Dechra Pharmaceuticals
Annual Report 2013

Plain-text annual report

Developing Focusing Delivering Annual Report and Accounts for the year ended 30 June 2013 Stock Code: DPH D e c h r a P h a r m a c e u t i c a l s P L C 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 1 3 ® www.dechra.com 22581-04 22/08/2013 Proof 3 ® Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2013 Developing the Business through Investment in our Pipeline The development of our product pipeline is critical to our future organic growth. Our spend has more than doubled in the last five years with an increase of almost 39% in the last financial year, taking our total spend to £8 million. Research and Development Spend up 38.8% at £8.0m (2012: £5.7m) Focusing on our Veterinary Pharmaceuticals Product Strategy In July 2013 we announced the disposal of our Services Segment namely National Veterinary Services, Dechra Laboratory Services and Dechra Specialist Laboratory Services. This completes our evolution and transformation from a low margin UK centric services company to an international specialist veterinary pharmaceuticals business. Underlying Operating Profit split by Services and Pharmaceuticals Segments since 2005* £ million . m 4 3 4 £ m 1 . 1 1 £ m 0 . 9 2 £ m 1 . 1 1 £ m 1 . 2 2 £ m 0 . 3 1 £ m 0 . 8 1 £ m 1 . 3 1 £ m 3 . 5 1 £ m 3 . 2 1 £ m 8 . 0 1 m 7 . 0 1 £ m m £ 5 . 9 £ 1 . 6 £ m 3 . 4 £ m 0 . 8 £ m 9 . 4 £ m 7 . 8 £ Pharmaceuticals Services 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 * Excludes corporate and other unallocated costs 1 July 2000 to 30 June 2001 1 July 2001 to 30 June 2002 1 July 2002 to 30 June 2003 1 July 2003 to 30 June 2004 1 July 2004 to 30 June 2005 1 July 2005 to 30 June 2006 1 July 2006 to 30 June 2007 1 July 2007 to 30 June 2008 1 July 2008 to 30 June 2009 1 July 2009 to 30 June 2010 1 July 2010 to 30 June 2011 1 July 2011 to 30 June 2012 1 July 2012 to 30 June 2013 December 2003 November 2004 July 2005 December 2006 January 2008 December 2008 November 2009 October 2010 Laboratories rebranded European marketing license for Felimazole Entered into a Granted a full EU Received approval to market Vetoryl in 19 major European Acquired the Acquired VetXX® VetXX integrated and Achieved mutual intellectual property for Holding A/S, a leading rebranded Dechra Equidone® Gel developer, producer Veterinary Products recognition of Malaseb® in Acquired DermaPet® Inc., a Florida based dermatological April 2003 North Western to NationWide Laboratories May 2003 Entered into a sub- license agreement with Bioenvision® Inc to develop Vetoryl for future marketing in the USA and Canada agreement with and granted a UK Janssen Animal Health, licence for a new countries allowing Janssen full marketing and distribution rights to Felimazole and Vetoryl in mainland Europe 2.5mg Felimazole tablet June 2006 April 2007 Acquired Leeds April 2005 Signed a development Veterinary Laboratories and marketing for £0.75 million and marketer of companion animal products, for a total consideration of £61.7 million Granted a range agreement for Vetoryl extension for a 30mg in Japan with Kyoritsu Vetoryl capsule Seiyaku May 2007 Secured a long term trademark license and marketing agreement with Pharmaderm Animal Health for a consideration of US$5.0 million, to supply a range of dermatological, ophthalmic and optic products to the US veterinary market April 2005 Opened a US operation based in Kansas City April 2005 Acquired Vetivex®, a licensed veterinary fluid therapy product, for £0.8 million * Revenue* £ million 210.3 £ million 9.7 Dividend per Share pence 4.78† Underlying Profit Before Taxation Underlying Profit Before Taxation Underlying Profit Before Taxation Underlying Profit Before Taxation Revenue £ million 179.3 £ million 6.7 Dividend per Share pence 3.78† Revenue £ million 186.8 £ million 8.1 Dividend per Share pence 4.32† Underlying Profit Before Taxation Revenue £ million 304.4 £ million 16.9 Dividend per Share pence 7.58† Underlying Profit Before Taxation Revenue £ million 253.8 £ million 12.7 Dividend per Share pence 6.89 † Revenue £ million 232.5 £ million 11.0 Dividend per Share pence 5.73† 17 European countries business, for a potential to HY-50® for a cash consideration of consideration of US$64.0 million. The 8.03 million Canadian acquisition strengthened dollars January 2012 Acquired the worldwide rights (excluding Canada) May 2013 Announced the closure of our manufacturing site in Uldum, Denmark. Skipton and Bladel sites renamed Dechra Manufacturing May 2012 July 2013 Announced the disposal of the Services Segment to Patterson Companies, Inc for £87.5 million, creating a clear strategic focus Acquired Eurovet® Animal Health B.V., an expert in developing, registering, producing and marketing added value, companion and farm animal veterinary pharmaceutical products, for a total cash consideration of Dechra’s position as a leader in the worldwide veterinary dermatological market December 2010 Acquired Genitrix® Limited, a privately owned veterinary company with a range of products complementary to total consideration of £6.4 million Dechra’s, for a potential €135 million approval for Vetoryl in DVP UK’s logistics February 2010 and finance function integrated into a central logistic and shared service centre in Uldum, Denmark December 2008 Received FDA the USA May 2009 New therapeutic canine diet developed and marketed to aid treatment of osteoarthritis in dogs, known as Specific® CJD June 2009 Received approval to market Felimazole in USA Underlying Profit Before Taxation Revenue £ million 426.0 £ million 33.0 Dividend per Share pence 12.27† Underlying Profit Before Taxation Revenue £ million 389.2 £ million 30.1 Dividend per Share pence 11.12 † Underlying Profit Before Taxation Revenue £ million 522.4 £ million 44.6 Dividend per Share pence 14.00† Underlying Profit Before Taxation Underlying Profit Before Taxation Revenue £ million 350.0 £ million 23.4 Dividend per Share pence 8.36† Revenue £ million 369.4 £ million 26.1 Dividend per Share pence 9.64† September 2000 Dechra listed on the London Stock Exchange at 120 pence per share, with a market capitalisation of £60 million December 2000 NVS’s semi automatic picking system commissioned at a cost of £0.5 million December 2001 Vetoryl® launched in the UK April 2002 Acquired North Western Laboratories and Cambridge Specialist Laboratory Services for a consideration of £2.75 million, enabling Dechra to extend its service offering to the veterinary profession April 2002 Felimazole® launched in the UK May 2002 Acquired Anglian Pharma Plc for a consideration of £2.5 million which more than doubled Dechra’s contract manufacturing revenues Revenue £ million 170.2 Underlying Profit Before Taxation £ million 7.3 Dividend per Share pence 3.78† Revenue £ million 156.4 Underlying Profit Before Taxation £ million 5.8 Dividend per Share pence 3.44† * From this point forward reported under IFRS. † Adjusted for the bonus element of the Rights Issue. The above financial metrics include the results of discontinued operations. 22581-04 22/08/2013 Proof 3 Delivering Sustainable Growth and Value Upon Dechra’s Stock Market Listing in 2001 the majority of the Group’s revenue and profit was derived from National Veterinary Services (a UK services and distribution business). Throughout our evolution, utilising the Services Segment’s strong cash generation, the Group has successfully evolved into a high margin, cash generative, self-funding international specialist veterinary pharmaceuticals and related products business. 1 July 2000 to 30 June 2001 1 July 2001 to 30 June 2002 1 July 2002 to 30 June 2003 1 July 2003 to 30 June 2004 1 July 2004 to 30 June 2005 1 July 2005 to 30 June 2006 1 July 2006 to 30 June 2007 1 July 2007 to 30 June 2008 1 July 2008 to 30 June 2009 1 July 2009 to 30 June 2010 1 July 2010 to 30 June 2011 1 July 2011 to 30 June 2012 1 July 2012 to 30 June 2013 September 2000 December 2001 Dechra listed on the London Stock Exchange at 120 pence per share, with a market capitalisation of £60 million December 2000 picking system commissioned at a cost of £0.5 million NVS’s semi automatic Services for a December 2003 Entered into a European marketing agreement with Janssen Animal Health, allowing Janssen full marketing and distribution rights to Felimazole and Vetoryl in mainland Europe April 2003 North Western Laboratories rebranded to NationWide Laboratories May 2003 Entered into a sub- license agreement with Bioenvision® Inc to develop Vetoryl for future marketing in the USA and Canada Vetoryl® launched in the UK April 2002 Acquired North Western Laboratories and Cambridge Specialist Laboratory consideration of £2.75 million, enabling Dechra to extend its service offering to the veterinary profession April 2002 Felimazole® launched in the UK May 2002 Acquired Anglian Pharma Plc for a consideration of £2.5 million which more than doubled Dechra’s contract manufacturing revenues November 2004 Granted a full EU license for Felimazole and granted a UK licence for a new 2.5mg Felimazole tablet April 2005 Granted a range extension for a 30mg Vetoryl capsule April 2005 Opened a US operation based in Kansas City April 2005 Acquired Vetivex®, a licensed veterinary fluid therapy product, for £0.8 million * Revenue £ million 179.3 Underlying Profit Before Taxation £ million 6.7 Dividend per Share pence 3.78† Revenue £ million 186.8 Underlying Profit Before Taxation £ million 8.1 Dividend per Share pence 4.32† Revenue* £ million 210.3 Underlying Profit Before Taxation £ million 9.7 Dividend per Share pence 4.78† Revenue £ million 232.5 Underlying Profit Before Taxation £ million 11.0 Dividend per Share pence 5.73† Underlying Profit Before Taxation Revenue £ million 170.2 £ million 7.3 Dividend per Share pence 3.78† Underlying Profit Before Taxation Revenue £ million 156.4 £ million 5.8 Dividend per Share pence 3.44† * From this point forward reported under IFRS. † Adjusted for the bonus element of the Rights Issue. January 2008 Acquired VetXX® Holding A/S, a leading developer, producer and marketer of companion animal products, for a total consideration of £61.7 million July 2005 Received approval to market Vetoryl in 19 major European countries June 2006 Signed a development and marketing agreement for Vetoryl in Japan with Kyoritsu Seiyaku December 2006 Acquired the intellectual property for Equidone® Gel April 2007 Acquired Leeds Veterinary Laboratories for £0.75 million May 2007 Secured a long term trademark license and marketing agreement with Pharmaderm Animal Health for a consideration of US$5.0 million, to supply a range of dermatological, ophthalmic and optic products to the US veterinary market December 2008 VetXX integrated and rebranded Dechra Veterinary Products November 2009 Achieved mutual recognition of Malaseb® in 17 European countries February 2010 DVP UK’s logistics and finance function integrated into a central logistic and shared service centre in Uldum, Denmark December 2008 Received FDA approval for Vetoryl in the USA May 2009 New therapeutic canine diet developed and marketed to aid treatment of osteoarthritis in dogs, known as Specific® CJD June 2009 Received approval to market Felimazole in USA May 2013 Announced the closure of our manufacturing site in Uldum, Denmark. Skipton and Bladel sites renamed Dechra Manufacturing July 2013 Announced the disposal of the Services Segment to Patterson Companies, Inc for £87.5 million, creating a clear strategic focus October 2010 Acquired DermaPet® Inc., a Florida based dermatological business, for a potential consideration of US$64.0 million. The acquisition strengthened Dechra’s position as a leader in the worldwide veterinary dermatological market December 2010 Acquired Genitrix® Limited, a privately owned veterinary company with a range of products complementary to Dechra’s, for a potential total consideration of £6.4 million January 2012 Acquired the worldwide rights (excluding Canada) to HY-50® for a cash consideration of 8.03 million Canadian dollars May 2012 Acquired Eurovet® Animal Health B.V., an expert in developing, registering, producing and marketing added value, companion and farm animal veterinary pharmaceutical products, for a total cash consideration of €135 million Revenue £ million 426.0 Underlying Profit Before Taxation £ million 33.0 Dividend per Share pence 12.27† Revenue £ million 389.2 Underlying Profit Before Taxation £ million 30.1 Dividend per Share pence 11.12 † Revenue £ million 522.4 Underlying Profit Before Taxation £ million 44.6 Dividend per Share pence 14.00† Revenue £ million 350.0 Underlying Profit Before Taxation £ million 23.4 Dividend per Share pence 8.36† Revenue £ million 369.4 Underlying Profit Before Taxation £ million 26.1 Dividend per Share pence 9.64† Revenue £ million 304.4 Underlying Profit Before Taxation £ million 16.9 Dividend per Share pence 7.58† Revenue £ million 253.8 Underlying Profit Before Taxation £ million 12.7 Dividend per Share pence 6.89 † 22581-04 22/08/2013 Proof 3 ® Welcome to Dechra Pharmaceuticals PLC Dechra is an international specialist veterinary pharmaceuticals business. Our expertise is in the development, manufacturing and sales and marketing of high quality products exclusively for veterinarians worldwide. Financial Highlights Revenue £ million up 52.2% 0 . 6 2 4 2 . 9 8 3 4 . 9 6 3 0 . 0 5 3 ) d e t a t s e R ( 3 . 4 2 1 2 . 9 8 1 Underlying Operating Profit* £ million up 53.1% Underlying Profit Before Taxation* £ million up 53.7% Underlying Earnings per Share* pence up 37.1% 6 . 6 3 8 . 1 3 1 . 9 3 ) d e t a t s e R ( 5 . 5 2 0 . 3 3 1 . 0 3 5 . 3 3 ) d e t a t s e R ( 8 . 1 2 1 . 6 2 4 . 3 2 4 . 3 2 † 9 0 . 7 2 † 3 5 . 3 2 † 3 5 . 3 2 2 . 8 2 0 . 5 2 0 . 5 2 † 3 5 . 1 3 † 7 3 . 2 3 7 2 . 9 2 ) d e t a t s e R ( 5 3 . 1 2 † 6 3 . 8 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 2 1 0 2 3 1 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 2 1 0 2 3 1 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 2 1 0 2 3 1 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 2 1 0 2 3 1 0 2 Dividend per Share Operating Profit Profit Before Taxation Earnings per Share pence up14.1% 0 0 . 4 1 † 7 2 . 2 1 † 2 1 1 1 . † 4 6 . 9 † 6 3 . 8 £ million up 104.2% . 5 8 1 7 . 7 1 8 . 6 1 3 . 8 1 . 1 6 1 . 1 6 1 £ million up 78.5% 7 . 1 2 9 . 0 2 9 . 9 1 7 . 7 1 . 7 7 1 ) d e t a t s e R ( 3 . 0 1 pence up 31.6% † 9 5 . 9 1 † 4 3 8 1 . † 5 6 5 1 . † 6 8 . 5 1 † 6 8 . 5 1 7 4 . 2 1 ) d e t a t s e R ( 0 2 . 5 . 5 2 ) 1 d e t a t s e R ( 1 6 . 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 2 1 0 2 3 1 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 2 1 0 2 3 1 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 2 1 0 2 3 1 0 2 * Non-underlying items comprise amortisation of acquired intangibles, acquisition expenses, rationalisation costs, loss on extinguishment of debt, the unwinding of discounts on deferred and contingent consideration and expenses related to the disposal of discounted operations (see notes 4, 5 and 29). † Adjusted for the bonus element of the Rights Issue. Restated to reflect continuing operations. Forward-Looking Statements: This document contains certain forward-looking statements. The forward-looking statements reflect the knowledge and information available to the Company during preparation and up to the publication of this document. By their very nature, these statements depend upon circumstances and relate to events that may occur in the future and thereby involving a degree of uncertainty. Therefore, nothing in this document should be construed as a profit forecast by the Company. www.dechra.com 22581-04 22/08/2013 Proof 3 01 Contents Strategic Report Our Business 04 Group at a Glance 06 Chairman’s Statement 08 Reasons to Invest 09 Business Model 10 Strategy 12 DVP EU Strengths and Capabilities 14 DVP US Strengths and Capabilities 16 International Footprint 18 Key Products and Specialisations 21 Manufacturing Strengths and Capabilities 23 Product Development 25 Product Pipeline Our Performance 26 Chief Executive Officer’s Q&A 28 Operating Review 28 Overview 30 Product Development and Regulatory Affairs 32 DVP EU Performance 34 Manufacturing Performance 36 DVP US Performance 38 Key Performance Indicators 40 Financial Review 46 Risk and Risk Management Our Governance 48 Board of Directors 50 Corporate Governance 61 Audit Committee Report 67 Directors’ Remuneration Report 84 Corporate Responsibility, Social, Ethical and Environmental Responsibilities 90 Other Disclosures 94 Statement of Directors’ Responsibilities Our Strategy To develop an international high margin, cash generative, specialist veterinary pharmaceuticals and related products business. Read more about our Strategy 10 Operational Highlights ❱ Creation of a pure play pharmaceuticals business ❱ Eurovet successfully integrated and expected synergies realised ❱ Divestment of the Services Segment completed on 16 August 2013, generating proceeds of £87.5 million. Net cash position after receipt of the proceeds is circa £7.0 million ❱ Underlying diluted EPS for continuing operations at 29.07 pence, growth of 42.2% versus last year (at constant exchange rate) ❱ Profit before tax on continuing operations up by 59.7% (at constant exchange rate) benefiting from a full year of Eurovet and a solid core performance ❱ Group revenue on continuing operations up by 56.6% (at constant exchange rate) despite slow trading in the third quarter and third party supply issues in US ❱ Focus therapeutic areas in companion animal products grew by 11.2% (at constant exchange rate) ❱ Increased investment in Research and Development to support the product pipeline and enlarged Group post-Eurovet acquisition ❱ Dividend per share up 14.1% to 14.00 pence Our Key Strengths ❱ Specialist products ❱ People and expertise ❱ Strategic focus ❱ International footprint ❱ Strong financial platform ❱ Development pipeline ❱ Strong market position ❱ Growing markets ❱ Customer satisfaction ❱ Innovation Read more about Reasons to Invest 08 Our Financials Our Values Our six Dechra Values: Dedication, Enjoyment, Courage, Honesty, Relationships and Ambition reflect the best aspects of behaviour and competence in Dechra. We embrace the Values at every level of the business. 96 Independent Auditor’s Report 98 Consolidated Income Statement 99 Consolidated Statement of Comprehensive Income 100 Consolidated Statement of Financial Position 101 Consolidated Statement of Changes in Shareholders’ Equity Read more about Our Values 102 Consolidated Statement of Cash Flows 88 103 Notes to the Consolidated Financial Statements Getting Around An introduction to the signposting tools used in this report: QR Codes Instant access to sections of our online report at the click of your smartphone’s code reader app: Read more about our Business Model 09 Read more online www.dechra.com 147 Company Balance Sheet 148 Reconciliation of Movements in Shareholders’ Funds 149 Notes to the Company Financial Statements 156 Financial History Shareholder Information 157 Glossary 159 Shareholder Information 160 Advisers 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationOur PerformanceOur BusinessStrategic Report02 Strategic Report 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 201303 The Group Strategic Report provides a review of the business for the financial year and describes how we manage risks. The report outlines the developments and performance of the Group during the financial year, the position at the end of the year and discusses the main trends and factors that could affect the future. Key performance indicators are published to show the performance and position of the Company. Pages 9 to 11 outline the Company’s business model and strategy. Strategic Report Our Business Pages 4 to 25 Details the composition of the Group, features a statement from the Chairman and senior management commentary on the individual business segments. Our Performance Pages 26 to 47 Outlines the developments and performance of the Group during the financial year with commentary from the Chief Executive Officer and Chief Financial Officer. Above: PLC Head Office, Northwich, Cheshire 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationOur PerformanceOur BusinessStrategic Report04 Group at a Glance EU Pharmaceuticals Dechra Veterinary Products EU (“DVP EU”) Sales, marketing and technical support of Dechra’s branded veterinary products to the veterinary profession in Europe. Dechra Pharmaceuticals Manufacturing (“DPM”) Licensed manufacturer of veterinary and human pharmaceuticals for DVP EU and third party customers. US Pharmaceuticals Dechra Veterinary Products US (“DVP US”) Sales, marketing and technical support of Dechra’s branded endocrine, ophthalmic, dermatological and equine products to the veterinary profession in the USA. Revenue £ million up 61.0% Operating Profit £ million up 58.5% Revenue £ million up 2.6% Operating Profit £ million down 4.7% 7 . 8 6 1 8 . 4 0 1 6 . 4 8 3 . 9 8 4 . 7 7 8 . 5 4 9 . 8 2 5 . 2 2 4 . 1 2 0 . 8 1 4 . 0 2 9 . 0 2 1 . 6 1 6 . 0 1 8 . 7 9 . 5 6 . 5 8 . 4 3 . 1 8 . 0 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 Sales Revenue Sales Revenue by specialisation Sales Revenue Sales Revenue by specialisation d a b c a Third party Pharma 10% b Export 13% c Veterinary Wholesalers 50% d Veterinary Practices 27% i a b c d h g f e a Dermatology 10% b Opthalmology 3% c Equine Medicine 7% d Endocrinology 16% e Pet Diets 18% f Analgesia and Critical Care 4% g Cardiovascular 2% h Food Producing Animals 25% i Other 15% a b c a Third party Pharma 5% b Export 7% c Distributors 88% a e d c b a Dermatology 55% b Opthalmology 3% c Equine Medicine 3% d Endocrinology 38% e Other 1% Read more about DVP EU 12 Read more about DVP US 14 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur Business 05 Product Development Product Development and Regulatory Affairs (“PDRA”) The Product Development and Regulatory Team develops and licenses Dechra’s own branded veterinary product portfolio of novel and generic pharmaceuticals and specialist pet diets. Research and Development Spend £ million up 38.8% 0 . 8 7 . 5 2 . 5 7 . 4 4 . 3 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 Read more about Product Development 23 Above: Product Development and Regulatory team employees 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationOur PerformanceOur BusinessStrategic Report 06 Chairman’s Statement Delivering Growth in Our Focus Therapeutic Areas in Europe Our European Pharmaceuticals Segment continues to show progress and achieved sales of £168.7 million, an increase of 66.3% (at constant exchange rates (“CER”)) over the previous year. On a like-for-like basis, adjusting 2012 to include a full year of Eurovet revenue, growth is 5%, despite having been affected by slow trading in the third quarter due to bad weather, as previously reported. Importantly, on a like-for-like basis all key therapeutic areas delivered a good performance: ❱ Our focus companion animal products performed very well increasing by 18.4% (at CER), with our key products Vetoryl, Felimazole and Cardisure® delivering double digit revenue growth. ❱ Despite a challenging environment for our food producing animal products, caused principally by pressure to reduce antimicrobials usage due to concerns over increasing resistance, we saw modest sales growth of our key water soluble antibiotics. Total sales for key products in this category remained flat due to competition issues on Cyclospray® (an aerosol for cattle foot rot). with Vetoryl continuing to grow at 11.6% and Felimazole at 16.3%. During the year, Dechra Veterinary Products US continued to invest in and build its sales team in order to reinforce its marketing activities and further strengthen relationships with veterinarians. As a result the operating profit for this Segment was slightly down at £5.6 million compared to £5.9 million in 2012. Strategic Divestment of the Services Segment The divestment of our Services Segment, completed post year end on 16 August 2013, represents a further step in the Board strategy to create a focused pure play specialist veterinary pharmaceuticals business. The Board believes that the Pharmaceuticals businesses are higher margin, cash generative businesses, operating in a global market with attractive long term growth prospects. The net proceeds of the disposal will be used initially to reduce Group’s debt but provides the Group with additional resources to continue its development, both organically and through strategic acquisitions. ❱ Diets grew by 2.6% (at CER) driven by the relaunch of our new wet diet presentation and a new intensive support diet for animals post-surgery. Increased Investment in Research and Development (“R&D”) In 2013 our Development and Regulatory team achieved approvals for: The results reflect the successful integration of Eurovet. This acquisition has met our expectations, expanding our geographical footprint in Europe, adding complementary products to our companion animal product portfolio, providing an entrance into the food producing animal market and increasing our manufacturing capabilities. Operating profit for the European Pharmaceuticals Segment increased to £45.8 million from £28.9 million in the prior year. Strong US Core Performance Revenues in the US totalled £20.5 million, growth of 4.7% (at CER) compared to the prior year. Third party supply issues on our ophthalmic and dermatology ranges hampered the US performance, as previously described in our trading update on 10 July 2013. However, adjusting for these unexpected circumstances, the core sales growth was 10.3% (at CER) ❱ ❱ ❱ three new products; three line extensions; and three existing products licensed into new territories. At the same time, development of our novel and generic products continued; four projects have now reached the clinical phase of development. We will also file imminetly in the UK and the US for a new equine product. As a specialist veterinary pharmaceuticals business, the Board has decided to increase the Group’s focus and investment in R&D as a key driver of future growth and profitability. Net Debt As expected our net borrowing position at the end of the financial year improved compared to 2012, reducing from £86.7 million to £80.8 million. Michael Redmond Non-Executive Chairman 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur Business07 “This has been a transformational year for Dechra. The disposal of the Services Segment represents a major step forward in the Board’s strategy to create a specialist veterinary pharmaceuticals business. We expect the quality of the Group’s business and its prospects to be enhanced as a result of the disposal.” Read more about Reasons to Invest 08 Above: Visual vials inspection at DPM, Skipton Dividend Subject to Shareholder approval at the forthcoming Annual General Meeting on 17 October 2013, the Board is proposing a final dividend of 9.66 pence per share, reflecting underlying EPS growth, and bringing the total dividend per share to 14.00 pence for the financial year ended 2013. The proposed final dividend shall be paid on 22 November 2013 to Shareholders on the Register on the Register at 8 November 2013. The shares will become ex-dividend on 6 November 2013. Prospects The divestment will enable management to focus exclusively on the areas of the business with the strongest margin, cash conversion and growth prospects. We intend to increase our focus on and investment in Research and Development to ensure the value of our pipeline is delivered and we continue to assess selective, strategic acquisitions which would add new products or geographies. We will continue to refine our strategy for the continuing Group in the next financial year. The Board remains committed to building a cash generative specialist veterinary pharmaceuticals business which will: ❱ expand our geographical footprint; ❱ maximising opportunities with our existing products; and ❱ advancing and deliver our promising pipeline. Current trading is ahead of last year and in line with management’s expectations. The Board is confident that the Group will continue to perform well despite a challenging environment and that our strategy will deliver enhanced Shareholder value. Michael Redmond Non-Executive Chairman 3 September 2013 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationOur PerformanceOur BusinessStrategic Report08 Reasons to Invest The table below summarises how our key strategic areas are linked to our risks and key performance indicators and highlights what our mid-term priorities are. This provides an user friendly guide on how to access further information in this report. Our Strategy Risks Mid-term Priorities Innovate Manufacture Commercialise Shareholder Return ❱ Deliver the pipeline ❱ Focus on specialist therapeutic areas ❱ In-license opportunities ❱ Innovative management team ❱ Failure of clinical trials ❱ Failure to meet regulatory requirements under which we operate ❱ Loss of key personnel ❱ Efficient effective ❱ Experienced sales ❱ Continue to grow sales operations ❱ Wide range of scale and dosage forms ❱ Profitable third party contracts ❱ End-to-end service and marketing teams focused on clearly defined therapeutic areas ❱ Expand into additional territories ❱ Leaders in continuous education programmes for veterinarians and profit ❱ Generate value by investing in the pipeline, maximising existing portfolio and expanding geographically ❱ Failure of a major ❱ Competitor products ❱ Mitigation plans are in place to reduce the potential impact of the identified risks on Shareholder value supplier ❱ Failure to meet regulatory requirements under which we operate ❱ Loss of key personnel launched against one of our leading brands ❱ Revenue from recently launched new products failing to meet expectations ❱ Prescribing pressure on veterinarians to reduce antibiotic use ❱ Loss of key personnel READ MORE ❭ Pages 10–11 ❭ Pages 46–47 ❱ Manage four products in ❱ Drive ongoing efficiency ❱ Establish Dechra clinical phase improvements ❱ Complete filing on two ❱ Extend FDA approval major products ❱ Evaluate new opportunities into new dosage forms for the Skipton site ❱ Implement Oracle IT system at the Bladel Site subsidiaries in new territories ❱ Further investment in US sales and marketing team as the pipeline delivers ❱ Maintain organic growth of key products ❱ Maximise the return on new product launches ❱ Revenue from key pharmaceutical products ❱ Revenue from specialist pet diets ❱ Employees ❭ Pages 12–25 ❱ Sustain growth ❱ Leverage strong balance sheet ❱ Generate strong cash conversion ❭ Pages 38–39 ❱ Underlying operating profit margin ❱ Cash conversion rate ❱ Return on capital employed KPIs (pre- divestment of Services) ❱ Pharmaceutical product development pipeline ❱ Employees ❱ Health and safety performance ❱ Employees 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur Business09 Business Model Dechra has a clear business model for delivering value: ❱ Our market knowledge, regulatory expertise, strong reputation and management experience helps us to identify potential product development targets, in-licensing and acquisition opportunities, focusing on specialist products in defined therapeutic areas. ❱ Our skilled Product Development and Regulatory team achieves international approvals and registrations. ❱ Manufacturing, which plays an integral part in the formulation and dosage form development, manufactures products as effectively and efficiently as possible. ❱ Following registration and manufacture of our products, experienced sales and marketing teams in the EU and US market our products directly to veterinary practices and indirectly through export partners to maximise awareness and sales of our products to veterinarians globally. ❱ This integrated approach of development, manufacturing and sales and marketing creates value for the business and its stakeholders. Above: Vetoryl for the US market is now manufactured in-house at DPM, Skipton Regulatory Expertise Specialists Team In-licensing Carefully selected acquired products Sales and Marketing Growing Brand Strength Strong and Growing Global Sales and Distribution Network Product Development and Regulatory Affairs Read more 23 Full Service Scale Dosage Forms Pharmaceutical Sales DVP EU European Wholesalers and Distributors DVP US Manufacturing Export Partners Veterinary Practices US Wholesalers and Distributors Read more 12 Sterile Read more 21 Regulatory Expertise and FDA Approvals Contract Manufacturing Value Generation 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationOur PerformanceOur BusinessStrategic Report10 Strategy Group Strategy The Group has a clearly defined strategy to: ❱ Develop an international high margin, cash generative, specialist veterinary pharmaceuticals and related products business through a clear focus on key therapeutic areas: dermatology, analgesia and critical care, endocrinology, cardiovascular, equine and food producing animal antimicrobials. The objective is to: ❱ Maximise value from our existing product portfolio and new product pipeline through an integrated business model which will deliver the maximum return to all stakeholders. Product Development and Regulatory Affairs Innovate Manufacturing Manufacture The strategy is to: ❱ Quickly and effectively evaluate the feasibility of development and registration of new products; ❱ Conduct trial work as cost-effectively as possible and in-house wherever possible; and ❱ Build on the team’s skills, expertise and knowledge to ensure regulatory submissions have the optimum chance of achieving approval upon first review. The objective is to: ❱ Screen exploratory ideas for suitability for addition to the pipeline; ❱ Conduct clinical trials and compile safety data where necessary and to provide regulatory dossiers for submission for approval to key global regulators; and ❱ Maintain existing product registrations and register licenses into new territories. The strategy is to: ❱ Provide technical formulation and development expertise to support in-house product development and third party customer requirements; ❱ Produce a wide range of dosage forms in both small and large scale; and ❱ Provide an end-to-end service with the highest levels of quality approval for our customers. The objective is to: standard achievable; and ❱ Produce our own branded, licensed products as effectively and economically as possible at the highest quality ❱ Provide a high quality differentiated manufacturing service to third party customers. Pharmaceutical Sales DVP EU Commercialise The strategy is to: ❱ Focus on clearly defined therapeutic sectors; ❱ Support and educate veterinary customers by taking a strong technical approach to sales and education and by gaining key opinion leader support; and ❱ Extend our sales and marketing capabilities into additional territories. DVP US The strategy is to: ❱ Focus on clearly defined therapeutic sectors within the companion animal market; ❱ Support and educate veterinary customers by taking a strong technical approach to sales and education and by gaining key opinion leader support; and ❱ Continue to develop and grow our infrastructure to create a sales and marketing team of sufficient scale to maximise current and future pipeline product sales across North America. Value Generation Shareholder Return The strategy is to: ❱ Deliver maximum return from our integrated business model by: — Investing in a strong development pipeline; — Maximising sales and margin of our existing product portfolio; and — Extending our geographical scope. DVP EU The objective is to: DVP US The objective is to: ❱ Create a sales and marketing structure which maximises both the exposure of the Dechra brand and sales of its products to veterinarians within the EU; and ❱ Supply marketing and technical support to worldwide distributors of our products. ❱ Create a sales and marketing structure which maximises both the exposure of the Dechra brand and sales of its products to veterinarians within the US. The objective is to: ❱ Continue to grow sales and profit by achieving our strategic objectives; and ❱ Generate value for all stakeholders. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur Business11 The objective is to: ❱ Maximise value from our existing product portfolio and new product pipeline through an integrated business model which will deliver the maximum return to all stakeholders. The objective is to: ❱ Screen exploratory ideas for suitability for addition to the pipeline; ❱ Conduct clinical trials and compile safety data where necessary and to provide regulatory dossiers for submission for approval to key global regulators; and ❱ Maintain existing product registrations and register licenses into new territories. The objective is to: ❱ Produce our own branded, licensed products as effectively and economically as possible at the highest quality standard achievable; and ❱ Provide a high quality differentiated manufacturing service to third party customers. DVP EU The objective is to: ❱ Create a sales and marketing structure which maximises both the exposure of the Dechra brand and sales of its ❱ Support and educate veterinary customers by taking a strong technical approach to sales and products to veterinarians within the EU; and ❱ Supply marketing and technical support to worldwide distributors of our products. DVP US The objective is to: ❱ Create a sales and marketing structure which maximises both the exposure of the Dechra brand and sales of its products to veterinarians within the US. The objective is to: ❱ Continue to grow sales and profit by achieving our strategic objectives; and ❱ Generate value for all stakeholders. Read more about KPI’s 38 Read more about Risk 46 Group Strategy The Group has a clearly defined strategy to: ❱ Develop an international high margin, cash generative, specialist veterinary pharmaceuticals and related products business through a clear focus on key therapeutic areas: dermatology, analgesia and critical care, endocrinology, cardiovascular, equine and food producing animal antimicrobials. Product Development and Regulatory Affairs The strategy is to: Innovate ❱ Quickly and effectively evaluate the feasibility of development and registration of new products; ❱ Conduct trial work as cost-effectively as possible and in-house wherever possible; and ❱ Build on the team’s skills, expertise and knowledge to ensure regulatory submissions have the optimum chance of achieving approval upon first review. Manufacturing The strategy is to: ❱ Provide technical formulation and development expertise to support in-house product development Manufacture and third party customer requirements; ❱ Produce a wide range of dosage forms in both small and large scale; and ❱ Provide an end-to-end service with the highest levels of quality approval for our customers. Pharmaceutical Sales DVP EU The strategy is to: Commercialise ❱ Focus on clearly defined therapeutic sectors; education and by gaining key opinion leader support; and ❱ Extend our sales and marketing capabilities into additional territories. DVP US The strategy is to: ❱ Focus on clearly defined therapeutic sectors within the companion animal market; ❱ Support and educate veterinary customers by taking a strong technical approach to sales and education and by gaining key opinion leader support; and ❱ Continue to develop and grow our infrastructure to create a sales and marketing team of sufficient scale to maximise current and future pipeline product sales across North America. Value Generation The strategy is to: ❱ Deliver maximum return from our integrated business model by: Shareholder Return — Investing in a strong development pipeline; — Maximising sales and margin of our existing product portfolio; and — Extending our geographical scope. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationOur PerformanceOur BusinessStrategic Report12 DVP EU Strengths and Capabilities Tony Griffin Managing Director René Hogenkamp Finance Director Giles Coley Sales and Marketing Director, Region I Jan Jaap Korevaar Sales and Marketing Director, Region II Region I: Denmark, Finland, France, Norway, Sweden and UK Region II: Belgium, the Netherlands, Germany, Portugal and Spain “Our customers are principally veterinarians; however, in some territories the route to market is through wholesalers and pharmacies.” What We Do DVP EU markets and sells Dechra’s veterinary products throughout Europe and exports to over 40 countries worldwide. The business has an operating board of six senior managers, and is managed from Bladel, the Netherlands, Sansaw, UK, and Uldum, Denmark. In total, DVP EU employs 318 people. Inventory is managed through a central distribution centre in Uldum, Denmark. DVP EU has sales operations in 12 countries; Belgium, Denmark, France, Finland, Germany, Ireland, the Netherlands, Norway, Portugal, Spain, Sweden and the UK, each run by regional country managers. DVP EU also exports to other European countries such as Austria, Italy and Poland, and across the globe to Australia, Brazil, Canada, the Middle East and the Far East. The key products in the DVP EU portfolio are predominantly companion animal products; however, with the acquisition of Eurovet, the range has expanded into the food producing animal market. During the year we have integrated the expertise and products from Eurovet and have continued to develop the Dechra brand across Europe. This drive to grow the brand will continue in the future with the launch of new products from the pipeline, an increased technical and educational programme, and expansion into new markets. Our Market Our customers are principally veterinarians; however, in some territories the route to market is through wholesalers and pharmacies. Our products are distributed through a mixture of our own direct sales, wholesalers and national distributor channels. When critical mass within a country is reached, and whenever financially beneficial, local sales operations are established. We look to build teams with local knowledge who can draw from Dechra’s technical expertise across the Group. Our Expertise In order to forge relationships with customers, technical dinners and seminars are held to provide a face-to-face programme to educate veterinarians on our key therapeutic sectors. Key opinion leaders, at both local and international levels, are recruited for seminars and presentations; additionally, webinars and online interactive educational tools are available on the DVP EU website. We have identified eight core therapeutic categories where we leverage our expertise: endocrinology, dermatology, ophthalmology, equine, cardiovascular, analgesia and critical care, diets/nutrition, and antibiotics for food producing animals. As well as novel products, DVP EU also produces generic products and specialist, therapeutic and maintenance pet diets. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur Business13 Carsten Jeppesen Marie-Louise Mans Logistics Director Europe HR Director Europe Above: Canaural was first launched in 1975 and is now registered in 27 countries introduce Comfortan to veterinarians in the UK, a total of 865 veterinarians attended, demonstrating a strong interest in this product. Across all territories the business is committed to developing new products and services that support the work of veterinarians. We will be expanding the Dechra brand through newly established subsidiaries within the EU and we will continue to develop our international presence through strong relationships with key partners. Looking Forward DVP EU is performing strongly in the three major European markets. The UK was the fastest growing EU market during the year, France and Germany also saw solid growth. DVP EU’s export business is also expanding in markets around the world. In endocrinology, an important therapeutic sector, Vetoryl, Felimazole and Forthyron® are key growth drivers as we gain marketing approval in an increasing number of countries. Other key products include the broad dermatology range, including Fuciderm®, Malaseb, Canaural ®and the DermaPet range. Cardisure, a generic product in DVP EU’s cardiovascular category, shows significant potential, as does Comfortan®, a recently approved product, in the analgesic category. Over ten technical seminars were held to 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationOur PerformanceOur BusinessStrategic Report14 DVP US Strengths and Capabilities Mike Eldred Doug Hubert Dana Fertig President, US Operations Vice-President, Sales and Marketing Veterinary Technical Services Manager Nancy Zimmerman Director of Marketing What We Do DVP US markets and sells Dechra’s veterinary products across the USA, the world’s largest animal health market. The business is strategically located in Kansas City, at the heart of the ‘Animal Health Corridor’, which is the world’s largest concentration of animal health businesses. Our Market Our customers are primarily small animal and equine veterinarians, of which there are approximately 90,000, working in 26,000 clinics across the country. DVP US provides products that solve clinical problems and help veterinarians treat medical conditions, thereby building their business. Led by an operating board of four senior managers, DVP US comprises 42 employees, 26 of whom are field-based sales representatives responsible for around 1,000 clinics each. The rest of the team consists of marketing professionals, in-house veterinarians, field veterinarians, technical support staff and a customer service team. DVP US currently only markets companion animal and equine products; it is estimated that there are around 80 million dogs and 95 million cats in the US at present and pet ownership is increasing. The animal health market is approximately $15 billion, out of a total US spend of $50 billion on pets. Spending in the pet market is recovering since the decline seen in the recent global financial crisis. It is now beginning to build, with industry experts predicting an annual growth rate of 3% to 5%. “Several products in the development pipeline will ensure the continued organic growth of our US business.” See Case Study on Continuing Education 37 Above: DVP US provides products that solve clinical problems and help veterinarians treat medical conditions 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur Business15 In the US, veterinarians and clinics are primarily supplied through distributors. Our sales representatives promote and sell products directly, but also network and visit clinics together with these distributors. Becoming increasingly important are corporate pet hospitals, such as Banfield and Veterinary Centers of America (“VCAs”) which are consolidating the market and delivering good growth. Our Expertise To increase knowledge of Dechra products to all key customers, technical Continuing Education (“CE”) meetings, attended by veterinarians, are being leveraged. Product awareness and knowledge is established in a face-to-face environment, key opinion leaders and influencers then share their increased knowledge of Dechra’s products to a wider audience. The product portfolio of DVP US currently includes 11 NADA approvals (with 20 different package sizes) and 50 products that are non-regulated. We have niche market leading positions in veterinary endocrinology, veterinary dermatology and topical dermatology. Our Dechra brand has gained momentum in the US, building on our strong reputation for customer service, the quality of an expanding product portfolio, further education programmes on our key areas of specialisation and high quality technical support. Looking Forward Several products in the development pipeline will ensure the continued organic growth of our US business. Commensurate with this growth, we will continue to invest in the sales and marketing infrastructure to develop a stronger US presence and improved contact with veterinarians. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationOur PerformanceOur BusinessStrategic Report16 International Footprint We currently have our own sales and marketing organisations in 12 Western European countries and in the USA. We also market products in over 40 countries worldwide through distributors and marketing partners. A number of these countries are currently being evaluated to assess the opportunity to extend our own sales and marketing capabilities thereby maximising margin return for the Group. United Kingdom Endocrinology Dermatology Ophthalmology Equine Cardiovascular Analgesia and Critical Care Food Producing Animal Products Key Products Ireland Key Products Key Products Sweden Key Products Finland Key Products Denmark Key Products Endocrinology Dermatology Ophthalmology Equine Cardiovascular Analgesia and Critical Care Food Producing Animal Products Norway Endocrinology Dermatology Ophthalmology Equine Cardiovascular Endocrinology Dermatology Ophthalmology Equine Cardiovascular Endocrinology Dermatology Ophthalmology Equine Cardiovascular Endocrinology Dermatology Ophthalmology Equine Cardiovascular Analgesia and Critical Care Food Producing Animal Products Analgesia and Critical Care Food Producing Animal Products Analgesia and Critical Care Food Producing Animal Products Analgesia and Critical Care Food Producing Animal Products Key Products Key Products Netherlands Endocrinology Dermatology Ophthalmology Equine Cardiovascular Analgesia and Critical Care Food Producing Animal Products Belgium Endocrinology Dermatology Ophthalmology Equine Cardiovascular Analgesia and Critical Care Food Producing Animal Products Key Products Key Products United States Endocrinology Dermatology Ophthalmology Equine Portugal Endocrinology Dermatology Ophthalmology Equine Cardiovascular Analgesia and Critical Care Food Producing Animal Products Key European Pharmaceuticals US Pharmaceuticals Export Number of key products “The majority of our products are novel or have clear marketing advantages over competitor products.” Read more about our Key Products and Specialisations 18 Spain Endocrinology Dermatology Ophthalmology Equine Cardiovascular Key Products France Key Products Germany Key Products Endocrinology Dermatology Ophthalmology Equine Cardiovascular Endocrinology Dermatology Ophthalmology Equine Cardiovascular Analgesia and Critical Care Food Producing Animal Products Analgesia and Critical Care Food Producing Animal Products Analgesia and Critical Care Food Producing Animal Products 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur Business17 The map below shows the number of key products in our focused therapeutic areas in territories where we have sales and marketing organisations. United Kingdom Endocrinology Dermatology Ophthalmology Equine Cardiovascular Analgesia and Critical Care Food Producing Animal Products Ireland Endocrinology Dermatology Ophthalmology Equine Cardiovascular Analgesia and Critical Care Food Producing Animal Products Key Products Key Products Norway Key Products Sweden Key Products Finland Key Products Denmark Key Products Endocrinology Dermatology Ophthalmology Equine Cardiovascular Analgesia and Critical Care Food Producing Animal Products Endocrinology Dermatology Ophthalmology Equine Cardiovascular Analgesia and Critical Care Food Producing Animal Products Endocrinology Dermatology Ophthalmology Equine Cardiovascular Analgesia and Critical Care Food Producing Animal Products Endocrinology Dermatology Ophthalmology Equine Cardiovascular Analgesia and Critical Care Food Producing Animal Products Netherlands Key Products Endocrinology Dermatology Ophthalmology Equine Cardiovascular Analgesia and Critical Care Food Producing Animal Products Belgium Key Products Endocrinology Dermatology Ophthalmology Equine Cardiovascular Analgesia and Critical Care Food Producing Animal Products Key Products Key Products United States Endocrinology Dermatology Ophthalmology Equine Portugal Endocrinology Dermatology Ophthalmology Equine Cardiovascular Analgesia and Critical Care Food Producing Animal Products Key European Pharmaceuticals US Pharmaceuticals Export Number of key products Spain Key Products France Key Products Germany Key Products Endocrinology Dermatology Ophthalmology Equine Cardiovascular Analgesia and Critical Care Food Producing Animal Products Endocrinology Dermatology Ophthalmology Equine Cardiovascular Analgesia and Critical Care Food Producing Animal Products Endocrinology Dermatology Ophthalmology Equine Cardiovascular Analgesia and Critical Care Food Producing Animal Products 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationOur PerformanceOur BusinessStrategic Report18 Key Products and Specialisations Historically, Dechra’s product range was entirely focused on companion animals and horses. However, the acquisition of Eurovet has given the Group a significant and strategically important platform in the food producing animal product market. The majority of key products in both the companion animal and food producing animal markets are novel or have clear marketing advantages over competitor products. Several of our branded ranges have market leading positions in the majority of territories in which we operate. Dermatology and Care Dermatology represents approximately 20% of veterinarians’ clinical time and is currently a major focus area for the industry. Best practice and management techniques look to adopt more topical products, as opposed to oral treatments, with the aim of utilising antibiotics more appropriately. Dechra’s product portfolio, with its range of licensed and non-licensed topical products, is well positioned for this approach. Canaural was first licensed in 1975 and is still the leading first line treatment for otitis externa in cats and dogs in several EU territories. Canaural, which is now registered in 27 countries, can also be used in conjunction with our leading ear cleaning product CleanAural®. Fuciderm, licensed in 1995, is the only licensed product for the treatment of surface pyoderma in dogs, such as acute moist dermatitis and intertrigo. It is a key product within our dermatology range, selling into 23 countries. Malaseb, was first licensed in 1996 and is still the market leading medicated shampoo for cats and dogs. It is used to treat skin diseases caused by Malassezia and staphylococcal infections. Animax, licensed for the treatment of skin conditions in dogs and cats, is only approved in the United States. The marketing rights for this product were acquired in May 2007. This product is currently unavailable due to third party supply issues. DermaPet, acquired in October 2010, is a range of shampoos, conditioners and ear products to treat numerous skin and ear conditions in dogs and cats. Key brands are Triz, MalAcetic and Malaket. The Care range comprises unlicensed products which complement our pharmaceutical range. They are available over the counter within veterinary practices. The three key products are CleanAural, a non-irritant cleaner suitable for frequent use in ears producing excess wax, Neutrale™, a range of specialist shampoos for skin conditions in dogs, and Lubrithal®, an eye lubricant for cats and dogs. Ophthalmology Ophthalmology is an area of veterinary medicine where we have a number of leading products including licensed pharmaceuticals, unlicensed care products and instruments. Fucithalmic® Vet, licensed in 1993, is the only licensed product available for the treatment of conjunctivitis associated with staphylococcal infections. It is highly effective because of its unique sustained release formulation that ensures prolonged retention within the eye. It is currently licensed in 21 countries. Additionally, we market a range of ophthalmic products in the USA. There are six products in the range, with the majority being the only veterinary licensed products in the US market. These products are currently unavailable due to third party supply issues; however, we anticipate relaunch in the 2013/2014 financial year. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur Business19 Forthyron is licensed to treat the most widely recognised endocrine disorder, canine hypothyroidism. It is the only mutually recognised levothyroxine treatment in Europe and is marketed in all the major European countries. Felimazole was the first veterinary licensed product for the treatment of feline hyperthyroidism. Originally licensed in the UK in 2002, Felimazole was then licensed in the EU in 2005, the US in 2009 and has subsequently been approved in Canada. Analgesia and Critical Care Equine Medicine The Group has a wide range of licensed products supporting the equine veterinarian. The leading product with the highest sales is Equipalazone® which is licensed in five major EU countries. Equipalazone was first licensed in a sachet presentation in 1972 and subsequently in paste and injection presentations. It continues to be the leading non-steroidal anti-inflammatory drug (“NSAID”) for the treatment of musculoskeletal disorders, such as lameness arising from acute and chronic laminitis in horses. Equidone Gel was approved in 2010 for the treatment of fescue toxicity in horses. This niche product is targeted specifically at the US market. Dechra has a wide range of products that support emergency medicine, pain relief and sedation. HY-50 is used for intra-articular and intravenous treatment of lameness in horses caused by joint dysfunction. The acquisition of this product, in January 2012, strengthened Dechra’s position in equine pain management in several major European territories. The Vetivex range of infusion fluids are licensed for the treatment of dehydration. They are widely used to meet normal fluid and electrolyte requirements when fluids cannot be given orally, such as during surgery. Domidine® is an injectable used for the sedation and slight analgesia of horses and cattle, to facilitate physical examinations and treatment, such as minor surgical interventions. Endocrinology Sedation and analgesia are major sub-groups of critical care. Dechra, enhanced by the Eurovet acquisition, markets one of the largest ranges of products in this sector. The range covers a wide number of species, different degrees of pain intensity management and duration of effect. Within the range there are a number of unique licenses, Intra Epicaine®, a local anaesthetic recommended for infiltration, nerve block, intra-articular and epidural anaesthesia in horses, Comfortan, the only licensed methadone hydrochloride for analgesia in dogs and Fentadon®, the only licensed fentanyl for intra-operative analgesia and post- operative pain management. Atipam® is a selective a2-antagonist receptor which reverses the sedative effects of medetomidine and dexmedetomidine in cats and dogs. Endocrine disorders are a key focus for the business with a number of unique licensed products treating a range of chronic diseases. The three leading brands are Vetoryl, Forthyron and Felimazole. Sedator® is licensed for sedation, analgesia and anaesthetic premedication and contains the active ingredient medetomidine hydrochloride. Vetoryl is a novel product for the treatment of Cushing’s syndrome (excess cortisol or hyperadrenocorticism) in dogs. It is marketed internationally and is the only recognised licensed efficacious veterinary product for the treatment of Cushing’s syndrome around the world. Other products in the range include Buprenodale® (buprenorphine), Ketamin (ketamine hydrochloride) and Plegicil (acepromazine maleate). 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationOur PerformanceOur BusinessStrategic Report20 Key Products and Specialisations continued Generics Several generic products are registered within the United Kingdom; this basket of products is marketed under the Dechra Veterinary Essentials® brand. A number of products are also registered in Europe; we are in the process of in-licensing and registering additional products to expand our branded generic range within this territory. Cardiovascular This is a new area of focus following the acquisition of Eurovet. Cardisure is the leading product in this category. The principal ingredient in Cardisure is pimobendan. It is a leading treatment for canine congestive heart failure and is marketed throughout Europe. product when added to drinking water. This reduces the need for additional enhancing agents widely used by competitor products. Octacillin®, marketed since 2003 in the Netherlands, is sold in 15 European countries following approvals in 2006 and 2011. Octacillin is a highly soluble and stable antibiotic powder containing amoxicillin which is added to drinking water in the treatment of diseases in swine and poultry. Soludox®, marketed in Benelux since 2002, is a highly soluble antibiotic powder for administration via drinking water and is currently sold in 16 EU countries as a result of approval, in 2010, for swine and chickens. The active ingredient is doxycycline. Methoxasol®, is a ready to use liquid medication, which can be easily added to the drinking water of swine and poultry; it has been marketed in the Netherlands since the mid 1990s. Following successful European procedures in 2000, 2009 and most recently in 2012, this highly soluble liquid is marketed in 15 EU countries. The active ingredients are sulphamethoxasol and trimethoprim, a proven synergistic combination for antimicrobial effectiveness. Cyclospray is the leading antibiotic spray treatment in Europe for claw/hoof infections, interdigital dermatitis (foot rot) in sheep and digital dermatitis in cattle. It is widely used in the prevention of infection of superficial traumatic or surgical wounds in cattle, sheep and pigs. Cyclospray has been marketed since 2000 in 12 EU countries. The active ingredient is chlortetracycline. Food Producing Animal Antimicrobials Pet Diets Dechra has a superior range of antimicrobial treatment products predominantly for swine and poultry. In a market where there is increased emphasis on reducing the usage of antibiotics in the food producing animal sector, it is essential that reliable and effective products are available to veterinarians to support them in the prudent use of antibiotics. The Solustab® range has been specifically developed to meet this need and is renowned for its high level of solubility leading to a reliable and stable Dechra has two main cat and dog diet product ranges, both branded Specific®, which are sold exclusively through veterinary practices. Therapeutic diets, which represent approximately 70% of overall diet sales, provide optimum levels of nutrition in areas such as diabetes, arthritis and urinary, kidney, liver and heart problems. Life stage diets, which represent approximately 30% of diet sales, provide premium quality daily nutrition for healthy dogs and cats. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur BusinessManufacturing Strengths and Capabilities 21 Mike Annice Managing Director Kirsty Ireland Finance Director Andrew Parkinson Quality Director Gareth Davies Sales and Marketing Director Chris Ashcroft Operations Director What We Do Dechra Pharmaceuticals Manufacturing (“DPM”) produces the vast majority of Dechra’s pharmaceuticals and also manufactures for third parties on a contract basis. The key strategic objective of manufacturing is to efficiently and economically produce Dechra’s veterinary pharmaceuticals product range, maintaining a robust and reliable supply chain for the Group, and to contribute revenue and profit to the Group from third party manufacturing. Our Sites After the Eurovet acquisition, DPM operated out of three sites based in Skipton, England, Bladel, the Netherlands, and Uldum, Denmark. Since then, the focus of DPM has been to integrate the sites, ensuring their processes and reporting are consistent so that the most effective manufacturing capabilities are available to DPM’s internal and external customers. The small site at Uldum will be closed by the end of the 2013 calendar year, as part of this restructuring with its two key products being transferred to Skipton. The Skipton and Bladel management teams have worked closely together to pool their skills and technical capabilities to standardise procedures and improve quality systems across the Group. Work has also been ongoing in improving the lean processes and to introduce a standard ERP system across the whole of DPM. Skipton The site at Skipton employs 215 people, and offers a comprehensive range of pharmaceutical manufacturing and packing services, predominantly for companion animals. The site is dual-licensed to produce both veterinary and human products. The site includes a Pharmaceutical Development Laboratory, a Routine QC (Quality Control) Laboratory and a Stability Testing and Validation Laboratory; these play a significant part in the new product development programme and are necessary for new product introductions. Bladel The site at Bladel, acquired as part of Eurovet, employs 120 people. The operation complements the existing Dechra capabilities; the site predominantly manufactures products for food producing animals in large scale batches. This site also has an aseptic manufacturing facility to produce sterile injections, a new competence in DPM’s manufacturing portfolio. Above: Dechra Pharmaceuticals Manufacturing, Skipton Above: Dechra Pharmaceuticals Manufacturing, Bladel 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationOur PerformanceOur BusinessStrategic Report22 Manufacturing Strengths and Capabilities continued “DPM will continue to support new product development and the increasingly important product pipeline.” Our Expertise DPM’s primary expertise is its ability to perform a wide range of services which delivers the flexibility that the veterinary market requires and provides a one-stop shop for its external customers. Furthermore, it offers a wide range of dosage forms and packaging capabilities and also supports the Group with the Pharmaceutical Development Laboratory which is integrated and aligned with our manufacturing capabilities. One-stop Shop DPM offers an end-to-end service; from formulation, method validation, stability testing, licensing support, flexibility in scale of production and packaging options to take products to market. The supply chain for the majority of products is short and we offer reliable high service levels with exceptional quality control throughout. Production Capabilities DPM has a wide range of capabilities in terms of dosage form, packaging capabilities and production scale. We can produce high, medium and low volumes of almost all dosage forms and have great flexibility in producing to demand. Dosage forms include: tablets, capsules, creams, ointments, gels, sterile injectables, low volume and high volume powders and pre-medicated feeds. We can pack into sachets, tubs, bags, capsules, tubes, bottles and jars. These capabilities are very important for the production of veterinary products where our licensed portfolio comes in many dosage formats and in various scales of batch size. Relative to human pharmaceuticals, veterinary batch runs are often very small. A number of our licensed branded minor products, although highly profitable, are of such a small scale that it would be difficult to find a third party manufacturer to produce them at a competitive price if we were unable to perform the function in-house. Product Development The Pharmaceutical Development Laboratory is integrated with our production capabilities. The primary objective is to formulate and validate products for our in-house pipeline which is a major benefit to the Group in order to shorten the time to get a product to market. Our technical expertise and development capabilities are also outsourced to third party customers which helps to secure new business. Contract Manufacturing In addition to manufacturing our own products, both Skipton and Bladel generate income through contract manufacturing. Although the clear focus is on Group manufacturing, we still seek to increase our third party sales; currently approximately 50% of Skipton’s and approximately 10% of Bladel’s output by value is contract manufacturing. The external offering includes product development, formulation, trial manufacturing, validation, production and packaging for both human and veterinary pharmaceuticals. Looking Forward Over the coming years the in-house production strategy will continue. There are currently no significant capacity constraints; therefore, we will continue to pursue profitable third party business. DPM will continue to support new product development and the increasingly important product pipeline. Manufacturing will also continue to maximise effectiveness and efficiency and improve productivity whilst constantly adapting our quality, health and safety and environmental systems. Above: Autoclave trolley in the injection suite, DPM, Skipton 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur BusinessProduct Development 23 Dr Susan Longhofer Rob Joosten Group Director, Product Development and Regulatory Affairs Product Development and Regulatory Affairs Director Product Development and Regulatory Affairs The Product Development and Regulatory Affairs (“PDRA)” team develops and licenses Dechra’s own branded veterinary product portfolio of novel and generic pharmaceuticals. Additionally, the team manages post-approval adverse event reporting, periodic product renewals and other activities required to maintain the product approvals. The team of 52 people are split into European Regulatory Affairs, US Regulatory Affairs, Pharmaceutical Development and Product Development. They work at four locations: Overland Park, USA, Sansaw, England, Skipton, England, and Bladel, the Netherlands. The team includes veterinarians, formulation chemists, pharmacists, analysts, clinical trial managers and product development managers. Product development process Although some products may have a slightly different path, most novel and generic products follow a fairly standard process which contains five phases which Dechra defines as: Exploratory, Pre-Clinical, Clinical, File/Submission and Launch. Dechra employs a structured process in its development pipeline however retains an opportunistic and entrepreneurial approach. Focus is given to the Group’s therapeutic specialisations: endocrinology, equine medicine, analgesia and critical care, cardiovascular, ophthalmology, and antimicrobials for food producing animals. New development opportunities and in-license opportunities are evaluated for strategic fit within these categories; therapeutics outside of the key areas are considered for inclusion in the pipeline if they 3 - 5 years average Exploratory Go/ No Go Indication(s) determined Active Pharmaceutical Ingredient (“API”) manufacturer selected Manufacturing site selected (finished products) Commercially - Is it worth taking the development idea forward? Pre-clinical Dose / formulation Selection CAP Formulation Novel (Start from scratch) CAP FAP Generic (Copycat product) Dose Titration CTR Preliminary Safety study Formulation Go/ No Go Clinical Go/ No Go File Launch 3 Pilot batches 2 Pilot batches CTR CTR CTR Safety Efficacy Residues Environmental Risk Assessment /Ecotoxicology User Safety Studies Bio equivalency Study/Studies or waiver Chemistry Drives timing, needs stable formulation CAP Companion Animal Product CTR Clinical Trials Required FAP Food Producing Animal New Formulation of products with existing maximum residue level (MRL) 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationOur PerformanceOur BusinessStrategic Report24 Product Development continued are novel and address unmet needs in the veterinary market. A product’s return on investment can vary: novel developments tend to have a mid to long term realisation with attractive high value returns; generic developments generally have shorter development timescales with returns dependent upon the number of generic entrants and speed to market relative to competition. Dechra’s current development pipeline is a mix of short, medium and long term opportunities. The Exploratory phase begins with identifying a novel molecule, an opportunity to develop a new formulation for an existing molecule, or an in-license opportunity. Before initiating a development programme, each opportunity is assessed by market need, market value, therapeutic indications, strategic fit and the likely complexity of the regulatory pathway. The second phase of the process is Pre- Clinical, which involves the collection of a range of preliminary data. When initiating development of a novel product, the correct dose has to be titrated and a stable formulation, that can be reliably and consistently manufactured, must be developed. For a generic product, the pioneer formulation may not meet the current regulatory requirements and may need to be reformulated. This phase is vital prior to initiating the clinical phase which involves expensive clinical trials or bio equivalency studies. The Clinical phase is the longest part of the process, potentially taking two or three years. After the formulation has been demonstrated to be stable, two to three pilot batches are manufactured for use in safety studies, efficacy studies and stability testing. For generic products, the batches are used in one or more bio equivalency studies to demonstrate that activity will replicate the pioneer product. If the studies conducted during the Clinical phase demonstrate the required safety, efficacy and chemical stability of the product, regulatory dossiers are prepared for submission. From beginning to end, this process takes on average between three and five years. Our Expertise The PDRA team includes skilled people with expertise in spotting niche opportunities, and the experience to navigate the hurdles of the development process. Across the four locations, project teams operate to tackle the wide range of projects. Investment in state- of-the-art laboratories in Bladel and Skipton, each with their respective dosage form expertise, provides the resources required to develop novel and generic formulations cost effectively. We believe our integrated and entrepreneurial approach to product development successfully delivers new products effectively and efficiently in the shortest possible time frame. “We believe our integrated and entrepreneurial approach to product development successfully delivers new product effectively and efficiently in the shortest possible time frame.” Above: Dechra Development Laboratory at DPM, Skipton 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur BusinessProduct Pipeline 25 Our product pipeline is critical to our future success. Our novel and generics projects are very diverse, with the majority building on our key therapy areas. We invest when we can identify growth opportunities with a clear financial return focusing on novel therapies to treat unmet needs with intellectual property protection. Our approach ensures we create sustainable growth throughout our targeted global markets. Low Risk Strategy There are various stage gates throughout the life of a development project where progress is reviewed and decisions are taken on whether to continue or not. Development is inherently risky and our stepped approach mitigates the risk of a costly failure. Wide Range of Projects In addition to the projects shown below, there are several other exploratory projects, line extensions, territory expansions and life cycle management projects. There is also an ongoing programme that renews and redevelops the Specific range of pet diets. Key Projects Therapeutic Category Species Territory Manufacturing Pre-clinical Clinical File Endocrinology Endocrinology Dogs Cats International International In-house Outsourced Dogs Endocrinology Horses Equine Dogs Dermatology Dogs Dermatology Ophthalmology Dogs Cardiovascular Dogs Cattle Antimicrobials Several Antimicrobials Poultry Antimicrobials EU International International International International EU EU EU EU Outsourced Outsourced In-house In-house Outsourced In-house In-house In-house In-house • • • • • • • • • • • • First Expected Launch 2015 2017 2014 (UK)/ 2016 (EU) 2014 (UK) 2017 2017 2017/2018 2017 2016 2015 2016 Future Value The expected revenue from these projects at peak is estimated to be circa £35 million. It takes approximately four to five years after launch for a product to reach peak sales. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationOur PerformanceOur BusinessStrategic Report26 Chief Executive Officer’s Q&A Your questions answered with Ian Page, Chief Executive Officer Q How does the sale of the Services businesses impact Group strategy going forward? The Group strategy has not changed at all. If anything, the sale of the Services businesses has allowed us to have an even clearer focus on our core strategy; furthermore, the proceeds of the sale have strengthened our balance sheet considerably. The consequences of which are that we now have the capabilities to look at further acquisitions if they become available to us in the future, and also we are able to put a little bit more investment in our product development pipeline, which will strengthen the opportunities for future growth. Q Why did Dechra decide to sell the Services businesses? The Group strategy has been clear for several years; to develop a high margin, cash generative veterinary pharmaceutical and products business. Within this strategy there is clearly no place for the Services businesses. Historically, the Services businesses were the strongest part of the Group both in terms of turnover and profit, but as the years have progressed, and we have developed our pharmaceutical business, that contribution has diminished. What actually triggered the transaction was a firm offer from Patterson. Patterson have a sole focus on Services; we believe that they will secure the future of the staff within the Services businesses and also continue to excel in performance at providing high levels of service to customers. So these factors, along with the firm offer, meant that we believed it was a strong win-win position for both parties. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur Performance27 Q Has the Eurovet integration progressed according to plan and has it fulfilled all your expectations? It has definitely fulfilled our expectations. It has extended our geography, particularly into Germany; strengthened our companion animal product portfolio; enhanced our manufacturing capabilities and also moved us into the livestock sector, which is a very important area for us to be involved in, as we look at our international expansion opportunities. In terms of the integration, it has delivered all the expected synergies to date of both revenue and cost nature; we expect it to continue to deliver further revenue synergies over the next couple of years. Q When will the product development pipeline start to deliver significant new products? The product pipeline has actually delivered products year on year now for several years, both pharmaceuticals and diets. The next major product was expected to be an equine lameness product but unfortunately this was delayed due to third party contract manufacturing issues. However, we have now resolved the issues and we expect the product to appear within the next 12 months within one or two major territories. Behind that, there is an extensive list of novel products that we have in development, so hopefully we should see at least one of these products appearing per year from 2014 onwards. Q What are your expectations for the business in the medium and long term? The world’s animal health markets are continuing to show growth. The companion animal markets remain strong in North America and Western Europe, and the livestock markets continue to increase in the developing world where there is a high demand for animal protein. So overall we are in a very strong position to deliver good organic growth with our existing portfolio but additionally, as I have already outlined, we have a very strong product development pipeline which will enhance that growth. We are looking at new countries to establish a presence; global expansion is high on our agenda; furthermore, with our strong balance sheet, we will hopefully be able to find one or two acquisitions to bolster the Group as a whole. So, all in all, we are in a very strong position to cement ourselves as one of the top ten global animal health companies. Developing Focusing Delivering Watch the Online Video www.dechra.annualreport2013.com Web link for your convenience 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationStrategic ReportOur BusinessOur PerformanceThe sale of the Services business is a significant step forward in achieving our clearly defined strategic objective. Introduction Strategically it has been a momentous year with the successful integration of Eurovet, acquired in May 2012, and with the transformational effect of the divestment of the Services businesses. Dechra is now entirely focused on developing, manufacturing and marketing high margin, cash generative veterinary pharmaceuticals and related products across global markets. From a trading perspective, a strong first half performance was partially offset by a poor third quarter, impacted by adverse weather and ongoing third party supply problems within the US. However, trading remained robust, with our key branded in-house manufactured products performing strongly. The acquisition of Eurovet has fulfilled our expectations. It has expanded our geographical coverage, especially in Germany; enhanced our manufacturing capabilities; added complementary products to our companion animal portfolio and provided an entrance into food producing animal pharmaceuticals. The food producing animal sector is particularly important as we look at opportunities to expand internationally. The companion animal market is not sufficient in scale in many countries outside of the EU and North America to merit our own presence solely with our current specialist product portfolio. Furthermore, the ever increasing demand for high quality meat protein from emerging markets is creating a strong global livestock market. Further details of the Eurovet integration are provided within the EU Pharmaceuticals Segment review. 28 Operating Review Overview Ian Page Chief Executive Officer 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur Performance29 The Board believes this is a fair valuation for businesses that have experienced increasing margin pressure over recent years as the customer base consolidates with the growth of corporate veterinary practice groups. We also recognise that Patterson is an ideal company to secure the future of the staff and take the businesses forward. “Eurovet has fulfilled our expectations and provided an entrance into food producing animal pharmaceuticals.” The sale of the Services businesses, National Veterinary Services (“NVS”®) and the Laboratories, is a significant step forward in our clearly defined strategic objective of developing an international specialist veterinary pharmaceuticals business. Historically, the strong cash generation of NVS has helped to fund the growth of the Pharmaceuticals Segments. However, as the years have progressed, the Pharmaceuticals Segments have gained sufficient critical mass to fund their own development and the Services businesses became strategically less and less relevant year on year. The businesses have been sold to Patterson Companies, Inc. for £87.5 million on a debt free, cash free basis. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationStrategic ReportOur BusinessOur Performance30 Operating Review continued Product Development and Regulatory Affairs Product Development The product development pipeline continues to deliver: ❱ Vetoryl, for the treatment of canine Cushing’s syndrome, has been approved in South Korea, Brazil and New Zealand. 1. new products for global markets: ❱ Methoxasol, an antimicrobial for swine and poultry has been approved in the EU; ❱ Buprenodale, a multi-dose small animal analgesic, has received authorisation throughout the EU; and ❱ Anesketin, a generic companion animal sedative, has been approved in seven EU countries. 2. line extensions: ❱ Soludox, our water soluble antibiotic for swine and poultry, has a new indication for turkeys in the EU; ❱ Felimazole 1.25mg, a new low dose strength to increase dosing options has been approved throughout the EU; and ❱ Comfortan, a companion animal analgesic has received an extension to its approval for use in cats. 3. registrations in new territories: ❱ Libromide, used in the treatment of canine epilepsy, has had its EU registration extended into France, Austria, Portugal and Switzerland; ❱ Felimazole, for feline hyperthyroidism, has been approved in Australia; and The Methoxasol and Soludox registrations extend our portfolio of food producing animal antimicrobial products which will provide new opportunities in this competitive market. The Comfortan, Buprenodale and Anesketin approvals give us the widest and most complete range of analgesics and sedatives of any animal health company within the EU. This further strengthens our position as a market leader in critical care. The Felimazole 1.25mg registration increases dosing options which allows veterinarians to better manage feline hyperthyroidism where each cat requires its own specific dosing regime. The introduction also further differentiates us from a generic version of the drug which has recently been launched in a number of EU territories. There has been material progress on our novel product pipeline. We have previously reported that the first major product launch, an equine lameness product, to be branded Osphos®, had experienced delays due to an enforced change to a new third party manufacturer. We anticipate making a submission for registration of this product in the UK, Canada and Australia imminently. As the horse, in the majority of the EU, is classed as a food producing species we are currently “There has been material progress on our novel pipeline.” Read more about our Product Pipeline 25 Above: Dechra is now entirely focused on developing, manufacturing and marketing high margin, cash generative veterinary pharmaceuticals and related products across global markets 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur Performance31 Above: Dechra has a wide range of products that support emergency medicine, pain relief and sedation conducting work to establish a maximum residue level prior to submission for approval throughout the rest of Europe. In the US the product already has complete safety and efficacy sections from the FDA. The Chemistry and Manufacturing Controls (“CMC”) section, the final requirement for the US submission, is dependent upon a successful FDA inspection of the third party manufacturing site. site in Skipton for solid oral dosage forms, a strategic decision was made to invest in manufacturing in-house wherever possible. The necessary equipment has been acquired and validated at our Skipton site and the pilot batch has been manufactured. The clinical trial is at an advanced stage with all the dogs now enrolled and initial results are very positive. A second major product, for a canine endocrine disorder, was originally intended to be manufactured by a third party. However, following ongoing external supply problems and the successful FDA approval of our own There are an additional six novel products in the development pipeline, three of which have long term patent protection: four novel products are for the global market and two are targeted specifically at the EU. There are also three major differentiated generic products for food producing animals under development. A potential twelfth product is at an advanced stage of assessment for inclusion in the programme. We anticipate a further two clinical trials to commence within the new calendar year. In addition to the novel products in development we have several generics, territory expansion and range extending products in development. Furthermore, we have a number of exploratory ideas to pursue. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationStrategic ReportOur BusinessOur Performance“As the enlarged product portfolio now has three areas of focus, food producing animal products, companions animal products and companion animal diets, a new strategy has been developed to give the sales and marketing teams across Europe clear direction.” Read more about our International Footprint 16 32 Operating Review continued European Performance European Pharmaceuticals Revenue from this segment increased by 61.0% (66.3% at constant currency) compared to last year. On a like-for-like basis, including the contribution from the Eurovet business, revenue grew by approximately 5%. DVP EU The initial objectives of the integration of Eurovet have been achieved within the year: ❱ Closure and restructuring of duplicate sales and marketing offices and teams in the UK, Benelux and Denmark; ❱ Dechra products launched in Germany through the newly acquired subsidiary with a smooth transition and retention of market share following the termination of the prior distribution agreement; ❱ The majority of the Eurovet companion animal products have been transferred to Dechra’s own sales organisation in France; ❱ Eurovet’s major swine and poultry products have been launched for the first time in France; ❱ All Eurovet products have been transitioned ready for launch into Norway, Finland and Sweden in the first quarter of the new financial year; ❱ Manufacturing rationalisation is underway, further details of which are provided later in this report; and ❱ Management teams have been successfully integrated creating a new operating board. This first phase of integration has progressed in line with our strategy and is delivering the expected cost and revenue synergies. Despite a very slow third quarter following the prolonged bad winter weather, pharmaceutical sales for the full year increased by approximately 5% on a comparable basis. There were big variations in performance on a territory by territory basis with the UK, France, Germany and Iberia performing well, and the Netherlands and Nordics underperforming. The underlying performance of our key strategic licensed veterinary products was robust. Our own branded pharmaceuticals grew by 5.1% at constant currency; growth was delivered across all key therapeutic sectors. Food producing animal antibiotic usage remains under review in a number of EU markets due to concerns regarding antimicrobial resistance; however, we still saw overall growth in this sector in all markets other than Belgium and the Netherlands. Our Specific pet diets grew by 2.6% at constant currency; this growth was assisted by the relaunch of a new presentation of our wet diet range and also by the introduction of a new intensive support diet for animals in rehabilitation post-surgery. As the enlarged product portfolio now has three areas of focus, food producing animal products, companion animal products and companion animal diets, a new strategy has been developed to give the sales and marketing teams across Europe clear direction. In our key therapeutic areas, where Dechra has a substantial market position, a strong reputation and an in-depth knowledge and expertise have been better defined and prioritised. Clear focus on these therapeutic sectors will allow us to target our marketing support and provide sales team prioritisation and also provide a structure to support key pipeline products which fit into these therapeutic segments. Two distinct marketing teams have been created, one focusing on food producing animal and equine products, the other on companion animal products and diets. We are already seeing the benefits of improving the alignment of diets with companion animal pharmaceuticals. Our allergy diet range was promoted as part of a dermatological campaign, one of our key therapeutic categories, which resulted in strong sales growth. Furthermore, a key account management structure has been implemented to focus on swine, poultry and equine as the veterinarians within these sectors have become very specialised and work increasingly in a concentrated number of practices. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur PerformanceCase Study 33 Felimazole European Marketing Campaign Felimazole was the first veterinary licensed product for the treatment of feline hyperthyroidism. Originally licensed in the UK in 2002, it has since been approved in the EU, US and Canada, becoming a key Dechra product. However, the feline hyperthyroidism market is now highly competitive, with Dechra’s market share coming under pressure from alternative products. In order to protect and strengthen Dechra’s position in this market, an international marketing campaign has been commissioned to reposition Felimazole. The objective is to highlight the benefits of Felimazole creatively through emotionally engaging communications, and to position Dechra as the European expert in endocrinology. The campaign’s theme reflects the key benefit of the product, namely restoring balance to a cat by flexible dosing options. By visualising this in dramatic imagery, the campaign draws attention to the positive effects that Felimazole can have on the hyperthyroid cat and demonstrates that the poise and precision that hyperthyroidism can take away, can be restored. The integrated campaign delivers a range of support for the veterinarian, pet owner and sales teams. It includes awareness generating press and banner advertising, flowcharts for diagnosis and treatment, sales aid, booklets and a loyalty pack. Key opinion leader-written case studies, articles and Academy learning will follow. The campaign will be launched in Germany and the UK in September, with France, the Netherlands, Belgium, Spain and the Nordics to follow in January 2014. Above: New Felimazole marketing material 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationStrategic ReportOur BusinessOur Performance34 Operating Review continued European Performance continued systems and GMP compliance systems are progressing well. Further efficiencies are also being delivered; significant yield improvements have been achieved and batch failure rates have halved. Furthermore, there has been a year on year improvement in accident rates with no reported RIDDOR’s in the last 12 months. Third party contract manufacturing continues to perform strongly with an increase in external sales of 12.5% at constant currency year on year. We continue to have a high level of new external contract manufacturing business enquiries. “Third party contract manufacturing continues to perform strongly.” Manufacturing Following the Eurovet acquisition our manufacturing sites were rebranded as Dechra Pharmaceuticals Manufacturing. After a detailed review of our capabilities following this acquisition, it was decided to close the manufacturing facility in Uldum, Denmark. This site only produced two major prescription products which have now been successfully transferred into Skipton. The care range of unlicensed products, previously manufactured at the site, are now being outsourced to a third party supplier. This site will be closed prior to the end of the 2013 calendar year. We are also in the process of transferring two Eurovet products, which were previously manufactured by a third party, into the Skipton tableting facility. Once the transfer of these products is complete, the full manufacturing synergies identified prior to the acquisition will be delivered. The manufacturing management teams of both businesses have been fully integrated and programmes to standardise IT Above: Fuciderm manufactured at DPM, Skipton 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur PerformanceCase Study 35 New Sterile Endocrine Product Manufactured In-house The Suspension is a new sterile injection product, developed for use in the treatment of Canine Hypoadrenocorticism (Addison’s disease). It is unique within the European market and has clear benefits over the daily tablet formulation used to treat the condition. The product was developed by Dechra’s Pharmaceutical Development Laboratory but was outsourced to an external manufacturer based in Swindon, UK. At the time, our injections facility was in need of significant refurbishment and we believed that outsourcing manufacturing to a facility that had an existing FDA approval would be the quickest way to get the product to market. The contractor produced three product registration batches in December 2011, but soon after decided to cease operations at the site. Rather than outsourcing to another contractor Dechra decided to bring the product into Dechra Pharmaceuticals Manufacturing’s Skipton site. In the time that had elapsed, the injection facility had gone through a major refurbishment and we had also gained FDA approval for our solid dose manufacturing suite. Therefore, we had the confidence in our capabilities to take the refurbished injection suite through the necessary approval process. The unexpected change in manufacturing site actually resulted in several benefits for Dechra. Manufacturing in-house lowers the cost of producing the product and increases the margin on all future sales. Additionally, improvements were identified to optimise the production process which would not have been possible externally. Finally, while Skipton’s injectables suite had recently been refurbished, including a new autoclave, the decision to bring the product in-house necessitated this investment. This has enhanced the site’s capability for both internal and external customers and has contributed towards the ultimate aim of having global approval of the Skipton site for all dosage forms. Above: Sterile Injectable Suite at DPM, Skipton 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationStrategic ReportOur BusinessOur Performance36 Operating Review continued US Performance US Pharmaceuticals Revenue from this Segment delivered growth of 4.7% in the year, hampered by third party supply issues with the ophthalmic and dermatological ranges. Third party supply problems for our leading dermatological product, Animax, persisted throughout the year and an enforced change to a new API supplier resulted in a complete out of stock situation. Every effort is being made by our supplier to produce the validation batches required to submit a variation for the change in API supplier. It is possible that the product could be back in production for the end of our current financial year. As the product is clinically unique it is considered that we should be able to recover the majority of historic sales once Animax becomes available again. We had also anticipated that at least one of our licensed veterinary ophthalmic products would have been back in production within the financial year being reported. However, the review period by the FDA was longer than expected and we still await approval for the change in manufacturer. If we are successful in this first round review by the FDA, products should be available for marketing within the first half of the financial year ending June 2014. If a second round review is required, the relaunch will be extended into the third or fourth quarter. The underlying performance within the US remains strong with our key products, Vetoryl and Felimazole, growing by 11.6% and 16.3% respectively. We continue to increase our reputation in the US with an ongoing educational programme on the conditions which our key products treat; within the year we held almost 100 meetings with over 3,300 veterinarians in attendance. We have continued to strengthen our sales team and have also appointed a new director of marketing, Nancy Zimmerman, who is already having a positive impact. In December 2012 we completed an agreement to in-license three new companion animal products: A-Cyst, Polyglycan SA and PolyChews. None of these products will make a material impact; however, they complement our existing range of specialist companion animal products and will make a contribution to the growth of our US business. Development continues on the new in-licensed generic product outlined in the Half Yearly Report. Following an initial review by the FDA, it is unlikely this product will receive registration in the 2013/2014 financial year. “The underlying performance within the US remains strong with our key products, Vetoryl and Felimazole, growing by 11.6% and 16.3% respectively. ” Above: The US animal health market is approximately $15 billion, out of a total US spend of $50 billion on pets 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur PerformanceCase Study Technical CE Meetings DVP US organises technical continuing education (“CE”) meetings which are centred around the education of veterinarians in terms of recognising, diagnosing, treating and managing diseases. The meetings are designed to improve awareness of Dechra and instil the message that Dechra is a company with state-of-the-art products, technical knowledge and a commitment to supporting the veterinary community. The meetings are an ongoing series of dinner seminars, with around 150 held each year across the US. Some of these events are organised by the Veterinary Medical Association (“VMA”) and are hosted by Dechra veterinarians. They feature guest speakers including experts and key opinion leaders, such as specialists and university veterinary clinicians who are respected leaders in their discipline. Dechra also sponsors evenings that do not feature a Dechra speaker, when they cover topics pertinent to our products. This gives Dechra independent, third party support and adds to the Company’s reputation. From a strategic point of view, these evenings are an inroad to markets DVP US is targeting, and ensures attendees are aware of Dechra products and how to use them as their first choice treatments. The seminars are RACE (“Registry for Approved Continuing Education”) approved, meaning that veterinarians gain educational credits for attending, as well as increasing their knowledge on diseases and treatments. On average Dechra-led seminars are attended by over 500 veterinarians a year, with this figure rising significantly when Dechra-sponsored evenings are held at major veterinary congresses. Since Vetoryl’s launch in 2008 it is estimated around 4,000 veterinarians have attended a seminar specific to this product which supports the momentum DVP is currently building in the US. Above: Within the year DVP US held almost 100 meetings with over 3,300 veterinarians in attendance 37 Group Information Technology Following the appointment of a new Group IT Director on 2 April 2012 a new Group IT strategy has been defined and implemented. The essence of the proposed strategy, which commenced in August 2012, is to standardise applications and hardware across the Group and to implement a network and infrastructure to support the implementation of the Oracle ERP project. The second phase of the Oracle implementation is progressing well with Bladel manufacturing expected to go live in the second quarter of the new financial year. Future roll outs will include our European and US subsidiaries as well as Group consolidation. People Anne-Francoise Nesmes was appointed to the Board as Chief Financial Officer on 22 April 2013. She joined the Group and the Board from GlaxoSmithKline PLC (“GSK”). Anne- Francoise is a high calibre finance professional with international pharmaceutical, manufacturing and commercial experience. Tony Griffin, formerly Chief Executive Officer of the AUV Group, was appointed as a Director of Dechra on 1 November 2012. Tony has played a key role in the integration of the Eurovet business into Dechra. In addition to his PLC Board responsibilities Tony’s principal responsibility is his role as the Managing Director of Dechra Veterinary Products Europe (“DVP EU”). Two new Independent Non-Executive Directors were also appointed to the Board. Julian Heslop commenced his role on 1 January 2013 and Ishbel Macpherson on 1 February 2013. Julian served as Chief Financial Officer of GSK between 2005 and 2011, having previously held senior roles in both GSK and Grand Metropolitan PLC. Ishbel currently holds a number of Non-Executive roles and has previously had 20 years’ experience as an investment banker specialising in mid-market corporate finance. Neil Warner has confirmed his intention to stand down as a Non-Executive Director at the forthcoming Annual General Meeting. I would like to take this opportunity to thank Neil for his commitment to Dechra over the past ten years and wish him well in his future. Neil is also our Senior Independent Director and Chairman of the Audit Committee. On his retirement from Board Ishbel Macpherson will be appointed as the Senior Independent Director and Julian Heslop as the Chairman of the Audit Committee. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationStrategic ReportOur BusinessOur Performance38 Operating Review continued Key Performance Indicators (“KPIs”) Financial Strategic element KPI Method of calculation Manufacture Revenue from key pharmaceutical products Global revenue from our top five products Target Prior to the Disposal of the Services Segment To achieve annual revenue growth of at least 10% 2013 Performance Five Year Record The KPI was exceeded during the year with a growth rate of 12.6% (15.9% at constant currency) being achieved. Vetoryl and Felimazole grew particularly strongly Commercialise Shareholder Return Revenue from specialist pet diets Commercialise Shareholder Return Manufacture Underlying operating margin before product development cost Commercialise Shareholder Return Innovate Manufacture Cash conversion rate Global revenue from the Specific brand of pet diets To achieve annual revenue growth of at least 6% On a reported basis, diets declined by 0.9%. However, we have seen a growth of 2.6% at constant currency Underlying operating profit before product development expenditure expressed as a percentage of Group revenue To achieve an underlying operating margin before product development costs of 10% in the medium term Further progress towards the medium term target was made driven by the increasing proportion of revenue achieved from pharmaceutical products Cash generated from operations before tax and interest payments as a percentage of operating profit before amortisation of acquired intangibles To achieve an annual cash conversion rate of at least 100% Cash conversion achieved over 100% during 2013 due to strong performance from the Pharmaceuticals Segments Commercialise Shareholder Return Innovate Manufacture Commercialise Shareholder Return Non-financial Return on capital employed (“ROCE”) Underlying operating profit as a percentage of average operating assets utilised. Operating assets exclude cash and cash equivalents, borrowings, tax and deferred tax balances To achieve a return on capital employed which exceeds the pre-tax weighted average cost of capital of the Group (“WACC”) ROCE is significantly ahead of the Group’s WACC although it reduced slightly in absolute terms due to the Eurovet acquisition Strategic element KPI Method of calculation Target 2013 Performance Five Year Record Innovate Pharmaceutical product development pipeline Number of products from the pipeline or in-licensed into at least one major territory with long term revenue potential of at least £0.5 million One new diet or range extension launched in the EU, two new pharmaceuticals, each launched in at least one key market Innovate Manufacture Health and safety performance Commercialise Innovate Manufacture Commercialise Shareholder Return Employees Lost Time Accident Frequency Rate (“LTAFR”): all accidents resulting in absence or the inability of employees to conduct the full range of their normal working activities for a period of more than three working days after the day when the incident occurred normalised per 100,000 hours worked Employee turnover calculated as number of leavers during the period as a percentage of the average total number of employees in the period Zero preventable accidents Moving Annual Turnover (“MAT”) rate of less than 15% One new diet product has been launched during the year in the EU. Nine new pharmaceutical registrations have been achieved in to a number of territories across the EU There has been a reduction in the total number of accidents during the year from 10 to 5. None of these accidents have resulted in a work related fatality or disability. More detail in relation to this can be found in the Social, Ethical and Environmental Responsibilities report on pages 84 to 89 The MAT decreased from last year’s 16.10% to 14.84%. More detail in relation to this can be found in the Social, Ethical and Environmental Responsibilities report on pages 84 to 89 Read More ❭ Page 40 ❭ Page 41 ❭ Page 42 ❭ Page 44 ❭ Page 45 Read More ❭ Page 30 ❭ Page 86 ❭ Page 87 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 £44.0m £39.1m £33.2m £29.4m £23.6m £27.9m £28.1m £27.6m £25.6m £22.7m 11.5% 9.9% 9.5% 8.9% 8.1% 107.0% 91.7% 82.8% 100.8% 112.5% 17.7% 20.6% 21.6% 22.6% 9.4% 10 products 6 products 6 products 6 products 5 products 0.22 0.55 0.82 0.75 0.94 14.84% 16.10% 15.88% 19.03% 19.81% 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur PerformanceHistorically we have measured a number of financial and non-financial key metrics in order to monitor our progress and assist in the achievement of our strategic plan. Following the recent disposal of our Services Segment it is the Senior Executive Teams intention to review the key performance indicators in order to ensure that we can adequately monitor and manage the progress of our strategy. 39 Financial Commercialise Shareholder Return Commercialise Shareholder Return Commercialise Shareholder Return Commercialise Shareholder Return Innovate Manufacture Commercialise Shareholder Return Non-financial Innovate Commercialise Commercialise Shareholder Return Revenue from key Global revenue from our top five products To achieve annual revenue growth of Target Prior to the Disposal of the Services Segment at least 10% Manufacture pharmaceutical products Revenue from specialist pet diets Strategic element KPI Method of calculation 2013 Performance Five Year Record Global revenue from the Specific brand of To achieve annual revenue growth of pet diets at least 6% On a reported basis, diets declined by 0.9%. However, we have seen a growth of 2.6% at constant currency The KPI was exceeded during the year with a growth rate of 12.6% (15.9% at constant currency) being achieved. Vetoryl and Felimazole grew particularly strongly Underlying Underlying operating profit before product To achieve an underlying operating Manufacture development expenditure expressed as a margin before product development percentage of Group revenue costs of 10% in the medium term operating margin before product development cost Further progress towards the medium term target was made driven by the increasing proportion of revenue achieved from pharmaceutical products Innovate Manufacture rate and interest payments as a percentage of rate of at least 100% Cash conversion Cash generated from operations before tax To achieve an annual cash conversion operating profit before amortisation of acquired intangibles Cash conversion achieved over 100% during 2013 due to strong performance from the Pharmaceuticals Segments Return on capital Underlying operating profit as a percentage of To achieve a return on capital employed (“ROCE”) average operating assets utilised. Operating employed which exceeds the pre-tax assets exclude cash and cash equivalents, weighted average cost of capital of borrowings, tax and deferred tax balances the Group (“WACC”) ROCE is significantly ahead of the Group’s WACC although it reduced slightly in absolute terms due to the Eurovet acquisition 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 £44.0m £39.1m £33.2m £29.4m £23.6m £27.9m £28.1m £27.6m £25.6m £22.7m 11.5% 9.9% 9.5% 8.9% 8.1% 107.0% 91.7% 82.8% 100.8% 112.5% 17.7% 20.6% 21.6% 22.6% 9.4% Strategic element KPI Method of calculation Target 2013 Performance Five Year Record Pharmaceutical Number of products from the pipeline or One new diet or range extension product development pipeline in-licensed into at least one major territory with launched in the EU, two new long term revenue potential of at least pharmaceuticals, each launched in £0.5 million at least one key market Innovate Manufacture performance all accidents resulting in absence or the Health and safety Lost Time Accident Frequency Rate (“LTAFR”): Zero preventable accidents Innovate Manufacture leavers during the period as a percentage of of less than 15% Employees Employee turnover calculated as number of Moving Annual Turnover (“MAT”) rate inability of employees to conduct the full range of their normal working activities for a period of more than three working days after the day when the incident occurred normalised per 100,000 hours worked the average total number of employees in the period One new diet product has been launched during the year in the EU. Nine new pharmaceutical registrations have been achieved in to a number of territories across the EU There has been a reduction in the total number of accidents during the year from 10 to 5. None of these accidents have resulted in a work related fatality or disability. More detail in relation to this can be found in the Social, Ethical and Environmental Responsibilities report on pages 84 to 89 The MAT decreased from last year’s 16.10% to 14.84%. More detail in relation to this can be found in the Social, Ethical and Environmental Responsibilities report on pages 84 to 89 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 10 products 6 products 6 products 6 products 5 products 0.22 0.55 0.82 0.75 0.94 14.84% 16.10% 15.88% 19.03% 19.81% Read More ❭ Page 40 ❭ Page 41 ❭ Page 42 ❭ Page 44 ❭ Page 45 Read More ❭ Page 30 ❭ Page 86 ❭ Page 87 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationStrategic ReportOur BusinessOur Performance40 Operating Review continued Financial Review Our divestment of the Services Segment (announced on 10 July 2013) was a logical strategic step following the successful acquisition of Eurovet in May 2012 and our stated objective to deliver a focused veterinary pharmaceuticals business. For the continuing operations in 2013, revenue and profits continued to grow, cash generation from operating activities was strong and investment to fund our advancing R&D pipeline increased. All numbers are presented on a continuing operations basis for the Pharmaceuticals Segments and 2012 has been restated. The Services Segment is shown as a discontinued business in both years. Growth rates are shown on a constant exchange rate basis (“CER”) and on a reported basis. Underlying Financial Results Underlying results of the Group reflect its trading performance excluding amortisation on acquired intangibles, non-underlying charges and other one-off events that are inherently volatile. Our results, excluding non-underlying items, are summarised below. 2013 2012 Continuing operations £’m Revenue 189.2 Gross profit 100.7 Gross profit % 53.2% Underlying operating profit Underlying profit before tax Underlying EBITDA 33.5 39.1 42.8 Discontinued Total operations £’m £’m 522.4 333.2 29.8 130.5 9.0% 25.0% Continuing operations £’m 124.3 71.1 57.2% Total £’m Continuing Continuing operations operations Reported Constant results currency 440.0 +52.2% +56.6% 99.3 +41.6% +45.6% Discontinued operations £’m 315.7 28.2 8.9% 22.6% 11.1 50.2 25.6 11.1 36.7 +53.1% +58.2% 11.1 44.6 21.8 11.1 32.9 +53.7% +59.7% 11.8 54.6 28.4 11.3 39.7 +51.0% +55.6% Revenue Total Group revenue increased by 56.6% at constant exchange and 52.2% at reported rate compared to the year ended June 2012. The acquisition of Eurovet occurred towards the later part of the 2012 financial year and hence revenue for that period included only five weeks of Eurovet revenue. Anne-Francoise Nesmes Chief Financial Officer 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur Performance 41 ) m £ ( e u n e v e R ) m £ ( e u n e v e R 200.0 180.0 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0 Revenue by Segment As reported, European Pharmaceuticals revenue at £168.7 million grew by 66.3% (CER) as a result of the Eurovet acquisition and a strong performance from our core brands. Revenue in the US at £20.5 million increased by 4.7% (CER) hampered by third party supply issues, as referred to in the Chief Executive Officer’s report. Excluding these issues, revenue increased approximately by 10%. Revenue by Categories On a like-for-like basis (including Eurovet for 12 months in 2012). All franchises reflected growth (at CER) versus 2012: ❱ Pharmaceuticals increased by 4.7% — The companion animal products grew by 7.8% driven by our key products Vetoryl, Felimazole and Cardisure — The food producing animal products declined by 3.2% due to pressure on antibiotic prescriptions and competition on Cyclospray ❱ Diets delivered growth of 2.6% ❱ Third party manufacturing had a solid performance with 12.5% growth European Pharmaceuticals US Pharmaceuticals Total 2012 2013 CAP FAP Sub-total Pharma Diets Third Party Mfg 2012 2013 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationStrategic ReportOur BusinessOur Performance 42 Operating Review continued Financial Review continued Gross Profit Following the Eurovet acquisition, our pharmaceutical product mix has broadened to include generics and food producing animal products. Consequently, overall gross margins have declined by 4% from 57.2% to 53.2%. Selling, General and Administrative expenses (“SG&A”) The SG&A increase of £13.8 million year on year reflects the full impact of running a combined operation after realising the expected synergies of the acquisition of Eurovet. Research and Development Expenses (“R&D”) R&D investment has increased by £2.3 million from £5.7 million to £8.0 million. This increase reflects not only our enlarged R&D organisation following the Eurovet acquisition but also our additional investment to advance and deliver our promising pipeline. Discontinued Businesses Consistent with the Group’s long term policy to focus its activities on the manufacture and marketing of specialist veterinary pharmaceutical products, we announced our intention to dispose of the Services Segment on 10 July 2013. The transaction was completed on 16 August 2013 with sales proceeds of £87.5 million. The disposed businesses have been accounted for as discontinued operations. Transaction expenses of £1.5 million have been recorded as non-underlying items for the discontinued operations. See note 29. Total Results and Non-Underlying Items Including the profit from the discontinued operations and non-underlying items, Group’s profit after tax of £17.9 million increased by 60.5% (CER) and 53.4% (at reported rate). Non-underlying items of £21.1 million for the continuing operations for the year comprised amortisation of acquired intangibles, rationalisation costs following the Eurovet acquisition and the unwinding of discounts on deferred and contingent consideration. Full details are shown in notes 4 and 5. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur Performance43 Total £’m 440.0 (340.7) 99.3 22.6% (56.9) (5.7) 36.7 8.3% (3.8) 32.9 (8.7) 26.3% 24.2 Reported results Constant currency +18.7% +20.0% +15.0% +15.8% +31.5% +34.4% +27.1% +29.8% +38.8% +38.9% +37.3% +40.8% +53.0% +53.5% +35.6% +39.4% +23.4% +27.0% +40.0% +43.8% (0.4) — (0.4) (16.1) 3.6 (12.5) +39.8% +40.5% +83.0% +83.6% +27.5% +28.2% Revenue Cost of sales Gross profit Gross profit % Selling, General and Administrative expenses Research and Development expenses Underlying operating profit Underlying operating profit % Net finance costs Underlying profit before tax Taxation Tax rate % Underlying profit after tax Non-underlying items Tax on non-underlying items Total non-underlying items Continuing operations £’m 189.2 (88.5) 100.7 53.2% 2013 Discontinued operations £’m 333.2 (303.4) 29.8 9.0% (53.6) (8.0) 39.1 20.7% (5.6) 33.5 (8.0) 24.1% 25.5 (21.1) 6.5 (14.6) (18.7) — 11.1 3.3% — 11.1 (2.7) 23.9% 8.4 (1.5) 0.1 (1.4) Total £’m 522.4 (391.9) 130.5 25.0% (72.3) (8.0) 50.2 9.6% (5.6) 44.6 (10.7) 24.1% 33.9 (22.6) 6.6 (16.0) Continuing operations £’m 124.3 (53.2) 71.1 57.2% 2012 Discontinued operations £’m 315.7 (287.5) 28.2 8.9% (17.1) — 11.1 3.5% — 11.1 (2.9) 25.8% 8.2 (39.8) (5.7) 25.6 20.5% (3.8) 21.8 (5.8) 26.5% 16.0 (15.7) 3.6 (12.1) Reported profit for the period 10.9 7.1 17.9 3.9 7.8 11.7 +53.4% +60.5% Reported diluted EPS (pence) Underlying diluted EPS (pence) 12.39 29.07 8.06 9.64 20.45 38.71 5.18 21.28 10.42 10.99 15.60 32.27 +31.1% +38.0% +20.0% +23.6% 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationStrategic ReportOur BusinessOur Performance44 Operating Review continued Financial Review continued Taxation The underlying tax charge from continuing operations for the year was £8.0 million. This reflects an effective tax rate of 24.1% compared to 26.5% in 2012. Our effective rate has reduced in the year as a result of changes to tax rates in both the UK and overseas. Earnings per Share and Dividends Underlying diluted EPS for the year for the Group business was 38.71 pence (2012: 32.27 pence). The underlying diluted EPS for the continued operations was 29.07 pence, representing 36.6% growth (at reported rate) over 2012. For clarity, the EPS for the financial year does not reflect any future interest benefits or tax impact as a result of the divestment. The Board is proposing a final dividend of 9.66 pence per share (2012: 8.50 pence). Added to the interim dividend of 4.34 pence per share, this brings the total dividend per share for the financial year ended June 2013 to 14.00 pence (2012: total 12.27 pence). Dividend cover based on underlying earnings was 2.8 times. Subject to Shareholder approval at the Annual General Meeting to be held on 17 October 2013, the final dividend will be paid on 22 November 2013 to Shareholders on the Register at 8 November 2013. The shares will become ex-dividend on 6 November 2013. Cash Flow and Net Debt The net cash inflow from the Group’s activities increased by £17.7 million (from £19.2 million to £36.9 million) reflecting the impact of our enlarged operations. A strong cash inflow in the second half of the year contributed to the cash conversion of 107.0%. Excluding non- underlying items, cash conversion was 98.4%. Following the divestment, the Group expects a moderate improvement in cash conversion. The significant transaction to report for investing activities during the period is the further payment of US$16.0 million (£10.0 million) in respect of the acquisition of DermaPet, Inc. The net borrowing position at the end of the year was £80.8 million down from £86.7 million last year. At the end of the year, the Group had the following banking facilities; ❱ A balance of £50.0 million on the initial £55.0 million term loan repayable in instalments through October 2016. £5.0 million was repaid in the period; and ❱ A £65.0 million revolving credit facility until October 2016. There was substantial headroom on all covenants during the year. The Group also has an overdraft facility of £10.0 million, none of which was utilised at year end. Underlying operating profit Non-underlying items (excluding amortisation on acquired intangibles) Operating profit before acquired intangibles amortisation Cash generated from operations before tax and interest payments Cash conversion (%) 2013 £’m 2012 £’m 50.2 36.7 (4.0) (4.9) 46.2 31.8 49.4 107.0 29.1 91.7 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur Performance45 Balance Sheet Net assets at 30 June 2013 totalled £174.6 million, a £20.9 million increase compared to the £153.7 million reported on 30 June 2012. Assets Total non-current assets Total current assets (excluding held for sale assets) Assets held for sale Total assets Liabilities Total current liabilities (excluding held for sale liabilities) Total non-current liabilities Liabilities held for sale Total liabilities Total net assets 2013  £’m 2012 Restated £’m 235.7 237.1 89.6 89.8 415.1 86.9 80.4 404.4 (49.5) (48.2) (137.0) (54.0) (240.5) 174.6 (147.3) (55.2) (250.7) 153.7 Intangibles amount to £219.6 million as at 30 June 2013. There was no significant movement versus 2012 other than the expected amortisation. The strong performance in the underlying trade associated with these intangibles continues to support their carrying value. Details can be found in note 11. Total working capital for continuing operations was £28.4 million in June 2013 compared to £29.7 million in 2012. This reflects our disciplined management of working capital. Financial Risks From a financial perspective we consider several risks, including the following: ❱ Our foreign currency exposure: the Group has significant sales in Europe, some revenues in US$ and operations in Danish Krone; ❱ Exposure to interest rate changes: the Group has entered into an interest rate swap on the term loan and the revolving credit facility; and ❱ Tax to ensure we are compliant across all territories. Additional considerations are disclosed in note 22. Events after the Reporting Period On 16 August 2013, the Group completed the sale of the Services businesses for a consideration of £87.5 million. The completion accounts are yet to be finalised. Summary During 2013 we continued to build a focused international specialist veterinary pharmaceuticals business. The divestment of the Services Segment at an attractive valuation strengthens our Balance Sheet giving the Group the opportunity to invest in our pipeline and other value-enhancing opportunities. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationStrategic ReportOur BusinessOur Performance         ❱ Product improvement plans and marketing strategies are reviewed on a regular basis ❱ Where competitor products are launched a response strategy is established and followed by our marketing team to highlight any unique selling points or competitive advantages or to position our products defensively to minimise competitor impact ❱ Market research is conducted in order to allow the marketing team to better understand customer needs and ensure that our ❱ Any product patents are monitored and consideration given to the formulation of a defensive strategy towards the end of the products fulfil the identified requirements life of the patent ❱ The Group ensures that it has detailed market knowledge and retains close contact with customers through its sales teams which are consistently trained to a high standard ❱ Alongside the marketing plan the sales team receives training on the product, its benefits and all available technical information 46 Operating Review continued Risk and Risk Management As we have stated in previous reports, the Group, like every business, faces risks and uncertainties in both its day-to-day operations and through events relating to the achievement of its long term strategic objectives. The Board has ultimate responsibility for risk management within the Group and there is an ongoing and embedded process of assessing, monitoring, managing and reporting on significant risks faced by the separate business units and by the Group as a whole. More detail in relation to this process can be found within the Corporate Governance section on pages 50 to 60. Strategic Element Risk Potential Impact How we mitigate the risk Commercialise Shareholder Return Competitor product launched against one of our leading brands ❱ Loss of market share and revenue ❱ Increased marketing activity and expenditure ❱ Revenues and margins may be materially adversely affected upon the expiry or early loss of patents, or by generic entrants into the market for the applicable product Commercialise Shareholder Return Commercialise Shareholder Return Revenue from recently launched new products failing to meet expectations ❱ Reduced revenue and profitability which may mean we are unable to recoup ❱ In respect of all new product launches a detailed marketing plan is established. Progress against the plan is constantly monitored the costs incurred in developing and launching the product ❱ Impairment of intangible assets Failure of clinical trials ❱ A succession of clinical trial failures could adversely affect our ability to deliver ❱ Before major costly efficacy studies are initiated, smaller proof of concept studies are conducted to study the effects of the Shareholder expectations drug on target species and for the target indication ❱ Development costs have been incurred but are effectively wasted ❱ Regular review of pipeline by a cross functional project team ❱ Our reputation and relationship with veterinarians could be damaged ❱ Our positioning in the market may be affected and could reduce our leading position in key therapeutic areas Commercialise Shareholder Return Shareholder Return Manufacture Prescribing pressure on veterinarians to reduce antibiotic use The failure of a major supplier ❱ Impact our antimicrobial product range and reduce sales ❱ Regular contact is made with all relevant veterinary authorities to ensure that we have a comprehensive understanding of ❱ Our reputation could be adversely impacted if we do not respond appropriately anticipated regulatory changes to government pressure ❱ Development of new products that minimise antimicrobial resistance concerns ❱ This may lead to significant delays and/or difficulties in obtaining goods and ❱ Where it becomes evident that issues in relation to manufacturing/supply may arise alternative suppliers are identified and detailed services on commercially acceptable terms plans drafted. Where a manufacturing transfer is required stock is built up in order to avoid/mitigate an out of stock situation ❱ The subsequent delay in manufacturing and sales may result in product ❱ In respect of manufacturing, a “second sourcing” project for key materials has been established and maintained shortages and significant delays, which may lead to lost sales ❱ The business units monitor the financial status of key customers and maintain regular contact with them (including face to face meetings) ❱ All contracts with suppliers are reviewed from both a commercial and legal perspective to ensure that assignment of the contract is allowed should there be a change of control of either of the contracting parties Innovate Manufacture Commercialise Shareholder Return Failure to meet regulatory requirements under which we operate ❱ Delays in regulatory reviews and approvals could impact the timing of a ❱ The Group always strives to exceed regulatory requirements and ensures that its employees have detailed experience and product launch knowledge of the regulations ❱ Significant delays to anticipated launch dates of new products could have a ❱ All businesses have clearly established quality systems and procedures in place material adverse effect on our margins ❱ Any changes made to the manufacturing, distribution, marketing and safety surveillance processes of our products may require additional regulatory approvals, resulting in additional costs and/or disruption to these processes ❱ Failure to achieve regulatory requirements may result in operational closures which in turn increases expenditure and delays production ❱ Regular contact is maintained with all relevant regulatory bodies in order to build/strengthen relationships and ensure good communication lines ❱ The regulatory and legal teams remain constantly updated in respect of proposed/actual changes in order to ensure that the business is equipped to deal with and adhere to such changes ❱ Where any changes are identified which could affect our ability to continue to market and sell any of our products a response team is created in order to mitigate such risk and to retain effective communication with the relevant regulators ❱ External consultants are utilised to audit our manufacturing systems prior to any major inspection Innovate Manufacture ❱ Inability to attract key personnel may weaken succession planning ❱ Succession planning is given consideration by the Board and, where deemed necessary, Key Man Insurance is in place Loss of key personnel ❱ Loss of knowledge, skills and experience ❱ New Executives/Senior Managers are provided with a detailed induction to the business Commercialise Shareholder Return ❱ Implementation of a Performance and Development Review Process is in progress ❱ Remuneration packages are reviewed on an annual basis in order to ensure that the Company can continue to retain, incentivise and motivate its employees 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Strategic ReportOur Performance47 The table below highlights the main potential risks to the Group strategy, as identified by the Board, and the controls put in place in order to mitigate the said risks: Strategic Element Risk Potential Impact How we mitigate the risk Competitor product ❱ Loss of market share and revenue Commercialise Shareholder Return launched against one of our leading brands ❱ Increased marketing activity and expenditure ❱ Revenues and margins may be materially adversely affected upon the expiry or early loss of patents, or by generic entrants into the market for the applicable ❱ Product improvement plans and marketing strategies are reviewed on a regular basis ❱ Where competitor products are launched a response strategy is established and followed by our marketing team to highlight any unique selling points or competitive advantages or to position our products defensively to minimise competitor impact ❱ Market research is conducted in order to allow the marketing team to better understand customer needs and ensure that our product products fulfil the identified requirements ❱ Any product patents are monitored and consideration given to the formulation of a defensive strategy towards the end of the life of the patent Revenue from recently ❱ Reduced revenue and profitability which may mean we are unable to recoup ❱ In respect of all new product launches a detailed marketing plan is established. Progress against the plan is constantly monitored Commercialise Shareholder Return launched new products failing to meet expectations the costs incurred in developing and launching the product ❱ Impairment of intangible assets ❱ The Group ensures that it has detailed market knowledge and retains close contact with customers through its sales teams which are consistently trained to a high standard ❱ Alongside the marketing plan the sales team receives training on the product, its benefits and all available technical information Failure of clinical trials ❱ A succession of clinical trial failures could adversely affect our ability to deliver ❱ Before major costly efficacy studies are initiated, smaller proof of concept studies are conducted to study the effects of the Commercialise Shareholder Return Shareholder expectations drug on target species and for the target indication ❱ Development costs have been incurred but are effectively wasted ❱ Regular review of pipeline by a cross functional project team ❱ Our reputation and relationship with veterinarians could be damaged ❱ Our positioning in the market may be affected and could reduce our leading position in key therapeutic areas Prescribing pressure ❱ Impact our antimicrobial product range and reduce sales ❱ Regular contact is made with all relevant veterinary authorities to ensure that we have a comprehensive understanding of Commercialise Shareholder Return on veterinarians to reduce antibiotic use to government pressure ❱ Our reputation could be adversely impacted if we do not respond appropriately anticipated regulatory changes ❱ Development of new products that minimise antimicrobial resistance concerns Shareholder Return Manufacture supplier services on commercially acceptable terms plans drafted. Where a manufacturing transfer is required stock is built up in order to avoid/mitigate an out of stock situation The failure of a major ❱ This may lead to significant delays and/or difficulties in obtaining goods and ❱ Where it becomes evident that issues in relation to manufacturing/supply may arise alternative suppliers are identified and detailed ❱ The subsequent delay in manufacturing and sales may result in product ❱ In respect of manufacturing, a “second sourcing” project for key materials has been established and maintained shortages and significant delays, which may lead to lost sales ❱ The business units monitor the financial status of key customers and maintain regular contact with them (including face to face meetings) ❱ All contracts with suppliers are reviewed from both a commercial and legal perspective to ensure that assignment of the contract is allowed should there be a change of control of either of the contracting parties Failure to meet regulatory requirements under which we operate Commercialise Shareholder Return Innovate Manufacture product launch knowledge of the regulations ❱ Delays in regulatory reviews and approvals could impact the timing of a ❱ The Group always strives to exceed regulatory requirements and ensures that its employees have detailed experience and ❱ Significant delays to anticipated launch dates of new products could have a ❱ All businesses have clearly established quality systems and procedures in place material adverse effect on our margins ❱ Regular contact is maintained with all relevant regulatory bodies in order to build/strengthen relationships and ensure good ❱ Any changes made to the manufacturing, distribution, marketing and safety communication lines surveillance processes of our products may require additional regulatory approvals, resulting in additional costs and/or disruption to these processes ❱ Failure to achieve regulatory requirements may result in operational closures which in turn increases expenditure and delays production ❱ The regulatory and legal teams remain constantly updated in respect of proposed/actual changes in order to ensure that the business is equipped to deal with and adhere to such changes ❱ Where any changes are identified which could affect our ability to continue to market and sell any of our products a response team is created in order to mitigate such risk and to retain effective communication with the relevant regulators ❱ External consultants are utilised to audit our manufacturing systems prior to any major inspection Innovate Manufacture ❱ Inability to attract key personnel may weaken succession planning ❱ Succession planning is given consideration by the Board and, where deemed necessary, Key Man Insurance is in place Loss of key personnel ❱ Loss of knowledge, skills and experience ❱ New Executives/Senior Managers are provided with a detailed induction to the business Commercialise Shareholder Return ❱ Implementation of a Performance and Development Review Process is in progress ❱ Remuneration packages are reviewed on an annual basis in order to ensure that the Company can continue to retain, incentivise and motivate its employees 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our GovernanceOur FinancialsShareholder InformationStrategic ReportOur BusinessOur Performance48 Board of Directors Michael Redmond Ian Page Anne-Francoise Nesmes Ed Torr Tony Griffin Non-Executive Chairman Chief Executive Officer Chief Financial Officer Committee Membership Committee Membership Committee Membership Nomination (Chairman), Remuneration Background 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. External appointments In November 2009, Michael was appointed Chairman of Abcam PLC, an AIM listed company, where he had previously held the post of Deputy Chairman (appointed February 2009). Not applicable Background Not applicable Background Ian joined 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 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. External appointments In October 2010 Ian was appointed as Non-Executive Chairman of Sanford DeLand Asset Management. Anne-Francoise was appointed Chief Financial Officer in April 2013. Prior to joining the Company, Anne-Francoise worked at GlaxoSmithKline (“GSK”) for over 15 years, where she held a number of finance roles including Senior Vice- President, Finance, of the global vaccines business unit based in Belgium. With GSK, Anne-Francoise developed her experience in a variety of roles including internal audit, corporate planning, commercial finance and between 2003 and 2006 was Vice-President Finance Controller for Europe. Prior to this Anne-Francoise held finance roles with John Crane, Tetra Pak, ADP and Caterpillar UK. External appointments None. Business Development Director Managing Director, Dechra Veterinary Products EU Committee Membership Committee Membership Not applicable Background Tony was appointed Managing Director of DVP EU in May 2012 following the acquisition of Eurovet Animal Health BV from AUV Holding B.V. He joined the AUV Group in 1993 as Director of Exports, having previously worked at Norbrook Laboratories and Moy Park. Tony was promoted to Managing Director of Eurovet in 1996 and in 2006 became the CEO of the AUV Group. External appointments None. Not applicable Background 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 EU in January 2008, following completion of the acquisition of VetXX. In May 2012 on the completion of the acquisition of Eurovet Animal Health BV, Ed reverted to his historical position within Dechra as Business Development Director. Prior to joining the Group, he worked within the animal healthcare sector for a number of companies including ICI, Wellcome and Alfa Laval Agri. External appointments None. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our GovernanceNeil Warner Dr Christopher Richards Julian Heslop Ishbel Macpherson Zoe Goulding 49 Company Secretary and Solicitor Background 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. External appointments None. Non-Executive Director Non-Executive Director Non-Executive Director Committee Membership Committee Membership Committee Membership Remuneration (Chairman), Audit, Nomination Background Chris joined the Group as a Non-Executive Director in December 2010. He is Chairman of Arysta LifeScience Corporation, having previously been appointed its President and Chief Executive Officer from 2004 to 2009. Arysta is a Japan-domiciled international company, developing and marketing crop protection products in more than 125 countries worldwide. Before joining Arysta, Chris spent 20 years in international management and leadership roles with Syngenta Crop Protection and its predecessor companies. External appointments Chris holds a number of Non-Executive Directorships including Cibus Global Limited (appointed November 2011), and he is Chairman of Oxitec Limited (appointed January 2012) and Plant Health Care PLC (appointed July 2012). Audit, Nomination, Remuneration Background Julian joined the Board in January 2013. He served as Chief Financial Officer of GlaxoSmithKline PLC between 2005 and 2011, having previously been appointed its Senior Vice President, Operations Controller between 2001 and 2005 and as Financial Controller of Glaxo Wellcome PLC between 1998 and 2000. Prior to this, Julian had senior finance roles at Grand Metropolitan PLC and Imperial Brewing and Leisure. He is a Fellow of the Institute of Chartered Accountants in England and Wales. External appointments Julian was appointed as a Non-Executive Director at Revolymer PLC in July 2012 and is their Audit Committee Chairman. He is also Chairman of the Audit Committee of the Royal Academy of Arts. Audit, Nomination, Remuneration Background Ishbel joined the Group as a Non-Executive Director in February 2013. She has over 20 years’ experience as an investment banker, specialising in UK mid-market corporate finance. She was Head of UK Emerging Companies Corporate Finance at Dresdner Kleinwort Benson from 1999 to 2005, having previously worked at Hoare Govett and Barclays de Zoete Wedd. External appointments Ishbel is currently Non-Executive Chairman of Speedy Hire PLC, a position which she has held since January 2011 (having been appointed to the Board of Speedy Hire in 2007). Ishbel is also a Non-Executive Director at Dignity plc and, previously, at May Gurney Integrated Services plc from 2010 to 2013. Senior Independent Non- Executive Director Committee Membership Audit (Chairman), Nomination, Remuneration Background Neil joined the Board in May 2003. He was Finance Director at Chloride Group PLC, a position he held for 14 years until its acquisition by Emerson Electric Co. Prior to this, Neil 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. External appointments In February 2011 Neil was appointed Non-Executive Director and Chair of the Audit Committee of Vectura Group plc, a product development company focused on the development of a range of inhaled therapies, principally for the treatment of respiratory diseases. He is also Non- Executive Chairman of Enteq Upstream plc, a specialist reach and recovery products and technologies provider to the upstream oil and gas services market, a post he has held since 26 May 2011. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance50 Letter from the Chairman on Governance Dear Shareholder On behalf of the Board I am pleased to present Dechra’s Corporate Governance report for the year ended 30 June 2013. The 2012/2013 financial year has seen a number of changes to the Board from both an Executive and Non-Executive perspective. In terms of Executive Director changes, Simon Evans tendered his resignation as Group Finance Director after 15 years’ service with the Company. During his tenure on the Board, Dechra developed from a UK based veterinary wholesale company into an international veterinary pharmaceuticals business. I would like to thank Simon for his significant contribution to the growth of Dechra and wish him well in his future. Following Simon’s resignation, JCA Group were retained to commence the search for a high calibre finance professional who could work alongside the Chief Executive Officer to continue to develop and progress the Group strategy. I was delighted that in April Anne-Francoise Nesmes agreed to join Dechra as its Chief Financial Officer. Anne-Francoise has an impressive financial career, the majority of which has been spent with GlaxoSmithKline during a 15 year period. I am sure that her experience and financial acumen will be invaluable to Dechra. I would like to take this opportunity to thank Paul Sandland, the Group Financial Controller, who in the interim period between Simon’s resignation and Anne-Francoise’s appointment, fulfilled the role of acting Group Finance Director with professionalism and commitment. I am also pleased to report the appointment of Tony Griffin as an Executive Director in November 2012. Following the Eurovet acquisition in spring 2012, the Board identified the requirement for additional resource at Executive Director level and considered that Tony provided the relevant experience to assist in the development and implementation of the Group strategy, particularly given his extensive career in the veterinary pharmaceuticals industry. In terms of new Non-Executive Director appointments, I am pleased to welcome both Julian Heslop and Ishbel Macpherson to Dechra. Each of whom has a wealth of relevant experience, which will bring valuable insight to the Board as we take Dechra forward into its next stage as a pure play veterinary pharmaceuticals business. I would like to express my gratitude to Neil Warner who, after over ten years as a Non-Executive Director of Dechra, has expressed his intention to stand down at the 2013 Annual General Meeting. Over the years Neil has provided a valuable contribution as both a Board member and Chairman of the Audit Committee, in particular in terms of finance, risk and governance. On behalf of the Board I wish him well in his future. The Board is currently undertaking its 2012/2013 evaluation. Following a discussion as to process it has been agreed that an internal evaluation will be held this year but the Board will seek to carry out an external evaluation for 2013/2014. Details of the findings and action points arising from the 2011/2012 evaluation are detailed in the report. Following the move to our new head office in Northwich, Cheshire it has been decided to hold this year’s Annual General Meeting at the new premises. This Meeting provides Shareholders with the opportunity to meet with the Board on an informal basis and I hope that you will be able to attend. Finally, should you have any questions in relation to the report, please feel free to contact myself or the Company Secretary. Michael Redmond Non-Executive Chairman 3 September 2013 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our GovernanceCorporate Governance 51 Directors’ Report: Corporate Governance The Financial Reporting Council’s UK Corporate Governance Code (the “Code”) establishes the principles of good governance for companies; the following report describes how the Company has applied these principles to its activities. The Board remains committed to maintaining high standards of corporate governance and continually strives to do so. In the opinion of the Directors, the Company has complied with the Code throughout the period under review except in respect of the composition of the Audit Committee. On Bryan Morton’s resignation in July 2012, Michael Redmond, Chairman of the Board, was appointed to the Audit Committee in order to maintain the required number of members in line with the Audit Committee Terms of Reference. Michael Redmond stood down as a member of the Audit Committee on 21 February 2013 upon the appointment of Julian Heslop and Ishbel Macpherson. Leadership The Board The Board is led by the Chairman Michael Redmond and comprises four Executive Directors and four Non-Executive Directors. The biographical details of the Board of Directors are shown on pages 48 and 49. The Chairman The primary role of the Chairman is to: ❱ ensure the effectiveness of the Board in all aspects of its role; ❱ ❱ facilitate the effective contribution of the Non-Executive Directors, ensuring that all decisions are subject to constructive debate and supported by sound decision making processes; and lead the Board in the determination of its strategy and the achievement of its objectives. The Chairman has a strong working relationship with Ian Page, the Chief Executive Officer, and works closely with him to ensure that Board decisions and strategy are implemented throughout the Group. There is a clear division of the roles and responsibilities of the Chairman and the Chief Executive Officer. These have been defined in writing and agreed by the Board. The Chairman, at the time of his appointment, did meet and continues to meet the independence criteria defined within the Code. As reported in the previous Annual Report, Dechra’s top ten Shareholders were consulted in August 2012 with regard to the tenure of the Chairman and the Senior Independent Director, each having held their respective positions for in excess of nine years. It was agreed with the Shareholders that it was deemed to be in the best interests of the Company and its stakeholders that the Chairman should remain in position for a further three years in order to oversee the induction and development of the new Non-Executive and Executive Directors to the Board. The Nomination Committee considers that Michael Redmond continues to lead the Board effectively, maintaining his independence and integrity at all times. He provides an invaluable contribution and insight to the Board by reason of both his previous pharmaceutical experience and the longevity of his association with the Company. Therefore as agreed with the Shareholders, the Chairman’s tenure will be reviewed prior to the 2014 Annual General Meeting. Non-Executive Directors Throughout the year the Non-Executive Directors have provided a solid, independent element to the Board ensuring that decisions are constructively challenged and debated. During the year an independent recruitment consultant, JCA Group, was retained to assist in the recruitment of two new Non-Executive Directors. At the commencement of the recruitment process an objective role description was defined and agreed by the Nomination Committee detailing the skills and experience required for the Board positions. As a result, on 1 January 2013 and 1 February 2013, Julian Heslop and Ishbel Macpherson, respectively, were appointed to the Board and also as members of the Remuneration, Audit and Nomination Committees. It is intended that Julian will be appointed as Chairman of the Audit Committee upon Neil Warner’s retirement at the forthcoming Annual General Meeting and further detail of this is provided in the Audit Committee Report on pages 61 to 66. It is considered that each of the newly appointed Non-Executive Directors brings with them a breadth of experience which will add value to the decision making of the Board and the formulation and progression of the Group strategy. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance52 Corporate Governance continued Senior Independent Director The Senior Independent Director is available to Shareholders if they have concerns which contact through the normal channels has failed to resolve or for which such contact is inappropriate. The Senior Independent Director also carries out the annual evaluation of the performance of the Chairman and chairs the Nomination Committee when it is considering the succession of that role. Neil Warner has held the position of Senior Independent Director since 5 November 2010, having been appointed as a Non-Executive Director with the Company on 2 May 2003. Following Neil’s retirement from the Board at the 2013 Annual General Meeting it has been agreed that Ishbel Macpherson will be appointed as the Senior Independent Director. Chief Executive Officer The Chief Executive Officer has day-to-day responsibility for the management of the Group. He develops the Group strategy and, once approved by the Board, implements this throughout the business. Ian Page is also the Non-Executive Chairman of Sanford DeLand Asset Management Limited (“Sanford”). The Board fully considered at the time of his appointment whether this would materially impact on his current time commitment as Chief Executive Officer and whether it could give rise to any conflict. As Ian Page is not involved in any investment decision made by Sanford it was not considered that any conflict would arise nor would there be any impact on his time commitment. Further details in relation to the appointment can be found in the Remuneration Report on pages 67 to 83. Chief Financial Officer The Chief Financial Officer has day-to-day responsibility for financial planning and reporting for the Group. She is also responsible for managing the financial risks and works with the Chief Executive Officer on all strategic matters. As well as assisting in the recruitment of two new Non-Executive Directors during the year, JCA Group was engaged in relation to the appointment of the Chief Financial Officer following the resignation of Simon Evans. Following a rigorous recruitment process, Anne-Francoise Nesmes was appointed to the Board in April 2013. Anne-Francoise is a high calibre finance professional who has valuable international, pharmaceutical, manufacturing and commercial experience gained during her extensive tenure with GlaxoSmithKline PLC over a 15 year period. Company Secretary Zoe Goulding was appointed as Company Secretary on 2 July 2007 and acts as Secretary to the Board and its Committees. The primary role of the Company Secretary is to advise the Board on matters of procedure and governance, ensuring that all required information is made available to the Board on a timely basis. Both the appointment and removal of the Company Secretary is a matter for the Board as a whole. Corporate Governance Framework The Board is collectively responsible for the success of the Company, ensuring that the Group is appropriately managed and achieves its strategic objectives. The Board fulfils this responsibility by monitoring the performance of the Group, inter alia, by: ❱ assisting, in a challenging and constructive manner, the Executive Directors in the setting of objectives for Group operating performance, financial goals and strategic progress; ❱ evaluating the progress of the achievement of the objectives and plans; and ❱ monitoring all significant risks which face the Group. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Governance53 There is a formal schedule of matters reserved to the Board. The schedule of matters covers a number of areas, including the following: Strategy and Management Financial Reporting Internal Controls Corporate Governance Approval and monitoring of long term objectives and strategy Approval of the Group’s operating and capital expenditure budgets Major organisational changes Regular reviews of business performance Approval of the Annual Report and dividend policy Approval of development expenditure Approval of treasury policy Review and approval of internal controls and risk management policies and processes Board and Committee composition (including succession planning) Corporate Governance matters Approval of policies such as Health and Safety and the Business Code of Conduct In addition, the Board also focuses on the financial controls operated by the Executive Directors with a view to ensuring that these are at the requisite levels so as not to hinder day-to-day administration of the business, but to ensure adequate internal control. Below Board level, operational and financial controls are contained in the delegated authorities document. This document is reviewed on an annual basis along with the schedule of matters reserved to the Board. Where necessary these documents are updated in line with best practice with a view to ensuring that the processes remain robust. Board Meetings The Board is scheduled to meet nine times per year. During the year two additional meetings were required to discuss the disposal of the Services Segment. Attendance at the Board and Nomination Committee meetings during the year to 30 June 2013 was as follows (details of attendance at the Audit and Remuneration Committee meetings are provided on pages 62 and 68 respectively): Name Mike Redmond Julian Heslop (appointed 1 January 2013) Ishbel Macpherson (appointed 1 February 2013) Dr Chris Richards Neil Warner Bryan Morton (resigned 9 July 2012) Ian Page Simon Evans (resigned 18 October 2012) Tony Griffin (appointed 1 November 2012) Anne-Francoise Nesmes (appointed 22 April 2013) Ed Torr Board (11 Meetings) 11/11 7/7* 6/6* 11/11 9/11 0/1† 11/11 2/2† 8/8* 3/3* 10/11 Nomination (4 Meetings) 4/4 1/1* 0/0* 4/4 4/4 0/0† n/a n/a 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. * Actual attendance/maximum number of meetings Director could attend based on date of appointment. † Actual attendance/maximum number of meetings Director could attend based on date of retirement. It is understood that there may be situations, either due to prior commitments or circumstances beyond their control, which mean a Director is unable to attend a Board or Committee meeting. In this situation the Board pack is still provided allowing the Director to raise any queries or discussion points either through the Chairman or Company Secretary, thereby allowing their views to be fully discussed at the meeting. Following the meeting any Director who was unable to attend is provided with the opportunity to discuss the meeting with either the Chairman, Company Secretary or any Executive Director. The Company Secretary ensures that an accurate record of each Board meeting is made which is circulated to the Board as soon as practicable after the meeting. Should Directors have concerns of any nature which cannot be resolved within the Board meeting, they have the right to ensure their view is recorded in the minutes. On resignation, should a Non-Executive Director have any concerns, they have a right to provide a written statement for circulation to the Board. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance54 Corporate Governance continued The Board believes in the necessity for challenge and debate at Board meetings and considers that the existing Board dynamics and processes encourage honest and open debate with the Executive Directors. The Board believes that the decision making process is inclusive and is not dominated by any individual or group of individuals. Board Meeting Agenda and Papers The Directors are supplied in a timely manner with all relevant documentation and financial information to assist them in the discharge of their duties. Prior to all Board meetings an agenda and supporting documentation is circulated to the Board. Every meeting agenda comprises reports from the following individuals: ❱ Chief Executive Officer; ❱ Chief Financial Officer; ❱ Managing Director and Finance Director of each Business Unit; ❱ Group HR Director; and ❱ Product Development and Regulatory Affairs Director. In addition, twice a year the Board receives detailed health, safety and environmental reviews encompassing all operating segments, plus the activities of the Transport Risk and Sustainability Committees. Three times a year the Board receives a full risk assessment review for discussion, following detailed risk reviews within each of the business units. Other ad hoc material relating to specific projects, legal, company secretarial and regulatory matters are included as necessary. The reports ensure that the Board is updated on all major items of strategic planning, business performance, personnel, investments and significant policy issues. This allows the Board to monitor the progress of the business and provides transparency across all areas within the Group. Each year an annual strategic agenda is drawn up and approved by the Board. This enables the Board to focus on and discuss key strategic areas on a regular basis. Additionally, every six months, a comprehensive review of the Group strategy is carried out. This agenda provides the Board with an opportunity to speak with the senior managers on a one to one basis and gain a more in-depth understanding of their area of responsibility. During the year the following business presentations have been made: Date of Meeting August 2012 December 2012 January 2013 April 2013 Presentation Subject Group IT Strategy DVP US update Oracle implementation Product Development and lifecycle management — review of key development projects and an outline of exploratory projects May 2013 Manufacturing and Sourcing Delivered by Allen Mellor (Group IT Director) Mike Eldred (President, DVP US) Allen Mellor (Group IT Director) Susan Longhofer (Group Director, Product Development and Regulatory Affairs) and Rob Joosten (Product Development and Regulatory Affairs) Mike Annice (Managing Director of Dechra Pharmaceuticals Manufacturing) The Chairman and the Non-Executive Directors generally meet before each Board meeting which allows them time to review and discuss any matters arising from the agenda without the Executive Directors being present. The Chairman also meets regularly with the Chief Executive Officer outside of the scheduled Board meetings. The Board has formally delegated specific responsibilities to Board Committees, in particular the Audit, Remuneration and Nomination Committees. The terms of reference for each of these Committees are available on the Company’s website or on request from the Company Secretary. The Board also appoints Committees on an ad hoc basis to approve specific projects as deemed necessary. During the year the Chief Executive Officer and Chief Financial Officer have attended the Board meetings of the businesses which make up the operating segments (in relation to the US these meetings are generally held by video conference). The meetings are chaired by the Chief Executive Officer allowing him and the Chief Financial Officer the opportunity to obtain detailed information on the businesses’ strategic, operational and financial progress including any issues potentially preventing the achievement of their targets. Key operational information obtained from these meetings is then reported back to the Board. The Chief Executive Officer has also chaired a number of product development meetings during the year. Representatives from the finance, marketing and manufacturing departments also attend these meetings thereby allowing the product pipeline to be comprehensively reviewed. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Governance55 Following the disposal of the Services Segment a review of the operational Board meetings has taken place and it has been agreed that six meetings a year will be held for DVP EU, DVP US, Manufacturing and Product Development. Furthermore, four Executive Board meetings have been scheduled. It is the intention that these meetings will be attended by the four Executive Directors, the Managing Directors of the operating businesses along with the IT and HR Directors. The Company maintains an appropriate level of Directors’ and Officers’ insurance in respect of legal action against Directors. Effectiveness Board Balance and Independence The Board recognises and understands the importance of balance and refreshment in terms of its composition. The following changes have taken place at Board level over the past 12 months: ❱ ❱ ❱ ❱ ❱ ❱ the appointment of Tony Griffin (Managing Director of DVP EU) as an Executive Director on 1 November 2012; the appointment of Julian Heslop (Non-Executive Director) on 1 January 2013; the appointment of Ishbel Macpherson (Non-Executive Director) on 1 February 2013; the appointment of Anne-Francoise Nesmes as Chief Financial Officer on 22 April 2013; the resignation of Bryan Morton (Non-Executive Director) on 9 July 2012; and the resignation of Simon Evans as Group Finance Director on 18 October 2012. As previously stated, Neil Warner will retire as a Non-Executive Director at the 2013 Annual General Meeting having held a position on the Board for over ten years. As agreed with the major Shareholders the Chairman’s position will be reviewed prior to the 2014 Annual General Meeting. 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, their ability to exercise independent judgement. This independence of mind provides them with the ability to challenge decisions and think strategically and is integral to the decision making processes of the Board. Diversity The Board understands the importance of having a diverse membership and recognises that diversity encompasses not only gender but also background and experience. However, the Board does not have a formal diversity policy and is generally opposed to the idea of stated quotas for females. The Board believes that appointments should be made solely on merit, the key criterion being whether or not the appointee can add to or complement the existing range of skills and experience on the Board. Notably, of the recent Board appointments, two out of the three have been female. Both of these appointments were made on merit, and not on gender. Both appointees were by far the strongest candidates for the positions and their skill set and overall experience fitted the objective role description approved by the Board at the outset of the recruitment process. In terms of female representation across the Group: 22% of Board members (2012: nil); 25.0% (2012: 25.0%) of the senior management team; and 42% (2012: 44.8%) of the overall workforce are females. Diversity in the Board and Beyond Board Members — Male/Female a a Female 22% b Male 78% Senior Management Staff — Male/Female a Female 25% b Male 75% a Employees — Male/Female a Female 42% b Male 58% b a b b 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance56 Corporate Governance continued Conflicts of Interest Pursuant to the Companies Act 2006 all Directors have a duty to avoid a situation in which they have, or could have, a direct or indirect conflict of interest with the Company. The Articles of Association of the Company enable the Directors to authorise any actual or potential conflict of interest which could arise. There are safeguards which will apply when Directors decide whether to authorise a conflict or potential conflict. Firstly, only independent Directors (i.e. those who have no interest in the matter being considered) will be able to take the relevant decision; secondly, in taking the decision the Directors must act in a way they consider, in good faith, will be most likely to promote the Company’s success. The Directors will also be able to impose limits or conditions when giving authorisation if they deem this to be appropriate. During the financial year under review no actual or potential conflicts have arisen. Information and Professional Development Detail in respect of the information provided to the Board prior to each meeting is provided earlier in this report. In order to ensure that the Board maintains its knowledge and familiarity with the Group’s operations it is intended that at least one Board meeting per year is held at one of the Group’s operational sites. During the year a Board meeting was held at Dechra Manufacturing, Skipton, and the main Eurovet facility (Bladel) in the Netherlands. The Board had an opportunity to be shown around both of these manufacturing facilities and meet with employees. Any newly appointed Directors are provided with comprehensive documentation aimed at providing information in relation to the remit and obligations of the role, current areas under consideration for the Board and the latest broker reports. New Directors are also offered the opportunity to visit the various business units in order to allow them to meet with the executive teams and to be shown around the operations. All of the new Non-Executive Directors and Executive Directors appointed during the year visited the facilities at both Skipton and Stoke-on-Trent prior to their respective appointments. Meetings were also arranged with the Product Development and Regulatory Affairs Directors, the HR Director and the Managing Director and Quality Director of Dechra Pharmaceuticals Manufacturing. The Company Secretary and Chairman are aware of the ongoing requirement to review and agree with each Director their training needs. In order to assist with these training requirements the Company Secretary provides briefings for the Directors, where necessary, that cover a number of legal and regulatory changes and developments relevant to the Director’s areas of responsibility. During the year these briefings included an update on the revised draft Directors’ Remuneration Report Regulations and the new strategic report proposals. In addition, the Company Secretary informs the Directors of any external training courses which may be of relevance. It is currently considered that the mixture of internal briefings and external training courses satisfies the Directors’ training needs; however, this will be reviewed on an ongoing basis. Each Director is entitled on request to receive information to enable him or her to make informed judgements in order to adequately discharge their duties. In addition, all Directors have access to the advice and services of the Company Secretary and senior managers, and may take independent professional advice at the Company’s expense in connection with their duties. Nomination Committee The Board has an established Nomination Committee to lead the process for Board appointments and to make recommendations to the Board. During the period the Nomination Committee comprised Michael Redmond (Chairman), Julian Heslop (appointed 1 January 2013), Ishbel Macpherson (appointed 1 February 2013), Dr Chris Richards and Neil Warner. The Chairman will not chair the Committee meeting if it is dealing with the appointment of his successor. Details of the work carried out by the Nomination Committee during the financial year have already been detailed in this report. The Nomination Committee normally meets once a year. During the financial year under review three additional Nomination Committee meetings were held in order to discuss and recommend the various Board appointments. The terms of reference set out the Nomination Committee’s role and the authority delegated to it by the Board. The terms of reference have been reviewed during the year; a copy is available on the Company website at www.dechra.com. The terms of reference 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; and to consider the structure, size and composition of the Board generally. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Governance 57 Other significant commitments of the Chairman and the Non-Executive Directors were disclosed to the Board before appointment, the Board is notified of any subsequent changes. The letters of appointment of the Non-Executive Directors are 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. Board Evaluation The Board undertakes an annual evaluation of its performance and that of its Committees. ❱ The 2011/2012 Board evaluation: The evaluation process was reviewed in detail by the Chairman and the Company Secretary and discussed with the Board. It was agreed that, given the number of changes to the Board during the review period, an internal (rather than external) evaluation would be the most beneficial to the Company. A detailed discussion document was then circulated to the Board covering the following areas: (i) Board composition; (ii) strategy review process; (iii) the format of Board meetings and the decision process; (iv) training and development; (v) the performance of the Board and the individual Directors; (vi) Corporate Governance; (vii) leadership and culture; and (viii) risk assessment. One to one meetings were then held by the Chairman with each of the Executive and Non-Executive Directors and Company Secretary. The evaluation of the Chairman was undertaken by the Senior Independent Director. The findings of the internal evaluation were then discussed with the Board in August 2012. Overall it was noted that no new issues of material significance had been raised during the review, rather input revolved around progress of the previous years’ action points. The main action points were as follows: Action Board succession planning discussion and implementation Review of Board pack content and Board meeting discussion Further development of the Group KPIs Post-acquisition reviews after 12 months ❱ The 2012/2013 Board evaluation Progress Two new Non-Executive Directors have been appointed during the course of the year. Furthermore, an additional Executive Director position was created by the appointment of Tony Griffin to the Board Following the October 2012 strategy meeting the Board agenda was reviewed in order to increase focus on strategic matters. This was assisted by an updated programme of strategic matters for review during the year This has not progressed to date but a review is now necessary given the recent disposal of the Services Segment This has been tabled into the rolling agenda for the PLC Board Meetings A discussion took place at the February 2013 Board meeting as to whether or not an external evaluation should be commenced during the 2012/2013 financial year given the Company’s move in June 2012 to the FTSE 250. It was agreed that given the changes to the Board (as detailed above) an internal evaluation would again be carried out. However, an external evaluation will be undertaken during the 2013/2014 financial year. The results of the 2012/2013 evaluation will be reported in next year’s Report and Accounts. Re-election On appointment, Directors are required to seek election at the first Annual General Meeting following appointment. At the forthcoming Annual General Meeting, Julian Heslop, Ishbel Macpherson, Tony Griffin and Anne-Francoise Nesmes, who were all appointed during the financial year, will offer themselves for election. All of the remaining Directors will retire and offer themselves for re-election, excluding Neil Warner. Each of the Directors standing for re-election has been subject to a formal evaluation. Each of the Directors continues to perform effectively and demonstrate commitment, not only in respect of their roles and responsibilities, but also in relation to the Group and its stakeholders. The Board therefore recommends that Shareholders vote in favour of their respective elections and re-elections. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance 58 Corporate Governance continued Accountability Financial Reporting The Board seeks to present a balanced and understandable assessment of the Group’s position and prospects, through the Chairman’s Statement 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 Independent Auditor’s Report on pages 94, and 96 to 97 respectively. Going Concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report and Operating Review on pages 3 to 45. The principal risks that may affect the Group’s future performance are set out on pages 46 and 47. During the year being reported, trading has continued to be robust with an improvement in profitability being achieved. Prior to the acquisition of Eurovet, the Group entered into a facilities agreement on 4 April 2012 (the “Facility Agreement”) with a syndicate of banks comprising Lloyds TSB Bank plc, Barclays Bank PLC, Svenska Handelsbanken AB (PUBL) and HSBC Bank plc (the “Banks”) under which a facility of £120 million was made available. The Facility Agreement included: ❱ a £55.0 million, 4½ year amortising term loan, repayable in eight instalments on 31 March and 30 September each year of £5.0 million per instalment, rising to £7.5 million per instalment from and including 30 September 2015 with a final instalment of £7.5 million on 31 October 2016. The first repayment was paid on 31 March 2013; and ❱ a £65.0 million 4½ year revolving credit facility committed until 31 October 2016. The net proceeds from the disposal of the Services Segment to Patterson Companies, Inc. in August 2013 will be used to reduce the Group’s debt through the prepayment and cancellation of the Group’s existing £50.0 million term loan facility and the reduction in amounts drawn under the Group’s existing £65.0 million revolving credit facility. This revolving credit facility will be retained on an ongoing basis to fund the development of the business. The Group also had cash balances of £32.8 million at 30 June 2013. The Directors have a reasonable expectation that the Company and Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis of accounting in preparing these annual financial statements. Internal Control and Risk Management The Directors are responsible for maintaining the Group’s system of internal control and for reviewing its effectiveness from a financial, operational and compliance perspective. 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 against material misstatement or loss. The Group has an established, ongoing and embedded framework of internal financial and operational control for identifying, evaluating and managing the risks faced by the Group. Every four months the Board carries out a 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 the business units’ executive teams on an ongoing basis. This framework has been in place throughout the year under review, and has continued up to the date of approval of the Annual Report. The risk management process was last reviewed in 2009 and it has been agreed that the process will once again undergo a review during 2013/2014. The Board has reviewed the operation and effectiveness of the internal controls for the year ended 30 June 2013. Further detail in respect of the risks and uncertainties faced by the Group and the mitigating action being taken can be found on pages 46 and 47. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Governance59 The Group’s key systems of control include: ❱ Management Structure The Group is organised into operating segments within which there are a number of business units. Each business unit has its own Managing Director and executive team; there are clear reporting lines and delegated authorities in place. Key functions such as tax, treasury, insurance, legal and personnel are controlled centrally. ❱ Management Accounting Processes The finance function has implemented a detailed management accounting process which is in operation and allows the Board and management transparency in terms of financial and operational performance, measured against key performance indicators (set at both business unit and Group level). Detailed management accounts are prepared on a monthly basis covering all areas of the business; these are reviewed by the relevant business units at their management meetings and by the Board on a monthly basis, thereby allowing any material variances to be discussed and any necessary action taken on a timely basis. Detailed forecasts are prepared and discussed in detail on a quarterly basis; these are then escalated to the Board for consideration and approval. The finance function maintain a financial policies manual which covers central and divisional management. The manual is reviewed at least annually and is also updated whenever reporting standards, legislation or internal commercial reasons dictate. Any changes to the policies are communicated throughout the Group’s finance function. The finance function schedules two annual internal conferences at which a technical update, tailored specifically to the Group’s commercial needs, is presented by the Auditor. During the 2012/2013 financial year this conference took place in November and April, the former meeting concentrated on the Senior Accounting Officer obligations and the latter provided an opportunity for the Chief Financial Officer to meet her team to discuss future strategy. Business unit management certify on a quarterly basis that key financial controls have been performed and that significant risks have been identified. ❱ 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 financial year is monitored monthly against budget, forecast and previous year. ❱ 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. Capital expenditure is controlled within each business with approval levels determined by the Board. ❱ Development Expenditure The Group has a transparent and established process for evaluating and monitoring the level of development expenditure incurred. As with all other business units the Product Development and Regulatory team agrees an annual budget which receives approval from the Board; performance against this is monitored on an ongoing basis. The Product Development and Regulatory team re-evaluates all projects at least twice a year (and reports all material decisions and changes to the Board). When evaluating projects a number of measurement criteria are considered, including the products’ net present value and return on investment. ❱ Whistle-blowing and Business Ethics Policy The Company has a whistle-blowing policy in place which establishes a confidential channel of communication for employees to bring matters of concern about the running of the business to the attention of senior management. Upon being notified of such a concern, the policy sets out a defined process which allows a full investigation to take place and, where necessary, corrective action to be taken. The Audit Committee reviews the whistle-blowing policy on an annual basis. The Business Ethics Policy is currently undergoing a review and it is intended that an updated policy is rolled out across the Group during 2013/2014. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance60 Corporate Governance continued Audit Committee and Auditors Information relating to the Audit Committee is set out in the Audit Committee Report on pages 61 to 66. This details the Company’s compliance with the Code’s requirements in respect of audit matters. Responsibility for monitoring the Group’s system of internal control rests with the Board. It is assisted by the Audit Committee, which reviews the Half-Yearly and Annual Reports provided to Shareholders, the audit process, the systems of internal control and risk management. The Auditor is 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. Remuneration Details of Directors’ remuneration are set out in the Directors’ Remuneration Report at pages 67 to 83. This report details the Company’s compliance with the Code’s requirements with regard to remuneration matters. 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 are held throughout the year. The Chief Executive Officer and Chief Financial Officer give annual and half-yearly results presentations to Institutional Investors, analysts and media, which are also available via telephone conference. These meetings are in addition to the Annual General Meeting and seek to foster mutual understanding of the Company’s and Shareholders’ objectives. Such meetings are conducted in a format to protect 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 other parties such as financial analysts, brokers and media. The Company also organises site visits on a periodic basis. Tony Griffin and Anne-Francoise Nesmes separately attended a number of the Institutional Shareholder meetings held in September 2012 and February 2013 respectively, post the announcement of the full and half yearly results. This provided a number of Dechra’s major Shareholders with the chance to meet Tony Griffin and Anne-Francoise Nesmes before the commencement of their appointment as Executive Directors. Feedback is collated by the Company’s Brokers after investor presentations. The feedback is then circulated to the Board for review and consideration. In addition, the Board is provided with a monthly market summary report which reports on share price and share register movements. Where material changes in respect of remuneration or governance are proposed the Board seeks to consult with its major Shareholders before implementing such changes. The annual and half-yearly results presentations are available to private investors via the Company’s website. The Company views the website as an important investor relations tool, and updates the website in line with best practice, ensuring that information relating to the Company and its activities is easily accessible. Constructive use of the Annual General Meeting All members of the Board are scheduled to attend the Annual General Meeting and the Chairmen of the Audit, Remuneration and Nomination Committees will be available to answer Shareholders’ questions both during the meeting and afterwards. Notice of the meeting, together with the Annual Report and Accounts, 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; this information will be made available as soon as practicable after the meeting on the Company website at www.dechra.com. The Notice of Meeting and an announcement relating to the total number of shares in respect of which Shareholders are entitled to exercise voting rights are made available on the Company’s website the day after the notice of meeting is posted to Shareholders. At the Annual General Meeting there will be an opportunity, following the formal business, for informal communications between Shareholders and Directors. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Governance61 Letter from the Audit Committee Chairman Dear Shareholder On behalf of the Board I am pleased to present Dechra’s Audit Committee Report for the year ended 30 June 2013. Last year I advised that, following over nine years’ service with Dechra, I would be standing down as a Non-Executive of the Group at the 2013 Annual General Meeting and that the recruitment for a replacement Non-Executive Director, with recent and relevant financial experience, had commenced. I am pleased to report that Julian Heslop was appointed as a Non-Executive Director and also a member of the Audit Committee in January 2013 and that Julian has accepted the role of Chairman of the Audit Committee upon my retirement in October 2013. Julian Heslop brings to the Committee a wealth of experience gained from serving as Chief Financial Officer of GlaxoSmithKline PLC between 2005 and 2011, having previously been appointed its Senior Vice President, Operations Controller between 2001 and 2005 and as Financial Controller of Glaxo Wellcome PLC between 1998 and 2000. Since Julian’s appointment in January 2013, he and I have worked closely together on all Audit Committee matters so that he is aware of any key issues in relation to audit matters and also to ensure a smooth and orderly handover of duties prior to my retirement. I am also pleased to welcome Ishbel Macpherson as a member of the Audit Committee. Further details in respect of both Ishbel and Julian are provided in the Corporate Governance Report. Last year you will recall that I reported that the Committee was in the process of defining the scope of an internal audit function with a view to commencing recruitment by the end of 2012. Following the resignation of the Group Finance Director, Simon Evans, in October 2012 it was agreed that the recruitment process be placed on hold until the new Chief Financial Officer, Anne-Francoise Nesmes, had taken up her role with the Company. Following Anne-Francoise’s appointment, and a number of discussions in relation to the potential remit of an internal audit function within Dechra, it has been decided that the best approach to take at the current time is to outsource the function for an interim period whilst consideration can be given to the longer term view of the remit and responsibilities of an internal audit function. More details in relation to the tender process are provided within the following report. Finally, I would like to take this opportunity to thank the Board of Dechra for their support during my tenure as both a Non-Executive of the Company and also Chairman of the Audit Committee. I firmly believe that Julian Heslop is well suited to guiding the Audit Committee forward and I wish him well with this role. As always, should you have any questions in relation to this report, please feel free to contact me or the Company Secretary. Neil Warner Audit Committee Chairman 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance62 Audit Committee Report Member Neil Warner Dr Chris Richards Bryan Morton (resigned 9 July 2012) Mike Redmond (appointed 19 July 2012/resigned 21 February 2012)* Julian Heslop (appointed 1 January 2013) Ishbel Macpherson (appointed 1 February 2013) Independent Yes Yes Yes Yes Yes Yes Meetings eligible to attend 4 4 1 1 Meetings attended 4 3 0 1 2 2 2 2 Secretary Zoe Goulding * Following the resignation of Bryan Morton from the Board, Mike Redmond was appointed as a member of the Audit Committee until the appointment of a new Non-Executive Director. Role and Responsibilities The main role and responsibilities of the Audit Committee (the “Committee”) are set out in the written terms of reference which are available on the Company website at www.dechra.com. The Committee’s terms of reference are reviewed on an annual basis and during the 2012/2013 financial year this took place at the February meeting. Following this review no material changes to the terms of reference were made. The main responsibilities of the Committee remain: ❱ ❱ ❱ ❱ ❱ to monitor the integrity of the financial statements of the Group, reviewing the annual and half-year reports in detail to ensure they present a balanced assessment of the Group’s position and prospects which is understandable to Shareholders and potential investors; to review the effectiveness of the Group’s internal controls and risk management systems as described on pages 58 to 59 and, in conjunction with the Auditor, consider the accounting policies adopted by the Group; to oversee the relationship with the Auditor. The Committee makes recommendations to the Board on the appointment of the Auditor, approves their remuneration and their terms of engagement, monitors their independence and objectivity, and sets the policy for non-audit work; to make recommendations to the Board on the requirement for an internal audit function; to review the arrangements for employees to raise concerns about wrongdoings, the Group’s systems and controls for prevention of bribery and procedures for detecting, monitoring and managing risk of fraud. In the performance of its duties the Committee has access to the services of the Auditor and is at liberty to obtain outside professional advice as necessary. During the year, no legal or independent professional advice was sought. The Auditor also has direct access to the Committee Chairman outside the formal Committee meetings. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Governance63 Membership, Meetings and Attendance The membership of the Committee and meeting attendance is stated on the previous page. Following the resignation of Bryan Morton in July 2012, Mike Redmond was appointed as a temporary member of the Audit Committee to ensure adherence to the Committee’s terms of reference and in particular to ensure that Committee membership consisted of three Non-Executive Directors. This appointment was terminated on 21 February 2013 following the appointment of Julian Heslop as a Non-Executive Director. The Committee is pleased also to welcome Ishbel Macpherson as its most recent member. The Board considers that the current Committee Chairman, Neil Warner, has recent and relevant financial experience as recommended by the UK Corporate Governance Code as a result of his financial background. He has held a number of financial positions throughout his career including most recently Finance Director of Chloride Group PLC (a position he held from 1997 until the end of December 2010) and also as Chairman of the Audit Committee of Vectura Group plc (to which he was appointed in February 2011). Neil Warner will be standing down as a Non-Executive Director of the Company and as the Chairman of the Audit Committee at the forthcoming Annual General Meeting. It is intended that Julian Heslop will replace Neil as the Committee Chairman. As detailed in the Chairman’s Letter on page 61, Julian worked for GlaxoSmithKline from 1998, latterly as its Chief Financial Officer from 2005 to 2011. It is therefore considered that Julian Heslop also has sufficient recent and relevant financial experience as required under the UK Corporate Governance Code. Details of the members’ financial and accounting experience are contained in the biographical details of the Board of Directors on pages 48 to 49. The Auditor attends meetings of the Committee other than when their appointment or performance is being reviewed. The Chief Executive Officer, Chairman, Chief Financial Officer and other senior finance staff attend as and when appropriate. The Committee has discussions at least once a year with the Auditor without management being present; during the financial year this took place at the end of the August meeting. Furthermore, during the year the Committee Chairman meets informally and has access to the Chief Financial Officer, Group Financial Controller and the senior audit engagement team. This group generally meets before the Committee meetings that consider the annual and half-yearly results. Neither the Company nor its Directors have any relationships that impair the Auditor’s independence. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance64 Audit Committee Report continued Activities during 2012/2013 The Committee met four times during the 2012/2013 financial year, timed to coincide with the financial reporting timetable of the Company. The table below sets out a number of the matters which were discussed (and where necessary approved) at the four meetings: Meeting July 2012* August 2012 February 2013 May 2013 Internal controls Matters discussed/approved at the meeting ❱ Review of the requirement for internal audit function ❱ Non-audit fee update ❱ IFS review update ❱ Audit strategy for the year ended 30 June 2012 (including timetable, scope and fees) ❱ Auditor independence ❱ Company expectations of the audit ❱ Auditor’s Report on the 2011/2012 financial results ❱ Draft preliminary statement ❱ Draft Annual Report ❱ External audit effectiveness ❱ Audit Committee effectiveness review ❱ Auditor independence confirmation ❱ Non-audit fee update ❱ Going concern confirmation ❱ ❱ Proposed final dividend ❱ Auditor representation letter ❱ ❱ Auditor’s report on half-yearly results ❱ Draft half-yearly report and announcement ❱ Terms of reference ❱ Interim dividend ❱ Going concern confirmation ❱ Senior Accounting Officer requirement ❱ Auditor representation letter ❱ Non-audit fee update ❱ Internal audit function ❱ Non-audit fee update ❱ IFS review update ❱ Audit strategy for the year ended 30 June 2013 (including timetable, scope and fees) ❱ Auditor independence ❱ Company expectations of the audit ❱ Senior Accounting Officer Internal audit function * Meeting postponed from May 2012 due to the Eurovet acquisition. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Governance65 Internal Control and Internal Audit Function The Board retains overall responsibility for establishing the systems of internal control and monitoring their ongoing effectiveness and also for the identification and management of risk. The Committee monitors and reviews the effectiveness of the Group’s internal control activities and further detail in respect of the internal controls are provided within the Corporate Governance Section (on pages 58 to 59). As reported in the 2012 Annual Report, in light of the Eurovet acquisition it was agreed that the Group was now of sufficient size to warrant an internal audit function. The Committee discussed the role specification at the August meeting. Following the resignation of the Group Finance Director, Simon Evans, in October 2012 it was agreed that the recruitment process be placed on hold until the new Chief Financial Officer, Anne-Francoise Nesmes, had taken up her role within the Company. Following Anne-Francoise’s appointment, discussions in relation to the role took place between the Committee Chairman and Chief Financial Officer and it was decided that the best approach to take in the current circumstances was to outsource the function for the short term so that a longer term view could be taken on the remit and responsibilities of an internal audit function. Tender invitations have been forwarded to a number of accountancy firms (excluding the Auditor, KPMG) for an enterprise risk management and internal support control function. Proposals are expected back by 27 September 2013 with presentations to be held mid- October. The timeframe will therefore allow the project to be initiated at the beginning of January 2014. It is anticipated that this ongoing support will continue for between 12 and 18 months until a firm decision can be made regarding insourcing compared to outsourcing in relation to the function. Auditor Audit Engagement Director Rotation In line with the ethical standards of the Audit Practices Board the Group Audit Engagement Director is rotated every five years. The current Group Audit Engagement Director was appointed during the 2010/2011 financial year. The next rotation is scheduled to take place during 2015/2016. Independence The Auditor annually confirms their policies on ensuring audit independence and provides the Committee with a report on their own audit and quality procedures. This report was reviewed during the audit strategy meeting held in May 2013 and the Committee remain satisfied of the Auditor’s independence. Effectiveness The performance of the Auditor is reviewed annually by the Committee at the end of the annual audit cycle taking into account feedback from financial directors and managers of the Group involved in the audit process, together with a review of the level of service provided by the Auditor to the Group. The Committee are satisfied with the current Auditor’s effectiveness. Audit Firm Tendering The Committee are aware of the recommendations in the FRC UK Corporate Governance Code in relation to the expectation of the external audit being put out to tender every ten years. KPMG Audit Plc has been appointed as the Auditor since the Company’s formation in 1997 and their performance has been reviewed annually by the Committee since that time. The Committee has remained consistently satisfied with the level of independence of the Auditor and the integrity of the audit process. However, given the recent changes in best practice the Committee has considered whether an audit firm tender should be undertaken during the 2013/2014 financial year. Given the appointment of a new Chief Financial Officer in April 2013 the Committee believes that it would not be in the best interests of the audit process or indeed in respect of risk management to undertake a tender so soon after this appointment. The Committee does, however, intend to undertake a tender process and will seek to align this with the rotation of the Audit Director Engagement scheduled for 2015/2016. The timing of this would therefore allow the successful audit firm (not disallowing for the fact that this could be the incumbent firm) to take up its appointment when the current Audit Director stands down. Re-appointment of Auditor In the light of organisational changes within KPMG, the Directors have agreed that KPMG Audit Plc, a wholly owned subsidiary of KPMG LLP, will step down as Auditor at the forthcoming Annual General Meeting and that a resolution to appoint KPMG LLP as Auditor and to authorise the Directors to set their remuneration will be proposed at the Annual General Meeting. There are no contractual obligations that restrict the Committee’s capacity to recommend a particular firm as Auditor. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance66 Audit Committee Report continued Non-Audit Assignments With respect to non-audit assignments undertaken by the Auditor, the Company has a policy to ensure that the provision of such services does not impair their independence or objectivity. Safeguards are in place to ensure continued audit independence including utilising separate teams to undertake the audit and non-audit work. When considering the use of the Auditor to undertake non-audit assignments, the Chief Executive Officer and Chief Financial Officer do at all times give consideration to the provisions of the FRC Guidance on Audit Committees with regard to the preservation of independence. To assist the Auditor’s independence Deloitte LLP was appointed in 2012 to undertake tax and compliance work in substitution for the Auditor. Audit Fee Review The fee proposals for the external audit and half-yearly results were considered and agreed in the May 2013 meeting. Non-Audit Fees The policy in respect of non-audit fees was reviewed and amended during the year ended 30 June 2009, whereby it was agreed that the non-audit fee be capped at 50% of the audit fee. Prior approval of the Committee is required should non-audit fees exceed the cap and an explanation of the reasons for exceeding the limit is provided to the Committee, who assess the qualification, expertise, independence and objectivity of the Auditor prior to granting approval. The Committee firmly believes that there are certain non-audit services where it is appropriate for the Group to engage the Auditor. During the year, the Auditor was commissioned to carry out working capital and reporting accountant work in respect of the disposal of the Services Segment. The Auditor was considered the most cost effective and appropriate firm to perform this work given both their knowledge of the existing business and the requirement to report on the existing as well as the reduced Group. The Committee did not consider that the performance of this non-audit work would affect or impair the Auditor’s integrity. This is consistent with the ethical standard recommended by the Accounting Practices Board. A summary of audit and non-audit fees in relation to the year is provided in note 6 to the Group’s financial statements. This shows that non-audit work represented 135% of the annual audit fee and, in line with the above stated policy, reflects the Committee’s prior approval of the fees paid to the Auditor in respect of the disposal of the Services Segment. Excluding the costs relating to the disposal, non-audit work represented 39% of the annual audit fee. Committee Effectiveness Review During the year, the Committee reviewed its own effectiveness as a part of the overall Board evaluation process. The Committee considered that it acted transparently and given the number of Committee and Board meetings scheduled throughout the financial year, maintained a thorough understanding of the Group and its business. The Committee also considered it had the skills to perform its responsibilities. The results of the review were advised to the Board. Neil Warner Audit Committee Chairman 3 September 2013 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our GovernanceLetter from the Remuneration Committee Chairman 67 Dear Shareholder On behalf of the Board I am pleased to present Dechra’s Remuneration Report for the year ended 30 June 2013. During the year the Remuneration Committee: ❱ ❱ reviewed the Chief Executive Officer’s remuneration package; reviewed the Long Term Incentive Plan (“LTIP”) performance metrics; and ❱ determine remuneration for the new Chief Financial Officer, Anne-Francoise Nesmes. In respect of Ian Page’s remuneration package the Committee believed that a repositioning was required in order to reflect his experience, performance and overall contribution to the Group. With regards to the proposed changes to the LTIP performance metrics, the Committee was of the opinion that the introduction of another performance measure (alongside relative TSR) would allow for a more balanced assessment of success and reward of long term shareholder value. The Committee consulted with the Company’s major Shareholders on the proposed changes and, taking into account feedback from investors, a number of changes were made to both Ian Page’s remuneration package and the LTIP performance criteria. Detail in respect of these changes are contained within the following report. The Committee believes that these changes align and focus remuneration to reward longer term, sustainable performance. During the year Dechra appointed a new Chief Financial Officer, Anne-Francoise Nesmes. Details of her remuneration package are provided in the following report including details of the one-off recruitment reward which it was agreed to grant her as partial compensation for the loss of share options granted to her by her previous employer. The Board considers Anne-Francoise as pivotal in assisting Ian Page to direct the Group to its next strategic stage and considers that it was in the best interests of the Company to create an overall recruitment package that would attract her to the role within Dechra and to incentivise and motivate her going forward during her career with the Company. It should be noted that all the Executive Directors and Non-Executive Directors have agreed to waive an increase to their respective salaries and fees for the 2013/2014 financial year. An above inflation fee increase has been made to the Chairman and the reasons for this are detailed in the following report. Below Board level the average pay increase across the Group was 1.5%. During the coming months, the Committee will review LTIP performance metrics in light of the disposal of the Services Segment and will consult with major Shareholders as appropriate. Finally, the Committee and I believe that ongoing dialogue with our major Shareholders is of key importance, should you have any queries in relation to this report please do not hesitate to contact myself or the Company Secretary. Dr Christopher Richards Remuneration Committee Chairman 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance68 Directors’ Remuneration Report The Remuneration Report is presented in accordance with the relevant provisions of the UK Corporate Governance Code (the “Code”) and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (the “Regulations”). In accordance with the Regulations the report is divided into two sections, unaudited and audited information. The audited information commences on page 81. As outlined above, Dechra has structured this report to incorporate a number of the key principles of the new Directors’ Remuneration Report regulations. For Dechra the new regulations will apply in full for the financial year ending 30 June 2014. Governance 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 Remuneration Committee (the “Committee”). This report will be submitted for advisory vote at the 2013 Annual General Meeting. Membership The Committee consists exclusively of independent Non-Executive Directors and during the financial year comprised as follows: Member Dr Chris Richards* Bryan Morton (resigned 9 July 2012) Julian Heslop (appointed 1 January 2013) Ishbel Macpherson (appointed 1 February 2013) Mike Redmond Neil Warner Secretary Zoe Goulding * Appointed Committee Chairman on the resignation of Bryan Morton. Independent Yes Yes Yes Yes Yes Yes Meetings eligible to attend 5 0 2 2 5 5 Meetings attended 5 0 2 1 5 4 The Chief Executive Officer attended all meetings held during the financial year in order to assist on matters concerning remuneration of other senior executives within the Group; however, the Chief Executive Officer was not present during the part of the meetings where his own remuneration was discussed. Responsibilities The Committee has its own terms of reference, which are approved by the Board. These are reviewed on an annual basis to ensure that they continue to adhere to best practice. During the 2012/2013 financial year this review took place at the June meeting. Copies can be obtained via the Company website at www.dechra.com. The Committee Chairman and the Company Secretary are available to Shareholders to discuss the remuneration policy. 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. In particular, the terms of reference authorise the Committee to: ❱ make recommendations to the Board on Executive remuneration; ❱ determine on behalf of the Board specific remuneration packages and conditions of employment for Executive Directors; ❱ determine targets for any performance related pay schemes operated by the Company; and ❱ determine the policy for and scope of any pension arrangements for the Executive Directors. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Governance69 Meetings The Committee met five times during the 2012/2013 financial year. Members’ attendance at the meetings can be found on the previous page. The table below sets out a number of the matters which were discussed (and where necessary approved) at the five meetings: Date August 2012 October 2012 December 2012 February 2013 June 2013 Subject Matter ❱ Approval of pilot scheme of the Performance Development Review (“PDR”) ❱ Review of benchmarking exercise ❱ Bonus scheme rules review ❱ Approval of Executive Director bonuses ❱ Discussion of the performance condition in respect of the LTIP granted in 2009 ❱ Review of Committee effectiveness ❱ Consideration of the grant of LTIP awards and performance conditions ❱ Approval of grant of Approved and Unapproved Share Options to senior managers ❱ Proposed changes to Chief Executive Officer’s remuneration package ❱ Proposed changes to the LTIP performance conditions ❱ Update on Shareholder consultation in relation to the proposed changes to Chief Executive Officer’s remuneration package ❱ Discussion of Chief Financial Officer’s proposed remuneration package and recruitment award ❱ Approval of amendments to LTIP performance conditions and grant of awards ❱ Chief Financial Officer’s recruitment award ❱ PDR update ❱ Confirmation of Executive Directors’ and Senior Managers’ salary for 2013/2014 ❱ Confirmation of Chairman’s fees for 2013/2014 ❱ Confirmation of Executive bonus arrangements for 2013/2014 ❱ Arrangements for conforming to the new legislation in respect of Directors’ Remuneration Report ❱ Review of terms of reference ❱ PLC Chairman’s remuneration Advisers The Committee’s main advisers are set out below: Adviser Chief Executive Officer and Group HR Director DLA Piper (UK) LLP Deloitte LLP Areas of advice Remuneration of senior executives and senior management Share scheme matters General remuneration and incentive arrangements for Executives and general share scheme advice Calculation of satisfaction (or otherwise) of the LTIP performance conditions DLA Piper (UK) LLP are the Company’s lawyers and Deloitte LLP provide tax and compliance advice to the Group. The nature and quantum of other services provided by DLA and Deloitte are always considered in order to ensure that no conflict of interest arises in relation to the services they provide to the Remuneration Committee. Effectiveness Review During the year, the Committee reviewed its effectiveness as part of the overall Board evaluation process. Following the review, the Committee considered it had the necessary skills and experience to perform its responsibilities, which was strengthened by the appointment of two Non-Executive Directors during the financial year. The Board was advised of these findings. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance70 Directors’ Remuneration Report continued Remuneration Policy and Practice Summary of the Remuneration Policy Dechra’s policy on Directors’ remuneration is to provide 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; and ❱ 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. In defining Dechra’s remuneration policy, the Committee takes into account best practice guidelines set by institutional investor bodies such as the Association of British Insurers. The Chairman of the Company also ensures the Company, through the Committee and its Chairman, maintains contact with major Shareholders about remuneration matters. Key Elements of Remuneration The key elements of the Directors’ remuneration package are illustrated in the following table. The policy details below apply from 1 July 2013. Policy table Element Base Salary Performance measures None, although performance of the individual is one of the considerations in setting salary levels. Purpose and link to strategy Core element of fixed remuneration reflecting the individual’s role and experience. When considering base salary levels the Committee ensures that it provides the basis for a market competitive package to recruit and retain talent amongst the Executive Directors. Operation The Committee reviews base salaries annually and in doing so recognises the value of the individual, their skills and experience and performance. The Committee also takes into consideration: (i) pay increases within the Group more generally; and (ii) Group organisation, profitability and prevailing market conditions. Opportunity Salary increases will normally be in line with the wider Group and the Committee considers any increase out of line with this very carefully. Higher increases may be awarded in exceptional circumstances, taking into account all relevant commercial factors. These could include: increase in scope and responsibility, falling considerably below market positioning or promotional increase. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our GovernanceElement Pension Purpose and link to strategy Help retain and recruit employees. Ensure adequate income in retirement. Taxable Benefits Provided on a market competitive basis Annual Bonus The executive bonus scheme rewards Executive Directors for achieving operating efficiencies and profitable growth in the relevant year by reference to operational targets and individual objectives. Operation The Company operates a Group Stakeholder personal pension scheme which has been effective since 1 July 2005. All Executive Directors excluding Tony Griffin are members of this scheme. Tony Griffin participates in a defined benefit pension plan which has been established in the Netherlands. This is a funded career average pay arrangement, where pensionable salary is subject to a €50,000 cap. Salary over this cap is paid into a defined contribution pension plan. The Company provides benefits in line with market practice and includes the use of a fully expensed car, medical cover and life assurance scheme. Other benefits may be provided based on individual circumstances. Targets are reviewed annually and any pay-out is determined by the Committee after the year end based on targets set for the financial period. Opportunity The Company contributes 14% of salary to the Group stakeholder personal pension scheme on behalf of the Executive Directors, excluding Tony Griffin. A salary supplement is paid in lieu of amounts above the annual allowance of £50,000 per annum with respect to Ian Page. The Company contributed 12.4% of Tony Griffin’s base salary. into the defined benefit pension plan up to the value of €50,000 of his salary and over this cap into the defined contribution pension plan. Set at a level which the Committee considers appropriate and provides sufficient level of benefit based on individual circumstances. Maximum bonus opportunity for Executive Directors is 100% of base salary. 71 Performance measures Not applicable. Not applicable. Challenging but achievable operational targets and individual objectives are determined at the beginning of the financial year. The personal objectives for the Chief Executive Officer, Ian Page, are set by the Chairman. The personal objectives for Anne-Francoise Nesmes, Tony Griffin and Ed Torr are set by Ian Page. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance72 Directors’ Remuneration Report continued Element Long Term Incentive Plan Purpose and link to strategy The LTIP provides a clear link between the remuneration of the Executive Directors and the creation of value for Shareholders by rewarding the Executive Directors for the achievement of longer term objectives aligned closely to Shareholders’ interests. SAYE Provision of the SAYE to Executive Directors creates staff alignment with the Group and provides a sense of ownership. Operation The Committee intends to make long term incentive awards under the existing LTIP. Under the LTIP, the Committee may grant awards as conditional shares, as nil cost options or as forfeitable shares. The Company also has in place a Company Share Option Plan (“CSOP”). Awards under the CSOP take the form of options to acquire shares, with a per share exercise price equal to the market value of a share at the date of grant. The Committee may at its discretion structure awards as Approved Performance Share Plan (“APSP”) awards comprising both an HMRC approved option granted under the CSOP and a LTIP award, with the vesting of the LTIP award scaled back to take account of any gain made on exercise of the approved option. Other than to enable the grant of APSP awards, the Company does not intend to grant awards under both the LTIP and CSOP in the same grant period. HMRC approved monthly savings scheme facilitating the purchase of shares at a discount. Opportunity Current scheme rules permit grants up to 150% of salary (200% of salary in exceptional circumstances). Shareholder approval is being sought at the forthcoming Annual General Meeting to increase the award opportunity to 200%. Performance measures Vesting of the awards will normally occur provided that: (a) the participant is still employed by the Group at the end of the vesting period; and (b) to the extent that the pre-set performance targets have been satisfied over the three year performance period. ❱ 50% on the Company’s EPS growth; ❱ 50% on the Company’s total shareholder return (“TSR”) performance relative to an appropriate comparator group; and ❱ an ‘underpin’ condition based on the Company’s underlying financial performance. Contribution limit of £250 per month. Not subject to performance conditions in line with the HMRC approved operation of such plans. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Governance73 Opportunity Not applicable. Performance measures Not applicable. Element Shareholding Guideline Purpose and link to strategy Provides alignment of Executive Directors’ interests with Shareholders and promotes share ownership. Operation In line with best practice, there are formal share ownership guidelines for Executive Directors. By the third anniversary of their appointment to the Board they are required to have acquired and retained a holding of Dechra shares equivalent to the value of at least 100% of their base salary. Non-Executive Directors Element Non-Executive Director Fees Purpose and link to strategy 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. Operation 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 Officer and the Chairman. Non-Executive Directors are not eligible to participate in any of the Company’s share schemes, incentive schemes or pension schemes. Opportunity Non-Executive Directors are paid a basic fee with additional fees paid for the chairing of Committees. By the third anniversary of their appointment to the Board, Non-Executive Directors are required to have acquired and retained a holding of Dechra shares equivalent to the value of 50% of their base fee. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance74 Directors’ Remuneration Report continued Policy on External Appointments The Company recognises that Executive Directors may be invited to become Non-Executive Directors of other companies and that this can help broaden the skills and experience of a Director. Executive Directors are only permitted to accept external appointments with the approval of the Board. The only Executive Director to hold an external appointment is Ian Page. He is Non-Executive Chairman of Sanford DeLand Asset Management Limited, a position which he has held since 7 October 2010. During the year, Ian Page received no remuneration for this appointment. Balance of Remuneration The following charts illustrate the proportions of the Executive Directors remuneration packages comprising fixed (i.e. base salary and employer pension contributions) and variable elements of pay, assuming maximum annual bonus and long term incentives are achieved. Ian Page Anne-Francoise Nesmes Ed Torr and Tony Griffin a Base Salary 24% b Pension 4% c Cash Bonus 24% d LTIP 48% d d a c b a b c a Base Salary 27% b Pension 4% c Cash Bonus 27% d LTIP 42% d a Base Salary 32% b Pension 4% c Cash Bonus 32% d LTIP 32% a b c Recruitment Remuneration Policy When hiring a new Executive Director, the Committee will typically seek to use the Policy detailed on pages 70 to 73 to determine the Executive Director’s ongoing remuneration package. To facilitate the hiring of candidates of the appropriate calibre required to implement the Group’s strategy, the Committee retains the discretion to make remuneration decisions which are outside the Policy. In determining appropriate remuneration, the Committee will take into consideration all relevant factors (including the quantum and nature of remuneration) to ensure the arrangements are in the best interests of Dechra and its Shareholders. The Committee may make an award in respect of hiring an employee to “buyout” incentive arrangements forfeited on leaving a previous employer. In doing so the Committee will take account of relevant factors including any performance conditions attached to these awards and the time over which they would have vested. The Committee would seek to incorporate buyout and recruitment awards to be in line with the Company’s remuneration framework so far as is practical. The Committee may consider other components including cash or shares awards, restricted stock awards and share options where there is a strong commercial rationale for doing so. Reasonable costs and support will be covered if the recruitment requires relocation of the individual. Expat allowances may also be paid in these circumstances. The Company recruited a new Chief Financial Officer, Anne-Francoise Nesmes, during the financial year, following the departure of Simon Evans. The Committee positioned the overall package for the new Chief Financial Officer at a level that was sufficient to recruit and retain a Chief Financial Officer of the required calibre and quality. Further details in respect of this can be found on page 79. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Governance75 Service Contracts and Policy on Payment for Loss of Office Details of the Executive Directors’ service contracts/Non-Executive Directors’ letters of appointment are set out below. Name Mike Redmond Ian Page Tony Griffin Anne-Francoise Nesmes Ed Torr Julian Heslop Ishbel Macpherson Dr Chris Richards Neil Warner Commencement date 25 April 2001 1 September 2008 1 November 2012 22 April 2013 6 February 2009 1 January 2013 1 February 2013 1 December 2010 2 May 2003 Notice Period Director 3 months 6 months 6 months 6 months 6 months 3 months 3 months 3 months 3 months Company 3 months 12 months 12 months 12 months 12 months 3 months 3 months 3 months 3 months There are no expiry dates applicable to either Executive or Non-Executive Directors’ service contracts. 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 basic salary entitlement for the unexpired period of notice (subject 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. In December 2012 the Non-Executive Directors agreed to an amendment to their respective service contracts reducing the notice period after the initial 12 month period from 12 months to three months’ termination by either party. The Non-Executive Directors are entitled to compensation on termination of their appointment confined to three months’ remuneration. Individual Directors’ eligibility for the various elements of compensation is set out below: Provision Base Salary/Fees Annual Bonus Long Term Incentives Pension Treatment upon loss of office Base salary/fees and benefits based on the duration of the notice period receivable from the Company. This will be reviewed on an individual basis and the decision whether or not to award a bonus in full or in part will be dependent upon a number of factors including the circumstances of their departure and their contribution to the business during the bonus period in question. Determined in line with the provisions of the relevant plan rules. This would be taken into account as part of the payment referred to in the base salary section. 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. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance76 Directors’ Remuneration Report continued Annual Report on Remuneration Base Salary Salary effective from Ian Page Tony Griffin Anne-Francoise Nesmes Ed Torr 1 January 2013 £440,000 €278,208 £300,000* £229,539 1 July 2013 £440,000 €278,208 £300,000 £229,539 * Anne-Francoise Nesmes’ base salary on the date of appointment In the last five years, salary increases for the Executive Directors have been in line with average salary increases for the wider employee population (approximately 2% to 3%). During the 2012/2013 financial year, a comprehensive review of Ian Page’s remuneration was undertaken, which highlighted that his base salary had fallen behind that of his peers. Our policy on base salary continues to be to provide a fixed remuneration component which reflects the experience and capabilities of the individual in the role, the demonstrated performance of the individual in the role, and which is competitive in the market we operate. Following the comprehensive review of Ian Page’s remuneration package, and after consultation and support from the major Shareholders, the Committee unanimously concluded that a significant step up in salary was appropriate. This reflects a number of factors: ❱ his achievements since being appointed to Chief Executive Officer in 2001, in particular his energetic leadership of the business and the contribution he has made to the Group’s significant strategic and financial progress; ❱ his delivery of significant and sustained increases in Shareholder value in what has been a very difficult environment for most businesses. In a period where many companies have had to settle for navigating through a crisis, our business has grown in size, both in terms of its complexity and geography; ❱ his successful integration of a number of significant strategic acquisitions, most recently the acquisition of Eurovet; and ❱ the market positioning of the salary against companies of a similar size and complexity. The increase in base salary in January to £440,000 represented an increase of 15%. This positions his salary around the median levels compared to companies of a similar size and complexity. All the Executive Directors have agreed to waive an increase in salary for the 2013/2014 financial year. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Governance77 Non-Executive Director Fees Since 2008 the Chairman and the Non-Executive Directors have been awarded inflationary increases only in respect of their fees. Furthermore, they waived any increase in 2009 and 2010. During the year a review of the Chairman’s remuneration during the year identified that his fee was substantially lower than that of other Chairmen of companies of comparable size and complexity. After due consideration, the Committee decided to increase his fee to a level more commensurate with his experience, performance and overall contribution to the business. The remaining Non-Executive Directors have agreed to waive an increase in their fees for the 2013/2014 financial year. Office Chairman Non-Executive Director Remuneration Committee Chairmanship additional fee Audit Committee Chairmanship additional fee 2012/13 Fee £’000 86 39 3 3 2013/14 Fee £’000 106 39 3 3 Annual Bonus The Company operates an annual cash incentive scheme for the Executive Directors. Annual bonuses were awarded by the Committee in respect of 2012/2013 having regard to the performance of the Group and personal performance objectives for the year. Details of the annual bonus scheme can be found in the table on page 71. The amount achieved for the year ended 30 June 2013 against targets for 2012/2013 is as follows: 2012/13 Targets Underlying profit before tax performance: 10% of salary payable upon the achievement of 95% of Group profit target rising to 90% of salary payable upon the achievement of 110% of Group profit target Personal objectives: up to an additional 10% of salary was payable to Executive Directors upon the achievement of personal objectives Total Annual Bonus Earned for the Year Ended 30 June 2013 Amount Achieved for the Year Ended 30 June 2013 The underlying profit before tax target was £47.0 million on a constant currency basis. Actual underlying profit before tax was £45.5 million reflecting 97% of the profit target resulting in a payment worth 26% of salary Actual performance resulted in payment worth 10% of salary. The objectives are based on key aspects of delivering the Group’s strategy 36% of salary 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance78 Directors’ Remuneration Report continued Long Term Incentive Arrangements and Share Schemes Long Term Incentive Plan (“LTIP”) LTIP Awards Vesting During the Year Ended 30 June 2013 With respect to the awards granted on 22 December 2010, the performance targets are: 1) an ‘underpin’ condition based on Group underlying diluted earnings per share performance: no awards will vest if the Group’s underlying 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 constituents of the FTSE Small Cap Index 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% As set out on page 82 for the three year period to 30 June 2013 the Company’s TSR performance was over 98% compared with an 84% TSR for live companies in the top quartile of the comparator group. In addition the Group’s underlying diluted EPS increased by 44.09% over the performance period as a result the LTIPs awarded in December 2010 will vest fully. LTIP Awards Made During the Year Ended 30 June 2013 Awards were granted to the Executive Directors on 5 March 2013, on the following basis: ❱ 150% of salary for Ian Page; and ❱ 100% of salary for the other Executive Directors. In various consultations with our major Shareholders, we have received strong support for the introduction of another performance measure alongside relative TSR under the LTIP to allow for a more balanced assessment of success and to reward the delivery of long term Shareholder value. Following consultation, the Committee resolved that 50% of the LTIP award will continue to be based on the Company’s relative TSR performance (relative to the FTSE 250) and 50% will be based on stretching EPS targets. Furthermore, to ensure the quality of earnings and delivery of other key financial performance indicators the vesting of awards under the LTIP will be subject to an additional Return on Capital Employed (“ROCE”) underpin. Following the disposal of the Services Segment, and in line with the LTIP scheme rules, the Committee are in the process of reviewing the performance targets attaching to the LTIP awards granted in March 2013 and intends to consult with major Shareholders by the end of the calendar year in respect of the same. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Governance79 Recruitment Award for Anne-Francoise Nesmes On appointment the Committee agreed to award Anne-Francoise Nesmes two LTIP awards to the value of 100% of her base salary: ❱ 100% to be subject to a performance period ending 30 June 2014 with a further one year’s continued employment subject to claw back; and ❱ 100% to be subject to a performance period ending 30 June 2015. This tranche will be subject to the same performance conditions as those attaching to the LTIP awards granted to the Executive Directors on 5 March 2013. In the event of a change of control of the Company prior to the vesting dates stated above, the Remuneration Committee has confirmed that it will exercise its discretion to allow the two LTIP awards to vest in full and that the performance conditions would be waived. The rationale behind the additional LTIP grants was as an offer of partial compensation for the loss of Performance Share Plan and Share Value Plan awards which Anne-Francoise Nesmes had been granted by her previous employer and which lapsed on the cessation of her employment with them. When Anne-Francoise Nesmes commenced her appointment with Dechra the Company was deemed to be in a close period by reason of the disposal of the Services Segment and therefore unable to grant the recruitment award. It is therefore proposed that both awards will be granted as a nil-cost option in early September (once the Company has announced its year end results). The grant will be made outside of the LTIP scheme rules and will be satisfied using market purchase shares. LTIP Awards for the Year Ending 30 June 2014 To align and focus Ian Page’s total remuneration package to reward longer term, sustainable performance the Committee granted a LTIP award to Ian Page of 150% of his salary in March 2013 and has proposed, after due consultation with major Shareholders, to award 200% of salary in respect of future financial years. Shareholder approval will be sought at the Annual General Meeting for the increase in long term incentive opportunity to 200% of salary. However, for the avoidance of doubt this level of award will not be a guaranteed entitlement. Whilst the Committee intends to make awards up to 200% of salary to Ian Page in the future, in line with best practice the Committee will review the level of award to be made each year and this level of award will be dependent on the Committee’s assessment of the continued growth and financial success of the Group and Ian Page’s personal performance. The Committee intends to make awards of 150% of base salary to Anne-Francoise Nesmes on an annual basis. LTIP awards for the other Executive Directors will remain at 100% of base salary. Payments to Past Directors There were no payments made to past Directors during the period. Payments for Loss of Office A compensation payment was made to Simon Evans during the financial year and equated to 12 months of his salary and benefits plus the use of a company car until the expiry of the lease (31 March 2015). A compensation payment was also made to Bryan Morton during the financial year which equated to two months of his salary. No other compensation payments were made to Executive or Non-Executive Directors during the year. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance80 Directors’ Remuneration Report continued Statement of Directors’ Shareholdings and Interests: Executive Directors Name Ian Page Tony Griffin (appointed 1 November 2012) Anne-Francoise Nesmes (appointed 22 April 2013) Ed Torr * Calculated using the share price as at 28 June 2013. Non-Executive Directors Name Mike Redmond Julian Heslop (appointed 1 January 2013) Ishbel Macpherson (appointed 1 February 2013) Dr Chris Richards Neil Warner * Calculated using the share price as at 28 June 2013. Ordinary Shares No. 859,751 20,077 — 424,552 Ordinary Shares No. 73,417 5,000 2,987 7,400 5,448 Ordinary Shares £’000* 5,932 138 — 2,929 Ordinary Shares £’000* 507 35 21 51 38 % of Salary 1,348% 61.9% — 1,276% % of Salary 589% 88% 52% 131% 96% Total Shareholder Return Graph The graph below shows the TSR performance of the Company over the past five financial years compared with the TSR over the same period for the FTSE 250 Total Return Index. Throughout the 2012/2013 financial year the Company has been a constituent member of the FTSE 250; for this reason it is considered that the TSR performance of the FTSE 250 Index be represented in this report. ) £ ( l e u a V Dechra FTSE 250 250 230 210 190 170 150 130 110 90 70 50 2008 2009 2010 2011 2012 2013 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Governance 81 Statement of Voting at Last Annual General Meeting The Company remains committed to ongoing Shareholder dialogue and takes an active interest in voting outcomes. The following table sets out actual voting in respect of the resolution to approve the Directors’ Remuneration Report at the Company’s Annual General Meeting on 19 October 2012: Resolution Approve Remuneration Report Votes for 68,162,190 % of vote 99.09 Votes against 623,458 % of vote 0.91 Votes withheld 20,759 Directors’ Shareholdings The beneficial interests of the Directors and their families in the share capital of Dechra Pharmaceuticals PLC as at 30 June 2013 were as follows: Name Mike Redmond Ian Page Tony Griffin (appointed 1 November 2012) Anne-Francoise Nesmes (appointed 22 April 2013) Ed Torr Julian Heslop (appointed 1 January 2013) Ishbel Macpherson (appointed 1 February 2013) Dr Chris Richards Neil Warner Ordinary Shares No. 2013 73,417 859,751 20,077 — 424,552 5,000 2,987 7,400 5,448 Ordinary Shares No. 2012 73,417 859,751 12,077 — 472,767 — — 7,400 5,448 There have been no changes in the holdings of the Directors between 30 June and 3 September 2013. Audited Information The Auditor is required to report on the information contained in the remainder of this report. Summary of Remuneration Executive Directors Ian Page Simon Evans (resigned 18 October 2012) Tony Griffin (appointed 1 November 2012) Anne-Francoise Nesmes (appointed 22 April 2013) Ed Torr Non-Executive Directors Mike Redmond Bryan Morton (resigned 9 July 2012) Julian Heslop (appointed 1 January 2013) Ishbel Macpherson (appointed 1 February 2013) Dr Chris Richards Neil Warner Salaries & Fees £’000 419* 317† 223 94 230 86 7† 19 16 42 42 1,495 Bonuses £’000 Other Benefits £’000 158 — 83 21 83 — — — — — — 345 33 21 7 10 17 — — — — — — 88 Total 2013 £’000 610 338 313 125 330 86 7 19 16 42 42 1,928 Total 2012 £’000 632 403 — — 375 84 41 — — 38 41 1,614 * This includes a salary supplement of £7,580 paid in lieu of employers’ pension contribution in excess of £50,000. Therefore the base salary is £411,283. † This includes compensation for loss of office. In relation to Bryan Morton’s fees the entire amount stated above related to compensation for loss of office. In relation to Simon Evans’s salary a total of £241,000 related to compensation for loss of office. The performance conditions attaching to the annual bonus for 2012/2013 are explained on page 77. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance82 Directors’ Remuneration Report continued Long Term Incentive Plan Awards made under the Long Term Incentive Plan are as follows Ian Page Simon Evans (resigned 18 October 2012) Tony Griffin (appointed 1 November 2012) Ed Torr Award date 24 September 2009 22 December 2010 7 September 2011 5 March 2013 Number of shares at 30 June 2012 94,575 78,656 92,811 266,042 Granted Lapsed during the during the year year — (94,575) — — — — — — 94,420 (94,575) 94,420 Number of shares at 30 June 2013 Exercised during the year — — 78,656 — 92,811 — 94,420 — 265,887 Performance period — 2009-2012 2010-2013 2011-2014 2012-2015 Share price at date of award pence 404.10 514.00 455.50 715.00 24 September 2009 22 December 2010 7 September 2011 59,447 49,441 58,338 167,226 — (59,447) — (49,441) — (58,338) — (167,226) — — — — — 2009-2012 — 2010-2013 — 2011-2014 — 404.10 514.00 455.50 5 March 2013 24 September 2009 22 December 2010 7 September 2011 5 March 2013 56,745 47,193 55,687 — 34,401 — 34,401 — — — (56,745) — — — — — — 32,838 (56,745) 32,838 159,625 — 34,401 — 34,401 — — 47,193 — 55,687 — 32,838 — 135,718 2012-2015 715.50 — 2009-2012 2010-2013 2011-2014 2012-2015 404.10 514.00 455.50 715.50 The performance conditions attaching to the Long Term Incentive Plan are explained on page 78. Independent verification has recently been sought from Deloitte in respect of the satisfaction of the performance targets for awards which will vest in December 2013. The ‘underpin’ condition (the Group’s adjusted earnings per share has grown by at least RPI plus 3% per annum over the performance period) has been met; and the Group’s TSR performance for the three year period to 30 June 2013 was in the top quartile of the FTSE Small Cap Total Return Index. The ‘underpin’ condition was tested by the Group and was not verified by Deloitte. Therefore the awards will vest in full. The aggregate gain made by the Executive Directors on share options exercised during 2013 was £5,187 (2012: £727,997). SAYE Scheme Directors’ entitlements under the SAYE Scheme are as follows: Ian Page Simon Evans (resigned 18 October 2012) Ed Torr Market price at date of grant Pence 387 Exercise price Pence Exercise dates 315.02* Dec 2013 Award date 13 October 2008 13 October 2008 12 October 2009 17 October 2011 16 October 2012 387 445 478 315.02* Dec 2013 304.92* Dec 2012 365.59* Dec 2014 471.00 Dec 2015 At 30 June 2012 Number 5,316 5,316 1,785 984 — 13,401 Exercised Number — Granted Number — Lapsed Number — — (1,785) — — (1,785) — — — 1,146 1,146 (5,316) — — — (5,316) At 30 June 2013 Number 5,316 — — 984 1,146 7,446 * Outstanding awards were subject to an adjustment following the Rights Issue to reflect the bonus element of the transaction. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Governance83 Share Price The middle market price for the Company’s shares on 30 June 2013 was 690p and the range of prices during the year was 473p to 780p. Pension Entitlement All Executive Directors (excluding Tony Griffin) were members of the Dechra Pharmaceuticals PLC Group Stakeholder personal pension scheme throughout the year. Tony Griffin is a member of the defined pension plan in the Netherlands. 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: Ian Page Simon Evans Anne-Francoise Nesmes Tony Griffin Ed Torr Contributions 2013 £’000 50 45 7 26 32 160 Contributions 2012 £’000 50 33 — — 30 113 Age 52 49 42 50 53 From 6 April 2011, the annual allowance for tax relief on pension savings for individuals reduced to £50,000. Since this became effective Ian Page has elected to receive a salary supplement in lieu of the employer contribution over and above the £50,000 limit. Tony Griffin is a member of the Basispensioen, a defined benefit scheme established in the Netherlands. The table below sets out the arrangements for Tony Griffin for the period from 1 November 2012 to 30 June 2013. Accrued benefit at 1 November 2012 Increase in accrued benefit excluding inflation allowance Increase in accrued benefit including inflation allowance Transfer value of benefit accrued during the period less member contributions Transfer value at 1 November 2012 Transfer value at 30 June 2013 Increase in transfer value over the period after member contribution By order of the Board €8,260 €494 €601 (€8,000) €134,000 €127,000 (€7,000) Dr Christopher Richards Remuneration Committee Chairman 3 September 2013 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance84 Corporate Responsibility, Social, Ethical and Environmental Responsibilities A responsible approach to our stakeholders and the wider community is considered by the Board to be fundamental to the business. The conduct of the business towards social, environmental, ethical and health and safety issues is recognised to have an impact on our reputation and therefore the implementation and improvement of policies and systems is ongoing. The Board takes ultimate responsibility for Corporate Social Responsibility (“CSR”) and continues to be committed to developing and implementing appropriate policies that create and maintain long term value for all stakeholders. Sound business ethics help to minimise risk, ensure legal compliance and enhance Company efficiency. The Sustainability Committee (the “Committee”) was set up in October 2009. It has terms of reference which were approved by the Board in July 2010, copies of which can be obtained from the Company Secretary or via the Company’s website at www.dechra.com. The Committee is chaired by Ed Torr, the nominated Director responsible for environmental policy. The Company Secretary is secretary to the Committee. The Committee is responsible for establishing and maintaining the Group’s social, ethical and environmental policy. The following report details how we have applied the main principles of this policy, a full copy of which can be obtained from the Company Secretary or via the Company website. Social Responsibilities The Board recognises that the Group has a responsibility to its stakeholders and therefore encourages the business units to contribute to the social and economic welfare of the local communities in which they operate. It recognises that by taking voluntary action in this area it is helping to protect and develop its own business. As reported in the 2011 Annual Report the Committee established a Group Donations Policy, which became effective 1 July 2011. From this date, the Group will donate up to £10,000 a year to be split between an animal welfare charity, an environmental charity and an employee nominated charity. All employees within the Group are entitled to nominate a charity or a non-commercial organisation. During 2012 the chosen charities were: Environmental Charity ❱ Staffordshire Wildlife Trust: As in previous years Dechra has maintained its investment in the Corporate Membership Scheme for the Staffordshire Wildlife Trust (the “Trust”). The continued support provided by the Company has assisted the Trust to continue with their education, conservation and community projects throughout Staffordshire. Employee Charity ❱ An employee at DVP EU took part in the Vatternrundan, an organised cycle race in Sweden which has been held over the last 48 years. This year there were over 23,000 cyclists who started the 300km circuit around Lake Vattern. The employee raised £2,500 which was matched by the Company, and the funds donated to Cancer Research UK. In addition to the annual Group donation each business unit has discretion to allocate funds to local community groups, employee nominated charities and/or animal welfare charities. Below is a selection of what has taken place during the 2012/2013 financial year. Animal Welfare ❱ As in previous years, many of our businesses have donated obsolete and/or short dated stock, damaged products and consumables to various charities, ensuring that such stock is not provided to charities where the donation-in-kind could be sold to third parties. DVP UK continued to provide assistance to a charity called Help the Street Cats of Morocco which it has been involved with since 2006 providing supplies of Atipam, Canaural, Cleanaural, Fucithalmic and Sedator. NVS donated dog food to City Dogs Home. Environment ❱ DVP EU has continued to donate DKK0.02 for every kilowatt per hour used for the period 2011 to 2015 to Energreen ApS for the construction of new green energy production facilities within Denmark. Other ❱ Each year DVP EU nominates a Danish charity. This year they donated DKK2,000 to the Danish Cancer Foundation. Furthermore as reported in the previous Annual Report, DVP EU has continued its sponsorship of three children through SOS Children’s Villages. ❱ Dechra Laboratory Services has maintained its links with local schools by offering a number of work experience placements to six children from local schools and four veterinary students. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Governance85 Business Ethics The Board expects all of the Group’s business activities to be conducted in accordance with the highest standards of ethical conduct and in full compliance with all applicable national and international legislation; in doing so we aim to maintain a reputation for acting responsibly and with integrity. The Board has formalised its expectations in respect of business conduct into a policy known as The Code of Business Conduct (the “Code”). The Code aims to set a standard of conduct which applies throughout the Group and ensures, amongst other things, that: ❱ all third parties are treated fairly, openly and honestly; ❱ our employees do not accept or offer bribes, facilitation payments or other inducements; and ❱ employees must avoid direct and indirect conflicts of interest (and where this is not possible, the employee must follow the procedure set out in the Code in order to ensure that the employee is removed from the position of conflict as soon as possible). A whistle-blowing policy is also in place whereby employees report, in confidence, any suspected wrongdoings within the business which they feel unable to discuss directly with local management. Details of the whistle-bowing policy are detailed on the Company website at www.dechra.com. The Dechra Values were launched in June 2011 across the business. Further information can be found on pages 88 to 89 and via the Company’s website at www.dechra.com. The Board fully endorses these Values and believes that they encapsulate Dechra’s business ethics and set standards that all employees should strive to achieve and ultimately exceed. Environmental Policy The Group recognises the importance of good environmental controls. It is the Group’s policy to comply with environmental legislation currently in place, adopt responsible environmental practices and give consideration to minimising the impact of its operations on the environment. Dechra has commenced collating the data to comply with the forthcoming Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, which requires all UK quoted companies to report on their greenhouse gas emissions as part of their annual Directors’ Report. This will be included in the 2014 Annual Report and Accounts. In terms of fuel, travel and waste we can report for the 2012/2013 financial year the following changes: Fuel With respect to the 2012/2013 financial year, Dechra, as reported in the 2012 Report, has undertaken a review of the Company Car provision with the view of standardising the offering and reducing CO2 emission. The two lower car bands, which account for over 55% of the Company Car fleet, have been amalgamated and the choice of car has been reduced to two models from the same manufacturer which are generating between 108 and 116 CO2g per km. In addition band three has been capped at 160 CO2/km, which account for a further 22% of the car fleet. The light commercial fleet of over 130 delivery vans now integrate an alternative range of vehicles including small VW Caddy vans returning over 46 mpg, as opposed to the previously standard vehicle that delivered only 32 mpg. The HGV fleet has been limited to 53mph and the Gloucester and Tiverton trunking routes have been amalgamated allowing the release of one HGV tractor unit and trailer which has resulted in a saving of least 200 miles per day. The average miles per gallon as at the end of June 2013 and June 2012 were as follows: HGV Fleet Transit 2013 10.71 32.34 2012 9.92 32.64 The HGV fleet complies with the Euro 5 standard, a European regulation which sets emission limits for each category of pollutant emissions, such as carbon monoxide, nitrogen oxides and combined emissions of hydrocarbons and nitrogen oxides. Following the disposal of the Services Segment in August 2013, Dechra will have a reduced car fleet and no commercial vehicles in the UK. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance86 Corporate Responsibility, Social, Ethical and Environmental Responsibilities continued Travel In respect of travel, use of the video conference facilities is recommended as priority over travel. Video conference facilities are installed at PLC, DVP UK, DVP US, Skipton, Bladel, Netherlands and Uldum, Denmark. Whilst the Company appreciates that face to face meetings are beneficial the use of video conference facilities substantially reduces the amount of travel by car and aeroplanes. Waste In respect of waste, the Group is a registered member of the Waste Packaging Obligations Regulations compliance scheme. The general waste is then sorted for collection by third party waste management companies. Dechra Manufacturing Skipton also actively monitors its recycling rates. This facility continues to comply with, and exceed, effluent discharge standards into local water supplies, which is subject to random monitoring by Yorkshire Water Authority. Standard operating procedures are in place to ensure that all contaminated waste is disposed of under strict controls. Furthermore, all exhaust air is fully filtered from the manufacturing unit before discharge into the environment. DVP EU is legally obliged to submit an environmental impact report to the Danish Ministry of Environment on an annual basis. The Group continues to review its environmental controls and encourage its own staff, suppliers and customers to achieve similar standards. 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 promotion of a policy of health and safety at work to ensure the care and well-being of its employees and on-site visitors. 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. For a number of years the Group has reported Lost Time Accident Frequency Rates (“LTAFR”) as a non-financial key performance indicator (see pages 38 to 39). The LTAFR is a calculation of all injuries that would be statutorily reportable under the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations (“RIDDOR”), normalised per 100,000 hours worked. This measure provides information to help monitor and control accidents and injuries to the workforce and is widely used as a key performance indicator throughout industry. The Company reports LTAFR on the same basis as in previous years, that is over-three day incidents. Over the course of the last 12 months the number of accidents has decreased from 10 to 5, none of which resulted in a work- related fatality or disability. It is hoped to reduce this further during the 2013/2014 financial year. Any material health and safety issues or incidents which occur are discussed in detail at both the monthly business unit board meetings and the PLC Board meetings. The discussions include details of the incident that took place and also details of any remedial action which has been taken in order to mitigate or prevent a recurrence of the incident. Twice a year a comprehensive health and safety report is presented at each of the business unit board meetings and subsequently reported to the PLC Board meeting the following month for discussion and review by the Directors. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Governance87 The Transport Risk Committee assesses risks relating to the Group fleet and establishes control procedures, including regular licence checks of all individuals who are able to drive company vehicles, investigations into all accidents and a disciplinary procedure for speeding offences. During the year an online driver risk assessment was undertaken by all new Company car and commercial vehicle drivers as part of their induction. The results of the assessment enables the Company to identify any drivers at risk and to provide further training to those drivers. It is intended that all drivers will be reassessed every three years. The investment so far in respect of the online driver assessments has had a positive impact on the number of insurance claims with both the frequency and severity of accidents having been reduced. Due to the disposal of the Services Segment this committee has met once during the year and its terms of reference will be reassessed in light of this disposal. All issues raised by this committee are reviewed by the Board as part of the bi-annual health and safety review. Employees We recognise that the success of the Group is dependent on our ability to attract, develop, motivate and retain skilled employees. For a number of years the Group has reported labour turnover as a non-financial KPI using a standard formula as follows: Total number of leavers over a period Average total number employed over period x 100 The Group has established a target of no more than 15% Moving Annual Turnover; during the 2012/2013 financial year we achieved 14.84% (2012: 16.10%). Dechra Pharmaceuticals Manufacturing Skipton is registered with ‘Investors in People’ and has continued in its commitment to people development through a number of apprentices embarking on the Modern Apprenticeship Scheme. Such employees are assisted in achieving National Vocational Qualifications (“NVQ”) as part of their apprenticeship, usually work-based but also involving literacy and numeracy modules. It is the Company’s policy to provide equal recruitment and other opportunities for all employees, regardless of age, sex, sexual orientation, 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 continues to encourage employees to share in the growth of the Company through eligibility to participate in the SAYE Scheme. The SAYE Scheme is currently offered to UK employees only; the take-up for the December 2012 grant was 21.59% (December 2011: 15.34%). The graph below shows the percentage of employees who have taken up the SAYE Scheme over the last five years. Percentage Take-up 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2008 2009 2010 2011 2012 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance88 Dechra Values “Values play a vital role in enabling all employees to be aware of what is expected of them” An effective values system aims to provide the Dechra Group with many benefits, from committed and happy employees to the best possible relationships with suppliers and customers. The Values play a vital role in bringing consistency to all the businesses across the Group, enabling all employees to be aware of what is expected of them and how they can achieve that. The initiative to define and communicate the Dechra Values began over two years ago. At the time, 75% of FTSE 100 companies had published sets of values, and Dechra recognised that there were many benefits to be drawn from creating and disseminating their own values across the Group. A steering group was formed in 2011 with HR and senior management involvement from each business within the Group. One of the aims of this group being to define a set of values which reflected the best aspects of personality and behaviour in Dechra, whilst also providing standards that could be used as a tool in managing and measuring employee performance. The discussions of the steering group led to the creation of the six Dechra Values: Dedication, Enjoyment, Courage, Honesty, Relationships and Ambition (conveniently spelling Dechra), which were launched Group wide in July 2011. Within a year of the launch all employees across Dechra had received a Standards Guide along with training on the Values, explaining what each Value meant for them individually and how it should be applied alongside examples of behaviour that (i) did not meet the standard, (ii) met the standard, and (iii) exceeded the standard. The Values have rolled out across all territories within which we have a legal entity, being initially translated into Danish, Spanish and French, and subsequently being integrated into newly acquired companies. Dutch and German translations will soon follow to allow for the Values to be rolled out to the more recently acquired Eurovet business. To demonstrate the ongoing commitment to these ideals, they have also become part of the recruitment and induction process, ensuring new recruits reflect and embrace the Values at every level of the business. Over the last 12 months, work has been ongoing to solidify the use of the Values across the Group with a number of developments in progress, most notably a pilot programme for the Performance and Development Review (“PDR”) process. This pilot, which came to an end in June 2013, trialled Dechra’s first universal appraisal scheme to 100 people, and met with very positive feedback from those involved. The PDR process involves three elements, with employees being measured against (i) their own role or Accountabilities, (ii) personal objectives (created uniquely for each employee) and (iii) the Dechra Values. Following the success of the pilot, it is intended that the PDR process will be spread further throughout the Group, demonstrating the integral part that the Values will play in career development at Dechra. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Governance89 “By improving performance at an individual and team level, the financial and operating performance can only benefit from the Group wide investment in the Values that has taken place so far and that will continue to increase” The PDR process is just one of a number of ways in which we can focus on “making the Values live”. A branded marketing campaign is about to launch with the aim of increasing the visibility of the Values, and all employees will be made aware of the progress of the initiative to date. Other future activity will see the Values become more prominent in everyday team briefings, workshops held to delve deeper and increase understanding of the Values, a growing presence on the intranet, and general activities to keep team members engaged with the Values in their day-to-day working life. There is also the ambition for a recognition scheme to reward exceptional employees in future, reflecting the positive effects that the Values initiative has had on individuals and on the business as a whole. Whilst not measurable at its current stage, by improving performance at an individual and team level, the financial and operating performance can only benefit from the Group wide investment in the Values that has taken place so far and that will continue to increase. 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance90 Directors’ Report: Other Disclosures Principal Activities and Strategic Report and Operating Review The Company acts as a holding company to all the Group’s subsidiaries. Following the disposal of the Services Segment on 16 August 2013 to Patterson Companies, Inc. the Group now operates under three segments: ❱ European Pharmaceuticals: markets and sells branded pharmaceuticals and specialist pet foods to the veterinary profession in Europe. It is a licensed manufacturer of both Dechra’s own branded products and products for third party customers; ❱ US Pharmaceuticals: markets and sells a range of endocrine, ophthalmic, dermatological and equine products into North America; and ❱ Research and Development: develops and licenses Dechra’s own branded veterinary product portfolio of novel and generic pharmaceuticals and specialist pet diets. The Chairman’s Statement and the Directors’ Strategic Report and Operating Review can be found on pages 3 to 47 and includes: ❱ a description of the principal risks and uncertainties faced by the Group; ❱ an analysis of the development and performance of the Company’s business during the financial year; ❱ the position of the Company’s business at the end of the financial year; ❱ main trends and factors likely to affect the future development, performance and position of the Company’s business; and ❱ financial and non-financial key performance indicators used to measure the Group’s performance. Results and Dividends The results for the year and financial position at 30 June 2013 are shown in the Consolidated Income Statement on page 98 and Consolidated Statement of Financial Position on page 100. The Directors recommend the payment of a final dividend of 9.66 pence per share which, if approved by Shareholders, will be paid on 22 November 2013 to Shareholders registered at 8 November 2013. The shares will become ex-dividend on 6 November 2013. An interim dividend of 4.34 pence per share was paid on 9 April 2013, making a total dividend for the year of 14.00 pence (2012: 12.27 pence restated for the bonus element of the Rights Issue). The total dividend payment is £12,199,000 (2012: £10,125,000). Research and Development The Group has a structured development programme with the aim of identifying and bringing to market new pharmaceutical products. Investment in development is seen as key to strengthen further the Group’s competitive position. Further information in relation to product development can be found on pages 23 to 25. The expense on this activity for the year ended 30 June 2013 was £7,961,000 (2012: £5,735,000) and a further £1,584,000 (2012: £447,000) was capitalised as development costs. Payment to 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 2013, the Group had an average of 49 days (2012: 71 days) purchases outstanding in creditors (including assets held for sale). The Company has an average of nil days (2012: nil days) purchases outstanding in creditors. Acquisitions There have been no acquisitions during the year under review. Disposals The disposals of the Services Segment was completed on 16 August 2013. Refer to note 29 to the Accounts on page 145 for further details. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Governance91 Share Capital The issued share capital of the Company for the year is set out in note 23 to the Accounts on page 137. As at the end of the financial year, 87,157,444 fully paid ordinary shares were in issue which included 287,268 ordinary shares issued during the year in connection with the exercise of options under the Company’s share option schemes. The holders of shares are entitled to receive dividends when declared, to receive the Company’s Report and Accounts, to attend and speak at general meetings of the Company, to appoint proxies and to exercise voting rights. 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 transfer of shares. The Directors are not aware of any agreements which limit the transfer of shares or curtail voting rights attached to those shares. At the Annual General Meeting of the Company held on 19 October 2012, the Company was authorised to purchase up to 8,687,017 of its ordinary shares, representing 10% of the issued share capital of the Company as at 10 September 2012. No shares were purchased under this authority 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. Under the proposed authority shares purchased may be either cancelled or held in treasury. The Directors require authority from Shareholders to allot unissued share capital to the Company and to disapply Shareholders’ statutory pre-emption rights. Such authorities were granted at the 2012 Annual General Meeting and resolutions to renew these authorities will be proposed at the 2013 Annual General Meeting. Substantial Interests in Voting Rights In accordance with the requirements in the Listing Rules and the Disclosure Rules and Transparency Rules of the Financial Conduct Authority, the Company had been notified of the following interests exceeding the 3% notification threshold as at the end of the financial year and a date not more than one month before the date of the notice of the Annual General Meeting. Schroder Investment Management Fidelity Investments Legal & General Investment Management NBIM Invesco Perpetual Threadneedle Investments Aberdeen Asset Management BlackRock Rathbones 30 June 2013 20 August 2013 Aggregate voting rights 10,393,209 6,071,481 4,468,376 4,419,600 3,807,459 3,709,746 3,635,456 3,447,401 3,083,776 Aggregate voting rights 10,218,133 6,718,524 4,321,271 4,321,540 3,813,206 3,849,921 4,129,749 3,434,649 N/A Percentage 11.93 6.97 5.13 5.07 4.37 4.26 4.17 3.96 3.54 Percentage 11.72 7.71 4.96 4.96 4.38 4.42 4.74 3.94 Below 3% 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance92 Directors’ Report: Other Disclosures continued Change of Control/Significant Agreements As detailed in the Going Concern Statement on page 58 the Group has bank facilities with a syndicate of banks comprising Lloyds TSB Bank plc, Barclays Bank PLC, Svenska Handelsbanken AB (PUBL) and HSBC Bank Plc (the “Bank”). Under the terms of these facilities the Bank can give notice to the Company to repay all amounts outstanding under the facilities and cancel the commitments where there is a change of control of the Company. No other agreements that take effect, alter or terminate upon a change of control of the Company following a takeover bid are considered to be significant in terms of their potential impact on the business as a whole. The Company does not have agreements with any director or employee that provides compensation for loss of office or employment resulting from a takeover, other than the Company share schemes. Under such schemes outstanding options and awards normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions at that time. With the exception of Anne-Francoise Nesmes the Remuneration Committee has confirmed that it would exercise its own discretion to vest in full should a change of control of the Company occur before the LTIP awards vest. The Directors consider that there are no contracted or other arrangements, such as those with major suppliers, which are likely to influence, directly or indirectly, the performance of the business and its values. Furthermore, there are no contracts of significance subsisting during the financial year between any group undertaking and a controlling Shareholder or in which a Director is or was materially interested. Directors The constitution of the Board and its Committees, together with biographical notes on the Directors, is shown on pages 48 to 49. Details of Directors’ attendance at Board and Committee meetings and a statement on Board evaluation are set out in the Corporate Governance Report, Audit Committee Report and Remuneration Report on pages 50 to 60, 62 and 68. During the financial year under review the following Board changes occurred: ❱ Bryan Morton resigned from his position as Non-Executive Director; ❱ Julian Heslop and Ishbel Macpherson were appointed to the Board as Non-Executive Directors on 1 January and 1 February 2013 respectively; and ❱ Tony Griffin and Anne-Francoise Nesmes were appointed to the Board as Executive Directors on 1 November 2012 and 22 April 2013 respectively. As at May 2013 Neil Warner has served 10 years as a Non-Executive Director and has expressed an intention to retire from the Board at the forthcoming Annual General Meeting. Under the Company’s Articles of Association Julian Heslop, Ishbel Macpherson, Tony Griffin and Anne-Francoise Nesmes will offer themselves for election as Directors at the forthcoming Annual General Meeting. Under the provisions of the UK Corporate Governance Code, all the remaining Directors will retire at the forthcoming Annual General Meeting and offer themselves for re-election. The interests of the Directors in the share capital of the Company are shown in the Remuneration Report on pages 67 to 83. 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. 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 provision 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. 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Governance93 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 2006. The Directors also benefited from qualifying third party indemnity provision in place during the financial year and at the date of this report. A copy of the indemnity provision will be available for inspection at the 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 94. Charitable Contributions Charitable donations made during the year in support of charitable causes in the local communities in which the Group operates and those of interest to its employees amounted to £7,250 (2012: £17,796). Further details of donations made by the Group are given on page 84. Political Donations and Expenditure No political donations were made during the year ended 30 June 2013. The Group has a policy of not making any donations to political organisations or independent election candidates or incurring political expenditure anywhere in the world as defined in the Political Parties, Elections and Referendums Act 2000. Events After the Reporting Period On 10 July 2013 the Company entered into a conditional agreement for the sale of its Services Segment, namely, NVS, Dechra Laboratory Services and Dechra Specialist Laboratories to Patterson Companies, Inc for a total effective consideration of £87.5 million. The sale completed on 16 August 2013. Auditor In light of organisational changes within KPMG, the Directors have agreed that KPMG Audit Plc, a wholly owned subsidiary of KPMG LLP, step down as Auditor of the Company at the Annual General Meeting and that a resolution to appoint KPMG LLP as Auditor and to authorise the Directors to determine their remuneration will be proposed at the forthcoming Annual General Meeting. Audit Information Each of the Directors who held office at the date of the approval of the Directors’ Report confirms that, so far as he or she is aware, there is no relevant audit information of which the Auditor is unaware, and each Director has taken all steps that he or she ought to have undertaken as a Director to make himself or herself aware of any relevant audit information and to establish that the Auditor is aware of that information. Annual General Meeting The 2013 Annual General Meeting of the Company will be held at 4.00 pm on 17 October 2013 at its offices at 24 Cheshire Avenue, Cheshire Business Park, Lostock Gralam, Northwich CW9 7UA. The notice of meeting, which includes special business to be transacted at the Annual General Meeting, is included within the Circular accompanying this Annual Report, together with an explanation of the resolutions to be considered at the meeting. By order of the Board Zoe Goulding Company Secretary 3 September 2013 22581-04 22/08/2013 Proof 3www.dechra.comStock code: DPH®Our FinancialsShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Governance94 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 applicable law and have elected to prepare the Parent Company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period. 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 adequate accounting records that are sufficient to show and explain the Parent Company’s transactions and 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 2006. 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 complies 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. Directors’ Responsibility Statement Required under the Disclosure and Transparency Rules We confirm to the best of our knowledge: 1) The financial statements, prepared in accordance with the applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and 2) The management report, which comprises the Directors’ Report and the Directors’ Strategic Report and Operating Review, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. Approved by the Board and signed on its behalf by: Ian Page Chief Executive Officer 3 September 2013 Anne-Francoise Nesmes Chief Financial Officer 3 September 2013 22581-04 22/08/2013 Proof 3Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our GovernanceFinancials Contents Independent Auditor’s Report Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Shareholders’ Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. Accounting Policies Operating Segments Finance Income Finance Expense Non-underlying Items Profit Before Taxation Employees Income Tax Expense Dividends Earnings per Share Intangible Assets Property, Plant and Equipment Impairment Reviews Deferred Taxes Inventories Trade and Other Receivables Cash and Cash Equivalents Trade and Other Payables Current Tax Liabilities Borrowings Employee Benefit Obligations Financial Instruments and Related Disclosures Share Capital Share-based Payments Analysis of Net Borrowings Operating Leases Foreign Exchange Rates Acquisitions Discontinued Operations Related Party Transactions Off Balance Sheet Arrangements Events after the Reporting Period 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 95 147 148 149 149 151 151 152 152 152 153 153 154 154 154 155 156 Company Balance Sheet Reconciliation of Movements in Shareholders’ Funds Notes to the Company Financial Statements Principal Accounting Policies (i) of the Company Directors and Employees Fixed Asset Investments Intangible Assets Tangible Assets Debtors Creditors Borrowings Deferred Tax Called up Share Capital Reserves Subsidiary Undertakings (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) Financial History 96 98 99 100 101 102 103 103 112 114 115 115 116 116 118 119 119 120 122 123 124 125 125 125 125 125 126 127 130 137 138 143 143 143 144 145 146 146 146 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials96 Independent Auditor’s Report to the Members of Dechra Pharmaceuticals PLC We have audited the financial statements of Dechra Pharmaceuticals PLC for the year ended 30 June 2013 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated and Parent Company Statement of Financial Position, the Consolidated Statement of Cash Flows, the Consolidated Statement of Changes in Shareholders’ Equity, the Parent Company Reconciliation of Movements in Shareholders’ Funds and the related notes. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU. The financial reporting framework that has been applied in the preparation of the Parent Company financial statements is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice). This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. 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 Auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 94, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the Audit of the Financial Statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. Opinion on Financial Statements In our opinion: ❱ ❱ ❱ ❱ the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 30 June 2013 and of the Group’s profit for the year then ended; the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; the Parent Company financial statements have been properly prepared in accordance with UK Generally Accepted Accounting Practice; the financial statements have been prepared in accordance with the requirements of the Companies Act 2006; and, as regards the Group financial statements, Article 4 of the IAS Regulation. Opinion on Other Matters Prescribed by the Companies Act 2006 In our opinion: ❱ ❱ the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials97 Matters on Which We Are Required to Report by Exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: ❱ adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or ❱ the Parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or ❱ certain disclosures of Directors’ remuneration specified by law are not made; or ❱ we have not received all the information and explanations we require for our audit. Under the Listing Rules we are required to review: ❱ ❱ the Directors’ statement, set out on page 58, in relation to going concern; the part of the Corporate Governance Statement on pages 50 to 60 relating to the Company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review; and ❱ certain elements of the report to Shareholders by the Board on Directors’ remuneration. Graham Neale (Senior Statutory Auditor) for and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants One Snowhill Snow Hill Queensway Birmingham B4 6GH 3 September 2013 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials98 Consolidated Income Statement For the year ended 30 June 2013 2013 Non- underlying items* (notes 4 & 5) £’000 — — — Note 2 Underlying £’000 189,176 (88,470) 100,706 Total £’000 189,176 (88,470) 100,706 Underlying £’000 124,330 (53,220) 71,110 2012 (Restated)‡ Non- underlying items* (notes 4 & 5) £’000 — — — Total £’000 124,330 (53,220) 71,110 (53,637) (20,772) (74,409) (39,830) (15,273) (55,103) (7,961) 39,108 196 (5,757) 33,547 (8,083) — (20,772) — (297) (21,069) 6,455 (7,961) 18,336 196 (6,054) 12,478 (1,628) (5,735) 25,545 80 (3,805) 21,820 (5,791) — (15,273) — (435) (15,708) 3,584 (5,735) 10,272 80 (4,240) 6,112 (2,207) 2 3 4 6 8 25,464 (14,614) 10,850 16,029 (12,124) 3,905 29 8,449 (1,386) 7,063 8,273 (429) 7,844 33,913 (16,000) 17,913 24,302 (12,553) 11,749 10 10 9 20.59p 12.47p 8.12p 20.45p 12.39p 8.06p 14.00p 15.65p† 5.20p 10.45p 15.60p† 5.18p 10.42p 12.27p† Revenue Cost of sales Gross profit Selling, general and administrative expenses Research and development expenses Operating profit Finance income Finance expense Profit before taxation — continuing operations Income tax expense Profit for the year — continuing operations Profit for the year — discontinued operations Profit for the year attributable to owners of the parent Earnings per share Basic — continuing operations — discontinued operations Diluted — continuing operations — discontinued operations Dividend per share (interim paid and final proposed for the year) * Non-underlying items comprise amortisation of acquired intangibles, acquisition expenses, rationalisation costs, loss on extinguishment of debt, the unwinding of discounts on deferred and contingent consideration, and expenses related to the disposal of discontinued operations. † Restated to reflect the impact of the bonus element of the Rights Issue. ‡ Restated for discontinued operations. 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our FinancialsConsolidated Statement of Comprehensive Income For the year ended 30 June 2013 Profit for the year Other comprehensive income: Items that will not be reclassified subsequently to profit or loss: Actuarial loss on defined benefit pension scheme Items that may be reclassified subsequently to profit or loss: Effective portion of changes in fair value of cash flow hedges Cash flow hedges recycled to income statement Foreign currency translation differences for foreign operations Income tax relating to components of other comprehensive income Total comprehensive income for the period attributable to owners of the parent 99 2013 £’000 17,913 2012 £’000 11,749 (772) (772) — — (185) 557 12,789 (86) 13,075 30,216 (419) 429 (8,434) (2) (8,426) 3,323 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials100 Consolidated Statement of Financial Position At 30 June 2013 ASSETS Non-current assets Intangible assets Property, plant and equipment Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Assets of disposal group held for sale Total current assets Total assets LIABILITIES Current liabilities Borrowings Trade and other payables Deferred and contingent consideration Current tax liabilities Liabilities of disposal group held for sale Total current liabilities Non-current liabilities Borrowings Deferred and contingent consideration Employee benefit obligations 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 2013 £’000 2012 £’000 11 12 15 16 17 29 20 18 28 19 29 20 28 21 14 23 219,596 16,074 235,670 29,199 27,682 32,791 89,784 179,456 415,126 (9,750) (28,483) (957) (10,368) (53,961) (103,519) (103,840) (4,971) (996) (27,184) (136,991) (240,510) 174,616 872 123,485 — 9,106 1,770 39,383 174,616 225,872 16,720 242,592 57,281 72,113 32,435 — 161,829 404,421 (5,106) (79,863) (10,337) (8,155) — (103,461) (114,046) (3,526) (363) (29,343) (147,278) (250,739) 153,682 869 122,642 (286) (3,683) 1,770 32,370 153,682 The financial statements were approved by the Board of Directors on 3 September 2013 and are signed on its behalf by: Ian Page Chief Executive Officer 3 September 2013 Anne-Francoise Nesmes Chief Financial Officer 3 September 2013 Company number: 3369634 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our FinancialsConsolidated Statement of Changes in Shareholders’ Equity For the year ended 30 June 2013 101 Year ended 30 June 2012 At 1 July 2011 Profit for the period Effective portion of changes in fair value of cash flow hedges, net of tax Foreign currency translation differences for foreign operations Cash flow hedges recycled to income statement, net of tax Total comprehensive income Transactions with owners Dividends paid Share-based payments Shares issued Total contributions by and distributions to owners At 30 June 2012 Year ended 30 June 2012 At 1 July 2012 Profit for the period Effective portion of changes in fair value of cash flow hedges, net of tax Foreign currency translation differences for foreign operations Actuarial loss on defined benefit pension scheme Cash flow hedges recycled to income statement, net of tax Total comprehensive income Transactions with owners Dividends paid Share-based payments Shares issued Total contributions by and distributions to owners At 30 June 2013 Attributable to owners of the parent Issued share capital £’000 664 — — — — — — — 205 205 Share premium account £’000 63,559 — Hedging reserve £’000 (294) — Foreign currency translation reserve £’000 4,751 — — — — — — — 59,083 59,083 (335) — — (8,434) 343 8 — (8,434) — — — — — — — — Merger reserve £’000 1,770 — Retained earnings £’000 27,883 11,749 Total £’000 98,333 11,749 — — — — — — — — — (335) — (8,434) — 11,749 343 3,323 (8,325) 1,063 — (7,262) (8,325) 1,063 59,288 52,026 869 122,642 (286) (3,683) 1,770 32,370 153,682 (3,683) — 1,770 — 32,370 17,913 153,682 17,913 869 — 122,642 — — — — — — — — — — — (286) — (140) — — — 12,789 — 426 286 — 12,789 — — — — — — (140) — (772) 12,789 (772) — 17,141 426 30,216 — — 3 3 872 — — 843 843 123,485 — — — — — — — — — 9,106 — — — — 1,770 (11,170) 1,042 — (10,128) 39,383 (11,170) 1,042 846 (9,282) 174,616 Hedging Reserve The hedging reserve represents the cumulative fair value gains or losses on derivative financial instruments for which cash flow hedge accounting has been applied. Foreign Currency Translation Reserve The foreign currency translation reserve contains exchange differences on the translation of subsidiaries with a functional currency other than Sterling and exchange gains or losses on the translation of liabilities that hedge the Company’s net investment in foreign subsidiaries. Merger Reserve The merger reserve represents the excess of fair value over nominal value of shares issued in consideration for the acquisition of subsidiaries where statutory merger relief has been applied in the financial statements of the Parent Company. 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials102 Consolidated Statement of Cash Flows For the year ended 30 June 2013 Cash flows from operating activities Profit for the period Adjustments for: Depreciation Amortisation and impairment Loss on disposal of intangible assets Loss/(profit) on sale of property, plant and equipment Expenses related to disposal of discontinued operations, net of tax Finance income Finance expense Equity settled share-based payment expense Income tax expense Operating cash flow before changes in working capital Decrease/(increase) in inventories Increase in trade and other receivables Increase/(decrease) in trade and other payables Cash generated from operating activities before interest and taxation Interest paid Income taxes paid Net cash inflow 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 outflow 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 Resetting of foreign currency borrowings Dividends paid Net cash (outflow)/inflow from financing activities Net (decrease)/increase 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 Reconciliation of net cash flow to movement in net borrowings Net (decrease)/increase in cash and cash equivalents Repayment of borrowings New borrowings Expenses of raising new borrowings New finance leases Exchange differences on cash and cash equivalents Retranslation of foreign borrowings Other non-cash changes Movement in net borrowings in the period Net borrowings at start of period Net borrowings at end of period 22581.04 10 September 2013 1:31 PM Proof 3 Note 2013 £’000 2012 £’000 17,913 11,749 12 11 6 6 29 3 4 24 8 28 12 11 11 23 23 9 17 17 25 25 2,795 19,876 — 462 1,357 (196) 6,054 821 4,167 53,249 1,299 (9,456) 4,302 49,394 (4,788) (7,741) 36,865 11 74 (10,333) (3,665) (1,584) (3,871) (19,368) 846 — — — (5,653) (2,289) (11,170) (18,266) (769) 32,435 1,125 32,791 (769) 5,653 — — (190) 1,125 687 (588) 5,918 (86,717) (80,799) 1,584 12,762 47 (45) — (219) 4,289 1,001 5,071 36,239 (4,846) (1,827) (438) 29,128 (2,645) (7,241) 19,242 50 219 (112,221) (1,645) (447) (6,300) (120,344) 60,575 (1,287) 120,000 (2,600) (64,328) (327) (8,325) 103,708 2,606 30,496 (667) 32,435 2,606 64,328 (120,000) 2,600 (1,010) (667) (429) (54) (52,626) (34,091) (86,717) Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our FinancialsNotes to the Consolidated Financial Statements 103 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 2013 comprise the Company and its subsidiaries. (a) Statement of Compliance These 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 147 to 155. (b) Basis of Preparation The Group’s business activities together with the factors likely to affect its future development, performance and position are set out in the Strategic Report and Operating Review on pages 3 to 47. The Directors have a reasonable expectation that the Company and Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis of accounting in preparing the annual financial statements. Refer to the Corporate Governance Report on page 58 for details. The consolidated financial statements are presented in Sterling, rounded to the nearest thousand. They are prepared on a going concern basis and under the historical cost convention, except where International Financial Reporting Standards require an alternative treatment. The principal variations relate to derivative financial instruments, cash settled share-based transactions and contingent consideration that are stated at fair value. The preparation for consolidated financial statements in conformity with IFRSs requires the use of accounting estimates and for management to exercise its judgement in the process of applying the Group’s accounting policies. These judgements and estimates are based on historical experience and management’s best knowledge of the amounts, events or actions under review and the actual results may ultimately differ from these estimates. Areas involving a high degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are, where necessary, disclosed separately. Discontinued Operations A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification of a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative income statement is presented as if the operation had discontinued from the start of the comparative period. The disposal of the Services Division, as described in note 29, gives rise to a discontinued operation and restatement of comparatives. Critical Judgements in applying the Group’s Accounting Policies and Key Sources of Estimation Uncertainty In the process of applying the Group’s accounting policies, the Directors have made the following judgements and estimates that have the most significant effect on the amounts recognised in the financial statements. The key sources of estimation uncertainty which may cause a material adjustment to the carrying amount of assets and liabilities are also 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. Valuation of Intangible Assets Product rights and customer relationships that are acquired by the Group as part of a business combination are stated at fair value at the date of acquisition less accumulated amortisation and impairment losses. Fair value at the date of acquisition reflects management’s judgement of the fair value of the individual intangible asset calculated by reference to the net present value of future benefits accruing to the Group from the utilisation of the asset, discounted at an appropriate discount rate. 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials 104 Notes to the Consolidated Financial Statements continued 1. Accounting Policies continued 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 22, credit risk is not highly concentrated for continuing operations. Capitalisation of Development Costs The Group applies judgement when assessing the probability that regulatory approval will be achieved for development projects and that those projects are commercially viable. This enables management to ascertain whether the criteria for the capitalisation of development costs have been met. Adoption of New and Revised Standards The following standards and interpretations are applicable to the Group and have been adopted in the current period as they are mandatory for the year ended 30 June 2013 but either have no material impact on the result or net assets of the Group or are not applicable. ❱ Amendments to IAS 1 ‘Presentation of Items of Other Comprehensive Income’ — amends how components of other income are presented. The amendments require the grouping of other comprehensive income into items that might be reclassified to the income statement in subsequent periods and items that will not be reclassified to the income statement in subsequent periods. ❱ Amendment to IAS 12 ‘Income Taxes — Deferred Tax: Recovery of Underlying Assets’ — introduces a presumption for deferred tax purposes that recovery of the carrying amount of an investment property will normally be through sale. In addition to the above, amendments to a number of standards under the annual improvements project to IFRS, which are mandatory for the year ended 30 June 2013, have been adopted in the year. The adoption of these standards and amendments has not had a material impact on the Group’s financial statements. New Standards and Interpretations not yet Adopted The following standards and interpretations have been published, endorsed by the EU, and are available for early adoption, but have not yet been applied by the Group in these financial statements. ❱ ❱ ❱ ❱ ❱ IFRS 10 ‘Consolidated Financial Statements’ — effective for annual periods beginning on or after 1 January 2014. IFRS 11 ‘Joint Arrangements’ — effective for annual periods beginning on or after 1 January 2014. IFRS 12 ‘Disclosure of Interests in Other Entities’ — effective for annual periods beginning on or after 1 January 2014. IFRS 13 ‘Fair Value Measurements’ — effective for annual periods beginning on or after 1 January 2013. IAS 27 (Revised) ‘Separate Financial Statements’ — effective for annual periods beginning on or after 1 January 2014. ❱ Amendment to IAS 19 ‘Employee Benefits’ — effective for annual periods beginning on or after 1 January 2013. The Group does not anticipate that the adoption of the above amendments will have a material effect on its financial statements on initial adoption. 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials105 1. Accounting Policies continued (c) Basis of Consolidation Subsidiary Undertakings Subsidiary undertakings are fully consolidated from the date on which control is transferred to the Group. They cease to be consolidated from the date that the Group no longer has control. All subsidiary undertakings have been consolidated. Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated on consolidation. The financial statements of all subsidiary undertakings are prepared to the same reporting date as the Company. During the 2012/2013 financial year the reporting dates of the previously acquired Eurovet companies have been brought in line with the Company. (d) Foreign Currency Translation (i) Functional and Presentational Currency The consolidated financial statements are presented in Sterling, which is the Group’s presentational currency and are rounded to the nearest thousand, except where it is deemed relevant to disclose the amounts to the nearest pound. 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) 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, with the exception of differences on transactions that are subject to effective cash flow hedges, which are recognised in other comprehensive income. (iii) Foreign Operations The assets and liabilities of foreign operations are translated to Sterling at the closing rate at the reporting date. The income and expenses are translated to Sterling at the average rate for the period being reported. Foreign currency differences are recognised in other comprehensive income in the foreign currency translation reserve, a separate component of equity. 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 previously recognised in other comprehensive income are recognised in the income statement in the same period in which the gain or loss on disposal is recognised. (e) Accounting for Financial Assets, Derivative Financial Instruments and Hedging Activities The Group classifies its financial assets into the following categories: held for trading financial assets and loans and receivables. 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. 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. The Group assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials 106 Notes to the Consolidated Financial Statements continued 1. Accounting Policies continued 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. Held for trading financial assets are recognised and subsequently carried at fair value. 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. Cash Flow Hedges Changes in the fair value of derivative financial instruments designated as cash flow hedges are recognised in other comprehensive income to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised immediately in the income statement. 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 other comprehensive income remains there until the forecast transaction occurs. When the hedged item is a non-financial asset, the amount recognised in other comprehensive income is transferred to the carrying amount of the asset when it is recognised. In other cases, the amount recognised in other comprehensive income is transferred to the income statement in the same period that the hedged item affects profit or loss. Trade Receivables Trade receivables are recognised and carried at original invoice amount less provision for impairment. A provision for impairment of trade 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 provision is recognised in the income statement in operating expenses. Trade and Other Payables Trade and other payables are initially recognised at fair value and subsequently at amortised cost. Borrowings and Borrowing Costs 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. Borrowing costs directly attributable to the acquisition, construction, or production of qualifying assets, which are assets that take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. All other borrowing costs are recognised in the income statement in the period in which they are incurred. 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials 107 1. Accounting Policies continued (f) Property, Plant and Equipment Owned Assets Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses (see accounting policy (j)). 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. Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful life 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. (g) Intangible Assets 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 separable 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. For acquisitions prior to 1 July 2009, costs directly attributable to business combinations formed part of the consideration payable when calculating goodwill. Adjustments to contingent consideration, and therefore the consideration payable and goodwill, are made at each reporting date until the consideration is fully determined. Acquisitions after this date fall under the provisions of ‘Revised IFRS 3 Business Combinations (2009)’. For these acquisitions, transaction costs, other than share and debt issue costs, are expensed as incurred and subsequent adjustments to the fair value of consideration payable are recognised in the income statement. Contingent consideration is measured at fair value based on an estimate of the expected future payments. 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. 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials 108 Notes to the Consolidated Financial Statements continued 1. Accounting Policies continued 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 consolidated statement of financial position 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. 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. 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. 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. 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 consolidated statement of financial position 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 ❱ patent rights ❱ marketing authorisations ❱ product rights ❱ customer relationships 5 years 5–10 years or period of patent Period of patent Indefinite life 10–15 years 10 years (h) 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. 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. 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials 109 1. Accounting Policies continued (i) (j) 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 are reviewed at each consolidated statement of financial position 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 consolidated statement of financial position 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. (k) 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. (l) Employee Benefits Pensions The Group operates a stakeholder personal pension scheme for certain employees. Obligations for contributions are recognised as an expense in the income statement as incurred. Dechra Veterinary Products SAS and Dechra Veterinary Products BV participate in state-run pension arrangements. These are not considered to be material to the Group financial statements and are accounted for as defined contribution schemes, with contributions being recognised as an expense in the income statement as incurred. The Group sponsors defined benefit arrangements in certain countries, the most material being a defined benefit pension plan in the Netherlands. This is a funded career average pay arrangement, where pensionable salary is subject to a cap. The arrangement is financed through an insurance contract. 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials 110 Notes to the Consolidated Financial Statements continued 1. Accounting Policies continued The Group’s net obligation in respect of defined benefit pension plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value, and the fair value of any plan assets is deducted. The liability discount rate is the yield at the Statement of Financial Position date using AA rated corporate bonds that have maturity dates approximating to the terms of the group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. All actuarial gains and losses that arise in calculating the Group’s obligation in respect of a scheme are recognised immediately in reserves and reported in the consolidated Statement of Comprehensive Income. Where the calculation results in a benefit to the Group, the asset recognised is limited to the present value of any future refunds from the plan or reductions in future contributions to the plan. Share-based Payment Transactions The Group operates a number of equity settled share-based payment programmes that allow employees to acquire shares in 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 over the vesting period on a straight-line basis in the income statement with a corresponding movement to equity reserves. Fair values are determined by use of an appropriate pricing model and are determined by reference to the fair value of the options granted. The amount to be expensed over the vesting period is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. At each consolidated statement of financial position date, the Group revises its estimates of the number of share incentives that are expected to vest. The impact of the revisions of original estimates, if any, is recognised in the income statement, with a corresponding adjustment to equity reserves, over the remaining vesting period. 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 consolidated statement of financial position date. (m) Revenue Recognition Revenue comprises the fair value of goods sold and services provided to external customers, net of value added tax, rebates, promotions and returns. 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. For services provided, revenue is recognised when the contractual service has been provided to the customer. No revenue is recognised where the recovery of the consideration is not probable or where there are significant uncertainties regarding associated costs or the possible return of goods. 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials 111 1. Accounting Policies continued (n) Leases Operating Leases 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. Finance Leases Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability using the effective interest method. (o) Net Financing Costs Net financing costs comprise interest payable on borrowings, unwinding of discount on provisions, interest receivable on funds invested, gains and losses on hedging instruments that are recognised in the income statement (see accounting policy (e)) and gains or losses on the retranslation of financial assets and liabilities denominated in foreign currencies. Interest income is recognised in the income statement as it accrues. The Group capitalises borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The interest expense component of finance lease payments is recognised in the income statement using the effective interest rate method. (p) Basis of Charge for Taxation Income tax expense comprises current and deferred tax. Current and deferred taxes are recognised in the income statement except to the extent that it relates to a business combination or items recognised directly in equity or in other comprehensive income. Current tax is the expected tax payable on the taxable income for the year using tax rates enacted or substantively enacted at the consolidated statement of financial position date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the consolidated statement of financial position 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, and is based upon tax rates enacted or substantively enacted at the consolidated statement of financial position 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 consolidated statement of financial position 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. 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials 112 Notes to the Consolidated Financial Statements continued 1. Accounting Policies continued (q) Earnings per Share The Group presents basic and diluted earnings per share (“EPS”) data for its ordinary shares. Basic EPS is calculated by dividing the profit attributable to ordinary Shareholders of the Company by the weighted average number of ordinary shares in issue during the period. Diluted EPS is determined by adjusting the profit attributable to ordinary Shareholders and the weighted average number of ordinary shares in issue, for the effects of all potential dilutive ordinary shares, which comprise share options granted to employees. There was a Rights Issue during the year ended 30 June 2012 and EPS figures have been restated to reflect the bonus element of this issue. The Group has also chosen to present an alternative EPS measure, with profit adjusted for non-underlying items. A reconciliation of this alternative measure to the statutory measure required by IFRS is given in notes 4 and 5. 2. Operating Segments The Group has four reportable segments, as discussed below, which are based on information provided to the Board of Directors, which is deemed to be the Group’s chief operating decision maker. Several operating segments which have similar economic characteristics have been aggregated into the reporting segments. The Services Segment comprises National Veterinary Services, Dechra Laboratory Services and Dechra Specialist Laboratories. This Segment services UK veterinary practices in both the companion animal and livestock sectors. On 10 July 2013, the Group announced its intention to dispose of the Services businesses. The disposal is consistent with the Group’s long term policy to focus its activities on the manufacture and marketing of pharmaceutical products. The Segment was not a discontinued operation or classified as held for sale at 30 June 2012 and the comparative consolidated income statement has been represented to show the discontinued operation separately from continuing operations. Refer to note 29 for further details, and segmental analysis in relation to the Services Division. The European Pharmaceuticals Segment comprises Dechra Veterinary Products EU, Eurovet and Dechra Pharmaceuticals Manufacturing. Dechra Pharmaceuticals Manufacturing manufactures the vast majority of our own branded licensed pharmaceutical products, which are marketed through DVP EU and Eurovet. This Segment operates internationally and specialises in companion animal products and has expanded into the food producing animal market following the acquisition of Eurovet. The US Pharmaceuticals Segment consists of Dechra Veterinary Products US which sells companion animal pharmaceuticals into that territory. The Pharmaceuticals Research and Development Segment includes all of the Group’s pharmaceutical research and development activities. There are varying levels of intersegment trading. Intersegment pricing is determined on an arm’s length basis. 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials 2. Operating Segments continued Reconciliations of reportable segment revenues, profit or loss and liabilities and other material items: Revenue by segment European Pharmaceuticals — total — total US Pharmaceuticals — intersegment Operating profit/(loss) by segment European Pharmaceuticals US Pharmaceuticals Pharmaceuticals Research and Development Segment operating profit Corporate and other unallocated costs Underlying operating profit Amortisation of acquired intangibles Rationalisation costs Acquisition costs Total operating profit Finance income Finance expense Profit before taxation — continuing operations Total liabilities by segment Services (classified as held for sale in 2013) European Pharmaceuticals US Pharmaceuticals Pharmaceuticals Research and Development Segment liabilities Corporate loans and revolving credit facility Corporate accruals and other payables Current and deferred tax liabilities Additions to intangible non-current assets by segment Services (classified as held for sale in 2013) European Pharmaceuticals US Pharmaceuticals Pharmaceuticals Research and Development 113 2013 £’000 2012 £’000 168,684 20,889 (397) 189,176 45,819 5,585 (7,961) 43,443 (4,335) 39,108 (18,195) (2,577) — 18,336 196 (6,054) 12,478 (53,961) (24,985) (6,602) (804) (86,352) (113,110) (3,496) (37,552) (240,510) 88 1,132 3,143 1,092 5,455 104,764 20,363 (797) 124,330 28,904 5,863 (5,735) 29,032 (3,487) 25,545 (10,833) (2,125) (2,315) 10,272 80 (4,240) 6,112 (55,244) (22,058) (14,221) (685) (92,208) (118,229) (2,804) (37,498) (250,739) 211 121,140 — 447 121,798 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials 114 Notes to the Consolidated Financial Statements continued 2. Operating Segments continued Additions to Property, Plant and Equipment by segment Services (classified as held for sale in 2013) European Pharmaceuticals US Pharmaceuticals Pharmaceuticals Research and Development Corporate and central costs Depreciation and amortisation by segment Services (included within discontinued operations) European Pharmaceuticals US Pharmaceuticals Pharmaceuticals Research and Development Corporate and central costs 2013 £’000 733 2,622 18 69 223 3,665 757 18,360 3,112 426 16 22,671 2012 £’000 484 10,469 10 136 — 11,099 700 10,524 2,800 322 — 14,346 Geographical Information The following table shows revenue based on the geographical location of customers and non-current assets based on the country of domicile of the entity holding the asset: UK Germany Rest of Europe USA Rest of World 3. Finance Income Finance income arising from: — Cash and cash equivalents — Loans and receivables — Return on employee benefit scheme assets 2013 Non- current assets £’000 17,651 2,399 176,674 38,946 — 235,670 2013 Revenue £’000 51,259 36,376 71,976 19,428 10,137 189,176 2012 Non- current assets £’000 24,164 2,304 178,350 37,774 — 242,592 2012 £’000 5 65 10 80 2012 Revenue £’000 20,352 7,572 64,786 25,857 5,763 124,330 2013 £’000 2 71 123 196 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials4. Finance Expense Underlying Finance expense arising from: — Financial liabilities at amortised cost — Interest cost in relation to employee benefit obligations — Foreign exchange losses Underlying finance expense Non-underlying Loss on extinguishment of debt Unwinding of discounts on deferred and contingent consideration Non-underlying finance expense Total finance expense 5. Non-underlying Items Non-underlying items comprise: Amortisation of intangible assets acquired as a result of acquisitions Rationalisation costs Expenses of the acquisition of Eurovet Animal Health B.V. 115 2012 £’000 2,873 12 920 3,805 2012 £’000 158 277 435 4,240 2013 £’000 5,150 124 483 5,757 2013 £’000 — 297 297 6,054 2013 £’000 18,195 2,577 — 20,772 2012 £’000 10,833 2,125 2,315 15,273 Rationalisation costs in 2012 and 2013 relate to the integration of Eurovet Animal Health B.V. This consists primarily of the costs incurred in relation to the rationalisation of the four duplicated sales offices and associated sales teams. 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials116 Notes to the Consolidated Financial Statements continued 6. Profit Before Taxation The following items have been included in arriving at profit before taxation of continuing operations: 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 on disposal of intangible assets Loss/(profit) on disposal of property, plant and equipment (Release of impairment)/impairment of receivables Operating lease rentals payable Research and development expenditure as incurred Auditor’s remuneration Analysis of total fees paid to the Auditor: Audit of these financial statements Audit of financial statements of subsidiaries pursuant to legislation Other services pursuant to legislation Other tax advisory services Other services relating to transactions Discontinued operations Audit of financial statements of subsidiaries pursuant to legislation Total fees paid to Auditor 7. Employees The average numbers of staff employed by the Group during the year, which includes Directors, were: Continuing operations Manufacturing Distribution Administration Discontinued operations Manufacturing Distribution Administration Total 2013 £’000 72,946 1,191 2,265 110 19,539 — 472 (7) 2,341 7,961 676 50 217 30 89 290 676 36 712 2012 £’000 38,493 190 1,108 88 12,450 47 (47) 86 1,983 5,735 1,038 50 190 29 103 666 1,038 35 1,073 2013 Number 2012 Number 289 72 406 767 60 336 124 520 1,287 184 56 285 525 53 338 126 517 1,042 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials7. Employees continued The costs incurred in respect of these employees were: Continuing operations Wages and salaries Social security costs Other pension costs Share-based payments charge (see note 24) Discontinued operations Wages and salaries Social security costs Other pension costs Total 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 Non-Executive Directors’ fees 117 2012 £’000 21,311 2,643 1,516 977 26,447 9,486 840 241 10,567 37,014 2012 £’000 2,766 354 208 757 204 4,289 2013 £’000 32,152 4,279 2,389 1,014 39,834 10,004 871 243 11,118 50,952 2013 £’000 3,284 391 278 598 211 4,762 Key management comprises the Board and the senior management team. Details of the remuneration, shareholdings, share options and pension contributions of the Executive Directors are included in the Directors’ Remuneration Report on pages 67 to 83. The Group operates a stakeholder personal pension scheme for certain employees and contributed between 4% and 14% of pensionable salaries. The Group also participates in state-run pension arrangements for certain employees in Dechra Veterinary Products SAS and Dechra Veterinary Products BV and operates defined benefit schemes in some countries. Total pension contributions amounted to £2,632,000 (2012: £1,757,000). 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials118 Notes to the Consolidated Financial Statements continued 8. Income Tax Expense Current tax — UK corporation tax — overseas tax at prevailing local rates — 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 - continuing operations Tax on discontinued operations Total income tax expense in the income statement 2013 £’000 675 5,871 (800) 5,746 (4,502) 384 (4,118) 1,628 2,539 4,167 2012 £’000 2,148 2,937 126 5,211 (3,590) 586 (3,004) 2,207 2,864 5,071 The tax on the Group’s profit before tax differs from the standard rate of UK corporation tax of 23.75% (2012: 25.5%). The differences are explained below: Profit before taxation Tax at 23.75% (2012: 25.5%) Effect of: — disallowable expenses — research and development tax credits — differences on overseas tax rates — adjustments in respect of prior years — non-taxable foreign exchange (gains)/losses — change in tax rates Total income tax expense — continuing operations Tax on discontinued operations Total income tax expense in the income statement Tax Recognised Directly in Equity Deferred tax on effective portion of changes in fair value of cash flow hedges Tax recognised in statement of comprehensive income Corporation tax on equity settled transactions Deferred tax on equity settled transactions Total tax recognised in equity 2013 £’000 12,478 2,964 286 (39) 553 (415) (137) (1,584) 1,628 2,539 4,167 2013 £’000 (86) (86) 152 70 136 2012 £’000 6,112 1,558 325 (181) (175) 712 304 (336) 2,207 2,864 5,071 2012 £’000 (2) (2) 143 (77) 64 The Budget on 20 March 2013 announced that the UK corporation tax rate will reduce to 20% by 2015. A reduction in the rate from 24% to 23% (effective from 1 April 2013) was substantively enacted on 3 July 2012, and further reductions to 21% (effective from 1 April 2014) and 20% (effective from 1 April 2015) were substantively enacted on 17 July 2013. This will reduce the Group’s future current tax charge accordingly and further reduce the deferred tax liability at 30 June 2013 (which has been calculated based on the rate of 23% substantively enacted at 30 June 2013) by £3.4 million. It has not yet been possible to quantify the full anticipated effect of the announced further rate reductions, although this will further reduce the Group’s future current tax charge and reduce the Group’s deferred tax liability accordingly. 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials 119 2013 £’000 7,390 3,780 11,170 8,419 2012 £’000 5,584 2,741 8,325 7,384 12,199 10,125 9. Dividends Final dividend paid in respect of prior year but not recognised as a liability in that year: 8.50p* per share (2012: 7.72p*) Interim dividend paid: 4.34p per share (2012: 3.77p*) Total dividend 12.84p per share (2012: 11.49p*) recognised as distributions to equity holders in the period Proposed final dividend for the year ended 30 June 2013: 9.66p per share (2012: 8.50p*) Total dividend paid and proposed for the year ended 30 June 2013: 14.00p per share (2012: 12.27p*) * Restated to reflect the impact of the bonus element of the Rights Issue. In accordance with IAS 10 ‘Events After the Balance Sheet Date’, the proposed final dividend for the year ended 30 June 2013 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 2014. The final dividend for the year ended 30 June 2012 is shown as a deduction from equity in the year ended 30 June 2013. 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 — Underlying* — continuing operations — discontinued operations — Basic — continuing operations — discontinued operations Diluted earnings per share — Underlying* — continuing operations — discontinued operations — Diluted — continuing operations — discontinued operations The calculations of basic and diluted earnings per share are based upon: Earnings for underlying basic and underlying diluted earnings per share — continuing operations — discontinued operations Earnings for basic and diluted earnings per share — continuing operations — discontinued operations 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 * Underlying measures exclude non-underlying items as defined on the consolidated income statement. † Restated to reflect the impact of the bonus element of the Rights Issue. 22581.04 10 September 2013 1:31 PM Proof 3 2013 Pence 38.98 29.27 9.71 20.59 12.47 8.12 38.71 29.07 9.64 20.45 12.39 8.06 £’000 33,913 25,464 8,449 17,913 10,850 7,063 2012 Pence 32.37† 21.35 11.02 15.65† 5.20 10.45 32.27† 21.28 10.99 15.60† 5.18 10.42 £’000 24,302 16,029 8,273 11,749 3,905 7,844 No. 87,011,352 587,258 87,598,610 No. 75,082,169 224,690 75,306,859 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials120 Notes to the Consolidated Financial Statements continued 11. Intangible Assets Cost At 1 July 2011 Additions Acquisitions through business combinations Disposals Foreign exchange adjustments At 30 June 2012 and 1 July 2012 Additions Disposals Transferred to held for sale Foreign exchange adjustments At 30 June 2013 Amortisation At 1 July 2011 Charge for the year Disposals At 30 June 2012 and 1 July 2012 Charge for the year Disposals Transferred to held for sale At 30 June 2013 Net book value At 30 June 2013 At 30 June 2012 and 1 July 2012 At 30 June 2011 Development costs £’000 Patent rights £’000 Marketing authorisations £’000 Acquired intangibles £’000 Total £’000 Goodwill £’000 24,249 — 36,348 — Software £’000 3,548 1,186 74 — (2,676) (152) 57,921 — — 4,656 728 (234) 7,102 447 3,680 — — (61) (48) 7,440 1,584 — — — — 3,680 — — (2,621) (1,836) — — 3,055 58,355 — — — — — — — — 98 3,412 1,070 551 — 1,621 451 (234) (891) 947 47 9,071 2,115 1,005 (14) 3,106 857 — — 3,963 — 3,680 798 335 — 1,133 335 — — 1,468 853 — — — — 853 — — — — 853 — — — — — — — — 115,002 5,114 154,434 6,747 78,629 — 115,051 (61) (5,339) (8,215) 193,406 3,143 — 267,956 5,455 (234) (377) (4,834) 8,658 204,830 11,858 280,201 25,353 10,871 — 36,224 18,233 — (230) 54,227 29,336 12,762 (14) 42,084 19,876 (234) (1,121) 60,605 58,355 2,465 5,108 2,212 853 150,603 219,596 57,921 24,249 3,035 2,478 4,334 4,987 2,547 2,882 853 853 157,182 89,649 225,872 125,098 Contracted capital commitments Software assets in the course of construction included above 2013 £’000 6 2,279 2012 £’000 616 638 Included in contracted capital commitments is £6,000 relating to assets held for sale. Goodwill is allocated across cash-generating units that are expected to benefit from that business combination. Key assumptions made in this respect are given in note 13. 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials121 11. Intangible Assets continued In accordance with the disclosure requirements of IAS 38 ‘Intangible Assets’ the components of acquired intangibles are summarised below: Cost At 1 July 2011 Additions Acquisitions through business combinations Foreign exchange adjustments At 30 June 2012 and 1 July 2012 Additions Transfer to assets held for sale Foreign exchange adjustments At 30 June 2013 Amortisation At 1 July 2011 Charge for the year At 30 June 2012 and 1 July 2012 Charge for the year Transfer to assets held for sale At 30 June 2013 Net book value At 30 June 2013 At 30 June 2012 and 1 July 2012 At 30 June 2011 Acquired development costs £’000 Product rights £’000 Customer relationships £’000 — — 24,080 (1,635) 22,445 — — 2,475 24,920 — — — 2,243 — 2,243 22,677 22,445 — 114,625 5,114 54,549 (3,704) 170,584 3,143 — 6,183 179,910 25,199 10,833 36,032 15,952 — 51,984 127,926 134,552 89,426 377 — — — 377 — (377) — — 154 38 192 38 (230) — — 185 223 Total £’000 115,002 5,114 78,629 (5,339) 193,406 3,143 (377) 8,658 204,830 25,353 10,871 36,224 18,233 (230) 54,227 150,603 157,182 89,649 The amortisation charge is recognised within administrative expenses in the income statement. The principal assets within acquired intangibles are the development costs and product rights recognised on the acquisitions of Dechra Veterinary Products Holding A/S, DermaPet Inc., Genitrix Limited and Eurovet Animal Health B.V. The carrying value of these assets at 30 June 2013 was £141.6 million with a remaining amortisation period of 4½ years, 12½ years, 7½ years and 9 years respectively. The other significant assets within acquired intangibles are the product rights recognised on the acquisition of Pharmaderm Animal Health and HY-50. The carrying value at 30 June 2013 was £1.5 million and £4.4 million with a remaining amortisation period of 10 years and 8½ years respectively. During the year the Company has completed a licensing, supply and distribution agreement for a branded veterinary generic pharmaceutical product from a US pharmaceutical development company. Under the terms of the agreement Dechra has paid US$1.5 million upon signing and will pay a further US$1.5 million on approval. There is a potential further contingent payment of US$2.0 million based on achieving US$20.0 million cumulative sales. The principal asset within patent rights comprises payments to acquire the right to develop and market Trilostane, the active ingredient of Vetoryl Capsules, for animal health applications in the USA and Canada. The carrying value at 30 June 2013 was £1.2 million with a remaining amortisation period of 5½ years. The rights to Equidone, which was launched in the US during 2011, has a carrying value of £0.9 million with an amortisation period of 8 years. £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. 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials122 Notes to the Consolidated Financial Statements continued 12. Property, Plant and Equipment Cost At 1 July 2011 Additions Acquisitions through business combinations Disposals Foreign exchange adjustments At 30 June 2012 and 1 July 2012 Additions Disposals Transfer to assets held for sale Foreign exchange adjustments At 30 June 2013 Depreciation At 1 July 2011 Charge for the year Disposals At 30 June 2012 and 1 July 2012 Charge for the year Disposals Transfer to assets held for sale At 30 June 2013 Net book value At 30 June 2013 At 30 June 2012 and 1 July 2012 At 30 June 2011 Net book value of assets held under finance leases At 30 June 2013 At 30 June 2012 and 1 July 2012 At 30 June 2011 Freehold land and buildings £’000 2,447 34 6,749 — (353) 8,877 1,442 (168) — 432 10,583 471 176 — 647 772 (78) — 1,341 9,242 8,230 1,976 — — — Short leasehold buildings £’000 Motor vehicles £’000 3,382 77 — — — 3,459 45 — (349) — 3,155 1,456 219 — 1,675 224 — (198) 1,701 1,454 1,784 1,926 — 32 40 205 — 14 (2) — 217 — (82) (135) — — 201 2 — 203 — (70) (133) — — 14 4 — — — Contracted capital commitments Assets in the course of construction included above Included in contracted capital commitments is £55,000 relating to assets held for sale. Plant and fixtures £’000 11,427 1,534 2,691 (218) (158) 15,276 2,178 (2,503) (4,706) 179 10,424 7,612 1,187 (215) 8,584 1,799 (2,134) (3,203) 5,046 5,378 6,692 3,815 163 371 568 2013 £’000 68 1,290 Total £’000 17,461 1,645 9,454 (220) (511) 27,829 3,665 (2,753) (5,190) 611 24,162 9,740 1,584 (215) 11,109 2,795 (2,282) (3,534) 8,088 16,074 16,720 7,721 163 403 608 2012 £’000 366 — 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials123 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 amount of the relevant asset or 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 are performed by forecasting the future cash flows attributable to the asset being tested (or the relevant cash generating unit in respect of goodwill). The forecast cash flows are discounted at an appropriate rate as described below. Projected future cash flows have been derived from the business plan and extrapolated by applying a growth rate of 3% (2012: 5%) per annum up to year five and thereafter a growth rate of 0% (2012: 0%) per annum into perpetuity which is considered to be conservative compared to the long term average growth rate for the industry. The business plan has been formulated based on various factors, including market growth forecasts, the experience of the impact of previous recessions and existing product growth. These factors reflect past experience of the Group and, where applicable, are consistent with external sources of information. The pre-tax discount rates have been estimated using the Group’s weighted average cost of capital, which is adjusted for consideration of market information, and risk adjusted dependent upon the specific circumstances of each asset or cash generating unit. Value in use calculations were performed at 30 June 2013 for the following assets: Cash generating unit Dechra Veterinary Products EU Dermapet Dales Dechra Veterinary Products EU Dermapet Laboratories Dales Goodwill carrying value £’000 55,794 330 2,231 Indefinite life assets carrying value £’000 822 — — 2013 2012 Goodwill carrying value £’000 52,749 320 2,621 2,231 Indefinite life assets carrying value £’000 822 — — — Total value £’000 56,616 330 2,231 Total value £’000 53,571 320 2,621 2,231 Pre-tax discount rate % 8.8 10.4 8.7 Pre-tax discount rate % 8.9 9.5 9.9 8.7 In all cases there was significant headroom between the carrying value and the value in use and no impairment provision is therefore required. An increase in the pre-tax discount rate of 1% and a reduction in the growth rate to nil would still not result in the requirement for an impairment provision. 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials124 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 Payables Share-based payments Employee benefit obligations Assets Liabilities Net 2013 £’000 — — 1,067 212 964 17 2,260 2012 £’000 — — 1,178 435 813 74 2,500 2013 £’000 (27,548) (1,896) — — — — (29,444) 2012 £’000 (29,984) (1,691) — (168) — — (31,843) 2013 £’000 (27,548) (1,896) 1,067 212 964 17 (27,184) 2012 £’000 (29,984) (1,691) 1,178 267 813 74 (29,343) 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 The aggregate amount of temporary differences associated with investments in subsidiaries for which deferred tax liabilities have not been recognised is £nil (2012: £nil). The estimated unprovided deferred tax liability in relation to these temporary differences is £nil (2012: £nil). Deferred tax assets in relation to losses amounting to £75,000 (2012: £368,000) have not been recognised due to uncertainty over their recoverability. (c) Movements During the Year Intangible assets Property, plant and equipment Inventories Receivables Payables Employee benefit obligations Share-based payments Intangible assets Property, plant and equipment Inventories Payables Employee benefit obligations Share-based payments Balance at 1 July 2011 £’000 (14,204) (550) 478 41 (69) — 861 (13,443) Balance at 1 July 2012 £’000 (29,984) (1,691) 1,178 267 74 813 (29,343) Recognised in income £’000 2,826 (389) 700 (41) (99) — 29 3,026 Recognised in income £’000 4,240 (117) (112) 19 (58) 81 4,053 Acquisitions £’000 (20,205) (835) — — 435 74 — (20,531) Acquisitions £’000 — — — — — — — Recognised in equity £’000 — — — — — — (77) (77) Recognised in equity £’000 — — — (86) — 70 (16) Foreign exchange adjustments £’000 1,599 83 — — — — — 1,682 Foreign exchange adjustments £’000 (1,804) (88) 1 12 1 — (1,878) Balance at 30 June 2012 £’000 (29,984) (1,691) 1,178 — 267 74 813 (29,343) Balance at 30 June 2013 £’000 (27,548) (1,896) 1,067 212 17 964 (27,184) Amounts recognised in income relating to continuing operations total £4,118,000 (2012: £3,004,000). 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials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 18. Trade and Other Payables Trade payables Other payables Derivative financial instruments Other taxation and social security Accruals and deferred income 19. Current Tax Liabilities Corporation tax payable 125 2012 £’000 7,732 1,661 47,888 57,281 2012 £’000 69,596 965 1,552 72,113 2013 £’000 6,698 2,224 20,277 29,199 2013 £’000 25,296 922 1,464 27,682 2013 £’000 32,791 2012 £’000 32,435 2013 £’000 11,859 6,973 15 2,729 6,907 28,483 2012 £’000 63,559 6,745 387 3,402 5,770 79,863 2013 £’000 10,368 2012 £’000 8,155 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials126 Notes to the Consolidated Financial Statements continued 20. Borrowings Current liabilities: Bank loans Finance lease obligations Arrangement fees netted off Non-current liabilities: Bank loans Finance lease obligations Arrangement fees netted off Total borrowings 2013 £’000 10,000 338 (588) 9,750 105,073 142 (1,375) 103,840 113,590 2012 £’000 5,000 695 (589) 5,106 115,757 246 (1,957) 114,046 119,152 On 4 April 2012, the Group refinanced its existing bank facility, which gave rise to a loss on extinguishment of debt of £158,000. The Group’s revised borrowing facilities comprise a term loan of £55 million payable over 4½ years, a £65 million revolving credit facility committed until 31 October 2016, an overdraft facility of £10 million renewable on 30 September 2013 and various finance lease obligations. At the year end, the Group had the following unutilised borrowing facilities: Bank overdraft facility 2013 £’000 10,000 2012 £’000 10,000 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 2.50% over LIBOR in respect of the term loan and revolving credit facility and 2.50% over base rate in respect of the overdraft facility. No covenants have been breached during the year ended 30 June 2013. 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 2013 £’000 2012 £’000 10,000 10,000 95,073 115,073 5,000 10,000 105,757 120,757 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials127 20. Borrowings continued 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 Present value of minimum lease payments 2013 £’000 361 137 8 506 (26) 480 2012 £’000 730 217 36 983 (42) 941 2013 £’000 338 134 8 480 — 480 2012 £’000 695 210 36 941 — 941 Further information on the interest profile of borrowings is shown in note 22. 21. Employee Benefit Obligations The Group sponsors defined benefit arrangements in certain countries, the most material being a defined benefit pension plan in the Netherlands. This is a funded career average pay arrangement, where pensionable salary is subject to a cap. The arrangement is financed through an insurance contract. The other defined benefit pension arrangements operated by the Company are unfunded: Jubilee awards of £98,000 (2012: £61,000) for employees in the Netherlands and Germany and early retirement plan provisions in Germany of £nil (2012: £2,000) are recognised within other payables in the statement of financial position as at 30 June 2013. The pension cost relating to the defined benefit pension arrangement in the Netherlands is assessed in accordance with the advice of an independent qualified actuary using the projected unit method. The major actuarial assumptions used by the actuary were: Discount rate Expected return on assets Inflation assumption Salary growth Rate of increase in accrued pensions of active members Rate of increase in pensions in payment Rate of increase in pensions in deferment 2013 3.90% 3.90% 1.90% 2.40% 1.30% 0.00% 0.00% 2012 4.60% 4.60% 1.90% 2.40% 1.90% 0.00% 0.00% 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials128 Notes to the Consolidated Financial Statements continued 21. Employee Benefit Obligations continued In valuing the liabilities of the pension scheme at 30 June 2013 and 30 June 2012, mortality assumptions have been made as indicated below. The mortality assumption follows the AG Prognosetafel 2012-2062 mortality tables with an experience adjustment in line with the ES-P2 tables as published by the Dutch Alliance of Insurers. The assumptions used by the Group are the best estimates chosen by the Directors from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily be borne out in practice. Present value of funded defined benefit obligations Fair value of scheme assets Net pension scheme deficit Movements in Present Value of Defined Benefit Obligations Defined benefit obligation at beginning of the period Defined benefit obligation at acquisition Service cost Interest cost Employee contributions Actuarial loss Foreign exchange difference on translation Defined benefit obligations at end of the period Movements in Fair Value of Scheme Assets Fair value of scheme assets at beginning of the period Fair value of scheme assets at acquisition Expected return on scheme assets Additional charges Employer contributions Employee contributions Actuarial gain Foreign exchange difference on translation Fair value of scheme assets at end of the period Analysis of the Amount Charged to the Income Statement Service cost Expected return on assets Interest on liabilities Additional charges Net pension expense 22581.04 10 September 2013 1:31 PM Proof 3 2013 £’000 (4,722) 3,726 (996) 2012 £’000 (2,801) 2,438 (363) 2013 £’000 2,801 — 446 124 107 1,076 168 4,722 2013 £’000 2,438 — 123 (289) 897 107 304 146 3,726 2013 £’000 446 (123) 124 289 736 2012 £’000 — 2,745 37 12 7 — — 2,801 2012 £’000 — 2,404 10 (23) 40 7 — — 2,438 2012 £’000 37 (10) 12 23 62 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials21. Employee Benefit Obligations continued Analysis of the Amount Charged to the Other Statement of Consolidated Income Amounts charged in previous periods Actuarial loss on defined benefit pension scheme Net pension expense 129 2013 £’000 — 772 772 2012 £’000 — — — Scheme Assets The Group’s defined benefit pension scheme in the Netherlands is financed through an insurance contract. Under this contract, a market price for the assets in respect of this insurance contract is not available. In accordance with IAS 19 for such insurance policies, an asset value has been calculated by discounting expected future cash flows. The discount rate used for this calculation reflects the risk associated with the scheme assets and the maturity or expected disposal date of those assets. The fair value of the scheme’s assets is as follows: Discount rate used to value assets Total fair value of assets Actual return on scheme assets 2013 £’000 3.90% 3,726 123 2012 £’000 4.60% 2,438 10 The long term rate of return on pension plan assets is determined by aggregating the expected return for each asset class over the strategic asset allocation as at the year end. This rate of return is then adjusted for any expected profit sharing based on market related returns on notional loans. The scheme’s assets do not include any of the Group’s own financial instruments or any property occupied by or other assets used by the Group. The employer has a contract with the insurance company Nationale-Nederlanden to cover the committed pension benefits. The employer contributions expected to be paid into the scheme for the next financial period amount to £571,000 (2012: £480,000). History of Amounts in the Current Period Present value of funded defined benefit obligations Fair value of scheme assets Deficit in the scheme 2013 £’000 (4,722) 3,726 (996) 2012 £’000 (2,801) 2,438 (363) 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials130 Notes to the Consolidated Financial Statements continued 22. 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 swaps, 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 policy specifically prohibits 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 2013, net borrowings were £80.8 million, whilst Shareholders’ equity was £174.6 million. The Group maintains a strong capital base so as to maintain investors’, creditors’ and market confidence and to sustain future development of the business. The Group monitors both the demographic spread of Shareholders, as well as the return on capital, which the Group defines as total Shareholder return. 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. There are financial covenants associated with the Group’s borrowings which are cash flow cover, interest cover, net debt to EBITDA and consolidated net worth. The Group comfortably complied with these covenants in 2013 and 2012. There were no changes in the Group’s approach to capital management during the year. 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. 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials131 22. Financial Instruments and Related Disclosures continued 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: ❱ £55 million term loan ❱ £65 million revolving credit facility ❱ £10 million working capital facility ❱ various finance leases The Group’s undrawn borrowing facilities at 30 June 2013 are detailed in note 20. 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 has hedged interest rate risk on a proportion of its term loan and revolving credit facility by means of an interest rate swap arrangement whereby the Group’s exposure to fluctuations in LIBOR is fixed at a rate of 0.83% on the term loan and 0.88% on the revolving credit facility. The amount of the term loan and revolving credit outstanding at 30 June 2013 was £115.1 million (2012: £120.8 million). The hedge is in place until 31 October 2016 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. Translational exposure in converting the income statements of foreign subsidiaries into the Group’s presentational currency of Sterling is not hedged. The Group hedges selectively expected currency cash flows outside normal trading activities, principally using foreign currency options. 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials132 Notes to the Consolidated Financial Statements continued 22. Financial Instruments and Related Disclosures continued 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 £59,009,000 (2012: £102,996,000) 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 Pharmaceuticals segments 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 (excluding assets relating to discontinued operations) accounted for approximately 2.0% of gross trade receivables at 30 June 2013 (2012: 1.5%). No customer accounted for more than 10% of total Group revenues. Receivables are written off against the impairment provision when management considers the debt to be no longer recoverable. 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 2013 and 30 June 2012. 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. ❱ Interest rate swaps — 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. ❱ Bank loans and overdrafts — based upon discounted cash flows using discount rates based upon facility rates renegotiated after the 30 June 2012 year end. ❱ Finance lease obligations — based upon discounted cash flows using discount rates based upon the Group’s cost of borrowing at the balance sheet date. 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials133 Carrying value £’000 32,791 32,791 25,296 922 26,218 59,009 2013 2012 Fair value £’000 32,791 32,791 25,296 922 26,218 59,009 Carrying value £’000 32,435 32,435 69,596 965 70,561 102,996 Fair value £’000 32,435 32,435 69,596 965 70,561 102,996 (115,073) (115,073) (120,757) (120,757) (15) (480) (11,859) (6,973) (5,928) (140,328) (81,319) (15) (480) (11,859) (6,973) (5,928) (140,328) (81,319) (387) (941) (63,559) (13,222) (13,863) (212,729) (109,733) (387) (938) (63,559) (13,222) (13,863) (212,726) (109,730) 22. Financial Instruments and Related Disclosures continued Analysis of Financial Instruments The financial instruments of the Group are analysed as follows: Financial assets Cash and cash equivalents Loans and receivables — trade receivables — other receivables Total financial assets Financial liabilities Bank loans and overdrafts Held for trading financial liabilities — derivatives designated as hedges Finance lease liabilities Trade payables Other payables Deferred and contingent consideration Total financial liabilities Net financial liabilities Fair Value Hierarchy The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows: ❱ Level 1 — quoted prices (unadjusted) in active market for identical assets or liabilities. ❱ Level 2 — inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). ❱ Level 3 — inputs for the asset or liability that are not based on observable market data (unobservable inputs). 30 June 2013 Derivative financial liabilities Deferred and contingent consideration Total 30 June 2012 Derivative financial liabilities Deferred and contingent consideration Total Level 1 £’000 — — — Level 1 £’000 — — — Level 2 £’000 (15) — (15) Level 2 £’000 (387) — (387) Level 3 £’000 — (5,928) (5,928) Level 3 £’000 — (13,863) (13,863) Total £’000 (15) (5,928) (5,943) Total £’000 (387) (13,863) (14,250) At 30 June 2013, the deferred consideration balance is made up of £3.8 million in relation to the Dermapet acquisition and £2.1 million for a US generic pharmaceutical product. Movements in deferred and contingent consideration consists of a £0.3 million payment made under the terms of the Genitrix acquisition, a £10.0 million payment offset by a £0.3 million unwinding of discount and £0.1 million decrease due to foreign exchange differences in relation to the DermaPet acquisition, and a £2.1 million addition for a US generic pharmaceutical. 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials134 Notes to the Consolidated Financial Statements continued 22. 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 start of period Impairment provision (released)/recognised Transferred to held for sale Impairment provision utilised At end of period 2013 £’000 4,052 415 11 — 4,478 2013 £’000 2,877 (7) (2,667) (55) 148 2012 £’000 5,810 983 644 2,649 10,086 2012 £’000 2,911 231 — (265) 2,877 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 2013 and 30 June 2012. Where interest is at floating rates, the future interest payments have been estimated using current interest rates: At 30 June 2013 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 Deferred and contingent consideration £’000 (5,928) — (318) (6,246) — (986) (3,945) (1,315) — — — (6,246) Bank loans and overdrafts £’000 (113,110) (1,963) (3,761) (118,834) (6,203) (5,639) (11,053) (13,233) (82,706) — — (118,834) Finance leases £’000 (480) — (26) (506) (354) (7) (137) (8) — — — (506) Trade and other payables £’000 (18,832) — — (18,832) (18,832) — — — — — — (18,832) Total £’000 (138,350) (1,963) (4,105) (144,418) (25,389) (6,632) (15,135) (14,556) (82,706) — — (144,418) 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials22. Financial Instruments and Related Disclosures continued At 30 June 2012 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 Deferred and contingent consideration £’000 (13,863) — (467) (14,330) — (10,336) — (3,994) — — — (14,330) Bank loans and overdrafts £’000 (118,211) (2,546) (6,056) (126,813) (756) (6,760) (11,666) (11,315) (15,921) (80,395) — (126,813) Finance leases £’000 (941) — (42) (983) (365) (365) (217) (36) — — — (983) The contractual undiscounted cash flows in respect of derivative financial instruments are as follows: Due: Within 6 months Between 6 months and 1 year Between 1 and 2 years Between 2 and 5 years 135 Total £’000 (209,796) (2,546) (6,565) (218,907) (77,902) (17,461) (11,883) (15,345) (15,921) (80,395) — (218,907) 2012 £’000 81 94 212 — 387 Trade and other payables £’000 (76,781) — — (76,781) (76,781) — — — — — — (76,781) 2013 £’000 83 (12) (25) (31) 15 The Group has a contractual obligation to pay £83,000 (2012: £81,000) under its interest rate swap arrangement covering the period from 30 June to 30 September 2013. With the exception of the above disclosed, there are no other assets that have been impaired during the year. 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials136 Notes to the Consolidated Financial Statements continued 22. Financial Instruments and Related Disclosures continued Foreign Currency Exposure The Sterling equivalents of financial assets and liabilities denominated in foreign currencies at 30 June 2013 and 30 June 2012 were: At 30 June 2013 Financial assets Trade receivables Other receivables Cash balances Financial liabilities Bank loans and overdrafts Trade payables Net balance sheet exposure At 30 June 2012 Financial assets Trade receivables Other receivables Cash balances Other financial assets Financial liabilities Bank loans and overdrafts Finance leases Trade payables Other financial liabilities Net balance sheet exposure Danish Krone £’000 52 3 2,903 2,958 — (34) (34) 2,924 Danish Krone £’000 6,666 147 2,766 242 9,821 — — (1,794) (3,921) (5,715) 4,106 Euro £’000 6,063 39 5,338 11,440 (11,990) (1,181) (13,171) (1,731) Euro £’000 9,902 284 4,900 49 15,135 (17,264) (248) (2,333) (1,902) (21,747) (6,612) US Dollar £’000 4,055 23 3,499 7,577 (29,567) (1,389) (30,956) (23,379) US Dollar £’000 4,019 20 7,372 — 11,411 (28,675) — (1,210) — (29,885) (18,474) Other £’000 5,844 211 2,081 8,136 — (124) (124) 8,012 Other £’000 2,222 73 3,042 171 5,508 — — (142) (1,669) (1,811) 3,697 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials137 22. Financial Instruments and Related Disclosures continued Sensitivity Analysis Interest Rate Risk A 2.0% increase in interest rates compared to those ruling at 30 June 2013 would reduce Group profit before taxation and equity by £621,000 (2012: £168,000). Foreign Currency Risk The Group has significant cash flows and net financial assets and liabilities in Danish Krone, US Dollar and Euro. 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 Krone US Dollar Euro Profit before taxation £’000 50 (111) (3,195) Net assets £’000 (15) (359) (12,286) Hedges Cash Flow Hedges The Group has entered into an interest rate swap on the term loan of £55 million and the revolving credit facility of £65 million. The Group has designated this a cash flow hedge. The risk being hedged is the variability of cash flows arising from movements in interest rates. No ineffectiveness arose on the hedge. The hedge is in place until 31 October 2016. The amounts recognised in equity are recycled to the income statement to offset gains and losses in the period in which the cash flows occurs. The amount recognised in equity in the year ended 30 June 2013 was a liability of £nil including an income tax credit of £15,000 (2012: £286,000 including an income tax credit of £101,000). 23. Share Capital Allotted, called up and fully paid at start of year Rights issue New shares issued Allotted, called up and fully paid at end of year Ordinary shares of 1p each 2013 No. 86,870,176 — 287,268 87,157,444 £’000 869 — 3 872 2012 No. 66,449,659 20,040,653 379,864 86,870,176 £’000 664 201 4 869 The Companies Act 2006 abolishes the requirement for a company to have an authorised share capital. At the 2009 Annual General Meeting the Shareholders approved a resolution whereby all provisions relating to the Company’s authorised share capital were removed from the Company’s constitutional documents. During the year 287,268 new ordinary shares of 1p (2012: 379,864 new ordinary shares of 1p) were issued following the exercise of options under the Long Term Incentive Plan, and the Approved, Unapproved and SAYE Share Options Schemes. The consideration received was £845,674 (2012: £452,782). 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. The Company issued 20,040,653 shares of 1p each by way of a 3 for 10 Rights Issue at an issue price of 300p per share on 16 May 2012. The Rights Issue generated net proceeds of £58,835,110 after costs of £1,286,849. The issue price represented a discount of 35.3% to the closing price of 464p per share on 4 April 2012, being the last business day before the announcement of the Rights Issue. 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials138 Notes to the Consolidated Financial Statements continued 24. Share-based Payments During the year, the Company operated the Unapproved Share Option Scheme, the Approved Share Option Scheme, the Long Term 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 ten years of the date of grant. Long Term Incentive Plan For awards granted before 5 March 2013: Vesting is dependent on an underpin condition based on the Company’s adjusted diluted earnings per share performance. No awards will vest unless adjusted diluted earnings per share has grown by at least 3% per annum above the retail prices index over the three year measurement period. Provided this condition is met, then the number of shares that vest depends on the Company’s TSR performance against the FTSE Small Cap Index over the three year measurement period. 100% of the shares vest if the Company achieves an upper quartile performance, 25% 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. For awards granted on and after 5 March 2013: Vesting is dependent on two performance targets which must be satisfied over a three year performance period commencing from the start of the financial year within which the award is granted. 50% of the award will vest dependent on the Company’s TSR performance against an appropriate comparator group. 50% of the award will vest subject to a performance condition based on the annual earnings per share growth. 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 or five 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 savings period. Prior to 16 October 2012 participants were able to save for a seven year 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. 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials139 At 30 June 2013 Number — 7,120 17,201 20,142 34,355 29,672 52,683 90,772 251,945 — 8,709 14,151 30,845 23,334 2,722 5,922 21,486 15,888 17,228 140,285 — 207,339 245,722 279,323 732,384 At 1 July 2012 Number 2,722 14,615 27,029 33,752 52,862 52,314 60,361 — 243,655 10,887 22,862 23,949 54,918 37,363 2,722 12,454 30,413 21,273 — 216,841 302,421 256,780 304,060 — 863,261 Exercised Number Granted Number Lapsed Number (2,722) (7,495) (9,828) (13,610) (18,507) (16,302) — — (68,464) (10,887) (14,153) (9,798) (24,073) (14,029) — (6,532) (5,470) — — (84,942) — — — — — — — 93,772 93,772 — — — — — — — — — 17,228 17,228 — — — — — (6,340) (7,678) (3,000) (17,018) — — — — — — — (3,457) (5,385) — (8,842) — — — — — — (302,421) (49,441) — (58,338) — — 279,323 (410,200) 279,323 3,909 76,022 42,588 114,713 95,020 100,126 — 432,378 1,756,135 172.47p — (55,777) — (78,085) — — — (133,862) (287,268) 294.39p — — — — — — 125,715 125,715 516,038 231.11p — (11,699) (6,166) (8,814) (2,729) (11,981) (10,656) (52,045) 3,909 8,546 36,422 27,814 92,291 88,145 115,059 372,186 (488,105) 1,496,800 205.61p 61.10p 24. Share-based Payments continued Year ended 30 June 2013 Exercise Period Unapproved Share Option Scheme 11 April 2003† 19 March 2007† 2 April 2008† 10 October 2008† 30 March 2009† 1 March 2010† 28 February 2011 10 September 2012 2006-2013 2010-2017 2011-2018 2011-2018 2012-2019 2013-2020 2014-2021 2015-2022 Approved Share Option Scheme 2 April 2004† 5 April 2005† 15 March 2006† 19 March 2007† 2 April 2008† 10 October 2008† 30 March 2009† 1 March 2010† 28 February 2011 10 September 2012 2007-2014 2008-2015 2009-2016 2010-2017 2011-2018 2011-2018 2012-2019 2013-2020 2014-2021 2015-2022 Long Term Incentive Plan 24 September 2009 22 December 2010 7 September 2011 5 March 2013 SAYE Option Scheme 12 October 2006 17 October 2007 13 October 2008 12 October 2009 13 December 2010 17 October 2011 16 October 2012 2012-2013 2013-2014 2014-2015 2016-2016 2009-2013 2010-2014 2011-2015 2012-2016 2013-2017 2014-2018 2015-2019 Total Weighted average exercise price* Exercise price per share* Pence 53.73 265.43 336.15 364.62 381.15 418.81 461.97 541.00 123.53 185.98 231.45 265.43 336.15 364.62 381.15 418.81 461.97 541.00 — — — — 179.77 257.16 315.02 304.92 375.64 365.54 471.00 * Adjusted to reflect the bonus element of the Rights Issue — there has been no impact on the overall fair value of options in issue. † Total share options exercisable at 30 June 2013 are 215,659. 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials140 Notes to the Consolidated Financial Statements continued 24. Share-based Payments continued Year ended 30 June 2012 Exercise price per share Pence 140.98 53.73 265.43 336.15 364.62 381.15 418.81 461.97 123.53 165.32 185.98 231.45 265.43 336.15 364.62 381.15 418.81 461.97 — — — — 179.77 257.16 315.02 304.92 375.64 365.54 Exercise Period Unapproved Share Option Scheme 22 April 2002† 11 April 2003† 19 March 2007† 2 April 2008† 10 October 2008† 30 March 2009† 1 March 2010 28 February 2011 2005-2012 2006-2013 2010-2017 2011-2018 2011-2018 2012-2019 2013-2020 2014-2021 Approved Share Option Scheme 2 April 2004† 2007-2014 3 December 2004† 2007-2014 2008-2015 5 April 2005† 2009-2016 15 March 2006† 2010-2017 19 March 2007† 2011-2018 2 April 2008† 2011-2018 10 October 2008† 2012-2019 30 March 2009† 2013-2020 1 March 2010 2014-2021 28 February 2011 Long Term Incentive Plan 19 November 2008 2011-2012 24 September 2009 2012-2013 22 December 2010 2013-2014 2014-2015 7 September 2011 SAYE Option Scheme 2009-2013 12 October 2006 2010-2014 17 October 2007 2011-2015 13 October 2008 12 October 2009 2012-2016 13 December 2010 2013-2017 2014-2018 17 October 2011 Total Weighted average exercise price* At 1 July 2012 Number 1,500 2,500 17,586 35,883 33,500 54,921 52,854 60,688 259,432 10,000 1,667 23,000 36,000 58,901 53,117 2,500 23,079 33,146 23,312 264,722 327,272 277,758 235,841 — 840,871 27,681 69,291 105,141 117,426 105,400 — 424,939 1,789,964 175.24p Exercised Number Granted Number Adjusted for Rights Issue* At 30 June 2012 Number — 2,722 14,615 27,029 33,752 52,862 52,314 60,361 243,655 10,887 — 22,862 23,949 54,918 37,363 2,722 12,454 30,413 21,273 216,841 — 302,421 256,780 304,060 863,261 Lapsed Number — — (611) (3,000) — (2,800) (4,790) (5,231) (16,432) — — — (4,000) (3,389) (3,000) — (6,200) (5,210) (3,769) (25,568) (94,555) — — — (94,555) — 222 1,449 2,731 2,752 4,617 4,250 4,904 20,925 887 — 1,862 2,392 4,562 3,030 222 1,496 2,477 1,730 18,658 — 24,663 20,939 24,797 70,399 318 6,731 3,563 9,508 7,716 8,127 35,963 145,945 — — — (4,300) (12,221) (18,096) (5,487) (40,104) 3,909 76,022 42,588 114,713 95,020 100,126 432,378 (176,659) 1,756,135 167.92p 172.47p (1,500) — (3,809) (8,585) (2,500) (3,876) — — (20,270) — (1,667) (2,000) (10,443) (5,156) (15,784) — (5,921) — — (40,971) (232,717) — — — (232,717) (24,090) — (61,816) — — — (85,906) (379,864) 111.35p — — — — — — — — — — — — — — — — — — — — — — — 279,263 279,263 — — — — — 97,486 97,486 376,749 94.59p * Adjusted to reflect the bonus element of the Rights Issue — there has been no impact on the overall fair value of options in issue. † Total share options exercisable at 30 June 2012 are 296,135. The weighted average exercise price of options eligible to be exercised at 30 June 2013 was 341.8p (2012: 302.5p). For options exercised during the year, the weighted average market price at the date of exercise was 629p (2012: 461p). The weighted average remaining contractual lives of options outstanding at the consolidated statement of financial position date was four years (2012: four years). 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials141 24. Share-based Payments continued Outstanding options on all Long Term Incentive Plan, Approved and Unapproved plans prior to 30 June 2010 were exercisable at 30 June 2013. No options issued under SAYE plans were exercisable at 30 June 2013. 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 Long Term 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: Long Term 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 05/03/13 279,323 699p Nil 3 years 0.34% 28% 1.72% 590p 10/09/12 111,000 558.5p 541p 5 years 0.66% 34% 2.20% 141p 07/09/11 279,263 455.5p Nil 3 years 0.85% 38% 2.66% 276p 28/02/11 84,000 507.5p 503p 5 years 2.65% 36% 2.07% 149p 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials142 Notes to the Consolidated Financial Statements continued 24. Share-based Payments continued 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 16/10/12 125,715 591p 471p 17/10/11 97,486 478p 398p 3.25 years 5.25 years 3.25 years 5.25 years — 7.25 years 0.41% 0.84% — 34% 2.08% 171p 192p — 0.98% 1.58% 2.11% 34% 2.53% 140p 147p 161p 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 2013 of £260,000 (2012: £73,000), of which £39,000 (2012: £18,000) 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 is included within administrative expenses. 2013 £’000 821 193 1,014 2012 £’000 1,001 (24) 977 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials143 2013 £’000 (113,110) (480) 32,791 (80,799) 2012 £’000 (118,211) (941) 32,435 (86,717) 25. Analysis of Net Borrowings Bank loans Finance leases and hire purchase contracts Cash and cash equivalents Net borrowings 26. 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 2013 £’000 1,362 2,775 2,787 6,924 2012 £’000 1,301 3,300 2,927 7,528 2013 £’000 2,432 2,357 49 4,838 2012 £’000 2,279 2,414 — 4,693 2013 £’000 3,794 5,132 2,836 11,762 2012 £’000 3,580 5,714 2,927 12,221 The Group leases properties, plant, machinery and vehicles for operational purposes. Property leases vary in length up to a period of 25 years. Plant, machinery and vehicle leases typically run for periods of up to five years. Commitments relating to discontinued operations included in the above amount to £4,384,000 (2012: £5,046,000). 27. Foreign Exchange Rates The following exchange rates have been used in the translation of the results of foreign operations: Danish Krone Euro US Dollar Closing rate at 30 June 2012 9.21 1.2389 1.5681 Average rate 9.0445 1.2135 1.5687 Closing rate at 30 June 2013 8.7146 1.1687 1.5208 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials144 Notes to the Consolidated Financial Statements continued 28. Acquisitions Acquisition of Eurovet Animal Health B.V. On 23 May 2012, the Group acquired 100% of the share capital of Eurovet Animal Health B.V., obtaining control of Eurovet. Eurovet is a veterinary pharmaceuticals business based in mainland Europe with its head office, manufacturing facility, research and development team and central sales and marketing office located in the Netherlands. Additionally, it has operations in Germany, Belgium, Denmark and the United Kingdom. It has highly complementary products, geographies, manufacturing competencies and is similar in structure to Dechra Veterinary Products. Recognised amounts of identifiable assets acquired and liabilities assumed Identifiable assets Property, plant and equipment Trade and other receivables Inventory Cash and cash equivalents Indentifiable intangible assets Identifiable liabilities Trade and other payables Employee benefit obligations Current tax Deferred tax Net identifiable assets Goodwill Total consideration Satisfied by: Cash Total consideration transferred Net cash outflow arising on acquisition Cash consideration Less: cash and cash equivalent balances acquired Book value £’000 Fair value £’000 9,454 6,600 12,795 3,989 14,620 (8,354) (341) (1,041) (858) 36,864 9,454 6,596 12,507 3,989 78,703 (8,825) (341) (1,690) (20,531) 79,862 36,348 116,210 116,210 116,210 116,210 (3,989) 112,221 The fair value of the financial assets includes trade receivables with a fair value of £5,669,000. The fair value adjustments principally relate to harmonisation with Group IFRS accounting policies, including the application of fair values on acquisition, principally the recognition of product rights in accordance with IFRS 3. The goodwill of £36,348,000 arising from the acquisition consists of the synergies, assembled workforce, technical expertise and the increased geographical presence in Germany and the Netherlands. None of the goodwill is expected to be deductible for income tax purposes. Acquisition related costs (included in operating expenses) amounted to £2,315,000. Eurovet’s results are reported within the European Pharmaceuticals Segment. Acquisition of Genitrix Limited On 1 December 2010, the Group acquired 100% of the share capital of Genitrix Limited. The acquisition of Genitrix Limited, a veterinary pharmaceuticals company based in Billingshurst, UK, is consistent with our strategy to grow our domestic and international pharmaceutical business. The remaining £300,000 contingent consideration outstanding for this acquisition was paid in the period. 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials 145 28. Acquisitions continued Acquisition of DermaPet Inc. On 22 October 2010, the Group acquired 100% of the share capital of DermaPet Inc., a Florida based business which develops and markets a range of dermatological preparations, including shampoos, conditioners and ear products, for the US and overseas companion animal markets. These veterinary products are marketed and distributed through the same channels as Dechra’s current US product portfolio. During the period the Group paid a further US$16,000,000 (£10,033,000) in respect of the acquisition of DermaPet, Inc. A payment of US$15,000,000 was made which related to the achievement of a contingent milestone target, the remaining US$1,000,000 related to deferred consideration which was paid on the second anniversary of the completion date. The maximum further consideration payable is US$6,000,000 of which US$1,000,000 is payable on the fourth anniversary of the completion date. The remaining US$5,000,000 is contingent upon revenue exceeding US$20,000,000 in any rolling 12 month period ending on the sixth anniversary of the completion date. 29. Discontinued Operations On 10 July 2013, the Group announced its intention to dispose of the Services businesses. However, the Group was committed to a plan to sell the businesses prior to 30 June 2013, therefore the assets have been classified as held for sale. The disposal is consistent with the Group’s long term policy to focus its activities on the manufacture and marketing of pharmaceutical products. The Services businesses constitutes a reporting segment in accordance with IFRS 8. The divestment was completed on 16 August 2013 for sale proceeds of £87.5 million. The costs to sell are £1.5 million (with an associated tax deduction of £0.1 million). Tax on the profit on disposal is expected to be £0.4 million. The completion accounts are yet to be finalised. The Group has not recognised any impairment losses in respect of the Services businesses, neither when the assets and liabilities of the operation were reclassified to held for sale nor at the end of the reporting period. The results of the discontinued operations included in the profit for the year are set out below. The Segment was not a discontinued operation or classified as held for sale at 30 June 2012. The comparative consolidated income statement has been represented to show the discontinued operation separately from continuing operations. Profit for the Year from Discontinued Operations Revenue Cost of sales Gross profit Distribution costs Administrative expenses Non-underlying expenses* Operating profit Net finance (expense)/income Profit before taxation from operating activities Income tax expenses Profit for the year Expenses related to disposal Tax on expenses related to disposal 2013 £’000 333,244 (303,389) 29,855 (12,540) (6,203) (38) 11,074 (5) 11,069 (2,649) 8,420 (1,467) 110 2012 £’000 315,672 (287,523) 28,149 (11,853) (5,240) (438) 10,618 90 10,708 (2,864) 7,844 — — Profit for the year from discontinued operations 7,063 7,844 * Non-underlying items comprise amortisation of acquired intangibles and rationalisation costs. See note 10 for the Earnings per ordinary share split between continued and discontinued operations. 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials146 Notes to the Consolidated Financial Statements continued 29. Discontinued Operations continued Cash Flows from Discontinued Operations Net cash inflows from operating activities Net cash inflows from investing activities Net cash outflows from financing activities (including repayment of intercompany funding) 2013 £’000 1,305 (810) (508) 2012 £’000 4,510 (534) (30,603) Assets Held For Sale The major classes of assets and liabilities of the Services businesses at the end of the reporting period are set out below: Goodwill Intangible assets Property, plant and equipment Inventories Trade and other receivables Assets of Services businesses classified as held for sale Trade and other payables Liabilities of Services businesses classified as held for sale Net assets of Services businesses classified as held for sale 2013 £’000 2,621 1,092 1,656 28,269 56,146 89,784 (53,961) (53,961) 35,823 30. 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 155. 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 67 to 83. The remuneration of key management is disclosed in note 7. 31. Off Balance Sheet Arrangements The Group has no off balance sheet arrangements to disclose as required by S410A of the Companies Act 2006. 32. Events after the Reporting Period On 16 August 2013, the Group completed the sale of the Services business for a consideration of £87.5 million. Refer to note 29 for further details of the discontinued operations. 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our FinancialsCompany Balance Sheet At 30 June 2013 Fixed assets Investments Intangible assets Tangible assets Current assets Debtors (includes amounts falling due after more than one year of £579,000 (2012: £571,000)) Cash at bank and in hand Creditors: amounts falling due within one year Net current 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 147 Note 2013 £’000 2012 £’000 iii iv v vi vii vii x xi xi xi 251,104 4,390 207 255,701 251,104 4,901 — 256,005 40,978 — 40,978 (50,331) (9,353) 246,348 (103,698) 142,650 872 123,485 — 18,293 142,650 21,306 1,052 22,358 (35,916) (13,558) 242,447 (113,800) 128,647 869 122,642 (286) 5,422 128,647 The financial statements were approved by the Board of Directors on 3 September 2013 and are signed on its behalf by: Ian Page Chief Executive Officer 3 September 2013 Anne-Francoise Nesmes Chief Financial Officer 3 September 2013 Company number: 3369634 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials 148 Reconciliation of Movements in Shareholders’ Funds For the year ended 30 June 2013 At start of year Profit for the financial year Effective portion of changes in fair value of cash flow hedges Cash flow hedges recycled to profit and loss account Share-based payments charge Dividends paid New shares issued At end of year 2013 £’000 128,647 23,220 (140) 426 821 (11,170) 846 142,650 2012 £’000 72,382 4,293 (335) 343 1,001 (8,325) 59,288 128,647 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our FinancialsNotes to the Company Financial Statements 149 (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 2006. Basis of Preparation No profit and loss account is presented for the Company as permitted by Section 408(2) and (3) of the Companies Act 2006. The profit dealt with in the accounts of the Company was £23,220,000 (2012: £4,293,000). Fees paid to KPMG Audit Plc and its associates for audit and non-audit services to the Company itself are not disclosed in the individual Financial Statements of Dechra Pharmaceuticals PLC because the Group Financial Statements are required to disclose such fees on a consolidated basis. 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 612 of the Companies Act 2006 apply, cost represents the nominal value of the shares issued together with the fair value of any additional consideration given and costs. Where investments are denominated in foreign currencies they are treated as monetary assets and revalued at each balance sheet date. Intangible Assets Product rights that are acquired by the Company are stated at cost less accumulated amortisation and impairment losses. Product rights are amortised over the period of their useful lives. 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 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 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. 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials150 Notes to the Company Financial Statements continued (i) Principal Accounting Policies of the Company continued 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 is exempt from the requirement to disclose related party transactions with other Group undertakings as they are all wholly owned within the Group and are included in the Dechra Pharmaceuticals PLC Consolidated Financial Statements. Transactions with Key Management Personnel There were no material transactions with key management personnel except for those relating to remuneration (see notes 7 and 30 to the Consolidated Financial Statements) and shareholdings. Transactions with Other Related Parties There are no controlling Shareholders of the Company. There have been no material transactions with the Shareholders of the Company. 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. (ii) Share-based Payment Transactions 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. Where the Company grants options over its own shares to the employees of its subsidiaries it recharges the expense to those subsidiaries. 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials 151 (i) Principal Accounting Policies of the Company continued 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 and have been substantively enacted 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 £2,088,000 (2012: £1,727,000). Information relating to Directors’ emoluments, share options and pension entitlements is set out in the Directors’ Remuneration Report on pages 67 to 83. (iii) Fixed Asset Investments Cost At 1 July 2012 At 30 June 2013 Net book value At 30 June 2013 At 30 June 2012 A list of principal subsidiary undertakings is given in note (xii). Shares in subsidiary undertakings £’000 251,104 251,104 251,104 251,104 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials152 Notes to the Company Financial Statements continued (iv) Intangible Assets Cost At 1 July 2012 At 30 June 2013 Amortisation At 1 July 2012 Charge for the year At 30 June 2013 Net book value At 30 June 2013 At 30 June 2012 (v) Tangible Assets Cost At 1 July 2012 Additions At 30 June 2013 Depreciation At 1 July 2012 Charge for the year At 30 June 2013 Net book value At 30 June 2013 At 30 June 2012 (vi) Debtors Amounts owed by subsidiary undertakings Group relief receivable Deferred taxation (see note (ix)) Other debtors Prepayments and accrued income Intangible assets £’000 5,114 5,114 213 511 724 4,390 4,901 Tangible Assets £’000 — 223 223 — 16 16 207 — 2013 £’000 36,119 3,951 579 176 153 40,978 2012 £’000 18,735 1,699 571 301 — 21,306 Included in debtors are amounts of £579,000 (2012: £571,000) due after more than one year relating to deferred tax assets. Of the amounts owed by subsidiary undertakings, £nil is due after more than one year (2012: £nil). 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials(vii) Creditors Bank loans and overdrafts (see note (viii)) Amounts due to subsidiary undertakings Other creditors Derivative financial instruments Other taxation and social security Accruals and deferred income 153 Falling due within one year 2013 £’000 15,221 32,226 — 15 105 2,764 50,331 2012 £’000 4,411 28,557 18 387 — 2,543 35,916 In accordance with FRS 21 ‘Events after the Balance Sheet Date’, the proposed final dividend for the year ended 30 June 2013 of 9.66p per share (2012: 8.50p per share restated to take into account the bonus element of the Rights Issue) has not been accrued for in these financial statements. It will be shown in the financial statements for the year ending 30 June 2014. The total cost of the proposed final dividend is £8,419,000 (2012: £7,384,000). Bank loans (see note (viii)) (viii) Borrowings Borrowings due within one year Bank overdraft Bank loan Arrangement fees netted off Borrowings due after more than one year Aggregate bank loan instalments repayable: — between one and two years — between two and five years Arrangement fees netted off Total borrowings Falling due after more than one year 2013 £’000 103,698 103,698 2011 £’000 113,800 113,800 2013 £’000 5,809 10,000 (588) 15,221 10,000 95,073 105,073 (1,375) 103,698 118,919 2012 £’000 — 5,000 (589) 4,411 10,000 105,757 115,757 (1,957) 113,800 118,211 The bank loans, revolving credit and overdraft facilities are secured by a fixed and floating charge on the assets of the Group. Interest is charged at 2.5% over LIBOR on the bank loan and revolving credit facility and 2.5% over base rate on the bank overdraft. No covenants have been breached during the year ended 30 June 2013. The Company guarantees certain borrowings of other Group companies, which at 30 June 2013 amounted to £480,000 (2012: £923,000). 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials154 Notes to the Company Financial Statements continued (ix) Deferred Tax At 1 July 2012 Amounts recognised in profit and loss Amounts recognised in equity At 30 June 2013 (included in debtors) The amounts provided for deferred taxation at 23% (2012: 24%) are as follows: Short term timing differences Accelerated capital allowances (x) Called up Share Capital Issued share capital Allotted, called up and fully paid at 1 July 2012 New shares issued Allotted, called up and fully paid at 30 June 2013 £’000 571 93 (85) 579 2012 £’000 571 — 571 2013 £’000 576 3 579 Ordinary shares of 1p each £’000 869 3 872 No. 86,870,176 287,268 87,157,444 Details of new ordinary shares issued following the exercise of options under the Long Term Incentive Plan and the Approved, Unapproved and SAYE Share Option Schemes are shown in note 23 to the consolidated financial statements. Share Options Details of outstanding share options over ordinary shares of 1p at 30 June 2013 under the various Group share option schemes are shown in note 24 to the Consolidated Financial Statements. (xi) Reserves At 1 July 2012 New shares issued Profit for the financial year Effective portion of changes in fair value of cash flow hedges Cash flow hedges recycled to profit and loss account Dividend (see note 9 to the consolidated financial statements) Share-based payments charge At 30 June 2013 Share premium account £’000 122,642 843 — — — — — 123,485 Hedging reserve £’000 (286) — — (140) 426 — — — Profit and loss account £’000 5,422 — 23,220 — — (11,170) 821 18,293 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our Financials155 (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: Principal Activity Marketer of veterinary products and distributor of veterinary products and equipment Developer, regulatory, manufacturer and marketer of veterinary products; wholesaler; provider of veterinary laboratory services Regulatory and product development Manufacturer of veterinary products and marketer of veterinary products 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 Marketer of veterinary pharmaceuticals and pet diets Marketer of veterinary pharmaceuticals and pet diets Manufacturer of veterinary products and marketer of veterinary products and pet diets Marketer of veterinary pharmaceuticals and pet diets Wholesaler and provider of laboratory services*** Marketer of veterinary pharmaceuticals and pet diets Non-trading Holding Company Holding Company Non-trading Non-trading Non-trading Non-trading Holding Company Non-trading Non-trading Holding Company Holding Company Non-trading Company Operating Subsidiaries Albrecht GmbH∞ Country of Incorporation Germany Dechra LimitedΩ England & Wales Dechra Development LLC** Dechra Veterinary Products A/S USA Denmark Dechra Veterinary Products OY# Dechra Veterinary Products SAS# Dechra Veterinary Products AS# Dechra Veterinary Products SLU# Dechra Veterinary Products AB# Dechra Veterinary Products BV# Dechra Veterinary Products Limited# Dechra Veterinary Products LLC** Eurovet NV∞ Eurovet Animal Health BV Eurovet Animal Health Limited∞ National Veterinary Services Limited** Scanimal Health ApS∞ Other Subsidiaries Anglian Manufacturing Chemists Limited‡ Anglian Pharma Manufacturing Limited† Anglian Pharma Limited Arnolds Veterinary Products Limited* Broomco 4263 Limited* Cambridge Specialist Laboratory Services Limited§ Dales Pharmaceuticals Limited* Dechra Investments Limited Farvet Laboratories BV∞ Leeds Veterinary Laboratories Limited North Western Laboratories Limited Veneto Limited DermaPet, Inc.¶ Finland France Norway Spain Sweden The Netherlands England & Wales USA Belgium The Netherlands England & Wales England & Wales Denmark England & Wales England & Wales England & Wales England & Wales England & Wales England & Wales England & Wales England & Wales The Netherlands England & Wales England & Wales England & Wales USA 100% of ordinary share capital held by Veneto Limited. 100% of ordinary share capital held by Dechra Investments Limited. 100% of ordinary share capital held by North Western Laboratories Limited. 100% of ordinary share capital held by Anglian Pharma Limited. 100% of ordinary share capital held by Anglian Pharma Manufacturing Limited. 100% of ordinary share capital held by Dechra Veterinary Products A/S . 100% of ordinary share capital held by Dechra Veterinary Products LLC. * Ω § † ‡ # ¶ ** 100% of ordinary share capital held by Dechra Limited. ∞ 100% of ordinary share capital held by Eurovet Animal Health B.V. *** Sale of subsidiary completed on 16 August 2013. Refer to note 32 for details. 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceShareholder InformationOur PerformanceStrategic ReportOur BusinessOur Financials156 Financial History Consolidated income statement Revenue Underlying operating profit Underlying profit after taxation Underlying earnings per share — basic (pence) — diluted (pence) Dividend per share (pence) Consolidated statement of financial position Non-current assets Current assets Current liabilities Non-current liabilities Net assets held for sale Shareholders’ funds Consolidated cash flow Net cash inflow from operating activities Net cash outflow from investing activities Net cash (outflow)/inflow from financing activities 2013 £’000 189,176 39,108 25,464 29.27 29.07 14.00 2012 (Restated)† £’000 124,330 25,545 16,029 2012 £’000 2011 £’000 2010 £’000 2009 £’000 426,041 36,601 24,302 389,237 31,823 22,748 369,369 28,190 19,437 349,964 24,971 16,759 21.35* 21.28* 12.27* 32.37* 32.27* 12.27* 31.53* 31.43* 11.12* 27.09* 26.99* 9.64* 23.52* 23.33* 8.36* 235,670 89,672‡ (49,558)‡ (136,991) 35,823 174,616 237,132 86,863‡ (48,217)‡ (147,278) 25,182 153,682 242,592 161,829 (103,461) (147,278) — 153,682 132,819 137,549 (88,952) (83,083) — 98,333 88,044 117,483 (89,041) (30,258) — 86,228 97,605 106,068 (85,722) (37,265) — 80,686 36,865 (19,368) (18,266) — — — 19,242 (120,344) 16,754 (36,178) 17,324 (1,715) 20,334 (1,489) 103,708 18,867 (10,821) (14,408) * Restated to reflect the impact of the bonus element of the Rights Issue. † Restated to reflect the Services Segment as discontinued operations. ‡ Excluding net assets held for sale. 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Our FinancialsGlossary 157 The following is a glossary of a number of the terms and acronyms which can be found within this document. Executive Directors The Executive Directors of the Company, currently Ian Page, Anne-Francoise Nesmes, Ed Torr and Tony Griffin API Active Principal Ingredient Bio equivalence The demonstration that the proposed formulation has the same biological effects as the pioneer product to which it is being compared. This is usually demonstrated by comparing blood concentrations of the active over time, but can be compared using a clinical endpoint (e.g. lowering of a worm count) for drugs that are not absorbed or for which blood levels cannot be determined. CAP Companion animal products CE Continuing Education CMC The Chemistry and Manufacturing Controls Cortisol A hormone which is made by the adrenal glands. Its production is increased during episodes of stress and it has many effects on the body. It helps regulate blood pressure, the immune system and helps balance the effect of insulin to keep the blood sugar at normal levels. Cushing’s Syndrome A condition caused by excess cortisol (see above) and is named after the physician who first described the condition in humans in the early twentieth century. FAP Food animal producing products FDA US Food and Drug Administration; a federal agency of the US Department of Health and Human Services. FRS Financial Reporting Standards FTSE250/350 Index An index comprising of the 101st to 350th largest companies listed on the London Stock Exchange in terms of their market capitalisation FTSE Small Cap Index An index comprising of the 351st to 619th largest listed companies on the London Stock Exchange in terms of their market capitalisation Hyperthyroidism Occurs when the thyroid glands produce excessive amounts of thyroid hormone. This causes an increase in the animal’s metabolism (the rate at which energy is utilised). IAS International Accounting Standards IFRS International Financial Reporting Standards Dechra Values or Values Dedication, Enjoyment, Courage, Honesty, Relationships and Ambition Intertrigo Refers to a bacterial, fungal or viral infection that has developed at the site of broken skin due to inflammation of body folds. This infection is common in dogs with folds, such as Pugs or Shar Peis. DPM Dechra Pharmaceuticals Manufacturing LIBOR The London inter-bank offered rate DVP EU Dechra Veterinary Products EU DVP US Dechra Veterinary Products US EBITDA Earnings before interest, tax, depreciation and amortisation. Euthyroid Euthyroid is the state of having normal thyroid gland function. Malassezia Yeasts that cause a secondary inflammatory skin disease. Malassezia is often found in otitis externa. MHRA Medicines and Healthcare products Regulatory Agency; an executive agency of the Department of Health. MRL Maximum residue level NADA New Animal Drug Application 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceOur FinancialsOur PerformanceStrategic ReportOur BusinessShareholder Information158 Glossary continued Non-Executive Directors The Non-executive Directors of the Company, currently Michael Redmond, Neil Warner, Dr Chris Richards, Julian Heslop and Ishbel Macpherson RIDDOR Reporting of Injuries, Diseases and Dangerous Occurrences Regulations NSAID Non-Steroidal Anti-Inflammatory Drug; essentially drugs which relieve pain, swelling, stiffness and inflammation. Equipalazone is the leading NSAID for the treatment of musculoskeletal disorders in the horse. Ordinary Shares An ordinary share of 1 pence in the share capital of the Company Rights Issue The three for ten rights issue of 20,040,653 shares, details of which are set out in the prospectus of the Company dated 25 April 2012. SAYE Save as You Earn Share Scheme Shareholder Holder of ordinary shares in Dechra Otitis Externa A condition which causes inflammation of the external ear canal (the tube between the outer ear and the ear drum). Staphylococcal Infections Communicable conditions caused by the Staphylococcus type of bacteria and generally characterised by pyoderma or the formation of abscesses. Surface Pyoderma Pyoderma is the medical term used to denote infections of the skin caused by bacteria. Surface Pyoderma is a bacterial infection which is confined to the surface of the skin; one of the commonest types is known as Pyotraumatic Dermatitis (acute moist dermatitis, or “hot spots”). It is typified by localised itching, moist reddened skin patches and ulcerated lesions. VCA Veterinary Centres of America PDRA Dechra’s Product Development and Regulatory Affairs team Product Pipeline This involves four stages which are as follows: ❱ Manufacturing — the part of the dossier which documents the quality, purity and physical characteristics of both the active ingredient and the final formulation (e.g. tablets, capsules, liquid). ❱ Safety — the part of the dossier which documents the effects of the final formulation at above normal dosage levels in the intended species. ❱ Efficacy — the part of the dossier which documents the effectiveness of the final formulation in the intended species. The studies may be controlled model studies or studies in animals with the naturally occurring disease. ❱ Regulatory — the period of time that regulatory agencies take to review the various sections of the dossier. 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Shareholder InformationShareholder Information Financial Calendar Interim Management Statement 2013 Annual General Meeting Final Dividend Ex Div Date Final Dividend Record Date Final Dividend Payment Date 17 October 2013 17 October 2013 6 November 2013 8 November 2013 22 November 2013 Annual General Meeting The 2013 Annual General Meeting of the Company will be held at 4.00 pm on 17 October 2013 at the offices of the Company at 24 Cheshire Avenue, Cheshire Business Park, Lostock Gralam, Northwich CW9 7UA. The notice of meeting, which includes special business to be transacted at the Annual General Meeting, is included within the Circular accompanying this Annual Report, together with an explanation of the resolutions to be considered at the meeting. Company Website The Dechra website (www.dechra.com) is the best source of useful and up-to-date information about Dechra and its activities, including the latest news, financial and product information to help improve understanding of our business. Additionally, the terms of reference of all our Committees, Articles of Association, our Values and a number of our internal policies are published on the website. Visit us at our website www.dechra.com Registrar Dechra’s Registrar is Computershare Investor Services PLC. Computershare should be contacted for any matters relating to your shareholding, including: ❱ Notification of change in name and address ❱ Enquiries about dividend payments ❱ Submission of proxy form for voting at the Annual General Meeting Computershare offers a facility whereby shareholders are able to access their shareholdings in Dechra (and other companies for which Computershare acts as Registrar) via their website (www.investorcentre.co.uk). 159 Alternatively Computershare can be contacted at: Computershare Investor Services PLC The Pavilions Bridgwater Road Bristol BS99 6ZZ Registrars’ Shareholder Helpline for Dechra : 0870 889 4030. Please have your Shareholder Reference Number to hand whenever you contact the Registrar; this can be found on your share certificate. Share Dealing Service Computershare offer a Share Dealing Service, to buy or sell shares. Further information can be obtained from www-uk.computershare.com/sharedealingcentre or by telephoning 0870 703 0084. Fee (on value of transaction) Minimum charge Stamp duty charge (purchases only) Telephone share dealing 1% £25.00 Internet share dealing 0.5% £15.00 0.5% 0.5% Computershare Investor Services PLC and its agents are authorised and regulated by the Financial Conduct Authority. Please note that the price of shares can go down as well as up, and you are not guaranteed to get back the original amount you originally invested. If you are in any doubt you should contact an independent financial adviser. Warning to Shareholders Share fraud includes scams where investors are called out of the blue and offered shares that often turn out to be worthless or non-existent, or an inflated price for shares they own. During the year we were alerted by some of our Shareholders to cold calls which they had received. The callers purport to represent various entities, including Drexel-Bearns, a US based firm. The callers stated that they were seeking to gain control of investor shareholdings held in the Company and/or personal financial information. We believe these to be boiler room scams. These types of calls are typically from overseas based ‘brokers’ who target UK shareholders and are commonly referred to as ‘boiler rooms’. These ‘brokers’ can be very persistent and extremely persuasive. While high profits are promised, those who buy or sell shares in this way usually lose their money. 22581.04 10 September 2013 1:31 PM Proof 3 www.dechra.comStock code: DPH®Our GovernanceOur FinancialsOur PerformanceStrategic ReportOur BusinessShareholder Information160 Shareholders are advised to be very wary of any unsolicited advice, offers to buy shares at a discount or offers of free company reports. If you are offered unsolicited investment advice, discounted shares, a premium price for shares you own, or free company or research reports, you should take these steps before handing over any money: ❱ check the FCA Register at www.fca.org.uk/firms/systems- reporting/register to ensure they are authorised; ❱ confirm that the firm is genuine by asking them for their firm reference number and contact details. Always use the details on the FCA Register to contact the firm. You should only access the Register from the FCA website at www.fca.org.uk; ❱ call the FCA Consumer Helpline on 0800 111 6786 if there are no contact details on the Register or you are told they are out of date; ❱ make additional checks to confirm that you are dealing with the firm direct for example checking the details on the firm’s website with directory enquiries or Companies House; If you are approached about a share scam you should tell the FCA by contacting their Consumer Helpline on 0800 111 678. If you have been offered, bought or sold shares you can use the share fraud reporting form at http://www.fca.org.uk/consumers/ scams/investment-scams/share-fraud-and-boiler-room-scams/ reporting-form. If you have already paid money to share fraudsters or suspect fraud you should contact Action Fraud on 0300 123 2040. Protecting your Identity Suggestions for safeguarding your shares: ❱ ensure all your share certificates are kept in a safe place or hold your shares electronically in CREST via a nominee; ❱ keep all correspondence relating to your shares in a safe place or destroy the correspondence by shredding; ❱ notify the Registrar of a change of address in writing or via their website (as detailed above); ❱ consider having your dividend paid directly into your bank account to eliminate the risk of a lost dividend cheque; ❱ search the FCA unauthorised firms list; and ❱ notify the Registrar of bank account detail changes in writing ❱ remember: if it sounds too good to be true, it probably is! If you use an unauthorised firm to buy or sell shares or other investments, you will not have access to the Financial Ombudsman Service or Financial Services Compensation Scheme if things go wrong. of via their website; and ❱ if you decide to sell or buy shares use only brokers registered in your own country or the UK. Advisers Auditor KPMG Audit Plc One Snowhill Snow Hill Queensway Birmingham B4 6GH Stockbroker & Financial Advisers Investec Bank plc 2 Gresham Street London EC2V 7QP 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 Principal Bankers continued Barclays Bank PLC One Snowhill Snow Hill Queensway Birmingham B3 2WN Financial PR TooleyStreet Communications Regency Court 68 Caroline Street Birmingham B3 1UG Principal Bankers Lloyds TSB Bank plc 2nd Floor 125 Colmore Row Birmingham B3 3SF Svenska Handelsbanken AB (publ) Island Reach Festival Way Stoke-on-Trent ST1 5SW HSBC Bank Plc Midlands Corporate Banking Centre 4th Floor 120 Edmund Street Birmingham B3 2QZ Trademarks Trademarks appear throughout this document in italics. Dechra and the Dechra “D” logo are registered trademarks of Dechra Pharmaceuticals PLC. The Malaseb trademark is used under licence from Dermacare-Vet Pty. Ltd. 22581.04 10 September 2013 1:31 PM Proof 3 Dechra Pharmaceuticals PLCAnnual Report and Accounts for the year ended 30 June 2013Shareholder Information 22581-04 22/08/2013 Proof 3® Dechra Pharmaceuticals PLC, 24 Cheshire Avenue, Cheshire Business Park, Lostock Gralam, Northwich, CW9 7UA T: +44 (0) 1606 814730 F: +44 (0) 1606 814731 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 l s P L C 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 1 3 22581-04 22/08/2013 Proof 3 

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