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20 Years of
Strategic Growth
®
Annual Report and Accounts
for the year ended 30 June 2017
Company Number: 3369634
Dechra Annual Report 2017 - Front.indd 3
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sluglineslugline
Welcome to
Dechra Pharmaceuticals PLC
Dechra is an international specialist veterinary
pharmaceuticals and related products business.
Our expertise is in the development, manufacture,
and sales and marketing of high quality products
exclusively for veterinarians worldwide.
Getting Around the Report
Icons are used within the Report to assist the reader to identify
links to other relevant sections of interest. Below is a selection
of icons you will see used within this Report:
For more information see further pages
within the Report
More information online at:
www.dechra.com
Glossary
Terms used within this section
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 involve a degree
of uncertainty. Therefore, nothing in this document should be
construed as a profit forecast by the Company.
Open the flaps
to view Our
History
Dechra Annual Report 2017 - Front.indd 4
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Delivering Consistently
for Our Shareholders
Dechra is a company that has consistently
delivered on its strategic objectives resulting
in a strong track record of growth.
Share Price
178.50p
Dividend
per Share
3.44p†
1 July 1996 to 30 June 1997
1 July 1997 to 30 June 1998
1 July 1998 to 30 June 1999
1 July 1999 to 30 June 2000
1 July 2000 to 30 June 2001
1 July 2001 to 30 June 2002
Underlying Profit
Before Taxation
£0.1m
Underlying Profit
Before Taxation
£0.7m
Underlying Profit
Before Taxation
£2.1m
Underlying Profit
Before Taxation
£5.8m
Market
Capitalisation
£88.9m
Underlying Profit
Before Taxation
£7.5m
Market
Capitalisation
£62.0m
June 1997
Management buyout
from Lloyds Chemist plc
supported by Mercury and
Bank of Scotland.
September 2000
Dechra listed on the
London Stock Exchange at
120 pence per share, with a
market capitalisation of
£60.0 million.
Our History
The Company was incorporated in May 1997 to effect the management buyout from Lloyds
Chemist plc. Three years later, in 2000, the issued ordinary share capital of Dechra was listed
on the London Stock Exchange. Since 2000, the Company has grown strongly through a
combination of innovation, organic growth and acquisition.
Underlying Profit Before Taxation is defined as operating profit excluding amortisation of acquired intangibles and
impairment of acquired intangibles, impairment of investments, acquisition expenses, fair value uplift of inventory
acquired through business combinations, rationalisation costs, loss on extinguishment of debt, and fair value and
other movements on deferred and contingent consideration
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.
Dechra Annual Report 2017 - Front.indd 5
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sluglinesluglineMarket Capitalisation£124.6mUnderlying Profit Before Taxation£11.0mMarket Capitalisation£108.1mUnderlying Profit Before Taxation£9.7mMarket Capitalisation£76.2mUnderlying Profit Before Taxation£8.1mMarket Capitalisation£44.6mUnderlying Profit Before Taxation£6.7mMarket Capitalisation£62.0mUnderlying Profit Before Taxation£7.5m1 July 2001 to 30 June 20021 July 2002 to 30 June 20031 July 2003 to 30 June 20041 July 2004 to 30 June 20051 July 2005 to 30 June 20061 July 2006 to 30 June 2007December 2006Acquired the intellectual property for Equidone® Gel.April 2007Acquired Leeds Veterinary Laboratories for £0.75 million.May 2007Secured a long term trademark licence 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.July 2005Received approval to market Vetoryl in 19 major European countries.June 2006Signed a development and marketing agreement for Vetoryl in Japan with Kyoritsu Seiyaku.November 2004Granted a full EU licence for Felimazole and granted a UK licence for a new 2.5mg Felimazole tablet.April 2005Granted a range extension for a 30mg Vetoryl capsule.April 2005Opened a US operation based in Kansas City.April 2005Acquired Vetivex®, a licensed veterinary fluid therapy product for £0.8 million.December 2003Entered into a European marketing agreement with Janssen Animal Health, allowing Janssen full marketing and distribution rights to Felimazole and Vetoryl in mainland Europe. April 2003North Western Laboratories rebranded to NationWide Laboratories.May 2003Entered into a sub-licence agreement with Bioenvision Inc. to develop Vetoryl for future marketing in the US and Canada.December 2001Vetoryl® launched in the UK.April 2002Acquired 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 2002Felimazole® launched in the UK.May 2002Acquired Anglian Pharma Plc for a consideration of £2.5 million which more than doubled Dechra’s contract manufacturing revenues.Market Capitalisation£183.7mUnderlying Profit Before Taxation£12.7mShare Price123.00pDividend per Share3.78p†Share Price149.50pDividend per Share4.32p†Share Price211.50pDividend per Share4.78p†Share Price240.00pDividend per Share5.73p†Share Price348.00pDividend per Share6.89p†Share Price178.50pDividend per Share3.44p†Share Price87.50pDividend per Share3.78p†Dechra Annual Report 2017 - Front.indd 604/09/2017 13:58:29 Share Price
385.00p
Dividend
per Share
9.64p†
Share Price
490.75p
Dividend
per Share
11.12p†
Share Price
422.50p
Dividend
per Share
8.36p†
Share Price
690.00p
Dividend
per Share
14.00p
Share Price
486.00p
Dividend
per Share
12.27p†
20,420,517
New shares
issued
Share Price
420.00p
Dividend
per Share
7.58p†
12,438,210
New shares
issued
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
1 July 2013 to 30 June 2014
Underlying Profit
Before Taxation
£16.9m
Market
Capitalisation
£274.0m
Underlying Profit
Before Taxation
£23.4m
Market
Capitalisation
£276.9m
Underlying Profit
Before Taxation
£26.1m
Market
Capitalisation
£254.4m
Underlying Profit
Before Taxation
£30.1m
Market
Capitalisation
£326.1m
Underlying Profit
Before Taxation
£33.0m
Market
Capitalisation
£422.1m
Underlying Profit
Before Taxation
£44.6m
Market
Capitalisation
£601.3m
Underlying Profit
Before Taxation
£39.8m
Market
Capitalisation
£634.6m
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.
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 an
European 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®.
June 2009
Received approval to market
Felimazole in the US.
October 2010
Acquired DermaPet®
Inc., a Florida based
dermatological business,
for a total 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 total
consideration of
£6.4 million.
January 2012
Acquired the worldwide
rights (excluding Canada)
to HY-50® for a cash
consideration of
CAD 8.03 million.
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.
May 2013
Skipton and Bladel
sites renamed Dechra
Manufacturing. Announced
the closure of our
manufacturing site in Uldum,
Denmark.
August 2013
Divested Services Segment
to Patterson Companies,
Inc. for £87.5 million,
creating a pure veterinary
pharmaceuticals and related
products business.
March 2014
Commenced trading
in Italy.
May 2014
Acquired business and
assets of PSPC, Inc. for a
consideration of up to
US$10 million.
† Adjusted for the bonus element of the Rights Issue.
Dechra Annual Report 2017 - Front.indd 1
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Share Price
1700.0p
Dividend
per Share
21.44p
Share Price
983.00p
Dividend
per Share
16.94p
Share Price
1172.00p
Dividend
per Share
18.46p
4,775,835
New shares
issued
Share Price
690.00p
Dividend
per Share
14.00p
Share Price
723.50p
Dividend
per Share
15.40p
1 July 2012 to 30 June 2013
1 July 2013 to 30 June 2014
1 July 2014 to 30 June 2015
1 July 2015 to 30 June 2016
1 July 2016 to 30 June 2017
Continuing Our Growth Story
Underlying Profit
Before Taxation
£44.6m
Market
Capitalisation
£601.3m
Underlying Profit
Before Taxation
£39.8m
Market
Capitalisation
£634.6m
Underlying Profit
Before Taxation
£45.1m
Market
Capitalisation
£864.7m
Underlying Profit
Before Taxation
£49.7m
Underlying Profit
Before Taxation
£77.0m
Market
Capitalisation
£1,087.0m
Market
Capitalisation
£1,584.0m
May 2013
Skipton and Bladel
sites renamed Dechra
Manufacturing. Announced
the closure of our
manufacturing site in Uldum,
Denmark.
August 2013
Divested Services Segment
to Patterson Companies,
Inc. for £87.5 million,
creating a pure veterinary
pharmaceuticals and related
products business.
January 2015
Commenced trading in
Canada.
May 2015
Commenced trading in
Poland.
March 2014
Commenced trading
in Italy.
May 2014
Acquired business and
assets of PSPC, Inc. for a
consideration of up to
US$10 million.
October 2015
Acquired 92.65% controlling
interest in Genera® d.d.,
the oldest and largest
manufacturer of animal health
products in Croatia, for a total
consideration of £26.8 million.
January 2016
Acquired 100% of Laboratories
Brovel S.A. de C.V., a family
owned veterinary pharmaceutical
company located in Mexico City,
Mexico, for a consideration of
£3.3 million and a further
£0.6 million contingent upon
reaching registrations milestones.
January 2016
Commenced trading in
Austria.
April 2016
Acquired Putney®, Inc., a
leading developer of FDA
approved CAP in the US, for a
consideration of £134.2 million.
October 2016
Acquired business and assets
of Apex Laboratories Pty Ltd,
a veterinary pharmaceutical
company which manufactures,
markets and sells branded
generic prescription products
for companion animals in
Australia and New Zealand
for a total consideration of
AUD$55.0 million (£34.2 million).
March 2017
Entered a long term Intellectual
Property Licensing Agreement
with Animal Ethics Pty Ltd to
sell and market Tri-Solfen®
for all animal species in all
international markets, excluding
Australia and New Zealand.
Acquired 33.0% of the issued
share capital of Medical Ethics
Pty Ltd (Medical Ethics), the
parent company of Animal
Ethics, for a total consideration
of AUD$18.0 million
(£11.0 million).
—Clear Strategic
Focus
—Development
Pipeline
—Entrepreneurial
and Innovative
—Manufacturing
Flexibility
—Growing Animal
Health Market
—Focused Portfolio
—Recognised Brand
—Expanding
International Focus
—Talented People
and Expertise
—Strong Balance
Sheet
Dechra Annual Report 2017 - Front.indd 2
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sluglineContinuing Our Growth StoryClear Strategic FocusWe have a defined strategy focused on four main drivers: portfolio focus, geographical expansion, pipeline delivery and targeted acquisition.Development PipelineWe have a strong pipeline of novel pharmaceuticals, generic pharmaceuticals and specialist pet diets and a track record of pipeline delivery. We are proactive in recognising and bringing new development opportunities into the portfolio.Entrepreneurial and InnovativeDechra encourages an entrepreneurial and innovative approach from its management team which is underpinned by appropriate internal controls and robust systems and procedures.Manufacturing Flexibility Our manufacturing sites offer a wide range of dosage forms and packaging capabilities which can be produced in small to large-scale production batches. This flexibility is a key requirement in producing our varied product portfolio.Growing Animal Health Market The global animal health market continues to demonstrate growth. This is driven in developed countries by increased medical and surgical capabilities for companion animals. In developing countries the increased demand for high quality meat protein drives the FAP market.Focused PortfolioWe have a clear portfolio focus and hold strong market positions in a number of our key therapeutic sectors such as endocrinology, dermatology, anaesthesia and analgesics, and equine medicine.Recognised BrandDechra is recognised as a global animal healthcare company with a strong and growing reputation as a provider of high quality, specialist veterinary medicines and related products.Expanding International FocusIn line with our strategy we are focused on extending the Dechra brand into new countries. We are also increasing distribution of our products on a global basis with selected partners, currently into over 50 countries.Talented People and ExpertiseWe have attracted and retained a qualified and skilled workforce throughout the organisation. This stable and motivated team has many years’ experience within the markets we serve. Our people strategy is underpinned by the Dechra Values.Strong Balance SheetThe Group maintains prudent management of its balance sheet and achieves strong cash flows. This position provides flexibility to invest in initiatives to drive long term growth.Creating value by:Employing 1,344 peopleProducts distributed to more than 50 countriesInvestor WebsiteWe maintain a corporate website at www.dechra.com containing a wide range of information of interest to both institutional and private investors including: —Latest news and press releases —Annual reports and investor presentationsOnline ReportVisit our online Annual Report at: dechra.annualreport2017.comDechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2017www.dechra.com03Dechra Annual Report 2017 - Front.indd 304/09/2017 13:58:31 Highlights
Total
Revenue
£359.3m
2016: £247.6m
CER: +28.3%
AER: +45.1%
359.3
247.6
203.5
Underlying Operating
Profit
£81.3m
2016: £52.9m
CER: +36.9%
AER: +53.7%
81.3
52.9
44.4
Underlying Diluted
Earnings Per Share
64.33p
2016: 42.65p
CER: +35.1%
AER: +50.8%
64.33
42.65
39.90
2015
2016
2017
2015
2016
2017
2015
2016
2017
Dividend
Per Share
21.44p
2016: 18.46p
CER: +16.1%
AER: +16.1%
21.44
18.46
16.94
Reported Operating
Profit
£33.2m
2016: £19.5m
CER: +42.6%
AER: +70.3%
Reported Diluted
Earnings Per Share
27.93p
2016: 13.90p
CER: +69.1%
AER: +100.9%
33.2
27.93
26.0
19.5
21.99
13.90
2015
2016
2017
2015
2016
2017
2015
2016
2017
CER is defined as Constant Exchange Rate against prior year, whilst £ is at reported, Actual Exchange Rate (AER). A reconciliation of underlying to reported measures
can be found on page 22.
Financial Performance
• Strong revenue growth of 28.3% at constant exchange rates (CER).
Strategic Progress
• Core portfolio growth solid in EU, excellent in NA; major therapeutic
• Solid revenue growth in Companion Animal Products (CAP), Food
sectors continue to grow.
producing Animal Products (FAP), and Equine.
• Strong performance from prior year acquisitions.
• 36.9% growth at CER in underlying operating profit.
• Apex (Australia) completed and integrated, and 33.0% share of
• Strong operational leverage and full year synergies from
Medical Ethics Pty Ltd acquired.
acquisitions lifts EBIT margin 140 bps to 22.6%.
• New geographic territories performing well; new Dechra Veterinary
• Consistently strong cash conversion of 115.9%, driving Net Debt/
Products International team to create greater focus.
underlying EBITDA leverage down from 2.0 to 1.4 times.
• Significant pipeline delivery with two new FAP EU registrations and
• Underlying diluted EPS growth of 35.1%; increase in full year
numerous international approvals.
dividend to 21.44 pence.
• Exploring several new pipeline opportunities.
04
Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2017
www.dechra.com
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Contents
Overview
Our Business Model
Pages 08 to 10
Delivering Our Strategy
Pages 13 to 15
Overview
Welcome to Dechra Pharmaceuticals PLC
Delivering Consistently for Our Shareholders
Continuing our Growth Story
Highlights
IFC
Flap
03
04
Geographical Footprint
Page 16
Financial Review
Pages 21 to 27
Product Development
Pages 44 and 45
How the Business Manages
Risk Pages 56 and 57
Directors’ Remuneration
Report Pages 81 to 101
Our Financials
Pages 108 to 169
Stock Code: DPH
Strategic Report
Our Business Model
Our Business Model Explained
Our Products
Dechra Values
Delivering our Strategy
Geographical Footprint
Non-Executive Chairman’s and
Chief Executive Officer’s Statement
Financial Review
Q&A with Ian Page
Q&A with Richard Cotton
Key Performance Indicators
Strategy in Action
Product Development
International Product Offering
Corporate Social Responsibility
How the Business Manages Risk
Understanding our Key Risks
Governance
Board of Directors
Corporate Governance
Audit Committee Report
Nomination Committee Report
Directors’ Remuneration Report
Directors’ Report – Other Disclosures
Statement of Directors’ Responsibilities
Financial Statements
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
Company Statement of Financial Position
Company Statement of Changes in
Shareholders’ Equity
Notes to the Company Financial Statements
Financial History
Company Information
Glossary
Shareholder Information
Advisers
08
09
11
12
13
16
17
21
28
29
30
32
44
46
48
56
58
64
66
74
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102
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116
117
118
119
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176
05
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sluglineDechra Annual Report 2017 - Front.indd 604/09/2017 13:58:35 sluglineStrategic ReportOur Business Model08Our Business Model Explained09Our Products11Dechra Values12Delivering Our Strategy13Geographical Footprint16Non-Executive Chairman’s and Chief Executive Officer’s Statement17Financial Review21Q&A with Ian Page28Q&A with Richard Cotton29Key Performance Indicators30Strategy in Action32Product Development44International Product Offering46Corporate Social Responsibility48How the Business Manages Risk56Understanding our Key Risks58Dechra Annual Report 2017 - Front.indd 704/09/2017 13:58:36 Our Business Model
Open the flap
to view Our Business
Model Explained
Our objectives are to innovate, develop, register, manufacture, supply and market high
quality products to the veterinary profession worldwide. We also offer high levels of
service, technical support and educational training to support the Dechra brand and to
develop a strong relationship and be recognised as an important partner to veterinarians.
Innovation, Development and Registration
Product Development Portfolio
Novel
Dedication
entities
True
Dedication
generics
Differentiated
Dedication
generics
Lifecycle
Dedication
management
Manufacturing
Range of Competencies
Tablets and
Dedication
capsules
Dedication
Creams
Dedication
Liquids
Dedication
Ointments
Dedication
Powders
Dedication
Vaccines
Supply Chain
Logistics Sites
Veterinary
Dedication
distributors and
wholesalers
Our Customers
Veterinary
practices and
Dedication
professional
farming
units
Veterinary
Dedication
professionals
Sales and Marketing
Telephone
Dedication
sales
representatives
Field based
Dedication
representatives
Educational
Dedication
programmes
Technical
Dedication
support
helplines
08
Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2017
www.dechra.com
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sluglineOur Business Model ExplainedInnovation, Development and RegistrationManufacturingSupply ChainProduct development ideas are generated in numerous ways, including: • regular cross functional meetings are held where all senior staff are encouraged to bring new ideas from their experience in the market place. • networking with key opinion leaders, especially in our focus therapeutic areas, to identify and develop ideas. • employing very talented veterinary scientists who extensively trawl scientific papers looking for new technologies that might have an application in our marketplace.In addition, our profile as the only major British veterinary pharmaceutical company gives us exposure to human pharmaceutical and biotech companies that are developing technologies, usually for human medicine, but often with a veterinary application. We spread our development portfolio across novel entities, differentiated generics, true generics and lifecycle management projects across multiple species.Our formulation and development laboratories are located at our manufacturing sites which allows us to emulate the manufacturing equipment at laboratory scale, a key expertise for in-house product development.After opportunities have been identified we have an evaluation phase where we conduct preliminary studies to assess suitability. Once a product has been classed as suitable for development it will be allocated to an internal development team who will be responsible for taking the product all the way through feasibility and development to regulatory submission. Once all the studies are concluded, if the product reaches the required safety, efficacy and stable chemical formula, regulatory dossiers are prepared for registration and filing with the relevant regulatory authorities.Manufacturing is a key competence of the Group; the prime objective is to deliver safe, efficacious, cost effective, quality products. Veterinary products come in many dosage forms, and often, batch runs for veterinary medicines are relatively small compared to human production; therefore it is often very difficult to outsource supply. We have a wide range of competencies across our six sites including tablets, creams, liquids, ointments, powders and vaccines that can be packed in a multitude of different presentations. Our products are distributed through two major logistics sites. The principal objective is to deliver a customer’s order on time and in full every time. Our European and International markets are serviced from our own logistics facility based in Uldum, Denmark and North America is supplied out of a third party logistics supplier in Kansas City. The majority of veterinary practices are supplied through specialised veterinary distribution companies that operate as one-stop shops. They stock the majority of items veterinary practices need and offer high levels of service, often with a next day delivery. These distributors, on the whole, are not proactive in selling product; they predominantly supply to demand where the demand is driven by Dechra’s own sales activities within veterinary practices. There are a few markets where we offer direct supply, such as Germany, that are not fully supported by veterinary distributors or where legislation enforces all pharmaceuticals to be sold through pharmacies, such as Denmark, Italy, Norway and Sweden.Read about Product Development on pages 44 and 45Read more in the Manufacturing and Supply Chain case study on page 40Dechra Annual Report 2017 - Front.indd 904/09/2017 13:58:38 sluglineTurn the page to read about Our ProductsSupply ChainOur CustomersSales and MarketingOur products are distributed through two major logistics sites. The principal objective is to deliver a customer’s order on time and in full every time. Our European and International markets are serviced from our own logistics facility based in Uldum, Denmark and North America is supplied out of a third party logistics supplier in Kansas City. The majority of veterinary practices are supplied through specialised veterinary distribution companies that operate as one-stop shops. They stock the majority of items veterinary practices need and offer high levels of service, often with a next day delivery. These distributors, on the whole, are not proactive in selling product; they predominantly supply to demand where the demand is driven by Dechra’s own sales activities within veterinary practices. There are a few markets where we offer direct supply, such as Germany, that are not fully supported by veterinary distributors or where legislation enforces all pharmaceuticals to be sold through pharmacies, such as Denmark, Italy, Norway and Sweden.All our products and sales and marketing activities are targeted at veterinary professionals. The majority of veterinarians prescribe and dispense the drugs, although there are a few territories in the world where the veterinarian writes a prescription and the drugs are purchased by the animal owner at a pharmacy. The majority of our sales are made into veterinary practices that tend to specialise in either companion animal or food producing animal treatment; however, there are numerous practices that are classified as mixed and who service all species. There is also an increasing number of equine practices and referral hospitals that provide high levels of specialisation. The veterinary profession is going through huge change as incorporated practice groups are consolidating practices at an increasing rate. In many countries, our relationship with these groups is very important; we are increasingly focused on key account management. With the ongoing integration of professional farming units, our Food producing Animal Product sales efforts are now often focused on these major integrators; however, the integrators themselves employ veterinarians who remain responsible for the prescribing and administration of our products.Dechra operates its own sales force and provides in-house marketing and technical support in 24 countries, predominantly in Europe and North America. In almost all these territories we have highly skilled field based representatives who make regular calls with all major veterinary practices in their territory. The representatives’ brief is to sell the product on a technical basis, outlining the beneficial aspects of our products and to provide educational support on how best to treat animals in our key therapeutic sectors. We also provide high levels of technical support and pharmacovigilance through helplines in every country in which we operate. These helplines provide veterinarians with support on how best to use our products and with free advice on any difficult or complex cases that may be encountered.The relationship with veterinarians is key and, to this end, we provide added value services. We offer high level educational programmes focused on the treatment of conditions in our key therapeutic sectors. We deliver this education through many channels, including major conferences, regional groups, to individual practices and increasingly through digital channels. These programmes are certified to offer veterinarians and veterinary nurses the continuing professional education points they require to maintain their professional qualification. Our Dechra Veterinary Products International sales, into over 50 additional countries, are through marketing and distribution partners who mainly promote our product range under the Dechra brand names in their own livery, often alongside their own or other in-licensed products.Strategic ReportDechra Annual Report 2017 - Front.indd 1004/09/2017 13:58:39 sluglineOur ProductsOur products can be divided into four categories: Companion Animal Products (CAP), Food producing Animal Products (FAP), Equine, and Nutrition and Diets. All are targeted at providing veterinary professionals with solutions for their customers’ needs:CAPThis is the basis upon which Dechra established its market position and continues to be our strongest sector, representing 62.3% of revenue. The majority of products in our portfolio are Prescription Only Medicines (POMs), prescribed, administered and dispensed by veterinarians working in companion animal practices. We also have a range of associated non-prescription products that complement the licensed pharmaceuticals, such as ear cleaners, dermatologically active shampoos and other topical and nutritional supplements.Key therapeutic sectors:Endocrinology, dermatology, analgesia and anaesthesia, cardiovascular and critical care.Species:Dogs and cats.Market dynamics:The principal driver of growth in companion animal markets is the pet owners’ compassion for their animals. The market has historically been orientated around developed countries such as Western Europe, North America, Australia and Japan. However, with increasing wealth in several developing regions, the companion animal market is now also emerging. Expenditure on companion animals continues to grow due to increasing pet ownership, advances in nutrition, increased competence in complex conditions by veterinarians, preventative healthcare and wellness and by increasing availability of more specialist pharmaceuticals. Dechra has developed a strong position in providing specialist and clinically necessary novel products. We also supply a range of products which complement these products in key therapeutic sectors where we are seen as the company of choice by many veterinarians.FAPDechra entered the FAP sector through the acquisition of Eurovet in 2012; it currently represents 13.2% of revenue. However, as over 60% of all global animal health sales are FAP, Dechra is underweight relative to the market and our competitors and it is an increasing area of focus, especially in our plans for geographical expansion. Our products are entirely POMs that are prescribed by veterinarians who work in either specialist veterinary practices or professional farming units. Key therapeutic sectors:Water soluble antibiotics, poultry vaccines, locomotion (lameness) and pain management.Species:Poultry, pigs and an increasing presence in cattle.Market dynamics:The key driver for growth in this sector is a huge increase in the global demand for high quality animal protein and dairy products. Vaccines are the biggest growth sector of the veterinary market and are anticipated to continue to outgrow therapeutic treatments. The majority of our sales are currently antibiotics which are sold mainly into Western Europe. Western Europe has been extremely proactive over the last five years in reducing antibiotic use due to concerns over antimicrobial resistance and ‘super bugs’. Dechra’s portfolio is positioned to match current best practice prescribing habits; additionally, our recent move into poultry vaccines should provide growth opportunities in future years as we seek global registrations.EquineThis is a sector in which few animal health companies specialise due to the relatively small number of horses in the world and the fact that in the majority of European countries the horse is classed as a food producing species which adds complexity to the licensing process. Equine veterinarians are specialised in the species and operate out of either mixed practices or, increasingly, specialist equine centres.Key therapeutic sectors:Lameness and pain management.Species:Horses and ponies.Market dynamics:The horse is classed as a minor species as there are very few, even in major countries such as the US where current estimates are only eight million and the UK at approximately one million. Although there is a big overlap, the market can be divided roughly into high performance sports horses and leisure horses and ponies. The market is variable and can be linked to the economy; however, high value sports horses will be treated at almost any cost. Dechra has developed a strong position in lameness and pain management with unique products that have superior efficacy compared to historic treatments.Nutrition and Diets (Nutrition)Our range of pet foods is predominantly focused on high quality nutrition to support therapeutic conditions in dogs and cats such as allergies, obesity, heart and kidney disease. They are sold through veterinary practices under the recommendation of either veterinarians or veterinary nurses and are recommended to support therapeutic recovery following diagnosis by a veterinarian of specific conditions.Key therapeutic sectors:Our pet diets are available to support the well being of animals with numerous therapeutic conditions. The ability to offer our wide range of products, branded Specific, is necessary to remain competitive in this sector.Species:Dogs and cats.Market dynamics:The global pet food market is huge and dwarfs the animal health pharmaceuticals market. The veterinary recommendation is respected by pet owners which allows them to take a small but significant part of this diet market. Dechra’s focus is predominantly therapeutic diets which are not available for self-selection through supermarkets and require advice from the veterinarian. There are very few competitors in this specialist sector of the pet food market and although we compete with huge global multinational companies, we are able to differentiate our position through the use of higher quality ingredients and through innovation.Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2017www.dechra.com11Dechra Annual Report 2017 - Front.indd 1104/09/2017 13:58:40 sluglineDechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2017www.dechra.com12Dechra ValuesDechra Annual Report 2017 - Front.indd 1204/09/2017 13:58:44 sluglineDelivering Our StrategyGenerate long term value for shareholdersStrategic EnablersabcPipeline DeliveryPortfolio FocusGeographical ExpansionManufacturing and Supply ChainTechnologyPeopleAcquisitionDedicationDedicationDedicationDedicationDedicationDedicationDedicationEnjoymentCourageHonestyRelationshipsAmbitionStrategic Growth DriversInternational specialist veterinary pharmaceuticals and related products businessDechra ValuesSince 2013, our priorities for each Strategic Growth Driver and Enabler have been clearly defined and communicated and are outlined in the table overleaf. In this section of the Annual Report we describe the progress we have made towards achieving our strategic objectives.Read more on Strategic Growth Drivers on pages 32 to 39Read more on Strategic Enablers on pages 40 to 43Strategic ReportStock Code: DPH13Dechra Annual Report 2017 - Front.indd 1304/09/2017 13:58:46 Delivering Our Strategy
continued
Our Strategic Priorities
Our Progress in 2017
Future Priorities
• Signed Animal Ethics licensing agreement, and building pipeline
• Continue to identify innovative development opportunities.
Link to Strategy in Action
Amoxi-Clav
Pipeline Delivery
We must deliver our pipeline on time, at the right costs and with the
expected returns. It is also important that we refill the pipeline so that
we get a constant flow of new products in future years.
of other in-licensing opportunities.
• Vaccines development strategy defined and new opportunities
identified.
• Zagreb product development laboratory commissioned and
operational.
• Putney’s Amoxi-Clav tablet development completed and other
projects continuing.
• A number of minor FAP market authorisations gained.
• Further develop Dechra laboratory network, including further FDA licensing.
See pages 32 and 33
• Continue to develop Vaccines pipeline.
• Explore and negotiate further in-licensing deals.
a
b c
FAP returned to growth.
Portfolio Focus
We are a specialist veterinary pharmaceuticals business focused on
CAP, Equine, FAP and Nutrition. We look to maximise our revenue by
focusing on clearly defined therapeutic sectors.
•
Increased effective use of CRM tools in EU and NA.
• Expanded sales force effectiveness training.
• Unblocking of distribution channels for Putney products in the US
has opened up market for enlarged NA business growth.
• Strong CAP and Equine growth continuing across the Group.
• Deepen market penetration of existing products across all territories.
• Enhance Nutrition and FAP sales growth.
• Continue to drive marketing and sales force effectiveness.
Our Key Therapeutic Areas
See pages 34 and 35
Geographical Expansion
We have identified a number of markets that present both volume and
profit opportunities in the medium to long term. Our entry strategies
will vary depending on the local market dynamics.
• Several international product registrations achieved.
• Develop Dechra Veterinary Products International business.
• Established Dechra Veterinary Products International business.
• Continue to leverage current registration portfolio in newer territories.
• Commenced appointment of the Dechra Veterinary Products
•
Increase international country registrations.
International team.
Dechra Veterinary Products
International
See pages 36 and 37
Acquisition
Our priority is to target strategic acquisitions that will expand our
geographical footprint and/or enhance our product portfolio.
and Apex.
• Acquisition of Apex, opening up new bridgehead into Australasia
and South East Asia.
• Acquisition of 33.0% of Medical Ethics Pty Ltd provides the Group
with secure access to novel therapeutic areas/product development.
• Successful integration and operation of Genera, Brovel, Putney
• Continue integration and leverage of recent acquisitions.
• Acquire businesses in target geographical/therapeutic markets.
Integration of Acquisitions
See pages 38 and 39
Strategic Enablers
Our strategic enablers, Manufacturing and Supply Chain, People and
Technology, support the execution of our strategy.
• Continued strengthening of Senior Executive Team with key
appointments of Richard Cotton, Giles Coley, Anthony Lucas and
Greig Rooney.
• Ongoing progress in Oracle deployment.
•
IT user hardware standardised across the Group.
• Develop and integrate procurement activities.
• Continue to develop leadership effectiveness, and quality of talent.
• Continue to develop Oracle ERP and other business systems.
• Developed new Manufacturing and Supply Chain strategy.
• Execute Manufacturing and Supply Chain remodelling strategy.
Manufacturing and Supply Chain
See page 40 for more on Manufacturing
and Supply Chain
SET (Senior Executive Team)
See pages 42 and 43 for more
on People
People – 20th Anniversary
See page 41 for more
on People - 20th Anniversary
14
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Strategic Report
Pipeline Delivery
We must deliver our pipeline on time, at the right costs and with the
expected returns. It is also important that we refill the pipeline so that
we get a constant flow of new products in future years.
identified.
operational.
of other in-licensing opportunities.
• Vaccines development strategy defined and new opportunities
• Zagreb product development laboratory commissioned and
• Putney’s Amoxi-Clav tablet development completed and other
projects continuing.
• A number of minor FAP market authorisations gained.
a
b c
Portfolio Focus
We are a specialist veterinary pharmaceuticals business focused on
CAP, Equine, FAP and Nutrition. We look to maximise our revenue by
focusing on clearly defined therapeutic sectors.
FAP returned to growth.
•
Increased effective use of CRM tools in EU and NA.
• Expanded sales force effectiveness training.
• Unblocking of distribution channels for Putney products in the US
has opened up market for enlarged NA business growth.
Geographical Expansion
We have identified a number of markets that present both volume and
profit opportunities in the medium to long term. Our entry strategies
will vary depending on the local market dynamics.
International team.
Acquisition
Our priority is to target strategic acquisitions that will expand our
geographical footprint and/or enhance our product portfolio.
and Apex.
and South East Asia.
• Acquisition of Apex, opening up new bridgehead into Australasia
• Acquisition of 33.0% of Medical Ethics Pty Ltd provides the Group
with secure access to novel therapeutic areas/product development.
Our Strategic Priorities
Our Progress in 2017
Future Priorities
• Signed Animal Ethics licensing agreement, and building pipeline
• Continue to identify innovative development opportunities.
Link to Strategy in Action
Amoxi-Clav
• Further develop Dechra laboratory network, including further FDA licensing.
See pages 32 and 33
• Continue to develop Vaccines pipeline.
• Explore and negotiate further in-licensing deals.
• Strong CAP and Equine growth continuing across the Group.
• Deepen market penetration of existing products across all territories.
• Enhance Nutrition and FAP sales growth.
• Continue to drive marketing and sales force effectiveness.
Our Key Therapeutic Areas
See pages 34 and 35
• Several international product registrations achieved.
• Develop Dechra Veterinary Products International business.
• Established Dechra Veterinary Products International business.
• Continue to leverage current registration portfolio in newer territories.
• Commenced appointment of the Dechra Veterinary Products
•
Increase international country registrations.
Dechra Veterinary Products
International
See pages 36 and 37
• Successful integration and operation of Genera, Brovel, Putney
• Continue integration and leverage of recent acquisitions.
• Acquire businesses in target geographical/therapeutic markets.
Integration of Acquisitions
See pages 38 and 39
Strategic Enablers
Our strategic enablers, Manufacturing and Supply Chain, People and
Technology, support the execution of our strategy.
Greig Rooney.
• Ongoing progress in Oracle deployment.
•
IT user hardware standardised across the Group.
• Continued strengthening of Senior Executive Team with key
appointments of Richard Cotton, Giles Coley, Anthony Lucas and
• Develop and integrate procurement activities.
• Continue to develop leadership effectiveness, and quality of talent.
• Continue to develop Oracle ERP and other business systems.
• Developed new Manufacturing and Supply Chain strategy.
• Execute Manufacturing and Supply Chain remodelling strategy.
Manufacturing and Supply Chain
See page 40 for more on Manufacturing
and Supply Chain
SET (Senior Executive Team)
See pages 42 and 43 for more
on People
People – 20th Anniversary
See page 41 for more
on People - 20th Anniversary
See our Key Performance Indicators
on pages 30 and 31
Read about Understanding Our Key Risks
on pages 58 to 61
Stock Code: DPH
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sluglineGeographical FootprintGloballyWithin EuropeKey European Pharmaceuticals North America Pharmaceuticals International ManufacturingWe currently have our own sales and marketing organisations in 24 countries. We also market our products in over 50 countries worldwide through distributors and marketing partners.Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2017www.dechra.com16Dechra Annual Report 2017 - Front.indd 1604/09/2017 13:58:48 sluglineNon-Executive Chairman’s and Chief Executive Officer’s StatementTony Rice Non-Executive Chairman Ian Page Chief Executive OfficerAs we complete our 20th year since the inception of the Company, we are pleased to report that the Group has delivered another strong financial performance. Ian Page Chief Executive OfficerAs we complete our 20th year since the inception of the Company, we are pleased to report that the Group has delivered another strong financial performance. This has been driven by growth from our existing portfolio, good market penetration from recent pipeline launches and the pleasing performance of the acquisitions made in the preceding financial year. This has resulted in strong cash generation and deleveraging of our balance sheet. Furthermore, we have completed two acquisitions within the 2017 financial year, the first of which extends our geographical footprint into Australia and New Zealand and the second is a minority stake together with the global marketing rights in a business that may transform our Food producing Animal Product (FAP) business in the long term through the development of a novel approach to farm animal pain relief. Portfolio FocusEU Pharmaceuticals SegmentDuring the 2017 financial year our EU Pharmaceuticals Segment increased its total reported revenues by 7.9% at constant exchange rates (CER). Our existing EU Pharmaceuticals business, excluding third party contract manufacturing and acquisitions, increased by 5.3%. Third party contract manufacturing revenues, which are reported under our EU Pharmaceuticals Segment, declined by 9.7% in the 2017 financial year. This was a conscious strategic move as we start to implement an efficiency improvement plan across our manufacturing sites (this is covered in more detail later in this Statement).Our Companion Animal Product (CAP) sales were the predominant driver of revenue growth in our core EU business; FAP and Equine also delivered growth of 1.3% and 0.7% respectively. The UK, France and Germany, the three main contributors to EU revenues, performed well; we also delivered strong revenue growth in Italy and Poland. After a slow start to our recently formed subsidiary in Austria, performance is now reaching our expectations.CAP revenue increased by 9.0% driven by a strong performance of Zycortal®, our novel endocrine product launched last year and also from established products such as Cardisure®, Vetoryl and our analgesia and anaesthesia range.We are pleased to report our FAP portfolio has delivered its second successive year of growth, albeit modest. This performance is set against a historical decline in antibiotic sales due to concerns over antimicrobial resistance which is continuing in most markets. Despite this, we are beginning to see signs of a recovery in sales of our water soluble antibiotics. We believe that our Solustab® range is now well positioned to provide veterinarians with a robust portfolio of suitable options for prudent use of antibiotics in the treatment of the majority of infectious diseases in pigs and poultry. The first of the poultry vaccines developed for the EU, Avishield® ND, was launched in Germany, the Netherlands and Belgium. Although we do not yet have a full range to offer our customers, we were still able to gain a market share of approximately 15% due to the product’s excellent efficacy and safety profile.The Equine portfolio growth has predominantly been driven by Osphos®, although we believe that sales are a long way from reaching full potential and will continue to grow as veterinarians gain a better understanding of this unique treatment. Generic competition to Equipalazone®, a long standing product in our portfolio, partly offset the sales growth in this category.The Nutrition and Diets market continues to be very competitive; we are maintaining sales of our brand, Specific following historical supply issues and are initiating a number of projects that we hope will re-invigorate the range in the near term. We have, towards the end of this financial year, launched two new hypo-allergenic wet diets for dogs and cats.The overall EU Pharmaceuticals Segment benefited from a full year’s contribution from the acquisition of Genera, the Croatian business acquired in October 2015 and eight months’ contribution from Apex, the Australian business acquisition completed in October 2016 (Dechra Veterinary Products International revenue, including Apex, are included in this Segment). Apex is performing well with the recently modernised factory achieving regulatory approval from the authorities in Australia in April 2017.GlossaryTerms used within this section:CAP: Companion Animal ProductsFAP: Food producing Animal ProductsCER: Constant Exchange RateEU Pharmaceuticals Segment: Dechra Veterinary Products EU, Dechra Veterinary Products International and Dechra Pharmaceuticals Manufacturing and ApexNorth America Pharmaceuticals Segment: Dechra Veterinary Product US, and Canada, and Dechra BrovelStock Code: DPH17Strategic ReportDechra Annual Report 2017 - Front.indd 179/4/2017 2:34:55 PM Non-Executive Chairman’s and
Chief Executive Officer’s Statement
continued
7.9% revenue
growth in the EU
93.7% revenue
growth in NA
Sales to over
50 countries
worldwide
Global registrations
continue to be
delivered
Excellent progress continues to be made on the integration of the
Genera acquisition. Significant cost savings have been delivered from
the workforce rationalisation and major improvements have been made
in the solid dose and liquids manufacturing facilities, into which new
products are being transferred to benefit from this low cost location.
The primary reason for the acquisition was to access their range of
poultry vaccines for broilers; the first of these has now been launched,
the next five are in registration and progress is being made with a
further four products.
North America Pharmaceuticals Segment
Total North American Segment revenues increased by 93.7%. Existing
business sales increased by 16.5% with our US and Canadian
businesses both performing well. The principal drivers of this growth
are CAP and Equine products. All major products have delivered
growth with excellent sales of Zycortal, Vetivex (a range of intravenous
fluids for critical care) and Osphos.
A number of new products were launched during the 2017 financial
year including Amoxi-Clav (the first major product approval from Putney
since we acquired the business in April 2016), three new extensions to
our Vetivex range, Carprovet flavoured tablets to increase our CAP pain
management range and two topical dermatology products in a new
mousse format.
Overall the Segment benefited from an exceptional performance
by Putney. The integration has been implemented extremely well;
significant cost savings have been delivered, new sales channels
opened and sales synergies from the enlarged team have been
delivered to both Putney and our existing product ranges.
The Mexican business, Brovel, acquired in January 2016 continues
to focus on the registration of Dechra products; initial approvals have
now been received. A new management team was appointed during
the 2016 financial year and there has been a notable improvement in
performance.
Product Pipeline
Integrated Team
We have invested in and commissioned a new development laboratory
in Genera, Croatia. We have also implemented a new management
structure to monitor and control all global pipeline activities, and have
successfully integrated the pipeline activities and team members from
all our recent acquisitions.
Pipeline Delivery
The most significant approval, as announced on 9 September 2016,
was for a generic antibiotic tablet, Amoxi-Clav. There have been
numerous other global registrations, the most significant of which are:
• Revozyn®, a cattle antibiotic for mastitis, in the Netherlands, UK
and Germany with applications having been made for a further
ten European markets;
• Cyclospray® aerosol and Vetoryl 5mg in Canada;
• Cardisure, Zycortal, Osphos, Doxy paste and Benazapril oral
solution in Australia;
• Osphos in Mexico;
•
Isathal® and Canaural in Korea;
• Domidine®, Atipam® and Sedator® in Thailand and South Africa; and
• Altidox®, a water soluble antibiotic, in 13 EU territories.
Filling the Pipeline
Our pipeline has been significantly enhanced by recent acquisitions
and remains strong. As the Company increases in scale, we recognise
that the pipeline needs to increase commensurately, and are therefore
constantly reviewing new technologies and developing relationships to
introduce new products into the programme. Within the year we have
signed three agreements to conduct Proof of Concept studies on new,
innovative and potentially material pharmaceuticals for the veterinary
market. We also continue to look at opportunities to secure products
from other companies and have, in the 2017 financial year, licensed in
a range of CAP generic tablets from a key partner for Europe, a dental
and a dermatological product from Kane Biotech Inc. for the US and
Canada and a dermatological product from Premune for the EU.
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Strategic Report
Acquisitions
On 14 October 2016, we completed the acquisition of the trade and
assets of Apex Laboratories Pty Ltd (Apex), based in Somersby near
Sydney, Australia for AUD$55.0 million (£34.2 million). The acquisition,
which is expected to be earnings enhancing in the first 12 months of
ownership, manufactures, markets and sells branded non-proprietary
prescription and other related CAP in Australia and New Zealand. Prior
to the acquisition it had revenues for the year ended 30 June 2016 of
AUD$14.8 million (£8.4 million) and operating profit of AUD$5.2 million
(£3.0 million). The principal reason for the acquisition was to provide
Dechra with direct access to the established and growing Australian
CAP and Equine markets, in which Dechra currently operates through
partners.
On 31 March 2017, we acquired a 33.0% stake in, Medical Ethics Pty
Ltd, the parent company of Animal Ethics Pty Ltd (Animal Ethics) for
a total consideration of AUD$18.0 million (£11.0 million). Separately,
we also announced that we had entered into a long term Intellectual
Property Licensing Agreement with Animal Ethics who are an Australian
based company focused on developing ethical pain relief products
for animal health. This agreement gives Dechra the rights to sell and
market Animal Ethics’ patented product Tri-Solfen for all animal species
in all international markets, excluding Australia and New Zealand.
Tri-Solfen is a topical product that is sprayed onto wounds which
simultaneously anaesthetises, relieves pain, controls bleeding and
protects against infection for routine treatments in farm animals such as
castration, tail docking, de-budding and de-horning. There is increasing
pressure from retailers, animal welfare and consumer groups to improve
the ethical treatment of animals. We believe that Dechra’s access to
Tri-Solfen will provide us with a unique position to increase our
presence in FAP markets globally.
Geographical Expansion
Sales in territories outside of Western Europe and our North American
Pharmaceuticals Segment are categorised as International and these
are reported under our EU Pharmaceuticals Segment; they currently
represent 8.6% of total Group sales.
Towards the end of the financial year we established a new business
unit, Dechra Veterinary Products International, led by Giles Coley, a long
standing senior executive within Dechra, to focus on increasing our
international presence. Historically, international sales have not been an
area of strategic focus and we are therefore underweight relative to our
competitors and the global market. By increasing focus and strategic
priority, we believe we can deliver material growth in future years.
Currently, sales outside our core markets are predominantly FAP
based. We believe our high quality products, mainly in pig and poultry,
will provide us an entry opportunity into markets where quality meat
consumption is increasing strongly. In the longer term we are targeting
companion animal markets which are beginning to gain growth
momentum in several developing countries; we are starting to register
products to benefit from this global growth in pet ownership.
Strategic Enablers
Manufacturing
We have commenced the implementation of a strategic five year plan
that will create centres of excellence for different dosage forms in our
major manufacturing sites and which will lead to significant gains in
efficiency throughout the period of the plan.
As part of this project we are reducing third party manufacturing
contracts. This was historically important business to utilise capacity
in our factories; however, the significantly increased scale of our own
production is now being hindered by a number of these smaller, low
margin contracts. We will therefore be exiting most of these contracts
over the next five years, only retaining a few significant, high volume
partnerships.
Following our recent acquisitions, in-sourced production accounts for
approximately 50% of all product sales. Our Manufacturing and Supply
Chain team have identified opportunities to reduce the complexity of
our supplier network by working with preferred partners and bringing
more of the currently outsourced production in-house.
Technology
We continue to focus on the implementation of the Oracle DVP EU
ERP solution which we announced at the Half Yearly results had fallen
behind schedule. We believe that excellent progress has now been
made and we are confident that a go live can be implemented prior to
the end of the 2018 financial year.
Several of other IT developments have been progressed in the year:
•
Implementation of the Hyperion Financial Management Group
consolidation solution is expected to be completed on plan by the
end of the 2017 calendar year;
• A new intranet has been developed to enhance Group internal
communications;
• A new platform is in place to host the Dechra Academy providing
greater flexibility and functionality;
• The roll out of the Group HR Cloud system is continuing; and
• A new Customer Relationship Management tool has been
implemented for our US operations.
People
As previously reported there have been three Board appointments in
the year. We are delighted that the Board has been strengthened by the
appointment of Tony Rice, who took over the role of Chairman, from
Michael Redmond, at our Annual General Meeting on 21 October 2016,
following a six month introduction to the Company as a Non-Executive
Director. An additional Non-Executive Director, Lawson Macartney,
joined the Board with effect from 1 December 2016 to strengthen
veterinary, technical and pharmaceutical knowledge on the Board.
Richard Cotton also joined the Board in January 2017 as Chief Financial
Officer.
As part of the new business unit, we have created a regulatory team to
focus on international registrations and are looking to appoint business
development managers in key geographies to support our existing
distributors and to establish new markets.
On behalf of the Board we would like to thank all employees for their
hard work, dedication and innovation throughout the year. Our people
are a key asset to the business; we consistently look to invest, to
strengthen, educate and motivate our team.
Read more about Manufacturing and Supply Chain
case study on page 40
Read more about Board of Directors
on pages 64 and 65
Stock Code: DPH
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Approval in 13 European markets for AltidoxProgress made in our strategic growth driversStrong growth in key territories Final dividend proposal of 15.33psluglineNon-Executive Chairman’s and Chief Executive Officer’s Statement continuedDividendThe Board is proposing a final dividend of 15.33 pence per share (2016: 12.91 pence per share). Added to the interim dividend of 6.11 pence per share, this brings the total dividend for the financial year ended 30 June 2017 to 21.44 pence per share, representing 16.1% growth over the previous year.Subject to shareholder approval at the Annual General Meeting to be held on 20 October 2017, the final dividend will be paid on 17 November 2017 to shareholders on the Register at 27 October 2017. The shares will become ex-dividend on 26 October 2017.OutlookAs outlined in this statement the core business and acquisitions are performing well. The enlarged Group continues to outperform the majority of markets in which we trade and we continue to identify new growth opportunities and operational efficiencies.Current trading is in line with the Board expectations and we anticipate delivering our strategic objectives in the new financial year. Tony Rice Non-Executive Chairman 4 September 2017Ian Page Chief Executive Officer 4 September 2017Read the Financial Review on pages 21 to 27Read Delivering Our Strategy on pages 13 to 15Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2017www.dechra.com20Dechra Annual Report 2017 - Front.indd 2004/09/2017 13:58:54 sluglineFinancial ReviewRichard Cotton Chief Financial OfficerDechra has delivered a strong set of financial results, with underlying EPS growth of 35.1% (at CER). This reflects excellent cash conversion performance of 115.9%, and a strengthening balance sheet, with leverage down from 2.0 to 1.4 times EBITDA, whilst continuing to invest.Richard Cotton Chief Financial OfficerOverview of Reported Financial ResultsTo assist with understanding our reported financial results, the consolidated results below are split between existing business and acquisition; acquisition includes those businesses acquired in the current and prior year. Additionally, the table below shows the growth at reported actual exchange rates (AER), and constant exchange rates (CER) to identify the impact of foreign exchange movements. The acquisitions loss is stated after certain non-underlying items. Non-underlying items comprise amortisation of acquired intangibles and impairment of acquired intangibles, impairment of investments, acquisition expenses, fair value uplift of inventory acquired through business combinations, rationalisation costs, loss on extinguishment of debt, and fair value and other movements on deferred and contingent consideration. Including non-underlying items, the Group’s profit before tax increased by 66.2% at CER (97.2% at AER). Dechra’s existing business grew by 29.0% at CER (57.2% at AER), with reported profit before tax of £43.4 million.As Reported2017Existing£m2017Acquisition£m2017Consolidated£m2016£mGrowth at AERGrowth at CERExisting% Consolidated%Existing%Consolidated%Revenue269.689.7359.3247.619.3%45.1%6.5%28.3%Gross profit159.232.5191.7132.422.6%44.8%10.5%29.8%Gross profit %59.1%36.2%53.4%53.5%160bps(10bps)220bps60bpsOperating profit/(loss)43.3(10.1)33.219.547.3%70.3%21.4%42.6%EBIT %16.1%(11.3%)9.2%7.9%310bps130bps180bps90bpsProfit/(loss) before tax43.4(14.8)28.614.557.2%97.2%29.0%66.2%Diluted EPS (p)——27.9313.90—100.9%—69.1%GlossaryTerms used within this section:IFRSs: International Financial Reporting Standards as adopted by the EUCER: Constant Exchange RatesAER: Actual Exchange RatesCAP: Companion Animal ProductsFAP: Food producing Animal Productsbps: basis pointsStock Code: DPH21Strategic ReportDechra Annual Report 2017 - Front.indd 2104/09/2017 13:58:56 Financial Review
continued
Overview of Underlying Financial Results
When presenting our financial results, we use a number of adjusted measures which are considered by the Board and management in reporting,
planning and decision making. Underlying results reflect the Group’s trading performance excluding non-underlying items, as defined above. A
reconciliation of underlying results to reported results in the year to 30 June 2017 is provided in the table below. In the commentary which follows,
all references will be to CER unless otherwise stated.
2017
Underlying
Results
£m
359.3
195.9
(99.6)
(15.0)
81.3
(4.2)
(0.1)
77.0
(16.9)
60.1
64.33
Non-cash uplift
on acquired
inventory
£m
—
(4.2)
—
—
(4.2)
—
—
(4.2)
1.5
(2.7)
—
Non-underlying Items
Amortisation
and related
costs of
acquired
intangibles
£m
—
—
(29.0)
(11.4)
(40.4)
—
—
(40.4)
12.6
(27.8)
—
Acquisition,
impairments
and
restructuring
costs
£m
—
—
(3.5)
—
(3.5)
—
(0.1)
(3.6)
0.2
(3.4)
—
Finance
expenses
£m
—
—
—
—
—
(0.2)
—
(0.2)
0.1
(0.1)
—
2017
Reported
Results
£m
359.3
191.7
(132.1)
(26.4)
33.2
(4.4)
(0.2)
28.6
(2.5)
26.1
27.93
Revenue
Gross profit
Selling, general and administrative expenses
R&D expenses
Operating profit
Net finance costs
Share of associate loss
Profit before tax
Taxation
Profit after tax
Diluted EPS (p)
In the year, Dechra delivered consolidated revenue of £359.3 million, representing an increase of 28.3% on the prior year. This included
£269.6 million from its existing business, an increase of 6.5%, and a £89.7 million contribution from acquisition business.
Consolidated underlying operating profit of £81.3 million, represents a 36.9% increase on the prior year. This included £64.0 million from Dechra’s
existing business, an increase of 11.8%, and a £17.3 million contribution from acquisition business.
Underlying EBIT margin increased by 140bps to 22.6%, with the dilution from the lower gross margin revenues acquired being offset significantly
by the operating leverage from revenue growth.
Underlying EPS grew by 35.1% to 64.33p reflecting the growth from the existing and acquired businesses, increased finance charges from the
increase in debt to fund the acquisitions, and the change in mix of the applicable tax rates.
Growth at AER
Growth at CER
Existing
%
19.3%
22.6%
160bps
24.0%
90bps
23.5%
—
—
Consolidated
%
45.1%
41.4%
(140bps)
Existing
%
6.5%
10.5%
220bps
Consolidated
%
28.3%
26.4%
(80bps)
53.7%
120bps
52.1%
50.8%
16.1%
11.8%
120bps
11.6%
—
—
36.9%
140bps
35.5%
35.1%
16.1%
2016
£m
247.6
138.5
55.9%
52.9
21.4%
58.0
42.65
18.46
Underlying
Revenue
Gross profit
Gross profit %
Underlying
Operating profit
Underlying EBIT %
Underlying EBITDA
Underlying Diluted
EPS (p)
Dividend per share
2017
Existing
£m
269.6
159.2
59.1%
64.0
23.7%
69.3
—
—
Underlying Diluted
Earnings per Share
64.33p
2017
Acquisition
£m
89.7
36.7
40.9%
2017
Consolidated
£m
359.3
195.9
54.5%
17.3
19.3%
18.9
—
—
81.3
22.6%
88.2
64.33
21.44
64.33
42.65
39.90
2015
2016
2017
22
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Strategic Report
Reported Segmental Performance
Reported segmental performance is presented in note 2 on pages 128 and 129. The effect of acquisitions made in the year and prior year was
significant, as was the effect of foreign exchange movements. The reported segmental performance is analysed between existing and acquisition
businesses, and at AER and CER in the table below. The acquisition elements capture both the additional base business coming into the Group,
the growth we generated in them in the year, as well as the synergies we have realised for the Group. This analysis becomes less definitive the
further in time from the completion of the acquisition, as the acquisition business is integrated with the existing business.
Reported
Revenue by segment
EU Pharmaceuticals
NA Pharmaceuticals
Total
Operating profit/(loss) by
segment
EU Pharmaceuticals
NA Pharmaceuticals
Pharmaceuticals Research
and Development
Segment operating profit
Corporate and unallocated costs
Underlying operating profit
Non-underlying operating items
Reported operating profit
2017
Existing
£m
2017
Acquisition
£m
2017
Consolidated
£m
200.3
69.3
269.6
56.0
24.5
(8.9)
71.6
(7.6)
64.0
(20.7)
43.3
26.6
63.1
89.7
4.7
18.7
(6.1)
17.3
—
17.3
(27.4)
(10.1)
226.9
132.4
359.3
60.7
43.2
(15.0)
88.9
(7.6)
81.3
(48.1)
33.2
2016
£m
188.9
58.7
247.6
51.7
17.5
(10.4)
58.8
(5.9)
52.9
(33.4)
19.5
Growth at AER
Growth at CER
Existing
%
Consolidated
%
Existing
%
Consolidated
%
14.4%
36.4%
19.3%
20.1%
125.6%
45.1%
3.6%
16.5%
6.5%
7.9%
93.7%
28.3%
11.1%
54.1%
(1.1%)
24.5%
(28.8%)
24.0%
—
47.3%
17.4%
146.9%
5.0%
31.4%
9.9%
110.9%
(44.2%)
51.2%
(28.8%)
53.7%
—
70.3%
3.4%
13.6%
(28.8%)
11.8%
—
21.4%
(31.7%)
36.1%
(28.8%)
36.9%
—
42.6%
Underlying Segmental Performance
European Pharmaceuticals
Revenue in European Pharmaceuticals grew by 7.9%. The existing business grew by 3.6%: excluding third party contract manufacturing, which is
being reduced in line with our strategy and replaced with own product manufacturing, revenues increased by 5.3%. This growth was driven mainly
by the strong contribution from market penetration and new product launches in the core CAP business, and the sustained growth of FAP despite
the ongoing pressure to reduce antibiotic prescriptions. The acquisitions of Genera (acquired in October 2015) and Apex (Dechra Veterinary
Products International business reported within European Pharmaceuticals, acquired in October 2016) contributed a combined £26.6 million to
revenue.
EBIT from existing business grew 5.0%, with operating margin expanding to 28.0% and consolidated operating margin increasing slightly to 26.8%
as a result of operating leverage.
Underlying
Revenue
EBITDA
EBITDA %
EBIT
EBIT %
2017
Existing
£m
200.3
59.0
29.5%
56.0
28.0%
2017
Acquisition
£m
26.6
6.0
22.6%
4.7
17.7%
2017
Consolidated
£m
226.9
65.0
28.6%
60.7
26.8%
Growth at AER
Growth at CER
2016
£m
188.9
55.0
29.1%
51.7
27.4%
Existing
%
14.4%
11.1%
(80bps)
11.1%
(80bps)
Consolidated
%
20.1%
18.2%
(50bps)
17.4%
(60bps)
Existing
%
3.6%
4.9%
40bps
5.0%
40bps
Consolidated
%
7.9%
10.4%
70bps
9.9%
50bps
European Pharmaceuticals
Revenue
£226.9m
226.9
European Pharmaceuticals
Operating Profit
188.9
168.7
£60.7m
60.7
51.7
48.0
2015
2016
2017
2015
2016
2017
Stock Code: DPH
Dechra Annual Report 2017 - Front.indd 23
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Financial Review
continued
North American Pharmaceuticals
Revenue from North American Pharmaceuticals grew by £55.0 million or 93.7%. The existing business grew by 16.5% to £69.3 million from
market penetration from existing CAP and Equine products. The acquisitions of Brovel (acquired January 2016) and Putney (acquired April 2016)
contributed £63.1 million, almost doubling the size of North American Pharmaceuticals. Putney delivered a particularly strong performance,
benefiting from the sales and marketing efforts of the enlarged Dechra team. Brovel in Mexico also delivered good growth.
EBIT from the existing business grew by 31.4% with strong operating leverage from the additional volume, moving the EBIT margin on existing
business to 35.4%. Including the acquisitions, EBIT increased from £17.5 million to £43.2 million, with EBIT margin expanding from 29.8% to
32.6%, with the operating leverage more than offsetting the dilutive gross margin from Putney sales.
Underlying
Revenue
EBITDA
EBITDA %
EBIT
EBIT %
2017
Existing
£m
69.3
24.6
35.5%
24.5
35.4%
2017
Acquisition
£m
63.1
19.0
30.1%
18.7
29.6%
2017
Consolidated
£m
132.4
43.6
32.9%
43.2
32.6%
Growth at AER
Growth at CER
2016
£m
58.7
17.6
30.0%
17.5
29.8%
Existing
%
36.4%
53.8%
400bps
54.1%
410bps
Consolidated
%
125.6%
147.7%
290bps
146.9%
280bps
Existing
%
16.5%
31.3%
400bps
31.4%
400bps
Consolidated
%
93.7%
111.4%
270bps
110.9%
270bps
Pharmaceuticals Research and Development
Pharmaceuticals Research and Development (R&D) expenses increased by 44.2% at AER from £10.4 million to £15.0 million, with existing
business research and development decreased slightly by 3.4%. R&D activities of the Genera, Brovel, Putney and Apex businesses added £6.1
million. Overall R&D expenses as a percentage of sales were unchanged at 4.2%: it is the Group’s strategy to grow its investment in R&D both
organically and by acquisition; the Board expects R&D expenses as a percentage of sales to grow in the coming years as it expands the product
pipeline.
R&D expenses
% of Sales
2017
Existing
£m
(8.9)
3.3%
2017
Acquisition
£m
(6.1)
6.8%
2017
Consolidated
£m
(15.0)
4.2%
2016
£m
(10.4)
4.2%
Growth at AER
Growth at CER
Existing
%
(1.1%)
Consolidated
%
(44.2%)
Existing
%
3.4%
Consolidated
%
(31.7%)
North America Pharmaceuticals
Revenue
132.4
North America Pharmaceuticals
Operating Profit
43.2
£132.4m
£43.2m
58.7
34.8
17.5
10.6
2015
2016
2017
2015
2016
2017
Development Spend
£15.0m
15.0
10.4
8.7
2015
2016
2017
24
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Strategic Report
Revenue by Product Category
CAP revenue continues to be the largest proportion of Dechra’s
business at 62.3%, up from 55.6% in the prior year. CAP grew 42.8%
in the year from market penetration, product launches and the addition
of the Putney sales. Equine revenue grew 19.5% in the year, with
very strong growth in the existing North American Pharmaceuticals
business. FAP revenue grew for a second successive year, at 8.9%
growth over the prior year, despite ongoing pressure on veterinarians
to reduce antibiotic prescriptions.
Nutrition and Diets revenue was 1.2% down on the prior year, though
progress has been made in the resolution of the supply and palatability
issues. Other revenue grew 14.5% to £33.5 million, the growth all
coming from non-core business from the acquisitions; Other revenue
also includes a 9.7% reduction in third party contract manufacturing,
which is being progressively exited in line with our manufacturing
strategy, to improve the production efficiency of Dechra’s own products.
Underlying Selling, General and Administrative
Expenses (SG&A)
SG&A costs at AER grew from £75.3 million in the prior year to
£99.6 million in the current year, a growth of 18.3%. This represents
growth from both acquisitions and the existing business, and
infrastructure cost added to manage the acquisitions. Within this
Corporate and unallocated costs grew by 28.8% to £7.6 million.
A large proportion of this increase relates to system improvement
projects, full year effect of central infrastructure changes and a
significant increase in employment taxes on share based incentive
schemes arising from the share price growth across the year from
1172p on 30 June 2016 to 1700p on 30 June 2017.
Most significantly, SG&A as a percentage of revenue declined in the
year from 30.4% in 2016 to 27.7% in 2017, as the revenue growth in
the business generated operating leverage from the cost base.
CAP
Equine
FAP
Subtotal Pharmaceuticals
Nutrition and Diets
Other
Total
2017
£m
223.8
27.2
47.3
298.3
27.5
33.5
359.3
2016
£m
137.7
20.5
38.1
196.3
24.4
26.9
247.6
%
%
Change
Change
at AER
at CER
62.5% 42.8%
32.7% 19.5%
24.1%
8.9%
52.0% 33.8%
12.7%
(1.2%)
24.5% 14.5%
45.1% 28.3%
Revenue by Product Category
(at AER)
CAP
Equine
FAP
Diets and Nutrition
Other
62.3%
7.6%
13.2%
7.7%
9.2%
£359.3m
Underlying Gross Profit
Gross margin for the existing business increased by 220bps to 59.1%.
This reflects changing product mix.
The acquisition business gross margin was 40.9%: this reflects the
weighting of the acquired Putney business in particular, where margin
is lower due to long term manufacturing partnerships.
Consolidated gross margin was 54.5%, down 80bps on the prior year
reflecting the margin dilution from acquisitions.
Non-underlying Items
Non-underlying items incurred in the year relate to the following:
• Non-cash inventory adjustment of £4.2 million – The non-cash
inventory adjustment which increases the value of acquisition
inventory sold by £4.2 million relates to the acquisition of Apex
(October 2016) and Putney (April 2016). It is the result of the fair
value exercise carried out in accordance with IFRS 3 ‘Business
combinations’ on acquisition.
• Amortisation and related costs of acquired intangibles of
£40.4 million – This includes the amortisation of the acquired
intangibles, and has grown significantly in the year from £20.1 million
to £40.4 million following the four acquisitions in the current and
prior year.
• Acquisitions, impairments and restructuring costs of £3.6 million –
This includes the transaction costs associated with the acquisition
of Apex, and of the minority share of Medical Ethics Pty Ltd (Medical
Ethics) and the impairment of the investment in Jaguar Animal
Health Inc.
• Finance Expenses of £0.2 million – This represents the unwinding of
the present value discounts relating to deferred consideration due
and associated foreign exchange.
Taxation
The reported effective tax rate (ETR) for the year is 8.6% (2016: 14.0%);
this includes both the underlying and non-underlying business. On an
underlying basis the ETR is 21.9% (2016: 22.7%): the main differences
to the UK corporation tax rate applicable of 19.75% (2016: 20.0%)
relate to patent box allowances, and differences in overseas tax
rates, the latter impacted in particular by the extent of growth in North
American Pharmaceuticals.
The underlying ETR is expected to increase towards 24% in the coming
year as the proportion of overseas profits attributable to higher tax
jurisdictions than the UK increases.
Stock Code: DPH
Dechra Annual Report 2017 - Front.indd 25
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Financial Review
continued
Earnings per Share and Dividend
Underlying diluted EPS for the year was 64.33 pence, a 35.1% growth
on the prior year. The 36.9% increase in operating profit partially offset
by the 7.7% increase in interest costs and 35.2% increase in the tax
charge were the main drivers of the increase on a weighted average
number of shares of 93.5 million (2016: 90.0 million).
• Net Debt has increased in the year by £3.4 million to £120.0 million;
this is after an increase in Net Debt of £25.0 million to fund the
acquisition of Apex, and an increase in Net Debt of £11.0 million to
fund the acquisition of the 33.0% share of Medical Ethics. Exchange
rate variations adversely affected the Net Debt position by
£6.0 million.
The reported diluted EPS for the year was 27.93 pence
(2016: 13.90 pence).
• Other liabilities increased to £41.9 million mainly due to contingent
consideration of £27.9 million for Animal Ethics.
The Board is proposing a final dividend of 15.33 pence per share
(2016: 12.91 pence), added to the interim dividend of 6.11 pence,
the total dividend per share for the year ended 30 June 2017 to 21.44
pence. This represents 16.1% growth over the prior year. Dividend
cover based on underlying diluted EPS is 3 times (2016: 2.3 times). The
Board continues to operate a progressive dividend policy recognising
investment opportunities as they arise.
Currency Exposure
Following the Brexit referendum in June 2016, the £/€ and £/$
exchange rates weakened materially. This exchange rate weakening
was barely reflected in the average rate for the 2016 financial year,
instead materialising in the 2017 financial year. The average rate for
£/€ has declined by 13.0%, and the £/$ rate by 14.4% in the period.
This has had a significant effect in the Consolidated Income Statement
and Statement of Financial Position, which is analysed in the above
paragraphs of this review between performance at AER and CER. CER
analysis compares the performance of the business on a comparable
basis.
£/€
£/$
Average rates
2017
1.1681
1.2735
2016
1.3432
1.4870
% Change
(13.0%)
(14.4%)
Currency Sensitivity
Euro €: a 1% variation in the £/€ exchange rate affects underlying
diluted EPS by approximately +/- 0.79%.
US Dollar $: a 1% variation in the £/$ exchange rate affects underlying
diluted EPS by approximately +/- 0.54%.
Current exchange rates are £/€ 1.08 and £/$ 1.29 as at 30 August
2017. If these rates had applied throughout the period, the underlying
diluted EPS would have been approximately 5.4% higher.
Currency Risk
During 2017, we have been exposed to transactional and translational
currency risk. In addition to the one-off transactional gain of £0.6 million
being recognised in the Consolidated Income Statement, £12.9 million
foreign exchange gain translational impact was recognised in the
Consolidated Statement of Comprehensive Income in 2017.
As part of our acquisition strategy, we seek to balance the foreign
exchange debt and related interest payable risk associated with non-
Sterling acquisitions with the underlying related income and assets in
foreign currencies. As we move forward and our business continues
to be more diversified, our exposure to currency volatility, in particular
in terms of the Euro and the US Dollar, is expected to become more
balanced.
Statement of Financial Position
The Statement of Financial Position is summarised in the table below.
• Non-current assets increased to £452.3 million mainly due to the
acquisition of Apex (£28.7 million), a 33.0% share of Medical Ethics
(£11.0 million) and acquired intangibles for Animal Ethics (£30.1
million).
Total non-current assets
Working capital
Net debt
Corporate and deferred tax
Other liabilities
Total net assets
2017
£m
452.3
63.2
(120.0)
(51.0)
(41.9)
302.6
2016
£m
393.0
63.3
(116.6)
(52.4)
(10.7)
276.6
Net Assets
£302.6m
302.6
276.6
194.5
2015
2016
2017
Cash Flow, Financing and Liquidity
The Group enjoyed strong cash generation during the year. With the
EBITDA margin strengthening from 23.4% to 24.5%, and working
capital shrinking by £6.9 million, net cash generated from operations
before non-underlying items increased to £98.0 million, representing
cash conversion of 115.9%.
Underlying operating profit
Depreciation and amortisation
EBITDA
EBITDA %
Working capital movement
Other
Net cash generated from
operations before non-underlying
items
Non-underlying items
Net cash generated from
operations
Cash conversion (%)
2017
£m
81.3
6.9
88.2
24.5%
6.9
2.9
98.0
(3.7)
2016
£m
52.9
5.1
58.0
23.4%
(1.6)
4.7
61.1
(4.6)
94.3
115.9%
56.5
106.8%
Net Debt Bridge
Other notable cash items are listed below in the Net Debt reconciliation
table:
• Capital expenditure on tangible and intangible assets increased
to £10.7 million (2016: £7.5 million) due to the full year effect of
the acquisitions and increased investments representing 1.5 times
depreciation and amortisation.
26
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Strategic Report
• Foreign exchange rate differences generated an adverse movement in
Net Debt of £6.0 million due to the 6.0% weakening of Sterling verses
the Euro, and the 3.4% weakening of Sterling verses the US Dollar.
Net Debt 30 June 2016
Net cash generated from operations before non-
underlying items
Non-underlying items
Capital expenditure
Acquisition of subsidiaries, associates and minority
interests
Expenses on new borrowings
Interest and tax
Net equity issued
Dividend paid
Foreign exchange on cash and borrowings
Net Debt 30 June 2017
Net Debt: underlying EBITDA ratio
£m
(116.6)
98.0
(3.7)
(10.7)
(46.6)
(0.1)
(16.9)
0.3
(17.7)
(6.0)
(120.0)
1.4
• With the strong cash generation from operations of £98.0 million
The acquisition of Putney was funded using cash and equity raised
from new share issuance: the performance of Putney has exceeded
the financial performance thresholds expected by the Company in the
period. The integration of Genera and Brovel has also been successful.
In addition the Group acquired 33.0% of the share capital of Medical
Ethics. Medical Ethics is the owner of Animal Ethics Pty Ltd with whom the
Group signed a product licensing agreement for Tri-Solfen in March 2017.
Brexit Risks
The decision by the UK to leave the European Union has created
uncertainty and volatility in markets. Whilst many decisions will be
needed to establish how the new trading environment will operate,
we do not anticipate changes to our business model in the near to
medium term.
We have established a cross-functional project team to assess and
monitor the situation, and determine if and when actions are needed.
Our current view on the possible changes is:
•
in terms of manufacturing and product registration, Dechra is
accustomed to trading with multiple countries and different rules
and legislation;
resulting in a Net Debt / underlying EBITDA leverage ratio of 1.4 times
(2016: 2.0 times).
• despite the possible additional administrative burden, our
distribution model can adapt to changes in tariffs and duties;
Borrowing Facilities
On 25 July 2017, the Group signed a new Credit agreement,
refinancing its previous £205.0 million Revolving Credit Facility (RCF).
The new committed facilities are a new five year multi-currency RCF
with two one year extension options for £235.0 million, through seven
banks: Bank of Ireland, BNP Paribas, Fifth Third, HSBC, Lloyds,
Raiffeisen and Santander. The RCF has an Accordion facility of a further
£125.0 million.
There are two covenants governing the RCF:
• Leverage: Net Debt to underlying EBITDA not greater than 3:1
(30 June 2017: 1.4) compared to the previous covenant of 2.5:1;
and
•
Interest Cover: underlying EBITDA to Net Finance Charges not less
than 4:1, unchanged from the previous facility (30 June 2017: 21.2).
There is a non-utilisation fee of 35.0% of the applicable margin. The
margin over LIBOR (or equivalent) ranges from 1.3% for leverage below
1.0 times, up to 2.2% for leverage above 2.5 times.
The new facility provides the Group with flexible competitively priced
facilities to finance its working capital, investment and future acquisition
needs.
Return on Capital Employed (ROCE)
In 2016, ROCE declined to 16.1% (2015: 20.0%) mainly due to the
increase in assets towards the end of the year following the acquisition
of Putney. In 2017, ROCE grew to 17.7% (2016: 16.1%) as the returns
from the 2016 acquisitions (in particular Putney) were manifest in the
Group’s results.
Acquisitions
The Group has made several acquisitions in recent years. Performance
of the acquisitions made during the 2016 and 2017 financial years
is separately summarised compared to the existing business in the
sections above.
In October 2016, the Group acquired the trade and assets of Apex
Laboratories Pty Ltd in Australia. The business has been successfully
integrated into the Group, and is performing in line with management
expectations. This, together with the other recent acquisitions of Genera,
Brovel and Putney, has been accounted for on a consolidated basis.
Stock Code: DPH
• our business is naturally hedged and diversified, which helps
in a period of exchange rate volatility;
• material contracts can be renegotiated over time as needed;
• we will monitor the impact on workforce and global mobility
to ensure we maintain an effective system for planning people
resources; and
• our geographical expansion over the last few years should help
support our growth should the European economy slow down
substantially.
Summary
We have delivered a strong set of financial results in the year with a
good performance from both our existing and acquisition businesses.
Our revenue growth has converted strongly to increased operating
profit and EPS, up 36.9% and 35.1% respectively on an underlying
basis.
Our strong financial disciplines have been maintained in a period of
significant change both internally and in the wider economy, with a
strong results orientation and focus on sales and margin development.
We have also continued our balance sheet discipline, delivering a
reduction in our net debt leverage from 2.0 times to 1.4 times through
our strong cash conversion of 115.9% and prudent approach to
financing our investments and acquisitions.
Our investments in the existing business and in acquisitions position
Dechra strongly for ongoing organic growth and expansion, and the
continued creation of shareholder value.
Richard Cotton
Chief Financial Officer
4 September 2017
27
04/09/2017 13:58:58
Dechra Annual Report 2017 - Front.indd 27
slugline
sluglineQ&A with Ian PageIan Page Chief Executive OfficerQ What do you consider to be the highlights of another strong year for Dechra?A There have been many highlights in the year but I would have to mention the success of our acquisitions that we have made over the last two years and when you couple that with a solid performance in the EU, and a very strong performance in the US, it has resulted in a profit performance which is above our expectations. Looking at things from an operational perspective, we have introduced a new manufacturing strategy and we are now getting greater efficiency and looking to better utilise our sites. From a people perspective we have over the last few years recruited a really strong Senior Executive Team and they are now really beginning to function exceptionally well. It would be remiss of me not to mention cash generation. Cash generation has again been strong within the year which has resulted in net debt being below market expectations for the year. So, all in all, many highlights.Q The US continues to outperform the EU; why is this?A The main reason is the relative maturity of the two markets. We have been trading in Europe a lot longer and a lot of our older products are getting close to reaching maturity in terms of market share; although we still do get growth by educating veterinary surgeons in better utilisation of the products. Within the US it is not only about education but it is also about gaining market share. It is a very large market and is a very difficult market to access. We have always said that we are underweight in terms of sales team, i.e. we do not have enough people to get round all the practices on a regular cycle. Even with the acquisition of Putney, it was still not up to the scale we would like to be, but we are now seeing the benefits of cross-selling Putney products and Dechra products through the enlarged sales team and we are beginning to get very strong market penetration in the US. So, we will continue to see the US outperform the EU in the future; however, that is not to detract what is still a very solid performance within the EU markets.Q What are your current thoughts on the likelihood of further acquisitions? A I have always said that it is important that the business is structured to be not dependent on acquisitions. Although we have been very successful in the acquisitions that we have made, it is a very consolidated market with few opportunities, if you look at what we have done organically, we have really strengthened our pipeline, we have put a greater focus on the international markets and we have created a lot of new opportunities in the year and I think if we are going to acquire it is likely to be to extend our geographical coverage as a lot of the main markets that we trade in, predominantly Western Europe and the US, the opportunities are few and far between. So, just to repeat myself, we have built a business that is successfully grown organically; if we can acquire we would like to, but the business is not dependent upon it.Q What is the rationale of investing in Animal Ethics?A Well I first met the CEO of Animal Ethics probably four years ago now, he came up with this idea of improving the welfare, in terms of pain management, of farm animals. There are many treatments in pigs, cattle and sheep that are currently conducted with very little pain control and what has actually changed over the years is that Animal Ethics have progressed their idea very, very well; it is a multi-component product that contains pain management and restricts blood flow and also limits infection. With this product they have managed to get great support from consumer groups, from supermarkets, from governments as animal welfare becomes more and more important in social circles. We are very delighted to have bought a third of the business, but more importantly we have signed an international marketing agreement and what this brings to us is a range of niche farm animal products that will really help our presence within this sector.Q Dechra has delivered sustained growth for 20 years; is it possible to maintain that momentum?A Well, it is remarkable to think that Dechra is 20 years old, 17 of those years as a FTSE listed company, obviously we are delighted that we have delivered good growth throughout all those years. Whilst you can never predict the future, of course we have confidence in the future; our strategy serves us well. We have many new ideas and we are working on lots of new product development opportunities that I believe will deliver growth in the future. We are expanding our geographical scope further and we have a very strong management team that is extremely focused so I have the confidence that we can continue to drive this business again and again over future years.Watch the full interview with Ian Page at dechra.annualreport2017.comWe have many new ideas and we are working on lots of new product development opportunities that I believe will deliver growth in the future. Ian Page Chief Executive OfficerDechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2017www.dechra.com28Dechra Annual Report 2017 - Front.indd 2804/09/2017 13:59:01 sluglineQ&A with Richard CottonRichard Cotton Chief Financial OfficerQ What were the key drivers behind the EBIT margin percentage improvement? A Gross margin at 54.5% was slightly lower than prior year (2016: 55.9%). The dilution in Group gross margin came as expected from the acquisitions, in particular from Putney, where margins are lower due to long term contract manufacturing partnerships. Sales, General and Administrative costs (SG&A) were greater than in 2016, though lower as a percentage of sales at 27.7% (2016: 30.4%), as additional volume leveraged the cost base. Underlying EBIT margin increased by 140bps to 22.6%, as revenue growth generated operating leverage across the Group as a whole, outweighing the margin dilution from the acquired products.Q How did the Board decide on the level of dividend, and what is it likely to do in the future? A The Board reviews the dividend twice a year, and in particular considers EPS growth, dividend cover, and the Group’s balance sheet and cash flow forecasts in setting the dividend. Underlying diluted EPS, including acquisitions, has grown strongly by 35.1% in the year, and during the year the Group has generated significant cash flow, reducing the leverage of the Group to 1.4 times EBITDA. Reflecting the strong performance of both the existing and acquisition businesses and the improved net debt leverage, the Board has proposed an increase to the final dividend of 18.7%, which when added to the interim dividend of 6.11p, gives a total dividend for the year of 21.44p, a 16.11% increase on the prior year (2016: 18.46p). Dividend cover based on underlying diluted EPS is 3 times (2016: 2.3 times). The Board continues to operate a progressive dividend policy recognising investment opportunities as they arise.Q Net debt now represents only 1.4 times underlying EBITDA compared to 2.0 times a year ago. What has caused this improvement and does the Board have a target?A Cash conversion, measured as net cash generated from operations after non-underlying items as a percentage of underlying operating profit is an important KPI and core discipline for the Group. In 2017 it was 115.9% consistent with the prior year (2016: 106.8%). The strength of the cash conversion is behind the strength of the Statement of Financial Position. In a year of increased capital expenditure, the acquisition of Apex, the investment in Medical Ethics, and adverse foreign exchange effects, Dechra’s net debt grew by only £3.4 million to £120.0 million. With the benefit of the greater underlying EBITDA from both the existing and acquisition businesses of £88.2 million (2016: £58.0 million), the net debt leverage of the Group has reduced to 1.4 times the enlarged underlying EBITDA (2016: 2.0 times). Since the end of the financial year the Group has refinanced its Revolving Credit Facility to provide longer dated, larger and more flexible borrowing facilities to finance its working capital, investment and future acquisition needs. The Board takes a prudent view of balance sheet leverage. It would typically target maximum Net Debt: underlying EBITDA of 2.0 times, though in the right circumstances may go to a level above this.Q Third party contract manufacturing sales have declined again, and you link this to your manufacturing strategy. Can you describe your manufacturing strategy?A As Dechra has grown organically and through acquisition, the number of manufacturing sites and complexity of its contract manufacturing network has grown significantly. During the year the Group has evaluated this in detail, considering its current and future needs, and has developed a Manufacturing remodelling strategy. • The strategy anticipates the remodelling of certain parts of the network to focus on the manufacture of specific dosage forms, and matching our product margins in line with our input cost base.• As a result of this, we will transfer some products around the Dechra network over the next five years, at the end of which period we expect to have terminated most third party contract manufacturing sales. • Over the five years we expect to invest an additional c.£18.0 million between capex and non-underlying costs which will pay back in two to three years in manufacturing cost efficiencies.Watch the full interview with Richard Cotton at dechra.annualreport2017.comUnderlying EBIT margin increased by 140 bps to 22.6%, as revenue growth generated operating leverage across the Group as a whole, outweighing the expected margin dilution from the acquired products.Richard Cotton Chief Financial OfficerStock Code: DPH29Strategic ReportDechra Annual Report 2017 - Front.indd 2904/09/2017 13:59:02 Key Performance Indicators
KPI and Definition
Performance
Commentary
Relevance to Strategy
Sales Growth
Year-on-year sales growth
including new products and
excluding revenue from acquired
businesses.
6.5%
2017
2016
2015
£269.6m
£225.9m
£203.5m
Dechra delivered £269.6 million
from its existing business, an
increase of 6.5% from market
penetration and new product
launches.
a
b c
Underlying Diluted
EPS Growth
Underlying profit after tax
divided by the diluted average
number of shares, calculated on
the same basis as note 11 to
the Accounts.
£
35.1%
2017
2016
2015
64.33p
42.65p
39.90p
The increase reflects growth
from the existing and acquired
businesses, increased finance
charges from the increased debt
to fund acquisitions, and the
change in mix to the applicable
tax rates.
A key driver of our strategy is to
deliver sustainable sales growth
through delivering our pipeline,
maximising our existing portfolio
and expanding geographically.
a
b c
Underlying EPS is a key indicator
of our performance and the return
we generate for our stakeholders.
It is one of the performance
conditions of the LTIP’s.
Return on Capital
Employed
Underlying operating profit
expressed as a percentage
of the average of the opening
and closing operating assets
(excluding cash/debt and net
tax liabilities).
£
160bps
2017
2016
2015
17.7%
16.1%
20.0%
ROCE grew as the returns from
the 2016 acquisitions (in particular
Putney, acquired in April 2016)
were manifest in the Group’s
results.
a
b c
As we look to grow the business,
it is important that we use our
capital efficiently to generate
returns superior to our cost
of capital in the medium to
long term. It underpins the
performance conditions of the
LTIP’s.
Key to Strategic Growth Drivers:
Key to Strategic Enablers:
Key:
Pipeline Delivery
a
b c Portfolio Focus
Geographical Expansion
Acquisition
Manufacturing and Supply Chain
£
LTIP performance condition
Technology
People
Read Delivering Our Strategy
on pages 13 to 15
Read How the Business Manages Risk
on pages 56 and 57
Read the Directors’ Remuneration Report
on pages 81 to 101
30
Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2017
www.dechra.com
Dechra Annual Report 2017 - Front.indd 30
slugline
04/09/2017 13:59:03
Strategic Report
KPI and Definition
Performance
Commentary
Relevance to Strategy
Underlying Cash
Conversion
Cash generated from
underlying operations before
tax and interest payments as
a percentage of underlying
operating profit.
New Product Revenue
Revenue from new products
as a percentage of total Group
revenue. A new product is
defined as any molecule
launched in the last five financial
years.
910bps
2017
2016
2015
115.9%
106.8%
105.9%
620bps
2017
2016
2015
8.2%
14.4%
13.8%
The Group enjoyed strong
underlying cash conversion
during the year. With the EBITDA
margin strengthening from 23.4%
to 24.5%, and working capital
shrinking by £6.9 million.
a
b c
Our stated aim is to be a cash
generative business.
The decline arose from the
increase in new product revenue
from acquisitions. We continue to
invest in our pipeline to develop
new products and plan to
increase this investment.
a
b c
Lost Time Accident
Frequency Rate (LTAFR)
All accidents resulting in
the absence or inability of
employees to conduct the full
range of their normal working
activities for a period of more
than three working days after
the day when the incident
occurred, normalised per
100,000 hours worked.
Employee Turnover
Number of leavers during the
period as a percentage of
the average total number of
employees in the period.
25.7%
2017
2016
2015
0.7
0.26
0.35
The LTAFR decreased from 0.35
to 0.26. None of these incidents
related in a work-related fatality or
disability.
260bps
2017
2016
2015
15.7%
13.1%*
12.2%*
The figure for the 2017 financial
year includes the employees
from Genera, Brovel and Putney,
whereas the previous year
excludes them. The increase
relates to streamlining of
operations within the acquired
businesses and the restructuring
of our manufacturing team.
*excludes Apex, Brovel, Genera and Putney
This measure shows the delivery
of revenue in each year from new
products launched in the prior five
years, on a rolling basis. It shows
the performance of our R&D and
sales and marketing organisations
when launching newly developed
or in-licensed products.
The safety of our employees is
core to everything we do. We are
committed to a strong culture of
safety in all our workplaces.
Read about Corporate
Social Responsibility
on pages 48 to 55
Attracting and retaining the
best employees is critical to
the successful execution of our
strategy.
Stock Code: DPH
Dechra Annual Report 2017 - Front.indd 31
slugline
31
05/09/2017 08:44:36
sluglineStrategy in Action:Pipeline DeliveryAmoxi-Clav The development of a product from our pipelineDechra Annual Report 2017 - Front.indd 3204/09/2017 13:59:05 sluglineAmoxicillin/Clavulanate Potassium Dechra acquired Putney in order to add new products and critical mass to its US business and a highly performing product development management system and process. One of the key projects in the Putney development process was a generic to an antibiotic consisting of amoxicillin and clavulanate potassium, which is one of the most commonly used antibiotics in small animal medicine. Clavamox tablets for dogs and cats were originally approved in the USA in 1984 and, despite patent protection and regulatory marketing exclusivity having lapsed several years previously, the high scientific and regulatory approval hurdles for a generic of this product in the USA had prevented any alternatives from being approved. This meant that the original product continued to be sold at high prices, however, it still commanded a significant market due to its high efficacy. Bringing a generic product to market requires formulation and manufacturing to the highest quality copy of the original product and demonstrating that the new product will work in the patient in exactly the same way as the original by showing bioequivalence. The development of this particular generic product required the need to overcome several significant technical challenges. Amoxicillin is a penicillin antibiotic which can only be manufactured in dedicated facilities to avoid cross-contamination with non-penicillin products due to widespread penicillin allergy in people. In addition, clavulanate potassium is extremely sensitive to moisture so even the slightest exposure of the product to moisture will result in the loss of clavulanate potassium activity. There are very few manufacturing facilities that can both handle penicillins and the low humidity manufacturing environment required for this product.Once a suitable manufacturing partner was identified extreme care had to be taken with the supply of every component that went into the product to ensure that moisture was prevented from coming in contact with the individual ingredients or final product. In addition, a novel manufacturing step was developed to keep the product stable throughout the shelf life.Another hurdle that the team faced was achieving bioequivalence to the innovator drug. The tight criteria set by FDA are hard to meet even with one molecule in one species but achieving bioequivalence for a combination product in two species was much more difficult and added a lot of complexity and risk to the development program. To make things even harder, the absorption of clavulanate potassium turned out to be extremely variable making it very difficult to achieve bioequivalence.Following collection of blood samples to measure the absorption of the amoxicillin and clavulanate potassium in bioequivalence studies, the clavulanate potassium continued to be a problem as it was not stable in the samples. Special sample handling and stabilisation methods had to be developed to reliably and consistently measure the amount of the clavulanate potassium in the samples and ensure that degradation did not compromise the study results. Despite all of this complexity, the Product Development team was successful in overcoming these hurdles to manufacture a high quality product that was successful in bioequivalence studies in both dogs and cats and Dechra was the first company to achieve a generic amoxicillin/clavulanate potassium product approval in the US.In only nine months since launch, the product has become a phenomenal success capturing significantly more market share than expected. This is a momentous achievement for Dechra. Dechra Annual Report 2017 - Front.indd 3304/09/2017 13:59:05 sluglineStrategy in Action:Portfolio FocusabcOur Key Therapeutic AreasDechra Annual Report 2017 - Front.indd 3404/09/2017 13:59:06 sluglinePortfolio FocusOne of Dechra’s four principal strategic objectives is Portfolio Focus, which is a major driver of our international growth. Portfolio Focus can simply be defined as maximising market penetration and market share, and therefore sales of our existing product range.With over 400 product lines and more than 4,000 Stock Keeping Units (SKUs) it is important that we focus our sales and marketing efforts on key strategic therapy areas. This focus orientates around:Companion AnimalsFood Producing AnimalsEquineEndocrinologyDermatologyAnaesthetics and Analgesia CardiologyOphthalmologyNutrition and DietsWater Soluble Powders Poultry VaccinesLocomotion (Lameness)Anaesthetics and Analgesia LocomotionDechra’s ambition is to maintain our technical leadership positioning for the individual diseases and conditions we treat within the therapy areas that we cover. Although Dechra’s overall share of the animal health market is small, we have become market leaders in many of these therapeutic areas. This is achieved through a number of routes:• In-field representative focus and technical excellence;• Educational programmes and seminars to practice groups;• Highly skilled technical, telephone based support teams who provide advice on difficult cases;• Online learning courses for both veterinarians and veterinary nurses;• Providing a comprehensive product range in each sector;• Networking and supporting the Key Opinion Leaders in these therapeutic areas;• Focused marketing campaigns; and• Strong advertising campaigns, examples of which can be seen on this page.Approximately 90% of Dechra’s revenues are generated from these key strategic therapy areas. It is important that we continue to maintain our market leading position and support the veterinary profession by continuing to deliver enhancements to our services and by continuing to invest and expand our product portfolio.Dechra Annual Report 2017 - Front.indd 3504/09/2017 13:59:08 sluglineStrategy in Action:Geographical ExpansionDechra Veterinary Products InternationalThe establishment of Dechra Veterinary Products InternationalDechra Annual Report 2017 - Front.indd 3604/09/2017 13:59:08 sluglineDechra Veterinary Products InternationalDuring the current financial year we have reorganised our export business, appointing an experienced dedicated director, who has been tasked with creating critical mass in countries outside Europe and North America, with the long term aim to establish subsidiaries in these countries. The business has been renamed from Rest of World to Dechra Veterinary Products International (DVP International), and currently exports to over 50 countries worldwide accessed through a network of distribution partners.In October 2016 Dechra acquired the trade and assets of Apex Laboratories Pty Ltd (Apex), a privately owned veterinary pharmaceutical company which manufactures, markets and sells branded non-proprietary prescription and other related companion animal products in Australia and New Zealand. This acquisition provides Dechra with direct access to the established and growing Australian companion animal product market which accounts for approximately 4.2 million dogs and approximately 3.3 million cats, a market in which Dechra operated through partners. Apex offers a base from which to support and build Dechra’s expansion in the Australasian and Asian regions and provides a springboard for the expansion of DVP International.To facilitate this growth:• We strongly believe that by respecting the cultural and environmental differences in our international markets we are able to engage better and understand our customers’ needs. Therefore our initial activities have been to work with local government funded bodies to support access to the right people and places in specific markets. Once we have concluded our research, the execution of the findings will be critical with the appointment of key business development personnel, for example we have recruited an experienced animal health consultant in Latin America. • To support our international partners, the first and most important priority is to be able to supply them with high quality products when they are needed. The whole experience of placing an order through to receipt of the delivery is an opportunity to engage with our partners to ensure that we meet expectations. To get this right every time requires drive, energy and focus from our customer service team.• Our markets, wherever you are in the world, are dictated by a technical need for a medicinal product for which there could be several choices. To assist our partners in maintaining up to date technical knowledge about specific product benefits which meet their customers’ needs best, we will provide technical personnel to support our commercial team.• We will also work closely with our global marketing team to enable our customers have access to the latest product information and communication tools. This includes giving our partners access to our training modules and their customers access to our valued online Academy modules.• One measure of success is that Dechra is recognised as an integral partner within our customers’ business. Our economic engine, however, is to ensure we sell the right products to the right markets. Several of our food producing animal products are in highly competitive environments and therefore price is a major factor when it comes to convincing a customer to sell your range. To support this challenge, we are linking up our customer services and supply chain to achieve better forecasting and manufacturing efficiencies.• The life blood for our partners is to have new products and new stories to communicate and with our broad range of registered EU, US and Australian products it is imperative that we register more products to build a critical mass in a territory. We are therefore setting up a dedicated team of regulatory people who can accelerate our international development programme.Summary:We are working on developing our market knowledge and business partnerships; the service we provide will attract new and motivate existing partners to drive business resulting in growth across major global markets.Dechra Annual Report 2017 - Front.indd 3704/09/2017 13:59:09 sluglineStrategy in Action:AcquisitionIntegration of AcquisitionsEnhancing our product portfolioDechra Annual Report 2017 - Front.indd 3804/09/2017 13:59:09 sluglineIntegration of PutneyOn 22 April 2016, Dechra acquired the share capital of Putney Inc., a leading developer of FDA approved CAP in the US located in Portland, Maine. The acquisition of Putney provided Dechra with a highly performing product development management system and processes, as well as an enhanced product portfolio and pipeline of high quality, bioequivalent, FDA approved, specialty drugs supporting the US veterinary community and strengthening our presence in the world’s largest companion animal market. Integration PrioritiesThe first year integration efforts focused on: • retaining key Product Development and Regulatory expertise, to enable continued product pipeline progress; and • the integration of Putney’s Commercial and Inside Sales functions into a combined US Commercial Operations to leverage existing distribution relationships and strengthen the commercial presence with US veterinary clinics.Delivering ValueThe Putney portfolio is exceeding expectations of value from the acquisition in the first year and delivering a year-on-year growth rate of 39% for the acquired Putney portfolio. The combined product portfolio provided our commercial team with improved access to distribution and veterinary clinics in the US, helping to drive year-on-year growth at above our expectations across the full US Dechra portfolio. In September of 2016, Putney Amoxicillin Trihydrate and Clavulanate Potassium Tablets, an antibiotic for dogs and cats, was approved by the FDA. This first approval from the Putney pipeline was our most successful launch to date in the US with initial market penetration well above expectations (see Strategy in Action: Pipeline Delivery). Investments in GrowthThe Customer Relationship Management (CRM) system previously used by Putney has been redesigned and implemented across the US and Canada providing Dechra with an enhanced ability to penetrate the market. The CRM system supports daily collaboration and performance tracking for partnered inside and outside sales representatives and provides real time data for commercial analysis and the development of targeted marketing promotions. Improvements in supply chain and logistics processes are underway to support continued growth and reduced supply risks and reliance on third party manufacturing of the expanded Dechra portfolio in the US market (for further information see Strategy in Action: Manufacturing and Supply Chain). Key Putney Product Development and Regulatory expertise has been retained in Portland while the global Product Development team was reorganised this year to support our portfolio strategy and enable the robust pipeline developed at Putney to continue its successful history of gaining approval by the FDA. Anthony Lucas, who joined Dechra as part of the Putney acquisition, has implemented Product Development best practices at Dechra and leads Global Product Development.Dechra Annual Report 2017 - Front.indd 3904/09/2017 13:59:10 Strategy in Action: Strategic Enablers
Manufacturing and Supply Chain
Our Objective: To deliver consistently outstanding value, quality and service
to every customer via a safe, efficient, integrated supply chain.
Key Facts:
•
In excess of 36 million packs produced in the 2017 financial
year;
• 27,000 order lines delivered per month from our warehouse
hub in Denmark for the European and International Supply
Chains;
• Delivery to customers speaking 40 different languages;
• Over 4,157 Stock Keeping Units (SKUs);
• We spend more than £35.0 million on raw materials across
the Group.
Dechra’s Internal Manufacturing Network:
Dechra currently operates six manufacturing sites:
• Sydney, Australia: 25 employees, produces tablets and liquids.
• Zagreb, Croatia: 152 employees, primary focus on vaccines
development and produces oral liquids, solid forms, care
products and nutrition supplements for long standing third
party customer.
• Bladel, Netherlands: 122 employees, centre for new product
introductions and aseptic filling. Additionally capability for
pre-mixed powder production and terminal sterilisation.
• Brovel, Mexico: 41 employees, produces tablets, liquids,
sterile products all for local markets.
• Skipton, UK: 233 employees, centre of excellence in solid
forms for tablets and capsules, liquids, creams, ointment
products and terminal sterilisation.
• Florida, USA: 15 employees, centre of excellence in
manufacturing chewable tablets.
Manufacturing facility at Zagreb, Croatia
External Manufacturing Network:
We also manage an external network of 42 contract
manufacturing organisations (CMOs). Together, the internal
and external network produce in excess of 36 million packs of
products per year. The volume is currently split approximately
50% from the internal network and 50% from the external
network. Our CMO footprint is predominately balanced across
North America and Europe, where the majority of the Group
revenue is generated. This is complemented with additional
CMOs in Australasia and Asia.
Our Supply Chain:
Our internal and external manufacturing sites deliver a range
of different finished product dose forms including solid doses,
liquids and sterile injectables. These finished goods are stored
and delivered to customers via modern warehouses located
in Denmark for DVP EU and Dechra Veterinary Products
International supply chains and Kansas City for the DVP NA
supply chain. There are multiple transport solutions available to
move products around the globe efficiently.
Following on from the successful implementation of a global Sales
and Operations Planning process in DVP EU our priority now is to
roll out the plan across the organisation to integrate fully with the
DVP NA business.
Our Strategy:
Manufacturing and Supply Chain has created a new and detailed
five year strategic plan.
To implement the strategy we have accelerated growth in our
talent pipeline, utilising both internal and external people and
have created a team able to challenge the status quo to support
all the Dechra strategic aims. This has included the following
key appointments: four Site Directors, a CMO Relationship
Manager, a Global Procurement Manager, and a Head of HR for
Manufacturing and Supply.
Our objectives include:
• Simplify the Dechra internal and external network by creating
dose form centres of excellence in each manufacturing site
and consolidate the CMO network.
• Reduce risk and establish a robust security of supply by
protecting our largest revenue streams via second sourcing
and CMO strategic relationships to reduce complications
in the supply chain.
• Leverage procurement opportunities across the Group
and focus on a culture of constant improvements to realise
efficiencies and enhance ways of working.
• Make full use of our low cost geographical locations and
maximise opportunities in all locations.
Our Group Manufacturing and Supply Chain strategy will simplify
our network and by creating centres of excellence the sites will
improve efficiency and technical expertise in their specific dose
forms. Additionally, by working with fewer CMOs, and creating
true partnerships, we can strengthen the supply chain and deliver
a sustainable service over the long term.
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Strategy in Action: Strategic Enablers
People – 20th Anniversary
Strategic Report
Dechra’s people are a core asset, and behind much of the Group’s success in its 20
year history of growth and development. Below a group of employees, whose service
longevity matches that of the Group, share their experiences of working at Dechra.
Q. What is your current role?
• HR & Operations Manager, Dechra Veterinary Products
UK & Ireland, UK.
• Supply Planner, Denmark.
• Supply Chain Sales and Operations Planning (EU &
International), UK.
• Executive Assistant to Chief Executive Officer &
Chief Financial Officer, UK.
• Quality Assurance Officer, UK.
• PDRA Assistant, the Netherlands.
• Finance Manager, Croatia.
Q. Would you recommend working at Dechra
to other people?
• Absolutely I would, the business is always offering new
challenges and expanding; therefore, the opportunity
to grow individually and learn new skills is extremely
motivational.
• Yes, it is an exciting working place. You are allowed to work
in different areas and you are being listened to.
• Yes, I would certainly recommend working in Dechra
because all people with whom I am in contact are very
collegiate, accessible, ready to help. It is a very pleasant
working atmosphere.
Q. What is the best thing about working
at Dechra?
• Without doubt the culture, the team spirit and enjoyment.
• The great colleagues and good relaxed atmosphere.
• Being part of an ambitious company that is always
evolving, never resting on its laurels.
• The people and the culture are great.
• For me, the people I work with every day make coming to
work a pleasure. The work I have done over the past 20
years has been so varied, there is never any time to get
bored in the job.
• My colleagues and the good atmosphere in the department
I currently work for (Product Development).
Q. Why have you continued to work at Dechra
for the length of time you have?
• Due to the fact that the work has not been the same for
over 20 years, the Company is developing.
•
It’s good to feel trusted and appreciated. I like the flexibility
to balance work and home life, and it’s a pleasure to work
for an organisation that’s going in the right direction and
takes care of employees. I like what I do and enjoy my
role immensely.
Q. How has Dechra changed over the past
20 years?
•
I think the first big acquisition had the biggest impact as
this gave us such a great European footprint and allowed
us to embrace new cultural experiences and this brought
enormous growth for all.
• Dechra has changed tremendously over the past 20 years
from being quite UK centric in the early days to the truly
international business it is today. The biggest change
is coming from the establishment of a global network
of Dechra offices with the local knowledge and skills to
engage closely with our customers, supported by a robust
Manufacturing & Supply Chain delivering the goods.
• Bit of a cliché, but it really has been an incredible journey!
From a UK veterinary wholesaler employing approximately
50 people in 1989 to a successful and respected
international veterinary pharmaceutical business employing
approximately 1,300 today; a real testament to the hard
work of the whole Dechra team.
• When I first started at Dechra 20 years ago there were only
45 people on the site, in one building and it felt like a family
run business. Now there are over 200 people on the site
spread across three buildings and it has a more corporate
business feeling about it. We have also made several
business acquisitions over the years and become a global
company, which feels great to be a part of.
• Dechra is becoming more and more a professional player
in the veterinary market of the bigger companies. The
biggest change in the past 20 years as far as I am
concerned was the takeover of Eurovet.
Stock Code: DPH
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Strategy in Action: Strategic Enablers
People – The Senior Executive Team
The Senior Executive Team (SET) was established in 2013 to lead the development
and implementation of the business strategy. Over the last couple of years there
have been a number of changes due to retirement and acquisitions.
The SET comprises
Ian Page
Chief Executive Officer
Richard Cotton
Chief Financial Officer
Tony Griffin
Managing Director Dechra
Veterinary Products EU
(Ian, Richard and Tony are
also part of the main Board)
Dr Susan Longhofer
Regulatory Affairs and
Business Development
Group Director
Dr Anthony Lucas
Group Product
Development Director
Mike Eldred
President North America
Greig Rooney
Group Manufacturing and
Supply Director
Allen Mellor
Group IT Director
Katy Clough
Group HR Director
Giles Coley
Dechra Veterinary Products
International
Group Director
The Company Secretary
attends the meetings of the
SET and acts as its secretary.
Dr Susan Longhofer Business Development and
Regulatory Affairs Group Director
Susan joined the Group in June 2005. A veterinarian with
over 26 years’ experience in the industry, she leads a team of
approximately 50 staff around the globe responsible for registering
new products and maintaining the registrations of our existing
products. She has recently assumed a Business Development
role searching out new products and opportunities to continue
to fill our product development pipeline. Prior to joining Dechra,
Susan worked for Virbac Corporation, Heska Corporation and
Merck Research Laboratories. Susan holds an MS and a DVM
in Veterinary Science and is a Diplomate, American College of
Veterinary Internal Medicine. She is located in Kansas, US.
Giles Coley Dechra Veterinary Products International Group Director
Giles joined Dechra in January 1999 as sales and marketing
manager for Arnolds Veterinary Products having previously spent
14 years primarily involved in dairy farming business consultancy.
During his time at Dechra he has been responsible for the launch
and market development of our leading brand Vetoryl, as well as
a number of our other key brands. Giles has also been an integral
member of the teams that ensured fast and smooth integrations of
several of our acquisitions and in particular as lead in the integration
of Apex in 2016. In his role of Dechra Veterinary Products
International Group Director, his responsibilities are extremely varied
and involve managing and growing our existing business through
Apex and distribution partners, as well as further developing
our Dechra International strategy through product registrations
and market development. Giles has a BSc degree in Agricultural
Technology. He is located in Shrewsbury, UK.
Mike Eldred President North America
Mike joined Dechra in 2004 and is responsible for Dechra
Veterinary Products’ North American business. Mike has more
than 20 years’ experience in the animal health sector, having held
senior positions in business development, sales and operations at
Virbac Corporation, Fort Dodge Animal Health and Sanofi Animal
Health. As our first employee in the US, he has built the significant
and growing US and Canadian team to162 people and with a
strong Dechra culture has grown sales revenue to £132.4 million.
Mike has also been involved in several commercial agreements
and acquisitions for the Group including Pharmaderm, DermaPet,
Phycox Animal Health and Putney. Mike has a BA in Business,
and an MBA. He is located in Kansas, US.
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Strategic Report
Allen Mellor Group IT Director
Dr Anthony Lucas Group Product Development Director
Allen joined Dechra in April 2012 and has developed and
implemented the Group IT strategy during this time. During the
last 20 years, Allen has gained a breadth of experience from the
implementation of diverse business solutions across multiple industry
sectors including Justice, Education, Energy, Distribution and Retail.
Having held several senior management positions encompassing
software development, IT service provision and IT departmental
management, his last role was as Head of IT for the BSS Group
PLC, a leading plumbing and heating distribution company. Allen is
currently responsible for all Group IT support to a multitude of internal
customers. He is located at Head Office, Northwich, UK.
Anthony joined Dechra in 2016 following the acquisition of Putney
Inc. where he was Senior Vice President of R&D. Anthony is originally
a veterinarian from Australia with five years in clinical practice
including a residency in emergency and critical care. Following a
Masters in veterinary pharmacology, PhD in human pharmacology
and post-doc at the University of Kansas, he spent six years at
Elanco in early drug development, technology acquisition and as
a Six Sigma black belt. In his six years at Putney, Anthony built the
R&D team, which delivered ten FDA product approvals.
As the Group Product Development Director, Anthony leads
a team of 50 scientists across five global research centres, to
efficiently deliver the pipeline of products to meet Dechra’s growth
needs. He is located in Maine, US.
Katy Clough Group HR Director
Katy joined in April 2014 from AppSense Ltd where she was
the Vice President of HR Europe and Rest of the World. With
over 15 years operating at Director level within the Technology,
Health, Travel and Finance industries, Katy brings with her a
wealth of HR expertise gained in both blue chip corporates and
smaller entrepreneurial companies. She has strong international,
leadership and M&A experience and has taken responsibility for
driving the global people agenda for the Dechra Group. She is
located at Head Office, Northwich, UK.
Greig Rooney Group Manufacturing and Supply Director
Greig joined Dechra in 2016. He has 20 years of experience
working in a variety of roles within the Pharmaceutical and Fast
Moving Consumer Good industries.
Greig started his career with GSK in 1998 on their Graduate
Management Training scheme. He worked in various Supply
Chain roles and spent six years outside of GSK working as a lean
consultant in the motor industry supply chain and also ran the
Bakery Operations for Greggs PLC in Birmingham.
Prior to joining Dechra, Greig worked as the Active Pharmaceutical
Ingredient Lifecycle Transformation Director, responsible for the
execution of GSK’s Strategy within the Pharmaceutical Business.
As the Group Manufacturing and Supply Director, Greig is responsible
for approximately 33% of Dechra’s workforce across six manufacturing
sites namely Bladel, the Netherlands; Zagreb, Croatia; Florida,
USA; Skipton, UK; Sydney, Australia; Brovel, Mexico; and the main
distribution centre in Europe at Uldum, Denmark.
Greig holds a BSc (Hons) in Science and Management Studies. He
is located in Northwich, UK.
Stock Code: DPH
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04/09/2017 13:59:14
Product Development
Although some products may have a slightly different path, most novel
and generic products follow a fairly standard process containing five
phases, defined as: Evaluation, Feasibility, Development, Registration
and Launch.
Dechra employs a structured process in its development pipeline while
retaining an opportunistic and entrepreneurial approach. Focus is given
to the Group’s therapeutic sectors. New development opportunities
and in-license opportunities are evaluated for strategic fit within these
sectors; therapies outside of the key areas are considered for inclusion
in the pipeline if they are novel and address medical needs in the
veterinary market.
A product’s return on investment can vary: novel developments tend
to have a medium to long term realisation with attractive high value
returns; generic developments generally have shorter time scales with
returns dependent upon the number of other entrants and our speed
to market relative to the competition. Dechra’s current development
pipeline is a mix of short, medium and long term opportunities.
Generating Ideas
The Evaluation 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.
Making the Chemistry Work
The second phase of the process is Feasibility, 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 development
phase which involves expensive clinical trials or bioequivalence studies.
Entering the Development Phase
The Development 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 bioequivalence studies
to demonstrate that activity will replicate the pioneer product. If the
studies conducted during the Development phase demonstrate the
required safety, efficacy and chemical stability of the product, regulatory
dossiers are prepared for Registration/Filing.
From beginning to end, the development process can take between
three and ten years before Launch depending on complexity and
nature of the product.
Go/
No Go
Go/
No Go
Go/
No Go
3–10 years
Evaluation
Feasibility
Development
Registration
Launch
Indication(s) determined
Active Pharmaceutical
Ingredient (API) manufacturer
selected
Manufacturing site selected
(finished products)
Commerciality – is there a
customer need?
Is it worth taking the
development idea forward
at the end
CAP
Novel
(start from
scratch)
Formulation
CTR
Dose
Titration
Preliminary
Safety study
CAP FAP
Formulation
Generic
(Copycat
product)
Chemistry
Drives timing
needs stable
formulation
CTR
CTR
— Safety
— Efficacy
— Residues
— Environmental
— Risk Assessment/
Ecotoxicology
CTR
3
Pilot
batches
— User Safety
Studies
2
Pilot
batches
Bioequivalence
Study/Studies or
waiver
Register
Launch
Register
Launch
CAP
Companion Animal Product
CTR
Clinical Trial Required
FAP
Food producing Animal Product
New Formulation of products
with existing maximum residue
limit (MRL)
Laboratory Studies
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Strategic Report
Product Pipeline
A key strategic priority for the Group is the delivery and strength of the pipeline. The following chart outlines the status of the major projects. Owing
to the nature of product development, the content of our pipeline will change over time as new projects progress from Evaluation to Development
to market or as projects are terminated. For competitive reasons, exact project details are not disclosed.
Evaluation
Feasibility
Development
Registration
CAP/Equine
FAP
CAP/Equine
FAP
CAP/Equine
FAP
CAP/Equine
FAP
Analgesic
therapy
for dogs
Anti-inflammatory
therapy for
poultry
Analgesic
therapy for
horses
Fluid therapy
for cattle
Antibiotic for
dogs and cats
Antibiotic for
cattle
Gastrointestinal
therapy for
horses
Antibiotic
for pigs and
poultry
Parasiticides
for cats
Antibiotic
for pigs
Dermatological
therapy
for dogs
Anti-inflammatory
for poultry
Projects are not shown for
the Evaluation phase as new
opportunities are constantly being
evaluated and will move into the
Feasibility phase quickly
if of interest.
Dermatology
treatment for
dogs
Dermatological
therapy for
dogs
Endocrine
therapy for
horses
Antibiotic
for pigs
Parasiticides
for dogs
Parasiticides
for poultry
Antibiotic for
dogs and cats
Antibiotic for
pigs and
poultry
Antibiotic
for cattle
Parasiticides
for dogs
Poultry
vaccines
Analgesic
therapy
for dogs
Poultry
vaccines
Endocrine
diagnostic
Poultry
vaccines
Anaesthetic
for dogs
Poultry
vaccines
Dermatological
therapy
for dogs
Analgesic
therapy
for cats
Cardiological
therapy
for dogs
Dermatological
therapy
for dogs
Dermatological
therapy
for dogs
Anti-inflammatory
for horses
Key
Analgesic, Anaesthesia,
Anti-inflammatory
Antimicrobial
Antiparasitic
Cardiology
Dermatology
Endocrinology
Fluid therapy
Gastrointestinal
Vaccines
Stock Code: DPH
Dechra Annual Report 2017 - Front.indd 45
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Poultry
vaccines
Poultry
vaccines
Poultry
vaccines
Poultry
vaccines
Poultry
vaccines
45
04/09/2017 13:59:15
International Product Offering
The tables below show the key products in our focus therapeutic areas in territories where we have sales and marketing organisations.
Endocrinology
Dermatology
and Care
Anaesthesia
and Analgesia
Cardiovascular
Key Product
Felimazole
Forthyron/Thyforon
Vetoryl
Zycortal
Key Product
Animax
Canaural
CleanAural
DermaPet Products
Isaderm
Malaseb
Key Product
Alvegesic
Atipam
Buprenodale
Comfortan
Phycox
Sedator
Vetivex
Key Product
Cardisure
c
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Equine Medicine
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Equipalazone
HY-50
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04/09/2017 13:59:16
sluglineFood producing Animal ProductsKey ProductAdriaticAustraliaAustriaBelgiumCanadaDenmarkFinlandFranceGermanyIrelandItalyMexicoN’landsNorwayPolandPortugalSpainSwedenUKUSCyclosprayMethoxasolOctacillinRapidexonSoludoxKey ProductAdriaticAustraliaAustriaBelgiumCanadaDenmarkFinlandFranceGermanyIrelandItalyMexicoN’landsNorwayPolandPortugalSpainSwedenUKUSSpecificKey ProductAdriaticAustraliaAustriaBelgiumCanadaDenmarkFinlandFranceGermanyIrelandItalyMexicoN’landsNorwayPolandPortugalSpainSwedenUKUSAvishield NDKey ProductAdriaticAustraliaAustriaBelgiumCanadaDenmarkFinlandFranceGermanyIrelandItalyMexicoN’landsNorwayPolandPortugalSpainSwedenUKUSCAP GenericsPet DietsVaccinesCAP GenericsStock Code: DPH47Strategic ReportDechra Annual Report 2017 - Front.indd 4704/09/2017 13:59:23 sluglineCorporate Social ResponsibilityTony Griffin Managing Director, Katy Clough Group HR Director Dechra Veterinary Products EUA responsible approach to our stakeholders and the wider community is considered by the Board to be important to the business. Our Corporate Social Responsibility strategy has three pillars: PillarPolicyObjectivesOur PeopleA great and safe place to workLeverage the Dechra Values and cultureMaintain high levels of employee engagementMaintain a reputation for acting responsibly and with integrityCulture of safe working practicesOur CommunityTo contribute to the social and economic welfare of the local communities in which we operateMaintain and improve the knowledge and skills of veterinarians who prescribe and use our productsContribute towards charitable causes through the donation of time, products and skills Our EnvironmentTo adopt responsible environmental practices and to give consideration to minimising the impact of our operations on the environmentEliminating waste sent to landfillUse energy more efficientlyContribute towards causes and projects which support our environmentThe progress in relation to the above objectives is described further in this report. 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 are an ongoing priority within the business.Tony Griffin is the nominated Director responsible for health, safety and environmental matters. However, the Board takes ultimate responsibility for Corporate Social Responsibility and is 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.GlossaryTerms used within this section:DPM: Dechra Pharmaceuticals ManufacturingLTAFR: Lost Time Accident Frequency RateMAT: Moving Annual TurnoverDechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2017www.dechra.com48Dechra Annual Report 2017 - Front.indd 4804/09/2017 13:59:27 Strategic Report
Our People
Our original people plan was developed three years ago to support the delivery of the Group’s five year plan. Significant progress has been made
with the formation and development of a strong Senior Executive Team (SET); embedding of a performance culture; putting in place the building
blocks for talent management; aligning compensation and benefits; carrying out leadership development and building a scalable HR Operation.
Earlier this year working closely with the SET and the Human Resources leaders, the people plan was adapted to support the delivery of the
evolving business goals.
Accelerate
Performance
Accelerate Performance:
Align employee efforts and drive productivity through effective
goal setting, feedback and focus on development
Creation
of Shared
Services
Grow Our
Own Talent
Grow Our Own Talent:
Attract retain and develop the right talent in the right place at the
right time
Healthy
Workplace
Strong Culture
and Values
Strong Culture and Values:
How we do things round here
Engaged and Committed Workforce:
A great place to work
Healthy Workplace:
Improving the working lives of our people
Engaged and
Committed
Workforce
Creation of Shared Services:
Efficient infrastructure supporting commercial operations
During this year we have focused on the ongoing integration of the
three acquisitions that we made during the 2016 financial year. The
growth of the Group has driven a need to simplify the commercial
organisation structure to allow a strong focus on core sales and
marketing activities delivering revenue goals. This has led to the
commencement of the development of a shared infrastructure with
the aims of controlling costs, avoiding duplication of effort and
ensuring all parts of the Group are supported equally.
During the year, we have focused our efforts on:
•
reorganising the Group following the acquisitions and recruiting key
roles where we identified gaps in our talent pipeline;
• strengthening our succession plans across the Group identifying
both high performers and those with high potential, putting in place
structured development plans. We have reduced the reliance on
individual contributors in many parts of the Group, and will continue to
develop a consistent approach to the development of our key talent;
• strengthening the Human Resources team in North America and in
Group Manufacturing and Supply to support the business; and
• working on the Group Manufacturing and Supply transformation
programme, restructuring and retraining our manufacturing teams
to prepare for the technical transfers across our sites.
We have continued to roll out our Human Resources system, Dechra
Diamond, across the Group and have enabled the second phase of
the project which supports the automation of some of the Personal
Development Review process including goal setting and the annual
review cycle. Our e-learning management system, Delta, has now
been introduced in North America, supporting the online training and
development of knowledge and skills of our staff.
In the year ahead we are planning to undertake our first Group-wide
employee engagement survey to provide us with a baseline understanding
of engagement levels and to identify any areas for improvement.
Our culture and Values are important to us and have helped to drive
the Group’s success. During the coming year we will be working with
the leadership teams around the Group to define the core leadership
competencies which we will use to recruit and develop our new and
existing leaders.
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 the period
Average total number employed over the period
× 100
The Group’s target is to maintain employee turnover (Moving Annual
Turnover (MAT)) at or below 15%. During the 2017 financial year this
was 15.7% (2016: 13.1%), which represents an increase of 2.6%. The
2016 figure excludes the employees from Genera, Brovel and Putney.
The increase has been driven by the organisational restructures as we
integrate the acquisitions.
It is the Group’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 Group’s terms and conditions and to provide
training and career development whenever appropriate. In summary,
we recognise that the success of the Group is dependent on our
ability to attract, develop, motivate and retain skilled employees.
Stock Code: DPH
Read Strategic Enablers – People
on pages 41 to 43
Dechra Annual Report 2017 - Front.indd 49
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Corporate Social Responsibility
continued
Informing and engaging our employees through internal channels
of communication is of utmost importance to the Group. We have
multiple channels of communication to provide both formal and informal
updates including a Group newsletter that is issued twice a year
(following the half-yearly and year end results), intranets, management
and team meetings at the respective business units. These ensure
that our employees are informed of the financial performance of
the Group, as well as the sharing of updates which are relevant to
all Group employees such as the introduction of new technology,
any management changes or restructuring, updates on corporate
social responsibility activities, and progress in relation to our strategic
objectives.
Apprenticeships and Work Experience
Our Dechra Pharmaceuticals Manufacturing (DPM) facilities continue
with the commitment to people development through a number of
apprenticeships; at its Skipton facility there are six apprentices and at
the Bladel facility there is one. The employees at Skipton are taking
National Vocational Qualifications or university degrees as part of
their apprenticeships. DPM also participates in work experience and
currently has two people on internship, in Zagreb, who are working for
one month in Quality Control and Pharmaceutical Development.
DVP EU offers internships at its UK operations, one in sales and
marketing and one in corporate marketing. Both internships are for one
year and are usually higher education students on their placement years.
Business Ethics
The Board expects all of the Group’s business activities to be
conducted in accordance with the highest ethical standards 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 these expectations into a policy
known as the Code of Business Conduct (the Code) which applies
throughout the Group. This Code is circulated around the business
together with the Anti-Bribery and Anti-Corruption Policy.
The Anti-Bribery and Anti-Corruption Policy was launched in the 2014
financial year (previously included in the Code of Business Conduct).
The policy, training documents and guidance have been translated and
rolled out across all of the Dechra territories. During this financial year
the Anti-Bribery and Anti-Corruption course has been launched on
our e-learning platform (Delta), in nine languages, with 929 employees
having access to the course. All new relevant employees will be
required to complete this course and existing relevant employees
will be required to undertake regular refresher training.
A Whistleblowing Policy is also in place whereby employees can report,
in confidence, any suspected wrongdoings within the business which
they feel unable to discuss directly with local management.
Health and Safety
The Group attaches great importance to the health and safety of its
employees and the public. The safety of our employees is paramount
and that means continuing to reinforce good safety management
practices as well as raising awareness of improved ways of working.
Management are responsible for, 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 our employees and onsite visitors.
Any material health and safety issues or incidents that occur are
discussed in detail at both business unit senior management meetings
and PLC Board meetings. Discussions include details of incidents and
any remedial action taken to mitigate or prevent recurrence. Twice a
year a comprehensive health and safety report is presented at each
of the business unit senior management meetings and subsequently
reported to the PLC Board meeting the following month for discussion
and review by the Directors.
The main sites within the Group have 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 Rate (LTAFR) as a non-financial key performance indicator
(see page 31).
The LTAFR is a calculation of all injuries that are 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 Group reports LTAFR on the same
basis as in previous years, that is absence or the inability of workers to
conduct their full range of their normal working activities for a period of
more than three working days after the day when the incident occurred.
The acquired business, Apex, was included from the first full month
that it become part of the Dechra Group. Over the course of the last 12
months the number of incidents has decreased from seven to six. None
of these incidents resulted in a work-related fatality or disability.
To continue to improve the safety performance across both existing and
newly acquired facilities and to reflect the priority that is given across
the business to safety, a proactive hazard awareness reporting initiative
has been introduced and rolled out across DPM. In the first year 1,769
preventative safety items have been raised and discussed across the
year with 1,476 being actioned and closed out.
Human Rights
Dechra is committed to upholding and respecting human rights both
within our business and from our suppliers. However, Dechra does
not currently have a separate human rights policy.
LTAFR
Modern Slavery
The Dechra Annual Report, the Code and the Values set out the
Group’s commitment to acting ethically and with integrity towards our
employees and in all our business relationships. Under the Code and
Dechra’s Third Party Principles Policy we have specific principles and
statements that cover ethical and human rights risks related to
anti-bribery and corruption, human resources, modern slavery,
child labour, non-discrimination and fair treatment.
DPM Zagreb & PDRA 0.38
DPM Bladel
DPM Florida
DPM Skipton
Apex (DPM & Dechra
International)
DVP EU
DVP US & Canada
(including Putney)
Mexico
PLC
0.00
0.00
0.93
0.00
0.12
0.00
0.00
0.00
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Strategic Report
Our Community
The Board 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.
This is the sixth year in which the Group has operated a Donations Policy. All employees within the Group are entitled to nominate a charity or a
non-commercial organisation. This year the number of nominations received exceeded our expectations and it was therefore decided to increase
the overall donation spend from £20,000 to £30,000, which was split equally between the following 15 charities:
Type of Charity
Charity
Animal
The Rehabilitation
Centre Silver
Vida Silvestre Jesus
Estudillo Lopez A.C.
(El Nido)
Country
Croatia
Mexico
People
The Trusty Paws
Clinic
The Underhound
Railroad
UK
USA
Frankie’s Friends
USA
Children’s House,
Zagreb
Gornja Bistra
Hospital
Croatia
Croatia
Jedni za druge
Croatia
BROEN
Denmark
Description
The Rehabilitation Centre Silver trains assistance dogs to be used in the
rehabilitation of disabled persons and children with developmental difficulties.
El Nido is the largest aviary in Latin America which is dedicated to saving hundreds
of animal species, most of which are endangered birds. The donation will be used
to support a project for the preservation of the great curassow which is a large
pheasant-like bird from the Neotropical rainforests in danger of extinction.
Provides free preventative care to dogs belonging to the homeless or vulnerably
housed of Glasgow and London.
Rescues dogs from various parts of the country and transports them to the
Northeast (primarily Maine) where they are fostered until matched with an adopter
A non-profit foundation dedicated to finding cures and saving pets with cancer and
other life-threatening conditions. The donation will provide lifesaving dialysis technology.
This charity provides children and young adults with accommodation, technical
support and security, and training necessary for their development.
A special hospital in Gornja Bistra which cares for children with chronic diseases,
through specialist activities and hospitalisation in cases when adequate treatment
cannot be provided at home.
Jedni za druge aims to prevent addiction and impulse control disorders, and to
develop social and psychological rehabilitation and resocialisation.
BROEN has as objective to support socially disadvantaged children and young
people with membership fees and equipment for sports or other leisure activities.
BROEN encourages children to socialise and be part of a positive community.
Nederlandse Cystic
Fibrosis Stichting
The Netherlands The Nederlandse Cystic Fibrosis Stichting fights for a better quality of life for people
who suffer from cystic fibrosis.
Tell me your dreams Mexico
This charity is focused on fulfilling the dreams of children who suffer from serious
terminal illnesses.
Soncek Murska
Sobota,
Slovenia
Soncek is an association that brings together children suffering from cerebral palsy. Their
aim is to provide as much as possible a normal life for these children, and includes many
different therapies such as physiotherapy, therapeutic riding and swimming.
Lotus Home
Sri Lanka
Lotus Home is an orphanage for disabled girls in Sri Lanka.
Be Their Difference,
Inc
USA
This foundation raises money to purchase toys to donate to the children’s hospitals
in Kentucky. The two major hospitals include Nortons Children’s Hospital in Louisville
and Kentucky Children’s Hospital in Lexington.
Twin To Twin
Transfusion
Syndrome (TTTS)
USA
This foundation is dedicated to helping families affected by TTTS. They provide
information for medical decisions, as well as emotional and financial support. There
is also a huge resource for bereavement support for infant loss.
Head Office team volunteered their time on the Northwich section of the
Trent and Mersey canal
The DPM team participated in a team building event in Den Bosch, the
Netherlands which included a donation to a local charity
Stock Code: DPH
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Corporate Social Responsibility
continued
Donations in Kind
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 2017 financial year.
Type of Charity
Animal
Animal
People
Charity
Help Street Animals of
Morocco (HSAM)
El Nido
Udruzenje Dijaliznih I
Transplantiranih Pacijenata
Jurisdiction
Morocco
Mexico
Bosnia/Hertz
Description
DVP UK continued to provide assistance to HSAM by providing supplies in 2017
of Alvegesic, Atipam and Sedator
Supply of veterinary products
Disinfectants to patients with kidney transplantation
Financial Donations
Business Unit
DPM Skipton
Jurisdiction
UK
DVP EU
Germany
DVP EU
International
DVP UK
UK
Genera
Croatia
Amount
£750
£659
£44,502
£300
£572
Description
Donations to Children in Need and The Christie Charitable Fund, Manchester
(specialised cancer hospital)
Donations to Veterinarians without borders, Aulendorf carnival and Society for
Cynological Research
Circle of Good: Donations to World Wide Fund for Nature (WWF), Marine Conversation
Society, Sea Life Centre Blankengerbe and The Ocean Clean Up (refer to case study)
Donation to Jade the Street Vet, who provides free veterinary care in London for
the pets of the homeless
Donation to the local fire service
Case Study:
Our Community – Dechra Academy for Veterinarians
Maintaining and improving knowledge and skills in an ever
changing industry is a major driver behind the ongoing demand
from the veterinary profession for high quality education. In a
number of countries the number of hours that each veterinarian
spends on Continuous Professional Development (CPD) each year
is mandated by their professional organisation.
From Dechra’s perspective, we are keen to ensure that the
diseases our products treat are diagnosed, monitored and treated,
and so education forms an intrinsic part of our marketing mix.
Our educational programmes have traditionally involved speakers,
often eminent Key Opinion Leaders, presenting to groups of
veterinarians face to face. We recognise that it is not always
convenient for our customers to give up their evenings and
travel to hear a speaker, so we have looked into ways to make
education available at a time and place to suit them.
The Dechra Academy was first launched in 2010 to provide an
e-learning environment for veterinarians, initially in the UK. The
attraction of anytime, any place learning was huge and the launch was
very successful with thousands of veterinary professionals registering to
complete the courses within the first few weeks of launch.
Now there are over 35 courses in the Academy in a wide range
of different formats from e-learning modules to webcasts and
podcasts and the Academy is available globally. The attraction of
this form of learning has not waned and we continue to receive a
significant number of new registrations worldwide every year.
We do still run Dechra Academy Live events, our face to face
meetings and webinars, but now we record these and offer them
to other customers as webcasts accessed via the Academy.
Our contribution to education has been recognised by our customers.
In a recent survey*, Dechra’s educational programme was highly rated
by our UK customers for its quality and for our commitment to the
industry. This ranking, along with the feedback from recent customer
research, has given us a clear indication of what our customers need,
when they need it and how we can increase awareness and usage of
our products. As a result, we are updating and improving the Dechra
Academy ready for launch in the next financial year.
The new Dechra Academy will include:
• a new look and feel;
•
•
improved navigation, simplifying the user journey; and
increased integration with the Dechra website.
We are also investing in a number of new e-learning modules to
ensure that we continue to meet our customers’ demands for
meaningful and relevant educational content.
* CPD Habits of Vets Across Europe, February 2017, CM Research Ltd.
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sluglineOur EnvironmentEnergy and Waste ManagementThe Group recognises the importance of good environmental controls. It is the Group’s policy to comply with environmental legislation currently in place, to adopt responsible environmental practices and to give consideration to minimising the impact of its operations on the environment. Annual Waste Disposal Performance BladelFloridaSkiptonZagrebRecovered, recycled and reused 100.0%43.0%56.1%86.6%Landfill—57.0%20.4%—Waste & Controlled Drugs—*—23.5%13.4%*Recycled.Our central logistics hub for Europe (the Dechra Service Center (DSC)) has continued with its annual contribution of DKK15,000 to Energreen ApS for the construction of new green energy production facilities within Denmark.Greenhouse Gas EmissionsIn order to determine our carbon emissions, we have used the GHG Protocol Corporate Accounting and Reporting Standard and have reported on emissions arising from those sources over which we have operational control (the exception being the inclusion of a third party manufacturer who leases part of our facility in Uldum, Denmark). Any acquisitions during the year are included from the first full month that they become part of the Dechra Group. The disclosures below encompass:• Scope 1: includes emission from combustion of fuel and operation of facilities (excluding combustion of fuel from Company cars);• Scope 2: includes emissions from purchased electricity, heat, steam and cooling; and• Vehicle emissions.Dechra has selected ‘Tonnes of CO2e per total £ million sales revenue’ as the intensity ratio as this is a relevant indicator of the Group’s growth.1 July 2016 to 30 June 20171 July 2015 to 30 June 2016 1 July 2014 to 30 June 2015Scope 14,0183,434636Scope 2 3,8903,1301,740Vehicle emissions1,6181,5111,241Total Carbon Footprint (tonnes of CO2e) 9,5268,0753,617Intensity ratio (tonnes of CO2e per £m)26.532.617.8As reported in last year’s report the increase in the 2016 financial year was mainly attributable to the production of the nutrition supplement that is manufactured at Genera. This was explained in a case study in the 2016 Annual Report. The intensity ratio has decreased by 6.1 tonnes of CO2e per total £ million sales revenue. The decrease is partially due to the continued monitoring and optimising of the energy resources used at our manufacturing facilities and at the DSC. In January 2017 DSC installed light emitting diode type (LED) lighting in their warehouse and administration. On a yearly basis this change is expected to save DKK133,370 (approximately £15,640) with a return on investment of 1.4 years and annual kWh saving of 112,464 kWh. At the beginning of 2017 the Melbourne facility in Florida, US upgraded its site with a retrofitting of the current lighting fixtures from conventional lighting to LED. On a yearly basis Melbourne expect to save a total of US$10,043 and with a return on investment of 1.7 years and an annual return on investment of 55%. The Melbourne site has experienced a 32 tonnes reduction in CO2 emissions per year. The change at both sites will result in an expected 50,000 hours lamp lifetime saving and a 100% reduction in mercury levels in lighting. We are now working with a third party to make similar changes at the Bladel facility.The Active Pharmaceutical Ingredient (API) Amoxicillin is used in the production of Octacilline and Solamocta. Traditionally, this API is produced by a chemical method, which uses large amounts of organic solvents, and produces a large amount of waste. To minimise the environmental impact of this chemical production, Dechra tested and validated an alternative source who utilises an enzymatic process to produce Amoxicillin. The benefits from using the enzymatic Amoxicillin include using fewer solvents in the synthesis, less environment pollution and a reduction of energy consumption greater than 50%. This is a step to reduce the environmental impact from the production of antibiotics.Case Study: Our Environment – Reduce WasteStock Code: DPH53Strategic ReportDechra Annual Report 2017 - Front.indd 5304/09/2017 13:59:30 Corporate Social Responsibility
continued
Case Study:
Our Environment – Ocean Cleanup
In 2015 the Circle of Good was developed as a positioning
for our Specific brand of pet food. The Circle of Good
includes a commitment to contribute up to 5% of its profits to
environmental causes, in particular marine sustainability. The
underlying principle of the Circle of Good is that Specific uses
the finest ingredients, foremost amongst these being fish, to
create products that deliver genuine health benefits for pets. This
creates products that veterinarians are proud to recommend
and from which owners see the benefits in their healthy pets.
Reinvesting a proportion of the profits into the environment that
provides these ingredients supports the process and completes
a Circle of Good.
A range of activities have been supported by the Circle of Good
initiative including WWF – Baltic Sea in Scandinavia; North
Sea Foundation in the Netherlands and Belgium with a beach
clean-up tour; The Finnish Association for Nature Conservation;
WWF Club PME in France; The Sustainable Seas Foundation in
Sweden and Keep Sweden Tidy Foundation; and beach clean-
ups with the Marine Conservation Society in the UK.
In 2017 The Ocean Cleanup (TOC) was added to the initiatives
supported by Specific. TOC is an imaginative, international and
ambitious scheme offering a potential solution to what was
previously seen as an intractable problem, that is the removal
of millions of tons of plastic from the world’s oceans, which
damage ecosystems and enter food chains. To clean this up
using vessels and nets will cost billions of dollars and take
thousands of years to complete. TOC aims to use the natural
ocean currents and winds, developing a network of floating
U-shaped screens that catch and channel the plastic to a central
point where it can be removed from the ocean and shipped to
shore for recycling. Computer models predict that TOC will be
able to remove 50% of the plastic waste in the Pacific in just
five years.
Going forward, Specific is looking to source all of its fish from
accredited sustainable sources; it already has this for the
majority of its fish oil and packaging is also under review to
reduce material weight.
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Strategic Report
The result of this transfer means we can support the commercial
ambition of the Group by reducing our cost of goods.
Furthermore, the 90% reduction in unnecessary movement of
goods means a dramatic CO2 emission reduction.
Case Study:
Our Environment – Cleanaural
Historically production of Cleanaural, one of the care products,
was undertaken at our small manufacturing facility located
alongside the logistics hub in Uldum, Denmark. In 2013 following
the closure of this manufacturing facility, production was moved to
a lower cost Contract Manufacturing Organisation (CMO) located
in Florida, US. Although manufacturing was carried out in Florida,
the bottles and nozzles were still supplied from Denmark, as they
had been specially designed and manufactured in Denmark.
This meant a journey of over 4,600 miles one way moving empty
bottles from Europe to US, the bottles being filled in the US, then
transported over 4,600 miles back to the logistics hub before
onward distribution into Europe. Therefore, a single bottle would
have travelled more than 9,200 miles before it was distributed to
the final customer.
Following the five year Dechra Manufacturing and Supply Chain
strategic plan it was decided to make use of the geographical
location and skilled workforce of our Zagreb manufacturing facility
in Croatia. We wanted to ensure security of supply chain and the
quality and cost improvements for the product. The plan was to
source and produce the product in Croatia and then send to the
logistics hub in Denmark, resulting in a total journey of around
1,000 miles compared to the 9,200 previously.
This transfer process has resulted in significant investment in
staff training and upskilling in Croatia. In addition, the technical
teams have looked at the manufacturing process and have made
improvements to the production methods. The site had to seek
regulatory approval for the manufacturing facility, and in December
2016 it received the GMP licence to operate from the Agency for
Medicinal Products and Medicinal Devices of Croatia (HALMED).
In March 2017, we successfully achieved the technology transfer
from the CMO facility in USA with the first production arriving
in our Danish logistics hub in April 2017, months ahead of the
original plan. The team have also undertaken a project to source
bottles and caps locally in Croatia to have a tighter supply chain in
place. We have been working closely with the CMO to ensure they
maintain our USA supply chain and provide a dual supply source.
Stock Code: DPH
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How the Business Manages Risk
Effective risk management and control is key to the delivery of our
business strategy and objectives. Our risk management and control
processes are designed to identify, assess, mitigate and monitor
significant risks, and can only provide reasonable and not absolute
assurance that the Group will be successful in delivering its objectives.
The Board is responsible for overseeing how the Group’s strategic,
operational, financial and compliance risks are managed, and for
assessing the effectiveness of the risk management and internal control
framework.
Our Senior Executive Team (SET) owns the risk management process
and is responsible for managing specific Group risks.
The SET is also responsible for embedding sound risk management
in strategy, planning, budgeting, performance management, and
operational processes within their respective Operating Segments
and business units.
The Board and the SET together set the tone and decide the level of
risk and control to be taken in achieving the Group’s objectives.
Top
Down
Board
Overseeing of the Group’s risk management and internal controls
Audit Committee
Annual validation of the risk reporting process
Senior Executive Team
Owners of the risk management process and responsible for embedding
risk management into business units
Bottom
Up
Business Units
Identification, mitigation and monitoring of risks
Risk Management Process
Our strategy informs the setting of the objectives across the business and is widely communicated. Strategic risks and opportunities are
identified as an integral part of the strategy setting process.
The SET is responsible for evaluating and managing risk from both a bottom up and top down level and acts as a link between the Board
and the business units to ensure management of operational risks is embedded in the business.
Each SET member owns one or more Group risks and is responsible for identifying how the risks are currently controlled, what additional
mitigating actions are required, what monitoring and assurance mechanisms are in place, assessing the effectiveness of key control
processes, and addressing any weaknesses identified.
The Board conducts a review of the risk management and internal control framework and SET members present their risks, controls and
mitigation plans to the Board for review on a rolling programme throughout the year. The Audit Committee reviews the effectiveness of
internal financial controls annually.
Identify
n it s
siness U
u
B
B
o
a
r
d
Monitor
r
Internal
Control
Framework
Assess
S
E
T
e
mitte
d it C o m
A u
Mitigate
e
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Internal Control Framework
Our internal control framework is designed to ensure:
• Operational Controls
Our key operational control processes are as follows:
• proper financial records are maintained;
•
the Group’s assets are safeguarded;
• compliance with laws and regulations; and
• effective and efficient operation of business processes.
The Dechra Values are the foundation of the control framework and it
is the Board’s aim that these values should drive the behaviours and
actions of all employees. The key elements of the control framework are
described below:
Management
Structure
Policies and Procedures
Business Planning
Operational Level Controls
Quality
Assurance
Pharmacovigilance
Information
Technology
Financial
Controls
Dechra Values
• Management Structure
Our management structure has clearly defined reporting lines,
accountabilities and authority levels.
The Group is organised as business units. Each business unit is led
by a SET member and has its own management team.
• Policies and Procedures
Our key financial, legal and compliance policies that apply across
the Group are:
• Code of Business Conduct;
• Delegation of Authorities;
• Anti-Bribery and Anti-Corruption;
• Whistleblowing;
• Sanctions; and
• Charitable Donations.
• Strategy and Business Planning
We have a five year strategic plan which is updated and reviewed by
the Board annually. Business objectives and performance measures
are defined annually together with budgets and forecasts. Monthly
business performance reviews are conducted at both Group and
business unit levels.
The product pipeline is reviewed regularly to:
• assess whether products in development are progressing
according to schedule;
•
identify new product ideas and assess fit with our product
portfolio; and
• assess the expected commercial return on new products.
Stock Code: DPH
• Quality Assurance: All our manufacturing sites have an
established Quality Management System. These systems are
designed to ensure that our products are manufactured to a
high standard and in compliance with the relevant regulatory
requirements.
• Pharmacovigilance: Our regulatory team operates a robust
system with a view to ensuring that any adverse reactions related
to the use of our products are reported and dealt with promptly.
•
Information Technology: Our business units currently use a
number of different local financial, manufacturing and warehouse
management systems to support their operations. We are in the
process of implementing Oracle across the Group.
• Financial Controls: Our controls are designed to prevent and
detect financial misstatement or fraud and operate at three
levels:
• Entity Level Controls performed by senior managers at Group
and business unit level;
• Month-end and Year-end procedures performed as part of
our regular financial reporting and management processes;
and
• Transactional Level Controls operated on a day-to-day basis.
Internal Audit provides independent and objective assurance and
advice on the design and operation of the Group’s internal control
framework. The internal audit plan seeks to provide balanced coverage
of the Group’s material financial, operational and compliance control
processes
Improvements in 2017
We have continued to strengthen and improve a number of key control
processes and the following changes have been implemented:
• a number of portfolio and project management improvements have
been implemented in our product development processes;
•
the manufacturing Quality Management Systems in all our recent
acquisitions have been assessed and improvements implemented to
ensure they meet relevant regulatory standards;
• a risk assessment of the key contract manufacturing organisations
(CMOs) that our supply chain is dependent upon has been
completed and quality audits have also been conducted on
the top 35 CMOs; and
• our standard financial control framework has been updated and
rolled out across the Group, including all recent acquisitions, in
response to a number of improvement opportunities identified
from internal audit reviews.
Plans for 2018
We will continue to refine and strengthen our internal control framework
where required in response to changes in our risk profile and
improvement opportunities identified by business management,
quality assurance and internal audit.
We are planning to review our key corporate compliance processes
and training activities including our Group Code of Conduct, key Group
Policies and our Third Party Principles Policy in order to improve our
ability to comply with existing and emerging legislation.
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slugline
Understanding Our Key Risks
• Lower pricing pressure: Livestock producers and pet owners
generally pay for animal healthcare themselves. Pricing decisions
are not influenced by government payors that are involved in
product and pricing decisions for human medicines.
• Less price erosion by generic competition: Generic competition
in animal healthcare, whilst playing an important role, has a lower
impact on prices compared to human pharmaceuticals because
of the smaller average market size of each product opportunity,
stronger customer relationships and brand loyalty.
The SET has identified and agreed key risks with the Board. Of these,
a number are deemed to be generic risks facing every business
including failure to comply with financial reporting regulation, foreign
exchange, IT systems failure and non-compliance with legislation. The
table below therefore details the ten principal risks that are specific to
our business and provides information on:
• how they link to Group strategy;
•
their potential impact on the business; and
• what controls are in place to mitigate them.
Dechra is one of only a handful of listed veterinary pharmaceuticals
companies in the FTSE. We therefore believe it is important to
summarise the key distinctions between the animal and human
pharmaceutical industries in order to provide a better understanding of
our risk profile.
The business of developing and marketing animal pharmaceuticals
shares a number of characteristics with human pharmaceutical
businesses. These similarities include the need to conduct clinical trials
to prove product safety and efficacy, obtain regulatory approval for new
products, complex and highly regulated product manufacturing, and to
market products based on approved clinical claims. However, there are
also significant differences between animal and human pharmaceutical
businesses, including:
• Product development is generally faster, cheaper and more
predictable and sustainable: Development of animal medicines
typically requires fewer clinical studies with fewer subjects and is
conducted directly in the target species. Decisions on product
safety, efficacy and likelihood of success can therefore be made
more quickly.
• Diversified product portfolios: Animal pharmaceuticals
businesses are generally less reliant on a small number of
‘blockbuster’ products. Animal health products are sold across
different regions which may have distinct product requirements.
As a result, animal health products often have a smaller market size
and the performance of any single product typically has less impact
on overall business performance.
• Stronger customer relationships and brand loyalty: Companion
Animal Products are directly prescribed and often dispensed and
sold by veterinarians which contributes to building brand loyalty,
which continues after the loss of patent protection or regulatory
exclusivity.
Link to
Strategic
Growth
Driver and
Enabler
a
b c
Risk
Potential Impact
Control and Mitigating Actions
Trends
Revenues and margins
may be adversely affected
should competitors launch
a novel or generic product
that competes with one of
our unique products upon
the expiry or early loss of
patents.
Costs may increase due to
defensive marketing activity.
We focus on lifecycle management strategies
for our key products to ensure they fulfil evolving
customer requirements.
Product patents are monitored and defensive
strategies are developed towards the end of the
patent life or the data exclusivity period.
We monitor market activity prior to competitor
products being launched, and develop a
marketing response strategy to mitigate
competitor impact.
Competitor
product
launches
against
some of
our key
products
Competitor Risk:
Competitor products launched
against one of our leading brands
(e.g. generics or a superior product
profile).
We depend on data exclusivity
periods or patents to have
exclusive marketing rights for
some of our products.
Although we maintain a broad
portfolio of products, our
unique products like Vetoryl and
Felimazole have built a market
which may be attractive to
competitors.
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Strategic Report
Link to
Strategic
Growth
Driver and
Enabler
a
b c
Risk
Potential Impact
Control and Mitigating Actions
Trends
Market Risk:
The emergence of veterinary
buying groups and corporate
customers.
We sell and promote primarily to
veterinary practices and distribute
our products through wholesaler
and distributor networks in most
markets.
In a number of mature markets,
veterinarians are establishing
buying groups to consolidate
their purchasing, and corporate
customers are also emerging.
Acquisition Risk:
Identification of acquisition
candidates and their potential
integration.
Identification of suitable
candidates and securing a
successful approach involves a
high degree of uncertainty.
Acquired products or businesses
may fail to deliver expected
returns due to over-valuation or
integration challenges.
The emergence of corporate
customers and buying
groups represents an
opportunity to increase
sales volumes and revenue
but may result in reduced
margins.
Our reputation and
relationships with veterinary
practices could also be
adversely affected.
We manage and monitor our national and
European pricing policies to ensure equitable
pricing for each customer group.
Our relationships with larger customers are
managed by key account managers.
Our marketing strategy is designed to support
veterinarians in retaining customers by promoting
the benefits of our product portfolio in our major
therapeutic areas.
Failure to identify or secure
suitable targets could slow
the pace at which we can
expand into new markets or
grow our portfolio.
Acquisitions could deliver
lower profits than expected
or result in intangible assets
impairment.
We have defined criteria for screening
acquisition targets and we conduct commercial,
clinical, financial and legal due diligence.
The Board reviews acquisition plans and
progress regularly and approves all potential
transactions.
The SET manages post-acquisition integration
and monitors the delivery of benefits and
returns.
Successful
integration
of recent
acquisitions
Product Development Risk:
Failure to deliver major products
either due to pipeline delays or
newly launched products not
meeting revenue expectations.
The development of pharmaceutical
products is a complex, risky and
lengthy process involving significant
financial, R&D and other resources.
Products that initially appear
promising may be delayed or
fail to meet expected clinical or
commercial expectations or face
delays in regulatory approval.
It can also be difficult to predict
whether newly launched products
will meet commercial expectations.
A succession of clinical trial
failures could adversely
affect our ability to deliver
shareholder expectations
and could also damage our
reputation and relationship
with veterinarians.
Our market position in key
therapeutic areas could be
affected, resulting in reduced
revenues and profits.
Where we are unable to
recoup the costs incurred
in developing and launching
a product this would result
in impairment of intangible
assets.
Potential new development candidates are
assessed from a commercial, financial and
scientific perspective by a multi-functional team to
allow senior management to make decisions on
which ones to progress.
The pipeline is discussed regularly by senior
management, including the Chief Executive Officer
and Chief Financial Officer. Regular updates are
also provided to the Board.
Each development project is managed by co-
project leaders who chair project team meetings.
Before costly pivotal studies are initiated, smaller
proof of concept pilot studies are conducted to
assess the effects of the drug on target species and
for the target indication.
In respect of all new product launches a detailed
marketing plan is established and progress against
that plan is regularly monitored.
The Group ensures that it has a detailed market
knowledge and retains close contact with customers
through its management and sales teams which are
trained to a high standard.
Stock Code: DPH
Dechra Annual Report 2017 - Front.indd 59
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59
04/09/2017 13:59:33
Understanding Our Key Risks
continued
Link to
Strategic
Growth
Driver and
Enabler
a
b c
Risk
Potential Impact
Control and Mitigating Actions
Trends
Regulatory Risk:
Failure to meet regulatory
requirements.
We conduct our business in a
highly regulated environment,
which is designed to ensure the
safety, efficacy, quality, and ethical
promotion of pharmaceutical
products.
Failure to adhere to regulatory
standards or to implement changes
in those standards could affect our
ability to register, manufacture or
promote our products.
Delays in regulatory
reviews and approvals could
impact the timing of a product
launch and have a material
effect on sales and margins.
Any changes made to the
manufacturing, distribution,
marketing and safety
surveillance processes of
our products may require
additional regulatory
approvals, resulting in
additional costs and/or
delays.
Non-compliance with
regulatory requirements
may result in delays to
production or lost sales.
The Group strives to exceed regulatory
requirements and ensure that its employees
have detailed experience and knowledge of the
regulations.
Manufacturing and Regulatory have established
quality systems and standard operating
procedures in place.
Regular contact is maintained with all relevant
regulatory bodies in order to build and strengthen
relationships and facilitate good communication
lines.
The regulatory and legal teams keep updated in
respect of changes with a view to ensuring that
the business is equipped to deal with, and adhere
to, such changes.
Where changes are identified which could affect
our ability to market and sell any of our products,
a response team is created in order to mitigate
the risk.
External consultants are used to audit our
manufacturing quality systems.
a
b c
Regulatory Risk:
Continuing pressure on reducing
antibiotic use.
The issue of the potential transfer
of antibacterial resistance from food
producing animals to humans is
subject to regulatory discussions.
In some countries this has led to
government recommendations on
reducing the use of antibiotics in
food producing animals.
Reliance on Third Parties Risk:
A supply failure on a key product
may affect our ability to develop,
make, or sell our products.
We rely on third parties for the
supply of all raw materials for
products that we manufacture
in-house. We also purchase many
of our finished products from third
party manufacturers.
a
b c
Reduction in sales of our
antimicrobial product range.
Our reputation could
be adversely impacted
if we do not respond
appropriately to government
recommendations.
Regular contact is maintained with relevant
veterinary authorities to ensure that we have
a comprehensive understanding of regulatory
changes.
We strive to develop new products and minimise
antimicrobial resistance concerns.
Antibiotic
decline has
increased in
the UK and
Denmark
Raw material supply failures
may cause:
•
Increased product
costs due to difficulties
in obtaining scarce
materials on commercially
acceptable terms;
• product shortages due to
manufacturing delays; or
• delays in clinical trials
due to shortage of trial
products.
Shortages in manufactured
products and third party
supply failures on finished
products may result in lost
sales.
We monitor the performance of our key suppliers
and act promptly to source from alternative
suppliers where potential issues are identified.
The top ten Group products are regularly reviewed
in order to identify the key suppliers of materials or
finished products.
We maintain buffer stocks and dual sourcing
arrangements of key products.
All contracts with suppliers are reviewed from
both a commercial and legal perspective to try to
ensure that assignment of the contract is allowed
should there be a change of control of either of
the contracting parties.
We have recruited a dedicated CMO Director to
manage our third party supplier network.
60
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Strategic Report
Link to
Strategic
Growth
Driver and
Enabler
a
b c
Risk
Potential Impact
Control and Mitigating Actions
Trends
Reliance on Third Parties Risk:
Loss of key third party
manufacturing customers
from DPM.
Other sales, relating to third party
manufacturing and other non-core
activities, represents approximately
9.2% of Group revenues.
Loss of a key customer
can impact manufacturing
revenues and lead to an
increase in the cost of goods
of the remaining portfolio.
The DPM sales team maintains relationships with
key customers.
Robust supply agreements are in place with each
of our key customers and are regularly reviewed.
Monthly customer service level monitoring and
reporting is in place.
Strategy
to reduce
third party
manufacturing
contracts
a
b c
People Risk:
Failure to retain high calibre,
talented senior managers and other
key roles in the business.
Our growth plans and future
success are dependent on retaining
knowledgeable and experienced
senior managers and key staff.
Loss of key skills and
experience could erode our
competitive advantage and
could have an adverse impact
on results.
Inability to attract and retain
key personnel may weaken
succession planning.
People Risk:
Failure to resource the business to
achieve our strategic ambitions,
particularly on geographical
expansion and acquisition.
As Dechra expands into new
markets and acquires new
businesses or science we recognise
that we may need new people
with different skills, experience
and cultural knowledge to execute
our strategy successfully in those
markets and business areas.
Failure to recruit or develop
good quality people could
result in:
• capability gaps in new
markets;
• challenges in integrating
new acquisitions; or
• overstretched resources.
This could delay implementation
of our strategy and we may
not meet shareholders’
expectations.
The Nomination Committee oversees succession
planning for the Board and the SET.
Succession plans are in place for the SET
together with development plans for key senior
managers. Key person insurance is in place where
appropriate.
Board
and SET
succession
planning
managed
successfully
Remuneration packages are reviewed on an
annual basis in order to help ensure that the
Group can continue to retain, incentivise and
motivate its employees.
The Group HR Director reviews the organisational
structure with the SET twice a year to aim to
ensure that the organisation is fit for purpose and
to assess the resourcing implications of planned
changes or strategic imperatives.
A development programme is in place to identify
opportunities to recruit new talent and develop
existing potential.
Successful
recruitment
of DPM
management
team
Key to Strategic Growth Drivers:
Key to Strategic Enablers:
Key to Risk Trend:
Pipeline Delivery
Manufacturing and Supply Chain
Increased risk
a
b c Portfolio Focus
Geographical Expansion
Acquisition
Technology
People
Decreased risk
No change
Read Delivering Our Strategy
on pages 13 to 15
Stock Code: DPH
Dechra Annual Report 2017 - Front.indd 61
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61
04/09/2017 13:59:34
sluglineDechra Annual Report 2017 - Middle.indd 6204/09/2017 14:00:11 sluglineGovernanceBoard of Directors64Corporate Governance66Audit Committee Report74Nomination Committee Report79Directors’ Remuneration Report81Directors’ Report – Other Disclosures102Statement of Directors’ Responsibilities 105Dechra Annual Report 2017 - Middle.indd 6304/09/2017 14:00:12 sluglineBoard of DirectorsTony Rice: Non-Executive ChairmanCommittee Membership: Nomination (Chairman), Remuneration.Skills and Experience: Tony has extensive board level experience across a range of sectors, including aerospace, healthcare, telecommunications and retail in both UK and international markets.Background: Tony joined the Board in May 2016 and was appointed Chairman in October 2016. He served as Chief Executive Officer at Cable & Wireless and Tunstall Holdings, and prior to that held various roles at BAE Systems including Managing Director of Commercial Aircraft and Group MD of Business Development. He has also served as a Non-Executive Director at Punch Taverns, Spirit Pub Company, Cable & Wireless, Telewest Communications and Saab Technologies, and Chairman of Alexander Mann Solutions.External Appointments: Tony is currently the Senior Independent Non-Executive Director and Chairman of the Remuneration Committee at Halma plc.Ian Page: Chief Executive OfficerCommittee Membership: Not applicable.Skills and Experience: Ian has gained detailed knowledge and experience through various positions he has held within the pharmaceutical and veterinary arena. He has a solid understanding of business development both in the UK and globally. In particular he has extensive experience in M&A and in the successful delivery of strategic plans.Background: Ian joined NVS, Dechra’s former services business, at its formation in 1989 and was an integral part of the MBO in 1997, becoming its Managing Director in 1998. He joined the Board in 1997 and became Chief Executive Officer in 2001. Ian has played a key role in the development of the Group’s growth strategy.External Appointments: In October 2010 Ian was appointed as Non-Executive Chairman of Sanford DeLand Asset Management Limited.Richard Cotton: Chief Financial OfficerCommittee Membership: Not applicable.Skills and Experience: Richard has a wealth of experience in senior financial roles in life sciences and other sectors, including broadcast and photographic, automotive, filtration and metals. His experience covers all finance management and value creation activities from R&D, to manufacturing and commerce in international organisations. He has significant experience in the development and successful execution of strategy, corporate finance and M&A, capital markets and governance.Background: Richard was appointed Chief Financial Officer in January 2017. Prior to joining Dechra he was Chief Financial Officer of Consort Medical plc from 2012 to 2016. He has also been Finance Director of Vitec Group plc from 2008 to 2011, Group Finance Director at Wagon plc from 2005 to 2008, and Group Finance Director of McLeod Russel plc from 2001 to 2005. Prior to this he held senior finance roles in Alcoa Inc.External Appointments: None.Tony Griffin Managing Director DVP EUTony Griffin: Managing Director, Dechra Veterinary Products EUCommittee Membership: Not applicable.Skills and Experience: Tony has over 25 years’ experience in the animal health business and has substantial international experience as a result of living and working outside the UK since 1993. He gained broad experience of running an international animal health business with teams in different European countries as Chief Executive Officer of the AUV Group. Tony is the Board nominated Director responsible for health, safety and environmental matters.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, becoming the Chief Executive Officer of the AUV Group in 2006. External Appointments: None.Tony Rice Non-Executive ChairmanIan Page Chief Executive OfficerRichard Cotton Chief Financial OfficerDechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2017www.dechra.com64Dechra Annual Report 2017 - Middle.indd 6404/09/2017 14:00:17 sluglineIshbel Macpherson Senior Independent Non-Executive DirectorIshbel Macpherson: Senior Independent Non-Executive DirectorCommittee Membership: Audit, Nomination, Remuneration (Chairman).Skills and Experience: Ishbel has a broad range of PLC Board experience in a variety of roles, including Chairman, Audit Committee and Remuneration Committee Chairman. She has knowledge and understanding of City matters gained over 20 years’ experience as an investment banker, specialising in UK mid-market corporate finance. Background: Ishbel joined the Group as a Non-Executive Director in February 2013. Prior to this 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 a Non-Executive Director at Galliford Try plc (appointed February 2014), Senior Independent Director at Bonmarche Holdings plc (appointed October 2013) and Non-Executive Director of Fidessa plc (appointed May 2017).Julian Heslop Non-Executive DirectorJulian Heslop: Non-Executive DirectorCommittee Membership: Audit (Chairman), Nomination, Remuneration.Skills and Experience: Julian has considerable financial experience as a result of the senior finance roles he has held in the pharmaceutical, food, property and brewing sectors over the last 30 years.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 held 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 is a Non-Executive Director at Itaconix PLC (appointed July 2012) and is their Audit Committee Chairman. He is also a Director and Chairman of the Audit Committee of the Royal Academy of Arts (appointed October 2012).Dr Lawson Macartney Non-Executive DirectorDr Lawson Macartney: Non-Executive DirectorCommittee Membership: Audit, Nomination and Remuneration.Skills and Experience: Lawson is a veterinarian and, in addition to spending several years in veterinary practice, has held a range of senior roles in pharmaceutical R&D, sales and marketing over the past 30 years.Background: Lawson joined the Board in December 2016. He served as Chief Executive Officer of Ambrx Inc. between 2013 and 2015, and prior to that led emerging business for Shire PLC. Before joining Shire in 2011, he was with GlaxoSmithKline PLC (GSK) from 1999 to 2011 in positions of increasing seniority. His final role at GSK was to lead the strategic marketing, outcomes and reimbursement, project management and portfolio teams. In addition to his veterinary degree, Lawson has a PhD in viral pathobiology and is a pathologist, holding Fellowship of the Royal College of Pathologists as well as Membership of the Royal College of Veterinary Surgeons.External Appointments: Lawson has been the Chairman of Viking Therapeutics Inc. since 2015, as well as the Chairman of the Nomination and Corporate Governance and a member of the Audit Committee. He is also a strategic adviser to several investment and private equity groups in both Europe and USA.Stock Code: DPH65GovernanceDechra Annual Report 2017 - Middle.indd 6504/09/2017 14:00:19 sluglineLetter from the Chairman on GovernanceTony Rice Non-Executive ChairmanDear ShareholderOn behalf of the Board I am pleased to present Dechra’s Corporate Governance Report for the year ended 30 June 2017.Managing GovernanceThe Board recognises that excellence in corporate governance is essential in order to generate and protect value for our investors. Our governance structure is designed to maintain effective control and oversight of our business whilst at the same time promoting the entrepreneurial spirit that has underpinned Dechra’s success to date.In our Corporate Governance Report we aim to provide a clear and meaningful explanation of how the Board leads the Group and discharges its governance duties, including how we apply the provisions of the UK Corporate Governance Code (the Code).LeadershipWe have a strong and balanced Board with a range of complementary skills to support the strategic and operational direction of the Group. There were several changes to the composition of the Board during the past year. As disclosed in last year’s Annual Report, Richard Cotton was appointed as Chief Financial Officer, replacing Anne-Francoise Nesmes who resigned in July 2016. Richard joined the Company in January 2017. We also welcomed Lawson Macartney to the Board as an independent Non-Executive Director. Lawson brings a depth of knowledge and expertise of product development to the Board. His biographical details can be found on page 65.Michael Redmond retired at the Annual General Meeting in October 2016, following which I was appointed as Chairman of the Company and the Nomination Committee. Michael played an instrumental part in the evolution and growth of Dechra and on behalf of the Board I would like to thank him for the huge contribution and guidance he has provided to the business throughout his tenure.Board EffectivenessAs Chairman, I am responsible for the leadership of the Board and ensuring its effectiveness in all aspects of its role. During the 2017 financial year we undertook an internal evaluation of the Board, its committees and individual Directors. I am delighted to report that the overall outcome from the evaluation was that the Board and its individual Directors are performing effectively, and that the Board is well supported and presents an open forum for debate. The findings from this evaluation can be found on page 72. AccountabilityWe are required by the Code to include an assessment of the viability of the Company. This is covered on page 73. Relations with ShareholdersThe Annual General Meeting will be held in Knutsford on 20 October 2017 and I would like to invite our shareholders to attend. It will provide you with an opportunity to meet the Board and ask any questions that you may have in respect of the Group’s activities. Finally, should you have any questions in relation to the report, please feel free to contact me or the Company Secretary. Tony Rice Non-Executive Chairman 4 September 2017Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2017www.dechra.com66Dechra Annual Report 2017 - Middle.indd 6604/09/2017 14:00:21 Corporate Governance
Governance
Compliance with the Code
The 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. In the opinion of the Directors, the Company
has complied with the Code throughout the period. The Code can be
found at www.frc.org.uk.
Leadership
The Role of the Board
The Board’s primary responsibility is to promote the long term success
of the Company by the creation and delivery of sustainable shareholder
value. The Board’s strategy has four drivers to promote growth:
• Pipeline Delivery;
• Portfolio Focus;
• Geographical Expansion; and
• Acquisition.
KPIs have been designed to measure progress and delivery of the
strategic plan and our four growth drivers. Further details are provided
on pages 30 and 31.
Board Membership and Responsibilities
Details of the Directors together with their biographical details can be
found on pages 64 and 65.
Non-Executive Directors
It is considered that each of the Non-Executive Directors is independent
and is free of any business or other relationship which could materially
interfere with, or compromise, their ability to exercise independent
judgement. Each brings with them a breadth of experience which adds
value to the decision making of the Board as well as the formulation
and progression of the Dechra strategy.
In line with the Code, at least half the Board, excluding the Chairman,
is determined by the Company to be independent.
Senior Independent Director
Ishbel Macpherson has held the position of Senior Independent Director
since October 2013. She provides a sounding board for the Chairman
and is available to shareholders if they have concerns that have failed
to be resolved through the normal channels. 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.
Role
Chairman
Responsibilities
• Lead the Board in the determination of its strategy and achievement of its objectives.
• 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.
• Ensure shareholder views are brought to the attention of the Board.
Chief Executive Officer
• Day-to-day management of the Group operations and leading the Senior Executive Team (SET).
• Performance and results of the Group.
• Propose strategy.
• Execute strategy agreed by the Board.
Chief Financial Officer
• Responsible for financial planning and reporting for the Group.
• Management of financial risk.
• Develop and execute the strategic plan in conjunction with the Chief Executive Officer.
• Secure funding as required.
Managing Director DVP EU
• Management of the segment which contributes the majority of Group revenue.
• Nominated Director for health, safety and environmental matters.
• Development and execution of strategy in the EU.
Non-Executive Directors
• Provide independent and constructive challenge.
• Represent a broad range of commercial and industry experience and independent judgement.
• Evaluate strategy and risks.
Stock Code: DPH
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Corporate Governance
continued
Board Responsibilities
The Board is responsible for the long term success of the Company. The main responsibilities and key actions carried out are set out below:
Responsibilities
Strategy and performance
Actions
Annual strategy review. Strategic decisions are made after reports and recommendations are received
from management on markets, potential growth areas including acquisitions, product development and
risk analysis, including execution risks.
Risk management and
internal controls
Ongoing review of key risks and material internal control processes. Review of stress tests on the
Group’s forecasts to support the viability statement. Receipt of Audit Committee reports on risk
management process and internal controls.
Oversight of the Group’s
operations
Approval of the annual budget and capital expenditure projects. Site visits to factories and offices in the
UK and abroad. Review progress through business unit reports and detailed financial result reports.
Governance
Receive governance reviews from external advisers, the Company Secretary and internal audit. Review
of Board skills, performance, composition and succession planning.
Matters Reserved for the Board
There is a formal schedule of matters reserved for the Board. The schedule of matters covers a number of areas, including the following:
Strategy and Management
Financial Reporting
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 acquisitions and business development proposals.
Approval of the Annual and Half-Yearly Reports and dividend policy.
Review of portfolio.
Approval of budget.
Approval of treasury policy, and tax strategy and policy.
Interaction with the external auditor.
Internal Controls
Maintain a sound system of internal control and risk management.
Corporate Governance
Board and Committee composition.
Corporate Governance matters.
Approval of Group policies including Health and Safety, Sanctions and the Anti-Bribery and
Anti-Corruption.
Board Meetings
The Board is scheduled to meet nine times per year. During the year two additional meetings were held: one in relation to the acquisition of
the trade and assets of Apex Laboratories Pty Ltd and one in relation to the appointment of Lawson Macartney as a Non-Executive Director.
Attendance at the Board and Committee meetings during the year to 30 June 2017 is set out in the table below:
Mike
Redmond†
19 April
2001
Tony
Rice#
5 May
2016
Ian
Page
13 June
1997
Richard
Cotton‡
3 January
2017
Tony
Griffin
1 November
2012
Julian
Heslop
1 January
2013
Lawson
Macartney*
1 December
2016
Ishbel
Macpherson
1 February
2013
Anne-
Francoise
Nesmes§
22 April
2013
4
11
11
5
11
11
n/a
4
6
1
4
6
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
5
5
8
6
4
1
2
11
1
5
5
8
n/a
n/a
n/a
Appointment Date
Board
Met 11 times
Audit Committee
Met 5 times
Nomination
Committee
Met 5 times
Remuneration
Committee
Met 8 times
Meetings attended
† Mike Redmond retired on 21 October 2016. He attended all meetings prior to his retirement.
‡ Richard Cotton has attended all meetings since his appointment.
* Lawson Macartney has attended all meetings since his appointment.
§ Anne-Francoise Nesmes resigned on 31 July 2016. She attended all meetings prior to her resignation.
# Tony Rice did not attend one ad hoc Nomination Committee meeting and two ad hoc Remuneration Committee meetings since his appointment.
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Governance
Where Directors cannot attend a meeting, the Board papers are still provided allowing the Director to raise any queries or discussion points
through the Chairman. 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.
During the year, in addition to its routine business, presentations by senior management, and strategic development, some of the other matters
considered by the Board included:
• Acquisition of the trade and assets of Apex Laboratories Pty Ltd;
• Licensing Agreement with Animal Ethics Pty Ltd and Share Acquisition of Medical Ethics Pty Ltd;
• Debt Strategy and Narrative;
• Vaccines Strategy;
•
Implementation of Oracle;
•
Impact of Brexit; and
• Appointment of the Chief Financial Officer.
Board Committees
The Board has formally delegated specific responsibilities to Committees, namely the Audit, Remuneration and Nomination Committees. The full
terms of reference for each of these Committees are available on the Company’s website (www.dechra.com) or on request from the Company
Secretary.
Committee
Role and Terms of Reference
Audit
The main responsibilities are:
Committee
Report on
Pages
74 to 78
•
to monitor the integrity of the financial statements of the Group, and assist the Board in ensuring that
the Annual Report, taken as a whole, is fair, balanced and understandable;
•
to review the effectiveness of the Group’s internal financial control systems as described on page 77;
•
to oversee the relationship with and review the effectiveness of the external auditor, monitor their
independence and objectivity, and set the policy for non-audit work; and
•
to review and approve the significant accounting policies.
Remuneration
The main responsibilities are:
81 to 101
•
to determine the remuneration, bonuses, long term incentive arrangements, contract terms and other
benefits in respect of the Executive Directors and the Chairman;
•
to oversee any major changes in employee benefit structures; and
•
to approve the design of any employee share schemes.
Nomination
The main responsibilities are:
79 and 80
•
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.
The Board also appoints Committees on an ad hoc basis to approve specific projects or delegated Board matters as deemed necessary.
Director Insurance and Indemnities
The Company maintains an appropriate level of Directors’ and Officers’ insurance in respect of legal action against Directors as permitted under
the Company’s Articles of Association and the Companies Act 2006. The Company also indemnifies the Directors under an indemnity deed with
each Director in respect of legal action to the extent allowed under the Company’s Articles of Association and the Companies Act 2006. As at the
date of this report, qualifying third party indemnity provisions are in force. A copy of the indemnity provisions will be available for inspection at the
forthcoming Annual General Meeting.
Stock Code: DPH
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Corporate Governance
continued
Effectiveness
The Board and its Committees are annually assessed to help ensure
their effectiveness is maintained and that they remain fit for purpose.
The Chairman manages the Board and oversees the operation of its
Committees with the aim of ensuring that they operate effectively by
utilising the diverse range of skills and experience of the various Board
members.
Board Composition and Gender Diversity
The Board seeks to ensure that the Board and the Committees have
an appropriate composition to manage their duties effectively and to
manage succession issues. The Board supports diversity in its broadest
sense and considers it an essential driver of Board effectiveness. The
Board recognises it is important that its composition is sufficiently
diverse and reflects a wide range of knowledge, skills and experience.
Board Balance and Independence
The Board understands the importance of balance and refreshment
in terms of its composition and keeps these matters under review.
There have been the following changes at Board level over the past
12 months:
• Anne-Francoise Nesmes (Executive Director) resigned on
31 July 2016;
• Michael Redmond (Non-Executive Chairman) retired at the 2016
Annual General Meeting;
• Tony Rice (Non-Executive Director) was appointed as Chairman after
the 2016 Annual General Meeting;
• Lawson Macartney (Non-Executive Director) joined the Board on
1 December 2016; and
• Richard Cotton (Executive Director) joined the Board on 3 January
2017.
As disclosed in the 2016 Annual Report, the Nomination Committee
retained an independent recruitment consultancy, Odgers Berndtson,
to assist in the appointment of Lawson Macartney. Further detail relating
to the recruitment process and appointment can be found in the
Nomination Committee Report on page 79.
The Nomination Committee Report on pages 79 and 80 provides further
information on succession planning measures taken by the Company
together with how we are developing the talent pool internally.
Length of Tenure of Chairman and Non-Executive Directors
4
3
2
1
0
2
2
0 to 3
years
3 to 6
years
6 to 9
years
9+
years
Board Composition
Non-Executive Chairman 14%
Non-Executive Directors
43%
Executive Directors
43%
The Board does not have a formal diversity policy and is generally
opposed to the idea of stated gender quotas. 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. The Board has 14%
female representation. Female representation below Board level was
27% of the SET and 53% of the overall workforce.
Gender Diversity
6
5
4
3
2
1
0
6
Female
Male
3
3
1
1
Entire
Board
Executive
Directors
Non-Executive
Directors
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Governance
Regular briefings are provided to the Directors, which cover a number
of legal and regulatory changes and developments relevant to each
Director’s areas of responsibility. In addition, the Company Secretary
informs the Directors of any external training courses which may be of
relevance.
Each Director is entitled, on request, to receive information to enable
him or her to make informed judgements in order to discharge their
duties adequately. 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.
Board Evaluation and Effectiveness
The effectiveness of the Board is important to the success of the Group
and the Board undertakes an annual evaluation of its performance and
that of its Committees, focusing on the following areas:
(i) Board composition; (ii) strategy review and delivery 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.
• The 2016 Internal Board Evaluation
The findings of the internal evaluation were discussed at the July
2016 Board meeting. Overall, the review indicated that the Board
operated effectively but noted some areas for improvement. The
actions which were taken are shown in the table below:
Action
Acquisition integration
Progress
An update on the integration of
Apex was provided and discussed in
December 2016
Bi-annual strategy review The strategy review occurred in May
Succession planning
2017; this was deferred due to the
appointment of Chief Financial Officer
in January 2017. The interim strategy
review will be held prior to the end of the
2017 calendar year
Succession planning is discussed at
least annually with the Nomination
Committee. Emergency succession
planning has also been discussed
during this financial year
Senior Executive Team
as at 30 June 2017
Overall Workforce
as at 30 June 2017
Female 27%
Male 73%
Female 53%
Male 47%
Conflicts of Interest and External Board Appointments
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 consider and, if appropriate, 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.
Ian Page is 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 he is not involved in any investment decision
made by Sanford it was not considered that any conflict would arise,
nor that there would be any material impact on his time commitment.
Induction and Training
In order to ensure that the Board maintains its knowledge and familiarity
with the Group’s operations, at least one Board meeting per year is
held at one of the Group’s operational sites. This year, Board meetings
were held at Dechra Pharmaceuticals Manufacturing in Croatia, and at
Dechra Veterinary Products EU in Den Bosch, the Netherlands. These
meetings provided the Board with an informal opportunity to meet with
senior management based at these sites.
Any newly appointed Directors are provided with comprehensive
documentation in relation to the remit and obligations of the role,
current areas under consideration for the Board and the latest equity
research reports. New Directors visit the various business units in order
to allow them to meet with the management teams and to be shown
around the operations. Lawson Macartney has visited the Company’s
facilities and had meetings with the management teams at Kansas,
USA, which included the Business Development and Regulatory Affairs
Director and the Product Development Director. In addition, meetings
were arranged with the Group HR Director, Company Secretary, and
Head of Internal Audit and Risk Assurance. Richard Cotton completed
a rigorous induction of the Company and has visited sites in Australia,
Croatia, Denmark, the Netherlands, US and the UK.
Stock Code: DPH
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Corporate Governance
continued
• The 2017 Internal Board Evaluation
The last external evaluation was done in 2014. A discussion took
place at the April 2017 Board meeting as to whether or not an
external evaluation should be commenced during the 2017 financial
year given the recent changes in the Board as detailed above. It was
agreed that given these changes an internal evaluation would again
be carried out.
The internal evaluation took the format of a questionnaire which was
distributed to all of the Board, with the survey results presented on
an anonymous basis. Following an initial review of the responses,
the Chairman discussed with the Executive and Non-Executive
Directors at the July 2017 Board meeting the general themes raised
by the survey and any other survey-related points they wished to
discuss. In addition the Senior Independent Director discussed the
performance of the Chairman with the Directors and the Chairman.
Overall, the review once again indicated that the Board operates
effectively but noted the following focus areas:
• Executive Director succession planning;
• Non-Executive Director Induction; and
• Concise Board papers.
The Board has agreed that an external evaluation will be undertaken
during the 2018 financial year. The results of the 2018 evaluation will
be reported in next year’s Annual Report.
Appointment and Re-election of Directors
On appointment, Directors are required to seek election at their first
Annual General Meeting following appointment. At the forthcoming
Annual General Meeting, Lawson Macartney and Richard Cotton, who
were appointed to the Board on 1 December 2016 and 3 January
2017 respectively, will offer themselves for election. All of the remaining
Directors will retire and offer themselves for re-election. Each of the
Directors has been subject to a formal evaluation by the Nomination
Committee and it is considered that each Director 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 shareholders.
The Board therefore recommends that shareholders vote in favour of
their respective re-elections and the election of Lawson Macartney and
Richard Cotton.
Accountability
Financial Reporting
The Board seeks to present a fair, balanced and understandable
assessment of the Group’s position and prospects.
The responsibilities of the Directors and the external auditor in connection
with the Financial Statements are explained in the Statement of Directors’
Responsibilities and the Independent Auditor’s Report on pages 105 and
108 to 114 respectively.
Preservation of Value
The basis on which the Group generates and preserves value over the
longer term and the strategy for delivering the objectives of the Group
are to be found in the Strategic Report.
Going Concern
The Directors have a reasonable expectation that the Group has
adequate resources to continue in operational existence for the
foreseeable future. Accordingly, they continue to adopt the going
concern basis of accounting in preparing these annual financial
statements.
In reaching this conclusion the Directors have given due regard to the
following:
•
•
•
the Group’s business activities together with factors likely to impact
the future growth and operating performance;
the financial position of the Group, its cash flows, available debt
facilities and compliance with the financial covenants associated
with the Group’s borrowings, which are described in the financial
statements; and
the cash generated from operations, available cash resources
and committed bank facilities and their maturities, which taken
together provide confidence that the Group will be able to meet its
obligations as they fall due.
As at 30 June 2017 the Group had cash balances of £61.2 million and
net borrowings of £120.0 million (2016: cash balances of £39.1 million
and net borrowings of £116.6 million). Further information on available
resources and committed bank facilities is provided in notes 18 and 21
to the financial statements.
In order to ensure that the ongoing funding requirements of the Group
are aligned to its strategic objectives, the Group has completed a
refinancing and entered into a facilities agreement in July 2017 (the
Facility Agreement) with a group of banks comprising Bank of Ireland
(UK) plc, BNP Paribas, Fifth Third Bank, HSBC Bank plc, Lloyds Bank
plc, Raiffeisen Bank International AG and Santander UK plc (the Banks)
under which a facility of £360.0 million was made available. The Facility
Agreement includes a committed revolving credit facility of £235.0
million, together with an ‘Accordion’ facility of £125.0 million. The facility
is committed for five years until July 2022 with two optional one year
extensions.
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Governance
Relations with Shareholders
Dialogue with Institutional Shareholders
Relationships with shareholders receive high priority and a rolling
programme of meetings between institutional shareholders and
Executive Directors is held throughout the year. The Chief Executive
Officer and Chief Financial Officer give annual and half-yearly results
presentations to institutional shareholders, analysts and the media in
the UK. These meetings are in addition to the Annual General Meeting
and seek to foster a 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 all the Company’s shareholders. Similar guidelines
also apply to other communications between the Company and other
parties such as financial analysts, brokers and the media.
Richard Cotton attended the 2016 Annual General Meeting in London.
This provided a number of Dechra’s shareholders with the chance to
meet Richard prior to his appointment as an Executive Director.
In May and December, the Company hosted an investor site day at
the Skipton manufacturing facility and will continue to offer site visits
on a periodic basis. The Chief Executive Officer also met US investors
in August 2016. Feedback is collated by the Company’s brokers
after such presentations. The feedback is circulated to the Board
for review and consideration. In addition, the Board is provided with
market summary reports which detail 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 Chairman and Senior Independent Director are available to meet
shareholders upon request.
Constructive use of the Annual General Meeting
All members of the Board are scheduled to attend the Annual General
Meeting (the Meeting) and the Chairmen of the Audit, Remuneration
and Nomination Committees will be available to answer shareholders’
questions at the Meeting. Notice of the Meeting is dispatched to
shareholders at least 20 working days before the Meeting. The
information sent to shareholders includes a summary of the business
to be covered, with a separate resolution 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. The results of votes lodged for and against
each resolution are announced to the London Stock Exchange and
displayed on the Company’s website. At the Meeting there will be an
opportunity, following the formal business, for informal communications
between shareholders and Directors.
Tony Rice
Non-Executive Chairman
4 September 2017
Viability Statement
In accordance with the Code, the Board has determined that a three year
period to 30 June 2020 is an appropriate period over which to provide
its viability statement. This is supported by the Group’s budget process
which includes detailed projections for the next two financial years and
broader projections from the third year of the five year strategic planning
process. The Board believes this provides a sound framework for providing
reasonable assurance on the Group’s viability given the inherent uncertainty
associated with longer term forecasts.
The Board’s assessment has been made with due regard to the
Group’s current position, its future prospects, the strategic plan and the
management of the Group’s principal risks as detailed on pages 58 to 61
of the Strategic Report.
The Board reviews the budget and strategic plan annually and the
Group’s principal risks on a rolling basis throughout the year. The planning
process considers risks to sales and cost forecasts for each part of the
Group and the Group’s consolidated income and cash flow forecasts.
Stress testing of the Group’s projected cash flows has been carried out
by considering those principal risks that could have a material impact
on viability. The impact of these principal risks can be summarised into
three categories, namely loss of profits on key products, pipeline delays,
and loss of third party manufacturing customers. A number of severe
but plausible stress tests have been conducted on these areas, both
individually and in combination, together with an overall reverse stress
test on the Group’s borrowing facilities and covenant commitments.
The Board believes that the Group has adequate resilience due to its
diversified product portfolio, its geographic footprint, a strong balance
sheet, healthy cash generation and access to external financing, which
includes committed facilities.
Based on the results of this analysis, the Board has a reasonable
expectation that the Group will be able to continue in operation and meet
its liabilities as they fall due over the three year period from 30 June 2017.
Internal Control and Risk Management
The Board retains overall responsibility for determining the nature and
extent of the risks it is willing to take in achieving its strategic objectives.
In accordance with the Code, the Board is responsible for reviewing
the effectiveness of the Group’s risk management and internal control
systems, and confirms that:
•
•
•
there is an ongoing process for identifying, assessing, managing
and monitoring the Group’s principal risks;
the SET’s assessment of the principal risks is considered to be
robust and those risks that have the potential to impact liquidity
have been considered in the assessment of the Group’s viability;
the principal risks and internal control processes have been
monitored by the SET throughout the year and reviewed by the
Board on a rolling programme throughout the year; and
• no significant failings or weaknesses in internal control processes
have been identified.
Based on its review throughout the year, the Board is satisfied that the
risk management and internal control systems in place remain effective
and provide reasonable but not absolute assurance that the Group will be
successful in delivering its objectives.
Further information on how the business manages risk can be found in
the Strategic Report on pages 56 and 57.
Stock Code: DPH
Dechra Annual Report 2017 - Middle.indd 73
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sluglineLetter from the Audit Committee ChairmanJulian Heslop Audit Committee ChairmanDear ShareholderOn behalf of the Board, I am pleased to present this year’s Audit Committee Report. During the year we focused on the major issues in relation to the Group’s financial reporting, including key accounting judgements and the ongoing quality of related disclosures. We also reviewed the effectiveness of the Group’s risk management and internal controls and processes.Richard Cotton was appointed as Chief Financial Officer in January 2017, replacing Anne-Francoise Nesmes who resigned in July 2016. He has a wealth of experience in senior financial roles in life sciences and other sectors and I look forward to working with him over the forthcoming years. I would like to take this opportunity to thank Septima Maguire, our Group Financial Controller, for her excellent work as acting Chief Financial Officer in the intervening period.Committee MembershipWe welcomed Lawson Macartney to the Committee and look forward to the fresh perspective he will bring given his strong product development, veterinary and business experience. As disclosed in the 2016 Annual Report, Tony Rice resigned as a Committee member on his appointment as Chairman of the Company. Financial Reporting CouncilDuring the year the Company received a letter from the Financial Reporting Council (FRC) in relation to its review of the Company’s Financial Statements for the year ended 30 June 2016. The Committee reviewed the responses from the Company and discussed this matter with the external auditor, further details of which can be found on page 76. The FRC was satisfied with the Company’s responses and our agreement to enhance certain disclosures. Annual Report 2017The judgements and factors that the Committee considered in reviewing the Annual Report for 2017 are set out in its report on page 76.The report also outlines significant accounting matters which received particular focus during the period. It explains why the issues were considered significant and explains how the Committee satisfied itself on the validity of the judgements made.Finally, we specifically reviewed, at the request of the Board, whether the 2017 Annual Report was fair, balanced and understandable and concluded that it was. The basis supporting our conclusion is set out on page 77.I will be available at the Annual General Meeting to answer any questions about our work.Julian Heslop Audit Committee Chairman 4 September 2017Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2017www.dechra.com74Dechra Annual Report 2017 - Middle.indd 7404/09/2017 14:00:23 Audit Committee Report
Governance
The Purpose and Function of the Audit Committee
(the Committee)
Purpose
The Committee’s key role is to review and report to the Board on
financial reporting, internal financial control effectiveness and to oversee
the relationship with the external auditor. The main responsibilities are
summarised on page 69 of the Corporate Governance Report.
Membership, Meetings and Attendance
The membership of the Committee, together with appointment dates
and attendance at meetings, are detailed on page 68 of the Corporate
Governance Report. The Committee is pleased to welcome Lawson
Macartney as its most recent member. Tony Rice resigned from the
Committee on his appointment as Chairman of the Company at the
2016 Annual General Meeting.
The Board considers that all members of the Committee are independent.
Julian Heslop has recent and relevant financial experience as a result of his
financial background and qualification. Ishbel Macpherson and Lawson
Macartney provide different but relevant skills and experience which
support the Committee in meeting its objectives. The biographies of all
Committee members are detailed on pages 64 and 65.
The Company Secretary attends each meeting and acts as its secretary
assisting the Chairman in ensuring that all Committee papers are provided
prior to each meeting in a timely manner and providing advice to the
Committee on all governance related matters.
Other members of the Board normally attend each meeting together with
the PricewaterhouseCoopers LLP (PwC) Lead Audit Partner, the Group
Financial Controller and the Head of Internal Audit and Risk Assurance.
The Committee has discussions at least twice a year with the external
auditor without management being present, including the meetings where
the annual and interim results are reviewed and endorsed.
Neither the Company nor its Directors have any relationships that impair
the external auditor’s independence.
Role and Responsibilities
The main role and responsibilities of the Committee are set out in the
written terms of reference which are available on the Company website
at www.dechra.com. The Board reviewed the Committee’s terms of
reference at the December 2016 meeting and amended them following
recent legislative changes in relation to its membership and the
qualifications required.
Major Activities of the Committee during the Year
The Committee met five times since the last Annual Report was issued.
The meetings are generally timed to coincide with the financial reporting
timetable of the Company. The Committee Chairman and the Company
Secretary have developed an annual programme of business. This
allows the Committee to ensure that standing items of business are
appropriately considered alongside any exceptional matters that may
arise during the course of the year.
The table below provides an overview of the main matters discussed at
the meetings:
Meeting Date
1 December 2016
19 December 2016
22 February 2017
11 May 2017
29 August 2017
Stock Code: DPH
Main Activities
• Review and approval of the annual internal audit plan
• Review of the internal audit progress and assurance report
• Review and approval of PwC Half-Yearly review plan
• Review of the Committee’s terms of reference
• Review of Anti-Bribery and Anti-Corruption and Whistleblowing Policies
• Review of status of statutory audits, global tax management and compliance support
• Review of non-audit fees (including actual and projected spend)
• Review and approval of FRC response letter
• Review of the Group’s Half-Yearly Report and supporting papers
• Consideration of the Half-Year Review Memorandum prepared by the external auditor
• Half year review of internal financial controls
• Half-Yearly Accounts and Report disclosure enhancement following FRC feedback
• Review of the internal audit progress and assurance report
• Review of the dividend policy and interim dividend proposal
• Meeting with the external auditor without management present
• Anti-Bribery and Anti-Corruption and Sanctions progress update
• Review and approval of the year end external audit strategy (including timetable, scope and fees)
• Discussion in relation to the Company’s expectations of the external auditor and audit process
• Review of year end accounting treatment for acquisitions, accounting for associates and segmental analysis
• Review of the internal audit progress and assurance report
• Review of non-audit fees (including actual and projected spend)
• Review of tax strategy and policy framework
• Meeting with the external auditor without management present
• Review of the Group’s preliminary statement,draft Annual Report (including the Audit Committee Report) for
the year ended 30 June 2017 and supporting papers, and the proposed final dividend
• Consideration of the Audit Memorandum prepared by the external auditor, including:
•
review of accounting treatment of non-underlying items
• assessment of acquired intangible assets and goodwill
• commentary on the general control environment across the Group
• Review and approval of the going concern and viability statements
• Review and approval of the internal control and risk management statements
• Review of the internal audit progress and assurance report
• Full year review of internal financial controls for the period ended 30 June 2017
• Review of the external audit effectiveness, external auditor’s independence and level of non-audit fees
• Meeting with the external auditor without management present
• Fair, balanced and understandable recommendation of the Annual Report
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Audit Committee Report
continued
During the year the Financial Reporting Council’s (FRC) Corporate
Reporting Review Team carried out a review of the Company’s Annual
Report for the year ended 30 June 2016. The Committee discussed the
Company’s response with the full involvement of the external auditors,
PwC, and Tony Rice, Chairman, prior to responding to the FRC. The
FRC have closed their enquiries with no requirement to restate any
disclosures. However, undertakings were given to enhance certain
disclosures in the future in response to the FRC review. The Committee
is satisfied that the enhancements proposed to, and agreed with, the
FRC have been appropriately incorporated in the 2017 Annual Report.
All significant matters under consideration by the Committee during the
year were supported by relevant justification papers and fully discussed
in order to ensure that due and appropriate consideration was given
before any decision was approved. Further detail in relation to a number
of the matters is provided below:
• Financial Judgements
The Committee reviewed both the half-year and the annual financial
statements. This process included an analysis by management of
key judgements made in determining the results. The Committee
reviewed this in detail and endorsed management’s judgements.
The Committee gave particular attention to significant matters where
judgement was involved, which were complex in nature, or where
additional performance measures (APMs) were provided to enhance
investors’ understanding of the underlying performance. The
Group uses various non-GAAP APMs within internal management
reporting, the Half-Yearly Report and the Annual Report. The
objective of these APMs is to isolate the impact of exceptional,
one-off or non-trading related items to allow the Board and investors
to understand better the underlying performance of the business.
The Group also uses constant exchange rate growth percentages
to eliminate the impact of exchange rate fluctuations and show the
underlying business growth.
These matters were well supported by briefing papers provided
by management and were specifically reviewed and agreed by the
external auditor in their reports to the Committee and in related
discussions.
The key matters reviewed are shown in the table below:
Significant risks considered by the Committee in relation
to the financial statements
Corresponding actions taken by the Committee to
address the issues
Review of the carrying value of acquired intangible assets and goodwill
of £377.8 million, which represents 125.0% of Group net assets.
The Committee reviewed management’s process for reviewing and
testing goodwill and other intangible assets for potential impairment.
Valuation of the acquired intangible assets and goodwill acquired during
business combinations in the year, which total £31.3 million.
Valuation and accounting for the acquired commercial licensing
agreement intangible with Animal Ethics Pty Ltd of £30.1 million
together with the related deferred consideration
The Committee reviewed the calculations and assumptions provided
by management and third party experts which support the valuation
of these acquired assets and these valuations were assessed for
completeness. The Committee reviewed the useful economic lives of
the identifiable intangible assets and the future growth rate assumptions
applied in the valuations.
Significant judgements considered by the Committee in relation
to the financial statements
Corresponding actions taken by the Committee to
address the issues
Review of the corporate tax rate for the year of 8.6% (21.9% on
underlying operations).
The Committee discussed the key risks in respect of corporate tax and
reviewed that appropriate controls were in place to ensure that taxation
calculations are not materially misstated. Areas where significant
judgements such as uncertain tax positions have been applied are
reviewed and challenged and external audit work and conclusions are
considered.
Review the accounting treatment of related disclosures for associates
acquired in the period of £10.9 million.
The Committee reviewed the basis for accounting for the associate
company and the related disclosures.
In order to assist investors with a better understanding of the underlying
performance of the business, management present within the financial
statements figures for underlying profit and earnings.
This is reconciled to the figures provided in the financial statements
and excludes matters such as impairment and amortisation of acquired
intangible assets and related deferred consideration, acquisition cost,
restructuring costs, and the fair value uplift on inventory acquired
through business combinations.
The Committee reviewed the basis for calculating the underlying
figures and its consistency with previous year’s figures. It also sought
confirmation from the external auditor, PwC, that they were satisfied
that the application of the accounting policy was appropriate.
The Committee also reviewed material one-off income and costs within
the underlying results, if any, and ensured these were clearly disclosed
within the financial statements and notes.
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Governance
• Going Concern and Viability Statements
The Committee reviewed the Group’s going concern and
viability statements set out on pages 72 and 73 of the Corporate
Governance Report. In considering the viability statement the
Committee paid particular attention to the robustness of the stress
testing scenarios. The external auditor reviewed management’s
assessment and discussed this review with the Committee.
• Fair, Balanced and Understandable Assessment
of the Annual Report
At the request of the Board, the Committee considered whether
the 2017 Annual Report was fair, balanced and understandable
and whether it provided the necessary information for shareholders
to assess the Company’s performance (pages 21 to 27), business
model (page 8) and strategy (pages 13 to 15).
The Committee based its assessment on a review of the processes
and controls put in place by management. This included the
relevant senior management providing information on their own
business units and their confirmation that it was fair, balanced and
understandable. In addition, the final draft document was reviewed
by all members of the Senior Executive Team (SET) who also
concluded that it met the fair, balanced and understandable test.
An integral part of the process was the Committee’s final review;
other Board members and the external auditor were invited to
comment so that issues could be debated and a final assessment
made.
The external auditor confirmed that in their opinion the Annual
Report 2017 was fair, balanced and understandable, which can
be found on pages 108 to 114.
This assessment was carried out by the Committee on
29 August 2017, following which the Committee reported to
the Board that it was satisfied that, taken as a whole, the
Annual Report 2017 is fair, balanced and understandable.
• Review of Policies and Procedures
During the year the Committee reviewed the following policies:
• Accounting Policies
The Committee undertook the annual review of the tax policy.
• Anti-Bribery and Anti-Corruption and Whistleblowing Policies
The Head of Internal Audit and Risk Assurance provides regular
updates on the third party due diligence procedures and their
implementation throughout the organisation.
• Dividend
The dividend policy was reviewed by the Committee and
amended to take account of the underlying financial position
of the organisation. The amended dividend policy was
recommended to the Board for approval.
Internal Controls and Risk Management
The Board retains overall responsibility for the management of the
Group’s risk management and internal control framework. The
Committee monitors and reviews the effectiveness of the Group’s
internal financial controls.
The Committee has also reviewed the effectiveness of the Group’s risk
management and internal control processes. This includes:
• confirmation that the rolling programme of risk and control reviews
by the Board has been completed;
• a review of the SET’s assessment of material internal control
effectiveness; and
• a review of the going concern and viability statements together with
the financial stress testing conducted to support these statements.
Further details in respect of the Group’s risk management and internal
control processes are provided on pages 56 and 57 of the Strategic
Report and the Board’s statements on the effectiveness of these
processes are provided on page 73 of the Corporate Governance
Report.
Internal Audit
The Head of Internal Audit and Risk Assurance provides objective
assurance and advice on the management of the Group’s risks and
its systems of internal control. Internal Audit is supported by a
co-sourcing arrangement with KPMG LLP (KPMG) to provide a flexible
resource model and access to specialist expertise and language skills
in geographies.
Internal Audit has a three year plan which seeks to provide balanced
assurance coverage of the Group’s material financial, operational
and compliance control processes. It sets out a rolling programme
of core assurance activities together with a significant focus on the
implementation of the Oracle ERP system. The annual delivery plan,
which defines the specific assurance projects to be delivered each
calendar year, is developed from the three year plan. The annual plan
for the year to December 2017 was approved by the Committee in
December 2016.
Internal Audit recommendations are communicated to relevant business
leaders and appropriate control improvements are agreed with them.
Audit reports are provided to the Audit Committee together with
regular progress reports on management’s implementation of control
improvements.
Stock Code: DPH
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sluglineAudit Committee Report continuedExternal Auditor Following a competitive tender in 2015, PwC were appointed as the Company’s external auditor for the 2016 audit.The Company complies with the Competition and Market Authority Order 2014 relating to audit tendering and the provision of non-audit services.Audit PlanPwC agreed their audit plan with the Committee, which included their audit scope, key audit risk areas and materiality. The Committee discussed the audit plan with PwC and approved it, together with the fees proposed.Independence, Effectiveness and Objectivity of the Audit ProcessThe Committee conducted a review of the external auditor’s independence, effectiveness and objectivity based on:• the Committee’s own assessment of the quality of the audit plan, the rigour of the audit findings and conclusions, the extent to which the Lead Audit Partner understands the business and constructively challenges management and the quality and clarity of the technical and governance advice provided;• the results of a questionnaire on external auditor effectiveness and efficiency (further detail on which is provided below);• a report prepared by PwC setting out its processes to ensure independence and its confirmation of compliance with them; and• the level of non-audit fees as a percentage of the audit and half-yearly review fees paid to the external auditor, which were 8.5% (2016: 3.9% in relation to services rendered by PwC).Responses to the questionnaire have been received from all finance directors across the Group who provided information and assistance to the external auditor. The questionnaire covered a number of areas, including:• quality of the audit team; • knowledge and understanding of the Group; • appropriateness of the areas of audit focus;• interaction with audit specialists; and• timeliness and adequacy of communication by the external auditor.The results of the questionnaire were reported to the Committee at the meeting on 29 August 2017. Based on the review set out above, the Committee is satisfied with the external auditor’s independence, effectiveness and objectivity.Re-Appointment of External AuditorAt the forthcoming Annual General Meeting, a resolution to re-appoint PwC as the external auditor and to authorise the Audit Committee to set their remuneration will be proposed. There are no contractual obligations that restrict the Committee’s capacity to recommend a particular firm as external auditor and the Company does not provide an indemnity to the external auditor. External Audit Engagement Partner RotationIn line with the ethical standards of the Audit Practices Board, the Lead Audit Partner will be rotated every five years. The current Lead Audit partner was appointed during the 2016 financial year and consequently will stand down at the latest after the completion of the audit of the 2020 financial year.Non-Audit AssignmentsWith respect to non-audit assignments undertaken by the external auditor, the Company has a policy of ensuring that the provision of such services does not impair their independence or objectivity. Prior approval of the Committee, or the Committee Chairman for smaller pieces of work, is required before the external auditor is appointed to carry out non-audit work and the rationale for doing so is provided to the Committee, who assess the qualification, expertise, independence and objectivity of the external auditor prior to granting approval. As such, non-audit fee spend is a standing item on the agenda for every Committee meeting.The Committee firmly believes that there are certain non-audit services where it is appropriate for the Group to engage the external auditor. In such cases safeguards are in place to ensure continued external auditor independence, including the use of separate teams to undertake the non-audit work separately from the audit work. The external auditor assisted with the preparation of the FRC letter. The Committee did not consider that the performance of this non-audit work affected or impaired the external auditor’s integrity. This is consistent with the ethical standard published by the Accounting Practices Board. The results of this policy are that:• Deloitte undertake global tax compliance work; • KPMG support internal audit; and• during the course of the year Deloitte, Ernst & Young LLP, KPMG, Smith & Williamson LLP and Grant Thornton UK LLP have provided advice on global mobility matters, related tax advice, company reorganisation, acquisition valuation support and due diligence. A summary of audit and non-audit fees in relation to the year is provided in note 7 to the Group’s financial statements. This shows that non-audit work carried out by the external auditor represented 8.5% (2016: 3.9%) of the annual audit fee and half-yearly review fee, and reflects the policy set out above.Julian Heslop Audit Committee Chairman 4 September 2017Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2017www.dechra.com78Dechra Annual Report 2017 - Middle.indd 7804/09/2017 14:00:23 sluglineNomination Committee ReportDear ShareholderOn behalf of the Board, I am pleased to present my first report of the Nomination Committee (the Committee) having succeeded Michael Redmond as Chairman in October 2016.During the year the Committee focused on the recruitment of a Non-Executive Director, Senior Executive Team (SET) succession planning and the leadership needs of the Group. As a result of this the Committee believes that the Company has a stable and experienced SET to lead the development and implementation of this strategy and that the Board continues to have the appropriate skills, knowledge and experience to oversee the effective delivery of our strategy.The following report provides an overview of the work carried out during the year under review.Dechra’s stance in relation to diversity is detailed in the Corporate Governance Report on page 70.Should you have any questions in relation to this report or the Committee, please contact me or the Company Secretary.Tony Rice Nomination Committee Chairman 4 September 2017Committee Membership and AttendanceThe membership of the Committee, together with appointment dates and attendance at meetings during the year, is set out on page 68 of the Corporate Governance Report. Other attendees at the meetings include the Chief Executive Officer, the Group HR Director and the Company Secretary (who acts as secretary to the Committee).The Chairman does not chair the Committee meeting if it is dealing with the appointment of his successor. The Senior Independent Director, Ishbel Macpherson, takes the chair when required.Role and ResponsibilitiesThe main role and responsibilities of the Committee are set out in the written terms of reference, which are available on the Company website at www.dechra.com. The Committee’s terms of reference are reviewed on an annual basis and during the 2017 financial year this took place at the February meeting. An overview of the terms of reference is detailed on page 69 of the Corporate Governance Report.Principal activities of the Committee during the year included:• Recruitment of Non-Executive DirectorThe Committee had a number of unscheduled meetings during the 2017 financial year due to the recruitment process for a Non-Executive Director, which commenced in the 2016 financial year. An independent recruitment consultancy, Odgers Berndtson (Odgers), was retained to assist and was provided with a role description detailing the skills and experience required for the position of a Non-Executive Director. To assist Odgers with the understanding of the requirements of the role, they met with the Chief Executive Officer, the Managing Director of DVP EU and the Chairman during the previous financial year resulting in a long list of candidates being identified for interview. One of the criteria was that the candidates should have life-science or pharmaceutical experience to fill the experience gap left on the Board by Michael Redmond’s retirement. All of the candidates had a broad range of experience across the life-science and pharmaceutical sectors, with 50% of them being non-UK residents. Following a rigorous recruitment process, which was led by Michael Redmond, our previous Chairman, Lawson Macartney was appointed to the Board on 1 December 2016. Lawson is a qualified veterinarian and has over 30 years’ of experience gained in the global pharmaceutical industry which has brought a depth of knowledge, and expertise of product development to the Board. Further details relating to his background and experience can be found on page 65. Board ExperienceInternational Corporate Pharmaceutical Experience ExperienceExperienced 86%Not experienced 14%Experienced 71%Not experienced 29%Tony Rice Nomination Committee ChairmanStock Code: DPH79GovernanceDechra Annual Report 2017 - Middle.indd 7904/09/2017 14:00:25 sluglineNomination Committee Report• SET Succession Planning and Leadership Needs of the GroupThe Group HR Director regularly presents to the Committee on the Company’s succession planning and talent development programme. A regular review of succession planning takes place across the Company, with a particular focus given to the SET succession. The process of documenting the performance/potential axis across each function’s top tier supports the decisions about the organisation design and structure. The results of this review are presented to the Committee, who discuss the succession plan for the SET at least annually.For Executive Directors and the SET, plans are in place for sudden, unforeseen absences, for medium term orderly succession and for longer term succession as well as supporting significant acquisitions that require full time Dechra leadership during the integration phase. These plans are then used as the basis for personal development plans for the identified employees and to ensure, looking forward, that we have the right people to deliver our strategy.The Committee has also discussed emergency succession planning, and is developing a framework to clearly identify individuals capable of covering key management roles on an interim basis. All these individuals will receive, or have received, the necessary coaching to ensure they have the required skills to provide any critical support when needed. Over the last three years, one of the elements of our People Plan has focused on the continual development of the SET to provide world class leadership to the Group (as detailed on page 49). We encourage regular contact between members of the SET and the Board, with all SET members presenting to the Board at least once a year, leading site visits of their respective businesses and attending one-to-one sessions with Non-Executive Directors to discuss specific issues when applicable.We have a coherent Leadership Development strategy which ensures that our SET has the capabilities required to manage the business effectively, and our organisation has a strong breadth of candidates for key leadership positions. In considering the Leadership needs of the Group, we have chosen to focus on two key areas:• Defining the current talent map of the organisation enabling us to share knowledge about our talent base, identify risks, gaps and to plan development of our future talent. • Understanding the organisation’s current capability versus the needs of the future strategic direction of the Group. Through acquisitions, recruitment and internal promotion we now have a stable and experienced SET, with clearly defined roles. Dechra has increasingly focused on the centralisation of support services, to allow the Business Unit leaders to focus their efforts on their core businesses. This has identified a gap in the SET and we are currently recruiting for a Group Marketing Director to complete the team.• Governance Following an internal evaluation, further details of which are provided on page 72 of the Corporate Governance Report, the Committee has concluded that each of the Directors seeking re-election continues to be an effective member of the Board. At the forthcoming Annual General Meeting, Lawson Macartney and Richard Cotton, who were appointed to the Board on 1 December 2016 and 3 January 2017 respectively, will offer themselves for election, and all of the remaining Directors will retire and offer themselves for re-election. Tony Rice Nomination Committee Chairman 4 September 2017Before I was appointed as Chairman of the Board in October 2016, I served as a Non-Executive Director for six months. This period of time gave me an excellent opportunity to get to know the Company and understand the business. Michael Redmond, as the retiring Chairman, spent invaluable time with me sharing his long standing experience of the Company’s history and established strategy, ensuring a smooth handover of responsibilities.In my initial months, I had a series of conversations with Ian Page to help me understand his approach, priorities and how he allocates his time, as well as the major milestones that led to the success of Dechra and the evolution of the strategic drivers.In addition, I have had many opportunities to meet with the SET, both on a one-to-one basis as well as a collective. This has enabled me to understand their areas of responsibility and the various elements of the business. This has included: • the process of identifying and filtering new product opportunities and the overall development of the product pipeline; and• the key financial dynamics and priorities for the Company.My first Board meeting was held at the Sansaw site, where I had the opportunity to meet with key members of the DVP EU sales and marketing team and European regulatory team seeing first hand the technical capability required to support the wide range of products. This gave me an opportunity to understand better the market dynamics and marketing approach. I was also able to learn about the various European regulatory processes and the significant work required to take our products to market.I have also visited the manufacturing facility in Skipton, which provided me a better understanding of the approach to quality and integrity of batch production processes, and an appreciation of the regulatory systems required to maintain FDA standards. I have subsequently visited the manufacturing facilities at Bladel and Croatia.I have enjoyed my first year at Dechra and the induction provided has given me a better understanding of Dechra, its product development, registration and manufacturing process, and its routes to market utilising its experienced sales and marketing teams.Case Study: Tony Rice InductionDechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2017www.dechra.com80Dechra Annual Report 2017 - Middle.indd 8004/09/2017 14:00:26 sluglineLetter from the Remuneration Committee ChairmanIshbel Macpherson Remuneration Committee ChairmanDear ShareholderI am pleased to present the Directors’ Remuneration Report for the year ended 30 June 2017.The report is divided into two sections: the Directors’ Remuneration Policy, followed by the Annual Report on Remuneration. The Policy sets out our forward looking policy for Directors’ remuneration and is a replacement for the Policy approved in 2014, which had 98.32% of votes cast in favour of it. The Annual Report on Remuneration provides details of the amounts earned in respect of the 2017 financial year and how the Policy will be implemented in the 2018 financial year. Our existing Long Term Incentive Plan (LTIP) expires in 2018 and shareholders will be asked to approve a new Long Term Incentive Plan at the Annual General Meeting. Further information in relation to the new LTIP is included in the Notice of Annual General Meeting; there is no increase in quantum under the new LTIP and we have introduced a two year post vesting holding period. Our Directors’ Remuneration PolicyThe new Policy is proposed in the context of a significant change in the scale of the business, with Dechra’s market capitalisation increasing from approximately £600.0 million in 2014 to approximately £1.7 billion. This increase has taken place over a period when Dechra has become increasingly international, and a more complex organisation as its scale and geographical spread has significantly increased. The Committee considers that the current remuneration framework continues to support effectively the delivery of our business strategy and the creation of shareholder value, as shown in the table on page 83. Our new Policy is not a radical overhaul of the Policy approved in 2014. The changes refine that Policy and take account of developments in best practice. The changes are summarised in the introduction to the new Policy on page 84 and include the adoption of a post vesting holding period for LTIP awards and enhanced shareholding guidelines. Our approach to the implementation of the Policy in the 2018 financial year, including our approach to performance measures for LTIP awards is described overleaf. Incentive Outturns in 2017As a result of the progress in our strategy, we have delivered underlying profit before tax during the year of £77.0 million, an improvement of 38.4% at constant exchange rates (54.9% at actual exchange rates) on the prior year. Reflecting the performance of the Group in relation to profit targets and the performance of Executive Directors against personal objectives as described on page 94, bonuses for the year equal to 92% of salary have been earned by Ian Page and Richard Cotton, and 90% earned by Tony Griffin. LTIP awards were granted to Ian Page and Tony Griffin in September 2014 and are due to vest on 15 September 2017, subject to the achievement of earnings per share (EPS) and total shareholder return (TSR) performance conditions (each applying to 50% of the awards) and an underpin based on return on capital employed (ROCE). The awards are scheduled to vest:• as to 100% of the TSR element (50% of the total award) by reference to TSR performance (reflecting upper quartile performance); and • as to 100% of the underlying diluted EPS element (50% of the total award) by reference to EPS performance (reflecting that the compound annual growth in the underlying diluted EPS at 21.0% was above the maximum threshold of 13.0%).In aggregate, taking into account the ROCE underpin (reflecting that the ROCE at 17.7% had not fallen below 15.0%), the LTIP awards vested as to 100%.Stock Code: DPH81GovernanceDechra Annual Report 2017 - Middle.indd 8104/09/2017 14:00:26 Letter from the Remuneration Committee Chairman
continued
The targets applying to the performance conditions are set to drive the
right behaviours and, in appropriate circumstances such as following the
acquisitions we undertook in the 2016 financial year, we adjust targets
upwards to ensure that they remain stretching but achievable. As noted
in the Directors’ Remuneration Report for the 2016 financial year, the
high level of growth for the three year performance period to June 2019
reflected the impact of earnings from acquisitions that were not included
in the 2016 base year, we recognise that for future LTIP awards the EPS
targets would need to be reduced to reflect a lower level of sustainable
growth. Accordingly, we have decided to decrease the EPS performance
requirement for maximum vesting from 20% to 15.5% to reflect the fact
that the acquisitions are now included in the base year and the lower
2020 financial year broker forecasts. Full details of the performance
measures and the targets for the 2018 financial year are set out on page
100. This level of growth is higher than the original 13% CAGR required
for maximum vesting for the 2016 financial year LTIP awards. We
consider that 15.5% EPS growth per annum is a stretching target which
should act as an appropriate incentive for executives to deliver sustained
business performance without encouraging excessive risk. Taking into
account comments received from shareholders, the underpin continues
to operate on the basis of a ROCE floor of 10%. However, to ensure
that management are not disincentivised from making shareholder value
enhancing acquisitions even if they have a short term impact on ROCE,
the underpin will now operate solely by reference to this floor; the details
of the underpin are set out on page 100.
The Link between our Directors’ Remuneration
Policy and our Strategy
Dechra’s Policy is designed to promote the long term success of the
Group and to reward the creation of long term value for shareholders.
The performance targets for all incentive elements are designed to
reward high performance whilst not encouraging inappropriate
business risks.
The table on the next page describes how certain remuneration
elements are linked to our strategy.
Executive Director Remuneration Decisions in 2017
In accordance with our Policy, our normal approach to Executive Director
salary increases is that they will not exceed the range of increases
awarded to the wider workforce. We explained last year that Ian Page’s
salary has not changed since January 2014 and that we would review
it during the 2017 financial year in light of the exceptional change in the
scale and complexity of the Group since that last review, taking into
account the Group’s significant acquisitions and international expansion
in the period. In the last six years, revenue derived from the UK has fallen
from 76% of total revenue in the 2012 financial year to 15.7% in the 2017
financial year, whilst the average number of employees has increased
by 31.8% over the same period. Since 30 June 2014 our international
sales operations (excluding our export business) have expanded from
14 countries (13 EU, 1 North America) to 24 (19 EU, 3 North America,
2 Australasia) as at 30 June 2017. Ian has been instrumental in guiding
the Group through this period, having driven its growth and exceptional
performance since it listed. Under Ian’s leadership, shareholders have
been provided with a stable investment that has delivered sustained and
substantial returns. Taking into account the fundamental contribution
that Ian has made to this transformation and recognising the increase
in the scope and responsibilities of his role since his salary was last
reviewed, we increased Ian’s salary with effect from September 2016 by
13.6% (which is equivalent to the cumulative annual pay increases for a
higher performer within the Group over the same period) to £500,000.
This increase positions his salary slightly below the mid-point of the
market competitive range compared to companies of a similar size and
complexity. Ian has notified the Committee that he does not wish to be
considered for a salary increase in respect of the 2018 financial year.
During the annual salary review cycle, Tony Griffin’s salary was increased
by 3% in respect of the 2017 financial year, broadly in line with the
average range of increases awarded to employees throughout the Group.
We granted LTIP awards in September 2016 subject to TSR and EPS
performance conditions (each applying to 50% of the awards) with the
EPS target for maximum vesting increased for these awards to 20%
CAGR, following shareholder consultation. A ROCE underpin continues
to apply to each element. Details of the awards are set out on page 98.
Directorate Changes
Richard Cotton joined Dechra on 3 January 2017 and his remuneration
arrangements were implemented as set out in last year’s Directors’
Remuneration Report. As noted last year, Richard was granted two
‘buyout’ awards in respect of incentives forfeited as a result of joining
Dechra; details of those awards are set out on page 98.
Performance Conditions for LTIP Awards
in 2018 Financial Year
Current performance conditions are based on relative TSR and EPS.
The use of a relative TSR measure for Dechra presents challenges
as it is difficult to determine an appropriate comparator group, and it
can reward volatility which does not reflect Dechra’s track record of
consistent growth over the previous five years. We recognise, however,
that some shareholders have a preference for a relative measure.
Therefore, for the 2018 financial year LTIP awards we propose to retain
relative TSR but to recalibrate the weightings so that relative TSR will
account for one third of each award, and EPS growth will account for
two thirds of each award. This recalibration provides a better line of
sight for management and provides the best link to our strategy.
The use of a ROCE underpin ensures that the EPS measure will
require the delivery of quality earnings, while the introduction of a two
year holding period, along with our shareholding guidelines of 200%
of salary, ensures that management are aligned with the long term
interests of shareholders and the delivery of sustained performance.
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Governance
Remuneration Element
Annual Bonus
Our annual bonus incentivises the delivery of the long term strategy through the achievement of
short term objectives.
90% of the opportunity is based on a stretching profit target which requires performance above
budget and market expectations to trigger the payment of a maximum bonus.
The balance of the bonus is based on the achievement of personal objectives which reflect the
priorities of the business, achievement of which is necessary to deliver the longer term strategy.
Strategic
Growth
Driver and
Enabler
a
b c
Link to our Key
Performance Indicators
• Sales Growth
Strong sales
performance is required
to maximise profit
• Cash Conversion
Strong cash conversion
reduces liquidity risk
Long Term Incentive Plan
The LTIP is designed to reward the generation of long term value for shareholders. Performance
measures reflect our long term objectives including sustainable profit growth and the enhancement
of shareholder value. Awards are based two thirds on growth in EPS and one third on the delivery
of shareholder returns.
• Underlying Diluted
EPS Growth
a
b c
• Return on Capital
Employed
The application of a ROCE underpin ensures executives are focused on using capital efficiently
and appropriately to allow the business to capitalise on growth opportunities in new territories and
markets whilst maintaining returns.
The introduction of a post vesting holding period aligns management with the long term interests of
shareholders and the delivery of sustained performance.
• New Product Sales
This measure
encourages innovation,
growth and sustainability
Generation of Long Term Value for Shareholders/Alignment of Interests
The Policy is designed to promote long term Group success and to reward the generation of shareholder value. A significant proportion of the
remuneration opportunity is linked to the achievement of stretching performance targets.
The interests of shareholders and executives are aligned by formal shareholding guidelines. Executive Directors are required to retain half of any
shares acquired under the LTIP and, if relevant, any recruitment award (after sales to cover tax) until such time as their holding has a value equal to
200% of their base salary.
Forward Looking
Subject to shareholder approval of the Policy at the Annual General Meeting, we will apply it in the 2018 financial year. More information is given on
page 100, and we have summarised key aspects below.
• Salary: Executive Directors’ salaries for the 2018 financial year will be considered in September at the same time as the salary review for the
wider workforce. In line with our normal policy, any increase to Executive Directors’ salaries will be in line with the increases awarded to the
wider workforce, although as noted above Ian Page has already notified the Committee that he does not wish to receive any increase.
• Bonus: The Executive Directors’ bonus opportunity for the 2018 financial year under the new Policy will remain at 100% of salary, consistent
with the existing Policy. The bonus will be based on a mix of stretching profit before tax targets (90% of the opportunity) and personal objectives
(10% of the opportunity).
• LTIP: Awards for the 2018 financial year will be granted under the new LTIP for which shareholder approval will be sought at the 2017 Annual
General Meeting. In line with the new Policy, those awards will be subject to a two year post vesting holding period.
Shareholder Views
We consulted with shareholders on the new Policy and LTIP and took account of feedback received before finalising our proposals. 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
contact me or the Company Secretary.
Ishbel Macpherson
Remuneration Committee Chairman
4 September 2017
Stock Code: DPH
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Directors’ Remuneration Report
Directors’ Remuneration Policy
This part of the Directors’ Remuneration Report sets out Dechra’s Directors’ Remuneration Policy which, subject to shareholder approval at the
2017 Annual General Meeting, shall take binding effect from the close of that meeting.
The Company’s first Directors’ Remuneration Policy was approved at the 2014 Annual General Meeting with 98.32% of votes in favour of it, and
took effect following the close of that meeting.
In accordance with the applicable regulations, Dechra is required to seek approval for a new Directors’ Remuneration Policy at the 2017 Annual
General Meeting. During the course of the 2017 financial year, the Remuneration Committee has reviewed the Policy approved in 2014 in the
context of Dechra’s strategy, developments in best practice and the forthcoming expiration of the Dechra Long Term Incentive Plan 2008. A radical
overhaul of the Policy is not proposed; however, we are proposing minor changes to the Policy as follows:
• To reflect typical practice, we have formalised the malus and clawback arrangements (which apply to both the annual bonus and Long Term
Incentive Plan (LTIP)) within the Policy.
• The shareholding requirement under our shareholding guidelines is now set at 200% of salary for all Executive Directors (consistent with the
level which applied previously for the Chief Executive Officer). We have updated the guidelines and, in order to reflect typical practice, we have
formally incorporated them within the Policy, as shown on page 87.
• We have introduced a two year holding period after the vesting of LTIP awards for awards granted in respect of the Group’s 2018 financial year
and future years.
• No significant changes are proposed to the Policy as it relates to salary, benefits (although an allowance may now be provided in lieu of a
company car), retirement benefits or annual bonus.
• LTIP awards for the Group’s 2018 financial year and future years will be made under the new LTIP for which shareholder approval is sought at
the 2017 Annual General Meeting. The Policy has been updated to reflect the terms of the new LTIP and that the 2008 LTIP is now a legacy
arrangement.
Other minor amendments have been made to the Policy to aid its administration, to reflect the changes referred to above and to reflect changes
in practice since the Policy was first approved in 2014.
Policy Table for Executive Directors:
Element: Base Salary
Purpose and link to strategy
Core element of fixed remuneration reflecting the individual’s role and experience.
Operation
The Committee ordinarily reviews base salaries annually taking into account a
number of factors including (but not limited to) the value of the individual, their
skills and experience and performance.
Performance measure
While no formal performance conditions apply, an individual’s
performance in role is taken into account in determining any
salary increase.
The Committee also takes into consideration:
• pay increases within the Group more generally; and
• Group organisation, profitability and prevailing market conditions.
Maximum opportunity
Whilst there is no maximum salary, increases will normally be within the
range of salary increases awarded (in percentage of salary terms) to other
employees in the Group. However, higher increases may be awarded in certain
circumstances, such as:
• on promotion or in the event of an increase in scope of the role or the
individual’s responsibilities;
• where an individual has been appointed to the Board at a lower than typical
market salary to allow for growth in the role, in which case larger increases
may be awarded to move salary positioning to a typical market level as the
individual gains experience;
• change in size and complexity of the Group; and/or
• significant market movement.
Such increases may be implemented over such time period as the Committee
deems appropriate.
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Governance
Element: Retirement Benefits
Purpose and link to strategy
Provide a competitive means of saving to deliver appropriate income in retirement.
Operation
The Company operates a Group Stakeholder personal pension scheme.
Performance measure
Not applicable.
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. Pension
contributions over this cap are paid into a defined contribution pension plan.
In appropriate circumstances, an Executive Director may receive a salary
supplement in lieu of contributions to a pension scheme.
Maximum opportunity
The Company contributes up to 14% of salary to a pension scheme on behalf
of the Executive Directors, and/or as a salary supplement in lieu of pension
contributions where appropriate.
Element: Benefits
Purpose and link to strategy
Provided on a market competitive basis.
Operation
The Company provides benefits in line with market practice and includes the
use of a fully expensed car (or car allowance), medical cover and life assurance
scheme.
Other benefits may be provided based on individual circumstances, which may
include relocation costs and expatriate allowances.
Maximum opportunity
Whilst the Committee has not set an absolute maximum on the level of benefits
Executive Directors may receive, the value is set at a level which the Committee
considers to be appropriately positioned taking into account relevant market
levels based on the nature and location of the role and individual circumstances.
Element: Annual Bonus
Performance measure
Not applicable.
Purpose and link to strategy
The executive bonus scheme rewards Executive Directors for achieving financial and strategic targets in the relevant year by reference to
operational targets and individual objectives.
Operation
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.
The Committee has discretion to amend the pay-out should any formulaic
output not reflect the Committee’s assessment of overall business performance.
Recovery provisions apply, as referred to below.
Maximum opportunity
The maximum bonus opportunity for Executive Directors is 100% of base salary.
Performance measure
Operational targets (which may be based on financial or strategic
measures) and individual objectives are determined to reflect the
Company’s strategy.
The personal objectives for the Chief Executive Officer are set
by the Chairman. The personal objectives for other Executive
Directors are set by the Chief Executive Officer. The personal
objectives are reviewed and endorsed by the Committee.
At least 75% of the bonus opportunity is based on financial
measures (which may include profit before tax).
For financial measures, up to 15% of the maximum for the
financial element is earned for threshold performance, rising to
up to 50% of the maximum for the financial element for target
performance and 100% of the maximum for the financial element
for maximum performance.
Vesting of the bonus in respect of strategic measures or
individual objectives will be between 0% and 100% based on
the Committee’s assessment of the extent to which the relevant
metric or objective has been met.
Stock Code: DPH
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Directors’ Remuneration Report
continued
Element: Long Term Incentive Plan (LTIP)
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 to shareholders’ interests.
Performance measure
Performance measures under the LTIP will be based on financial
measures (which may include, but are not limited to, earnings
per share growth, relative total shareholder return, return on
capital employed and free cash flow).
Awards will vest as to 25% for threshold performance,
increasing to 100% for maximum performance.
Operation
LTIP awards for the Company’s 2018 financial year and future years will be
made under the new LTIP for which shareholder approval is sought at the 2017
Annual General Meeting.
Under the new LTIP, the Committee may grant awards as conditional shares,
as nil (or nominal) cost options, as forfeitable shares, as market value share
options with a per share exercise price equal to the market value of a share
at the date of grant or as cash settled equivalents (or may settle in cash
a share award). Other than in the case of ‘Qualifying LTIP awards’ as referred
to below, market value share options will not be granted to Executive Directors.
Awards will usually vest following the assessment of the applicable performance
conditions, but will not be released (so that the participant is entitled to acquire
shares) until the end of a holding period of two years beginning on the vesting
date. Alternatively, awards may be granted on the basis that the participant is
entitled to acquire shares following the assessment of the applicable
performance conditions but that (other than as regards sales to cover tax
liabilities) the award is not released (so that the participant is able to dispose
of those shares) until the end of the holding period.
An additional payment (in the form of cash or shares) may be made in respect
of shares which vest under the LTIP to reflect the value of dividends which
would have been paid on those shares during the period beginning with the
date of grant and ending with the release date (this payment may assume that
dividends had been reinvested in Dechra shares on a cumulative basis).
Market value options may be granted under the LTIP as tax-advantaged
Company Share Option Plan (CSOP) options, offering tax savings to the Group
and the participant.
The Committee may at its discretion structure awards as Qualifying LTIP
Awards, consisting of a CSOP option and an ordinary nil-cost LTIP award,
with the ordinary award scaled back at exercise to take account of any gain
made on exercise of the CSOP option.
Recovery provisions apply, as referred to below.
Maximum opportunity
The maximum award level under the LTIP in respect of any financial year is
200% of salary.
If a Qualifying LTIP award is granted, the value of shares subject to the CSOP
option will not count towards the limits referred to above, reflecting the
provisions for the scale back of the ordinary LTIP award.
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Governance
Element: All Employee Share Plans
Purpose and link to strategy
Provision of the Save As You Earn Scheme (SAYE) to Executive Directors creates staff alignment with the Group and provides a sense of
ownership. Executive Directors may participate in such other all employee share plan as may be introduced from time to time.
Operation
Tax qualifying monthly savings scheme facilitating the purchase of shares at a
discount.
Performance measure
Not subject to performance conditions in line with typical market
practice.
Any other all employee share plan would be operated for Executive Directors
in accordance with its rules and on the same basis as for other qualifying
employees.
Maximum opportunity
The limit on participation and the permitted discount under the SAYE scheme
will be those set in accordance with the applicable tax legislation from time to
time. The limit on participation under and other relevant terms of any other all
employee share plan would be determined in accordance with the plan rules
(and, where relevant, applicable legislation) and would be the same for the
Executive Directors as for other relevant employees.
Recovery Provisions (Malus and Clawback)
The annual bonus and LTIP are subject to recovery provisions as set out below.
Annual Bonus
The annual bonus opportunity may be cancelled or reduced before payment (malus) in the event of material misstatement of Dechra’s financial
statements, serious reputational damage to Dechra or gross misconduct on the part of the Executive Director.
For up to two years following the payment of a bonus, the amount paid may be recovered (clawback) in the event of material misstatement of
Dechra’s financial statements or gross misconduct on the part of the Executive Director.
LTIP
At any time prior to its vesting, an LTIP award may be cancelled or reduced (malus) in the event of a material misstatement of Dechra’s financial
statements, serious reputational damage to Dechra, if an annual bonus award has paid out at a higher level than would have been the case but for
a material misstatement or serious reputational damage, or in the event of gross misconduct.
For up to two years after the vesting of an LTIP award, it may be cancelled or reduced (if it has not been exercised) or the Executive Director may
be required to make a payment to the Company in respect of some or all of the shares acquired (clawback). These clawback provisions may be
applied in the event of material misstatement of Dechra’s financial statements or gross misconduct on the part of the Executive Director.
Malus and clawback may be applied to any CSOP option granted under the LTIP to the extent permitted by the applicable tax legislation.
Operation of Share Plans
The Committee may amend the terms of awards and options under its share plans in accordance with the plan rules in the event of a variation of
Dechra’s share capital or a demerger, special dividend or other similar event or otherwise in accordance with the rules of those plans.
Explanation of Performance Metrics
Performance measures for the LTIP and annual bonus are selected to reflect the Company’s strategy. Stretching performance targets are set each
year by the Committee taking into account a number of different factors.
Annual Bonus
The Committee considers that the underlying profit before tax is closely aligned to the Group’s key performance metrics; together with annual
personal objectives linked to the achievement of strategic milestones, we consider that this encourages sustainable growth year by year.
LTIP
The application of EPS and TSR targets to the LTIP aligns management’s objectives with those of shareholders for the longer term.
The Committee may vary or substitute any performance measure if an event occurs which causes it to determine that it would be appropriate to
do so, provided that any such variation or substitution is fair and reasonable and (in the opinion of the Committee) the change would not make the
measure less demanding. If the Committee were to make such a variation, an explanation would be given in the next Directors’ Remuneration Report.
Shareholding Guidelines
To align the interests of Executive Directors with those of shareholders, the Committee has adopted formal shareholding guidelines. Executive
Directors are required to retain half of any shares acquired under the LTIP and, if relevant, any recruitment award (after sales to cover tax) until such
time as their holding has a value equal to 200% of salary.
Shares subject to LTIP awards which have vested but not been released (that is which are in a holding period) or which have been released but
have not been exercised count towards the guidelines on a net of assumed tax basis.
Stock Code: DPH
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Directors’ Remuneration Report
continued
Policy Table for Non-Executive Directors:
Element
Fees and benefits
Purpose and link to strategy
To provide fees within a market
competitive range reflecting the
experience of the individual,
responsibilities of the role and the
expected time commitment.
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.
Non-Executive Directors may be
eligible to receive benefits such
as travel and other reasonable
expenses.
Opportunity
Fees are set taking into account
the responsibilities of the role and
expected time commitment.
Non-Executive Directors are paid a
basic fee with additional fees paid
for the chairing of Committees. An
additional fee is also paid for the
role of Senior Independent Director.
Where benefits are provided to
Non-Executive Directors they will be
provided at a level considered to be
appropriate taking into account the
individual circumstances.
Policy for the Remuneration of Employees More Generally:
The Group aims to provide a remuneration package that is competitive in an employee’s country of employment and which is appropriate to
promote the long term success of the Company. The Company intends to apply this policy fairly and consistently and does not intend to pay more
than is necessary to attract and motivate staff. In respect of the Executive Directors, a greater proportion of the remuneration package is ‘at risk’
and determined by reference to performance conditions. The Company’s SAYE scheme encourages share ownership by qualifying employees and
enables them to share in value created for shareholders.
Illustrations of Application of Remuneration Policy:
The following charts provide an illustration, for each of the Executive Directors, of the application for the 2018 financial year of the Policy. The
charts show the split of remuneration between fixed pay (that is base salary, benefits and employer pension contributions/salary supplement),
annual bonus and long term incentive pay on the basis of minimum remuneration, remuneration receivable for performance in line with Dechra’s
expectations and maximum remuneration (not allowing for any share price appreciation).
Ian Page
Richard Cotton
Tony Griffin
n
o
i
t
a
r
e
n
u
m
e
r
l
a
t
o
T
)
0
0
0
£
(
2,500
2,000
1,500
1,000
£624,000
500
100%
0
Minimum
performance
Fixed Pay
Bonus
LTIP
£2,124,000
47%
£1,124,000
22%
22%
56%
24%
29%
2,500
2,000
1,500
1,000
500
0
n
o
i
t
a
r
e
n
u
m
e
r
l
a
t
o
T
)
0
0
0
£
(
£409,000
100%
£715,000
18%
25%
57%
£1,284,000
41%
27%
32%
Performance
in line with
expectations
Maximum
performance
Minimum
performance
Performance
in line with
expectations
Maximum
performance
2,500
2,000
1,500
1,000
500
0
n
o
i
t
a
r
e
n
u
m
e
r
l
a
t
o
T
)
0
0
0
£
(
Fixed Pay
Bonus
LTIP
£560,000
13%
25%
62%
£917,000
31%
31%
38%
Performance
in line with
expectations
Maximum
performance
£345,000
100%
Minimum
performance
Fixed Pay
Bonus
LTIP
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Governance
In illustrating the potential reward, the following assumptions have been made.
Annual bonus
LTIP
Fixed pay
Minimum performance.
No bonus.
No LTIP vesting.
Performance in line with
expectations.
Bonus equal to 50% of salary is
earned.
Maximum performance.
Bonus equal to 100% of salary is
earned.
LTIP vests as to 25% of the
maximum award (50% of salary
for Ian Page, 37.5% of salary for
Richard Cotton and 25% of salary
for Tony Griffin).
LTIP vests in full (200% of salary
for Ian Page, 150% of salary for
Richard Cotton and 100% of
salary for Tony Griffin).
Base salary (being the latest known
salary as at 1 July 2017, employer
pension contributions at an assumed
rate of 14% on the latest known
salary, and benefits as disclosed in the
single figure table on page 92 for the
2017 financial year less, in the case of
Richard Cotton, a relocation allowance
of £15,000 paid in the 2017 financial
year and with the resulting figure then
doubled to give an annual equivalent
figure).
Recruitment Remuneration Policy
When hiring a new Executive Director, the Committee will typically align the remuneration package with the above Policy.
When determining appropriate remuneration arrangements, the Committee may include other elements of pay which it considers are appropriate.
However, this discretion is capped and is subject to the limits referred to below.
• Base salary will be set at a level appropriate to the role and the experience of the Executive Director being appointed. This may include
agreement on future increases up to a market rate, in line with increased experience and/or responsibilities, subject to good performance,
where it is considered appropriate.
• Pension will only be provided in line with the above Policy.
• The Committee will not offer non-performance related incentive payments (for example a ‘guaranteed sign-on bonus’).
• Other elements may be included in the following circumstances:
• an interim appointment being made to fill an Executive Director role on a short term basis;
•
if exceptional circumstances require that the Chairman or a Non-Executive Director takes on an executive function on a short term basis;
•
if an Executive Director is recruited at a time in the year when it would be inappropriate to provide a bonus or long term incentive award
for that year as there would not be sufficient time to assess performance. Subject to the limit on variable remuneration set out below, the
quantum in respect of the months employed during the year may be transferred to the subsequent year so that reward is provided on a fair
and appropriate basis;
•
if the Director will be required to relocate in order to take up the position, it is the Company’s policy to allow reasonable relocation, travel and
subsistence payments. Any such payments will be at the discretion of the Committee.
• The Committee may also alter the performance measures, performance period, vesting period and holding period of the annual bonus or LTIP,
subject to the rules of the LTIP, if the Committee determines that the circumstances of the recruitment merit such alteration. The rationale will be
clearly explained in the next Directors’ Remuneration Report.
• The maximum level of variable remuneration which may be granted (excluding ‘buyout’ awards as referred to below) is 300% of salary.
The Committee may make payments or awards in respect of hiring an employee to ‘buyout’ remuneration arrangements forfeited on leaving a
previous employer. In doing so, the Committee will take account of relevant factors including any performance conditions attached to the forfeited
arrangements and the time over which they would have vested. The Committee will generally seek to structure ‘buyout’ awards or payments on
a comparable basis to the remuneration arrangements forfeited. Any such payments or awards are excluded from the maximum level of variable
remuneration referred to above. ‘Buyout’ awards will ordinarily be granted on the basis that they are subject to forfeiture or ‘clawback’ in the event
of departure within 12 months of joining Dechra, although the Committee will retain discretion not to apply forfeiture or clawback in appropriate
circumstances.
Any share awards referred to in this section will be granted as far as possible under Dechra’s ordinary share plans. If necessary and subject to the
limits referred to above, recruitment awards may be granted outside of these plans as permitted under the Listing Rules which allow for the grant
of awards to facilitate, in unusual circumstances, the recruitment of an Executive Director.
Where a position is filled internally, any ongoing remuneration obligations or outstanding variable pay elements shall be allowed to continue in
accordance with their terms.
Fees payable to a newly appointed Chairman or Non-Executive Director will be in line with the policy in place at the time of appointment.
Stock Code: DPH
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Directors’ Remuneration Report
continued
Policy on Service Contracts:
Details of the Executive Directors’ service contracts and Non-Executive Directors’ letters of appointment are set out on page 101.
Whilst the Committee’s policy is for the service contract of any newly appointed Executive Director to have a notice period of not more than
12 months, the Committee retains discretion to set an initial notice period of up to 24 months, reducing to 12 months over the initial 12 months of
employment.
Policy on Payment for Loss of Office:
Individual Directors’ eligibility for the various elements of compensation is set out below:
Provision
Base Salary/Fees
Payments in Lieu of Notice
Annual Bonus
LTIP
Treatment upon loss of office
Base salary/fees and benefits (including pension contributions or applicable salary supplement) based on
the duration of the notice period receivable from the Company.
The Company has discretion to make a payment in lieu of notice at any time after notice has been given by
either the Company or the Director. Such a payment would consist of basic salary for the unexpired period
of notice and may also include benefits (including pension contributions or applicable salary supplement) for
that period.
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. Any bonus payment would typically be
pro-rated for time in service to termination and paid at the usual time (although the Committee retains
discretion to pay the bonus earlier in appropriate circumstances).
If an Executive Director ceases employment with the Group before an award under the new LTIP vests as
a result of ill-health, injury, death, transfer of his employing entity out of the Group or any other reason, at
the discretion of the Committee, the award will usually be released on the normal release date, although the
Committee has discretion to permit the award to be released on cessation or at some other time (such as
following the end of the performance period). In either case, the award will vest to the extent determined by
reference to the relevant performance conditions and as reduced to reflect the period of time from the start
of the performance period to the date of cessation as a proportion of the performance period.
If an Executive Director ceases employment for any reason after the vesting date of an award under the
new LTIP but before it is released (that is if he ceases employment during the holding period), that award will
continue to subsist in accordance with the rules of the new LTIP (unless the cessation is due to summary
dismissal, in which case the award will lapse) and will ordinarily be released at the normal release date,
although the Remuneration Committee has discretion to release the award at the date of cessation.
The award will be released to the extent it vested by reference to the performance conditions.
If an Executive Director ceases employment for any reason after the release date of an award under the new
LTIP, that award will continue to subsist in accordance with the rules of the new LTIP (unless the cessation is
due to summary dismissal, in which case the award will lapse).
Other Payments
In appropriate circumstances, payments may also be made in respect of accrued holiday pay, and
outplacement and legal fees.
Change of Control
Options under the Company’s SAYE scheme will vest on cessation in accordance with the plan rules,
which do not allow for discretionary treatment.
In the event of a change of control, unvested awards under the new LTIP will be released to the extent
determined by the Committee taking into account the relevant performance conditions and, unless the
Committee determines otherwise, the extent of vesting so determined shall be reduced to reflect the
proportion of the relevant performance period that has elapsed. In the event of a change of control during
the holding period relating to an award under the new LTIP, that award will be released to the extent it
vested by reference to the performance conditions.
Options under the SAYE scheme will vest on a change of control.
Where appropriate the Committee would have regard to the departing Executive 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.
Where a ‘buyout’ or other award is made, the leaver provisions would be determined at the time of the award.
The Committee reserves the right to make additional exit payments where such payments are made in good faith in discharge of an existing legal
obligation (or by way of damages for breach of such an obligation) or by way of settlement or compromise of any claim arising in connection with
the termination of a Director’s office or employment.
The Non-Executive Directors are entitled to compensation on termination of their appointment confined to three months’ remuneration.
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Governance
Consideration of Employment Conditions Elsewhere in the Group
The Committee does not formally consult with employees as part of its process when determining Executive Director pay. However, as noted in
the Policy table on page 84, the level of salary increases of employees within the wider Group is considered when setting base salary for Executive
Directors. The Committee is also kept informed of general decisions made in relation to employee pay and related issues.
Consideration of Shareholders’ Views
The Committee believes that ongoing dialogue with major shareholders is of key importance. During the 2017 financial year, the Committee
consulted with shareholders in relation to the new policy and new LTIP, and our proposals have been finalised having regard to feedback received.
Legacy Remuneration Arrangements
The Committee reserves the right to make remuneration payments and payments for loss of office notwithstanding that they are not in line with the
Policy set out above where the terms of payments were agreed:
• before the Policy came into effect (provided that, in the case of any payments agreed on or after 24 October 2014 they are in line with the Policy
approved at the 2014 Annual General Meeting); or
• at a time when the relevant individual was not a Director of the Company and, in the opinion of the Committee, the payment was not in
consideration for the individual becoming a Director of the Company.
For these purposes, ‘payments’ includes the satisfaction of variable remuneration and, in relation to an award over shares, the terms of the
payment are ‘agreed’ no later than the time the award is granted.
Any such payment shall include the satisfaction of any awards granted under the Dechra Long Term Incentive Plan 2008 and of the recruitment
awards granted to Richard Cotton on 7 March 2017 as referred to on page 88 of Dechra’s Annual Report and Accounts for the year ended
30 June 2016 and as further described on page 98 of Dechra’s Annual Report and Accounts for the year ended 30 June 2017. The Committee
may operate the Dechra Long Term Incentive Plan 2008 in accordance with its terms, including the ability to adjust awards as referred to on
page 87.
Ishbel Macpherson
Remuneration Committee Chairman
4 September 2017
Stock Code: DPH
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Directors’ Remuneration Report
continued
2017 Annual Report on Remuneration
The following section provides detail of remuneration earned by the Directors during the year in line with the Directors’ Remuneration Policy
approved by the shareholders at the Annual General Meeting held on 24 October 2014, along with details of how the Policy to be proposed to
shareholders at the 2017 Annual General Meeting will be applied in the 2018 financial year. PricewaterhouseCoopers LLP (PwC) have audited
pages 92 to 101 unless indicated otherwise.
Single Total Figure of Remuneration
The table below sets out the total remuneration for each person who has served as a Director in the period ended 30 June 2017. The table shows
the remuneration for each such person in respect of the year ended 30 June 2017 and the year ended 30 June 2016:
Ian Page
Richard Cotton7
Tony Griffin8
Anne-Francoise Nesmes9
Tony Rice10
Michael Redmond11
Ishbel Macpherson12
Julian Heslop
Lawson Macartney13
Total
Salaries &
Fees
£0001
Benefits
£0002
Annual
Bonus
£0003
Long Term
Incentives
£0004
Pension
£0005
Total
£000
2017
490
175
285
29
102
39
58
55
29
1,262
2016
440
—
232
323
6
126
43
45
—
1,215
2017
54
20
19
—
—
—
—
—
—
93
2016
54
—
28
16
—
—
—
—
—
98
2017
451
161
256
—
—
—
—
—
—
868
2016
317
—
167
232
—
—
—
—
—
716
2017
2,046
—
531
—
—
—
—
—
—
2,577
20166
1,607
—
424
719
—
—
—
—
—
2,750
2017
68
25
39
4
—
—
—
—
—
136
2016
62
—
25
45
—
—
—
—
—
132
2017
3,109
381
1,130
33
102
39
58
55
29
4,936
2016
2,480
—
876
1,335
6
126
43
45
—
4,911
Please note the following methodologies have been used in respect of the above table:
1. Salaries & Fees – this is the cash paid or received in respect of the relevant period.
2. Benefits – this represents the taxable value of all benefits paid or received in respect of the relevant period. The benefits provided include the use of a fully expensed
car, medical cover and life assurance. The amount for Richard Cotton includes a one-off relocation allowance of £15,000.
3. Annual Bonus – this is the amount of cash bonus paid in respect of the financial year.
4. Long Term Incentives – this is the value of any long term incentives vesting where the performance period ended in the relevant period.
5. Pension – this is the cash value of the employer contribution to the Group stakeholder personal pension scheme or, in the case of Tony Griffin, defined contribution
pension plan plus the value of any salary supplement paid.
6. The 2016 value assigned to the long term incentives for Ian Page, Tony Griffin and Anne-Francoise Nesmes was shown in last year’s Annual Report as an estimate,
with the value determined by reference to a share price of £11.299 (being the average market value of a share over the last quarter of the Company’s financial period
ended on 30 June 2016). This has been restated to show the actual value determined by reference to a price of £12.92 (being the market value of a share on
28 November 2016, the date of vesting).
7. Richard Cotton was appointed on 3 January 2017.
8. Tony Griffin’s remuneration is paid in Euros but reported in Sterling for the purpose of this table. The exchange rate used for this purpose was 1.3432 for 2016 and
1.1681 for 2017. His salary was €332,560 for 2017 (reflecting two months at a salary of €324,449 and ten months at a salary of €334,182) and €311,949 for 2016
(reflecting six months at a salary of €299,449 and six months at a salary of €324,449).
9. Anne-Francoise Nesmes resigned on 31 July 2016.
10. Tony Rice was appointed to the Board on 5 May 2016 and to the office of Chairman on 21 October 2016.
11. Michael Redmond retired on 21 October 2016.
12.
Ishbel Macpherson’s fee increased to £58,000 from £43,000 on her appointment as Chairman of the Remuneration Committee (the 2017 figure includes the
increase in the base fee). The fee increase in 2016 was pro-rated.
13. Lawson Macartney was appointed on 1 December 2016.
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Governance
Additional Disclosures in Respect of the Single Figure Table
Salaries and Fees
As disclosed in the Directors’ Remuneration Report in the 2016 Annual Report, the Executive Directors’ base salaries were reviewed in September
2016 in order that the review is aligned with the performance development review calendar to provide a clearer link between performance and
reward.
Following that review, Tony Griffin’s salary was increased by 3% to €334,182 with effect from 1 September 2016, broadly in line with the average
range of increases awarded to employees in the wider Group.
Ian Page’s salary was increased to £500,000 with effect from 1 September 2016, as referred to in the statement from the Remuneration
Committee Chairman on page 82. Ian Page has notified the Committee that he does not wish to be considered for a salary increase in respect of
the 2018 financial year.
The Committee’s approach to Executive Directors’ salaries for the year ending 30 June 2018 is summarised on page 100.
The Chairman and other Non-Executive Directors are paid a fee for their role. The Senior Independent Director and the chairmen of the
Remuneration Committee and Audit Committee receive an additional fee for those roles. As disclosed in the Directors’ Remuneration Report in the
2016 Annual Report, it had been agreed to increase the base fee from £40,000 to £50,000. No changes were made to the additional fees and the
fee for the Chairman for the year ended 30 June 2017. The Non-Executive Directors’ fees for the years ended 30 June 2017 and 30 June 2016
were determined on the following basis:
Office
Chairman
Non-Executive Director
Remuneration Committee Chairmanship additional fee
Audit Committee Chairmanship additional fee
Senior Independent Director additional fee
2017
Fee
£000
126
50
5
5
3
2016
Fee
£000
126
40
5
5
3
The Committee’s approach to the Chairman’s and Non-Executive Directors’ fees for the year ending 30 June 2018 is summarised on page 100.
Annual Bonus
The Company operates an annual cash incentive scheme for the Executive Directors. Annual bonuses were awarded by the Committee in respect
of the 2017 financial year having regard to the performance of the Group and personal performance objectives for the year.
The amount achieved for the year ended 30 June 2017 against targets for the 2017 financial year is as follows:
2017 Financial Year 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 2017
Amount Achieved for the Year Ended 30 June 2017
The underlying profit before tax target was £65.6 million. Actual
underlying profit before tax was £77.0 million. This converted into an
achievement of 108% of the profit target when translated at constant
exchange rate resulting in a payment worth 82% of salary.
Actual performance resulted in payment worth 10% of salary for the
period for Ian Page and Richard Cotton and 8% of salary for Tony Griffin.
The objectives are based on key aspects of delivering the
Group’s strategy*.
92% of salary for Ian Page and Richard Cotton and 90% for
Tony Griffin
* The Committee considers that the objectives for the forthcoming financial year (2018) are commercially sensitive as they give our competitors insight into our
business plans and therefore are not detailed in this report.
Further information regarding the 2017 financial year personal objectives for each Executive Director and the performance achieved is given on the
following page.
Stock Code: DPH
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Directors’ Remuneration Report
continued
The personal objectives of each Executive Director for the year ended 30 June 2017 are set on an individual basis and are closely linked to the
corporate, financial, strategic and other non-financial objectives of the Company. This enables the Committee to reward the Executive Directors’
contribution to both the annual financial performance and the achievement of specific objectives. A summary of the objectives is set out below
along with a description of the performance against them. The Committee reviewed the performance of each Executive Director against their
specific objectives based on a report by the Chief Executive Officer and with respect to the Chief Executive Officer, a report by the Chairman.
Director
Ian Page
Richard Cotton
Tony Griffin
Objective
Pipeline Delivery
Portfolio Focus
Acquisition
Geographical Expansion
Onboarding
Leadership of finance team
Portfolio Focus
Geographical Expansion
Revenue Growth
Technology Enabler
Performance
Successful launch of Amoxi-Clav
Development of vaccines strategy
Acquisition of business and assets of Apex Laboratories Pty Ltd
and 33.0% stake in Medial Ethics Pty Ltd
Establishment of Dechra Veterinary Products International
Completed a rigorous induction
Established as Leader of finance team and developed the treasury
strategy
Companion Animal Product sales increased by 9.0%
Key new territories performed in line with expectations
Strong sales growth in Italy and Poland
Implementation of the Oracle DVP EU ERP solution has fallen
behind schedule and will now be completed during the 2018
financial year
Based on the above assessment against objectives set, the Committee determined that the performance of Ian Page and Richard Cotton
warranted maximum payout in relation to the non-financial elements of their respective bonuses. Tony Griffin warranted a payout of 8% in relation
to the non-financial elements of his bonus. The Committee’s approach to Executive Directors’ annual bonus opportunities for the year ending
30 June 2018 is summarised on page 100.
LTIP Awards Vesting in Respect of the Year Ended 30 June 2017
The LTIP awards granted on 15 September 2014 are due to vest on 15 September 2017. Ian Page and Tony Griffin were granted LTIP Awards
on 15 September 2014, the performance targets for which are as follows: 50% of the award is subject to a performance condition based on the
Company’s total shareholder return (TSR) performance over the performance period relative to the constituent companies of the FTSE 250 index
(excluding investment trusts) over the performance period as follows:
TSR performance
Below median
Median
Between median and upper quartile
Upper quartile
Vesting percentage
0%
25% of the TSR portion will vest
Pro-rata vesting between 25% and 100% based on the Company’s ranking
in the comparator group
100% of the TSR portion will vest
50% of each award is subject to a performance condition based on the growth in the Company’s underlying diluted earnings per share (EPS) over
the performance period as follows:
EPS compound annual growth rate
<8% CAGR
8% CAGR
CAGR between 8% and 13%
>13% CAGR
Vesting Percentage
0%
25% of the EPS portion will vest
Pro-rata vesting between 25% and 100%
100% of the EPS portion will vest
Both the TSR element and the EPS element are subject to an additional return on capital employed (ROCE) performance measure. Unless the
Group’s ROCE is 10% or more in the final year of the performance period, the awards will lapse in full regardless of TSR and EPS performance.
The percentage vesting will be reduced by 10% for every 1% that ROCE falls below 15%.
The Company’s TSR performance was over 168.1% compared with a 64.7% TSR for the upper quartile company in the comparator group (FTSE
250 Index (excluding Investment Trusts)). Therefore 100% of the TSR element will vest. In addition, the compound annual growth in the Group’s
underlying diluted EPS for the performance period was 21.0%. Accordingly, 100% of the EPS element will vest. Overall, taking into account that
ROCE performance for 2017 was 17.7%, the LTIP awards will vest as to 100% of maximum opportunity. In the single figure table on page 92, the
value attributable to this award is calculated by multiplying the number of shares in respect of which the award is expected to vest by £17.741
(being the average market value of a share over the last quarter of the Company’s financial period ended on 30 June 2017).
Anne-Francoise Nesmes’ LTIP award granted on 15 September 2014 lapsed on 31 July 2016.
The details of the LTIP awards granted during the year ended 30 June 2017 are set out below. The Committee’s approach to Executive Directors’
LTIP awards for the year ending 30 June 2018 is summarised on page 100.
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Governance
SAYE Exercised During the Year Ended 30 June 2017
Ian Page
Date of
grant
Number of
options
7 April 2014
1,630
Option
price
£5.52
Exercise
date
2 May 2017
The aggregate gain made by the Executive Directors on share options and LTIP awards exercised during 2017 was £2,872,032
(2016: £1,803,017).
Pension
Ian Page was a member of the Dechra Pharmaceuticals PLC Group Stakeholder personal pension scheme throughout the year, and Richard
Cotton became a member of the scheme following his joining the Group in January 2017. Tony Griffin is a member of a defined benefit pension
plan in the Netherlands. Contributions made by Dechra Pharmaceuticals PLC on behalf of the Executive Directors during the year equated to no
more than 14% of pensionable salary for each Executive Director.
The annual allowance for tax relief on pension savings for individuals earning over £150,000 per annum reduced from £40,000 to £10,000 on
6 April 2016. Richard Cotton elected to receive a salary supplement in lieu of the employer contribution over and above the £10,000 limit for the
entire period under review. From 6 April 2016, Ian Page’s pension savings reached the lifetime allowance and from this date he elected to receive
his pension contributions as a salary supplement.
Tony Griffin is a member of the Basispensioen, a defined benefit pension plan established in the Netherlands. The table below sets out the
arrangements for Tony Griffin for the period under review.
Accrued benefit at 1 July 2016
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 July 2016
Transfer value at 30 June 2017
Increase in transfer value over the period after member contribution
€10,940
€11,631
€12,086
€45,000
€206,000
€253,000
€47,000
The defined benefit pension plan is capped at €50,000. Pensionable salary over this cap is paid into a defined contribution plan. Following the
implementation by the Dutch government of a reduction in the cap on maximum amount of pensionable income to €100,000, Tony Griffin elected
to receive a salary supplement in lieu of the pension premium entitlement for earnings above €100,000. This was effective from 1 January 2015.
The earliest date that a non-reduced pension is payable is 10 February 2040.
Stock Code: DPH
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sluglineDirectors’ Remuneration Report continuedTotal Shareholder Return (TSR) Graph The graph below shows the TSR performance of the Company over the past eight financial years compared with the TSR over the same period for the FTSE 250 Total Return Index. Throughout the financial year ended 30 June 2017 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 is the appropriate comparator for this report.50150250350450550650Total Shareholder Return IndexDechraFTSE 250200920102011201220132014201520172016Chief Executive Officer Remuneration for Eight Previous YearsYear endedTotal single figure remuneration£000Annual bonus payout (% of maximum opportunity)LTIP vesting (% of maximum number of shares)30 June 20173,10992100.030 June 20162,4807296.2530 June 20151,9348093.130 June 20141,58980100.030 June 20131,20136100.030 June 201268260030 June 20119846071.130 June 201076844100.0Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2017www.dechra.com96Dechra Annual Report 2017 - Middle.indd 9604/09/2017 14:00:28 Governance
Percentage Change in Chief Executive Officer Remuneration
The table below sets out in relation to salary, taxable benefits and annual bonus the percentage change in pay for Ian Page and the average
percentage change for all UK based employees, comparing pay in respect of the year ended 30 June 2016 and the year ended 30 June 2017.
For these purposes, UK employees were chosen as a comparator group reflecting that Ian Page is UK based and the number of UK employees
was sufficiently large to provide a robust comparison. Employees outside the UK were not included in the comparator group since country specific
differences could distort the comparison.
Salary1
Taxable benefits2
Annual bonus
Chief Executive Officer
2017
£000
490
54
451
2016
£000
440
54
317
Increase
%
11.4
—
42.3
Average per all UK based Employees
Increase
%
12.5
8.6
9.8
2016
£000
31.6
1.6
2.8
2017
£000
35.6
1.7
3.0
1. As referred to in the Remuneration Committee Chairman’s statement on page 82, prior to September 2016 Ian Page’s salary had not been increased since January
2014, since which date there has been an exceptional change in the scale and complexity of the Group. The increase in Ian Page’s salary between 2016 and 2017
should be viewed in this context. Ian Page has elected to waive any increase in his salary for 2018.
2. Excludes SAYE options granted in the financial year.
Relative Importance of Spend on Pay
The following table sets out the percentage change in distributions to shareholders by way of dividend and share buyback and total remuneration
paid to or receivable by all Group employees comparing the year ended 30 June 2016 and the year ended 30 June 2017.
Distributions to shareholders by way of dividend and share buyback
Overall expenditure on pay
Year ended
30 June 2017
£000
19,973
76,117
Year ended
30 June 2016
£000
16,865
56,504
% change
18.4
34.7
Stock Code: DPH
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Directors’ Remuneration Report
continued
Long Term Incentive Arrangements and Share Schemes:
LTIP Awards Made During the Year Ended 30 June 2017
Awards were granted to the Executive Directors on 19 September 2016, on the following basis:
Ian Page
Tony Griffin2
Type of award
Nil cost option under the LTIP 200% of salary
Maximum
opportunity
Number of
shares
73,260
Face value
at grant1
£999,999
Conditional award under the
LTIP
100% of salary
20,858
£284,712
% of award
vesting at
threshold
Performance
period
25% 1 July 2016 –
30 June 2019
25% 1 July 2016 –
30 June 2019
1. For these purposes, the face value of the award is calculated by multiplying the number of shares by £13.65 (being the average share price used to determine the
number of shares comprised in the awards).
2. The exchange rate used for this purpose was 1.1737 (the exchange rate at grant).
50% of each award is subject to a performance condition based on the Company’s TSR performance over the performance period relative to the
constituent companies of the FTSE 250 index (excluding investment trusts) over the performance period as follows:
TSR performance
Below median
Median
Between median and upper quartile
Upper quartile
Vesting percentage
0%
25% of the TSR portion will vest
Pro-rata vesting between 25% and 100% based on the Company’s ranking in the comparator group
100% of the TSR portion will vest
50% of each award is subject to a performance condition based on the growth in the Group’s underlying diluted EPS over the performance period.
As disclosed in the Directors’ Remuneration Report in the 2016 Annual Report, following the acquisitions of Genera and Putney in 2016, we
increased the EPS growth target required for maximum vesting, recognising the additional earnings forecasted, to 20% CAGR. Accordingly,
the EPS target is as follows:
Original EPS compound annual
growth rate
<8% CAGR
8% CAGR
CAGR between 8% and 20%
>20% CAGR
Vesting percentage
0%
25% of the EPS portion will vest
Pro-rata vesting between 25% and 100%
100% of the EPS portion will vest
Both the TSR element and the EPS element are subject to an additional ROCE performance measure. Unless the Group’s ROCE is 10% or more
in the final year of the performance period, the awards will lapse in full regardless of TSR and EPS performance. The percentage vesting will be
reduced by 10% for every 1% that ROCE falls below 15%.
Recruitment Award for Richard Cotton
As disclosed in the Directors’ Remuneration Report for the 2016 financial year, as part of his recruitment, the Committee agreed to award Richard
two ‘buyout’ awards in respect of incentives forfeited as a consequence of joining Dechra. Each award was over shares with a value of £350,000
at the date of grant.
The awards were granted on 7 March 2017 as follows:
Type of award
Nil cost option
Nil cost option
Number of shares
subject to award
21,0331
21,0331
Face value
of award
£349,9982
£349,9892
Performance condition
Performance in role
The performance conditions applying to the
LTIP awards granted on 15 September 2015
Vesting date
3 January 2018
15 September 2018
1. Either award may be reduced to take into account of any relevant performance conditions for the forfeited awards not being achieved.
2. For these purposes, the face value of the awards is calculated by multiplying the number of shares by £16.64 (being the average closing mid-market price for the
five dealing days preceding to the award date).
SAYE Options Granted in the Year
No Directors were granted SAYE options during the year ended 30 June 2017.
Payments to Past Directors
There were no payments made to past Directors during the period.
Payments for Loss of Office
There were no payments for loss of office made to Directors during the period.
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Governance
Shareholding Guidelines and Statement of Directors’ Shareholdings and Interests:
Executive Directors
In respect of the financial year ended 30 June 2017, the Company’s shareholding guidelines for Executive Directors required that by the third
anniversary of their appointment to the Board, Executive Directors are required to have acquired and retained a holding of Dechra shares equivalent
to the value of at least 100% of their base salaries. Thereafter, by the fifth anniversary of appointment, the Chief Executive Officer and Chief
Financial Officer are required to have acquired and retained a holding equivalent to the value of at least 200% and 150% respectively of their base
salary. The holdings of each person who served as an Executive Director during the period ended 30 June 2017 (and their families as at
30 June 2017 or, if earlier, the date of resignation) are as follows:
Name
Ian Page
Richard Cotton
Tony Griffin
Anne-Francoise Nesmes
Appointment
date
13 June 1997
3 January 2017
1 November 2012
2 April 2013
Ordinary
shares
Number
676,808
12,837
64,320
39,502
Ordinary
shares
£000*
11,506
218
1,093
525
% of
salary
2,301.5
62.4
382.2
162.7
* Calculated using the share price as at 30 June 2017 (or, if earlier, the date of resignation).
Non-Executive Directors
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 at least 50% of their annual base fee. The holdings of the Non-Executive Directors and their families as at 30 June
2017 (or, if earlier, the date of retirement) are as follows:
Name
Tony Rice
Ishbel Macpherson
Julian Heslop
Lawson Macartney
Michael Redmond
Appointment
date
5 May 2016
1 February 2013
1 January 2013
1 December 2016
19 April 2001
Ordinary
shares
number
40,000
5,848
10,000
—
73,417
Ordinary
shares
£000*
680
99
170
—
1,088
% of
base fee
539.7
198.8
340.0
—
800.0
* Calculated using the share price as at 30 June 2017 (or, if earlier, the date of retirement).
There have been no changes in the holdings of the Directors between 30 June and 4 September 2017.
Executive Directors’ Interests under Share Schemes Long Term Incentive Plan
Awards held under the Long Term Incentive Plan by each person who was a Director at during the year ended 30 June 2017 are as follows:
Number of
shares at
30 June
2016
129,221
115,334
90,721
—
—
—
34,129
29,937
22,641
—
66,079
60,747
49,993
Granted
during the
year
—
—
—
73,260
21,033
21,033
—
—
—
20,858
—
—
—
Lapsed
during the
year
(4,846)
—
—
—
—
—
(1,280)
—
—
—
(2,478)
(60,747)
(49,993)
Exercised
during the
year
(124,375)
—
—
—
—
—
(32,849)
—
—
—
(63,601)
—
—
Number of
shares at
30 June
20171
—
115,334
90,721
73,260
21,033
21,033
—
29,937
22,641
20,858
—
—
—
Award date
27 November 2013
15 September 2014
15 September 2015
19 September 2016
7 March 20172
7 March 20172
27 November 2013
15 September 2014
15 September 2015
19 September 2016
27 November 2013
15 September 20143
15 September 20153
Status
Vested
Unvested
Unvested
Unvested
Unvested
Unvested
Vested
Unvested
Unvested
Unvested
Vested
Lapsed
Lapsed
Performance
period
2013–2016
2014–2017
2015–2018
2016–2019
2017–2018
2015–2018
2013–2016
2014–2017
2015–2018
2016–2019
2013–2016
2014–2017
2015–2018
Ian Page
Richard Cotton
Tony Griffin
Anne-Francoise
Nesmes
1. Number of shares as at 30 June 2017, or at the date of leaving if earlier.
2. These awards are Recruitment Awards granted to Richard Cotton as referred to on page 98. They were granted outside the rules of the LTIP.
3. These awards lapsed on 31 July 2016.
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Directors’ Remuneration Report
continued
SAYE Scheme
Options held under the SAYE Scheme by each person who was served as a Director during the year ended 30 June 2017 are shown below:
Ian Page
Anne-Francoise Nesmes1
1. This options lapsed on 31 July 2016.
Number of
options at
30 June or, if
earlier, date of
resignation
1,465
1,465
Date of
grant
13 October 2014
13 October 2014
Option
price
£6.14
£6.14
Exercise
date
December 2017
December 2017
Implementation of the Directors’ Remuneration Policy in the Year Ending 30 June 2018 (Unaudited):
Subject to approval at the 2017 Annual General Meeting, the Directors’ Remuneration Policy outlined on pages 84 to 91 will be implemented in the
year ending 30 June 2018, as set out below.
Salary and Fees
The next review of Executive Directors’ salaries will be undertaken in September 2017. It is planned that the Executive Directors’ salaries for 2017
will increase in line with the range of increases proposed for the wider workforce, although Ian Page has notified the Committee that he does not
wish to be considered for a salary increase in respect of 2018 financial year.
No changes will be made to the fee for the Chairman and Non-Executive Directors for the year ending 30 June 2018. There will be no changes to
the additional fees.
Annual Bonus
No changes have been made to the bonus structure. Consequently Executive Directors will have a bonus opportunity of 100% of salary for the
year ending 30 June 2018, on the same basis as for the year ended 30 June 2017. Details of the bonus structure can be found on
pages 93 and 94. In the opinion of the Board, the performance targets applying to the annual bonus are commercially sensitive, and prospective
disclosure could provide competitors with insight into the Group’s business plans and expectations. However, the Company will disclose how any
bonus earned relates to performance against targets on a retrospective basis when the targets are no longer considered commercially sensitive,
as shown on pages 93 and 94 in respect of bonuses for the Group’s 2017 financial year.
LTIP
The Committee proposes that LTIP awards for the year ending 30 June 2018 (the 2018 Grant) will be made at the level of 200% of salary for
Ian Page, 150% for Richard Cotton and 100% of salary for Tony Griffin.
The performance measures for the awards will be based on TSR (one third) and EPS (two thirds), with an underpin based on ROCE. The TSR
targets will be the same as for the awards made in the 2017 financial year, details of which can be found on page 94.
As referred to on page 82, the EPS growth target required for maximum vesting for the 2018 Grant has been decreased to 15.5% CAGR to reflect
the fact that the acquisitions are now included in the base year and to reflect the lower 2020 financial year broker forecasts. Accordingly, the EPS
targets for the 2018 Grant are:
EPS compound annual growth rate
<8% CAGR
8% CAGR
CAGR between 8% and 15.5%
>15.5% CAGR
Vesting percentage
0%
25% of the EPS portion will vest
Pro-rata vesting between 25% and 100%
100% of the EPS portion will vest
Both the TSR element and the EPS element will be subject to an additional ROCE performance measure. Unless the Company’s ROCE is 10%
or more in the final year of the performance period, the awards will lapse in full regardless of TSR and EPS performance.
Subject to its approval by shareholders, the Awards in respect of the 2018 Grant will be granted under the new LTIP for which shareholder
approval is sought at the 2017 Annual General Meeting. The awards will ordinarily be subject to a two year post vesting holding period.
Consideration by Directors of Matters Relating to Directors’ Remuneration:
Governance
The Board has overall responsibility for the Group’s Remuneration Policy and the setting of the Non-Executive Directors’ fees, although the task of
determining and monitoring the remuneration packages of the Executive Directors and agreeing the Chairman’s fee level has been delegated to
the Committee.
Membership
Details of each member’s attendance at the Committee’s meetings is detailed on page 68.
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, he was not present during the part of the meetings where his own remuneration was discussed.
Furthermore, the Group HR Director has attended all meetings held during the financial year.
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Governance
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 2017 financial year this review took place at the July 2017 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.
An overview of the Committee’s terms of reference is provided on page 69.
Service Contracts and Letters of Appointment
Details of the Executive Directors’ service contracts and Non-Executive Directors’ letters of appointment are set out below.
Name
Tony Rice
Ian Page
Richard Cotton
Tony Griffin
Julian Heslop
Lawson Macartney
Ishbel Macpherson
Commencement date
5 May 2016
1 September 2008
3 January 2017
1 November 2012
1 January 2013
1 December 2016
1 February 2013
Notice Period
Director
3 months
6 months
6 months
6 months
3 months
3 months
3 months
Company
3 months
12 months
12 months
12 months
3 months
3 months
3 months
There are no expiry dates applicable to either Executive or Non-Executive Directors’ service contracts. The Non-Executive Directors are entitled to
compensation on termination of their appointment confined to three months’ remuneration.
While the Committee’s policy is for the service contract of any newly appointed Executive Director to have a notice period of not more than 12
months, the Committee retains discretion to set an initial notice period of up to 24 months, reducing to 12 months over the initial 12 months of
employment.
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.
Advisers
The following have provided advice to the Committee during the year in relation to its consideration of matters relating to Directors’ remuneration:
• Chief Executive Officer, Chief Financial Officer, Group HR Director and Company Secretary; and
• Deloitte LLP (Deloitte).
Deloitte is retained to provide independent advice to the Committee as required. Deloitte is a member of the Remuneration Consultants Group and,
as such, voluntarily operates under the Code of Conduct in relation to executive remuneration consulting in the UK. Deloitte’s fees for providing
remuneration advice to the Committee were £19,000 for the year ended 30 June 2017. The Committee assesses from time to time whether this
appointment remains appropriate or should be put out to tender and takes into account the Remuneration Consultants Group Code of Conduct
when considering this. Deloitte was appointed by the Committee and has provided share scheme advice and general remuneration advice to the
Company. Details of additional services which Deloitte provided to Dechra are detailed on page 78.
Statement of Voting at Previous 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 advisory vote on the Directors’ Remuneration Report and the binding vote on the Remuneration Policy at the
Company’s Annual General Meeting on 21 October 2016 and 24 October 2014 respectively:
Resolution
To approve Remuneration Report
To approve Remuneration Policy
Ishbel Macpherson
Remuneration Committee Chairman
4 September 2017
Votes
for
66,616,092
66,935,753
% of vote
98.76
98.32
Votes
against
834,805
1,140,380
% of vote
1.24
1.68
Votes
withheld
1,734,331
302,814
Stock Code: DPH
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Directors’ Report – Other Disclosures
The Directors present their annual report on the affairs of the Group,
together with the audited Group financial statements for the year ended
30 June 2017. Certain disclosure requirements which form part of
the Directors’ Report are included elsewhere in this Annual Report.
Therefore, this report should be read in conjunction with the Strategic
Report (which includes the Corporate Social Responsibility Report)
on pages 8 to 61 along with the Corporate Governance Report and
Board Committee Reports. They are incorporated by reference into this
Directors’ Report and include:
• Details in respect of the Board of Directors;
• Details in respect of Directors’ Indemnities;
• Statement of Directors’ Responsibilities;
• Review of the Group’s business during the year and any likely future
developments;
• Going concern and viability statements;
• Employees with disabilities and employee involvement; and
• Details in respect of Greenhouse Gas Emissions.
Information in relation to post-balance sheet events and financial risk
management (including the exposure to price, credit and liquidity risk)
can be found in notes 24 and 35 to the Financial Statements.
Acquisitions and Disposals
The acquisitions during the year under review are as follows:
Date of
acquisition
October 2016
March 2017
Detail
Business and
assets of Apex
Laboratories Pty
Limited.
33.0% of the
issued share
capital in Medical
Ethics Pty Ltd
(Medical Ethics).
A business that manufactures, markets
and sells branded non-proprietary
prescription and other related
companion animal products in Australia
and New Zealand.
Parent company of Animal Ethics
Pty Ltd (Animal Ethics), an Australian
based company focused on developing
ethical pain relief products in animal
health.
Consideration
Consideration of AUD$55.0 million (£34.2 million), funded from
the Group’s own cash and debt resources.
Consideration of AUD$18.0 million (£11.0 million). The
AUD$18.0 million will be split as to AUD$9.0 million of new
equity to provide funding to Animal Ethics and the balance to
acquire existing shares from the current shareholders.
Amendment of the Articles of Association
The Company’s Articles of Association may be amended by a special
resolution of its shareholders.
Significant Agreements/Change of Control
As detailed in the Going Concern Statement on page 72, the Group
has bank facilities with a group of banks comprising Bank of Ireland
(UK) plc, BNP Paribas, Fifth Third Bank, HSBC Bank plc, Lloyds
Bank plc, Raiffeisen Bank International AG and Santander UK plc (the
Banks); these facilities include a change of control provision. Under
this provision, a change of control of the Company could result in
withdrawal of facilities. 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 provide 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. In the event of
a change of control, unvested awards under the Long Term Incentive
Plan will vest to the extent determined by the Remuneration Committee
taking into account the relevant performance conditions and, unless the
Remuneration Committee determines otherwise, the extent of vesting
so determined shall be reduced to reflect the proportion of the relevant
performance period that has elapsed.
The Directors consider that there are no contracted or other single
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 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 Articles
of Association. The powers of the Directors set out in the Articles of
Association include those in relation to the issue and buy-back of
shares.
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Governance
Overseas Branches
The Company, through its subsidiary Genera d.d., has established
branches in Bosnia-Herzegovina and Serbia.
Political Donations and Expenditure
No political donations were made during the year ended 30 June 2017
(2016: nil). 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.
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 44 and 45. The expense on
this activity for the year ended 30 June 2017 was £14,978,000
(2016: £10,355,000) and a further £1,258,000 (2016: £570,000) was
capitalised as development costs.
Results and Dividends
The results for the year and financial position at 30 June 2017 are
shown in the Consolidated Income Statement on page 115 and
Consolidated Statement of Financial Position on page 117. The
Directors are recommending the payment of a final dividend of
15.33 pence per share which, if approved by shareholders, will be
paid on 17 November 2017 to shareholders registered at 27 October
2017. The shares will become ex-dividend on 26 October 2017. An
interim dividend of 6.11 pence per share was paid on 7 April 2017,
making a total dividend for the year of 21.44 pence per share
(2016: 18.46 pence per share). The total dividend payment is
£19,973,000 (2016: £16,865,000).
Share Capital
The issued share capital of the Company for the year is set out in
note 25 to the Consolidated Financial Statements. As at the end of
the financial year 93,178,756 fully paid ordinary shares were in issue,
which included 431,758 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. The only exception to this
is the Trustees of the Dechra Employee Benefit Trust, who hold 42,066
shares and have waived their rights to dividends and in accordance
with the Investment Association guidance they abstain from voting at
general meetings.
At the Annual General Meeting of the Company held on 21 October
2016, the Company was authorised to purchase up to 9,275,208 of
its ordinary shares, representing 10% of the issued share capital of
the Company as at 9 September 2016. 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 2016 Annual
General Meeting and resolutions to renew these authorities will be
proposed at the 2017 Annual General Meeting.
Stock Code: DPH
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Directors’ Report – Other Disclosures
continued
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.
Fidelity Management & Research
Standard Life Aberdeen
BlackRock Inc
Standard Life
The Capital Group Companies, Inc
Schroders
Aviva plc
Old Mutual
Legal & General Group
AEGON
Aberdeen Group
Hargreave Hale Ltd Stockbrokers
30 June 2017
14 August 2017
Aggregate
voting
rights
8,563,921
—
6,419,020
4,770,145
4,160,036
4,135,440
3,730,200
3,575,190
3,486,988
3,361,786
3,127,481
2,955,497
Percentage
9.19
—
6.89
5.12
4.46
4.44
4.00
3.84
3.74
3.61
3.36
3.17
Aggregate
voting
rights
8,666,431
7,041,399
6,492,125
—
3,890,018
4,017,465
3,902,307
3,255,911
3,355,126
3,479,454
—
2,966,698
Percentage
9.30
7.56
6.97
—
4.17
4.31
4.19
3.49
3.60
3.73
—
3.18
Auditor
A resolution to re-appoint PricewaterhouseCoopers LLP as external auditor and to authorise the Audit Committee 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 external 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 external auditor is aware of that
information.
The Directors’ Report has been approved by the Board and signed on its behalf by:
Melanie Hall
Company Secretary
4 September 2017
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Statement of Directors’ Responsibilities
Governance
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
Financial Statements in accordance with applicable law and regulations.
Directors’ Responsibility Statement
Each of the Directors as at the date of the Annual Report, whose
names and functions are set out on pages 64 and 65, confirm that to
the best of his/her knowledge:
Company law requires the Directors to prepare Financial Statements
for each financial year. Under that law they are required to prepare
the Group Financial Statements in accordance with applicable law
and International Financial Reporting Standards (IFRSs) as adopted
by the European Union (EU) and Company Financial Statements in
accordance with United Kingdom (UK) Accounting Standards (UK,
comprising FRS101 ‘Reduced Disclosure Framework’, and applicable
law).
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 Company and of their profit or
loss for that period. In preparing each of the Financial Statements, the
Directors are required to:
• select appropriate accounting policies and apply them consistently;
1. the Company Financial Statements, which have been prepared in
accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising FRS
101 ‘Reduced Disclosure Framework’, and applicable law), give a
true and fair view of the assets, liabilities, financial position and profit
of the Company;
2. the Group Financial Statements, prepared in accordance with the
IFRSs as adopted by the EU, give a true and fair view of the assets,
liabilities, financial position and profit or loss of Group; and
3. the Strategic Report includes a fair review of the development and
performance of the business and the position of the Group and
Company, together with a description of the principal risks and
uncertainties that they face.
• state whether applicable IFRSs as adopted by the European
Approved by the Board and signed on its behalf by:
Ian Page
Chief Executive Officer
4 September 2017
Richard Cotton
Chief Financial Officer
4 September 2017
Union have been followed for the Group Financial Statements and
United Kingdom Accounting Standards, comprising FRS 101, have
been followed for the Company Financial Statements, subject to
any material departures disclosed and explained in the Financial
Statements;
• make judgements and estimates that are reasonable and prudent;
and
• prepare the Financial Statements on a going concern basis unless
it is inappropriate to presume that the Group and Company will
continue in business.
The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Group’s and Company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the Group and Company, and enable them to
ensure that its Financial Statements and the Directors’ Remuneration
Report comply with the Companies Act 2006 and, as regards the
Group Financial Statements, Article 4 of the IAS Regulation.
The Directors are also responsible for safeguarding the assets of the
Group and Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
Company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of Financial Statements may differ from
legislation in other jurisdictions.
The Directors consider that the Annual Report and Accounts, taken
as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group and
Company’s performance, business model and strategy.
Stock Code: DPH
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sluglineDechra Annual Report 2017 - Back.indd 10604/09/2017 14:01:06 sluglineFinancial StatementsIndependent Auditor’s Report108Consolidated Income Statement115Consolidated Statement of Comprehensive Income116Consolidated Statement of Financial Position117Consolidated Statement of Changes in Shareholders’ Equity118Consolidated Statement of Cash Flows119Notes to the Consolidated Financial Statements120Company Statement of Financial Position160Company Statement of Changes in Shareholders’ Equity161Notes to the Company Financial Statements162Financial History169Dechra Annual Report 2017 - Back.indd 10704/09/2017 14:01:07 Independent Auditor’s Report to the Members of
Dechra Pharmaceuticals PLC
Report on the Audit of the Financial Statements
Opinion
In our opinion:
• Dechra Pharmaceuticals PLC’s Group financial statements and Company financial statements (the Financial Statements) give a true and fair
view of the state of the Group’s and of the Company’s affairs as at 30 June 2017 and of the Group’s profit and cash flows for the year then
ended;
•
•
•
the Group Financial Statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as
adopted by the European Union;
the Company Financial Statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice
(United Kingdom Accounting Standards, comprising FRS 101 ‘Reduced Disclosure Framework’, and applicable law); and
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.
We have audited the Financial Statements, included within the Annual Report and Accounts (the Annual Report), which comprise: the Consolidated
and Company Statements of Financial Position as at 30 June 2017; the Consolidated Income Statement and Statement of Comprehensive
Income, the Consolidated Statement of Cash Flows; and the Consolidated and Company Statements of Changes in Equity for the year then
ended; and the Notes to the Financial Statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under ISAs
(UK) are further described in the Auditors’ Responsibilities for the Audit of the Financial Statements section of our report. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the Financial Statements in the
UK, which includes the FRC’s Ethical Standard as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities
in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided to the
Group or the Company.
Other than those disclosed in note 7 to the Financial Statements, we have provided no non-audit services to the Group or the Company in the
period from 1 July 2016 to 30 June 2017.
Our Audit Approach
Overview
• Group overall materiality – £2.6 million (2016: £1.6 million).
•
In determining Group overall materiality, we have considered a range of benchmarks that may be appropriate
in the Group’s circumstances and which are used to assess the performance of the Group. These include
Group Revenue, Group Profit before tax and Group Profit before tax adjusted for non-recurring items. Applying
our professional judgement, we determined Group overall materiality to be £2.6 million.
• Company Financial Statement materiality – £1.2 million (2016: £1.2 million) based on 0.5% of net assets.
• Following our assessment of the risks of material misstatement of the Consolidated Financial Statements we
performed audits of the complete financial information of 19 reporting units and specified procedures for
a further 1 reporting unit.
In addition the Group engagement team audited the Company and certain centralised functions, including
those covering the Group treasury operations, corporate taxation, and goodwill and intangible asset impairment
assessments.
•
• The components on which audits of the complete financial information and centralised work was performed
accounted for 92% of Group revenue and 88% of adjusted profit before tax.
• As part of our supervision process, the Group engagement team have visited significant components, in
addition to performing the audits of the in scope UK reporting locations. We have also visited the component
auditors in the Netherlands during the year.
Our assessment of the risk of material misstatement also informed our views on the areas of particular focus of
our work which are listed below;
• Business combinations – assessment of the acquisition accounting in respect of Apex Laboratories Pty Ltd
and revisions made to the fair values assigned to the acquired assets and liabilities of Putney Inc.
• Associate accounting – assessment of the accounting for the investment in an associate following the
acquisition of 33.0% of the share capital in Medical Ethics Pty Ltd.
• Licensing agreements – recognition of acquired intangible assets in respect of licensing agreements.
•
Impairment of intangible assets subject to amortisation – assessment of the carrying value of acquired
intangible assets and other relevant assets.
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Financial Statements
The Scope of Our Audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the Financial Statements. In particular,
we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making
assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override
of internal controls, including evaluating whether there was evidence of bias by the Directors that represented a risk of material misstatement due
to fraud.
Key Audit Matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the Financial Statements
of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the
auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the
efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the
context of our audit of the Financial Statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on
these matters. This is not a complete list of all risks identified by our audit.
Key audit matter
Business combinations – assessment of the acquisition accounting
in respect of Apex Laboratories Pty Ltd and revisions made to the fair
values assigned to the acquired assets and liabilities of Putney Inc.
Refer to the Audit Committee Report on page 76, the critical
accounting estimates and judgements in note 1 (b) to the accounts
on page 121, and note 32 (Acquisitions).
The Group completed the acquisition of Apex Laboratories Pty Ltd
(Apex) on 14 October 2016.
We focused on this area because the accounting for business combinations
including the opening balance sheet position is inherently judgemental.
IFRS 3 (revised) requires that consideration is given to the existence
and measurement of separable identifiable intangible assets that have
been acquired as part of each respective acquisition agreement. For
the acquisition of Apex, significant value has been attributed to the
developed technology, brand and product portfolio, the recognition of
which is dependent on cash flow forecasts including future business
growth, product development and the application of an appropriate
discount rate, all of which are subjective.
The calculation of deferred tax liabilities arising on the identifiable
intangible assets is reliant on the correct application of local tax rates.
The 12 month measurement period following the acquisition of Putney
Inc concluded on 21 April 2017. The provisional fair values attributed
to the assets and liabilities acquired have been reviewed, specifically
deferred taxes. The measurement of deferred taxes is dependent
on the understanding and application of local tax rules, with the
recognition of any deferred tax assets being judgemental based
on the Directors’ evaluation of recoverability.
How our audit addressed the key audit matter
•
Intangible assets – We obtained the cash flow forecasts supporting
the intangible assets identified and agreed that these were
consistent with those approved by the Board as part of the
acquisition process. For sales volumes we tested that the relevant
assumptions are consistent to the recent performance of the
acquired business. We assessed the validity of new products being
made available for sale through independent research as to the
accessibility and marketability of similar products.
We engaged our valuation specialists who, benchmarked within
a reasonable range that the growth assumptions were in line with
industry expectation and the specific geographical locations in
which the business operates. Our valuation specialists also agreed
that the discount rates were consistent with those applied by
companies of comparable size and within the relevant industry.
• Taxation – We recalculated the deferred tax liabilities arising on the
acquired intangibles assets and agreed that relevant tax rates have
been used.
In respect of Putney, the Directors evaluated the operating losses
available for future utilisation. We have agreed the quantum and
nature of the losses to the filed tax computations taking in to
account the period to the date of acquisition. We recalculated the
deferred tax asset and agreed the recognition of this by confirming
the basis of recoverability as being consistent with historical
performance and Board approved forecasts.
Stock Code: DPH
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Independent Auditor’s Report to the Members of
Dechra Pharmaceuticals PLC
continued
Key Audit Matters continued
Key audit matter
Associate accounting – assessment of the accounting for investment
in associate following the acquisition of 33.0% share capital in Medical
Ethics Pty Ltd
How our audit addressed the key audit matter
Share capital – we have agreed the percentage of share capital
acquired to the purchase agreement and verified the associated cash
outflow.
Notional fair value assessment – in order to assess the carrying values
of the acquired intangibles, we have agreed the cash inflows are
matched to the milestone payment schedule which forms part of the
purchase agreement and the sum of cash inflows arising from the
other payments due including forecast royalty income. We have agreed
that the forecast royalty income is consistent with that approved by the
Board.
We have performed sensitivities on the growth assumptions,
confirming that the basis of the respective valuations have taken into
account appropriate assumptions.
Our valuation specialists have agreed that the discount rate is
consistent to those applied by other companies of comparable
geographical spread and operating activities.
Amortisation – we have re-performed the calculation of amortisation
based on the applicable share of identified intangible assets without
exception.
Medical Ethics and Kane BioTech – We have agreed the total
consideration being paid, split between an initial payment and
contingent consideration as set out in the purchase agreement.
In respect of Tri-Solfen, we have performed sensitivities on the growth
and expected timing of market registrations and agreed that those
adopted are consistent with those approved by the Board. For Kane
BioTech products, we have performed sensitivities on volumes and the
expected timing of product launch and agreed that the assumptions
adopted are consistent with those approved by the Board.
In performing sensitivities we have confirmed that the basis of the
respective valuations have taken into account appropriate assumptions.
Our valuation specialists also agreed that the discount rate was
consistent to those applied by other companies of comparable
geographical spread and operating activities.
Refer to the Audit Committee Report on page 76, the critical
accounting estimates and judgements in note 1 (b) to the accounts
on page 120, and note 6 (Interest in Associate).
On 30 March 2017, the Group completed the acquisition of 33.0% of
the share capital of Medical Ethics Pty Ltd, an entity incorporated in
Australia and the parent company of Animal Ethics Pty Ltd.
Considering the terms of the agreement and the percentage of
ownership acquired, the Directors’ concluded that they cannot
demonstrate control but have significant influence. As such the
transaction has been accounted for as an investment in an associate.
The investment in the associate has been initially recognised at
cost with subsequent measurement reflecting the Group’s 33.0%
share of the associate’s post acquisition profit or loss including an
adjustment made for the amortisation of acquired intangible assets.
As such, a ‘notional’ purchase price allocation has been undertaken,
to identify and fair value the assets and liabilities of the associate.
This assessment is dependent on cash flow forecasts including future
business growth and the application of an appropriate discount rate,
all of which are subjective in nature.
Licensing agreements – recognition of acquired intangible assets in
respect of licensing agreements
Refer to the Audit Committee Report on page 76, the critical
accounting estimates and judgements in note 1 (b) to the accounts
on page 120, and note 12 (Intangible Assets).
Medical Ethics
On 30 March 2017 the long term in-licensing agreement for the
exclusive rights to market and sell Tri-Solfen for all animal species in
all international markets (excluding Australia and New Zealand) was
acquired from Animal Ethics Pty Ltd.
The licensing agreement has been recorded at cost and is being
amortised straight line over the period of the contract to 2029.
Consideration is in the form of milestone payments and other payments
which are forecast to reflect the probability of successful registration
and subsequent performance within different global territories. Future
payments are contingent on these factors and therefore represent an
area of judgement.
Kane BioTech
On 5 March 2017 an exclusive distribution agreement for StrixNB and
DispersinB in the US, Canadian and Mexican veterinary markets was
acquired.
The in-licensing agreement has been recorded at cost and will be
amortised straight line over the period of the contract to 2027. The
milestone payments and other payments are forecast to reflect the
probability of successful product launch and subsequent performance.
The future payments are contingent on these factors and therefore
represent an area of judgement.
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Financial Statements
How our audit addressed the key audit matter
Acquired intangible assets and other relevant assets – We agreed that
the basis of the current and future revenue forecasts are consistent
with previous performance. Our valuation specialists benchmarked,
within a reasonable range, the growth and discount rate to economic
and industry averages and the cost of capital for other comparable
companies respectively. We have performed sensitivities on a selection
of these assumptions confirming that the level of headroom calculated
is not unduly susceptible to change.
Key Audit Matters continued
Key audit matter
Impairment of intangible assets subject to amortisation - assessment
of the carrying value of acquired intangible assets and other relevant
assets
Refer to the Audit Committee Report on page 76, the critical
accounting estimates and judgements in note 1 (b) to the accounts
on page 120, and note 12 (Intangible Assets).
The Directors’ exercise judgement as to whether impairment triggers,
which require a full impairment assessment to be performed, have been
identified in relation to acquired intangible assets and other relevant
assets.
Where a full impairment assessment is required to support the carrying
value of the assets held, the Directors’ have prepared a discounted
cash flow which includes a number of assumptions. The assumptions
which are deemed to be the most significant in respect of these
forecasts are the current and future performance of individual products.
The long term growth and discount rate are also considered to be
subjective.
How We Tailored the Audit Scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the Financial Statements as a whole,
taking into account the structure of the Group and the Company, the accounting processes and controls, and the industry in which they operate.
The Group is structured along three segments being European Pharmaceuticals, North American Pharmaceuticals and Pharmaceuticals Research and
Development, with each division set up to manage operations on both a regional and functional basis, consisting of a number of reporting units.
The Group Financial Statements are a consolidation of 38 active reporting units comprising the Group’s operating businesses and centralised
functions. These reporting units maintain their own accounting records and controls and report to the head office finance team in the UK.
Accordingly, of the Group’s 38 active reporting units we identified 18 which, in our view, required a full audit of their complete financial information
in order to ensure that sufficient audit evidence was obtained. The reporting units on which a full audit of their complete financial information
was performed accounted for 92% of Group revenue and 84% of adjusted profit before tax. Of these reporting units, two were considered to be
significant components due to their size, being Dechra Veterinary Products LLC and Putney Inc. both in the USA.
In addition to the significant components, 16 active non-significant reporting units were subjected to a full scope audit, five located in the UK,
seven located in Denmark, two located in the Netherlands and one located in Germany and Croatia respectively, were conducted such that the
audit work was complete prior to the finalisation of the Group Financial Statements either by the Group engagement team or by PwC network firms
in those territories, operating under our instruction. Specific audit procedures on certain balances and transactions were performed on a further
one reporting unit.
The Group consolidation, Financial Statements disclosures and a number of centralised functions were audited by the Group engagement team
at the head office. These included, but were not limited to, central procedures on treasury operations, UK and corporate taxation and goodwill
and intangible asset impairment assessments. We also performed Group level analytical procedures on all of the remaining out of scope active
reporting units to identify whether any further audit evidence was needed, which resulted in no extra testing being required. The Company was also
subject to a full scope audit.
The Group engagement team visits component auditors based on significance and/or risk characteristics, to ensure coverage across the Group.
The Group engagement team are responsible for the audit of all in scope UK reporting locations performing full scope audits. As part of our
supervision process, the Group engagement team have visited significant components, in addition to performing the audits of the in scope UK
reporting locations. We have also visited the component auditors in the Netherlands during the year.
Additionally the Group audit team was in contact, at each stage of the audit, in line with detailed instructions issued and through global planning
calls and further regular written communication. Specifically, for all component teams, the Group team discussed in detail the planned audit
approach at the component level, were in attendance at local audit close meetings and following independent review, discussed the detailed
reported findings of the audit with each component team.
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with
qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual
Financial Statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the Financial
Statements as a whole.
Stock Code: DPH
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Independent Auditor’s Report to the Members of
Dechra Pharmaceuticals PLC
continued
Based on our professional judgement, we determined materiality for the Financial Statements as a whole as follows:
Overall materiality
How we determined it
Rationale for benchmark
applied
Group Financial Statements
£2.6 million (2016: £1.6 million).
In determining Group overall materiality, we have
considered a range of benchmarks that may be
appropriate in the Group’s circumstances and which
are used to assess the performance of the Group.
These include Group Revenue, Group Profit before tax
and Group Profit before tax adjusted for non-recurring
items. Applying our professional judgement, we
determined Group overall materiality to be £2.6 million.
We believe that profit before tax adjusted for non-
recurring items provides a consistent basis for
determining materiality as it eliminates the impact
of these items which fluctuate year on year and can
have a disproportionate impact on the Consolidated
Income Statement.
Company Financial Statements
£1.2 million (2016: £1.2 million).
0.5% of net assets.
The Company is the ultimate holding Company of
the Dechra Group of Companies and with no trading
activity, net assets is considered to be the primary
measure used by the shareholders in assessing the
performance of the entity, and is a generally accepted
auditing benchmark.
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of
materiality allocated across components was between £0.15 million and £1.9 million.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £0.1 million in respect of both
the Group and Company (2016: £0.1 million) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative
reasons.
Going Concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
We are required to report if we have anything material to add or draw attention to in respect of
the Directors’ Statement in the Financial Statements about whether the Directors considered it
appropriate to adopt the going concern basis of accounting in preparing the Financial Statements
and the Directors’ identification of any material uncertainties to the Group’s and the Company’s
ability to continue as a going concern over a period of at least twelve months from the date of
approval of the Financial Statements.
We are required to report if the Directors’ statement relating to Going Concern in accordance with
Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit.
Outcome
We have nothing material to add or to
draw attention to. However, because
not all future events or conditions can
be predicted, this statement is not
a guarantee as to the Group’s and
Company’s ability to continue as a going
concern.
We have nothing to report.
Reporting On Other Information
The other information comprises all of the information in the Annual Report and Accounts other than the Financial Statements and our auditors’
report thereon. The Directors are responsible for the other information. Our opinion on the Financial Statements does not cover the other
information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of
assurance thereon.
In connection with our audit of the Financial Statements, our responsibility is to read the other information and, in doing so, consider whether
the other information is materially inconsistent with the Financial Statements or our knowledge obtained in the audit, or otherwise appears to be
materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude
whether there is a material misstatement of the Financial Statements or a material misstatement of the other information. If, based on the work we
have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to
report based on these responsibilities.
With respect to the Strategic Report, Directors’ Report and Corporate Governance Statement, we also considered whether the disclosures
required by the UK Companies Act 2006 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006, (CA06), ISAs (UK)
and the Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as described below (required
by ISAs (UK) unless otherwise stated).
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Financial Statements
Strategic Report and Directors’ Report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’ Report for the
year ended 30 June 2017 is consistent with the Financial Statements and has been prepared in accordance with applicable legal requirements.
(CA06)
In light of the knowledge and understanding of the Group and Parent Company and their environment obtained in the course of the audit, we did
not identify any material misstatements in the Strategic Report and Directors’ Report. (CA06)
Corporate Governance Statement
In our opinion, based on the work undertaken in the course of the audit, the information given in the Corporate Governance Statement (on pages
66 to 74) about internal controls and risk management systems in relation to financial reporting processes and about share capital structures in
compliance with rules 7.2.5 and 7.2.6 of the Disclosure Guidance and Transparency Rules sourcebook of the FCA (DTR) is consistent with the
Financial Statements and has been prepared in accordance with applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we did not
identify any material misstatements in this information. (CA06)
In our opinion, based on the work undertaken in the course of the audit, the information given in the Corporate Governance Statement (on pages
64 to 71) with respect to the Company’s corporate governance code and practices and about its administrative, management and supervisory
bodies and their committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of the DTR. (CA06)
We have nothing to report arising from our responsibility to report if a corporate governance statement has not been prepared by the Company.
(CA06)
The Directors’ Assessment of the Prospects of the Group and of the Principal Risks That Would Threaten The Solvency Or Liquidity of
The Group
We have nothing material to add or draw attention to regarding:
• The Directors’ confirmation on page 73 of the Annual Report that they have carried out a robust assessment of the principal risks facing the
Group, including those that would threaten its business model, future performance, solvency or liquidity.
• The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
• The Directors’ explanation on page 73 of the Annual Report as to how they have assessed the prospects of the Group, over what period they
have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that
the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related
disclosures drawing attention to any necessary qualifications or assumptions.
We have nothing to report having performed a review of the Directors’ statement that they have carried out a robust assessment of the principal
risks facing the Group and statement in relation to the longer term viability of the Group. Our review was substantially less in scope than an audit
and only consisted of making inquiries and considering the Directors’ process supporting their statements; checking that the statements are in
alignment with the relevant provisions of the UK Corporate Governance Code (the Code); and considering whether the statements are consistent
with the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit. (Listing Rules)
Other Code Provisions
We have nothing to report in respect of our responsibility to report when:
• The statement given by the Directors, on page 77, that they consider the Annual Report taken as a whole to be fair, balanced and
understandable, and provides the information necessary for the members to assess the Group’s and Company’s position and performance,
business model and strategy is materially inconsistent with our knowledge of the Group and Company obtained in the course of performing our
audit.
• The section of the Annual Report on page 75 describing the work of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
• The Directors’ statement relating to the Company’s compliance with the Code does not properly disclose a departure from a relevant provision
of the Code specified, under the Listing Rules, for review by the auditors.
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act
2006. (CA06)
Stock Code: DPH
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Independent Auditor’s Report to the Members of
Dechra Pharmaceuticals PLC
continued
Responsibilities for the Financial Statements and the Audit
Responsibilities of the Directors for the Financial Statements
As explained more fully in the Statement of Directors’ Responsibilities set out on page 105, the Directors are responsible for the preparation of the
Financial Statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The Directors are also
responsible for such internal control as they determine is necessary to enable the preparation of Financial Statements that are free from material
misstatement, whether due to fraud or error.
In preparing the Financial Statements, the Directors are responsible for assessing the Group’s and the Company’s ability to continue as a going
concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either
intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the Financial Statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is
not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these Financial Statements.
A further description of our responsibilities for the audit of the Financial Statements is located on the FRC’s website at:
www.frc.org.uk/auditors responsibilities. This description forms part of our auditors’ report.
Use of this Report
This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16
of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose
or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Other Required Reporting
Companies Act 2006 Exception Reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not
visited by us; or
• certain disclosures of Directors’ remuneration specified by law are not made; 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.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit Committee, we were appointed by the Directors on 23 October 2015 to audit the Financial Statements
for the year ended 30 June 2016 and subsequent financial periods. The period of total uninterrupted engagement is two years, covering the years
ended 30 June 2016 to 30 June 2017.
Andrew Hammond (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Birmingham
4 September 2017
• The maintenance and integrity of the Dechra Pharmaceuticals PLC website is the responsibility of the Directors; the work carried out by the
auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have
occurred to the Financial statements since they were initially presented on the website.
• Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other
jurisdictions.
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Consolidated Income Statement
For the year ended 30 June 2017
Financial Statements
Revenue
Cost of sales
Gross profit
Selling, general and administrative
expenses
Research and development expenses
Operating profit
Finance income
Finance expense
Share of loss of investments
accounted for using the equity
method
Profit before taxation
Income taxes
Profit for the year
Attributable to:
Owners of the parent
Non-controlling interests
Profit for the year
Earnings per share
Basic
Diluted
Dividend per share (interim paid
and final proposed for the year)
Note
2
Underlying
£000
359,275
(163,335)
195,940
(99,613)
(14,978)
81,349
805
(5,056)
(101)
76,997
(16,865)
60,132
60,127
5
60,132
2
3
4
6
7
9
27
11
11
10
2016
Non-
underlying*
(notes
4 & 5)
£000
—
(6,070)
(6,070)
(27,294)
—
(33,364)
—
(1,766)
—
(35,130)
9,252
(25,878)
(25,708)
(170)
(25,878)
Underlying
£000
247,562
(109,052)
138,510
(75,298)
(10,355)
52,857
21
(3,200)
—
49,678
(11,288)
38,390
38,376
14
38,390
2017
Non-
underlying*
(notes
4 & 5)
£000
—
(4,225)
(4,225)
(32,469)
(11,441)
(48,135)
—
(242)
(58)
(48,435)
14,413
(34,022)
(34,022)
—
(34,022)
Total
£000
359,275
(167,560)
191,715
(132,082)
(26,419)
33,214
805
(5,298)
(159)
28,562
(2,452)
26,110
26,105
5
26,110
28.09p
27.93p
21.44p
Total
£000
247,562
(115,122)
132,440
(102,592)
(10,355)
19,493
21
(4,966)
—
14,548
(2,036)
12,512
12,668
(156)
12,512
14.00p
13.90p
18.46p
* Non-underlying items comprise amortisation of acquired intangibles and impairment of acquired intangibles, impairment of investments, acquisition expenses, fair
value uplift of inventory acquired through business combinations, rationalisation costs, loss on extinguishment of debt, and fair value and other movements on
deferred and contingent consideration.
Stock Code: DPH
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Consolidated Statement of Comprehensive Income
For the year ended 30 June 2017
Profit for the year
Other comprehensive income/(expense):
Items that will not be reclassified subsequently to profit or loss:
Remeasurement of defined benefit pension scheme
Income tax relating to components of other comprehensive income/(expense)
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
Recycle of profit/(losses) arising on available for sale financial assets
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
Non-controlling interests
2017
£000
26,110
2016
£000
12,512
2,074
(535)
1,539
—
15
343
12,877
—
13,235
40,884
40,719
165
40,884
(1,551)
385
(1,166)
(154)
233
(450)
32,116
1,234
32,979
44,325
44,202
123
44,325
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Consolidated Statement of Financial Position
At 30 June 2017
Financial Statements
ASSETS
Non-current assets
Intangible assets
Property, plant and equipment
Investments
Deferred tax assets
Total non-current assets
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets
LIABILITIES
Current liabilities
Borrowings
Trade and other payables
Deferred and contingent consideration
Current tax liabilities
Total current liabilities
Non-current liabilities
Borrowings
Deferred and contingent consideration
Employee benefit obligations
Provisions
Deferred tax liabilities
Total non-current liabilities
Total liabilities
Net assets
EQUITY
Issued share capital
Share premium account
Own shares
Hedging reserve
Foreign currency translation reserve
Merger reserve
Retained earnings
Total equity attributable to equity holders of the parent
Non-controlling interests
Total equity
Note
2017
£000
12
13
6
15
16
17
18
21
19
20
21
23
22
15
25
26
27
396,262
45,197
10,854
780
453,093
56,507
67,269
61,200
184,976
638,069
(973)
(61,309)
(1,617)
(2,512)
(66,411)
(180,186)
(33,373)
(3,009)
(3,180)
(49,273)
(269,021)
(335,432)
302,637
932
173,376
(667)
—
18,241
1,770
107,422
301,074
1,563
302,637
Restated
2016
£000
355,258
37,718
—
466
393,442
54,375
68,869
39,142
162,386
555,828
(1,672)
(59,946)
(467)
(3,897)
(65,982)
(154,093)
(3,166)
(3,721)
(3,334)
(48,920)
(213,234)
(279,216)
276,612
927
172,451
(21)
(15)
5,524
1,770
93,995
274,631
1,981
276,612
The financial statements were approved by the Board of Directors on 4 September 2017 and are signed on its behalf by:
Ian Page
Chief Executive Officer
4 September 2017
Richard Cotton
Chief Financial Officer
4 September 2017
Company number: 3369634
Stock Code: DPH
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Consolidated Statement of Changes in
Shareholders’ Equity
For the year ended 30 June 2017
Attributable to owners of the parent
Share
Issued
premium
share
account
capital
£000
£000
880 124,801
—
—
Own
shares
£000
(303)
—
Hedging
reserve
£000
(94)
—
Foreign
currency
translation
reserve
£000
(27,547)
—
Merger
reserve
£000
1,770
Retained
earnings
£000
Total
£000
94,981 194,488
12,668
Non-
controlling
interests
£000
Total
equity
£000
— 194,488
12,512
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
279
(154)
(156)
(450)
(154)
(450)
(154)
(450)
—
—
—
—
—
—
33,350
(1,166)
233
79
—
123
—
—
—
—
—
—
—
—
—
—
—
—
—
—
47
—
— 12,668
— 33,071
— (1,166)
— (1,166)
— 33,071
233
44,325
233
44,202
—
33,071
—
—
— 11,052
—
—
47,650
—
— (15,292)
—
3,536
—
—
(15,292)
3,536
— 47,697
—
—
Year ended 30 June 2016
At 1 July 2015
Profit/(loss) for the period
Effective portion of changes in fair
value of cash flow hedges, net of tax
Losses arising on available for sale
financial assets
Foreign currency translation
differences for foreign operations, net
of tax
Remeasurement of defined benefit
pension scheme, net of tax
Cash flow hedges recycled to income
statement, net of tax
Total comprehensive income
Transactions with owners:
Dividends paid
Share-based payments
Shares issued
Acquisition of non-controlling interests
Own shares recycled to
retained earnings
Total contributions by and distributions
to owners
At 30 June 2016
Year ended 30 June 2017
At 1 July 2016
Profit for the period
Recycle of losses arising on available
for sale financial assets
Foreign currency translation differences
for foreign operations, net of tax
Remeasurement of defined benefit
pension scheme, net of tax
Cash flow hedges recycled to income
statement, net of tax
Total comprehensive income
Transactions with owners:
Dividends paid
Share-based payments
Shares issued
Acquisition of non-controlling interests
Own shares purchased
Total contributions by and distributions
to owners
At 30 June 2017
Hedging Reserve
The hedging reserve represents the cumulative fair value gains or losses on derivative financial instruments for which cash flow hedge accounting
has been applied, net of tax.
— (17,664)
3,104
—
—
—
—
—
—
—
(14,276)
1,770 107,422 301,074
(17,664)
3,104
930
—
(646)
— (17,664)
—
3,104
—
930
(583)
(583)
—
(646)
— (15,292)
—
3,536
— 47,697
1,858
93,995 274,631
26,105
35,941
93,995 274,631
1,981 276,612
26,110
(14,859)
1,563 302,637
1,858
37,799
1,981 276,612
927 172,451
—
47,650
927 172,451
925
932 173,376
—
—
— 27,987
—
—
—
—
(646)
—
—
925
—
—
15
40,719
15
40,884
—
12,717
—
18,241
—
—
—
—
—
—
—
5
—
—
—
—
—
—
—
— 12,717
5,524
—
— (14,560)
— (12,038)
—
5,524
— 12,717
— 26,105
(646)
(667)
282
(21)
—
165
(15)
—
(21)
—
—
(15)
12,877
15
15
1,539
1,539
1,539
1,770
1,770
1,858
—
—
—
—
—
—
—
—
(282)
(583)
343
343
343
160
282
47
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5
5
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.
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Consolidated Statement of Cash Flows
For the year ended 30 June 2017
Cash flows from operating activities
Operating profit
Non-underlying items
Underlying operating profit
Adjustments for:
Depreciation
Amortisation and impairment
Loss on disposal of intangible assets
Loss on disposal of tangible assets
Equity settled share-based payment expense
Underlying operating cash flow before changes in working capital
(Increase)/decrease in inventories
Decrease/(increase) in trade and other receivables
Increase in trade and other payables
Cash generated from operating activities before interest, taxation and non-underlying items
Cash outflows in respect of non-underlying items
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
Interest received
Acquisition of subsidiaries (net of cash acquired)
Acquisition of non-controlling interests
Acquisition of investments in associates
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
Own shares purchased
New borrowings
Expenses of raising borrowing facilities
Repayment of borrowings
Dividends paid
Net cash inflow from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at start of period
Exchange differences on cash and cash equivalents
Cash and cash equivalents at end of period
Reconciliation of net cash flow to movement in net (borrowings)/cash
Net increase/(decrease) in cash and cash equivalents
New borrowings
Repayment of borrowings
Expenses of raising borrowing facilities
Acquisition of subsidiary borrowings
Exchange differences on cash and cash equivalents
Retranslation of foreign borrowings
Other non-cash changes
Movement in net borrowings in the period
Net (borrowings)/cash at start of period
Net borrowings at end of period
Stock Code: DPH
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Financial Statements
2017
£000
33,214
48,135
81,349
4,913
1,942
309
212
2,268
90,993
(1,552)
6,360
2,122
97,923
(3,653)
94,270
(4,836)
(12,008)
77,426
32
(34,966)
(583)
(11,013)
(4,221)
(1,258)
(5,266)
(57,275)
930
(646)
25,000
(150)
(5,879)
(17,664)
1,591
21,742
39,142
316
61,200
21,742
(25,000)
5,879
150
—
316
(6,282)
(141)
(3,336)
(116,623)
(119,959)
Restated
2016
£000
19,493
33,364
52,857
3,763
3,890
—
69
2,058
62,637
5,712
(16,393)
8,571
60,527
(4,076)
56,451
(1,393)
(11,483)
43,575
33
(166,173)
(390)
—
(2,802)
(570)
(4,133)
(174,035)
47,697
—
103,841
(360)
(10,572)
(15,292)
125,314
(5,146)
45,948
(1,660)
39,142
(5,146)
(103,841)
10,572
360
(15,027)
(1,660)
(14,308)
(994)
(130,044)
13,421
(116,623)
Note
13
12
7
7
28
27
6
13
12
12
25
26
10
18
29
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Notes to the Consolidated Financial Statements
1. Accounting Policies
Dechra Pharmaceuticals PLC is a public limited company, which is listed on the London Stock Exchange and incorporated and domiciled
in the United Kingdom. The address of its registered office is 24 Cheshire Avenue, Cheshire Business Park, Lostock Gralam, Northwich,
England. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below,these
have been applied consistently in all years presented.
(a) Statement of Compliance
These consolidated financial statements have been prepared and approved by the Directors in accordance with International Financial
Reporting Standards (IFRSs) and IFRS Interpretations Committee (IFRS IC) as adopted by the European Union, and the Companies Act
2006 applicable to companies reporting under IFRS. The Company has elected to prepare its Parent Company financial statements in
accordance with FRS 101 and they are separately presented on pages 160 to 168.
(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 on pages 8 to 61. 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 72 for details.
The consolidated financial statements are presented in Sterling, rounded to the nearest thousand, or rounded to the nearest million in
the commentary to the notes. They are prepared on a going concern basis and under the historical cost convention, except where IFRS
require an alternative treatment. The principal variations relate to derivative financial instruments, cash settled share-based transactions,
contingent consideration and assets and liabilities acquired through business combinations that are stated at fair value.
The preparation of 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.
In the preparation of the financial statements, comparative amounts have been restated to reflect the hindsight adjustments made on
the provisional Putney and Brovel acquisition accounting adjustments. Hindsight adjustments have been made to goodwill, intangibles,
deferred tax, receivables and payables.
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.
(i)
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 or whenever there is an
indication of impairment. 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 14.
(ii) Valuation of Intangible Assets
Product rights, commercial relationships and brand intangibles 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.
Other intangible assets acquired by the Group are stated at cost, which might include future milestone and royalty payments.
The measurement of these reflect management’s best estimate as to future performance, discounted at an appropriate rate.
(iii) Taxation
The Group recognises deferred tax assets and liabilities based upon future taxable income and the expected recoverability of
the balance. The estimate will include assumptions regarding future income streams of the Group and the future movement in
corporation tax rates in the respective jurisdictions. In respect of uncertain tax positions, where an outflow of funds is believed to be
probable and a reliable estimate of the outcome of the dispute can be made, management provides for its best estimate of the liability.
The estimate of liabilities in respect of current taxation depends on estimates and judgements in respect of whether or not,
and the extent to which, items of income and expenditure will be taxable.
(iv) Non-underlying Items
The Group presents a number of non-GAAP measures. This is to allow investors to understand the underlying performance
of the Group, excluding items associated with areas such as acquisition and disposal related expenses and income (including
amortisation and impairment on acquired intangibles, fair value uplift of inventory acquired, and the reversal of fair value and other
movements on deferred and contingent consideration), the profit and related expenses on disposal of discontinued operations,
debt refinancing including any loss on extinguishment of debt, impairment of investments and rationalisations. Judgement is
associated with the classification of these items. The costs incurred in making acquisitions and their integration are deemed to
be non-underlying as they don’t relate to the sales and profit from ongoing trading activities.
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Financial Statements
1. Accounting Policies continued
(v) Business Combinations
Deferred and contingent consideration and assets and liabilities acquired through business combinations are recorded initially at fair
value. Those fair values are based on risk-adjusted future cash flows discounted using appropriate interest rates. The assumptions
relating to future cash flows and discount rates are based on future forecasts and therefore are inherently judgemental.
Adoption of New and Revised Standards
There are no new standards, amendments to standards or interpretations mandatory for the first time for the year ended
30 June 2017, which have had a material impact on the financial statements.
New Standards and Interpretations not yet Adopted
There are a number of new standards and amendments to existing standards currently in issue but not yet effective, including three
significant standards:
•
IFRS 9 ‘Financial Instruments’;
•
IFRS 15 ‘Revenue from contracts with customers’; and
•
IFRS 16 ‘Leases’
IFRS 9 and IFRS 15 are now expected to be effective for the year ended 30 June 2019, with IFRS 16 expected to be effective for the
year ended 30 June 2020. It is not currently practicable to quantify their effect. There are no other new standards, amendments to
existing standards or interpretations that are not yet effective that would be expected to have a material impact on the Group.
(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. Non-controlling
interests represent the portion of shareholders’ earnings and equity attributable to third party shareholders.
The financial statements of all subsidiary undertakings are prepared to the same reporting date as the Company, with the exception of
Genera Pharma d.o.o. and Dechra-Brovel S.A. de C.V. (which both prepare local financial statements to 31 December each year, in line
with local tax authority regulations).
Associates
Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between
20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting. Under the equity
method, the investment is initially recognised at cost, and the carrying amount is increased or decreased to recognise the investor’s share
of the change in net assets of the investee after the date of acquisition. Intangible assets identified as part of the notional purchase price
allocation are amortised over the useful life of each asset, with the Group’s share recognised as a charge in the income statement.
The Group’s share of post-acquisition profit or loss is recognised in the income statement, and its share of post-acquisition movements
in other comprehensive income is recognised in other comprehensive income with a corresponding adjustment to the carrying amount
of the investment. Distributions received from an associate reduce the carrying amount of the investment.
The Group determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired.
If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate
and its carrying value and recognises the amount adjacent to share of profit/(loss) of associates in the income statement.
Gains and losses resulting from upstream and downstream transactions between the Group and its associate are recognised in the
Group’s financial statements only to the extent of unrelated investor’s interests in the associates. Unrealised losses are eliminated unless
the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed
where necessary to ensure consistency with the policies adopted by the Group.
(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 million. 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.
Stock Code: DPH
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Notes to the Consolidated Financial Statements
continued
1. Accounting Policies continued
(iii) Foreign Operations
The income and expenses are translated to Sterling at the average rate for the period being reported. The assets and liabilities of
foreign operations are translated to Sterling at the closing rate at the reporting date. Foreign currency differences on all translations
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 and Liabilities, Derivative Financial Instruments and Hedging Activities
The Group classifies its financial assets into the following categories: held for trading financial assets, available for sale 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 needs
to be impaired.
Held for Trading and Available for Sale Financial Assets
This category has two sub-categories: financial assets held for trading or available for sale 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 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.
Net Investment Hedge
For hedges of net investments in foreign operations, where the hedge is effective movements are recognised in other comprehensive
income. Ineffectiveness is recognised in the income statement. Gains and losses accumulated in equity are included in the income
statement when the foreign operation is partially disposed of or sold.
Trade Receivables
Trade and other receivables are initially recognised at fair value and subsequently stated at amortised cost less appropriate allowances
for amounts which are expected to be non-recoverable. 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. 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 a 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.
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Financial Statements
1. Accounting Policies continued
(f) Property, Plant and Equipment
Owned Assets
Items of property, plant and equipment are stated at cost less accumulated depreciation and impairment losses.
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 to 15 years
4 years
The residual value, where significant, 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 before 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.
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.
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. 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.
Internally generated costs of development are capitalised, once the criteria are met, 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.
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 (including future milestone and royalty payments as applicable)
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 or extends the asset life. All other expenditure is expensed as incurred.
Stock Code: DPH
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Notes to the Consolidated Financial Statements
continued
1. Accounting Policies continued
(g)
Intangible Assets
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 or is otherwise stated below. Goodwill and intangible assets with an indefinite useful life are systematically
tested for impairment at each consolidated statement of financial position date. Intangible assets are amortised from the date that they
are available for use. Assets in the course of construction are not amortised until the date the assets become available for use. The
estimated useful lives are as follows:
• software
• capitalised development costs
• patent rights
• marketing authorisations
• product rights
• commercial relationships
• brand
• acquired capitalised development costs
• pharmacological process
5 to 7 years
5 to 10 years or period of patent
period of patent
indefinite life or period of marketing authorisation
10 to 15 years
7 years
3 to 10 years
10 to 15 years
10 years
The pharmacological process is amortised on a reducing balance method at a rate of 20% over a 10 year life based on the expected
profile of future cash flows.
The amortisation of the intangible assets are classified as an administrative expense because they relate to the right to sell and distribute
the product. Within the acquired intangibles the product rights encompass market authorisations, and the capitalised development
costs encompass product authorisations subject to regulatory approval. The pharmacological process is classified as a research and
development expense as it relates to the process of taking a product through to registration.
(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 determined 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.
(i) 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.
(j)
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.
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Financial Statements
1. Accounting Policies continued
(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 funded
through an insurance contract.
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 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, as
performed by a qualified third party valuation expert.
The fair values of options granted under all other share option schemes have been determined using the Black–Scholes option pricing
model, as performed by a qualified third party valuation expert.
When the options are exercised, the company issues new shares. The proceeds received net of any directly attributable
transaction costs are credited to share capital (nominal value) and share premium.
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.
Bonus and Commission Payments
The Group operates sales incentives schemes for certain employees and third party sales representatives in particular territories. The
related bonuses and commissions are accrued in line with the related sales revenues.
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Notes to the Consolidated Financial Statements
continued
1. Accounting Policies continued
(m) Revenue Recognition
Revenue is recognised in the income statement when goods are supplied to external customers against orders and, title and risk
of loss are passed to the customer. As sales arrangements differ from time to time (for example by customer and by territory), each
arrangement is reviewed to ensure that revenue is recognised when title and risk has passed in full to the customer. This review and the
corresponding recognition of revenue encompasses a number of factors which include, but are not limited to the following:
•
•
reviewing delivery arrangements and whether the buyer has accepted title – we recognise the revenue at the point at which full title
has passed; and/or
where distribution arrangements are in place, recognising when the goods pass to the third party customer (for example by reviewing
insurance arrangements) and recognising revenue at the point at which title has passed.
Rebates, deductions and discounts are provided for in the same period as the related sales are recorded, and are recognised when
reliable estimates can be made of relevant deductions and all relevant obligations have been fulfilled, such that the earnings process is
regarded as being complete. We estimate the quantity and value of goods which may ultimately be returned at the point of sale. Our
return accruals are based on actual experience over the preceding 12 months for established products. For newly launched products,
we use rates based on our experience with similar products or a predetermined percentage.
Revenue from third party manufacturing consists principally of the production of goods to customer specification together with the
provision of technical services. Revenues from third party manufacturing are recognised upon completion of the work order, either the
completion and agreed delivery of the product, or upon full provision of the service.
Revenue represents net invoice value after the deduction of discounts and allowances given and accruals for estimated future rebates
and returns. The methodology and assumptions used to estimate rebates and returns are monitored and adjusted regularly in light of
contractual and legal obligations, historical trends, past experience and projected market conditions. Market conditions are evaluated
using wholesaler and other third party analysis, and internally generated information. Value added tax and other sales taxes are excluded
from revenue.
(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 rate 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) Provisions
Provisions for legal claims, environmental remediation, deferred rent and advanced grants for property, plant and equipment are
recognised when: the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of
resources will be required to settle the obligation; and the amount can be reliably estimated. Provisions are not recognised for future
operating losses.
Where there are a number of similar obligations, the likelihood that an outflow will be required on settlement is determined by
considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any
one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax
rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in
the provision due to passage of time is recognised as interest expense.
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Financial Statements
1. Accounting Policies continued
(r) 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.
In respect of uncertain tax positions, where an outflow of funds is believed to be probable and a reliable estimate of the outcome of the
dispute can be made, management provides for its best estimate of the liability. In calculating any such liability a risk based approach is
applied which takes into account, as appropriate, the probability that the Group would be able to obtain compensatory adjustments
under international tax treaties.
The estimated annual benefit of global intellectual property and innovation incentives is accounted for within current and deferred tax.
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.
(s) 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.
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 IFRSs is given in notes 4 and 5.
2. Operating Segments
The Group has three reportable segments, as discussed below, which are based on information provided to the Board of Directors, which
is deemed to be the Group’s chief operating decision maker. Several operating segments which have similar economic characteristics have
been aggregated into the reporting segments. In undertaking this aggregation the assessment determined that the aggregated segments
have similar products, production processes, customers and overall regulatory environment.
The European Pharmaceuticals Segment comprises Dechra Veterinary Products EU, Apex Laboratories Pty Limited (Apex), Genera and
Dechra Pharmaceuticals Manufacturing. This Segment operates internationally and manufactures and markets Companion Animal, Equine
and Food producing Animal Products. This Segment also includes third party manufacturing and other non-core activities sales. The
Segment expanded during the year with the acquisition of the trade and assets of Apex.
The North American Pharmaceuticals Segment consists of Dechra Veterinary Products US, Putney, Dechra Veterinary Products Canada, and
Dechra-Brovel, which sells Companion Animal, Equine Products and Food producing Animal Products in those territories. The Segment also
includes our manufacturing unit based in Melbourne, Florida.
The Pharmaceuticals Research and Development Segment includes all of the Group’s pharmaceutical research and development activities.
From a Board perspective, this Segment has no revenue income.
Stock Code: DPH
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Notes to the Consolidated Financial Statements
continued
2. Operating Segments continued
Reconciliation of reportable segment revenues, profit or loss and liabilities and other material items:
Revenue by segment
European Pharmaceuticals — total
— total
NA Pharmaceuticals
Operating profit/(loss) by segment
European Pharmaceuticals
NA Pharmaceuticals
Pharmaceuticals Research and Development
Segment operating profit
Corporate and other unallocated costs
Underlying operating profit
Amortisation of acquired intangibles
Impairment of acquired intangibles and associated deferred consideration
Impairment of assets available for sale
Fair value uplift of inventory acquired through business combinations
Rationalisation costs
Expenses relating to acquisition activities
Total operating profit
Finance income
Finance expense
Share of losses in investment accounted for using the equity method
Profit before taxation
Total liabilities by segment
European Pharmaceuticals
NA Pharmaceuticals
Pharmaceuticals Research and Development
Segment liabilities
Corporate loans and revolving credit facility
Corporate accruals and other payables
Current and deferred tax liabilities
Revenue by product category
CAP
Equine
FAP
Diets
Other
Additions to intangible non-current assets by segment (including through business combinations)
European Pharmaceuticals
NA Pharmaceuticals
Pharmaceuticals Research and Development
Corporate and central costs
2017
£000
226,930
132,345
359,275
60,706
43,195
(14,978)
88,923
(7,574)
81,349
(40,444)
—
(602)
(4,225)
(809)
(2,055)
33,214
805
(5,298)
(159)
28,562
(73,738)
(20,165)
(404)
(94,307)
(181,143)
(8,197)
(51,785)
(335,432)
223,826
27,246
47,315
27,457
33,431
359,275
64,502
4,409
1,373
104
70,388
2016
£000
188,859
58,703
247,562
51,653
17,500
(10,355)
58,798
(5,941)
52,857
(20,149)
(1,675)
—
(6,070)
(1,581)
(3,889)
19,493
21
(4,966)
—
14,548
(47,498)
(15,890)
(776)
(64,164)
(155,741)
(6,494)
(52,817)
(279,216)
137,686
20,518
38,101
24,383
26,874
247,562
15,809
161,011
55
2,404
179,279
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2. Operating Segments continued
Additions to Property, Plant and Equipment by segment
(including through business combinations)
European Pharmaceuticals
NA Pharmaceuticals
Pharmaceuticals Research and Development
Corporate and central costs
Depreciation and amortisation by segment
European Pharmaceuticals
NA Pharmaceuticals
Pharmaceuticals Research and Development
Corporate and central costs
The total depreciation and amortisation charge is made up of the following;
Non-underlying
Amortisation — selling, general and administrative expenses
Amortisation — research and development expenditure
Underlying
Amortisation
Depreciation
Financial Statements
2017
£000
2016
£000
10,117
567
82
—
10,766
22,697
23,367
500
735
47,299
29,003
11,441
40,444
1,942
4,913
6,855
19,443
924
36
69
20,472
18,984
5,901
345
85
25,315
20,149
—
20,149
1,403
3,763
5,166
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
— Foreign exchange gains
2017
Non-
current
assets
£000
15,567
2,404
192,461
193,166
49,495
453,093
2017
Revenue
£000
56,317
37,410
113,118
124,128
28,302
359,275
2016
Non-
current
assets
£000
19,624
2,326
162,138
206,364
2,990
393,442
2016
£000
21
—
21
2016
Revenue
£000
54,420
34,105
91,794
53,912
13,331
247,562
2017
£000
204
601
805
Stock Code: DPH
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Notes to the Consolidated Financial Statements
continued
4. Finance Expense
Underlying
Finance expense arising from:
— Financial liabilities at amortised cost
— Net interest on net defined benefit obligations
— Foreign exchange losses
Underlying finance expense
Non-underlying
Loss on extinguishment of debt (note 21)
Fair value and other movements on deferred and contingent consideration
Non-underlying finance expense
Total finance expense
5. Non-underlying Items
Non-underlying items charged to operating profit comprise:
Amortisation of acquired intangibles
— classified within selling, general and administrative expenses
— classified within research and development expenses
Impairment of investments
Impairment of acquired intangibles and associated deferred consideration
Fair value uplift of inventory acquired through business combinations
Rationalisation costs
Expenses relating to acquisition activities
2017
£000
5,016
40
—
5,056
2017
£000
—
242
242
5,298
2017
£000
29,003
11,441
602
—
4,225
809
2,055
48,135
2016
£000
2,372
17
811
3,200
2016
£000
844
922
1,766
4,966
2016
£000
20,149
—
—
1,675
6,070
1,581
3,889
33,364
Amortisation of acquired intangibles reflects the amortisation of the fair values of future cash flows recognised on acquisition in relation to the
identifiable intangible assets acquired.
Impairment of investments relates to the impairment of the investment in Jaguar Animal Heath Inc.
Impairment of acquired intangibles and associated deferred consideration includes the impairment of a US generic pharmaceutical product
following the acquisition of Putney Inc., as Putney have already developed a similar product. It also includes the impairment of an acquired
intangible due to the cessation of sales following a competitor registration in the US.
The fair value uplift of inventory acquired through business combinations is recognised in accordance with IFRS 3 ‘Business Combinations’
to record the inventory acquired at fair value and its subsequent release into the income statement.
Rationalisation costs relate to the integration and restructuring programmes implemented subsequent to acquisitions or the reorganisation of
internal functions.
Expenses relating to acquisition activities includes legal and professional fees incurred during the acquisitions of Apex (£1.6 million) and
Medical Ethics (£0.4 million).
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Financial Statements
6.
Interests in Associate
(a) Losses in Associate
Set out below is the summarised financial information of Medical Ethics Pty Ltd for the period 30 March 2017 to 30 June 2017, which are
accounted for using the equity method. This is not Dechra PLC’s share of the results.
Revenue
Pre-tax loss from continuing operation
Post-tax loss from continuing operations
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Net assets of associate
(b) Interest in Associate
1 July 2016
Additions
Share of underlying loss after tax
Share of amortisation of intangible asset identified on acquisition
30 June 2017
2017
£000
1,631
(65)
(303)
2017
£000
—
5,548
5,548
—
(538)
(538)
5,010
£000
—
11,013
(101)
(58)
10,854
On 30 March 2017 the Group acquired a 33.0% interest in Medical Ethics Pty Ltd for AUD$18.0 million (£11.0 million), which is the holding
company of Animal Ethics Pty Ltd. The company is incorporated in Australia, which is also the principal place of business. The registered
address is c/o Level 3, 649 Bridge Road, Richmond, Victoria 3121, Australia. The company has share capital consisting solely of ordinary
shares, which are directly owned by the group. Medical Ethics Pty Ltd is a private company and there is no quoted market price available
for its shares. There is no contingent liabilities relating to the Group’s interest in the associate. Acquisition related costs (included in operating
expenses) amounted to £0.4 million in the period.
As explained in note 1, the Group has undertaken a provisional notional fair value exercise at the date of acquisition to allocate the cost of
the investment to the individual assets, liabilities and contingent liabilities at their acquisition date fair values. The fair values attributed at the
acquisition date are provisional as the Directors have not yet reached final determination of all aspects of the fair value exercise. The Directors
will finalise the fair values within 12 months of the acquisition date. The Group’s share of the loss arising from its investment in Medical Ethics
Pty Ltd for the period 30 March 2017 to 30 June 2017, includes the effect of amortising the fair value adjustments.
(c) Reconciliation of summarised financial information presented to the carrying amount of its interest in associates
Opening net assets 1 July 2016
Fair value of associate acquired
Post-tax loss from continuing operations
Amortisation of notional intangible asset recognised on acquisition
Interest in associate
Goodwill
Carrying value of investment in associate
2017
£000
—
2,420
(101)
(58)
2,261
8,593
10,854
Stock Code: DPH
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Notes to the Consolidated Financial Statements
continued
7. 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 property, plant and equipment
Loss on disposal of intangible assets
Impairment of intangible assets — underlying
Impairment of intangible assets — non-underlying
Impairment of receivables
Operating lease rentals payable
Research and development expenditure as incurred
Auditors’ remuneration
Analysis of total fees paid to the Auditors’:
Audit of these financial statements
Audit of financial statements of subsidiaries pursuant to legislation
Other services pursuant to legislation
Other assurance services
Total fees paid to Auditors’
8. Employees
The average numbers of staff employed by the Group during the year, which includes Directors, were:
Manufacturing
Distribution
Administration
Total
The costs incurred in respect of these employees were:
Wages and salaries
Social security costs
Other pension costs
Share-based payments charge (see note 28)
Total
Related party transactions — the remuneration of key management was as follows:
Short term employee benefits
Post-employment benefits
Share-based payments charge
2017
£000
147,742
920
2016
£000
104,221
988
4,891
22
42,386
212
309
—
—
426
3,037
14,978
663
232
342
37
52
663
2017
Number
486
109
743
1,338
2017
£000
60,869
8,039
4,384
2,825
76,117
2017
£000
5,108
234
1,656
6,998
3,761
2
21,552
69
—
2,487
1,675
93
2,543
10,355
559
186
317
35
21
559
2016
Number
417
121
770
1,308
2016
£000
44,331
6,748
3,039
2,386
56,504
2016
£000
4,350
251
1,332
5,933
Key management comprises the Board and the Senior Executive Team.
Details of the remuneration, shareholdings, share options, pension contributions and payments for loss of office of the Executive Directors
are included in the Directors’ Remuneration Report on pages 81 to 101.
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 £4,384,000
(2016: £3,039,000). Contributions to defined benefit pension schemes included in the above figures total £670,000 (2016: £581,000).
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9.
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 tax rates
— adjustment in respect of prior years
Total deferred tax expense
Total income tax expense in the Consolidated Income Statement
Financial Statements
2017
£000
4,406
7,846
(942)
11,310
(9,475)
(34)
651
(8,858)
2,452
2016
£000
1,629
7,755
(218)
9,166
(7,116)
(62)
48
(7,130)
2,036
The tax on the Group’s profit before taxation differs from the standard rate of UK corporation tax of 19.75% (2016: 20.0%). The current tax
rate used for the period is 19.75% based on rates already enacted in previous periods. The differences to this rate are explained below:
Profit before taxation
Tax at 19.75% (2016: 20.0%)
Effect of:
— expenses not deductible
— acquisition expenses
— one-off costs (foreign exchange/acquisition costs) in relation to the acquisition of Putney Inc.
— research and development related tax credits
— patent box tax credits
— impact of financing (income not taxable)
— share of results of associate
— effects of overseas tax rates
— adjustment in respect of prior years
— difference between current and deferred tax rates
— change in tax rates
Total income tax expense in the Consolidated Income Statement
2017
£000
28,562
5,641
162
565
—
(57)
(2,086)
(741)
31
(745)
(291)
7
(34)
2,452
2016
£000
14,548
2,910
235
167
1,314
(231)
(1,118)
(405)
—
(608)
(170)
4
(62)
2,036
Recurring items in the tax reconciliation include: research and development related tax credits and patent box incentives; expenses not
deductible; share of results of associate; and the impact of financing. The effective tax rate is 8.6% (excluding non-underlying items the
effective tax rate is 21.9%).
Tax Credit/(Charge) Recognised Directly in Equity
Corporation tax on foreign currency translation
Deferred tax on employee benefit obligations
Tax recognised in Consolidated Statement of Comprehensive Income
Corporation tax on equity settled transactions
Deferred tax on equity settled transactions
Total tax recognised in Equity
2017
£000
—
(535)
(535)
758
78
836
2016
£000
1,234
385
1,619
1,366
112
1,478
The Government has announced in the Finance Act 2016 that it intends to reduce the rate of corporation tax to 17% with effective from
1 April 2020, this was substantively enacted in September 2016. The Finance Act 2015 (No. 2) which was substantively enacted in October
2015 included provisions to reduce the rate of corporation tax to 19% with effect from April 2017. Deferred tax has been calculated using
these rates based on the timing of when each individual deferred tax balance is expected to reverse in the future. To the extent that more
deferred tax reverses after 1 April 2020 than expected then the impact will be a greater reduction on the net deferred tax liability.
The Group’s future tax charge, and its effective tax rate could be affected by several factors including the impact of the implementation
of the OECD’s Base Erosion and Profit Shifting (‘BEPS’) actions.
Stock Code: DPH
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Notes to the Consolidated Financial Statements
continued
10. Dividends
Final dividend paid in respect of prior year but not recognised as a liability in that year:
12.91 pence per share (2016: 11.82 pence per share)
Interim dividend paid: 6.11 pence per share (2016: 5.55 pence per share)
Total dividend 19.02 pence per share (2016: 17.37 pence per share) recognised as distributions
to equity holders in the period
Proposed final dividend for the year ended 30 June 2017: 15.33 pence per share
(2016: 12.91 pence per share)
Total dividend paid and proposed for the year ended 30 June 2017: 21.44 pence per share
(2016: 18.46 pence per share)
2017
£000
11,979
5,685
2016
£000
10,401
4,891
17,664
15,292
14,288
11,974
19,973
16,865
In accordance with IAS 10 ‘Events After the Balance Sheet Date’, the proposed final dividend for the year ended 30 June 2017 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
2018. There are no income tax consequences. The final dividend for the year ended 30 June 2016 is shown as a deduction from equity in
the year ended 30 June 2017.
11. Earnings per Share
Earnings per ordinary share has 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*
— Basic
Diluted earnings per share
— Underlying*
— Diluted
The calculations of basic and diluted earnings per share are based upon:
Earnings for underlying basic and underlying diluted earnings per share
Earnings for basic and diluted earnings per share
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
2017
Pence
64.68
28.09
64.33
27.93
2017
£000
60,132
26,110
2016
Pence
42.95
14.00
42.65
13.90
2016
£000
38,390
12,512
Number
92,962,967
516,032
93,478,999
Number
89,380,414
628,307
90,008,721
* Underlying measures exclude non-underlying items as defined in the Consolidated Income Statement on page 115.
At 30 June 2017, there are 294,848 options that are excluded from the EPS calculations as they are not dilutive for the period presented but
may become dilutive in the future.
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12. Intangible Assets
Goodwill
£000
Software
£000
Development
costs
£000
Patent
rights
£000
Marketing
authorisations
£000
Acquired
intangibles
£000
Cost
At 1 July 2015
Additions
Acquisitions through business
combinations
Impairment
Foreign exchange adjustments
At 30 June 2016 and
1 July 2016 (restated)
Additions
Acquisitions through business
combinations
Disposals
Foreign exchange adjustments
At 30 June 2017
Accumulated Amortisation
At 1 July 2015
Charge for the year
Impairment
Foreign exchange adjustments
At 30 June 2016 and
1 July 2016 (restated)
Charge for the year
Disposals
Foreign exchange adjustments
At 30 June 2017
Net book value
At 30 June 2017
At 30 June 2016 (restated)
49,326
—
52,323
—
11,530
113,179
—
9,906
—
5,049
128,134
—
—
—
—
—
—
—
—
—
128,134
113,179
5,663
2,796
108
(151)
752
9,168
3,237
78
(100)
349
12,732
2,226
202
(151)
264
2,541
375
(96)
102
2,922
9,810
6,627
10,640
570
—
(1,537)
592
10,265
1,258
—
(317)
488
11,694
5,298
796
(1,319)
354
5,129
984
—
31
6,144
5,550
5,136
3,680
1,337
—
—
—
5,017
299
—
—
—
5,316
2,138
405
—
—
2,543
583
—
—
3,126
2,190
2,474
Software assets in the course of construction included above
Financial Statements
Total
£000
255,776
4,703
174,576
(5,965)
49,573
478,663
39,081
31,307
(417)
19,554
568,188
89,092
21,552
(1,803)
14,564
123,405
42,386
(108)
6,243
171,926
853
—
—
—
—
853
104
—
—
—
957
—
—
—
—
—
—
—
—
—
185,614
—
122,145
(4,277)
36,699
340,181
34,183
21,323
—
13,668
409,355
79,430
20,149
(333)
13,946
113,192
40,444
(12)
6,110
159,734
957
853
249,621
226,989
396,262
355,258
2017
£000
9,403
2016
£000
1,451
The 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 2017 was £0.3 million with a remaining
amortisation period of 1.5 years. The rights to Equidone, which was launched in the US during 2011, has a carrying value of £0.4 million
with a remaining amortisation period of 4 years. The in-licensed products within EU and Canada acquired in 2016 had a carrying value of
£0.7 million and £0.4 million respectively, with remaining amortisation periods of 3.5 years and 8.5 years respectively. During the year,
£0.3 million was added to patent rights for new in-licenced products within EU, with a remaining amortisation period of 4.5 years.
£0.8 million of the marketing authorisations relate to the Vetivex range of products. Ownership of the marketing authorisations rests with
the Group in perpetuity. There are not believed to be any legal, regulatory or contractual provisions that limit their useful lives. Vetivex is an
established range of products which are relatively simple in nature and there are a limited number of players in the market. Accordingly, the
Directors believe that it is appropriate that the marketing authorisations are treated as having indefinite lives for accounting purposes.
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 14.
Stock Code: DPH
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Notes to the Consolidated Financial Statements
continued
12. 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 2015
Acquired through business combinations
Impairment
Foreign exchange adjustments
At 30 June 2016 and 1 July 2016
(restated)
Additions
Acquisitions through business
combinations
Foreign exchange adjustments
At 30 June 2017
Accumulated Amortisation
At 1 July 2015
Charge for the year
Impairment
Foreign exchange adjustments
At 30 June 2016 and 1 July 2016
(restated)
Charge for the year
Disposals
Foreign exchange adjustments
At 30 June 2017
Net book value
At 30 June 2017
At 30 June 2016 (restated)
Commercial
relationships
£000
Pharmacological
process
£000
—
1,370
—
192
1,562
—
—
126
1,688
—
188
—
19
207
358
(12)
20
573
1,115
1,355
—
45,464
—
3,371
48,835
—
—
1,712
50,547
—
759
—
55
814
11,441
—
(172)
12,083
38,464
48,021
Capitalised
development
costs
£000
20,719
63,765
—
8,597
93,081
—
17,956
3,462
114,499
6,009
3,367
—
1,297
10,673
9,102
—
643
20,418
94,081
82,408
Brand
£000
—
11,546
—
886
12,432
—
374
441
13,247
—
309
—
24
333
1,984
—
(23)
2,294
10,953
12,099
Product
rights
£000
164,895
—
(4,277)
23,653
184,271
34,183
2,993
7,927
229,374
73,421
15,526
(333)
12,551
101,165
17,559
—
5,642
124,366
105,008
83,106
Total
£000
185,614
122,145
(4,277)
36,699
340,181
34,183
21,323
13,668
409,355
79,430
20,149
(333)
13,946
113,192
40,444
(12)
6,110
159,734
249,621
226,989
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Financial Statements
12. Intangible Assets continued
The table below provides further detail on the acquired intangibles and their remaining amortisation period.
Significant assets
Intangible assets arising from the acquisition
of VetXX Holding A/S
Intangible assets arising from the acquisition of Dermapet Product, marketing and
Description
Product, marketing and
distribution rights
distribution rights
Carrying value
£’000
4,855
Sub-Total
carrying value
£’000
4,855
Remaining
amortisation
period
½ year
26,183
26,183
8 ½ years
Intangible assets arising from the acquisition of Genetrix Product, marketing and
1,912
1,912
3 ½ years
Intangible assets arising from the acquisition of Eurovet
Intangible assets arising from the acquisition of
PSPC Inc
Intangible asset acquired from Pharmaderm
Animal Health
HY-50 intangible asset acquired from Bexinc Limited
Intangible assets arising from the acquisition of Genera
Intangible assets arising from the acquisition of Putney
distribution rights
Technology, product, marketing
and distribution rights
Product, marketing and
distribution rights
Marketing and distribution rights
Marketing and distribution rights
Product, brand, technology,
marketing and distribution rights
Product, brand, technology,
pharmacological process,
marketing and distribution rights
Intangible asset arising from the acquisition of Apex
Product and technology
Intangible asset relating to Animal Ethics
Intangible assets relating to a US dental licensing
agreement
Marketing and distribution rights
Marketing and distribution rights
41,585
41,585
5 years
4,517
4,517
7 years
838
2,344
1,286
470
8,572
10,178
38,478
56,146
16,342
3,003
29,079
3,832
838
5 years
2,344
4 ½ years
5 ½ years
8 ½ years
13 ½ years
10,328 Genera – total
9 years
9 years
11 years
104,802 Putney – total
16 years
13 years
Apex - total
10 years
10 years
19,345
29,079
3,833
249,621
Stock Code: DPH
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Notes to the Consolidated Financial Statements
continued
13. Property, Plant and Equipment
Freehold
land and
buildings
£000
Short
leasehold
buildings
£000
Motor
vehicles
£000
Plant and
fixtures
£000
Cost
At 1 July 2015
Additions
Acquired through business combinations
Disposals
Foreign exchange adjustments
At 30 June 2016 and 1 July 2016
Additions
Acquired through business combinations
Disposals
Foreign exchange adjustments
At 30 June 2017
Accumulated Depreciation
At 1 July 2015
Charge for the year
Disposals
Foreign exchange adjustments
At 30 June 2016 and 1 July 2016
Charge for the year
Disposals
Foreign exchange adjustments
At 30 June 2017
Net book value
At 30 June 2017
At 30 June 2016
Net book value of assets held under finance leases
At 30 June 2017
At 30 June 2016
Contracted capital commitments
Assets in the course of construction included above
17,536
142
11,554
(98)
4,421
33,555
148
3,400
(10)
2,131
39,224
8,314
1,007
(98)
1,453
10,676
625
(8)
779
12,072
27,152
22,879
—
—
4,128
167
51
(7)
15
4,354
15
—
—
6
4,375
2,146
308
(7)
8
2,455
316
—
(2)
2,769
1,606
1,899
—
43
125
2
215
(67)
(19)
256
56
96
(9)
21
420
106
42
—
(29)
119
62
(10)
7
178
242
137
—
—
18,436
2,491
5,850
(202)
2,516
29,091
4,002
3,049
(919)
1,186
36,409
12,837
2,406
(200)
1,245
16,288
3,910
(708)
722
20,212
16,197
12,803
—
—
2017
£000
4,160
303
Total
£000
40,225
2,802
17,670
(374)
6,933
67,256
4,221
6,545
(938)
3,344
80,428
23,403
3,763
(305)
2,677
29,538
4,913
(726)
1,506
35,231
45,197
37,718
—
43
2016
£000
112
269
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Financial Statements
14. Impairment Reviews
Goodwill and indefinite life assets are tested for impairment annually, or more frequently if there are indications that amounts might be
impaired. The impairment tests involve 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. In the Group’s case, the recoverable amount is based on the value in use
calculations.
Acquired intangible assets that are being amortised are reviewed for indicators of impairment annually, and in the event that impairment
indicators exist, a full value in use calculation is performed. Despite the current year sales growth, given the previous sales decline of our
FAP products, the impairment indicator assessment for FAP assets was given particular attention. A review was performed to ensure that
the individual products capitalised are reflective of the sales growth in the period and that no impairment indicators exist. No impairment
was recognised on these assets.
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.
The cash flow forecasts are derived as follows:
• The latest available Board-approved business plan for the first two years;
• The business plan is extrapolated by applying a growth rate of between 0% and 3% (2016: 3%) per annum in years three and four; and
• Thereafter, a terminal value is calculated based on year four cash flows, and assuming a long term growth rate of 0% (2016: 0%).
The projections covered a period of four years as we believe this to be the most appropriate timescale over which to review and consider
annual performances before applying a fixed terminal value.
Value in use calculations were performed at 30 June 2017 for the following assets:
Cash generating unit
Dechra Veterinary Products EU
Dechra Veterinary Products NA
Dechra Pharmaceuticals Manufacturing — Skipton
Cash generating unit
Dechra Veterinary Products EU
Dechra Veterinary Products NA
Dechra Pharmaceuticals Manufacturing — Skipton
2017
Indefinite
life assets
carrying value
£000
957
—
—
957
2016
Indefinite
life assets
carrying value
£000
853
—
—
853
Goodwill
carrying
value
£000
72,307
53,596
2,231
128,134
Goodwill
carrying
value
(restated)
£000
54,510
56,438
2,231
113,179
Total
value
£000
73,264
53,596
2,231
129,091
Total
value
£000
55,363
56,438
2,231
114,032
Pre-tax
discount
rate
%
11.7
14.5
13.2
Pre-tax
discount
rate
%
12.3
13.5
11.1
Key Assumptions
The key assumptions implicit in the impairment review are those regarding the Board-approved business plan, medium and long term growth
rates and the discount rate.
The Board-approved business plan incorporates a number of key input assumptions, most notably regarding market growth expectations,
the competitive and legislative environments, lifecycle management, selling prices, product margins and direct costs. The assumptions
applied in the business plan are based on past experience and the Group’s expectation of future market changes and, where applicable,
are consistent with external sources of information.
The medium and long term growth rates of 2-3% and 0% respectively reflect a cautious estimate of expected future growth in the Group’s
markets, are no higher than those implicit in the Group’s strategic planning process, and do not exceed the long term growth rates in the
countries in which each CGU operates.
The pre-tax discount rates have been estimated using a market participant rate, which is adjusted after consideration of market information,
and risk adjusted dependent upon the specific circumstances of each asset or cash generating unit.
Sensitivity Analysis
We have performed sensitivity analyses around the key assumptions and have concluded that no reasonable changes in key assumptions
would cause the recoverable amount to be less than the carrying value. An increase in the pre-tax discount rate of 10% and a reduction in
the growth rate to nil would still not result in the requirement for an impairment provision.
Stock Code: DPH
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Notes to the Consolidated Financial Statements
continued
15. Deferred Taxes
(a) Recognised Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are attributable to the following:
Intangible assets
Property, plant and equipment
Inventories
Receivables/payables
Share-based payments
Losses
R&D tax credits
Employee benefit obligations
Assets
Liabilities
Net
2017
£000
—
—
831
3,488
1,581
8,414
1,289
992
16,595
Restated
2016
£000
—
—
—
1,555
1,370
14,042
793
1,175
18,935
2017
£000
(61,316)
(3,772)
—
—
—
—
—
—
(65,088)
Restated
2016
£000
(63,711)
(3,604)
(74)
—
—
—
—
—
(67,389)
2017
£000
(61,316)
(3,772)
831
3,488
1,581
8,414
1,289
992
(48,493)
Restated
2016
£000
(63,711)
(3,604)
(74)
1,555
1,370
14,042
793
1,175
(48,454)
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 gross temporary differences associated with investments in subsidiaries for which deferred tax liabilities have
not been recognised is £1,478,000 (2016: £nil). The estimated unprovided deferred tax liability in relation to these temporary differences
is £74,000 (2016: £nil).
Deferred tax assets in relation to losses amounting to £1.1 million (2016: £1.0 million) have not been recognised due to uncertainty over their
recoverability. Included within unrecognised losses are £1.1 million of losses which expire prior to 2030. Other losses may be carried forward
indefinitely.
(c) Movements during the Year
Intangible assets
Property, plant and equipment
Inventories
Receivables/payables
Share-based payments
Losses
R&D tax credits
Employee benefit obligations
Intangible assets
Property, plant and equipment
Inventories
Receivables/payables
Share-based payments
Losses
R&D tax credits
Employee benefit obligations
Acquired
through
business
combinations
(restated)
£000
(44,715)
(1,289)
(2,873)
247
—
12,797
585
251
(34,997)
Recognised
in income
£000
3,824
(127)
2,698
689
48
197
13
(212)
7,130
Recognised
in equity
£000
Foreign
exchange
adjustments
£000
—
—
—
—
112
—
—
385
497
(5,585)
(382)
(64)
139
—
949
66
84
(4,793)
Balance at
30 June
2016
(restated)
£000
(63,711)
(3,604)
(74)
1,555
1,370
14,042
793
1,175
(48,454)
Acquired
through
business
combinations
£000
Recognised
in income
£000
Recognised
in equity/OCI
£000
Foreign
exchange
adjustments
£000
Balance at
30 June
2017
£000
11,135
(101)
1,273
1,873
133
(6,226)
479
292
8,858
(6,397)
—
(286)
—
—
—
—
—
(6,683)
—
—
—
—
78
—
—
(535)
(457)
(2,343)
(67)
(82)
60
—
598
17
60
(1,757)
(61,316)
(3,772)
831
3,488
1,581
8,414
1,289
992
(48,493)
Balance at
1 July
2015
£000
(17,235)
(1,806)
165
480
1,210
99
129
667
(16,291)
Balance at
1 July 2016
(restated)
£000
(63,711)
(3,604)
(74)
1,555
1,370
14,042
793
1,175
(48,454)
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Financial Statements
15. Deferred Taxes continued
Deferred tax assets and liabilities are analysed in the statement of financial position, after offset of balances within countries as follows:
Deferred tax asset:
Deferred tax liability:
16. Inventories
Raw materials and consumables
Work in progress
Finished goods and goods for resale
2017
£000
780
(49,273)
(48,493)
2017
£000
15,572
3,898
37,037
56,507
Restated
2016
£000
466
(48,920)
(48,454)
2016
£000
13,375
4,378
36,622
54,375
Included in finished goods and goods for resale is £nil (2016: £5,188,000) of inventory held at net realisable value having been acquired
through business combinations.
17. Trade and Other Receivables
Trade receivables
Other receivables
Available for sale financial assets (note 24)
Prepayments and accrued income
18. Cash and Cash Equivalents
Cash at bank and in hand
19. Trade and Other Payables
Trade payables
Other payables
Derivative financial instruments
Other taxation and social security
Accruals and deferred income
20. Current Tax Liabilities
Corporation tax payable
2017
£000
59,679
5,501
—
2,089
67,269
2017
£000
61,200
2017
£000
21,433
18,713
—
4,797
16,366
61,309
2017
£000
2,512
Restated
2016
£000
59,232
8,084
129
1,424
68,869
2016
£000
39,142
Restated
2016
£000
24,326
17,210
50
5,147
13,213
59,946
2016
£000
3,897
Stock Code: DPH
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Notes to the Consolidated Financial Statements
continued
21. Borrowings
Current liabilities:
Bank loans
Finance lease obligations
Non-current liabilities:
Bank loans
Finance lease obligations
Arrangement fees netted off
Total borrowings
2017
£000
965
8
973
180,529
8
(351)
180,186
181,159
2016
£000
1,648
24
1,672
154,435
—
(342)
154,093
155,765
In October 2016, the Group increased its existing facility from £150.0 million plus an accordion of £30.0 million to a multi-currency revolving
credit facility of £205.0 million with no accordion until September 2019. During the year £25.0 million was drawn from this revised facility.
This facility is not secured on any specific assets of the Group but is supported by a joint and several cross-guarantee structure. Interest will
be charged at 1.8% over LIBOR. All covenants were met during the year ended 30 June 2017. This facility has since been refinanced post
year-end, refer to Note 35.
At 30 June 2016, it was noted that the £1.6 million of the facility exceeded the £150.0 million limit due to exchange rate movements, as
such, this was disclosed within the current portion of borrowing.
Genera also has borrowing facilities of £7.4 million, of which £4.7 million was drawn down at 30 June 2017. Interest is fixed at 3.2%.
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
2017
£000
965
1,158
179,371
181,494
2016
£000
1,648
—
154,435
156,083
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
Further information on the interest profile of borrowings is shown in note 24.
Minimum lease
payments
Present value of
minimum lease
payments
2017
£000
8
7
1
16
1
17
2016
£000
24
—
—
24
2
26
2017
£000
8
7
1
16
1
17
2016
£000
24
—
—
24
2
26
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Financial Statements
22. Provisions
At start of period
Provision recognised
Provision utilised
Foreign exchange differences
At end of period
Deferred Rent
£’000
(559)
—
37
(20)
(542)
Provision for
PPE grant
£’000
(2,603)
—
514
(178)
(2,267)
Environmental
Health & Safety
£’000
(172)
(300)
118
(17)
(371)
Total
£’000
(3,334)
(300)
669
(215)
(3,180)
The Group has received advanced payment for rental income on its facilities in Portland. This has been recognised at amortised cost and is
being utilised over the period of the rental contract.
Genera has received advanced funding for the refurbishment of the manufacturing facility for a third party manufacturing contract. The
funding has been recognised at amortised cost and is being utilised over the life of the property, plant and equipment.
On the acquisition of Genera, the Group acquired a fair value provision to address existing legal and environmental compliance. A provision
is recognised at the present value of the costs to be incurred for the remediation of the manufacturing site.
23. 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 £182,000 (2016: £187,000) for
employees in the Netherlands are recognised within other payables in the Consolidated Statement of Financial Position as at 30 June 2017.
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
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
2017
2.10%
1.80%
2.30%
0.80%
0.00%
0.00%
2016
1.50%
1.80%
2.30%
1.00%
0.00%
0.00%
In valuing the liabilities of the pension scheme at 30 June 2017 and 30 June 2016, mortality assumptions have been made as indicated
below.
The mortality assumption follows the Prognosetafel AG2016 (2016: Prognosetafel AG2014) mortality tables with an experience adjustment
in line with the ES-P2 tables as published by the Dutch Alliance of Insurers.
Assumed life expectations on retirement age
Retiring today (age 67)
Retiring in 20 years (age 47)
Male
19.6
21.9
Female
21.8
24.2
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
2017
£000
(17,907)
14,898
(3,009)
2016
£000
(17,360)
13,639
(3,721)
Stock Code: DPH
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Notes to the Consolidated Financial Statements
continued
23. Employee Benefit Obligations continued
Movements in Present Value of Defined Benefit Obligations
Defined benefit obligation at beginning of the period
Service cost
Interest cost
Employee contributions
Benefits paid
Remeasurements:
— (Gain)/loss from change in financial assumptions
— Loss from change in demographic assumptions
— Experience losses
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
Interest income
Additional charges
Employer contributions
Employee contributions
Benefits paid
Remeasurements:
— Premium adjustment
— Return on plan assets
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
Net interest cost
Additional charges
Net pension expense
Cumulative Analysis of the Amount Charged to the Other Statement of Consolidated Income
Amounts charged in previous periods
Actuarial (gain)/loss on defined benefit pension scheme
Net pension expense
2017
£000
17,360
1,644
269
206
(20)
(3,429)
122
658
1,097
17,907
2017
£000
13,639
230
(136)
670
206
(20)
483
(1,058)
884
14,898
2017
£000
1,644
39
136
1,819
2017
£000
2,570
(2,074)
496
2016
£000
7,210
867
211
171
(6)
4,814
—
2,034
2,059
17,360
2016
£000
5,899
194
(124)
581
171
(6)
62
5,235
1,627
13,639
2016
£000
867
17
124
1,008
2016
£000
1,019
1,551
2,570
144
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Financial Statements
23. Employee Benefit Obligations continued
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:
Total fair value of assets
Actual return on scheme assets
Discount rate used to value assets
2017
£000
14,898
230
2.10%
2016
£000
13,639
194
1.50%
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 £680,069 (2016: £630,000).
History of Amounts in the Current Period
Present value of funded defined benefit obligations
Fair value of scheme assets
Deficit in the scheme
2017
£000
(17,907)
14,898
(3,009)
2016
£000
(17,360)
13,639
(3,721)
2015
£000
(7,210)
5,899
(1,311)
2014
£000
(5,927)
4,857
(1,070)
2013
£000
(4,722)
3,726
(996)
The sensitivity of the defined benefit obligation to change in the weighted principal assumptions is:
Discount rate
Salary growth rate
Inflation rate
Life expectancy
Change in
assumption
0.25%
0.25%
0.25%
Impact on defined benefit obligation
Increase in assumption Decrease in assumption
Increase by 7.4%
Decrease by 0.7%
Decrease by 0.3%
Decrease by 1 year
in assumption
Decrease by 2.7%
Decrease by 6.8%
Increase by 0.7%
Increase by 0.2%
Increase by 1 year
in assumption
Increase by 2.7%
The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this
is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit
obligation to significant actuarial assumptions the same method has been applied as when calculating the pension liability recognised within
the statement of financial position.
Stock Code: DPH
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Notes to the Consolidated Financial Statements
continued
24. 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.
The Board of Directors has approved a policy which governs all treasury activities.
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. Hedges of net investments in foreign operations are also used in the
management of foreign currency risk.
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 2017, net borrowing was £120.0 million
(2016: net borrowing was £116.6 million), whilst shareholders’ equity was £302.6 million (2016: £276.6 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 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. There were no changes in the Group’s approach to capital
management during the year.
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 interest cover, and net debt to underlying EBITDA. The
Group complied with these covenants in 2017 and 2016.
Operating cash flow is used to fund investment in the development of new products as well as to make the routine outflows of capital
expenditure, tax, dividends and repayment of maturing debt.
The Group’s policy is to maintain borrowing facilities centrally which are then used to finance the Group’s operating subsidiaries, either by way
of equity investments or loans.
Financial Risk Management
The Group has exposure to the following risks from its use of financial instruments:
•
liquidity risk
• market risk
• credit risk
This note presents information about the Group’s exposure to each of the above risks, and the Group’s objectives, policies and processes for
measuring and managing risk.
Liquidity Risk
Liquidity risk is the risk that the Group will not have sufficient funds to meet liabilities as they fall due. Cash flows and covenants of the Group
are monitored 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:
• £205.0 million multi-currency revolving credit facility;
• £4.7 million bank loans; and
• various finance leases.
The Group’s revised borrowing facilities at 30 June 2017 are detailed in note 21. Refer to note 35 for events after the reporting period for
changes in the facility.
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Financial Statements
24. Financial Instruments and Related Disclosures continued
Market Risk
Market risk is the risk that changes in market prices, such as foreign exchange rates or interest rates, will affect the Group’s income or the
value of its holding of financial instruments.
Interest Rate Risk Management
The majority of the Group’s borrowings bear interest at floating rates linked to base rate or LIBOR and are consequently exposed to cash
flow interest rate risk.
The Group has hedged interest rate risk on a proportion of its 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 1.8% on the revolving credit facility. The amount of the revolving credit
outstanding at 30 June 2017 was £176.8 million at the year end exchange rates (2016: £151.6 million).
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. During the previous year the Group designated
a US dollar loan of $120.0 million, as a net investment hedge of US dollar net assets.
Credit Risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual
obligations.
The Group considers its maximum credit risk to be £65.2 million (2016: £67.4 million), which is the total carrying value of the Group’s financial
assets excluding cash and cash equivalents.
Cash is only deposited with highly rated banks in line with our treasury policy.
The Group offers trade credit to customers in the normal course of business. Trade and bank references are obtained prior to extending credit.
Our principal customers are pharmaceutical wholesalers and distributors. The failure of a large wholesaler could have a material adverse
impact on the Group’s financial results.
The largest customer of the Group sits within the NA Pharmaceuticals segment and accounted for approximately 15.4% of gross trade
receivables at 30 June 2017 (2016: 11.8%). This customer accounted for 18.5% (2016: 14.5%) of total Group revenues. One other customers
accounted for more than 10% of total Group revenues (2016: none).
Receivables are written off 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 2017 and
30 June 2016. The following assumptions were used to estimate the fair values:
• Cash and cash equivalents — approximated to the carrying amount.
• Forward exchange contracts — based on market price and exchange rates at the balance sheet date.
• Available for sale financial instruments — based on the market rates at year end.
• Derivatives (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 — approximated to the carrying amount.
• Bank loans and overdrafts — based upon discounted cash flows using discount rates based upon facility rates renegotiated at the
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.
Stock Code: DPH
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Notes to the Consolidated Financial Statements
continued
24. 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
Available for sale financial instruments
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
2017
2016
Carrying
value
£000
61,200
61,200
—
59,679
5,501
65,180
126,380
Fair
value
£000
61,200
61,200
—
59,679
5,501
65,180
126,380
Carrying
value
£000
39,142
39,142
129
59,232
8,084
67,445
106,587
Fair
value
£000
39,142
39,142
129
59,232
8,084
67,445
106,587
(181,494)
(181,494)
(155,741)
(155,741)
—
(16)
(21,433)
(18,713)
(34,990)
(256,646)
(130,266)
—
(16)
(21,433)
(18,713)
(34,990)
(256,646)
(130,266)
(50)
(24)
(24,326)
(17,210)
(3,633)
(200,984)
(94,397)
(50)
(24)
(24,326)
(17,210)
(3,633)
(200,984)
(94,397)
In March 2015, the Group made an investment of US$1 million in Jaguar Animal Health Inc. (Jaguar) to potentially gain access to the EU
marketing rights for a companion animal product. At 30 June 2017, the Company holds 178,571 shares in Jaguar following its IPO. The
Company also holds 89,286 warrants, which are valid for three years. The shares and warrants have been fully impaired during the period.
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Financial Statements
24. Financial Instruments and Related Disclosures continued
Fair Value Hierarchy
The table below analyses the Group’s financial instruments carried at fair value, by valuation method. Where possible, quoted prices in active
markets are used (Level 1). Where such prices are not available, the asset or liability is classified as Level 2, provided all significant inputs to
the valuation model used are based on observable market data. If one or more of the significant inputs to the valuation model is not based on
observable market data, the instrument is classified as Level 3. There were no transfers between Level 1 and Level 2 during the year.
30 June 2017
Available for sale financial instruments
Derivative financial liabilities
Deferred and contingent consideration for business combinations
Total
30 June 2016
Available for sale financial instruments
Derivative financial liabilities
Deferred and contingent consideration for business combinations
Total
Level 1
£000
—
—
—
—
Level 1
£000
129
—
—
129
Level 2
£000
—
—
—
—
Level 2
£000
—
(50)
—
(50)
Level 3
£000
—
—
(34,990)
(34,990)
Level 3
£000
—
—
(3,633)
(3,633)
Total
£000
—
—
(34,990)
(34,990)
Total
£000
129
(50)
(3,633)
(3,554)
Deferred and contingent consideration is recorded at fair value based on risk-adjusted future cash flows discounted using appropriate
interest rates, which are reviewed annually. The inputs relating to future cash flows will include cash flows relating to the relevant contractual
arrangements. There would be no material effect on the amounts stated from any reasonably probable change in such inputs at 30 June
2017. Refer to note 4 for amounts recognised in the Consolidated Income Statement in the year.
At 30 June 2017, the deferred and contingent consideration balance is made up of £0.5 million in relation to the Brovel acquisition,
£3.0 million in relation to the Phycox acquisition, £3.6 million in relation to the Kane licensing agreement and £27.9 million in relation to the
Animal Ethics licensing agreement. Movements in deferred and contingent consideration consist of: £0.8 million decrease due to foreign
exchange differences, £28.8 million and £3.7 million in relation to the acquisition of the Medical Ethics Pty Ltd and Kane Biotech Inc licensing
agreements respectively; payments of £0.7 million and £0.3 million of unwinding of discount.
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 recognised
Acquired through business combinations
Foreign exchange differences
Impairment provision utilised
At end of period
2017
£000
2,829
625
221
624
4,299
2017
£000
2,836
426
—
224
(315)
3,171
2016
£000
3,524
1,844
259
200
5,827
2016
£000
263
93
2,327
291
(138)
2,836
Stock Code: DPH
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Notes to the Consolidated Financial Statements
continued
24. Financial Instruments and Related Disclosures continued
Liquidity Risk — Contracted Cash Flows of Financial Liabilities
The following table shows the cash flow commitments of the Group in respect of financial liabilities at 30 June 2017 and 30 June 2016.
Where interest is at floating rates, the future interest payments have been estimated using current interest rates:
Bank loans
and
overdrafts
£000
Finance
leases
£000
Trade and
other
payables
£000
At 30 June 2017
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
At 30 June 2016
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
(34,990)
—
(26,777)
(61,767)
(843)
(843)
(3,349)
(6,984)
(6,398)
(3,341)
(40,009)
(61,767)
Deferred and
contingent
consideration
£000
(3,633)
—
(1,273)
(4,906)
(234)
(234)
(789)
(961)
(541)
(570)
(1,577)
(4,906)
(181,494)
351
(411)
(181,554)
(639)
(546)
(1,258)
(177,733)
(1,184)
(194)
—
(181,554)
Bank loans
and
overdrafts
£000
(156,083)
342
(632)
(156,373)
(632)
—
—
—
(155,741)
—
—
(156,373)
(16)
—
(1)
(17)
(5)
(4)
(7)
(1)
—
—
—
(17)
Finance
leases
£000
(24)
—
(2)
(26)
(5)
(5)
(8)
(7)
(1)
—
—
(26)
The contractual undiscounted cash flows in respect of derivative financial instruments are as follows:
Due:
Within 6 months
Total
£000
(256,646)
351
(27,189)
(283,484)
(39,948)
(3,078)
(4,614)
(184,718)
(7,582)
(3,535)
(40,009)
(283,484)
Total
£000
(201,276)
342
(1,907)
(202,841)
(42,407)
(239)
(797)
(968)
(156,283)
(570)
(1,577)
(202,841)
2016
£000
50
50
(40,146)
—
—
(40,146)
(38,461)
(1,685)
—
—
—
—
—
(40,146)
Trade and
other
payables
£000
(41,536)
—
—
(41,536)
(41,536)
—
—
—
—
—
—
(41,536)
2017
£000
—
—
The Group has a contractual obligation to pay £nil (2016: £50,000), as its interest rate swap arrangement ended on 31 October 2016.
There are no other assets (2016: none) that have been impaired during the year.
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Financial Statements
24. Financial Instruments and Related Disclosures continued
Foreign Currency Exposure
The Sterling equivalents of financial assets and liabilities denominated in foreign currencies at 30 June 2017 and 30 June 2016 were:
At 30 June 2017
Financial assets
Trade receivables
Other receivables
Cash balances
Financial liabilities
Bank loans and overdrafts
Trade payables
Other payables
Finance lease
Net balance sheet exposure
At 30 June 2016
Financial assets
Trade receivables
Other receivables
Cash balances
Financial liabilities
Bank loans and overdrafts
Trade payables
Other payables
Derivatives
Net balance sheet exposure
Danish
Krone
£000
918
—
—
918
(12,957)
(29)
—
—
(12,986)
(12,068)
Danish
Krone
£000
—
—
—
—
(15,167)
(2)
—
—
(15,169)
(15,169)
Euro
£000
7,626
77
—
7,703
(7,911)
(6,963)
(515)
(16)
(15,405)
(7,702)
Euro
£000
4,057
—
—
4,057
(31,688)
(4,513)
(790)
(25)
(37,016)
(32,959)
US
Dollar
£000
1,102
—
5,759
6,861
(127,144)
(1,081)
—
—
(128,225)
(121,364)
US
Dollar
£000
1,402
51
495
1,948
(122,838)
(698)
(16)
(25)
(123,577)
(121,629)
Other
£000
395
—
5,725
6,120
—
(42)
(357)
—
(399)
5,721
Other
£000
851
49
6,422
7,322
—
(133)
(705)
—
(838)
6,484
Sensitivity Analysis
Interest Rate Risk
A 2.0% increase in annual interest rates compared to those ruling at 30 June 2017 would reduce Group profit before taxation and equity by
£3,620,000 (2016: £3,120,000).
Foreign Currency Risk
The Group has significant cash flows and net financial assets and liabilities in Danish Krone, US Dollar and Euro. The Group does not hedge
either economic exposure or the translation exposure arising from the profits of non-Sterling businesses. The Group is hedging certain foreign
currency translations through the designation of a US dollar loan as a net investment hedge of US dollar net assets.
The following table shows the impact on the Group’s profit after taxation of a 10% appreciation of Sterling against each of these currencies
compared to the rates prevailing at the year end date. In this analysis, only financial assets and liabilities held on the balances sheet at the
year end are assessed and are only considered sensitive to foreign exchange rates where they are not in the functional currency of the entity
that holds them. There is no impact on other equity reserves.
Danish Krone
US Dollar
Euro
Stock Code: DPH
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Profit after
taxation
£000
(943)
(602)
(9,479)
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Notes to the Consolidated Financial Statements
continued
24. Financial Instruments and Related Disclosures continued
The sensitivities above represent the Directors’ view of reasonably possible changes in each risk variable, not worst case scenarios or stress
tests. The outputs from the sensitivity analysis are estimates of the impact of the effect of changes in market risks assuming that the specified
changes occur at the year end and are applied to the risk exposures at that date. Accordingly, they show the impact on profitability and the
balance sheet from such movements.
Actual results in the future may differ materially from these estimates due to commercial actions taken to mitigate any potential losses from
such rate movements, to the interaction of more than one sensitivity occurring and to further developments in global financial markets. As
such, this table should not be considered as a projection of likely future gains and losses.
25. Share Capital
Allotted, called up and fully paid at start of year
New shares issued
Allotted, called up and fully paid at end of year
Ordinary shares of 1p each
2017
£000
927
5
932
Number
92,746,998
431,758
93,178,756
2016
£000
880
47
927
Number
87,971,163
4,775,835
92,746,998
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, 431,758 new ordinary shares of 1p (2016: 377,235 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
£931,342 (2016: £742,988). 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.
26. Own Shares
At start of the period
Recycled to profit and loss account
Purchase of own shares
At end of period
2017
£000
21
—
646
667
2016
£000
303
(282)
—
21
The own shares reserve represents the cost of shares in Dechra Pharmaceuticals PLC purchased in the market and held by the Group’s
Employee Benefit Trust to satisfy options under the Group’s share options schemes (see note 28 for details). The number of ordinary shares
held by the Employee Benefit Trust at 30 June 2017 was 42,066 (2016: 2,880).
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Financial Statements
27. Non-Controlling Interests
Following the acquisition of Genera in October 2015, the following non-controlling interest has been recorded in the Group financial
statements;
At start of period
Acquired through business combinations
Additional consideration paid to non-controlling interests
Profit/(loss) for the period
Foreign exchange differences
At end of period
2017
£’000
1,981
—
(583)
5
160
1,563
2016
£’000
—
2,248
(390)
(156)
279
1,981
On 8 November 2016, the Group purchased 0.12% of the voting shares for a consideration of HRK 344,000 (£0.04 million). On 5 December
2016, the Group purchased another 1.62% of the voting shares for a consideration of HRK 4,810,000 (£0.54 million). The Group now holds
95.13% of the equity share capital of Genera.
28. 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
Vesting is dependent on two performance conditions 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 annual earnings per share
targets. Each of the TSR and EPS elements is subject to an additional ROCE underpin. Unless the Company’s ROCE is 10% or more in the
final year of the performance period, the award will lapse in full.
SAYE Option Scheme
This scheme is open to all UK employees. Participants save a fixed amount of up to £500 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.
Stock Code: DPH
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Notes to the Consolidated Financial Statements
continued
28. Share-based Payments continued
Year ended 30 June 2017
Exercise
Period
Unapproved Share Option Scheme
2 April 2008†*
10 October 2008†*
30 March 2009†*
1 March 2010†*
28 February 2011†*
10 September 2012†
16 September 2013
5 March 2014
11 September 2014
15 September 2015
18 March 2016
19 September 2016
2011–2018
2011–2018
2012–2019
2013–2020
2014–2021
2015–2022
2016–2023
2017–2024
2017–2024
2018-2025
2019-2026
2019-2026
Approved Share Option Scheme
2 April 2008†*
1 March 2010†*
28 February 2011†*
10 September 2012†
16 September 2013
11 September 2014
15 September 2015
18 March 2016
19 September 2016
Long Term Incentive Plan
27 November 2013
15 September 2014
15 September 2015
22 March 2016
19 September 2016
10 October 2016
7 March 2017
SAYE Option Scheme
12 October 2009*
13 December 2010*
17 October 2011*
16 October 2012
7 April 2014
13 October 2014
12 October 2015
13 October 2016
Total
Weighted average exercise price*
2011–2018
2013–2020
2014–2021
2015–2022
2016–2023
2017–2024
2018-2025
2019-2026
2019-2026
2016–2017
2017–2018
2018–2019
2019–2019
2019–2020
2019–2020
2018–2019
2012–2016
2013–2017
2014–2018
2015–2019
2017–2019
2017–2023
2018–2024
2019–2025
Exercise
price
per share
Pence
336.15
364.63
381.15
418.81
461.97
541.00
721.00
698.00
763.00
975.00
1118.00
1369.00
336.15
418.81
461.95
541.00
721.00
763.00
975.00
1118.00
1369.00
—
—
—
—
—
—
—
304.92
375.64
365.54
471.00
552.00
614.00
792.00
1095.00
At
1 July
2016
Number
6,649
5,444
10,886
4,354
8,164
31,000
47,628
2,000
57,713
55,060
950
—
229,848
3,612
5,360
44
500
11,158
12,087
18,940
5,050
—
56,751
267,070
266,158
220,621
8,786
—
—
—
762,635
3,418
7,064
6,326
7,576
95,043
106,577
92,162
—
318,166
1,367,400
300.46p
Exercised
Number
Granted
Number
Lapsed
Number
(3,383)
(2,722)
(2,177)
(2,177)
(4,943)
(5,000)
(29,863)
(2,000)
(9,104)
(1,911)
—
—
(63,280)
(2,524)
(4,894)
—
(500)
(7,909)
—
—
—
—
(15,827)
(257,052)
(7,046)
(5,170)
—
—
—
—
(269,268)
(3,418)
(2,431)
(6,326)
—
(69,726)
(1,482)
—
—
(83,383)
(431,758)
215.71p
—
—
—
—
—
—
—
—
—
—
—
96,798
96,798
—
—
—
—
—
—
—
—
9,202
9,202
—
—
—
—
149,463
5,319
42,066
196,848
—
—
—
—
—
—
—
52,877
52,877
355,725
570.71p
—
—
—
—
—
—
—
—
(4,600)
(5,089)
—
(7,946)
(17,635)
—
—
—
—
—
(1,096)
(5,500)
—
(54)
(6,650)
(10,018)
(63,854)
(59,617)
—
—
—
—
(133,489)
—
(91)
—
—
(2,934)
(4,966)
(9,358)
(3,448)
(20,797)
(178,571)
232.47p
At
30 June
2017
Number
3,266
2,722
8,709
2,177
3,221
26,000
17,765
—
44,009
48,060
950
88,852
245,731
1,088
466
44
—
3,249
10,991
13,440
5,050
9,148
43,476
—
195,258
155,834
8,786
149,463
5,319
42,066
556,726
—
4,542
—
7,576
22,383
100,129
82,804
49,429
266,863
1,112,796
430.64p
* 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 2017 are 68,707.
154
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Exercised
Number
Granted
Number
Lapsed
Number
28. Share-based Payments continued
Year ended 30 June 2016
Exercise
Period
Unapproved Share Option Scheme
2 April 2008†*
10 October 2008†*
30 March 2009†*
1 March 2010†*
28 February 2011†*
10 September 2012
16 September 2013
5 March 2014
11 September 2014
15 September 2015
18 March 2016
2011–2018
2011–2018
2012–2019
2013–2020
2014–2021
2015–2022
2016–2023
2017–2024
2017–2024
2018–2025
2019–2026
Approved Share Option Scheme
19 March 2007†*
2 April 2008†*
1 March 2010†*
28 February 2011†*
10 September 2012
16 September 2013
11 September 2014
15 September 2015
18 March 2016
Long Term Incentive Plan
5 March 2013
27 September 2013†
27 November 2013
15 September 2014
15 September 2015
22 March 2016
SAYE Option Scheme
13 October 2008*
12 October 2009*
13 December 2010*
17 October 2011*
16 October 2012
7 April 2014
13 October 2014
12 October 2015
Total
Weighted average exercise price*
2010–2017
2011–2018
2013–2020
2014–2021
2015–2022
2016–2023
2017–2024
2018–2025
2019-2026
2016–2016
2014–2015
2016–2017
2017–2018
2018–2019
2019-2026
2011–2015
2012–2017
2013–2016
2014–2018
2015–2019
2017–2019
2017–2023
2018-2024
Exercise
price
per share
Pence
336.15
364.62
381.15
418.81
461.97
541.00
721.00
698.00
763.00
975.00
1188.00
265.43
336.15
418.81
461.97
541.00
721.00
763.00
975.00
1188.00
—
—
—
—
—
—
315.02
304.92
375.64
365.54
471.00
552.00
614.00
792.00
At
1 July
2015
Number
9,915
11,976
20,683
14,143
18,461
63,244
47,842
2,000
60,817
—
—
249,081
7,620
9,766
5,360
5,545
10,756
15,158
15,183
—
—
69,388
226,168
41,739
276,012
275,332
—
—
819,251
5,306
3,418
16,379
6,825
59,599
102,257
120,502
—
314,286
1,452,006
244.39p
(3,266)
(6,532)
(7,620)
(7,612)
(8,120)
(30,244)
—
—
(721)
—
—
(64,115)
(7,620)
(6,154)
—
(5,501)
(10,256)
(2,123)
(415)
—
—
(32,069)
(210,112)
(38,859)
(4,113)
—
—
—
(253,084)
(5,306)
—
(8,830)
—
(50,686)
(905)
(1,091)
—
(66,818)
(416,086)
178.56p
—
—
—
—
—
—
—
—
—
55,060
950
56,010
—
—
—
—
—
—
—
18,940
5,050
23,990
—
—
—
—
220,621
8,786
229,407
—
—
—
—
—
—
—
101,513
101,513
410,920
387.56p
Financial Statements
At
30 June
2016
Number
6,649
5,444
10,886
4,354
8,164
31,000
47,628
2,000
57,713
55,060
950
229,848
—
3,612
5,360
44
500
11,158
12,087
18,940
5,050
56,751
—
—
267,070
266,158
220,621
8,786
762,635
—
3,418
7,064
6,326
7,576
95,043
106,577
92,162
318,166
1,367,400
—
—
(2,177)
(2,177)
(2,177)
(2,000)
(214)
—
(2,383)
—
—
(11,128)
—
—
—
—
—
(1,877)
(2,681)
—
—
(4,558)
(16,056)
(2,880)
(4,829)
(9,174)
—
—
(32,939)
—
—
(485)
(499)
(1,337)
(6,309)
(12,834)
(9,351)
(30,815)
(79,440)
364.60p
300.46p
* 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 2016 were 76,013.
The weighted average exercise price of options eligible to be exercised at 30 June 2017 was 470.86p (2016: 453.67p). For options exercised
during the year, the weighted average market price at the date of exercise was 1,415p (2016: 1,206p). The weighted average remaining
contractual lives of options outstanding at the Consolidated Statement of Financial Position date was four years (2016: four years).
Outstanding options on all Long Term Incentive Plan, Approved and Unapproved plans prior to 30 June 2014 were exercisable at
30 June 2017. No options issued under SAYE plans were exercisable at 30 June 2017 (2016: nil).
Stock Code: DPH
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Notes to the Consolidated Financial Statements
continued
28. Share-based Payments continued
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
07/03/17
21,033
1652p
Nil
2 years
0.12%
22%
1.54%
1500p
07/03/17
21,033
1652p
Nil
1 year
0.12%
22%
1.54%
1500p
10/10/16
5,319
1389p
Nil
3 years
0.12%
22%
1.54%
1108p
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
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
Risk-free rate
— three year scheme
— five year scheme
Volatility
— three year scheme
— five year scheme
Dividend yield
Fair value per share
— three year scheme
— five year scheme
19/9/16
149,463
1379p
Nil
3 years
0.12%
22%
1.54%
1108p
19/9/16
106,000
1379p
1369p
6.5 years
0.47%
26%
1.54%
305p
22/03/16
8,786
1200p
Nil
3 years
0.46%
22%
1.61%
1021p
18/03/16
6,000
1185p
1188p
6.5 years
1.02%
26%
1.62%
273p
13/10/16
52,877
1370p
1095p
15/09/15
220,621
990p
Nil
3 years
0.68%
22%
0.54%
764p
15/09/15
74,000
990p
975p
6.5 years
1.47%
27%
0.54%
284p
12/10/15
101,513
930p
792p
3.25 years
5.25 years
3.25 years
5.25 years
0.22%
0.44%
22%
24%
1.51%
302p
346p
0.83%
1.17%
22%
26%
0.53%
215p
283p
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 2017 of £968,000 (2016: £842,000), of which £78,000 (2016: £65,000) related to vested options. The
total charge to the Consolidated Income Statement in respect of share-based payments was:
Equity settled share-based transactions
Cash settled share-based transactions
The above charge to the Consolidated Income Statement is included within administrative expenses.
2017
£000
2,268
557
2,825
2016
£000
2,058
328
2,386
156
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29. Analysis of Net Borrowings
Bank loans
Finance leases and hire purchase contracts
Cash and cash equivalents
Net borrowings
30. Operating Leases
Financial Statements
2017
£000
(181,143)
(16)
61,200
(119,959)
2016
£000
(155,741)
(24)
39,142
(116,623)
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
2017
£000
1,009
2,573
1,620
5,202
2016
£000
986
2,619
1,536
5,141
2017
£000
2,282
4,006
1,143
7,431
2016
£000
1,978
3,142
1,517
6,637
2017
£000
3,291
6,579
2,763
12,633
2016
£000
2,964
5,761
3,053
11,778
The Group leases properties, plant, machinery and vehicles for operational purposes. Property leases vary in length up to a period of 20
years. Plant, machinery and vehicle leases typically run for periods of up to five years.
31. Foreign Exchange Rates
The following exchange rates have been used in the translation of the results of foreign operations:
Danish Krone
Euro
US Dollar
32. Acquisitions
Average rate
for 2016
10.0162
1.3432
1.4870
Closing rate
at 30 June
2016
9.0010
1.2099
1.3433
Average rate
for 2017
8.6901
1.1681
1.2735
Closing rate
at 30 June
2017
8.4571
1.1372
1.2978
Acquisition of Apex
On 14 October 2016, Dechra acquired certain trade and assets of Apex Laboratories Pty Ltd, a veterinary pharmaceuticals company based
in New South Wales, Australia. The Group paid £34.2 million (AUD$ 55.0 million) consideration in cash on a debt free, cash free basis.
Recognised amounts of identifiable assets acquired and liabilities assumed
Identifiable assets
Property, plant and equipment
Software
Inventories
Trade and other receivables
Trade and other payables
Non-current liabilities
Identifiable intangible assets
Net deferred tax liability
Net identifiable assets
Goodwill
Total consideration
Satisfied by:
Cash
Total consideration transferred
Net cash outflow arising on acquisition
Cash consideration
Fair value
£000
6,545
78
2,120
1,575
(462)
(171)
21,323
(6,683)
24,325
9,906
34,231
34,231
34,231
34,231
34,231
The fair values shown above are provisional and may be amended if information not currently available comes to light. The provisional
fair value adjustments principally relate to harmonisation with Group IFRS accounting policies, including the application of fair values on
acquisition, principally being the recognition of fair value uplift on acquired inventory and intangibles in accordance with IFRS 3.
Stock Code: DPH
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Notes to the Consolidated Financial Statements
continued
32. Acquisitions continued
The goodwill of £9.9 million arising from the acquisition consists of technical expertise of the assembled workforce, access to the
Australasian and Asia Pacific regions to continue geographical expansion, and future sales expected to be achieved through the registration
of Dechra products in these countries. None of the goodwill is expected to be deductible for income tax purposes.
Acquisition related costs (included in operating expenses) amounted to £1.6 million. Apex’s results are reported within the EU Pharmaceuticals
Segment. Apex contributed £7.1 million revenue and £1.1 million to the Group’s pre-tax profit for the period between the date of acquisition and
the balance sheet date. If the acquisition of Apex had been completed on the first date of the financial year, the contribution to Group revenues
for the period would have been £9.9 million and the Group pre-tax profit would have been £2.1 million.
Prior Year Acquisitions
In the prior year the Group acquired Putney and Brovel. The fair values of the assets and liabilities acquired have been reconsidered as part of
the hindsight period.
In relation to Putney, there was a reduction in provisions of £0.4 million to true-up the position at acquisition. Intangible assets were reduced
by £0.8 million to reflect an agreement that at the point of acquisition was not required due to the existence of other supplier relationships.
Hindsight adjustments have also been made in respect of deferred tax assets on losses (£2.9 million), inventory (£0.2 million), R&D credits
(£0.6 million), intangibles (£0.3 million) and receivables (£0.3 million).
In relation to Brovel, there was a reduction in receivables (£0.1 million) and an increase in payables of £0.1 million following a true-up of the
final working capital position. A deferred tax asset of £0.3 million has been recognised following a detailed assessment of the recoverability
of these assets.
Following the acquisition of Genera in October 2015, the disclosure of the final fair values of the assets and liabilities acquired have been
included in the financial statements for the year ended 30 June 2016.
Acquisition of Brovel
The revised fair values of the acquired assets and liabilities on the acquisition of Brovel are detailed below:
Recognised amounts of identifiable assets acquired and liabilities assumed
Identifiable assets
Property, plant and equipment
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Net deferred tax asset
Net identifiable assets
Goodwill
Total consideration
Satisfied by:
Cash
Contingent consideration arrangement
Total consideration transferred
Net cash outflow arising on acquisition
Cash consideration
Less cash and cash equivalents acquired
Fair value
£000
243
1,152
346
202
(465)
120
1,598
2,466
4,064
3,473
591
4,064
3,473
(202)
3,271
158
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32. Acquisitions continued
Acquisition of Putney
The revised fair values of the acquired assets and liabilities on the acquisition of Putney are detailed below:
Recognised amounts of identifiable assets acquired and liabilities assumed
Identifiable assets
Property, plant and equipment
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Provisions
Debt
Identifiable intangible assets
Net deferred tax liability
Net identifiable assets
Goodwill
Total consideration
Satisfied by:
Cash
Total consideration transferred
Net cash outflow arising on acquisition
Cash consideration
Less cash and cash equivalents acquired
Financial Statements
Fair value
£000
466
14,037
5,699
1,541
(7,160)
(546)
(6,299)
112,580
(31,517)
88,801
45,391
134,192
134,192
134,192
134,192
(1,541)
132,651
33. Related Party Transactions
Subsidiaries
The Group’s ultimate Parent Company is Dechra Pharmaceuticals PLC. A listing of subsidiaries is shown within the financial statements of the
Company on pages 167 to 168.
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 81 to 101. The remuneration of key management is disclosed in note 8.
Non-Controlling Interests
Refer to note 27 for transactions with non-controlling interests during the year.
34. Off Balance Sheet Arrangements
The Group has no off balance sheet arrangements to disclose as required by S410A of the Companies Act 2006.
35. Events after the Reporting Period
On 25 July 2017, the Group signed a new Credit agreement refinancing its previous £205.0 million Revolving Credit Facility (RCF). The new
committed facilities are a new five year multi-currency RCF with two one year extension options for £235.0 million through seven banks:
HSBC, BNP Paribas, Fifth Third, Santander, Lloyds, Bank of Ireland and Raiffeisen. The RCF has an Accordion facility of a further £125.0
million.
There are two covenants governing the RCF:
•
•
Leverage: Net Debt to underlying EBITDA not greater than 3:1
Interest cover: underlying EBITDA to Net Finance Charges not less than 4:1
There is a non-utilisation fee of 35.0% of the applicable margin. The margin over LIBOR (or equivalent) ranges from 1.3% for gearing below
1 time, up to 2.2% for gearing above 2.5 times.
Following the refinancing, the existing capitalised arrangement fees of £0.4 million will be accelerated to the income statement.
Stock Code: DPH
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Company Statement of Financial Position
At 30 June 2017
Non-current assets
Investments
Intangible assets
Tangible assets
Current assets
Trade and other receivables (includes amounts falling due after more than one year of £1,362,000
(2016: £1,351,000))
Cash at bank and in hand
Borrowings
Trade and other payables
Net current liabilities
Total assets less current liabilities
Non-current liabilities
Borrowings
Net assets
Equity
Called up share capital
Share premium account
Foreign currency translation reserve
Hedging reserve
At 1 July
Profit/(loss) for the year attributable to the owners
Other changes in retained earnings
Retained earnings
Total equity shareholders’ funds
Note
iv
v
vi
vii
ix
viii
ix
xi
2017
£000
447,489
7,715
122
455,326
15,129
—
15,129
(11,334)
(66,073)
(62,278)
393,048
2016
£000
413,199
5,726
197
419,122
18,617
—
18,617
(32,133)
(34,745)
(48,261)
370,861
(151,793)
241,255
(128,163)
242,698
932
173,376
545
—
68,790
11,829
(14,217)
66,402
241,255
927
172,451
545
(15)
86,768
(5,772)
(12,206)
68,790
242,698
The financial statements were approved by the Board of Directors on 4 September 2017 and are signed on its behalf by:
Ian Page
Chief Executive Officer
4 September 2017
Richard Cotton
Chief Financial Officer
4 September 2017
Company number: 3369634
160
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Company Statement of Changes in
Shareholders’ Equity
For the year ended 30 June 2017
Financial Statements
Attributable to owners of the parent
Called up
share
capital
£000
880
—
—
—
—
—
—
—
47
47
927
927
—
—
—
—
—
—
5
Share
premium
account
£000
124,801
—
—
—
—
—
—
—
47,650
47,650
172,451
172,451
—
—
—
—
—
—
925
5
932
925
173,376
Foreign
currency
translation
reserve
£000
Hedging
reserve
£000
Retained
earnings
£000
Total
shareholders’
funds
£000
(91)
—
(154)
—
230
76
—
—
—
—
(15)
(15)
—
15
—
15
—
—
—
15
—
545
—
86,768
(5,772)
212,903
(5,772)
—
—
—
—
—
—
—
—
545
545
—
—
—
—
—
—
—
—
545
—
(450)
—
(6,222)
(15,292)
3,536
—
(11,756)
68,790
68,790
11,829
(154)
(450)
230
(6,146)
(15,292)
3,536
47,697
35,941
242,698
242,698
11,829
—
15
343
12,172
(17,664)
3,104
—
(14,560)
66,402
343
12,187
(17,664)
3,104
930
(13,630)
241,255
Year ended 30 June 2016
At 1 July 2015
Loss for the period
Effective portion of changes in fair value of
cash flow hedges, net of tax
Losses arising available for sale financial
assets
Cash flow hedges recycled to income
statement, net of tax
Total comprehensive expense
Transactions with owners
Dividends paid
Share-based payments
Shares issued
Total contributions by and distributions to
owners
At 30 June 2016
Year ended 30 June 2017
At 1 July 2016
Profit for the period
Cash flow hedges recycled to income
statement, net of tax
Recycle of losses on available for sale financial
assets
Total comprehensive income
Transactions with owners
Dividends paid
Share-based payment charge
Shares issued
Total contributions by and distributions to
owners
At 30 June 2017
Stock Code: DPH
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Notes to the Company Financial Statements
(i) Principal Accounting Policies of the Company
Accounting Principles
The Company Statement of Financial Position has been prepared on a going concern basis, under the historical cost convention, in
accordance with applicable UK accounting standards and the Companies Act 2006. The principle accounting policies applied in the
preparation of these financial statements are set out below, and have been applied consistently.
Basis of Preparation
No income statement 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 £11,829,000 (2016: loss £5,772,000).
The following exemptions have been taken in preparing the financial statements;
(a) Exemption for fair value as deemed cost
The Company has elected to measure certain items of property, plant and equipment at fair value at the date of transition and has
used those values as the deemed cost at that date.
(b) Exemption for borrowing costs
The Company has elected to apply the requirements of IAS 23 only with effect from 1 July 2014. Borrowing costs incurred on or
after 1 July 2014 are accounted for in accordance with IAS 23, that is borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset, being one that takes a substantial amount of time to get ready for its intended use, are
capitalised as part of the cost of the asset.
(c) Business combinations
Paragraphs 62, B64(d), B64(e), B64(g), B64(h), B64(j) to B64(m), B64(n)(ii), B64(o)(ii), B64(p), B64(q)(ii), B66 and B67 of IFRS 3
‘Business Combinations’ as the equivalent disclosures are included in the consolidated financial statements of the Group.
(d) Share-based payments
Paragraphs 45(b) and 46 to 52 of IFRS 2, ‘Share-based payment’ (details of the number and weighted-average exercise prices of
share options, and how the fair value of goods and services received was determined).
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 year end 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 income statement.
The fair value of interest rate swaps is the estimated amount that the Company would receive or pay to terminate the instrument at the
statement of financial position date. The fair value of forward exchange contracts and options is their quoted market price at the year end
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 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 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 101 not to present a cash flow statement
as part of its financial statements.
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Financial Statements
(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 101 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 8 and 33 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 other
than distributions in the period (see note 10 of the Consolidated Financial Statements).
Employee Benefits
(a) Pensions
The Company operates a Group stakeholder personal pension scheme for certain employees. Obligations for contributions are
recognised as an expense in the income statement as incurred.
(b) 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 income statement with
a corresponding movement in equity. The fair value is measured at grant date and spread over the period during which the employees
become unconditionally entitled to the shares or options (the vesting period). The fair value of the shares or options granted is measured
using a valuation model, taking into account the terms and conditions upon which the shares or options were granted. The amount
recognised as an expense in the income statement is adjusted to take into account an estimate of the number of shares or options that
are expected to vest together with an adjustment to reflect the number of shares or options that actually do vest except where forfeiture
is only due to market-based conditions not being achieved.
The fair values of grants under the Long Term Incentive Plan have been determined using the Monte Carlo simulation model. The fair
values of options granted under all other share option schemes have been determined using the Black–Scholes option pricing model.
National Insurance contributions payable by the Company on the intrinsic value of share-based payments at the date of exercise are
treated as cash settled awards and revalued to market price at each statement of financial position date.
Where the Company grants options over its own shares to the employees of its subsidiaries, it recharges the expense to those
subsidiaries.
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 income
statement.
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 IAS 12 ’Income Taxes’.
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.
Stock Code: DPH
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Notes to the Company Financial Statements
continued
(ii) Directors and Employees
Total emoluments of Directors (including pension contributions) amounted to £4,936,000 (2016: £4,911,000). Information relating to
Directors’ emoluments, share options and pension entitlements is set out in the Directors’ Remuneration Report on pages 81 to 101. Tony
Griffin’s remuneration is paid by Dechra Veterinary Products EU in Euros but reported in Sterling for the purposes of these figures. The
exchange rate used was 1.1681 (2016: 1.3432).
Administration
Total
The costs incurred in respect of these employees were:
Wages and salaries
Social security costs
Other pension costs
Share-based payments charge (see note 28)
Total
Related party transactions — the remuneration of key management was as follows:
Short term employee benefits
Post-employment benefits
Share-based payments charge
2017
Number
31
31
2016
Number
24
24
2017
£000
4,273
579
161
2,825
7,838
2017
£000
3,666
179
1,368
5,213
2016
£000
3,063
457
126
2,386
6,032
2016
£000
2,984
168
1,095
4,247
Key management comprises the Board and the Senior Executive Team.
The Group operates a stakeholder personal pension scheme for certain employees and contributed between 4% and 14% of pensionable
salaries. Total pension contributions amounted to £161,000 (2016: £126,000).
(iii) Profit/(loss) Before Taxation
The following items have been included in arriving at profit/(loss) before taxation of continuing operations:
Depreciation of property, plant and equipment
— owned assets
Amortisation of intangible assets
Operating lease rentals payable
Auditor’s remuneration — audit of these financial statements
(iv) Investments
Cost
At 1 July 2016
Additions
At 30 June 2017
Impairment
At 30 June 2016
Charge for the period
At 30 June 2017
Net book value
At 30 June 2017
At 30 June 2016
2017
£000
79
612
142
22
2016
£000
74
524
119
22
Shares in
subsidiary
undertakings
£000
425,443
34,290
459,733
12,244
—
12,244
447,489
413,199
A list of subsidiary undertakings is given in note (xii). During the year, the Company invested in Dechra Investments Limited and Dechra
Finance Ireland DAC, both wholly owned subsidiaries.
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(v)
Intangible Assets
Cost
At 1 July 2016
Additions
At 30 June 2017
Accumulated Amortisation
At 30 June 2016
Charge for the year
At 30 June 2017
Net book value
At 30 June 2017
At 30 June 2016
Software assets in the course of construction included above
(vi) Tangible Assets
Cost
At 1 July 2016
Additions
At 30 June 2017
Accumulated Depreciation
At 1 July 2016
Charge for the year
At 30 June 2017
Net book value
At 30 June 2017
At 30 June 2016
(vii) Trade and Other Receivables
Amounts owed by subsidiary undertakings
Group relief receivable
Deferred taxation (see note (x))
Available for sale financial assets
Other receivables
Prepayments and accrued income
Financial Statements
Acquired
Intangibles
£000
Software
£000
Total Intangible
assets
£000
5,114
—
5,114
2,259
512
2,771
2,343
2,855
2,883
2,601
5,484
12
100
112
5,372
2,871
2017
£000
4,728
7,997
2,601
10,598
2,271
612
2,883
7,715
5,726
2016
£000
2,494
Tangible assets
£000
394
4
398
197
79
276
122
197
2016
£000
11,853
4,726
1,351
129
476
82
18,617
2017
£000
10,067
3,230
1,362
—
336
134
15,129
Included in debtors are amounts of £1,362,000 (2016: £1,351,000) 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 (2016: £nil).
In March 2015, the Group made an investment of US$1.0 million in Jaguar Animal Health Inc. (Jaguar) to potentially gain access to the EU
marketing rights for their companion animal products. At 30 June 2017, the Company holds 178,571 shares in Jaguar following its IPO.
The Company also holds 89,286 warrants, which are valid for three years. During the year this investment has been impaired.
Stock Code: DPH
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Notes to the Company Financial Statements
continued
(viii) Trade and Other Payables
Amounts due to subsidiary undertakings
Derivative financial instruments
Current tax liabilities
Other taxation and social security
Accruals and deferred income
2017
£000
61,536
—
272
175
4,090
66,073
2016
£000
30,631
50
—
132
3,932
34,745
In accordance with IAS 10 ‘Events after the Balance Sheet Date’, the proposed final dividend for the year ended 30 June 2017 of 15.33
pence per share (2016: 12.91 pence per share) has not been accrued for in these financial statements. It will be shown in the financial
statements for the year ending 30 June 2017. The total cost of the proposed final dividend is £14,288,000 (2016: £11,974,000).
(ix) Borrowings
Borrowings due within one year
Bank overdraft
Borrowings due after more than one year
Aggregate bank loan instalments repayable:
— between two and five years
Arrangement fees netted off
Total borrowings
2017
£000
2016
£000
11,334
32,133
152,144
(351)
151,793
163,127
128,505
(342)
128,163
160,296
In October 2016, the Group increased its existing facility from £150.0 million plus an accordion of £30 million to a multi-currency revolving
credit facility of £205.0 million with no accordion until September 2019. During the year £25.0 million was drawn from this revised facility.
On 25 July 2017, the Company refinanced this facility. Refer to note 21 and 35 of the Consolidated Financial Statements for further details.
No interest has been capitalised during the year (2016: £nil).
The Company guarantees certain borrowings of other Group companies, which at 30 June 2017 amounted to £nil (2016: £nil).
(x) Deferred Tax
At 1 July 2016 (included in trade and other receivables)
Additions to the income statement
Additions to statement of changes in equity
At 30 June 2017 (included in trade and other receivables)
The amounts provided for deferred taxation at 18% (2016: 19%) are as follows:
Short term timing differences
Accelerated capital allowances
(xi) Called up Share Capital
Issued share capital
Allotted, called up and fully paid at 1 July 2016
New shares issued
Allotted, called up and fully paid at 30 June 2017
£000
1,351
(109)
120
1,362
2016
£000
1,453
(102)
1,351
2017
£000
1,593
(231)
1,362
Ordinary shares
of 1p each
£000
927
5
932
Number
92,746,998
431,758
93,178,756
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 notes 25 and 28 to the Consolidated Financial Statements.
Share Options
Details of outstanding share options over ordinary shares of 1p at 30 June 2017 under the various Group share option schemes are shown in
note 28 to the Consolidated Financial Statements.
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Financial Statements
(xii) Subsidiary Undertakings
Operating subsidiaries
Name
Country of
Incorporation
Albrecht GmbH
Germany
Principal Activity
Registered Address
Shareholder
Marketer of veterinary pharmaceuticals
and distributor of veterinary
pharmaceuticals and equipment
Hauptstr. 6-8, Aulendorf, Germany
Eurovet Animal Health B.V.
Apex Laboratories Pty
Limited
Australia
Developer, regulatory, manufacturer and
marketer of veterinary pharmaceuticals
2 Cal Close, Somersby NSW 2250,
Australia
The Netherlands
Activities of financial services holding
company
Pettelaarpark 38, 5216PD
‘s-Hertogenbosch, Netherlands
Dechra Holding Australia
Pty Limited
Dechra Finance Limited
Cooperatieve Dechra
Finance Netherlands
W.A.
Dechra Development
LLC
Dechra Limited
USA
Contract regulatory and product
development services for the Group
Principal Place of Business: 7015 College
Blvd, Suite 510, Overland Park KS 66211,
United States*
Dechra Holdings US Inc
England and
Wales
Developer, regulatory, product
development, manufacturer and
marketer of veterinary pharmaceuticals
24 Cheshire Avenue, Cheshire Business
Park, Lostock Gralam, Northwich, CW9
7UA, United Kingdom
Dechra Investments Limited
Dechra Finance
Australia Limited
England and
Wales
Financial Services
Dechra Finance B.V.
The Netherlands
Financial services
Dechra Finance
Ireland Designated
Activity Company
Dechra Finance
Limited
Republic of
Ireland
Financial services
England and
Wales
Activities of financial services holding
company
Dechra Finance
Sterling Limited
England and
Wales
Financial services
Dechra Veterinary
Products, Inc
Canada
Marketer of veterinary pharmaceuticals
and pet diets
24 Cheshire Avenue, Cheshire Business
Park, Lostock Gralam, Northwich, CW9
7UA, United Kingdom
Dechra Pharmaceuticals
PLC
Pettelaarpark 38, 5216PD
‘s-Hertogenbosch, Netherlands
Cooperatieve Dechra
Finance Netherlands W.A.
6th Floor, 2 Grand Canal Square, Dublin 2,
Ireland
Dechra Pharmaceuticals
PLC
24 Cheshire Avenue, Cheshire Business
Park, Lostock Gralam, Northwich, CW9
7UA, United Kingdom
24 Cheshire Avenue, Cheshire Business
Park, Lostock Gralam, Northwich, CW9
7UA, United Kingdom
100 King Street West, Suite 6100, 1 First
Canadian Place, Toronto ON M5X 1B8,
Canada
Dechra Pharmaceuticals
PLC
Dechra Pharmaceuticals
PLC
Dechra Limited
Marketer of veterinary pharmaceuticals
and pet diets
Hintere Achmhlerstrasse 1a, 6850 Dornbirn,
Austria
Dechra Limited
Achterstenhoek 48 2275 Lille, Belgium
Eurovet Animal Health B.V.
Marketer of veterinary pharmaceuticals
and pet diets
Marketer of veterinary pharmaceuticals
and pet diets
Mekuvej 9, DK-7171 Uldum, Denmark
Dechra Pharmaceuticals
PLC
Dechra Limited
Marketer of veterinary pharmaceuticals
and pet diets
c/o As.ajotoimisto Borenius Oy, Yrjönkatu
13 A, 00120 Helsinki, Finland
Marketer of veterinary pharmaceuticals
and pet diets
60 Avenue du Centre, 78180 Montigny le
Bretonneux, France
Dechra Veterinary Products
A/S
Marketer of veterinary pharmaceuticals
and pet diets
Via Agostino da Montefeltro 2, 10134
Torino, Italy
Dechra Limited
Marketer of veterinary pharmaceuticals
and pet diets
Henrik Ibsens Gate 90, Postboks 2943 Solli,
0230 Oslo, Norway
Dechra Veterinary Products
A/S
Netherlands
Marketer of veterinary pharmaceuticals
and pet diets
Handelsweg 25, 5531AE Bladel,
Netherlands
Marketer of veterinary pharmaceuticals
and pet diets
1st Floor, 61 Moldlinska Str., 03-199
Warsaw, Poland
Dechra Veterinary Products
A/S
Dechra Limited
Marketer of veterinary pharmaceuticals
and pet diets
C/Balmes, 202, P.6-08006 Barcelona,
Spain
Dechra Veterinary Products
A/S
Dechra Veterinary
Products GmbH
Dechra Veterinary
Products N.V.
Dechra Veterinary
Products A/S
Dechra Veterinary
Products Oy
Dechra Veterinary
Products SAS
Dechra Veterinary
Products S.r.l.
Dechra Veterinary
Products AS
Dechra Veterinary
Products B.V.
Dechra Veterinary
Products Sp. z o.o.
Dechra Veterinary
Products, S.L.
Unipersonal
Dechra Veterinary
Products AB
Austria
Belgium
Denmark
Finland
France
Italy
Norway
Poland
Spain
Sweden
Marketer of veterinary pharmaceuticals
and pet diets
Dechra Veterinary
Products Limited
England and
Wales
Marketer of veterinary pharmaceuticals
and pet diets
Dechra Veterinary
Products, LLC
USA
Marketer of veterinary pharmaceuticals
and pet diets
Principal Place of Business: Stora Wäsby
Orangeriet 3 , Upplands Väsby, 194 37 ,
Sweden
24 Cheshire Avenue, Cheshire Business
Park, Lostock Gralam, Northwich, CW9
7UA, United Kingdom
Principal Place of Business: 7015 College
Blvd, Suite 525, Overland Park KS 66211,
United States
Dechra Veterinary Products
A/S
Dechra Veterinary Products
A/S
Dechra Holding US Inc
Stock Code: DPH
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Notes to the Company Financial Statements
continued
(xii) Subsidiary Undertakings continued
Name
Dechra-Brovel, S.A.
de C.V.
Country of
Incorporation
Mexico
Eurovet Animal Health
B.V.
The Netherlands
Genera d.d.*
Croatia
Principal Activity
Registered Address
Shareholder
Developer, regulatory, manufacturer and
marketer of veterinary pharmaceuticals
Holding company, developer, regulatory,
manufacturer and marketer of veterinary
pharmaceuticals
Holding company, Developer, regulatory,
manufacturer and marketer of veterinary
pharmaceuticals and crop protection
Principal Place of Business: Empresa
Numero 66, Colonia Mixcoac, Delegacion
Benito Juarez, Ciudad de Mexico, Distrito
Federal, Mexico
Dechra Limited
Handelsweg 25, 5531AE Bladel,
Netherlands
Dechra Pharmaceuticals
PLC
Svetonedeljska cesta 2, Kalinovica, 10436
Rakov Potok , Croatia
Eurovet Animal Health B.V.
Genera d.o.o Sarajevo Bosnia
Marketer of veterinary pharmaceuticals
Herzegovina
ˇ
Hamdije Cemerlica 2, Sarajevo, Bosnia and
Herzegovina
´
Genera d.d.
Genera Pharma d.o.o. Serbia
Marketer of veterinary pharmaceuticals
Gostivarska 70, Vozdovac, Beograd, Serbia Genera d.d.
Genera Sl d.o.o
Putney, Inc
Slovenia
USA
Marketer of veterinary pharmaceuticals
Parmova Ulica, Ljubljana, Slovenia
Genera d.d.
Developer, regulatory and marketer of
veterinary pharmaceuticals
Principal Place of Business: One Monument
Square, Suite 400, Portland ME ME 04101,
United States
Dechra Holdings US Inc
Scanimalhealth ApS
Denmark
Marketer of veterinary pharmaceuticals Radhustorvet 5 2, 3520 Farum, Denmark
Eurovet Animal Health B.V.
Other subsidiaries
Name
Apex Laboratories Pty
Limited
Country of
Incorporation
Principal Activity
Registered Address
Shareholder
New Zealand
Non-trading
Level 12, 55 Shortland Street, Auckland,
1010, New Zealand
Apex Laboratories Pty
Limited
Arnolds Veterinary
Products Limited
England and
Wales
Non-trading
Broomco 4263
Limited
England and
Wales
Non-trading
Dales Pharmaceuticals
Limited
England and
Wales
Non-trading
Dechra Holding
Australia Pty Limited
Dechra Holdings
US Inc
Australia
Holding Company
USA
Holding company
Dechra Investments
Limited
England and
Wales
Holding company
DermaPet, Inc
USA
Non-trading
Farvet Laboratories
B.V.
Veneto Limited
The Netherlands
Non-trading
England and
Wales
Holding company
24 Cheshire Avenue, Cheshire Business
Park, Lostock Gralam, Northwich, CW9
7UA, United Kingdom
24 Cheshire Avenue, Cheshire Business
Park, Lostock Gralam, Northwich, CW9
7UA, United Kingdom
24 Cheshire Avenue, Cheshire Business
Park, Lostock Gralam, Northwich, CW9
7UA, United Kingdom
2 Cal Close, Somersby NSW 2250,
Australia
Principal Place of Business: 7015 College
Blvd, Suite 525, Overland Park KS 66211,
United States
24 Cheshire Avenue, Cheshire Business
Park, Lostock Gralam, Northwich, CW9
7UA, United Kingdom
Principal Place of Business: 7015 College
Blvd, Suite 525, Overland Park KS 66211,
United States
Handelsweg 25, 5531AE Bladel,
Netherlands
24 Cheshire Avenue, Cheshire Business
Park, Lostock Gralam, Northwich, CW9
7UA, United Kingdom
Veneto Limited
Veneto Limited
Veneto Limited
Dechra Limited
Dechra Limited
Dechra Pharmaceuticals
PLC
Dechra Veterinary
Products LLC
Eurovet Animal Health
B.V.
Dechra Pharmaceuticals
PLC
* Eurovet Animal Health B.V. holds 85.54%, 10.0% is held as treasury stock and 4.46% is held by minority shareholders
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Financial History
Consolidated Income Statement
Revenue
Underlying operating profit
Underlying profit after taxation
Underlying earnings per share
— basic (pence)
— diluted (pence)
Continuing underlying earnings per share
— basic (pence)
— diluted (pence)
Dividend per share (pence)
Operating profit
Profit after taxation
Earnings per share
— basic (pence)
— diluted (pence)
Continuing earnings per share
— basic (pence)
— diluted (pence)
Consolidated Statement of Financial Position
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets held for sale
Shareholders’ funds
Consolidated Statement of Cash Flows
Net cash inflow from operating activities
Net cash (outflow)/inflow from investing activities
Net cash (outflow)/inflow from financing activities
‡ Excluding net assets held for sale.
Financial Statements
2017
£000
2016
£000
2015
£000
2014
£000
2013
£000
359,275
81,349
60,132
247,562
52,857
38,390
203,480
44,351
35,307
193,571
42,168
31,849
189,176
39,108
25,464
64.68
64.33
64.68
64.33
21.44
42.95
42.65
42.95
42.65
18.46
40.17
39.90
40.17
39.90
16.94
37.61
37.48
36.45
36.32
15.40
38.98
38.71
29.27
29.07
14.00
33,214
26,110
19,493
12,512
25,980
19,459
24,996
19,416
18,336
10,850
28.09
27.93
28.09
27.93
14.00
13.90
14.00
13.90
22.14
21.99
22.14
21.99
67.57
67.33
22.22
22.14
20.59
20.45
12.47
12.39
453,093
184,976
(66,411)
(269,021)
—
302,637
393,442
162,386
(65,982)
(213,234)
—
276,612
184,903
108,624
(44,109)
(54,930)
—
194,488
214,440
86,334
(35,715)
(60,253)
—
204,806
235,670
89,672‡
(49,558)‡
(136,991)
35,823
174,616
77,426
(57,275)
43,575
(174,035)
1,591
125,314
40,983
(4,651)
(14,819)
11,472
76,575
(92,148)
36,865
(19,368)
(18,266)
Stock Code: DPH
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sluglineDechra Annual Report 2017 - Back.indd 17004/09/2017 14:01:14 sluglineShareholder InformationGlossary172Shareholder Information174Advisers176Dechra Annual Report 2017 - Back.indd 17104/09/2017 14:01:14 Glossary
The following is a glossary of a number of the terms and acronyms
which can be found within this document:
DVP International
Dechra Veterinary Products International
Adriatic region
Croatia, Bosnia-Herzegovina, Serbia and Slovenia
AER
Actual Exchange Rate
API
Active Pharmaceutical Ingredient
APM
Alternative Performance Measures
BEPS
Base Erosion Profit Sharing
Bioequivalence
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
bps
Basis Points
CAGR
Compound Annual Growth Rate
CAP
Companion Animal Products
CER
Constant Exchange Rate
CMOs
Contract Manufacturing Organisations
CPD
Continuing Professional Development
CRM
Customer Relationship Management
CSOP
Company Share Option Plan
CTR
Clinical Trials Required
Dechra Values or Values
Dedication, Enjoyment, Courage, Honesty, Relationships and Ambition
DPM
Dechra Pharmaceuticals Manufacturing
DSC
Dechra Service Center
DVP
Dechra Veterinary Products
DVP EU
Dechra Veterinary Products EU or Dechra Veterinary Products Europe
DVP NA
Dechra Veterinary Products North America
DVP US
Dechra Veterinary Products US
EBIT
Earnings before interest and tax. This is the same as non-underlying
operating profit
EBITDA
Earnings before interest, tax, depreciation and amortisation
EPS
Earnings Per Share
ERP
Enterprise Resource Planning
EU Pharmaceuticals
European Pharmaceuticals Segment comprising DVP EU, DVP
International and DPM
Executive Directors
The Executive Directors of the Company, currently Ian Page, Richard
Cotton and Tony Griffin
FAP
Food producing Animal Products
FDA
US Food and Drug Administration; a federal agency of the US
Department of Health and Human Services
FRC
Financial Reporting Council
FRS
Financial Reporting Standards
FTSE
Companies listed on the London Stock Exchange
FTSE100 Index
An index comprising the 1st to 100th largest companies listed on the
London Stock Exchange in terms of their market capitalisation
FTSE250/350 Index
An index comprising the 101st to 350th largest companies listed on the
London Stock Exchange in terms of their market capitalisation
GAAP
Generally Accepted Accounting Practices
GHG
Greenhouse Gas
GMP
Good Manufacturing Practice
HALMED
Agency for Medicinal Products and Medicinal Devices of Croatia
HR
Human Resources
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Shareholder Information
IAS
International Accounting Standards
IFRSs
International Financial Reporting Standards
IT
Information Technology
KPI
Key Performance Indicator
Leverage
The ratio of Net Debt to underlying EBITDA
LIBOR
The London Inter-Bank Offered Rate
LTAFR
Lost Time Accident Frequency Rate
LTIP
Long Term Incentive Plan
MAT
Moving Annual Total
MHRA
Medicines and Healthcare products Regulatory Agency; an executive
agency of the Department of Health in the UK
Maximum Residue Limit (MRL)
The maximum acceptable concentration of a substance that may be
found in a food product obtained from an animal that has received a
veterinary medicine
NADA
New Animal Drug Application
Non-Executive Directors
The Non-Executive Directors of the Company, currently Tony Rice,
Julian Heslop, Lawson Macartney and Ishbel Macpherson
PDRA
Dechra’s Product Development and Regulatory Affairs team
Qualifying LTIP Award
Qualifying LTIP Awards comprises a CSOP option and an ordinary
nil-cost LTIP award, with the ordinary award scaled back at exercise to
take account of any gain made on exercise of the CSOP option.
R&D
Research and Development
RCF
Revolving Credit Facility
RIDDOR
Reporting of Injuries, Diseases and Dangerous Occurrences
Regulations
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
ROCE
Return On Capital Employed
RPI
Retail Price Index
SAYE
Save As You Earn Share Scheme
SET
Senior Executive Team
SG&A
Selling, General and Administrative Expenses
SKU’s
Stock Keeping Units
TSR
Total Shareholder Return
North America Pharmaceuticals
North American Pharmaceuticals Segment comprising DVP US and
Canada and Dechra-Brovel
VMD
Veterinary Medicines Directorate
OECD
The Organisation for Economic Cooperation and Development
Ordinary Shares
An ordinary share of 1 pence in the share capital of the Company
Oracle Programme
Enterprise Resources Planning (ERP) software
POMs
Prescription Only Medicines
Stock Code: DPH
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sluglineShareholder InformationFinancial CalendarInterim Management Statement20 October 20172017 Annual General Meeting20 October 2017Final Dividend Ex-Dividend Date26 October 2017Final Dividend Record Date27 October 2017Final Dividend Payment Date17 November 2017Annual General MeetingThe 2017 Annual General Meeting of the Company will be held at 1.00pm on 20 October 2017 at The Mere Golf Resort & Spa, Chester Road, Mere, Knutsford, Cheshire WA16 6LJ. The notice of meeting (the Notice), which includes special business to be transacted at the Annual General Meeting together with an explanation of the resolutions to be considered at the meeting, is made available on the Company website or mailed to shareholders, if they have elected to receive the Notice in paper format.Share HistoryDechra floated on the London Stock Exchange in September 2000 at £1.20 per share, with a market capitalisation of £60.0 million.In relation to the acquisition of VetXX Holdings A/S, on 15 January 2008, Dechra undertook a placing and open offer on the basis of 11 Open Offer shares for every 50 existing shares held on 10 December 2007 at an issue price of 303 pence. On 9 January 2008, 11,624,544 shares were issued.On 5 April 2012, a Rights Issue was announced on the basis of three new ordinary shares for every existing ten shares held on 23 April 2012 at a subscription price of £3.00 per share. The Rights Issue resulted in 20,040,653 shares being issued with dealings commencing on 16 May 2012.On 17 March 2016 4,398,600 ordinary shares were offered by way of placing at an issue price of £11.00 per share.Company WebsiteThe 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 websitewww.dechra.comElectronic CommunicationsShareholders now have the opportunity to receive shareholder communications electronically, e.g. Annual Reports, Notice of the Annual General Meeting and Proxy Forms. You can elect to receive email notifications of shareholder communications by registering at www.shareview.co.uk, where you can also set up a bank mandate to receive dividends directly to your bank account and to submit proxy votes for shareholder meetings. Receiving the Company’s communications electronically allows the Company to communicate with its shareholders in a more environmentally friendly, cost effective and timely manner.RegistrarDechra’s Registrar is Equiniti Limited. Equiniti 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 MeetingShareholders who receive duplicate sets of Company mailings because they have multiple accounts should contact Equiniti to have their accounts amalgamated. Equiniti offers a facility whereby shareholders are able to access their shareholdings in Dechra via their website (www.shareview.co.uk). Alternatively, Equiniti can be contacted at:Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DARegistrars’ Shareholder Helpline for Dechra: 0371 384 2030 or +44(0) 121 415 7047, if calling from outside of the UK.Please have your Shareholder Reference Number to hand whenever you contact the Registrar; this can be found on your share certificate or a recent dividend tax voucher.Share Dealing ServiceEquiniti Financial Services Limited offer a Share Dealing Service to buy or sell shares. Further information can be obtained from www.shareview.co.uk/dealing or by telephoning 0845 603 7037.Telephone share dealingInternet share dealingPostal share dealingFee (on value of transaction)up to £50,000Balance over £50,0001.5% 0.25%1.5%0.25%1.75%1.75%Minimum charge£60.00£45.00£60.00Stamp duty charge (purchases only)0.5%0.5%0.5%Equiniti Financial Services Limited 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 amount you originally invested. If you are in any doubt, you should contact an independent financial adviser.Dechra Pharmaceuticals PLC Annual Report and Accounts for the year ended 30 June 2017www.dechra.com174Dechra Annual Report 2017 - Back.indd 17404/09/2017 14:01:16 Shareholder Information
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 on the previous page);
• consider having your dividend paid directly into your bank account
to eliminate the risk of a lost dividend cheque;
• notify the Registrar of bank account detail changes in writing or via
their website; and
•
if you decide to sell or buy shares, use only brokers registered in
your own country or the UK.
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. Previously 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.
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 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 (or +44 207 066
1000, if calling from outside of the UK) 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;
• search the FCA unauthorised firms list; and
•
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.
If you are approached about a share scam, you should tell the FCA
by contacting their Consumer Helpline on 0800 111 678 (or +44 207
066 1000, if calling from outside of the UK). If you have been offered,
bought or sold shares, you can use the share fraud reporting form at
www.fca.org.uk/scams.
If you have already paid money to share fraudsters or suspect fraud,
you should contact Action Fraud on 0300 123 2040.
Stock Code: DPH
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Advisers
Auditor
PricewaterhouseCoopers LLP
Cornwall Court
19 Cornwall Street
Birmingham
B3 2DT
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
Principal Bankers continued
HSBC Bank plc
Midlands Corporate Banking Centre
4th Floor
120 Edmund Street
Birmingham
B3 2QZ
Lloyds Bank plc
125 Colmore Row
Birmingham
B3 3SF
Raiffeisen Bank International AG
Am Stadtpark 9
1030 Vienna
Austria
Santander UK PLC
2nd Floor
100 Ludgate Hill
London
EC4M 7RE
Registrars
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
Financial PR
TooleyStreet Communications
Regency Court
68 Caroline Street
Birmingham
B3 1UG
Principal Bankers
Bank of Ireland (UK) plc
40 Mespil Road
Dublin
Ireland
B3 2QZ
BNP Paribas, London Branch
3rd Floor
10 Harewood Avenue
London
NW1 6AA
Fifth Third Bank
38 Fountain Square Plaza
Cincinnati
Ohio 45263
USA
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 Dermcare-Vet Pty. Ltd.
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®
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
www.dechra.com
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