6 0 t p e S 6 0 c e D 7 0 r a M 7 0 e n u J 8 0 t p e S 8 0 c e D 8 0 r a M 8 0 e n u J Effectiveness Review During the year, the Committee reviewed its effectiveness through a process led by the Committee Chairman. The findings were reported to the Committee and the Board. 42 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 43 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Audited Information The auditors are required to report on the information contained in the remainder of this report. Summary of Remuneration Executive Directors ID Page (Chief Executive) SD Evans ETW Torr Non-Executive Directors M Redmond (Chairman) MM Diamond NW Warner Salaries & Fees £’000 Bonuses £’000 Other Benefits £’000 Total 2008 £’000 Total 2007 £’000 300 175 160 60 31 29 755 180 105 96 — — — 381 69 47 37 — — — 549 327 293 60 31 29 153 1,289 389 256 233 52 29 27 986 Executive bonuses for the year ended 30 June 2008 (as reflected in the table above) were determined as follows: Profit performance — 10% of salary payable upon the achievement of 95% of Group profit target rising to 50% of salary payable upon the achievement of 105% of Group profit target. Actual performance reflected 115% of the profit target resulting in a payment worth 50% of salary. Personal objectives — up to an additional 10% of salary was payable to Executive Directors upon the achievement of personal objectives. Actual performance resulted in payments worth 10% of salary. Executive Incentive Plan Awards made under the Executive Incentive Plan are as follows: ID Page SD Evans ETW Torr Award date 2004 2005 2006 2008 2004 2005 2006 2008 2004 2005 2006 2008 Number of shares at 30 June 2007 48,589 34,861 47,412 — 130,862 33,096 23,904 30,263 — 87,263 31,348 22,908 28,245 — 82,501 Granted during the year — — — 37,975 37,975 — — — 22,152 22,152 — — — 20,253 20,253 Exercised during the year (48,589) — — — (48,589) (33,096) — — — (33,096) (31,348) — — — (31,348) Number of shares at 30 June 2008 Performance period Share Price at Share Price at date of award date of exercise pence pence — 2004–2007 34,861 47,412 37,975 120,248 2005–2008 2006–2009 2007–2010 — 2004–2007 23,904 30,263 22,152 76,319 2005–2008 2006–2009 2007–2010 — 2004–2007 22,908 28,245 20,253 71,406 2005–2008 2006–2009 2007–2010 159.5 251 250.75 386 159.5 251 250.75 386 159.5 251 250.75 386 350 — — — 350 — — — 350 — — — Awards under the EIP vest based on Dechra’s TSR performance over a three year performance period starting on 1 July prior to date of grant relative to the FTSE Small Cap Total Return Index with 30% of awards vesting for median performance rising to 100% for upper quartile performance. No awards vest unless the Committee is satisfied with the underlying financial performance of the Company over the performance period. During the financial year awards granted in 2004 became exercisable. Independent verification by HNBS showed that the Company’s TSR performance for the three year period to 30 June 2007 was in the top quartile of the FTSE Small Cap Total Return Index. The Committee also determined that the underlying financial performance of the Company over the performance period had been satisfactory. The full award was therefore exercisable. Independent verification has also recently been sought from HNBS in respect of the satisfaction of the performance targets for awards which vested as at 30 June 2008. It has been confirmed to the Committee that the Company’s TSR performance for the three year period to 30 June 2008 was again in the top quartile of the FTSE Small Cap Total Return Index. Subject to the Committee confirming that the underlying financial performance of the Company has been satisfactory throughout the performance period, the awards will be capable of exercise for a 90 day period commencing on 2 September 2008. The aggregate gain made by the Executive Directors on share options exercised during 2008 was £589,000. The aggregate gain made by the Executive Directors on share options exercised during 2007 was £694,000. O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 43 (cid:1) (cid:1) 15400DECHRA:Layout 1 9/9/08 17:39 Page 44 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Directors’ Remuneration Report continued SAYE Scheme Directors’ entitlements under the SAYE Scheme are as follows: Market price at date of grant pence Award date Exercise price pence Exercise dates At 30 June 2007 number Exercised number Granted number Lapsed number ID Page SD Evans ETW Torr 2 April 2003 15 October 2004 15 October 2004 18 October 2005 48 198 198 255 39 June 2008 42,115 (42,115) 158 158 204 Jan 2008 Jan 2008 Dec 2008 7,641 3,056 2,750 (7,641) (3,056) — 55,562 (52,812) — — — — — — — — — — At 30 June 2008 number — — — 2,750 2,750 Share Price The middle market price for the Company’s shares on 30 June 2008 was 420p and the range of prices during the year was 306p to 462.75p. Pension Entitlement All Executive Directors were members of the Dechra Pharmaceutical PLC Group Stakeholder personal pension scheme throughout the year. Contributions made by Dechra Pharmaceuticals PLC on behalf of the Executive Directors during the year are based on a percentage of pensionable salary and were paid as follows: Age 47 44 48 Contributions 2008 £000 Contributions 2007 £000 42 25 22 89 31 20 18 69 ID Page SD Evans ETW Torr By order of the Board Malcolm Diamond Chairman — Remuneration Committee 2 September 2008 44 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 45 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Social, Ethical and Environmental Responsibilities A responsible approach to our stakeholders and the wider community is seen by the Board to be fundamental to the Group. The conduct of the Group towards social, environmental, ethical and health and safety issues is recognised to have an impact on our reputation and the implementation of policies and systems continues. The Board takes ultimate responsibility for Corporate Social Responsibility (CSR) and continues to be committed to developing and implementing appropriate policies to create and maintain long-term value for Shareholders. Sound business ethics help to minimise risk, ensure legal compliance and enhance Company efficiency. The need to review and manage risks to the short and long-term value of the Company arising from CSR is recognised by the Board and it considers that it has received adequate information to review these risks and has not identified any risks to the business that could affect its future value. Environmental Policy The Group recognises the importance of good environmental controls. It is the Group’s policy to comply with and exceed environmental legislation currently in place, adopt responsible environmental practices and be committed to minimising the impact of its operations on the environment. The Group is a registered member of a compliance scheme in respect of the Waste Packaging Obligations Regulations and, in addition, all of the National Veterinary Services depots recycle waste cardboard back to UK paper mills, and waste polythene is also recycled back to UK recycling agents. In particular, Dales Pharmaceuticals has achieved a 47% reduction in its landfill waste as a direct result of increased recycling activities. A fleet of low CO2 emission diesel vehicles is maintained; these vehicles are replaced every three years via leasing agreements. In addition, a number of LPG powered vehicles are being used in and around the London area. Our manufacturing unit, Dales Pharmaceuticals, continues to comply with, and exceed, effluent discharge standards into local water supplies, this being monitored by Yorkshire Water Authority. Standard operating procedures are in place to ensure that contaminated waste is disposed of under strict controls. Exhaust air is fully filtered from the manufacturing unit before discharge. Dales Pharmaceuticals is now actively working towards achieving its ISO 140001 status. A gap analysis has recently been carried out which has highlighted the procedures to be drafted. Funding has been obtained form the Manufacturing Advisory Service who are assisting Dales Pharmaceuticals in obtaining the standard and it is hoped that the status will be achieved within the next financial year. Dales Pharmaceuticals has previously worked closely with the Carbon Trust in order to review its respective energy consumption and a number of areas identified where improvements can be made. As a result of the Carbon Trust audit of Dales Pharmaceuticals the manufacturing unit has (amongst other things): Installed low energy use (high frequency) lighting in all new or refurbished areas of the site; Replaced and tuned the main burner unit in the factory steam boiler to effect maximum efficiency of the gas burn; and Changed the grade of oil used in the oil fired heater unit contained in one of the buildings on site. This new grade of oil is significantly more energy efficient. The Carbon Trust has recently visited the Distribution Unit, NVS, in order to carry out an energy consumption audit and the results are awaited in respect of this. It is envisaged that similar audits will be carried out at the remaining UK operating units within the next financial year. Dechra Pharmaceuticals PLC has been involved in the Corporate Membership Scheme for the Staffordshire Wildlife Trust (the Trust) throughout the financial year. The money provided by the Company has assisted the Trust in funding its core operating costs and assisted in helping support community activities organised by the Trust, in particular, a guided walk at Parrotts Drumble (situated behind the Group’s Distribution unit, NVS) that attracted over 100 participants. The Group continues to review its environmental controls and encourage its own staff, suppliers and customers to achieve similar standards. ETW Torr is the nominated Director responsible for environmental policies. Business Ethics The Board expects all of the Group’s business activities to be conducted in accordance with high standards of ethical conduct and full compliance with all applicable national and international legislation. This includes, in particular, the provision of a safe working environment including health and safety awareness, maintenance of fair and competitive employment practices, opposition to any bribery or corrupt business practices, treating suppliers on a fair basis to build long-term relationships to our mutual benefit, and being responsive to our customers’ needs and providing a high standard of customer care. A Whistle-Blowing Policy is in place whereby employees may report, in confidence, any suspected wrongdoings within the business where they feel unable to discuss any such issue directly with local management. The policy was reviewed and updated during the year by the Audit Committee. This policy is available to all employees via staff handbooks and the Company website at www.dechra.com. Open and honest communication is positively encouraged between employees and management throughout the business. O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 45 (cid:1) (cid:1) (cid:1) 15400DECHRA:Layout 1 9/9/08 17:39 Page 46 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Social, Ethical and Environmental Responsibilities continued Health and Safety Policy The Group attaches great importance to the health and safety of its employees and the public. The management are responsible and committed to the maintenance, monitoring and promoting of a policy of Health and Safety at work, to ensure the care and well-being of its employees and on-site visitors. All of its sites are registered with the British Safety Council. Each unit within the Group has an active Health and Safety Committee comprising representatives from both management and employees. The workforce nominates employee representatives. These committees meet on a regular basis to carry out a review of risk assessments and standard operating procedures as well as investigating any concerns raised by individual employees. Each site has the requisite number of employees trained in Health and Safety legislation. A full health and safety report is presented at Divisional Board Meetings on a regular basis in the presence of Executive Directors. These reports are summarised for subsequent review by the Board. A transport risk review committee has been established to assess risks related to the vehicle fleet and establish control procedures. This includes a quarterly licence check of all individuals who are able to drive Company vehicles, an investigation into all accidents and a disciplinary procedure for speeding offences. This committee meets four times a year and issues raised by this committee are included at Health and Safety meetings. SD Evans is the nominated Director responsible for Health and Safety policies. Employees It is the Group’s policy to encourage employee involvement as the Directors consider that this is essential for the successful running of the business. The Group keeps employees informed of performance, developments and progress by way of regular team briefing sessions and notices. The manufacturing site, Dales Pharmaceuticals, is registered with “Investors in People” and operates a Works Council. Dales Pharmaceuticals also takes on a number of apprentices each year via the Modern Apprenticeship Scheme. Such employees are assisted in achieving National Vocational Qualifications as part of their apprenticeship, usually work-based but also involving literacy and numeracy modules. During the year, Claire Harrison, one of the apprentices employed at the unit, was put forward by her Training Officer from the North Lancs Training Group for the Learning and Skills Council National Apprenticeship Award 2008. Claire went on to win the award. It is the Company’s policy to provide equal recruitment and other opportunities for all employees, regardless of age, sex, religion, race or disability. The Group gives full consideration to applications from disabled people, where they adequately fulfil the requirements of the role. Where existing employees become disabled, it is the Group’s policy whenever practicable to provide continuing employment under the Company’s terms and conditions and to provide training and career development whenever appropriate. The Group has encouraged employees to share in the growth of the Company through eligibility to participate in the SAYE Scheme. National apprentice of the year award Dales employee Claire Harrison receiving the national apprentice of the year award from Mike Annice 46 15400 09/09/2008 Proof 8 154 15400DECHRA:Layout 1 9/9/08 17:39 Page 47 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Statement of Directors’ Responsibilities in respect of the Annual Report and the Financial Statements The Directors are responsible for preparing the Annual Report and the Group and Parent Company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and have elected to prepare the Parent Company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice). The Group financial statements are required by law and IFRSs as adopted by the EU to present fairly the financial position and the performance of the Group; the Companies Act 1985 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation. The Parent Company financial statements are required by law to give a true and fair view of the state of affairs of the Parent Company. In preparing each of the Group and Parent Company financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; for the Parent Company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Parent Company financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will continue in business. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 47 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) 15400DECHRA:Layout 1 9/9/08 17:39 Page 48 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Independent Auditors’ Report We have audited the Group and Parent Company financial statements (the “financial statements”) of Dechra Pharmaceuticals PLC for the year ended 30 June 2008 which comprise the Consolidated Income Statement, the Consolidated and Parent Company Balance Sheets, the Consolidated Statement of Cash Flows, the Consolidated Statement of Changes in Shareholders’ Equity and the related notes. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited. This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective Responsibilities of Directors and Auditors The Directors’ responsibilities for preparing the Annual Report and the Group financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU, and for preparing the Parent Company financial statements and the Directors’ Remuneration Report in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice) are set out in the Statement of Directors’ Responsibilities on page 47. Our responsibility is to audit the financial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors’ Report is consistent with the financial statements. The information given in the Directors’ Report includes that specific information presented in the Directors’ Business Review that is cross-referenced from the Business Review and Future Developments section of the Directors’ Report. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and other transactions is not disclosed. We review whether the Corporate Governance Statement reflects the Company’s compliance with the nine provisions of the 2006 Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Basis of Audit Opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors’ Remuneration Report to be audited. Opinion In our opinion: the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the Group’s affairs as at 30 June 2008 and of its profit for the year then ended; the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; the Parent Company financial statements give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the state of the Parent Company’s affairs as at 30 June 2008; the Parent Company financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985; and the information given in the Directors’ Report is consistent with the financial statements. KPMG Audit Plc Chartered Accountants Registered Auditor 2 Cornwall Street Birmingham B3 2DL 2 September 2008 48 15400 09/09/2008 Proof 8 1540 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) 15400DECHRA:Layout 1 9/9/08 17:39 Page 49 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Consolidated Financial Statements Contents 50 Consolidated Income Statement 51 Consolidated Balance Sheet 52 Consolidated Statement of Changes in Shareholders’ Equity 53 Consolidated Statement of Cash Flows 55 Notes to the Consolidated Financial Statements 90 Financial History O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 49 15400DECHRA:Layout 1 9/9/08 17:39 Page 50 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Consolidated Income Statement For the year ended 30 June 2008 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Operating profit Finance income Finance expense Profit before taxation Income tax expense Profit for the year attributable to equity holders of the parent Earnings per share Basic Diluted Dividend per share (interim paid and final proposed for the year) Note 2 2 3 4 6 8 10 10 9 2008 Amortisation of acquired intangibles and rationalisation costs (note 5) £’000 — — — — (5,071) (5,071) — (77) (5,148) 1,281 Adjusted £’000 304,371 (250,771) 53,600 (13,360) (21,098) 19,142 1,973 (4,262) 16,853 (4,668) Total £’000 304,371 Adjusted £’000 253,803 (250,771) (216,952) 53,600 (13,360) (26,169) 14,071 1,973 (4,339) 11,705 (3,387) 36,851 (10,850) (12,125) 13,876 1,044 (2,274) 12,646 (3,780) 12,185 (3,867) 8,318 8,866 2007 Amortisation of acquired intangibles and rationalisation costs (note 5) £’000 — — — — (27) (27) — — (27) 8 (19) 14.20p 14.09p 8.25p Total £’000 253,803 (216,952) 36,851 (10,850) (12,152) 13,849 1,044 (2,274) 12,619 (3,772) 8,847 16.86p 16.62p 7.50p 50 stock code: DPH stock code: DPH 15400 09/09/2008 Proof 8 154 15400DECHRA:Layout 1 9/9/08 17:39 Page 51 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Consolidated Balance Sheet At 30 June 2008 ASSETS Non-current assets Intangible assets Property, plant and equipment Deferred tax assets Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets LIABILITIES Current liabilities Borrowings Trade and other payables Current tax liabilities Total current liabilities Non-current liabilities Borrowings Deferred tax liabilities Total non-current liabilities Total liabilities Net assets EQUITY Issued share capital Share premium account Hedging reserve Foreign currency translation reserve Merger reserve Retained earnings Total equity attributable to equity holders of the parent Note 11 12 14 15 16 17 20 18 19 20 14 22 2008 £’000 90,375 8,224 1,053 99,652 32,435 47,445 22,219 102,099 201,751 (21,218) (62,596) (2,824) (86,638) (27,998) (15,316) (43,314) (129,952) 71,799 652 62,166 281 1,608 1,770 5,322 71,799 The financial statements were approved by the Board of Directors on 2 September 2008 and are signed on its behalf by: Ian Page Director Simon Evans Director www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s 2007 £’000 13,089 5,739 — 18,828 25,732 36,173 17,222 79,127 97,955 (4,529) (48,641) (2,464) (55,634) (11,666) (147) (11,813) (67,447) 30,508 528 28,041 (71) — 1,770 240 30,508 51 15400DECHRA:Layout 1 9/9/08 17:39 Page 52 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Consolidated Statement of Changes in Shareholders’ Equity For the year ended 30 June 2008 Issued share capital £’000 519 Share premium account £’000 27,693 Hedging reserve £’000 (71) Year ended 30 June 2007 At 1 July 2006 Profit for the period being total recognised income and expense for the period Dividends paid Share-based payments including current and deferred tax Shares issued At 30 June 2007 Year ended 30 June 2008 At 1 July 2007 Profit for the period Fair value gains on derivative financial instruments Exchange differences on translation of foreign operations Total recognised income and expense for the period Dividends paid Share-based payments including current and deferred tax Shares issued Share issue expenses At 30 June 2008 — — — 9 — — — 348 528 28,041 528 — — — — — — 124 — 652 28,041 — — — — — — 35,636 (1,511) 62,166 Foreign currency translation reserve £’000 — — — — — — — — 1,608 — — — — — — — — (71) (71) — 352 352 — — — — 281 — 1,608 Merger reserve £’000 1,720 Retained earnings £’000 (5,946) — — — 50 1,770 1,770 — — — — — — — — 8,847 (3,595) 934 — 240 240 8,318 — — 8,318 (4,420) 1,184 — — Total £’000 23,915 8,847 (3,595) 934 407 30,508 30,508 8,318 352 1,608 10,278 (4,420) 1,184 35,760 (1,511) 71,799 1,608 1,770 5,322 Hedging Reserve The hedging reserve represents the cumulative fair value gains or losses on derivative financial instruments for which hedge accounting has been applied. Foreign Currency Translation Reserve The foreign currency translation reserve contains exchange differences on the translation of subsidiaries with a functional currency other than sterling. Merger Reserve The merger reserve represents the excess of fair value over nominal value of shares issued in consideration for the acquisition of subsidiaries where statutory merger relief has been applied in the financial statements of the Parent Company. 52 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 53 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Consolidated Statement of Cash Flows For the year ended 30 June 2008 Cash flows from operating activities Profit for the period Adjustments for: Depreciation Amortisation Loss/(gain) on sale of property, plant and equipment Finance income Finance expense Equity-settled share-based payment expenses Income tax expense Operating cash flow before changes in working capital Increase in inventories Increase in trade and other receivables Increase in trade and other payables Cash generated from operations Interest paid Income taxes paid Net cash from operating activities Cash flows from investing activities Proceeds from sale of property, plant and equipment Interest received Acquisition of subsidiaries Purchase of property, plant and equipment Capitalised development expenditure Purchase of other intangible non-current assets Net cash from investing activities Cash flows from financing activities Proceeds from the issue of share capital Share issue expenses New borrowings Expenses of raising new borrowings Repayment of borrowings Dividends paid Net cash from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at start of period Exchange differences on cash and cash equivalents Cash and cash equivalents at end of period www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 Note 27 2008 £’000 8,318 1,291 3,230 15 (1,973) 4,339 603 3,387 19,210 (3,912) (3,070) 3,825 16,053 (4,450) (3,041) 8,562 5 1,648 (65,151) (694) (1,331) (92) (65,615) 35,747 (1,511) 50,200 (751) (17,185) (4,420) 62,080 5,027 17,222 (30) 22,219 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s 2007 £’000 8,847 984 137 (7) (1,044) 2,274 479 3,772 15,442 (3,737) (248) 2,871 14,328 (2,228) (2,895) 9,205 23 1,059 (717) (823) (1,680) (2,845) (4,983) 357 — — — (3,481) (3,595) (6,719) (2,497) 19,719 — 17,222 53 15400DECHRA:Layout 1 9/9/08 17:39 Page 54 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Consolidated Statement of Cash Flows continued Reconciliation of net cash flow to movement in net borrowings For the year ended 30 June 2008 Net increase/(decrease) in cash and cash equivalents Repayment of borrowings New borrowings Borrowings assumed on acquisition of subsidiaries New finance leases Other non-cash changes Movement in net cash/(borrowings) in the period Net cash at start of period Net (borrowings)/cash at end of period Note 27 24 2008 £’000 5,027 17,185 (50,200) — (319) 283 (28,024) 1,027 (26,997) 2007 £’000 (2,497) 3,481 — (55) (956) (25) (52) 1,079 1,027 54 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 55 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Consolidated Financial Statements 1. Accounting Policies Dechra Pharmaceuticals PLC is a Company domiciled in the United Kingdom. The consolidated financial statements of the Group for the year ended 30 June 2008 comprise the Company and its subsidiaries. (a) Statement of Compliance The Consolidated Financial Statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the European Union. The Company has elected to prepare its Parent Company financial statements in accordance with UK GAAP and they are separately presented on pages 91 to 99. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these Group financial statements. The Group’s significant accounting policies are listed below: (b) Basis of Preparation The financial statements are presented in Sterling, rounded to the nearest thousand. They are prepared on the historical cost basis except for derivative financial instruments and cash-settled share-based transactions that are stated at fair value. The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgements made by Directors in the application of accounting policies that have a significant effect on the Financial Statements and estimates with a significant risk of material adjustment in the next year are discussed in note 28. During the period, the Company adopted the following accounting statements: — IFRS 7 Financial Instruments: Disclosures and the related amendment to IAS 1 Presentation of Financial Statements — Capital Disclosures — IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies — IFRIC 8 Scope of IFRS 2 — IFRIC 9 Reassessment of Embedded Derivatives — IFRIC 10 Interim Financial Reporting and Impairment — IFRIC 11 Group and Treasury Share Transactions These have resulted in additional disclosures, but have had no impact on reported profit or net assets. At the date of authorisation of these financial statements, the following Standards/revisions to Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective: — IFRS 2 Share-based Payments (revised 2008) — IFRS 3 Business Combinations (revised 2008) — IFRS 5 Non-current Assets Held for Sale and Discontinued Operations (revised 2008) — IFRS 8 Operating Segments — IAS 1 Presentation of Financial Statements (revised 2007/2008) — IAS 16 Property, Plant and Equipment (revised 2008) — IAS 19 Employee Benefits (revised 2008) — IAS 23 Borrowing Costs (revised 2008) — IAS 27 Consolidated and Separate Financial Statements (revised 2008) — IAS 28 Investments in Associates (revised 2008) — IAS 31 Interests in Joint Ventures (revised 2008) — IAS 32 Financial Instruments: Presentation (revised 2008) — IAS 36 Impairment of Assets (revised 2008) — IAS 38 Intangible Assets (revised 2008) — IAS 39 Financial Instruments: Recognition and Measurement (revised 2008) — IFRIC 12 Service Concession Arrangements — IFRIC 13 Customer Loyalty Programmes — IFRIC 14 The Limit on a Defined Benefit Asset. Minimum Funding Requirements and their Interaction The Directors anticipate that the adoption of these Standards/revisions to Standards and Interpretations in future periods will have no material impact on the financial statements of the Group except for additional segment disclosure when IFRS 8 comes into effect for periods commencing on or after 1 January 2009 and the financial statement presentation changes under IAS 1 (revised 2007/2008) which also comes into effect for periods beginning on or after 1 January 2009. O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 55 15400DECHRA:Layout 1 9/9/08 17:39 Page 56 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Consolidated Financial Statements continued 1. Accounting Policies continued Basis of Consolidation (c) Subsidiaries (i) Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases. (ii) Transactions Eliminated on Consolidation Intra-Group balances and any unrealised gains and losses or income and expenses arising from intra-Group transactions are eliminated in preparing the Consolidated Financial Statements. (d) (e) Business Combinations The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of completion, of assets given, liabilities incurred or assumed, and equity instruments issued by the Company in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s indentifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS3 are recognised at their fair value at the acquisition date. Foreign Currency Translation (i) Functional Currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). (ii) (iii) Foreign Currency Translation Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Foreign Operations The results and financial position of all the Group entities that have a functional currency different from the functional currency of the Parent Company are translated into sterling as follows: (i) (ii) assets and liabilities are translated at the closing rate at the reporting date; income and expenses are translated at the average rate for the period being reported. On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to Shareholders’ equity, being recognised in the foreign currency translation reserve. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. On disposal of a foreign entity, accumulated exchange differences are recognised in the income statement in the same period in which the gain or loss on disposal is recognised. There are no Group entities operating in a hyperinflationary economy. (f) Financial Assets and Liabilities Financial assets The Group classifies its financial assets into the following categories: held for trading financial assets, loans and receivables, held-to- maturity investments and available-for-sale financial assets. The classification depends on the purpose for which the assets are held. Management determines the classification of its financial assets at initial recognition in accordance with IAS 39 Financial Instruments: Recognition and Measurement and re-evaluates this designation at every reporting date for financial assets other than those held at fair value through the income statement. Held for trading financial assets This category has two sub-categories: financial assets held for trading and those designated at fair value through the income statement at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives that do not qualify for hedge accounting are also categorised as held for trading. Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the reporting date. Held for trading financial assets are recognised and subsequently carried at fair value. Available-for-sale financial assets are recognised and subsequently carried at fair value plus any directly attributable transaction costs. Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Financial assets not carried at fair value through the income statement are initially recognised at fair value plus transaction costs. Financial assets are derecognised when the rights to receive cash flows from the assets have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Gains and losses (both realised and unrealised) arising from changes in the value of financial assets held at fair value through the income statement are included in the income statement in the period in which they arise. 56 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 57 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 1. Accounting Policies continued Unrealised gains and losses arising from changes in the fair value of non-monetary securities classified as available-for-sale are recognised in equity. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in the income statement as gains and losses from investment securities. The Group assesses at each reporting date whether there is objective evidence that a financial asset or a Group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the income statement, is removed from equity and recognised in the income statement. Impairment losses recognised on these instruments are not reversed through the income statement if the fair value of the instrument increases in a later period. Derivative financial instruments The Group uses derivative financial instruments to manage its exposure to foreign exchange and interest rate risks. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for speculative purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are remeasured to fair value at each reporting date. Hedging Cash flow hedges Changes in the fair value of derivative financial instruments designated as cash flow hedges are recognised directly in equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised in profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains there until the forecast transaction occurs. When the hedged item is a non-financial asset, the amount recognised in equity is transferred to the carrying amount of the asset when it is recognised. In other cases, the amount recognised in equity is transferred to profit or loss in the same period that the hedged item affects profit or loss. Hedges of net investment in foreign operations Foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment in a foreign operation are recognised in the Foreign Currency Translation Reserve within equity, to the extent that the hedge is effective. To the extent that the hedge is ineffective, such differences are recognised in profit or loss. When the hedged part of a net investment is disposed of, the associated cumulative amount in equity is transferred to profit or loss as an adjustment to the profit or loss on disposal. Receivables Receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a third party with no intention of trading the receivable. They are included in current assets, except for those with maturities greater than one year after the balance sheet date (these are classified as non-current assets). Receivables are included in trade and other receivables in the balance sheet. Receivables are recognised initially at fair value and subsequently measured at amortised cost. Amortised cost is determined using the effective interest method less an allowance for impairment. An allowance for impairment of receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows (discounted at the effective interest rate). The allowance is initially recognised in the income statement. Trade and Other Payables Trade and other payables are initially recognised at fair value and subsequently at amortised cost. Borrowings Borrowings are recognised initially at fair value net of directly attributable transaction costs incurred. Borrowings are subsequently stated at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. (g) Property, Plant and Equipment (i) Owned Assets Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses (see accounting policy k). (ii) Leased Assets Leases under the terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Assets acquired by finance leases are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses. O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 57 15400DECHRA:Layout 1 9/9/08 17:39 Page 58 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Consolidated Financial Statements continued 1. Accounting Policies continued (iii) Subsequent Costs The Group recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other costs are recognised in the income statement as an expense as incurred. (iv) Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land is not depreciated. Assets in the course of construction are not depreciated until the date the assets become available for use. The estimated useful lives are as follows: freehold buildings short leasehold buildings plant and fixtures motor vehicles 25 years period of lease 3 –10 years 4 years The residual value, if not insignificant, is reassessed annually. (h) Intangible Assets (i) Goodwill All business combinations are accounted for by applying the purchase method. Goodwill represents amounts arising on acquisition of subsidiaries, associates and joint ventures. In respect of business acquisitions that have occurred since 1 July 2004, goodwill represents the difference between the cost of the acquisition and the fair value of the assets, liabilities and contingent liabilities acquired. In respect of acquisitions prior to this date, goodwill is included on the basis of its deemed cost, which represents the amount recorded under previous GAAP. The classification and accounting treatment of business combinations that occurred prior to 1 July 2004 were not reconsidered in preparing the Group’s opening IFRS balance sheet at 1 July 2004. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is not amortised but is allocated to cash generating units and is tested annually for impairment. (ii) Research and Development Costs Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the income statement as an expense is incurred. The Group is also engaged in development activity with a view to bringing new pharmaceutical products to market. Internally generated costs of development are capitalised in the balance sheet unless those costs cannot be measured reliably or it is not probable that future economic benefits will flow to the Group, in which case the relevant costs are expensed to the income statement as incurred. Due to the strict regulatory process involved, there is inherent uncertainty as to the technical feasibility of development projects often until regulatory approval is achieved, with the possibility of failure even at a late stage. The Group considers that this uncertainty means that the criteria for capitalisation are not met unless it is highly probable that regulatory approval will be achieved and the project is commercially viable. Where development costs are capitalised, the expenditure includes the cost of materials, direct labour and an appropriate proportion of overheads. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses. (iii) Acquired Intangible Assets Intangible assets recognised as a result of a business combination are stated at fair value at the date of acquisition less accumulated amortisation and impairment losses. (iv) Other Intangible Assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Expenditure on internally generated goodwill and other intangibles is recognised in the income statement as an expense is incurred. (v) Subsequent Expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. (vi) Amortisation Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Goodwill and intangible assets with an indefinite useful life are systematically tested for impairment at each balance sheet date. Other intangible assets are amortised from the date that they are available for use. The estimated useful lives are as follows: software capitalised development costs acquired intangibles patent rights marketing authorisations product rights 5 years 5–10 years 10–15 years Period of patent Indefinite life Period of product rights 58 stock code: DPH 15400 09/09/2008 Proof 8 1540 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) 15400DECHRA:Layout 1 9/9/08 17:39 Page 59 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 1. Accounting Policies continued (i) Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. (j) (k) The cost of inventories is based on the first-in, first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity. Cash and Cash Equivalents Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Impairment The carrying amounts of the Group’s assets, other than inventories and deferred tax assets, are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. The recoverable amount of assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. For goodwill, assets that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date and when there is an indication that the asset is impaired. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating units (group of units), and then to reduce the carrying amount of the other assets in the units (group of units) on a pro-rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (l) Dividends Dividends are recognised in the period in which they are approved by the Company’s Shareholders or, in the case of an interim dividend, when the dividend is paid. (m) Employee Benefits (i) (ii) Pensions The Company operates a Group stakeholder personal pension scheme for certain employees. Obligations for contributions are recognised as an expense in the income statement as incurred. Share-Based Payment Transactions The Group operates a number of equity-settled share-based payment programmes that allow employees to acquire shares of the Company. The Group also operates a Long Term Incentive Plan for Directors and senior Executives. The fair value of shares or options granted is recognised as an employee expense on a straight-line basis in the income statement with a corresponding movement in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the shares or options (the vesting period). The fair value of the shares or options granted is measured using a valuation model taking into account the terms and conditions upon which the shares or options were granted. The amount recognised as an expense in the income statement is adjusted to take into account an estimate of the number of shares or options that are expected to vest together with an adjustment to reflect the number of shares or options that actually do vest except where forfeiture is only due to market-based conditions not being achieved. The fair values of grants under the Long Term Incentive Plan have been determined using the Monte Carlo simulation model. The fair values of options granted under all other share option schemes have been determined using the Black–Scholes option pricing model. National Insurance contributions payable by the Company on the intrinsic value of share-based payments at the date of exercise are treated as cash-settled awards and revalued to market price at each balance sheet date. O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 59 15400DECHRA:Layout 1 9/9/08 17:39 Page 60 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Consolidated Financial Statements continued 1. Accounting Policies continued (n) Revenue (i) Goods Sold For both Pharmaceuticals and Services, revenue from the sale of goods is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the buyer. This is normally when the buyer takes delivery of the goods. Appropriate provision is made, based on past experience, for the possible return of goods and discounts given to customers. (ii) Services Provided Revenue is recognised when the contractual service has been provided to the customer. (iii) Royalty and Milestone Payments Milestone payments received from the granting of distribution and marketing rights for products are recognised in the income statement over the period in which the Company fulfils the longer of all of its obligations and the period for which rights are granted relating to such payments. (o) Expenses (i) Operating Lease Payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement evenly over the period of the lease, as an integral part of the total lease expense. (ii) Finance Lease Payments Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. (iii) Net Financing Costs Net financing costs comprise interest payable on borrowings, interest receivable on funds invested and gains and losses on hedging instruments that are recognised in the income statement (see accounting policy f). Interest income is recognised in the income statement as it accrues. The interest expense component of finance lease payments is recognised in the income statement using the effective interest rate method. (p) Income Tax Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method and represents the tax payable or recoverable on most temporary differences which arise between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes (the tax base). Temporary differences are not provided on: goodwill that is not deductible for tax purposes; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit and do not arise from a business combination; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates expected to apply in the period in which the liability is settled or the asset is realised and is based upon tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is not probable that the related tax benefit will be realised against future taxable profits. The carrying amounts of deferred tax assets are reviewed at each balance sheet date. Current and deferred tax credits received in respect of share-based payments are recognised in the Income Statement to the extent that they do not exceed the standard rate of taxation on the Income Statement charge for share-based payments. Credits in excess of the standard rate of taxation are recognised directly in equity. (q) Segment Reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. (r) Operating Profit and Operating Cash Flow Operating profit and operating cash flow is stated before investment income and finance costs. 60 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 61 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 2. Segmental Analysis The Group’s primary reporting segment is business divisions which correspond with the way the operating businesses are organised and managed within the Group and its secondary segment is geographical origin. Segment results, assets and liabilities comprise those items directly attributable to particular segments as well as items which can reasonably be allocated to those segments. Inter-segment transactions are entered into applying normal commercial terms that would be available to third parties. Unallocated items comprise mainly corporate assets, expenses, loans and borrowings together with the elimination of inter-segment transactions. The composition of the segments is detailed in the Directors’ Business Review section of this Annual Report. The following table analyses revenue and operating profit accordingly: Business Segment Revenue Pharmaceuticals 2007 £’000 2008 £’000 Services 2008 £’000 2007 £’000 Unallocated 2008 £’000 2007 £’000 Total 2008 £’000 2007 £’000 External customers 45,187 19,736 259,184 234,067 — — 304,371 253,803 Inter-segment Total revenue 9,115 6,912 179 140 54,302 26,648 259,363 234,207 (9,294) (9,294) (7,052) — — (7,052) 304,371 253,803 Adjusted operating profit 10,765 6,102 10,693 9,525 (2,316) (1,751) 19,142 13,876 Amortisation of acquired intangibles and rationalisation costs (5,035) (21) (36) (6) — — (5,071) (27) Operating profit Finance income Finance expense Profit before taxation Income tax expense Profit for the year Assets Intangible assets Property, plant and equipment Other assets Cash offset Total assets Liabilities Borrowings Other liabilities Cash offset Total liabilities 5,730 6,081 10,657 9,519 (2,316) (1,751) 14,071 13,849 1,973 1,044 (4,339) (2,274) 11,705 12,619 (3,387) (3,772) 8,318 8,847 86,468 6,401 9,382 3,624 3,907 1,823 3,707 2,115 35,140 15,071 80,706 70,090 — — 650 — — 90,375 13,089 8,224 5,739 156 116,496 85,317 — — — — (13,344) (6,190) (13,344) (6,190} 128,009 28,077 86,436 75,912 (12,694) (6,034) 201,751 97,955 (506) (586) (1,418) (1,489) (60,636) (20,310) (62,560) (22,385) (14,123) (5,452) (47,343) (42,571) (19,270) (3,229) (80,736) (51,252) — — — — 13,344 6,190 13,344 6,190 (14,629) (6,038) (48,761) (44,060) (66,562) (17,349) (129,952) (67,447) Net assets/(liabilities) 113,380 22,039 37,675 31,852 (79,256) (23,383) 71,799 30,508 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 61 15400DECHRA:Layout 1 9/9/08 17:39 Page 62 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Consolidated Financial Statements continued 2. Segmental Analysis continued Other Segment Items Capital expenditure — intangible assets — property, plant and equipment Total capital expenditure Share-based payments charge Depreciation and amortisation 77,238 3,448 80,686 — 3,922 4,611 549 5,160 — 569 295 232 527 — 599 1,348 595 1,943 — 552 — — — 759 — — — — 596 — 77,533 3,680 81,213 759 4,521 Geographical Segment The following table shows revenue based on the geographical location of customers: UK Rest of Europe USA Rest of world 2008 £’000 277,463 20,460 5,266 1,182 304,371 5,959 1,144 7,103 596 1,121 2007 £’000 247,920 4,246 1,121 516 253,803 The table below gives additional information in respect of segment revenue and segment operating profit, based on the geographical location of the business unit supplying the goods or services. Segment assets and capital expenditure are based on the geographical location of the assets and expenditure. Activities in the UK comprise all operating segments. Overseas operations comprise pharmaceuticals only. UK USA Denmark 2008 £’000 2007 £’000 2008 £’000 2007 £’000 2008 £’000 2007 £’000 Unallocated 2008 £’000 2007 £’000 Total 2008 £’000 2007 £’000 Revenue by geographical origin 280,847 253,429 4,566 374 18,958 — — — 304,371 253,803 18,357 15,825 450 (198) 2,651 — (2,316) (1,751) 19,142 13,876 118,401 102,533 2,275 1,456 93,769 — (12,694) (6,034) 201,751 97,955 Adjusted operating profit by geographical origin Total assets Capital expenditure — intangible assets 3,584 5,959 — property, plant and equipment 787 1,141 Total capital expenditure 4,371 7,100 3. Finance Income Recognised in profit or loss Finance income arising from: — Cash and cash equivalents — Derivatives at fair value through profit or loss — Loans and receivables — 17 17 — 73,949 3 3 2,876 76,825 — — — — — — — 77,533 5,959 — 3,680 1,144 — 81,213 7,103 2008 £’000 1,631 325 17 1,973 2007 £’000 1,018 — 26 1,044 62 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 63 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 3. Finance Income continued Finance income arising from derivatives at fair value through profit or loss relates to fair value gains on forward foreign currency contracts. Recognised directly in equity Foreign currency translation differences for foreign operations Net loss on hedge of net investment in foreign operations Recognised in foreign currency translation reserve Fair value gains on interest rate floor and ceiling Income tax expense on above Amount recycled to income statement Recognised in hedging reserve Total recognised in equity 4. Finance Expense Finance expense arising from: — Financial liabilities at amortised cost — Derivatives at fair value through profit or loss 2008 £’000 2,415 (807) 1,608 2008 £’000 446 (125) 31 352 1,960 2008 £’000 4,281 58 4,339 2007 £’000 — — — 2007 £’000 — — — — — 2007 £’000 2,228 46 2,274 Finance expense arising from derivatives at fair value through profit or loss relates to fair value losses on foreign currency options and interest rate floor and ceilings. 5. Adjusted Operating Profit and Profit before Taxation Adjusted operating profit is calculated as follows: Operating profit Operating profit Amortisation of intangible assets acquired as a result of business combinations Rationalisation costs arising following the acquisition of VetXX Holdings A/S Adjusted operating profit Adjusted profit before taxation is calculated as follows: Profit before taxation Profit before taxation Amortisation of intangible assets acquired as a result of business combinations Rationalisation costs arising following the acquisition of VetXX Holdings A/S Write-off of unamortised arrangement fees on borrowings refinanced as a result of the acquisition of VetXX Holdings A/S Adjusted profit before taxation www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 2008 £’000 14,071 2,975 2,096 19,142 2008 £’000 11,705 2,975 2,096 77 16,853 2007 £’000 13,849 27 — 13,876 2007 £’000 12,619 27 — — 12,646 63 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s 15400DECHRA:Layout 1 9/9/08 17:39 Page 64 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Consolidated Financial Statements continued 6. Profit before Taxation The following items have been included in arriving at profit before taxation: Cost of inventories recognised as an expense Impairment of inventories included in above figure Depreciation of property, plant and equipment — owned assets — under finance leases Amortisation of intangible assets Loss/(profit) on disposal of property, plant and equipment Impairment of receivables Operating lease rentals payable Research and development expenditure as incurred Auditors’ remuneration Analysis of total fees paid to the auditors: Audit of these financial statements Audit of financial statements of subsidiaries pursuant to legislation Other services pursuant to legislation Other services relating to taxation 2008 £’000 247,801 548 1,065 226 3,230 15 788 2,719 2,408 278 30 139 17 92 278 2007 £’000 214,602 446 806 178 137 (7) 1,183 2,124 1,645 260 25 78 8 149 260 In addition, payments made to the auditors of £964,000 (2007: £15,000) relating to corporate finance transactions have been capitalised as part of the acquisition cost of VetXX Holdings A/S. 64 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 65 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 7. Employees The average numbers of staff employed by the Group during the year, which includes Directors, were: Manufacturing Distribution Administration The costs incurred in respect of these employees were: Wages and salaries Social security costs Other pension costs Share-based payments charge (see note 23) Related party transactions — the remuneration of key management was as follows: Wages and salaries (including benefits in kind) Social security costs Other pension costs Share-based payments charge 2008 Number 203 411 275 889 2008 £’000 19,766 1,849 813 759 23,187 2008 £’000 1,750 224 138 510 2,622 2007 Number 147 390 210 747 2007 £’000 13,992 1,359 403 596 16,350 2007 £’000 1,499 192 111 439 2,241 Key management comprises Executive Directors, the Product Development and Regulatory Affairs Director and the Divisional Managing Directors. Details of the remuneration, shareholdings, share options and pension contributions of the Executive Directors are included in the Directors’ Remuneration Report on pages 38 to 44. The Group operates a stakeholder personal pension scheme for certain employees. The Group contributed between 4% and 14% of pensionable salaries which amounted to £813,000 (2007: £403,000). O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 65 15400DECHRA:Layout 1 9/9/08 17:39 Page 66 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Consolidated Financial Statements continued 8. Income Tax Expense Current tax — charge for current year — adjustment in respect of prior years Total current tax expense Deferred tax — origination and reversal of temporary differences — adjustment in respect of prior years Total deferred tax expense Total income tax expense in the income statement 2008 £’000 3,687 (29) 3,658 (300) 29 (271) 3,387 Of the current tax expense of £3,658,000, an amount of £14,000 (2007: £nil) was in respect of foreign territories. The tax on the Group’s profit before tax differs from the standard rate of UK corporation tax of 28% (2007: 30%). The differences are explained below: Profit before taxation Tax at 28% (2007: 30%) Effect of: — depreciation on assets not eligible for tax allowances — disallowable expenses — utilisation of overseas losses — over-recovery of deferred tax on share-based payments — research and development tax credits — differences on overseas tax rates — reduction in tax rate used to calculate deferred tax liability — adjustments in respect of prior years — adjustments due to changes in tax rate Total income tax expense 2008 £’000 11,705 3,277 15 45 (137) — — (5) 16 — 176 3,387 Additional current tax credits of £266,000 (2007: £454,000) and a deferred tax charge of £265,000 (2007: credit of £1,000) have been recognised directly in equity. The corporation tax rate applicable to the Company changed from 30% to 28% with effect from 1 April 2008. 2007 £’000 3,361 (69) 3,292 409 71 480 3,772 2007 £’000 12,619 3,786 47 41 58 (46) (60) — (56) 2 — 3,772 66 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 67 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 9. Dividends Final dividend paid in respect of prior year but not recognised as a liability in that year 5.00p per share (2007: 4.33p) Interim dividend paid 2.75p per share (2007: 2.50p) Total dividend 7.75p per share (2007: 6.83p) recognised as distributions to equity holders in the period Proposed final dividend for the year ended 30 June 2008 5.50p per share (2007: 5.00p) Total dividend paid and proposed for the year ended 30 June 2008 8.25p per share (2007: 7.50p) 2008 £’000 2,640 1,780 4,420 3,588 5,368 2007 £’000 2,278 1,317 3,595 2,640 3,957 In accordance with IAS 10 ‘Events After the Balance Sheet Date’, the proposed final dividend for the year ended 30 June 2008 has not been accrued for in these financial statements. It will be shown as a deduction from equity in the financial statements for the year ending 30 June 2009. The proposed final dividend for the year ended 30 June 2007 is shown as a deduction from equity in the year ended 30 June 2008. 10. Earnings per Share Earnings per ordinary share have been calculated by dividing the profit attributable to equity holders of the parent after taxation for each financial period by the weighted average number of ordinary shares in issue during the period. Basic earnings per share — Adjusted basic — Basic Diluted earnings per share — Adjusted diluted — Diluted The calculations of basic and diluted earnings per share are based upon: Earnings for adjusted basic and adjusted diluted earnings per share calculations Earnings for basic and diluted earnings per share figures 2008 Pence 20.81 14.20 20.64 14.09 £’000 12,185 8,318 No. 2007 Pence 16.89 16.86 16.66 16.62 £’000 8,866 8,847 No. Weighted average number of ordinary shares for basic earnings per share Impact of share options Weighted average number of ordinary shares for diluted earnings per share 58,560,097 464,486 59,024,583 52,482,659 737,011 53,219,670 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 67 15400DECHRA:Layout 1 9/9/08 17:39 Page 68 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Consolidated Financial Statements continued 11. Intangible Assets Cost At 1 July 2006 Additions Disposals At 30 June 2007 and 1 July 2007 Additions Goodwill £’000 Software £’000 4,385 467 — 4,852 — Develop- ment costs £’000 826 1,680 — 2,506 1,331 261 — 10 Patent rights £’000 789 257 — 1,046 1,879 — — — 717 591 — 1,308 411 94 — 3 Acquisition through business combinations 14,397 Disposals Foreign exchange adjustments — 595 At 30 June 2008 Amortisation At 1 July 2006 Charge for the year Disposals At 30 June 2007 and 1 July 2007 Charge for the year Disposals At 30 June 2008 Net book value At 30 June 2008 At 30 June 2007 and 1 July 2007 At 1 July 2006 19,844 1,816 4,108 2,925 — — — — — — — 91 58 — 149 132 — 281 181 52 — 233 123 — 356 — — — — — — — 19,844 4,852 4,385 1,535 1,159 626 3,752 2,273 645 2,925 1,046 789 Contracted capital commitments Software assets in the course of construction included above Product rights £’000 Marketing authori- sations £’000 Acquired intangibles £’000 278 — (278) — — — — — — 18 — (18) — — — — — — 260 Total £’000 7,817 5,959 (278) — 2,933 — 2,933 13,498 — 3,621 59,160 73,912 — — 2,375 2,983 822 31 — 853 — — — — 853 64,468 94,014 — — — — — — — 853 853 822 — 27 — 27 290 137 (18) 409 2,975 3,230 — — 3,002 3,639 61,466 90,375 2,906 13,089 — 2008 £’000 — 935 7,527 2007 £’000 200 1,158 Goodwill is allocated across cash-generating units and consequently a consistent approach in assessing the carrying value of this amount is taken. Key assumptions made in this respect are given in note 13. The addition in the year arose from the acquisition of VetXX Holdings A/S (see note 27). 68 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 69 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 11. Intangible Assets continued Development costs are internally generated. All other additions to intangible assets were acquired outside the Group and have been measured at cost or fair value at the time of acquisition. The amortisation charge is recognised within administrative expenses in the income statement. During the year ended 30 June 2003, the Group entered into an agreement with Bioenvision, a Company based in the USA, to acquire the exclusive marketing and development rights of Trilostane for animal health applications in the USA and Canada. Trilostane is the active ingredient in the Group’s branded product Vetoryl Capsules. The first stage payment of £789,000 including legal costs was made in 2003 and has been capitalised as a patent right. Depending upon certain milestones being achieved, the Group is committed to making two further payments. The second stage payment of US$750,000 becomes payable on the submission of a New Animal Drug Application to the US Food and Drug Administration (“FDA”) and the final payment of US$3,000,000 becomes payable on the FDA granting a marketing authorisation for Vetoryl Capsules. These amounts are accrued for in these financial statements. Once a marketing authorisation has been granted and the patent right can be applied commercially, the patent rights will begin to be amortised. £822,000 of the marketing authorisations relate to the Vetivex range of products. The Vetivex marketing authorisations are regarded as having indefinite useful economic lives and have not been amortised. Ownership of the marketing authorisations rests with the Group in perpetuity. There are not believed to be any legal, regulatory or contractual provisions that limit their useful lives. Vetivex is an established range of products which are relatively simple in nature and there are a limited number of players in the market. Accordingly, the Directors believe that it is appropriate that the marketing authorisations are treated as having indefinite lives for accounting purposes. Acquired intangibles comprise: — Marketing authorisations, brands and trademarks of products recognised on the acquisition of VetXX Holdings A/S — Customer relationships recognised on the acquisition of Leeds Veterinary Laboratories Limited — Trademarks and brands recognised on the acquisition of Pharmaderm Animal Health O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 69 15400DECHRA:Layout 1 9/9/08 17:39 Page 70 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Consolidated Financial Statements continued 12. Property, Plant and Equipment Freehold land and buildings £’000 Short leasehold buildings £’000 Motor vehicles £’000 Plant and fixtures £’000 Cost At 1 July 2006 Additions Acquisitions through business combinations Disposals At 30 June 2007 and 1 July 2007 Additions Acquisition through business combinations Disposals Foreign exchange adjustments At 30 June 2008 Depreciation At 1 July 2006 Charge for the year Disposals At 30 June 2007 and 1 July 2007 Charge for the year Disposals At 30 June 2008 Net book value At 30 June 2008 At 30 June 2007 and 1 July 2007 At 1 July 2006 Net book value of assets held under finance leases At 30 June 2008 At 30 June 2007 and 1 July 2007 At 1 July 2006 Assets in the course of construction included above Contracted capital commitments 13 — — — 13 — 2,072 — 84 2,601 27 — — 2,628 144 — — — 2,169 2,772 — — — — 61 — 61 2,108 13 13 — — — 550 147 — 697 154 — 851 1,921 1,931 2,051 84 70 77 433 — — — 433 — — (2) — 431 433 — — 433 — (2) 431 — — — — — — 7,500 1,079 38 (33) 8,584 678 786 (1,524) 32 8,556 3,969 837 (17) 4,789 1,076 (1,504) 4,361 4,195 3,795 3,531 938 1,172 1,028 2008 £’000 290 327 Total £’000 10,547 1,106 38 (33) 11,658 822 2,858 (1,526) 116 13,928 4,952 984 (17) 5,919 1,291 (1,506) 5,704 8,224 5,739 5,595 1,022 1,242 1,105 2007 £’000 370 61 70 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 71 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 13. Impairment Reviews Goodwill, indefinite life assets and intangible assets not yet available for use are tested for impairment annually, or more frequently if there are indications that amounts might be impaired. The impairment test involves determining the recoverable amounts of the relevant cash-generating unit, which corresponds to the higher of the fair value less costs to sell or its value in use. Value in use calculations have been performed using the methods and assumptions detailed below: (a) Goodwill The carrying amount of goodwill shown in note 11 comprises £2,621,000 (2007: £2,621,000) relating to the acquisition of North Western Laboratories Limited and Leeds Veterinary Laboratories Limited, £2,231,000 (2007: £2,231,000) relating to the acquisition of Anglian Pharma plc and £14,397,000 (2007: £nil) in respect of the acquisition of VetXX Holdings A/S. For the purpose of annual impairment reviews the goodwill relating to North Western Laboratories and Leeds Veterinary Laboratories Limited has been allocated to the Laboratories cash-generating unit, the goodwill relating to Anglian Pharma plc has been allocated to the Dales Pharmaceuticals cash- generating unit and the goodwill relating to VetXX Holdings A/S has been allocated to the VetXX cash-generating unit. The recoverable amount of all units is based on value in use calculations. The value in use of each of these cash-generating units has been determined by discounting projected future cash flows by a pre-tax discount rate of 9.93%, being the Directors’ estimate of the weighted average cost of capital of the Company. Projected future cash flows have been derived from the annual budget for the year ending 30 June 2009 extrapolated applying a growth rate of 5% per annum up to year five and no growth in revenues beyond year five. The strong market position of each business justifies considering a period in excess of five years. In all cases, the value in use is significantly higher than the carrying amount and no impairment provision is therefore required. Indefinite Life Assets The Directors consider that the Vetivex marketing authorisations with a carrying amount of £822,000 have an indefinite life. Their value in use has been determined by discounting projected future cash flows by a pre-tax discount rate of 9.93%, being the Directors’ estimate of the weighted average cost of capital of the Company. Projected future cash flows have been derived from the annual budget for the year ending 30 June 2009 applying a growth rate of 5% per annum up to year five and no growth in revenues beyond year five. The value in use is significantly higher than the carrying amount and no impairment provision is therefore required. Intangible Assets not yet available for use (i) Vetoryl The Group is developing an intangible asset in respect of authorisation to market our product Vetoryl Capsules in the USA. This intangible asset will only be available for use once marketing authorisation is received from the FDA. (b) (c) The carrying amount in respect of this intangible asset is as follows: Payment to acquire patent rights to Trilostane (the active ingredient of Vetoryl Capsules) Subsequent development costs Further Bioenvision milestone payments 2008 £’000 789 1,869 1,879 4,537 2007 £’000 789 1,263 — 2,052 Value in use has been determined by discounting the projected cash flows by a pre-tax discount rate of 14.93%. The higher discount rate reflects the uncertainty of the timing of future cash flows. Projected cash flows have been determined from a detailed marketing plan covering a five year period from product launch extrapolated forward. No growth in revenues is assumed after the fifth year following launch. The marketing plan uses data on the market size and market penetration taking into account our experience in launching Vetoryl Capsules in other territories. Based upon the above calculation, the value in use is significantly higher than the carrying amount and no impairment provision is required. (ii) Felimazole The Group is developing an intangible asset in respect of authorisation to market our product Felimazole Tablets in the USA. This intangible asset will only be available for use once market authorisation is received from the FDA. At 30 June 2008, the carrying value of this intangible asset (included within development costs) was £697,000 (2007: £344,000). Value in use has been determined by discounting the projected cash flows by a pre-tax discount rate of 14.93%. The higher discount rate reflects the uncertainty of the timing of future cash flows. Projected cash flows have been determined from a detailed marketing plan covering a five year period from product launch extrapolated forward. No growth in revenues is assumed after the fifth year following launch. The marketing plan uses data on the market size and market penetration taking into account our experience in launching Felimazole Tablets in other territories. Based upon the above calculation, the value in use is significantly higher than the carrying amount and no impairment provision is required. O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 71 15400DECHRA:Layout 1 9/9/08 17:39 Page 72 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Consolidated Financial Statements continued 14. Deferred Taxes (a) Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Intangible assets Property, plant and equipment Inventories Receivables Cash and cash equivalents Borrowings Payables Current tax liabilities Trading losses Share-based payments Shown as: Deferred tax assets Deferred tax liabilities Assets 2008 £’000 2007 £’000 — — 53 — — — 248 — 1,309 788 2,398 — — — 30 — — 32 — — 856 918 Liabilities Net 2008 £’000 (15,872) (423) (72) (294) — — — — — — 2007 £’000 (740) (325) — — — — — — — — 2008 £’000 (15,872) (423) (19) (294) — — 248 — 1,309 788 (16,661) (1,065) (14,263) 2008 £’000 1,053 (15,316) (14,263) Deferred tax assets and liabilities are offset to the extent that there is a legally enforceable right to offset current tax assets against current tax liabilities. (b) Unrecognised deferred tax assets Tax losses 2008 £’000 — Overseas tax losses brought forward at 1 July 2007 have been utilised during the current financial year. (c) Movement in temporary differences during the year 2007 £’000 (740) (325) — 30 — — 32 — — 856 (147) 2007 £’000 — (147) (147) 2007 £’000 166 Balance at 1 July 2006 £’000 Acquisitions £’000 Recognised in income £’000 Recognised in equity £’000 Balance at 30 June 2007 £’000 (193) (311) — 98 — — 38 — 813 445 (113) (434) — — — — — — — — (14) — (68) — — (6) — 42 (113) (480) — — — — — — — — 1 1 (740) (325) — 30 — — 32 — 856 (147) Intangible assets Property, plant and equipment Inventories Receivables Cash and cash equivalents Borrowings Payables Current tax liabilities Share-based payments 72 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 73 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Balance at 1 July 2007 £’000 (740) (325) — 30 — — 32 — — 856 (147) 14. Deferred Taxes continued Intangible assets Property, plant and equipment Inventories Receivables Cash and cash equivalents Borrowings Payables Current tax liabilities Trading losses Share-based payments 15. Inventories Raw materials and consumables Work in progress Finished goods and goods for resale 16. Trade and Other Receivables Trade receivables Other receivables Prepayments and accrued income 17. Cash and Cash Equivalents Cash at bank and in hand Short-term deposits The short-term deposits are repayable on demand. 18. Trade and Other Payables Trade payables Other payables Other taxation and social security Accruals and deferred income www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 Acquisitions £’000 (14,863) (136) 56 (84) — — 201 — 1,257 — Recognised in income £’000 Recognised in equity £’000 331 44 (71) (112) — — 7 — — 72 — — — (125) — — — — — (140) (265) (13,569) 271 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s Foreign exchange adjustments £’000 Balance at 30 June 2008 £’000 (600) (15,872) (6) (4) (3) —— —— 8 —— 52 — (423) (19) (294) 248 1,309 788 (553) (14,263) 2008 £’000 3,860 316 28,259 32,435 2008 £’000 43,741 1,896 1,808 47,445 2008 £’000 4,657 17,562 22,219 2008 £’000 50,177 5,412 3,894 3,113 62,596 2007 £’000 2,250 208 23,274 25,732 2007 £’000 34,029 1,368 776 36,173 2007 £’000 1,468 15,754 17,222 2007 £’000 44,019 605 1,978 2,039 48,641 73 15400DECHRA:Layout 1 9/9/08 17:39 Page 74 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Consolidated Financial Statements continued 19. Current Tax Liabilities Corporation tax payable 20. Borrowings Current liabilities Bank loans and overdrafts Finance lease obligations Non-current liabilities Bank loans Finance lease obligations Arrangement fees netted off Total borrowings 2008 £’000 2,824 2008 £’000 20,616 602 21,218 27,500 1,507 (1,009) 27,998 49,216 2007 £’000 2,464 2007 £’000 4,000 529 4,529 10,200 1,546 (80) 11,666 16,195 The Group’s borrowing facilities comprise a term loan of £32.5 million repayable in equal instalments of £2.5 million each 30 June and 31 December, a £15 million revolving credit facility committed until 31 December 2012, an overdraft facility of £10 million renewable on 1 July 2009 and various finance lease obligations. At the year end, the Group had the following unutilised borrowing facilities: Revolving credit facility Bank overdraft facility 2008 £’000 — 10,000 10,000 2007 £’000 5,000 4,000 9,000 The term loan, revolving credit and overdraft facilities are secured by a fixed and floating charge on the assets of the Group. Interest is charged at 1.25% over LIBOR for the term loan, 1% over LIBOR for the revolving credit facility and 1% above base rate for the overdraft facility. The maturity of the bank loans and overdrafts is as follows: Payable: Within one year Between one and two years Between two and five years Due after five years 2008 £’000 20,616 5,000 15,000 7,500 48,116 2007 £’000 4,000 5,000 5,200 — 14,200 The minimum lease payments and the present value of minimum lease payments payable under finance lease obligations are: Within one year Between one and two years Between two and five years Total minimum lease payments Future finance charges Present value of lease obligations Minimum Lease Payments 2007 2008 £’000 £’000 Present Value of Minimum Lease Payments 2007 2008 £’000 £’000 786 631 1,116 2,533 (424) 2,109 704 623 1,153 2,480 (405) 2,075 602 517 990 2,109 — 2,109 529 511 1,035 2,075 — 2,075 Further information on the interest profile of borrowings is shown in note 21. 74 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 75 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 21. Financial Instruments and Related Disclosures The Group’s financial instruments comprise cash deposits, bank loans and overdrafts, finance lease obligations, derivatives used for hedging purposes and trade receivables and payables. Treasury Policy The Group reports in sterling and pays dividends out of sterling profits. The role of the Group’s treasury activities is to manage and monitor the Group’s external and internal funding requirements and financial risks in support of the Group’s corporate activities. Treasury activities are governed by policies and procedures approved by the Board of Directors. The Group uses a variety of financial instruments, including derivatives, to finance its operations and to manage market risks from these operations. Derivatives, principally comprising forward foreign currency contracts, foreign currency options and interest rate floors and ceilings, are used to hedge against changes in foreign currencies and interest rates. The Group does not hold or issue derivative financial instruments for speculative purposes and the Group’s treasury policies specifically prohibit such activity. All transactions in financial instruments are undertaken to manage the risks arising from underlying business activities, not for speculation. Capital Management The capital structure of the Group consists of net borrowings and Shareholders’ equity. At 30 June 2008, net borrowings were £27.0 million, whilst shareholders’ equity was £71.8 million. Net borrowings have increased compared to the equivalent point last year as new borrowings were taken on to partially finance the acquisition of VetXX Holdings A/S. The Group manages its capital structure to maintain a prudent balance between debt and equity that allows sufficient headroom to finance the Group’s product development programme and appropriate acquisitions. The Group operates globally, primarily through subsidiary companies established in the markets in which the Group trades. The Group’s operating subsidiaries are generally cash generative and none are subject to externally imposed capital requirements. Operating cash flow is used to fund investment in the development of new products as well as to make the routine outflows of capital expenditure, tax, dividends and repayment of maturing debt. The Group’s policy is to maintain borrowing facilities centrally which are then used to finance the Group’s operating subsidiaries, either by way of equity investments or loans. Financial Risk Management The Group has exposure to the following risks from its use of financial instruments: — liquidity risk — market risk — credit risk This note presents information about the Group’s exposure to each of the above risks, and the Group’s objectives, policies and processes for measuring and managing risk. Liquidity risk Liquidity risk is the risk that the Group will not have sufficient funds to meet liabilities as they fall due. Cash forecasts identifying the liquidity requirements of the Group are produced quarterly. These are reviewed to ensure sufficient financial headroom exists for at least a 12 month period. The Group manages its funding requirements through the following lines of credit: — £32.5 million term loan — £15 million revolving credit facility — £10 million working capital facility — various finance leases The Group’s undrawn borrowing facilities at 30 June 2008 are detailed in note 20. O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 75 15400DECHRA:Layout 1 9/9/08 17:39 Page 76 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Consolidated Financial Statements continued 21. Financial Instruments and Related Disclosures continued Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates or interest rates, will affect the Group’s income or the value of its holding of financial instruments. Interest rate risk management The majority of the Group’s borrowings bear interest at floating rates linked to base rate or LIBOR and are consequently exposed to cash flow interest rate risk. The Group had hedged interest rate risk on its term loan by means of an interest rate floor and ceiling arrangement whereby the Group’s exposure to fluctuations in LIBOR is limited to a minimum rate of 4.40% and a maximum rate of 5.70%. The amount of the term loan outstanding at 30 June 2008 was £32.5 million. The hedge is in place until 31 December 2010 and the amount hedged matches the repayment profile of the loan. Foreign exchange risk management Foreign currency transaction exposure arising on normal trade flows is not hedged. The Group matches receipts and payments in the relevant foreign currencies as far as possible. To this end, bank accounts are maintained for all the major currencies in which the Group trades. Where foreign subsidiaries have ongoing funding requirements in the local currency, then forward contracts are used. The Group also hedges selectively expected currency cash flows outside normal trading activities, principally using foreign currency options. The Group hedges its net investment in major overseas subsidiaries by denominating an appropriate amount of borrowings in the local currency to match the net assets of the subsidiary. However, translational exposure in converting the income statements of foreign subsidiaries into the Group’s presentational currency of sterling is not hedged. Borrowings that are denominated in foreign currencies that match investments in overseas Group assets are treated as hedges against the relevant assets. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Group considers its maximum credit risk to be £67,380,000 which is the total carrying value of the Group’s financial assets. Cash is only deposited with highly rated banks. The Group offers trade credit to customers in the normal course of business. Trade and bank references are obtained prior to extending credit. The financial statements of corporate customers are monitored on a regular basis. The principal customers of the Services division are UK veterinary practices. The customer base is diverse and, with the exception of the largest corporate accounts, the failure of a single customer would not have a material adverse impact on the Group's financial results. The principal customers of the Pharmaceuticals division are European and US wholesalers. The failure of a large wholesaler could have a material adverse impact on the Group’s financial results. The largest customer of the Group accounted for approximately 7.5% of gross trade receivables at 30 June 2008. Receivables are written off against the impairment provision when management considers the debt to be no longer recoverable. 76 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 77 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 21. Financial Instruments and Related Disclosures continued Fair value of financial assets and liabilities The following table presents the carrying amounts and the fair values of the Group’s financial assets and liabilities at 30 June 2008 and 30 June 2007. The following assumptions were used to estimate the fair values: Cash and cash equivalents — approximates to the carrying amount. Forward exchange contracts — based on market price and exchange rates at the balance sheet date. Currency options and interest rate floor and ceiling — based upon the amount that the Group would receive or pay to terminate the instrument at the balance sheet date, being the market price of the instrument. Receivables and payables — approximates to the carrying amount. Finance lease obligations — based upon discounted cash flows using discount rates based upon the Group’s cost of borrowing at the balance sheet date. Analysis of Financial Instruments The financial instruments of the Group are analysed as follows: Financial assets Cash and cash equivalents Held for trading financial assets: — derivatives designated as hedges — other derivatives Loans and receivables — trade receivables — other receivables within the scope of IAS 39 Other financial assets Total financial assets Financial liabilities Bank loans and overdrafts Finance lease liabilities Trade payables Total financial liabilities Net financial assets and liabilities 2008 2007 Carrying value Fair value Carrying value Fair value 22,219 22,219 17,222 17,222 446 689 1,135 43,741 285 44,026 — 67,380 (47,107) (2,109) (50,177) (99,393) (32,013) 446 689 1,135 43,741 285 44,026 — 25 25 34,029 — 34,029 — 25 25 34,029 — 34,029 —— — 67,380 51,276 51,276 (47,107) (2,177) (50,177) (99,461) (32,081) (14,120) (2,075) (44,019) (60,214) (8,938) (14,120) (2,168) (44,019) (60,307) (9,031) O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 77 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) 15400DECHRA:Layout 1 9/9/08 17:39 Page 78 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Consolidated Financial Statements continued 21. Financial Instruments and Related Disclosures continued Credit risk — Overdue financial assets The following table shows financial assets which are overdue and for which no impairment provision has been made: Overdue by: Up to one month Between one and two months Between two and three months Over three months The movement in the impairment provision was as follows: At 1 July 2007 Impairment provision recognised Impairment provision utilised At 30 June 2008 2008 £’000 2,590 930 431 1,452 5,403 2008 £’000 3,177 846 (2,440) 1,583 2007 £’000 1,541 535 319 2,676 5,071 2007 £’000 2,033 1,183 (39) 3,177 Liquidity risk — Contracted cash flows of financial liabilities The following table shows the cash flow commitments of the Group in respect of financial liabilities excluding derivatives at 30 June 2008 and 30 June 2007. Where interest is at floating rates, the future interest payments have been estimated using current interest rates: At 30 June 2008 Carrying value Arrangement fees netted off Future interest Total committed cash flow Payable: Within 6 months Between 6 months and 1 year Between 1 and 2 years Between 2 and 3 years Between 3 and 4 years Between 4 and 5 years Over 5 years Bank Loans and overdrafts £’000 (47,107) (1,009) (8,283) (56,399) (19,369) (3,582) (6,892) (6,532) (6,172) (5,812) (8,040) Finance Leases £’000 (2,109) — (424) (2,533) (432) (354) (633) (442) (413) (259) — Trade Payables £’000 (50,177) — — Total £’000 (99,393) (1,009) (8,707) (50,177) (109,109) (50,168) (69,969) (9) — — — — — (3,945) (7,525) (6,974) (6,585) (6,071) (8,040) Of the bank loans and overdrafts of £19,369,000 payable within six months, £15,000,000 is available to be drawn down again. (56,399) (2,533) (50,177) (109,109) 78 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 79 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 21. Financial Instruments and Related Disclosures continued At 30 June 2007 Carrying value Arrangement fees netted off Future interest Total committed cash flow Payable: Within 6 months Between 6 months and 1 year Between 1 and 2 years Between 2 and 3 years Between 3 and 4 years Between 4 and 5 years Over 5 years Bank Loans and overdrafts £’000 (14,120) (80) (1,901) (16,101) (2,518) (2,445) (5,653) (5,485) — — — Finance Leases £’000 (2,075) — (405) (2,480) (400) (303) (623) (544) (357) (253) — Trade Payables £’000 (44,019) — — (44,019) (44,010) (9) — — — — — Total £’000 (60,214) (80) (2,306) (62,600) (46,928) (2,757) (6,276) (6,029) (357) (253) — The contractual undiscounted cash flows in respect of derivative financial instruments are as follows: (16,101) (2,480) (44,019) (62,600) Due: Within 6 months Between 6 months and 1 year Between 1 and 2 years 2008 2007 Receivables £’000 Payables £’000 Receivables £’000 Payables £’000 2,306 2,231 2,231 6,768 1,978 1,955 2,072 6,005 — — — — — — — — At 30 June 2008, the Group had entered into forward exchange contracts to buy DKK63 million (£6,693 million translated at the closing exchange rate) and sell £6,005 million. The fair value gain arising during the year of £325,000 is recognised within finance income (see note 3). The Group has a contractual right to receive £75,000 under its interest rate floor and ceiling arrangement covering the period from 1 July to 31 December 2008. There are no contractual cash flows arising from foreign currency options as the Group has the right, but not the obligation, to purchase foreign currency. With the exception of the above disclosed, there are no other assets that have been impaired during the year. O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 79 15400DECHRA:Layout 1 9/9/08 17:39 Page 80 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Consolidated Financial Statements continued 21. Financial Instruments and Related Disclosures continued Foreign currency exposure The sterling equivalents of financial assets and liabilities denominated in foreign currencies at 30 June 2008 and 30 June 2007 were: At 30 June 2008 Financial assets Trade receivables Other receivables Cash balances Derivatives Other financial assets Financial liabilities Bank loans and overdrafts Finance leases Trade payables Derivatives Net balance sheet exposure At 30 June 2007 Financial assets Trade receivables Other receivables Cash balances Derivatives Other financial assets Financial liabilities Bank loans and overdrafts Finance leases Trade payables Derivatives Other financial liabilities Net balance sheet exposure Danish kroner £’000 1,490 — 3,182 — — 4,672 (20,791) — (2,430) — (23,221) (18,549) Danish kroner £’000 — — — — — — — — — — — — Euros £’000 2,789 84 3,328 — — 6,201 — (1,286) (581) — (1,867) 4,334 Euros £’000 827 42 292 — — 1,161 — — (91) — (91) 1,070 US dollars £’000 709 — 596 — — Other £’000 761 — 388 — — 1,305 1,149 — — (141) — (141) — — (73) — (73) 1,164 1,076 US dollars £’000 257 — 27 — — 284 — — (1,251) — (1,251) (967) Other £’000 — — — — — — — — — — — — 80 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 81 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 21. Financial Instruments and Related Disclosures continued Sensitivity Analysis Interest rate risk A 1% increase in interest rates compared to those ruling at 30 June 2008 would reduce Group profit before taxation by £156,000. Foreign currency risk The Group has significant cash flows and net financial assets and liabilities in Danish kroner, US dollars and euros. The following table shows the impact on the Group’s profit before taxation and net assets of a 10% appreciation of sterling against each of these currencies: Danish kroner US dollars Euros Profit before taxation £’000 (529) (23) (1,231) Net assets £’000 (3,031) (193) (1,231) Hedges Cash flow hedges The Group has entered into an interest rate floor and ceiling on the term loan of £32.5 million and designated it a cash flow hedge. The risk being hedged in the variability of cash flows arising from movements in interest rates. No ineffectiveness is assumed on the hedge. The hedge is in place until 31 December 2010. The amounts recognised in equity are recycled to the income statement to offset gains and losses in the period in which the cash flow occurs. The amount recognised in equity in the year ended 30 June 2008 was £446,000 less related income tax of £125,000 (2007: £nil). £44,000 less income tax of £13,000 was recycled to the income statement (2007: £nil). Net investment hedges Borrowings in Danish kroner taken out at the time of the acquisition of VetXX Holdings A/S have been designated as a net investment hedge in respect of the foreign currency translation risk arising on the Group’s net investment in VetXX Holdings A/S. No ineffectiveness is assumed on the hedge. O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 81 15400DECHRA:Layout 1 9/9/08 17:39 Page 82 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Consolidated Financial Statements continued 22. Share Capital Authorised Allotted, called up and fully paid at start of year New shares issued Allotted, called up and fully paid at end of year Ordinary shares of 1p each 2008 2007 £’000 1,000 528 124 652 No. £’000 100,000,000 52,803,699 12,438,210 65,241,909 750 519 9 528 No. 75,000,000 51,915,002 888,697 52,803,699 On 8 January 2008, 11,624,544 new ordinary shares were issued by way of a Placing and Open Offer at a price of 303p per share to partially finance the acquisition of VetXX Holdings A/S. The gross proceeds raised were £35.2 million. During the year, 813,666 new ordinary shares of 1p (2007: 873,889 new ordinary shares of 1p) were issued following the exercise of options under the Executive Incentive Plan and the Approved, Unapproved and SAYE Share Options Schemes. The consideration received was £537,000 (2007: £357,000). In the year ended 30 June 2007, 14,808 new ordinary shares of 1p were issued in part consideration for the acquisition of Leeds Veterinary Laboratories Limited (see note 27). The market value of these new ordinary shares of 1p at the date of issue was £50,000 and this amount was credited to merger reserve. The holders of ordinary shares are entitled to receive dividends as declared or approved at General Meetings from time to time and are entitled to one vote per share at such meetings of the Company. 23. Share-based Payments During the year, the Company operated the Unapproved Share Option Scheme, the Approved Share Option Scheme, the Executive Incentive Plan and the Save As You Earn (“SAYE”) Share Option Scheme as described below: Unapproved and Approved Share Option Schemes Under these Schemes, options are granted to certain Executives and employees of the Group (excluding Executive Directors) to purchase shares in the Company at a price fixed at the average market value over the three days prior to the date of grant. For the options to vest, there must be an increase in earnings per share of at least 12% above the growth in the UK Retail Prices Index (RPI) over a three year period. Once vested, options must be exercised within 10 years of the date of grant. Executive Incentive Plan Under this plan Executive Directors and selected senior Executives are awarded shares in the Company subject to a Total Shareholder Return (“TSR”) target. The TSR target measures the Company’s TSR performance against the FTSE Small Cap Index over a three year measurement period (commencing at the beginning of the financial year in which the awards are made). 100% of the shares vest if the Company achieves an upper quartile performance, 30% of the shares vest at median performance and awards vest on a straight-line basis for performance in between. No shares vest if performance is below median. In addition, awards will only vest if, in the opinion of the Remuneration Committee, the performance of the Company has been satisfactory. SAYE Option Scheme This Scheme is open to all UK employees. Participants save a fixed amount of up to £250 per month for either three, five or seven years and are then able to use these savings to buy shares in the Company at a price fixed at a 20% discount to the market value at the start of the saving period. The SAYE options must ordinarily be exercised within six months of the completion of the relevant savings period. The exercise of these options is not subject to any performance criteria. 82 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 83 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 23. Share-based Payments continued Outstanding awards and the movement during the year are shown below: Year ended 30 June 2008 Exercise price per share Pence At 1 July 2007 Number Exercise period Exercised Number Granted Number Lapsed Number At 30 June 2008 Number Unapproved Share Option Scheme 14 September 2000 2003–2010 120 51,500 (42,500) 22 April 2002 11 April 2003 19 March 2007 2 April 2008 Approved Share Option Scheme 2 April 2004 3 December 2004 5 April 2005 15 March 2006 19 March 2007 2 April 2008 Executive Incentive Plan 9 October 2004 3 October 2005 14 September 2006 29 February 2008 SAYE Option Scheme 9 April 2002 3 April 2003 15 October 2004 18 October 2005 12 October 2006 17 October 2007 Total 2005–2012 153.5 38,500 (22,000) 2006–2013 2010–2017 2011–2018 58.5 289 366 35,500 (27,000) 26,139 — — — — — — — (2,000) 7,000 — — — 16,500 8,500 26,139 45,842 (10,000) 35,842 151,639 (91,500) 45,842 (12,000) 93,981 2007–2014 134.5 67,000 (32,000) 2007–2014 180 30,000 (3,333) 2008–2015 202.5 162,000 (88,500) 2009–2016 2010–2017 2011–2018 252 289 366 162,000 161,861 — — — — — — — — — — — 35,000 26,667 (8,000) 65,500 (11,000) 151,000 (11,000) 150,861 83,158 — 83,158 582,861 (123,833) 83,158 (30,000) 512,186 2007–2008 2008–2009 2009–2010 2011–2012 2005–2007 2006–2008 2007–2009 2008–2010 — — — — 129 39 124 204 182,525 (182,525) 205,141 216,128 — — — — — — — 152,472 603,794 (182,525) 152,472 470 (470) 367,237 (362,184) 127,447 (51,493) 79,136 (1,350) — — — — — — — — — — — (5,053) — 205,141 216,128 152,472 573,741 — — — 75,954 (1,806) 75,980 (6,349) 130,473 2009–2013 195.74 137,133 (311) 2010–2014 280 — — 164,959 (7,099) 157,860 711,423 (415,808) 164,959 (20,307) 440,267 2,049,717 (813,666) 446,431 (62,307) 1,620,175 Weighted average exercise price 115.0p 65.4p 209.2p 245.0p 156.8p www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 83 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s 15400DECHRA:Layout 1 9/9/08 17:39 Page 84 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Consolidated Financial Statements continued 23. Share-based Payments continued Year ended 30 June 2007 Exercise price per share Pence At 1 July 2006 Number Exercise period Exercised Number Granted Number Lapsed Number At 30 June 2007 Number Unapproved Share Option Scheme 14 September 2000 2003–2010 120 131,000 (79,500) 22 April 2002 11 April 2003 19 March 2007 Approved Share Option Scheme 2 April 2004 3 December 2004 5 April 2005 15 March 2006 19 March 2007 Executive Incentive Plan 5 December 2003 9 October 2004 3 October 2005 14 September 2006 SAYE Option Scheme 26 April 2001 9 April 2002 3 April 2003 15 October 2004 18 October 2005 12 October 2006 Total 2005–2012 153.5 87,500 (49,000) 2006–2013 2010–2017 58.5 289 82,500 (41,000) — — 26,139 — 26,139 301,000 (169,500) 26,139 (6,000) 151,639 — — — — — 51,500 38,500 (6,000) 35,500 2007–2014 134.5 123,000 (54,000) 2007–2014 180 30,000 2008–2015 202.5 171,000 2009–2016 2010–2017 252 289 175,000 — — — — — — — — — (2,000) 67,000 — 30,000 (9,000) 162,000 (13,000) 162,000 161,861 — 161,861 499,000 (54,000) 161,861 (24,000) 582,861 2006–2007 2007–2008 2008–2009 2009–2010 2004–2006 2005–2007 2006–2008 2007–2009 2008–2010 — — — — 158 129 39 124 204 505,000 (505,000) 182,525 205,141 — — — — — — — 216,128 892,666 (505,000) 216,128 — — — — — — 182,525 205,141 216,128 603,794 28,188 (18,578) 12,570 (11,544) 496,393 (115,267) 129,127 98,330 — — — — — — — — (9,610) (556) — 470 (13,889) 367,237 (1,680) 127,447 (19,194) 79,136 153,545 (16,412) 137,133 764,608 (145,389) 153,545 (61,341) 711,423 2,457,274 (873,889) 557,673 (91,341) 2,049,717 2009–2013 195.74 — Weighted average exercise price 79.9p 40.8p 151.3p 166.3p 115.0p For options exercised during the year, the weighted average market price at the date of exercise was 409p (2007: 264p). The weighted average remaining contractual lives of options outstanding at the balance sheet date was four years (2007: four years). 84 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 85 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 23. Share-based Payments continued As allowed by the transitional provisions of IFRS 1 and IFRS 2, included above are options over shares that have not been recognised in accordance with IFRS 2 as the options were granted before 7 November 2002. The fair values for shares granted under the Unapproved, Approved and SAYE Option Schemes have been calculated using the Black–Scholes option pricing model. The fair values of shares awarded under the Executive Incentive Plan have been calculated using a Monte Carlo simulation model which takes into account the market-based performance conditions attaching to those shares. The assumptions used in calculating fair value are as follows: Executive Incentive Plan Date of grant Number of shares awarded Share price at date of grant Exercise price Expected life Risk-free rate Volatility Dividend yield Fair value per share Unapproved and Approved Share Option Schemes Date of grant Number of shares awarded Share price at date of grant Exercise price Expected life Risk-free rate Volatility Dividend yield Fair value per share 2/4/08 129,000 367p 366p 5 years 4.08% 36% 2.04% 116p Save as You Earn Option Scheme Date of grant Number of shares awarded Share price at date of grant Exercise price Expected life — three year scheme — five year scheme — seven year scheme Risk-free rate — three year scheme — five year scheme — seven year scheme Volatility Dividend yield Fair value per share — three year scheme — five year scheme — seven year scheme 19/3/07 188,000 289p 289p 5 years 4.98% 36% 2.36% 92p 17/10/07 164,959 357.5p 280p 3.25 years 5.25 years 7.25 years 5.07% 5.04% 5.02% 36% 2.09% 130p 147p 158p 29/2/08 152,472 386p Nil 3 years 4.20% 36% 1.94% 259p 15/3/06 177,000 252p 252p 5 years 4.32% 36% 2.15% 79p 12/10/06 153,545 257.25p 195.74p 3.25 years 5.25 years 7.25 years 4.85% 4.75% 4.65% 36% 2.43% 94p 104p 110p 14/9/06 216,128 250.75p Nil 3 years 4.70% 36% 2.49% 162p 5/4/05 181,000 212p 202.5p 5 years 4.61% 36% 2.40% 69p 18/10/05 111,078 255p 204p 3.25 years 5.25 years n/a 4.25% 4.31% n/a 36% 2.04% 88p 101p n/a 3/10/05 205,141 251p Nil 3 years 4.21% 36% 2.07% 169p 3/12/04 30,000 179.32p 180p 5 years 4.53% 36% 2.61% 54p 15/10/04 144,147 160p 124p 3.25 years 5.25 years n/a 4.56% 4.64% n/a 36% 2.92% 55p 61p n/a 9/10/04 210,739 164p Nil 3 years 4.69% 36% 2.95% 105p 2/4/04 147,000 136p 134.5p 5 years 4.76% 36% 3.19% 40p 3/4/03 1,034,938 54p 39p 3.25 years 5.25 years n/a 3.78% 4.14% n/a 36% 7.63% 14p 14p n/a Expected volatility was determined by calculating the historical volatility of the Group’s share price over its entire trading history. National Insurance contributions are payable by the Company in respect of some of the share-based payments. These contributions are payable on the date of exercise based on the intrinsic value of the share-based payments and are therefore treated as cash-settled awards. The Group had an accrual at 30 June 2008 of £229,000 (2007: £181,000), of which £123,000 (2007: £38,000) related to vested options. The total charge to the Income Statement in respect of share-based payments was: Equity-settled share-based transactions Cash-settled share-based transactions The above charge to the Income Statement was included within administrative expenses. www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 2008 £’000 603 156 759 2007 £’000 479 117 596 85 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s 15400DECHRA:Layout 1 9/9/08 17:39 Page 86 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Consolidated Financial Statements continued 24. Analysis of Net (Borrowings)/Cash Bank loans and overdraft Finance leases and hire purchase contracts Cash and cash equivalents Net (borrowings)/cash 2008 £’000 (47,107) (2,109) 22,219 (26,997) 2007 £’000 (14,120) (2,075) 17,222 1,027 25. Operating Leases At the balance sheet date the Group had outstanding commitments for future minimum rentals payable under non-cancellable operating leases as follows: Within one year Between one and five years In five years or more Land and buildings Other assets Total 2008 £’000 1,081 3,943 3,343 8,367 2007 £’000 1,008 3,975 4,284 9,267 2008 £’000 1,670 1,708 — 3,378 2007 £’000 826 697 11 2008 £’000 2,751 5,651 3,343 2007 £’000 1,834 4,672 4,295 1,534 11,745 10,801 26. Foreign Exchange Rates The following exchange rates have been used in the translation of the results of foreign operations. Danish krone US dollar At acquisition 9.80 n/a Average rate 9.5957 2.0044 Closing rate at 30 June 2008 9.4136 1.9954 86 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 87 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 27. Acquisition of Subsidiary On 15 January 2008 the Company acquired the entire share capital of VetXX Holdings A/S, a Danish company. The assets and liabilities acquired are allocated as follows: Intangible assets (see note 11) Property, plant and equipment (see note 12) Deferred tax assets Inventories Trade and other receivables Trade and other payables Current tax Deferred tax liabilities Net assets Goodwill (see note 11) Consideration (including costs) Satisfied by: Cash Expenses of acquisition Cash flow on acquisition Book value £’000 261 2,946 1,094 2,699 7,268 (7,295) (11) — 6,962 Fair value adjustments £’000 59,254 (88) — — — (711) — (14,663) 43,792 Fair value £’000 59,515 2,858 1,094 2,699 7,268 (8,006) (11) (14,663) 50,754 14,397 65,151 63,658 1,493 65,151 The fair value adjustments may be amended in the year ending 30 June 2009 if information not currently available comes to light. Goodwill represents the present value of synergies expected to arise following the acquisition. The fair value adjustment in relation to intangible assets recognises marketing authorisations, brands and trademarks in accordance with IFRS 3. The deferred tax adjustment reflects the tax effect of the fair value adjustments. Other adjustments reflect the estimated realisable value of the assets and liabilities. For the 12 month period ended 30 June 2008, VetXX Holdings A/S made a consolidated adjusted operating profit of £5,818,000, of which £2,651,000 was recognised in the period following acquisition. If the acquisition had occurred on 1 July 2007, management estimates that consolidated revenue would have been £323.2 million and adjusted operating profit for the period would have been £22.31 million. O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 87 15400DECHRA:Layout 1 9/9/08 17:39 Page 88 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Consolidated Financial Statements continued 27. Acquisition of Subsidiary continued On 26 April 2007 the Company acquired the entire share capital of Leeds Veterinary Laboratories Limited. The assets and liabilities acquired are allocated as follows: Intangible assets Property, plant and equipment (see note 12) Inventories Trade and other receivables Cash and cash equivalents Borrowings Trade and other payables Current tax Deferred tax Goodwill (see note 11) Total consideration Satisfied by: Cash Issue of ordinary shares Transfer of freehold property Expenses of acquisition Total consideration Less: issue of ordinary shares (see note 22) transfer of freehold property cash acquired Cash flow on acquisition Book value £’000 — 67 38 691 13 (55) (140) (16) — 598 Fair value adjustments £’000 377 (29) — — — — — — (113) 235 Fair value £’000 377 38 38 691 13 (55) (140) (16) (113) 833 467 1,300 673 50 520 57 1,300 (50) (520) (13) 717 Intangible assets recognised on acquisition represent customer relationships. Goodwill represents the expertise and technical knowledge of the Company’s staff and the long-term strategic benefit of expanding the geographic coverage of the Group’s Laboratories business. For the 12 month period ended 30 June 2007, Leeds Veterinary Laboratories Limited made a profit of £44,000 (before exceptional income of £237,000), of which £28,000 was recognised in the period following acquisition. If the acquisition had occurred on 1 July 2006, management estimates that consolidated revenue would have been £254,617,000 and consolidated profit for the period would have been £8,863,000 (before exceptional income of £237,000). 88 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 89 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 28. Critical Accounting Judgements and Key Sources of Estimation Uncertainty Critical Judgements in applying the Group’s Accounting Policies In the process of applying the Group’s accounting policies as described in note 1, the Directors have made the following judgements that have the most significant effect on the amounts recognised in the Financial Statements. Intangible Asset — Vetoryl Capsules USA As described in note 13, the Group is carrying a total amount of £4,537,000 in respect of Vetoryl Capsules USA. Recoverability of this amount is dependent upon obtaining FDA approval to market Vetoryl Capsules in the USA. Based upon positive discussions with the FDA (evidenced by the product being granted expedited review status) and the obtaining of marketing approval in the European Union, the Directors concluded that the obtaining of marketing authorisation in the USA is highly likely and that the criteria for recognising an intangible asset have been met. Intangible Asset — Felimazole Tablets USA As described in note 13, the Group is carrying a total amount of £697,000. Recoverability of this amount is dependent upon obtaining FDA approval to market Felimazole Tablets in the USA. Based on positive discussions with the FDA and the obtaining of marketing approval in the European Union, the Directors concluded that the obtaining of marketing authorisation in the USA is highly likely and that the criteria for recognising an intangible asset have been met. Key Sources of Estimation Uncertainty The key sources of estimation uncertainty which may cause a material adjustment to the carrying amount of assets and liabilities are discussed below: Impairment of Goodwill and Indefinite Life Intangible Assets The Group determines whether goodwill and indefinite life assets are impaired at least on an annual basis. This requires an estimation of the value-in-use of the cash-generating units to which they are allocated. Estimating the value-in-use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. Further detail on the assumptions used in determining value-in-use calculations is provided in note 13. Impairment of Receivables The Group has estimated impairment of receivables by assessing recoverability of amounts due on a customer by customer basis. As described in note 21, credit risk is not highly concentrated with the exception of corporate veterinary practices and veterinary wholesalers. If the receivables due from one of these large customers proved to be irrecoverable then an additional impairment provision may be required. 29. Related Party Transactions Subsidiaries The Group’s ultimate Parent Company is Dechra Pharmaceuticals PLC. A listing of all principal subsidiaries is shown within the financial statements of the Company on page 99. Transactions with Key Management Personnel The details of the remuneration, long-term incentive plans, shareholdings, share options and pension entitlements of individual Directors are included in the Directors’ Remuneration Report on pages 38 to 44. The remuneration of key management is disclosed in note 7. O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 89 15400DECHRA:Layout 1 9/9/08 17:39 Page 90 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Financial History 2008* £’000 2007* £’000 2006* £’000 304,371 19,142 16,853 12,185 20.81 20.64 8.25 889 99,652 17,284 (2,824) (15,316) (26,997) 71,799 16,053 (2,802) (3,041) (2,112) (65,151) (4,420) 66,500 5,027 253,803 13,876 12,646 8,866 16.89 16.66 7.50 747 18,828 13,264 (2,464) (147) 1,027 30,508 232,471 12,312 11,044 7,557 14.71 14.36 6.24 691 13,567 11,774 (2,505) — 1,079 23,915 14,328 13,997 (1,169) (2,895) (5,325) (717) (3,595) (3,124) (2,497) (1,218) (2,618) (1,492) — (2,777) (97) 5,795 Income statement Revenue Adjusted operating profit Adjusted profit before taxation Adjusted profit after taxation Adjusted earnings per share — basic (pence) — diluted (pence) Dividend per share (pence) Average number of employees Balance sheet Non-current assets Working capital Current tax liabilities Deferred tax liabilities Net (borrowings)/cash Shareholders’ funds Cash flow Cash flow from operating activities Net interest paid Tax paid Capital expenditure Acquisitions Equity dividends paid Financing Changes in cash in period * Reported under IFRS † Reported under UK GAAP 2005* £’000 210,267 11,255 9,701 7,027 13.77 13.54 5.20 679 12,391 12,127 (2,057) — (4,859) 17,602 13,549 (1,667) (1,996) (1,925) — (2,473) 11,760 17,248 2004† £’000 186,843 9,184 8,060 5,751 11.28 11.12 4.70 643 10,398 11,318 (1,275) (174) (10,110) 10,157 10,576 (1,012) (1,864) (546) — (2,192) (2,588) 2,374 The main differences between the information under UK GAAP and IFRS relate to classification of sale of trading data to suppliers, goodwill amortisation, capitalisation of development expenditure, share-based payments charges, treatment of lease incentives, income tax, deferred tax and dividends. These are fully explained in the Annual Report and Financial Statements for the year ended 30 June 2006. 90 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 91 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Company Financial Statements Contents 92 Company Balance Sheet 93 Reconciliation of Movements in Shareholders’ Funds 94 Notes to the Financial Statements O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 91 15400DECHRA:Layout 1 9/9/08 17:39 Page 92 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Company Balance Sheet At 30 June 2008 Fixed assets Investments Current assets Debtors Cash at bank and in hand Creditors: (amounts falling due within one year) Net current assets/(liabilities) Total assets less current liabilities Creditors: amounts falling due after more than one year Net assets Capital and reserves Called up share capital Share premium account Hedging reserve Profit and loss account Total equity Shareholders’ funds Note iv v vi vi x xi xi xi 2008 £’000 94,366 94,366 47,574 7 47,581 (37,087) 10,494 104,860 (26,641) 78,219 652 62,166 281 15,120 78,219 2007 £’000 54,658 54,658 12,366 7 12,373 (23,348) (10,975) 43,683 (10,120) 33,563 528 28,041 (71) 5,065 33,563 The financial statements were approved by the Board of Directors on 2 September 2008 and are signed on its behalf by: Ian Page Director Simon Evans Director 92 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 93 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Reconciliation of Movements in Shareholders’ Funds For the year ended 30 June 2008 At start of period Profit for the financial year Movement in hedging reserve Share-based payments charge Dividends paid New shares issued At end of period 2008 £’000 33,563 13,872 352 603 (4,420) 34,249 78,219 2007 £’000 32,397 3,925 — 479 (3,595) 357 33,563 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 93 15400DECHRA:Layout 1 9/9/08 17:39 Page 94 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Financial Statements (i) Principal Accounting Policies of the Company Accounting Principles The Company Balance Sheet has been prepared under the historical cost convention except for derivatives which are stated at fair value in accordance with applicable UK accounting standards and the Companies Act 1985. Basis of Preparation No Profit and Loss Account is presented for the Company as permitted by Section 230(4) of the Companies Act 1985. The profit dealt with in the accounts of the Company was £13,872,000 (2007: £3,925,000). Investments Investments held as fixed assets are stated at cost less any impairment losses. Where the consideration for the acquisition of a subsidiary undertaking includes shares in the Company to which the provisions of section 131 of the Companies Act 1985 apply, cost represents the nominal value of the shares issued together with the fair value of any additional consideration given and costs. Derivative Financial Instruments The Company uses derivative financial instruments to manage its exposure to foreign exchange and interest rate risks. In accordance with its treasury policy, the Company does not hold or issue derivative financial instruments for speculative purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value of instruments that do not qualify for hedge accounting is recognised immediately in the profit and loss account. The fair value of interest rate swaps, floors and ceilings, is the estimated amount that the Group would receive or pay to terminate the instrument at the balance sheet date. The fair value of forward exchange contracts and options is their quoted market price at the balance sheet date, being the present value of the quoted forward price. Hedging Cash flow hedges Changes in the fair value of derivative financial instruments designated as cash flow hedges are recognised directly in equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised as profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains there until the forecast transaction occurs. When the hedged item is a non-financial asset, the amount recognised in equity is transferred to the carrying amount of the asset when it is recognised. In other cases, the amount recognised in equity is transferred to profit or loss in the same period that the hedged item affects profit or loss. Cash Flow Statement As the ultimate holding company of the Dechra Pharmaceuticals PLC Group, the Company has relied upon the exemption in FRS 1 (Revised) not to present a cash flow statement as part of its financial statements. Dividends Dividends are recognised in the period in which they are approved by the Company’s Shareholders or, in the case of an interim dividend, when the dividend is paid. Dividends receivable from subsidiaries are recognised when either received in cash or applied to reduce a creditor balance with the subsidiary. Interest-Bearing Borrowings Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest- bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. Related Parties Under FRS 8 the Company has relied upon the exemption not to disclose related party transactions with other Group undertakings as they are all included in the Dechra Pharmaceuticals PLC Consolidated Financial Statements. Employee Benefits (i) Pensions The Company operates a Group stakeholder personal pension scheme for certain employees. Obligations for contributions are recognised as an expense in the profit and loss account as incurred. 94 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 95 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 (i) Share-Based Payment Transactions Principal Accounting Policies of the Company continued (ii) The Company operates a number of equity-settled share-based payment programmes that allow employees to acquire shares of the Company. The Company also operates a Long Term Incentive Plan for Directors and senior Executives. The fair value of shares or options granted is recognised as an employee expense on a straight-line basis in the profit and loss account with a corresponding movement in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the shares or options (the vesting period). The fair value of the shares or options granted is measured using a valuation model, taking into account the terms and conditions upon which the shares or options were granted. The amount recognised as an expense in the profit and loss account is adjusted to take into account an estimate of the number of shares or options that are expected to vest together with an adjustment to reflect the number of shares or options that actually do vest except where forfeiture is only due to market-based conditions not being achieved. The fair values of grants under the Long Term Incentive Plan have been determined using the Monte Carlo simulation model. The fair values of options granted under all other share option schemes have been determined using the Black-Scholes option pricing model. National Insurance contributions payable by the Company on the intrinsic value of share-based payments at the date of exercise are treated as cash-settled awards and revalued to market price at each balance sheet date. Foreign currency Foreign currency transactions are translated into sterling using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities are translated at the closing rate at the reporting date. Foreign exchange gains and losses are recognised in the profit and loss account. Taxation The charge for taxation is based on the profit for the year and takes into account taxation deferred because of timing differences between the treatment of certain items for taxation and accounting purposes. Deferred tax is measured on a non-discounted basis at the tax rates that are expected to apply in the periods in which the timing differences reverse and is provided in respect of all timing differences which have arisen but not reversed by the balance sheet date, except as otherwise required by FRS 19 “Deferred Tax”. Financial Guarantee Contracts Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its Group, the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee. (ii) Directors and Employees Total emoluments of Directors (including pension contributions) amounted to £1,378,000 (2007: £1,055,000). Information relating to Directors’ emoluments, share options and pension entitlements is set out in the Directors’ Remuneration Report on pages 38 to 44. Including Directors, the average number of staff employed during the year solely in an administrative function was 8 (2007: 8). The costs incurred in respect of these employees were: Wages and salaries Social security costs Other pension costs Share-based payments charge At 30 June 2008, outstanding pension contributions of £11,000 (2007: £7,000) were included in creditors. (iii) Auditors’ Remuneration Audit of the Parent Company financial statements 2008 £’000 1,251 151 94 269 1,765 2008 £’000 20 2007 £’000 1,042 125 80 195 1,442 2007 £’000 15 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s Amounts paid to the Company’s auditors in respect of services to the Company, other than the audit of the Company’s financial statements, have not been disclosed as the information is required instead to be disclosed on a consolidated basis. www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 95 15400DECHRA:Layout 1 9/9/08 17:39 Page 96 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Financial Statements continued (iv) Fixed Asset Investments Cost and net book value At 1 July 2007 Additions At 30 June 2008 Shares in Subsidiary Undertakings £’000 54,658 39,708 94,366 A list of principal subsidiary undertakings is given in note xii. During the year, the Company acquired VetXX Holdings A/S. Where subsidiaries are acquired for shares, or a combination of shares and cash, statutory merger relief has been applied and accordingly cost includes the nominal value of shares issued. (v) Debtors Amounts owed by subsidiary undertakings Group relief receivable Deferred taxation (see note ix) Other debtors Prepayments and accrued income Included in debtors are amounts of £228,000 (2007: £275,000) due after more than one year. (vi) Creditors Bank loans and overdrafts (see note vii) Finance lease obligations Amounts due to subsidiary undertakings Other creditors Other taxation and social security Accruals and deferred income 2008 £’000 45,048 1,655 228 508 135 2007 £’000 10,724 1,218 275 61 88 47,574 12,366 Falling due within one year 2007 £’000 10,190 — 12,540 9 54 555 23,348 2008 £’000 33,960 35 1,962 11 40 1,079 37,087 In accordance with FRS 21, Events after the Balance Sheet Date, the proposed final dividend for the year ended 30 June 2008 of 5.50p per share has not been accrued for in these financial statements. It will be shown in the financial statements for the year ending 30 June 2009. The total cost of the proposed final dividend is £3,588,000. Bank loans (see note vii) Finance lease obligations 96 stock code: DPH Falling due after more than one year 2008 £’000 26,491 150 26,641 2007 £’000 10,120 — 10,120 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 97 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 (vii) Borrowings Borrowings due within one year Bank overdraft Bank loan Finance lease obligations Borrowings due after more than one year Aggregate bank loan instalments repayable: between one and two years between two and five years after five years Arrangement fees netted off Finance lease obligations repayable: between one and two years between two and five years 2008 £’000 13,344 20,616 35 33,995 5,000 15,000 7,500 27,500 (1,009) 26,491 39 111 150 2007 £’000 6,190 4,000 — 10,190 5,000 5,200 — 10,200 (80) 10,120 — — — Total borrowings 60,636 20,310 The bank loans and overdrafts are secured by a fixed and floating charge on the assets of the Group. Interest is charged at between 1% and 1.25% over LIBOR. The Company guarantees certain borrowings of other Group companies, which at 30 June 2008 amounted to £1,924,000 (2007: £2,075,000). (viii) Financial Instruments Changes in fair value (charged)/credited to profit and loss 2008 £’000 (58) 2007 £’000 (46) Details of valuation techniques and fair values of each category of financial instruments are given in note 21 to the Consolidated Financial Statements in the section headed ‘Financial Instruments and Related Disclosures’. O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 97 15400DECHRA:Layout 1 9/9/08 17:39 Page 98 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Notes to the Financial Statements continued (ix) Deferred Tax At 1 July 2007 Transfer to profit and loss account Transfer from equity At 30 June 2008 (included in debtors) The amounts provided for deferred taxation at 28% (2007: 28%) are as follows: Short term timing differences Total (x) Called up Share Capital Issued share capital Allotted, called up and fully paid at 1 July 2007 New shares issued Allotted, called up and fully paid at 30 June 2008 Authorised share capital At 30 June 2008 At 30 June 2007 £’000 275 78 (125) 228 2007 £’000 (275) (275) Ordinary Shares of 1p each No. 52,803,699 12,438,210 65,241,909 100,000,000 75,000,000 2008 £’000 (228) (228) £’000 528 124 652 1,000 750 During the year, 813,666 new ordinary shares of 1p were issued following the exercise of options under the Executive Incentive Plan and the Approved, Unapproved and SAYE share option schemes. The consideration received was £537,000 (2007: £357,000). In addition, 11,624,544 new ordinary shares of 1p were issued in part consideration for the acquisition of VetXX Holdings A/S. The gross proceeds raised were £35.2 million. Share Options Details of outstanding share options over ordinary shares of 1p at 30 June 2008 under the various Group share option schemes are shown in note 23 to the Consolidated Financial Statements. (xi) Reserves At 1 July 2007 New shares issued Share issue expenses Profit for the financial year Movement in hedging reserve Dividend (see note 9 to Consolidated Financial Statements) Share-based payments charge At 30 June 2008 Share premium account £’000 28,041 35,636 (1,511) — — — — 62,166 Hedging reserve £’000 (71) — — — 352 — — 281 Profit and loss account £’000 5,065 — — 13,872 — (4,420) 603 15,120 98 stock code: DPH 15400 09/09/2008 Proof 8 1540 15400DECHRA:Layout 1 9/9/08 17:39 Page 99 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 (xii) Subsidiary Undertakings Dechra Pharmaceuticals PLC is the ultimate parent and controlling party of the Group. The principal subsidiary undertakings of the Company, all of which are wholly owned, are: Company Dechra Limited§ Country of Operation Country of Incorporation UK Great Britain Dechra Investments Limited National Veterinary Services Limited* Arnolds Veterinary Products Limited* Dales Pharmaceuticals Limited* Veneto Limited North Western Laboratories Limited Cambridge Specialist Laboratory Services Limited† Anglian Pharma Manufacturing Limited‡ Anglian Pharma Limited Dechra Veterinary Products LLC Leeds Veterinary Laboratories Limited VetXX Holdings A/S VetXX A/S# VetXX OY¶ UK UK UK UK UK UK UK UK UK USA UK Denmark Denmark Great Britain Great Britain Great Britain Great Britain Great Britain Great Britain Great Britain Great Britain Great Britain USA Great Britain Denmark Denmark Finland Finland Dechra Veterinary Products SAS¶ France France VetXX DV¶ VetXX AS¶ Holland Holland Norway Norway VetXX Animal Health SLU¶ Spain Spain VetXX AB¶ VetXX Ltd¶ Sweden Sweden UK Great Britain Principal Activity Wholesaler, marketer and manufacturer of pharmaceuticals; Wholesaler and marketer of veterinary products, instruments and equipment; Provider of veterinary laboratory services Holding company Non-trading Non-trading Non-trading Holding company Non-trading Non-trading Non-trading Holding company Distributor of veterinary products Non-trading Holding company Marketer and manufacturer of veterinary pharmaceuticals and pet diets Marketer of veterinary pharmaceuticals and pet diets Marketer of veterinary pharmaceuticals and pet diets Marketer of veterinary pharmaceuticals and pet diets Marketer of veterinary pharmaceuticals and pet diets Marketer of veterinary pharmaceuticals and pet diets Marketer of veterinary pharmaceuticals and pet diets Marketer of veterinary pharmaceuticals and pet diets * § † 100% of ordinary share capital held by Veneto Limited. Voting preference shares held by Dechra Pharmaceuticals PLC Employee Benefit Trust. 100% of ordinary share capital held by Dechra Investments Limited. 100% of ordinary share capital held by North Western Laboratories Limited. O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s 100% of ordinary share capital held by Anglian Pharma Limited. ‡ # ¶ 100% of ordinary share capital held by VetXX A/S. 100% of ordinary share capital held by VetXX Holdings A/S. www.dechra.com stock code: DPH 15400 09/09/2008 Proof 8 99 15400DECHRA:Layout 1 9/9/08 17:39 Page 100 Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Glossary of Terms The following is a glossary of a number of the terms and acronyms Intertrigo which can be found within this document. Refers to a bacterial, fungal or viral infection that has developed at the Adjusted operating profit Profit before interest, tax, amortisation of acquired intangibles site of broken skin due to inflammation of body folds. This infection is common in dogs with folds such as Pugs or Shar Peis. and rationalisation costs relating to the acquisition of VetXX Malassezia Holdings A/S. Adjusted pre-tax profit Yeasts that cause a secondary inflammatory skin disease. Malassezia is often found in otitis externa. Profit before tax, amortisation of acquired intangibles and MHRA rationalisation costs relating to the acquisition of VetXX Holdings A/S. Medicines and Healthcare products Regulatory Agency; an Cortisol executive agency of the Department of Health. A hormone which is made by the adrenal glands. Its production is NSAID increased during episodes of stress and it has many effects on Non-Steroidal Anti-Inflammatory Drug; essentially drugs which relieve the body. It helps regulate blood pressure, the immune system pain, swelling, stiffness and inflammation. Equipalazone is the leading and helps balance the effect of insulin to keep the blood sugar at NSAID for the treatment of musculoskeletal disorders in the horse. normal levels. Cushing’s Disease Otitis Externa A condition which causes inflammation of the external ear canal A condition caused by excess cortisol (see below) and is named (the tube between the outer ear and the ear drum). after the physician who first described the condition in humans in the early twentieth century. FDA Staphylococcal Infections Communicable conditions caused by the Staphylococcus type of bacteria and generally characterised by pyoderma or the formation of US Food and Drug Administration; a federal agency of the US abscesses. department of Health and Human Services. Surface Pyoderma Hyperthyroidism Pyoderma is the medical term used to denote infections of the skin Occurs when the thyroid glands produce excessive amounts of caused by bacteria. Surface Pyoderma is a bacterial infection which is thyroid hormone. This causes an increase in the animal’s metabolism confined to the surface of the skin; one of the commonest types is (the rate at which energy is burnt up). known as Pyotraumatic Dermatitis (acute moist dermatitis, or “hot spots”). It is typified by localised itching, moist, reddened skin patches and ulcerated lesions. 100 stock code: DPH 15400 09/09/2008 Proof 8 15400DECHRAcover:Layout 2 9/9/08 18:33 Page 2 Welcome to Dechra Group Strategy To sustain growth from our core businesses. To continue to develop our veterinary pharmaceutical portfolio. To increase our pharmaceutical penetration into international markets. Services Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2008 Advisers Merchant Bank & Financial Advisers NM Rothschild & Sons Limited New Court St Swithins Lane London EC4P 4DU Stockbroker & Financial Advisers Dresdner Kleinwort 30 Gresham Street London EC2P 2XY Principal Bankers Bank of Scotland 55 Temple Row Birmingham B2 5LS Auditors KPMG Audit Plc 2 Cornwall Street Birmingham B3 2DL Lawyers DLA Piper UK LLP Victoria Square House Victoria Square Birmingham B2 4DL Registrars Computershare Investor Services PLC PO Box 82 The Pavilions Bridgwater Road Bristol BS13 8AE Financial PR Citigate Dewe Rogerson Limited 9 The Apex 6 Embassy Drive Edgbaston Birmingham B15 1TP Pharmaceuticals Trademarks Trademarks appear throughout this document in italics. Dechra and the Dechra “D” logo are registered trademarks of Dechra Pharmaceuticals PLC. Contents 01 Financial Highlights 02 Operational Review 08 Chairman’s Statement 10 Directors’ Business Review 28 Board of Directors 29 Senior Management 30 Directors’ Report 33 Corporate Governance 37 Audit Committee Report 38 Directors’ Remuneration Report 45 Social, Ethical and Environmental Responsibilities 47 Statement of Directors’ Responsibilities in respect of the Annual Report and the Financial Statements 48 Independent Auditors’ Report 49 Consolidated Financial Statements 91 Company Financial Statements 100 Glossary of Terms 101 Advisers 15400 09/09/2008 Proof 7 15400 09/09/2008 Proof 7 www.dechra.com stock code: DPH 101 O u r i B u s n e s s O u r P e r f o r m a n c e O u r G o v e r n a n c e O u r A c c o u n t s (cid:1) (cid:1) (cid:1) 15400DECHRAcover:Layout 2 9/9/08 18:33 Page 1 Dechra House Jamage Industrial Estate Talke Pits Stoke-on-Trent Staffordshire ST7 1XW England t: +44 (0)1782 771100 f: +44 (0)1782 773366 e: corporate.enquiries@dechra.com Registered in England No. 3369634 www.dechra.com D e c h r a P h a r m a c e u t i c a s P L C l A n n u a l R e p o r t a n d A c c o u n t s f o r t h e y e a r e n d e d 3 0 J u n e 2 0 0 8 15400 09/09/2008 Proof 7 15400 09/09/2008 Proof 7 An International Veterinary Pharmaceutical Business Annual Report and Accounts for the year ended 30 June 2008 

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