Hikma Pharmaceuticals Annual Report 2008

Plain-text annual report

12751_Cover.qxp 2/4/09 13:40 Page 1 Hikma Pharmaceuticals PLC 13 Hanover Square London W1S 1HW UK www.hikma.com Hikma Pharmaceuticals PLC Annual report 2008 Trusted... i H k m a P h a r m a c e u t i c a l s P L C A n n u a l r e p o r t 2 0 0 8 12751_Cover.qxp 2/4/09 13:40 Page 2 Hikma Pharmaceuticals PLC Over the 30 years since Hikma was founded, we have grown into a successful speciality pharmaceutical group. Our business today is diverse in its product line and the breadth of its geographic coverage. This diversiﬁcation will ensure that we maintain our track record of strong growth. For more information visit our website www.hikma.com Designed and produced by Radley Yeldar www.ry.com This report is printed on Era Silk paper. The paper contains 50% de-inked post-consumer waste and virgin wood ﬁbre from well-managed forests independently certiﬁed according to the rules of the Forest Stewardship Council (FSC). It is manufactured at a mill that is certiﬁed to ISO14001 and EMAS environmental standards. The mill uses pulps that are elemental chlorine free (ECF) and the inks in printing this report are all vegetable-based. Printed at St Ives Westerham Press Ltd, ISO14001, FSC certiﬁed and CarbonNeutral® 12751_p01_p09.qxp 3/4/09 09:44 Page 01 Hikma Pharmaceuticals PLC Annual report 2008 01 What’s in this annual report? Overview 02 04 How we performed 05 Operational highlights of 2008 06 Chairman’s review 08 What we do 09 How and where we work Trusted...to deliver Better health 10 How our products improve people’s lives around the world Trusted...to deliver Our strategy 26 28 Chief Executive Ofﬁcer’s strategic review 34 Business and ﬁnancial review Trusted...to deliver Responsibly 58 How we are ensuring that we act responsibly O v e r v i e w T r u s t e d t o d e l i v e r B e t t e r h e a l t h T r u s t e d t o d e l i v e r O u r s t r a t e g y T r u s t e d t o d e l i v e r R e s p o n s i b l y Governance and ﬁnancial results 66 68 Board of Directors 70 Senior management 72 Corporate Governance report 78 Directors’ report 81 Remuneration Committee report 92 Statement of Directors’ responsibilities 93 Independent auditors’ report 95 Consolidated income statement 96 Consolidated balance sheet 97 Consolidated statement of changes in equity 98 Consolidated cash ﬂow statement 99 Notes to the consolidated ﬁnancial statements 142 Hikma Pharmaceutical PLC accounts 150 Shareholder information 152 Principal Group companies 152 Advisers G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p01_p09.qxp 27/3/09 21:59 Page 02 02 Hikma Pharmaceuticals PLC Annual report 2008 04 How we performed 05 Operational highlights of 2008 06 Chairman’s review 08 What we do 09 How and where we work 12751_p01_p09.qxp 31/3/09 15:26 Page 03 Hikma Pharmaceuticals PLC Annual report 2008 03 O v e r v i e w Who we are We are a fast growing speciality pharmaceutical company with operations in Europe and the United States and a unique focus in the Middle East and North Africa (MENA) region. Our goal is to improve the health and well-being of people in all our markets by delivering high quality products across a wide range of therapeutic areas. We do this by developing, manufacturing and marketing branded and un-branded generic as well as in-licensed products in both oral and injectable dosage forms. 12751_p01_p09.qxp 1/4/09 23:38 Page 04 04 Overview Hikma Pharmaceuticals PLC Annual report 2008 How we performed Our 2008 results demonstrate the strength of our Branded and Injectables businesses as well as the challenges posed by our Generics business in the US. Revenue $million +29.4% Operating profit $million -12.7% EBITDA1 $million -1.7% 2008 580.7 202 2007 92.4 303 2007 115.8 2008 113.8 2006 75.2 2008 80.7 2006 89.0 2007 448.8 2006 317.0 212 000 Profit attributable to shareholders $million -8.7% 898 2006 54.5 2007 62.6 2008 57.1 000 000 202 101 101 000 000 000 1 Reported proﬁt before interest, tax, depreciation and amortisation. Adjusted1 profit attributable to shareholders $million 2007 64.5 2006 54.8 2008 67.4 +4.5% Diluted earnings per share cents 2007 35.4 202 2006 31.0 2008 29.6 -16.4% 000 1 Proﬁt before the amortisation of intangible assets (other than software) and exceptional items. 12751_p01_p09.qxp 1/4/09 23:39 Page 05 Group performance $ million Operating cash ﬂow Capital expenditure Net debt Net debt/equity Dividend per share (cents) * 2007 ﬁgures restated. 2008 75.0 56.7 -170.9 28% 2007 53.3* 49.4 2006 35.3 53.2 -306.8* +25.0 72% 7.5 7.5 ns 7.0 Hikma Pharmaceuticals PLC Annual report 2008 05 O v e r v i e w Operational highlights of 2008 Group revenues up 29% to $580.7 million with 63% of revenues generated in MENA Adjusted proﬁt attributable to shareholders up 4.5% to $67.4 million1 Branded revenues up 61% to $321 million reﬂecting strong organic growth of 22%2 Injectables revenues up 23% to $149 million, reﬂecting organic growth of 14%3. Injectables revenues in MENA grew by 43%, and in the US by 29% Generics business returned to proﬁt in Q4 2008 following management changes and operational improvements Operating cash ﬂow up 41% to $75 million through strong focus on working capital management Net debt reduced by 44% to $171 million 1 Proﬁt before amortisation of intangible assets (other than software) and exceptional items. 2 Excluding the impact of Hikma Egypt and APM acquired in 2007. 3 Excluding the impact of APM and Thymoorgan in 2007. 12751_p01_p09.qxp 31/3/09 15:25 Page 06 06 Overview Hikma Pharmaceuticals PLC Annual report 2008 Chairman’s review 2008 was both a rewarding and challenging year at Hikma. Looking forward, I am conﬁdent in the Company’s prospects for this year and the years to come. Results Our businesses in the Middle East and North Africa (“MENA”) region continued to thrive and the successful integration of two important acquisitions signiﬁcantly strengthened our position as the leading regional pharmaceutical manufacturer. In line with our commitment to become a leading global speciality pharmaceutical company, we also made excellent progress in our Injectables business, where revenues grew by 23.2%. We are making good progress in implementing our oncology strategy. Against these areas of progress, we faced some difﬁculties in our US Generics business, where the extremely competitive trading environment made it difﬁcult for us to offset the completion of a large government contract. I am pleased to report that we took prompt management action and successfully restored this business to proﬁtability by the end of the year. For the year we delivered record revenues of $580.7 million and total revenue growth of 29.4%. The impact of the difﬁculties in our US Generics business in the ﬁrst half of 2008 resulted in a lower gross margin for the Group of 44.2%, compared with 49.4% in 2007, and a decline of 12.7% in our operating proﬁt to $80.7 million. However, earnings before interest, tax, depreciation and amortisation (EBITDA) declined by only 1.7% to $113.8 million and on an adjusted basis operating proﬁt decreased by 1%. Proﬁt attributable to shareholders for the period declined by 8.7% to $57.1 million, but on an adjusted basis increased by 4.5%. Diluted earnings per share declined by 16.4% to 29.6 cents per share. Impressively, our operating cash ﬂow reached $75.0 million, an increase of 40.7%, through a strong focus on working capital management. Dividend In order to pursue our growth strategy and mindful of the difﬁcult economic times in which the world ﬁnds itself, the Board has recommended that the dividend should be held this year. Therefore the Board is recommending a ﬁnal dividend of 4.0 cents per share (approximately 2.8 pence per share), which will make a dividend for the full year of 7.5 cents per share, the same as paid in 2007. The proposed ﬁnal dividend will be paid on 2 June 2009 to shareholders on the register on 1 May 2009, subject to approval by shareholders at the Annual General Meeting. Samih Darwazah Non-Executive Chairman Operating cash flow $million +40.7% 2008 75 2007 53.3* 000 525 050 2006 35.2 575 000 * 2007 ﬁgures restated. 12751_p01_p09.qxp 27/3/09 21:59 Page 07 Hikma Pharmaceuticals PLC Annual report 2008 07 O v e r v i e w Net debt $million -44.3% 2007 306.8* 2008 170.9 888 191 494 797 000 2006 (25) * 2007 ﬁgures restated. Balance sheet developments In January 2008 we raised gross proceeds of £81.6 million (approximately $160 million) through the placing of 17 million ordinary shares to fund the December 2007 acquisition of Arab Pharmaceutical Manufacturing Co. Ltd (“APM”). We ended 2008 with net debt of $170.9 million, compared with $306.8 million at the end of 2007, reﬂecting not only the equity issue but also higher operating cash ﬂow from improved management of our working capital. We are well invested and as a result our balance sheet is strong, with over $63 million in cash at the year-end and unutilised loan facilities of $121 million across multiple geographies. Outlook With 60% of our sales generated in the MENA region, Hikma should continue to beneﬁt from the overall pharmaceutical market growth in this region, which we expect will remain much higher than the global market. Our share of the MENA market should also continue to increase as we further penetrate existing markets, expand into new markets and grow our portfolio of own-brand and in-licensed products. With new products and entry into new markets, we believe that there remains considerable scope for us to grow our global Injectables business, particularly in the MENA region but also in the US and Europe. We expect our performance in our US Generics business, which returned to proﬁtability in the fourth quarter of 2008, to continue to improve. In summary, I am highly conﬁdent in the Company’s prospects for this year and the years to come. This conﬁdence is based on the strength of our Branded and Injectables businesses, the recovery in the Generics business that we have already begun to experience, and the excellent management team that we have in place. Samih Darwazah Non-Executive Chairman 12751_p01_p09.qxp 2/4/09 01:33 Page 08 08 Overview Hikma Pharmaceuticals PLC Annual report 2008 What we do We develop, manufacture and market generic and in-licensed pharmaceutical products within three core businesses. We are increasingly focusing on high value products in key therapeutic areas such as oncology, diabetes and cardiovascular. Branded Our Branded business develops, manufactures and markets 241 solid, semi-solid and liquid branded pharmaceutical products in 460 dosage strengths and forms including 33 patented products under-license from the originator. Most of these products are sold within the MENA region. Thanks to our strong brand recognition and our reputation of quality products, we are increasingly the licensing partner of choice in the MENA. 2008 Revenue Proportion of Group sales Top products $320.8m 55.3% Actos® Amoclan Ciprolon Prograf® Votrex Injectables Our Injectables business focuses on a specialized sub-segment of the global generics market and has a growing presence in the MENA region, Europe and the US. We develop, manufacture and market over 81 injectable products in 202 dosage strengths and forms with a focus on four key therapeutic areas: anti-infectives, oncology, central nervous system and cardiology. Seven of these products are manufactured and marketed under license from the originator. 2008 Revenue Proportion of Group sales Top products $149.3m 25.7% Cefizox Cefuroxime Ciprolon Samixon Vancomycin Generics Our Generic business operates in the competitive US market, where generic products are usually sold under the chemical name of the active pharmaceutical compound. We develop, manufacture and market 47 non-branded generic pharmaceutical products in 105 dosage strengths and forms. We are increasingly focusing our product portfolio on niche products in order to compete in this difficult and rapidly changing market. 2008 Revenue Proportion of Group sales Top products $105.7m 18.2% Amoxicillin Cefaclor Doxycycline Lisinopril Lithium Carbonate 12751_p01_p09.qxp 31/3/09 00:04 Page 09 Hikma Pharmaceuticals PLC Annual report 2008 09 How and where we work Our broad geographic footprint spans 49 countries around the world. Our growth is driven by high manufacturing standards, strong research and development capabilities and experienced sales and marketing teams. O v e r v i e w Key Our markets R&D centres Manufacturing plants 4 R&D centres USA Jordan Saudi Arabia Portugal 12 manufacturing plants Jordan*(x4) Portugal*(x2) USA* Saudi Arabia* Italy Algeria Germany Egypt *FDA approved Revenues in US $130.6 million Revenues in Europe $84.2 million Revenues in MENA $365.9 million 12751_p10_p25.qxp 27/3/09 22:03 Page 10 10 Hikma Pharmaceuticals PLC Annual report 2008 to deliver better health 12751_p10_p25.qxp 30/3/09 23:04 Page 11 Hikma Pharmaceuticals PLC Annual report 2008 11 How we improve people’s lives Our excellent product portfolio covering key therapeutic areas is focused on the patient. Our strong product pipeline, with 647 pending approvals across all regions and markets, demonstrates our commitment to continuing to improve people’s lives. Our aim is also to provide better access to medicines in most of our markets by delivering cost effective products to patients. T r u s t e d t o d e l i v e r B e t t e r h e a l t h 12751_p10_p25.qxp 30/3/09 23:06 Page 12 Anti-infectives Hikma has been a market leader in anti-infectives in the MENA region for more than 15 years. First introduced by Hikma in Jordan in the early 1990’s, Amoclan continues to be widely prescribed across the region. Amoclan is a combination product containing the broad spectrum penicillin amoxicillin and clavulanic acid, an inhibitor of the enzyme beta-lactamase that is secreted by resistant bacteria, rendering many penicillins ineffective. Amoclan’s strong brand recognition, efﬁcacy and affordability have helped to sustain a high market share in numerous countries across the MENA region. 29 products 90 dosage strengths and forms a i r e t c a b d o r i l i o C a h c i r e h c s E : e g a m i s i h T 12751_p10_p25.qxp 27/3/09 22:04 Page 13 “Feel like playing again.” T r u s t e d t o d e l i v e r B e t t e r h e a l t h 12751_p10_p25.qxp 30/3/09 23:08 Page 14 Cephalosporins Our Injectables business has a long history in producing high quality cephalosporins. Cephalosoprins are bactericidal antibiotics that have the same mode of action as other beta-lactam antibiotics such as penicillins. We are very proud to have in our portfolio Samixon (ceftriaxone) which is a potent third generation cephalosporin with a broad spectrum activity against both gram-positive and gram-negative bacteria. In our cephalosporin manufacturing facility in Portugal, we produced 22 million vials for our markets in the US, MENA and Europe in 2008. 6 products 34 dosage strengths and forms s u e r u a s u c c o c o y h p a t s l , a i r e t c a b e v i t i s o p - m a r G : e g a m i s i h T 12751_p10_p25.qxp 27/3/09 22:04 Page 15 “Back to my best.” T r u s t e d t o d e l i v e r B e t t e r h e a l t h 12751_p10_p25.qxp 30/3/09 23:12 Page 16 Alimentary Tract and Metabolism Through the acquisition of APM in December 2007, Hikma added Actos® (pioglitazone), a leading treatment for type 2 diabetes to its MENA product portfolio. Actos® is sold under-licence from Takeda. Actos®, along with healthy eating and physical activity, works by treating insulin resistance, an important defect of type 2 diabetes. Actos® helps the body use insulin more effectively by making cells more sensitive and controlling blood sugar levels. Hikma’s strong sales team across the MENA region have nearly doubled Actos® sales and signiﬁcantly increased its market share. 46 products 76 dosage strengths and forms 12751_p10_p25.qxp 31/3/09 00:06 Page 17 T r u s t e d t o d e l i v e r B e t t e r h e a l t h “Harmonising my life.” s a e r c n a p n a m u H : e g a m i e t i s o p p O 12751_p10_p25.qxp 31/3/09 00:07 Page 18 Dermatologicals Through Hikma’s strong relationship with Astellas, which dates back to the late 1970’s, Hikma is able to sell under-license some of Astellas’ leading brands in the MENA region. Protopic® (tacrolimus) is a prescription ointment containing the immunosuppressant tacrolimus and is used to treat moderate to severe eczema. It has proven effective in helping both adult and pediatric patients in controlling this troublesome condition. Through Hikma’s strong promotion, Protopic® enjoys a market share of over 60% in the main MENA markets. 33 products 46 dosage strengths and forms 12751_p10_p25.qxp 27/3/09 22:05 Page 19 “Finally...relief!” T r u s t e d t o d e l i v e r B e t t e r h e a l t h i n k s n a m u h f o n o i t c e s s s o r C : e g a m i e t i s o p p O 12751_p10_p25.qxp 31/3/09 00:08 Page 20 Injectable Anti-infectives Our injectable portfolio in the MENA region includes a number of excellent anti-infective products. Two of our leading brand names are Targoplanin (teicoplanin) and Prizma (piperacillin/tazobactam). Both are recommended for treatment of resistant pathogens and life threatening infections and both products were the ﬁrst generic versions introduced to the market. This has allowed increased patient reach and lowered institutional expenditure on this category of products. 20 products 59 dosage strengths and forms s u e r u a s u c c o c o l y h p a t S : e g a m i s i h T i n k s n a m u h f o e c a f r u s e h t n o 12751_p10_p25.qxp 27/3/09 22:06 Page 21 “A clean bill of health.” T r u s t e d t o d e l i v e r B e t t e r h e a l t h 12751_p10_p25.qxp 31/3/09 00:09 Page 22 Oncology Following the oncology acquisitions we made in 2007, we are now present in one of the fastest growing therapeutic areas in the pharmaceutical industry. Our global oncology portfolio includes primarily injectable cytotoxics products. These products can be used for the treatment of a wide range of tumor types and are still the cornerstone of cancer therapy. Hikma will continue to build its oncology portfolio and aims to become a speciality provider of products for oncology and supportive care across all the Hikma markets. 13 products 49 dosage strengths and forms s l l e c r e c n a C : e g a m i s i h T 12751_p10_p25.qxp 27/3/09 22:06 Page 23 “Beating cancer.” T r u s t e d t o d e l i v e r B e t t e r h e a l t h 12751_p10_p25.qxp 31/3/09 00:13 Page 24 Cardiovascular Heart disease and stroke, together remain the leading cause of death in the United States. It is estimated that cardiovascular products make up over 15% of the total US generic pharmaceuticals market. Hikma is committed to expanding its cardiovascular portfolio in the US to include a comprehensive line of treatments for a range of cardiovascular disease conditions. A leading product in Hikma’s generic portfolio in the US is Digoxin. It is used to treat congestive heart failure and to lower heart rate. 8 products 29 dosage strengths and forms e v l a v l a r t i m h t i w i t r a e h f o w e v r e b m a h c r u o f l i a c p a d n u o s a r t l U : e g a m i s i h T 12751_p10_p25.qxp 27/3/09 22:07 Page 25 “Looking for a healthy life.” T r u s t e d t o d e l i v e r B e t t e r h e a l t h 12751_p26_p57.qxp 27/3/09 22:32 Page 26 26 Hikma Pharmaceuticals PLC Annual report 2008 to deliver our strategy 28 Chief Executive Ofﬁcer’s strategic review 34 Business and ﬁnancial review 12751_p26_p57.qxp 31/3/09 00:15 Page 27 Hikma Pharmaceuticals PLC Annual report 2008 27 Our vision To build Hikma into a world class, leading speciality pharmaceutical company. This will be achieved through both organic growth and by acquisitions that align with our strategy. As we build the business it is our goal to maintain the high standards of ethics and responsibility that have always been central to the way we operate. Our strategy has six core priorities: l Strengthening our leading position in the MENA region Developing our global product range in growing therapeutic areas % %% %%% S „„ „ Extending our reach and diversity through partnerships Increasing the scale of our speciality Injectables business Leveraging our expertise and capacity in the US market Maintaining our world-class manufacturing and API sourcing capabilities T r u s t e d t o d e l i v e r O u r s t r a t e g y 12751_p26_p57.qxp 27/3/09 22:33 Page 28 28 Our strategy Hikma Pharmaceuticals PLC Annual report 2008 Chief Executive Ofﬁcer’s strategic review In this year’s report to shareholders, we’ve set out our vision – to build Hikma into a world-class, leading speciality pharmaceutical company – and the strategic priorities to achieve this vision, against which we can measure our progress. In 2008, we made signiﬁcant progress towards delivering on some of these priorities, particularly in the MENA region and in our speciality Injectables business. In our Generics business in the US, however, we found delivering on our priorities more challenging. Importantly, we ended the year on a stable footing in the US and better placed to drive each of our businesses forward in 2009. Strengthening our leading position in the MENA region Our degree of focus on the fast-growing MENA region is unique and we increased our penetration of this valuable market in 2008 both through organic growth and the integration of two major acquisitions. Total MENA sales reached $366 million in 2008, or 63% of Group sales – an increase of 60% over 2007. Clearly our business in the MENA region beneﬁted from the fast growing local pharmaceutical markets, which grew by an average of 18.5% in 2008, four times as fast as the global market. Acquisitions also played an important role in the growth we achieved. Following the integration of Hikma Egypt (previously Alkan) we are now ﬁrmly established in the Egyptian market, the second largest of the 17 private pharmaceutical markets in which we operate in the MENA region. Hikma Egypt’s sales grew by 58% over the year reﬂecting the beneﬁts of applying our sales and marketing expertise and substantial improvements in operating efﬁciency. The acquisition of Arab Pharmaceutical Manufacturing (APM) brought us valuable additional manufacturing capacity in Jordan and also licences for a number of patented products that we are now selling throughout MENA. Our sales effort has proven very successful, with APM’s revenues growing by 38% in 2008. Developing our global product range in growing therapeutic areas Further growth in the MENA region as well as in Europe and the US came from the development of our product portfolio. We increased our product range in 2008, from 353 to 369 products, enhancing our potential in core markets and bringing opportunities in newer markets across all regions. Importantly, we continued to increase our focus on higher margin, value- added products in targeted therapeutic areas such as cardiovascular, CNS and oncology. We also increased our emphasis on “quality sales” to ensure that we are getting the most in terms of proﬁt and cash collection from the very strong Hikma brand name and reputation. Said Darwazah Chief Executive Ofﬁcer 2008 Revenue $580.7m 2008 Operating proﬁt $113.8m 2008 Submissions* 233 * across all regions and markets in 2008 12751_p26_p57.qxp 31/3/09 00:18 Page 29 Hikma Pharmaceuticals PLC Annual report 2008 29 MENA sales $million +60% 2008 365.9 2007 229.2 2006 157.7 4 5 7 8 0 2008 Injectable sales % by region MENA: 36% US: 17% Europe – Injectables: 24% Europe – Oncology: 23% Extending our reach and diversity through partnerships We seek to strengthen our relationships with all stakeholders within the healthcare value chain. Expanding our in-licensed business with research-based multinational companies is a key part of this growth strategy and will enable us to continuously launch new innovative medical treatments valued by patients and physicians. Our in-licensed products performed extremely well in 2008, with sales growing by 63%. Sales of in-licensed products acquired through acquisitions exceeded expectations and the Takeda products in particular, which include Actos™ and Blopress™, grew by 64% in 2008. This growth was achieved in APM’s existing markets. As we begin to launch these products in new markets such as Egypt and Algeria we expect to see incremental sales coming through in 2009. Increasing the scale of our speciality Injectables business Our speciality Injectables business experienced rapid growth in sales in MENA and the US in 2008, up 43% and 29%, respectively. This helped to compensate for the increase in pricing pressure in Germany. We feel that our presence in the MENA region truly differentiates us from our global competitors. As MENA sales increase as a percentage of overall Injectable sales, our proﬁtability in this business should also improve. Our developing presence in the ﬁeld of oncology is also a key strength and should help to drive future growth and improve proﬁtability. The global oncology and cancer care market is growing rapidly, with an increasing number of specialist hospitals and clinics focused on treating this growing disease. Oncology is targeted to represent an increasing percentage of Injectable sales in 2009 as we launch our oncology products in the MENA region and continue to roll out our oncology portfolio across Europe. Leveraging our expertise and capacity in the US market Sales in our Generics business in the US were adversely affected by the completion of a major Government supply contract at the end of 2007. The absence of these revenues in 2008 was coupled with deteriorating market conditions and intense competition and pricing pressure. We have responded with a thorough overhaul of the business that has involved improving our ability to obtain cost-effective supplies of APIs from multiple sources, raising prices where possible, terminating unproﬁtable supply arrangements, improving manufacturing and distribution efﬁciencies and raising service levels. We have also made several management changes. T r u s t e d t o d e l i v e r O u r s t r a t e g y 12751_p26_p57.qxp 31/3/09 00:19 Page 30 30 Our strategy Hikma Pharmaceuticals PLC Annual report 2008 Chief Executive Ofﬁcer’s statement continued Capital expenditure $m +14.8% 2006 53.2 2007 49.4 2008 56.7 1 1 00 00 00 These actions, as well as the FDA-enforced withdrawal of some suppliers from the US market, helped the Generics business return to proﬁtable trading in the last quarter of 2008 and we are conﬁdent that the business, which has an exemplary compliance record, will regain full year proﬁtability in 2009. Maintaining our world-class manufacturing capabilities In 2008 we invested approximately $57 million in expanding and upgrading our capacity to meet growing demand. Although the acquisitions we made in 2007 raised our capacity (and also brought some new manufacturing processes), certain facilities have required upgrading to ensure the highest quality of manufacture. Acquisitions Much of 2008 was spent integrating the four acquisitions we completed in 2007. Looking forward, we are conﬁdent that there remains considerable scope for further acquisitions, particularly in the MENA region, where the pharmaceutical market is highly fragmented and where many countries require or prefer a local manufacturing presence. We are focusing efforts on acquisitions in countries where we do not currently have a direct presence or where we can accelerate our penetration of existing markets. Management evolution Hikma has grown rapidly over the past couple of years, both organically and through our acquisitions. This has brought a need to ensure that our increased size and complexity does not hinder our growth prospects and our ﬂexibility to quickly capture new revenue opportunities. Furthermore, in our competitive industry and the current economic environment, we need to increase our focus on productivity, supply chain efﬁciency and returns on investment for our shareholders. As a result, we will be adapting our management structure in order to facilitate these important priorities. Our revenue generation functions of sales and marketing, business development, R&D and registration in both MENA and Europe will now be overseen by Taghreed Shunnar, who previously managed our Branded Business. Freeing Taghreed and her team from production and operational activities will enable them to dedicate their efforts towards maintaining our top-line growth, creating new business opportunities and capitalising on them quickly. Taghreed has demonstrated considerable success in growing our Branded business, both through Hikma products and licensing partnerships, and I am sure that she will maintain this track record for our sales in both MENA and Europe. 12751_p26_p57.qxp 27/3/09 22:33 Page 31 Hikma Pharmaceuticals PLC Annual report 2008 31 “Management changes mean we are focussing on productivity, supply chain efﬁciency and returns on investment for our shareholders.” Said Darwazah Chief Executive Ofﬁcer The growing signiﬁcance of the MENA region in the Injectables business model has led to an increasing overlap between our Injectables and Branded supply chains. We have signiﬁcant manufacturing capabilities in 12 facilities across seven countries in MENA and Europe and we are sure that there is signiﬁcant room for improvement if these facilities and their supply chains are managed in a more uniﬁed manner. As a result, our operations teams in Europe and MENA will now be working together in order to realise that potential. This will lead to enhanced working capital management, realisation of manufacturing, supply and distribution synergies, and help our sales function by efﬁciently delivering products to their customers – when they need them and where they need them. Bassam Kanaan will be heading our efforts in this regard in addition to his role as Chief Financial Ofﬁcer. Bassam has been with us for seven years now as Group CFO and his thorough understanding of our global operations will enable him and his team to make this change a success. The sales and operations aspects of the Generics business will continue to be run by Mike Raya, given the unique characteristics of the US market and the management changes that we have made there that have already proved successful. Majda Labadi, who previously led our Injectables segment, will now be heading up the critical function of Group Human Resources, so that we can attract and retain the talent Hikma needs to grow. Our position in growing markets and broad geographical spread, combined with our strong brands and reputation for quality, gives us great conﬁdence that we can deliver on our objective to become a leading global multinational speciality pharmaceutical company. Said Darwazah Chief Executive Ofﬁcer T r u s t e d t o d e l i v e r O u r s t r a t e g y 12751_p26_p57.qxp 31/3/09 15:45 Page 32 32 Our strategy Hikma Pharmaceuticals PLC Annual report 2008 Strengthening our leading position in the MENA region. Our strong position in the MENA region is unique with operations in 17 MENA markets and more than 1,200 sales and marketing employees. Recent acquisitions have enhanced our presence in existing MENA markets, brought high quality and complementary product portfolios and provided access to new markets, including the large and fast growing Egyptian market. We are conﬁdent that the MENA region will continue to offer signiﬁcant and sustainable market growth opportunities for our existing business and we continue to look for acquisitions across the region. Increasing penetration of our core markets Branded business market share* Position Share 2 At the end of 2008, Hikma is the ﬁfth largest pharmaceutical manufacturer in the MENA region with a market share of 3.4%* competing against major multinational pharmaceutical companies as well as local competitors. In our core markets, Saudi Arabia, Algeria, Jordan and Sudan, we are one of the top 5 players and across all our markets many of our products have a market share of 15% or more. 1 Jordan 2 Algeria 3 Saudi Arabia 1 4 5 12.4% 6.4% 4.9% * Source: IMS Health. MAT Dec. 08. Retail sales only. 1 3 12751_p26_p57.qxp 1/4/09 17:42 Page 33 A technician in our Jordan facility The combined efforts and dedication of our employees have been an important factor behind Hikma’s strong market position. “Proud to make a difference.” T r u s t e d t o d e l i v e r O u r s t r a t e g y 12751_p26_p57.qxp 31/3/09 00:40 Page 34 34 Our strategy Hikma Pharmaceuticals PLC Annual report 2008 Business and ﬁnancial review This year we have delivered record revenue growth of 29.4% with strong performances in the Branded and Injectables businesses and generated excellent operating cashﬂow through a strong focus on working capital management. Key performance indicators The Board measures progress on our strategic objectives by reference to ﬁve key ﬁnancial performance indicators (“KPIs”) applied on a Group-wide and segmental basis. These same indicators are used by executive management to manage the business. Performance in 2008 against these indicators is set out in the table below left, together with the prior year performance data. It is important to note that the 2008 ﬁgures were impacted by the difﬁculties experienced in the US Generics business. For 2009 and onwards, the Board will measure Group performance by reference to an amended set of key performance indicators that better reﬂect the Group’s focus on continued revenue growth and operational excellence. These indicators will be measured on both a Group-wide and a segmental basis. These new performance indicators are: Hikma’s key performance indicators 1. Revenue growth Year ended Year ended 31 December 31 December 2007 2008 29.4% 44.2% 13.8% 41.6% 49.4% 20.6% –8.7% 14.8% 2. Operating proﬁt growth compared with revenue growth 3. Cash to cash cycle time 4. Return on invested capital 5. New product launches 17 28 Group performance Revenue growth Gross proﬁt margin Operating proﬁt margin Growth in proﬁt attributable to shareholders Number of new product launches in MENA, Europe and the US Revenue for the Group increased by 29.4% to $580.7 million, compared with $448.8 million in 2007. The revenue contribution from Hikma Egypt (previously Alkan), APM and Thymoorgan – the acquisitions completed since the beginning of 2007 – was $102.5 million. Underlying organic revenue growth (excluding the impact of these acquisitions) was 9.5%, driven by strong performances in both the Branded and Injectables businesses but offset by a 14.9% decline in revenues in our US Generics business. As a result, the Branded and Injectables businesses accounted for 81% of revenues in 2008 compared with 71% in 2007. The Group’s gross proﬁt increased by 15.8% to $256.5 million, compared with $221.5 million in 2007. Group gross margin was 44.2%, compared with 49.4% in 2007, primarily due to the impact of the signiﬁcant decline in gross proﬁt in the Generics business. Group operating expenses rose by 36.1% to $175.8 million, compared with $129.1 million in 2007. This reﬂects primarily a strategic increase in sales and marketing expenses and control of our general and administrative and research For the purposes of this report, “Company” means Hikma Pharmaceuticals PLC and “Group” means the Company and its subsidiary and associated undertakings. 12751_p26_p57.qxp 1/4/09 23:43 Page 35 Hikma Pharmaceuticals PLC Annual report 2008 35 Group revenues Revenue by segment Branded Injectables Generics Revenue by region MENA US Europe and rest of world 2008 2007 55.3% 25.7% 18.2% 63.0% 22.5% 14.5% 44.3% 27.0% 27.7% 51.0% 32.0% 17.0% 4Before the amortisation of intangible assets (other than software) and exceptional items, which include acquisition integration costs and revisions to estimates for charge-backs, rebates and returns. 2008 Revenue by segment % Branded: 55.3% Generics: 18.2% Injectables: 25.7% and development costs during the year. Excluding acquisitions, operating expenses grew by 19.7%. On an adjusted basis4, operating expenses as a percentage of sales increased by 0.3 percentage points to 28.5%, up from 28.2% in 2007. Sales and marketing expenses increased by 48.5% to $90.6 million, largely reﬂecting the consolidation of APM and Hikma Egypt and the higher amortisation costs related to intangible assets arising on these acquisitions. Excluding the 2007 acquisitions of APM, Hikma Egypt and Thymoorgan, sales and marketing expenses rose by 19.8% as we invested in the promotion of our leading own-brand and in-licensed products. We expect to see further beneﬁts from this in 2009. Sales and marketing expenses represented 15.6% of Group revenue in 2008, compared with 13.6% in 2007. We expect sales and marketing expenses as a percentage of sales to begin to decline slightly in 2009. The Group’s general and administrative expenses increased by 23.6% to $56.9 million, compared with $46.0 million in 2007. This increase partially reﬂects the consolidation of APM, Hikma Egypt and Thymoorgan and includes exceptional acquisition integration costs of $1.6 million. Tighter control of corporate general and administrative costs meant that there was only a slight increase of $1.3 million, bringing total corporate general and administrative costs to $19.4 million, compared with $18.0 million in 2007. Overall, general and administrative expenses represented 9.8% of Group revenue in 2008, compared with 10.3% in 2007. Investment in R&D increased by 14.6% to $22.2 million, with total investment in R&D now representing 3.8% of Group revenue, compared with 4.3% in 2007. This decline mainly reﬂects an increase in the proportion of our development projects in the MENA region where development costs tend to be lower than in the USA or Europe. It also reﬂects a strategic shift towards the acquisition of product ﬁles and related product intangibles. Other net operating expenses, consisting mainly of provisions against slow moving items of $8.6 million partially offset by foreign exchange gains of $1.2 million, were $6.2 million, compared with $2.8 million in 2007. The major reason for the increase in 2008 was the provision that we made in our US Generics business for slow moving items due to deteriorating market conditions. Operating proﬁt for the Group decreased by 12.7% to $80.7 million, compared with $92.4 million in 2007, and Group operating margin decreased to 13.9%, compared with 20.6% in 2007. This decline reﬂects, for the most part, the loss incurred in our Generics business where operating proﬁt fell by $37.4 million from 2007 to 2008. Adjusted operating proﬁt for the Group, deﬁned as operating proﬁt before the amortisation of intangible assets (other than software) and exceptional items, which include acquisition integration costs and revisions to estimates for charge- backs, rebates and returns, was largely unchanged in 2008 at $94.3 million, T r u s t e d t o d e l i v e r O u r s t r a t e g y 12751_p26_p57.qxp 31/3/09 00:46 Page 36 36 Our strategy Hikma Pharmaceuticals PLC Annual report 2008 Developing our global product range in growing therapeutic areas. Diabetes is growing in the MENA region, where the ageing population together with lifestyle changes have led to an increase in type 2 diabetes. In fact the United Arab Emirates, Bahrain, Kuwait and Oman are amongst the 10 countries in the world experiencing the greatest increases of diabetes amongst their populations. With the growing incidence of diabetes comes an increase in cardiovascular disease, with diabetes patients two to four times more likely to develop cardiovascular disease than the general population. To address the changing needs of patients in our markets our portfolio is more focused on the cardiovascular and metabolic therapeutic areas. In 2008 we launched ﬁve new cardiovascular products, one diabetes product and two central nervous system products. Accessing quality products through our in-licensing partnerships Blopress® and Blopress® Plus from Takeda Blopress® (candersatan cilexetil) which is an angiotesin II receptor blocker (ARB) revolutionizes hypertension treatment by blocking the action of the hormone responsible for high blood pressure. Blopress® Plus offers hypertensive patients additional blood pressure control through an innovative single pill combination and was recently launched in Jordan, Tunisia, Bahrain and Qatar as a line extension. 12751_p26_p57.qxp 31/3/09 17:41 Page 37 T r u s t e d t o d e l i v e r “More choices than ever.” O u r s t r a t e g y Khalid Farraj is a trained pharmacist who joined Hikma as a medical representative in Jordan in 2003 and has progressed to become a supervisor. Hikma prides itself on the quality of it’s medical sales team, the majority of whom are trained in the medical ﬁeld. 12751_p26_p57.qxp 31/3/09 00:50 Page 38 38 Our strategy Hikma Pharmaceuticals PLC Annual report 2008 Business and ﬁnancial review continued 5 Products are deﬁned as pharmaceutical compounds sold by the Group. New products are deﬁned as pharmaceutical compounds not yet launched by the Group and existing compounds being introduced into a new segment or a new region. Line extensions are new forms or dosage strengths. Filings include only ﬁlings for new products and the ﬁrst ﬁling of line extensions in a segment or region. Approvals are comprehensive and include approvals for new products and line extensions and approvals in new countries. Pending approvals include only applications that are pending for new products and the ﬁrst ﬁling of a line extension in a segment or region. compared with $95.1 million in 2007. These exceptional items include a $4.8 million one-off provision for revisions to our estimates for chargebacks, returns and rebates in our US Generics business and $1.6 million of acquisition integration costs associated with the acquisition of APM and Hikma Egypt. Adjusted operating proﬁt margin was 16.1%, compared with 21.2% in 2007. This decline is attributed primarily to the difﬁculties experienced by our Generics business in the US but also to planned investment in sales and marketing related to new product launches in the Branded business. Research and development5 The Group’s product portfolio continues to grow. During 2008, we added 17 new products to the Group portfolio that now includes 369 products in 767 dosage strengths and forms. We manufacture and/or sell 40 of these products under licence. In 2008, Hikma received 154 regulatory approvals of which 91 approvals were for the Branded business, 60 for the Injectables business and three for the Generics business. Over the same period, 168 products and line extensions were launched across the Group, including the 17 new pharmaceutical compounds not previously marketed. To ensure a continuous ﬂow of new products from our pipeline, we submitted 46 regulatory ﬁlings for new products, and a total of 233 submissions across all regions and markets. As of 31 December 2008, we had a total of 107 pending approvals for new products and 647 pending approvals across all regions and markets. We estimate the approximate addressable market for our portfolio of pending approvals to be approximately $24 billion, based on estimates by IMS Health for the 2008 full year sales of the currently marketed equivalent products in the markets covered by the pending approvals. At 31 December 2008, we had a total of 111 new products under development. We expect the majority of these to receive several marketing authorisations for differing strengths and/or product forms over the next few years. Filings in 2008 for new products Filings and new in 2008 line extensions Pending approvals for new products Filings and new line in 2008 approvals as of extensions as of 31 December for new 31 December 2008 2008 Total pending products only Generics United States Branded MENA Europe and rest of world Injectables United States MENA Europe and rest of world Group total 4 169 16 8 26 10 233 4 32 16 8 12 9 81 2 16 6 6 7 9 46 33 386 37 32 145 14 647 Pending approvals for new products only as of 31 December 2008 25 23 14 21 11 13 33 41 37 32 17 13 173 107 12751_p26_p57.qxp 27/3/09 22:34 Page 39 Hikma Pharmaceuticals PLC Annual report 2008 39 Branded revenues $million +61.3% 2008 320.8 2007 198.9 2006 130.1 000 575 050 525 000 2008 MENA market share Top nine MENA markets Sanoﬁ-Aventis Glaxosmithkline Novartis Pﬁzer Hikma Spimaco Bayer Astrazeneca Johnson & Johnson Pharco Rank 1 2 3 4 5 6 7 8 9 10 YoY Growth Market share % 100 11.1 % 18.5 20.9 17.2 18.6 12.7 27.0 12.9 18.8 30.2 12.7 24.2 7.7 5.7 5.2 3.4 2.4 2.2 1.9 1.8 1.6 6 Source of all market and market share data: IMS Health, Moving Annual Totals as of December 2008 for the top 9 MENA markets in which Hikma operates (Algeria, Egypt, Jordan, Kuwait, Lebanon, Morocco, Saudi Arabia, Tunisia and the United Arab Emirates). These market ﬁgures are for retail pharmacy sales only and exclude hospital sales and government contracts that can be signiﬁcant in certain markets Branded Pharmaceuticals The Branded business is our largest business in terms of revenue and operating proﬁt. Branded revenues increased by 61.3% to $320.8 million in 2008, compared with $198.9 million in 2007, reﬂecting strong organic growth of 22.4% enhanced by the acquisitions we made in the MENA region in 2007. Trading continued to be strong across all our MENA markets, particularly Algeria, Jordan, Saudi Arabia and the other Gulf Cooperation Council (GCC) countries. Both of the acquisitions in 2007 in the MENA region performed ahead of our expectations in 2008. Sales at APM, acquired in December 2007, grew by 38% to $61.3 million in 2008 compared with reported sales of $44.4 million in 2007. This performance demonstrates how successful the integration process has been. We have improved APM’s organisational structure by creating a new sales operation and logistics, supply chain, budgeting and production planning functions and we have integrated the Hikma and APM distribution channels in many markets. These changes are bringing synergies and will reduce future sales and marketing expenses. In order to improve working capital management, we have applied Hikma’s standard terms of trade wherever possible. We have upgraded APM’s manufacturing facilities to bring them into line with Hikma’s demanding levels of quality and compliance standards. Through this process we nearly doubled production on most lines. Further capacity upgrades were made towards the end of the year that required a scheduled suspension of production at the APM plant for almost two months. Production has since restarted. Sales at Hikma Egypt, acquired in September 2007, grew by 58% to $28.8 million (2008) compared with $18.2 million (2007). This acquisition signiﬁcantly enhanced our exposure to the fast-growing Egyptian market. Hikma Egypt has now been fully integrated, with key functions such as ﬁnance, marketing and R&D incorporated into Hikma’s global systems. We have also made signiﬁcant process improvements, nearly doubling production output and units sold compared with 2007. We also made a signiﬁcant investment in sales and marketing to launch the Hikma brand in the Egyptian market and to promote key products. In 2008 our largest markets were Algeria, Saudi Arabia, Jordan and Egypt. More focused sales and marketing efforts have helped to drive customer demand and increase sales across these and most other Branded markets. Signiﬁcant attention was paid to promoting new and recently launched products, strengthening our market position in key therapeutic areas and building brand recognition. As a result of these efforts, Hikma is now the ﬁfth largest pharmaceutical manufacturer in the MENA region, with a market share of 3.4%6. For the top nine retail pharmaceutical markets in MENA in which we operate, the total private market was worth approximately $7.3 billion in 2008 with year-on-year growth of 18.5%. Algeria is the largest private pharmaceutical market in the MENA region. The private market in Algeria was worth over $1.7 billion in 2008, when it grew at a rate of over 30%. In 2008, we raised our market share in Algeria to 6.4% compared with 6.1% in 2007. We are now the fourth largest pharmaceutical manufacturer and the largest generic pharmaceutical manufacturer by value in the Algerian market. T r u s t e d t o d e l i v e r O u r s t r a t e g y 12751_p26_p57.qxp 31/3/09 00:55 Page 40 40 Our strategy Hikma Pharmaceuticals PLC Annual report 2008 Extending our reach and diversity through partnerships. Hikma seeks to strengthen its partnerships with all stakeholders within the healthcare value chain. Expanding our under license business with research based multinational companies is a key part of this strategy and will enable us to continuously launch new innovative medical treatments valued by patients and physicians. In 2008, we signed three new agreements with originator pharmaceutical companies. In order to differentiate ourselves from other local generic companies in the MENA region, we are forging strong lasting relationships and loyalty with physicians and the medical community by providing medical education programs and scientiﬁc workshops and conducting clinical studies. +28 products acquired in 3 years The pioneering role of the GLORY study Hikma is working on becoming a true long-term partner to health care providers. In April 2008, Hikma signed a major agreement with the Jordan Cardiologists Collaborating Group (JCC Group) to conduct an epidemiological study called Glory which aims to measure the relationship between Myocardial Infarction (MI) and the diabetes state of the MI patient. Hikma is the full sponsor of this study. The ﬁrst results are expected at the end of 2009. 12751_p26_p57.qxp 31/3/09 17:42 Page 41 “Strong relationships.” Dr Mamoun Al Zebdeh prescribes Hikma products for his patients as he trusts the quality of the products we manufacture. T r u s t e d t o d e l i v e r O u r s t r a t e g y 12751_p26_p57.qxp 31/3/09 00:50 Page 42 42 Our strategy Hikma Pharmaceuticals PLC Annual report 2008 Business and ﬁnancial review continued Branded operating profit $million +41.8% 2008 87.5 2007 61.7 000 525 050 2006 39.4 575 000 Pharmaceutical market growth in 2008* Egypt +19% Algeria +31% Saudi Arabia +6% Jordan +17% * Source: IMS Health MAT Dec 2008 Retails Sales only Egypt is currently the second largest private pharmaceutical market in MENA. In 2008 it grew by 19% and was worth over $1.6 billion in retail sales. Our market share in Egypt, while still well below our strategic target of 5%, has increased signiﬁcantly and currently stands at 1.4%. We expect further strong growth in 2009 as we launch more Hikma products through our Egyptian sales network. Saudi Arabia is the third largest private pharmaceutical market in MENA. The retail market was worth in excess of $1.5 billion in 2008 when it grew by 6%. The acquisition of APM in 2007 has helped to strengthen Hikma’s position in the Saudi market where we are the ﬁfth largest pharmaceutical manufacturer, with a market share in value terms of 4.9% in 2008, compared with 4.8% in 2007. Although the Jordanian pharmaceutical market is still comparatively small, we remain the clear market leader with a market share of 12.4%, up from 7.7% in 2007, and more than twice the share of the second largest pharmaceutical company operating in this market. The increase in our market share is due to our expanding product range and the consolidation of APM. In-licensing remains an important part of our growth strategy in the MENA region and our portfolio of licensed products continues to deliver excellent results. In 2008 revenue from our 40 in-licensed products (including in-licensed products that we acquired from APM and Hikma Egypt) grew by 63% and accounted for one-third of total Branded sales. Our long-term strategic target is to raise this proportion to 50%. We are conﬁdent that our strong market position in the MENA region and our excellent track record with licensed products will continue to attract leading multinational partners. This is demonstrated by the excellent performance of the Takeda products that entered our portfolio in 2007. Sales of the antidiabetic Actos®, the antihypertensive Blopress® and the other products in-licensed from Takeda in 2007 grew by more than 64% in 2008 as we captured greater market share. Gross proﬁt in the Branded business increased by 60.0% to $172.8 million, compared with $108.0 million in 2007. The Branded business’s gross margin remained stable at 53.9%, compared with 54.3% in 2007. Branded operating proﬁt increased by 41.8% in 2008 to $87.5 million. Operating margin in the Branded business was 27.3% in 2008, down from 31.0% in 2007. On an adjusted basis, excluding the amortisation of acquisition related intangible assets and exceptional items, operating margin in 2008 was 29.2% against 31.2% in 2007. The decline in margin primarily reﬂects the additional investment in sales and marketing activities and research and development to support the strong growth in Branded sales. This investment in sales and marketing relates in particular to the promotion of key products including the new in-licensed products acquired from APM. In 2008, the Branded business received 91 regulatory approvals, including 17 new products in Jordan and Egypt, 67 in other MENA markets and seven in Europe and the rest of the world. In line with our strategic objectives for the Branded business, we launched a total of six new products in 2008, four in Jordan and two in Egypt. The total number of Branded sales and marketing staff operating across our 17 MENA markets at year end was 1,090, including 296 in Egypt, 222 in Saudi Arabia, 149 in Jordan and 164 in Algeria. 12751_p26_p57.qxp 27/3/09 22:34 Page 43 Hikma Pharmaceuticals PLC Annual report 2008 43 Injectables revenues $million +23.2% 2008 149.3 2007 121.2 0.0 5.5 0.0 2006 67.6 5.5 0.0 000 575 050 525 000 Injectables operating profit $million +8% 2008 63.4 2007 54.2 2006 28.3 Injectable Pharmaceuticals Revenue in our global Injectables business increased by 23.2% to $149.3 million. Excluding the contribution from the acquisitions of Thymoorgan and APM that we made in 2007, organic growth was 14.2%, driven by a strong performance in the MENA region and our growing business in the US. Injectables revenue grew by 43.0% in the MENA region with Jordan and Algeria performing particularly well. This growth is attributable to the strength of our product portfolio, the quality of our sales force and a 50% increase in attractive tender business. The MENA region now represents 36.6% of Injectables sales, compared with 31.5% in 2007. We continue to see excellent prospects for growth in Injectables sales in the MENA region which we expect to account for an increasing percentage of our future Injectable sales. Despite intensifying competition in the US injectable market, our US Injectables sales grew by 29.2% compared with 2007 and represented 16.7% of our global Injectables business. We saw strong demand in both our own product and private label business in the US. We beneﬁted from a number of new product launches that resulted in a US product portfolio that was signiﬁcantly more diverse than in 2007. We are also achieving higher sales volumes across a broader portfolio of cephalosporin antibiotics and have seen excellent growth in some of our liquid products. In Europe, which includes our oncology business, we saw increasing pricing pressure in the German market. Overall European injectable sales reached $69.8 million, compared with $63.7 million in 2007, an increase of 9.6%. Excluding a $7million decrease in the year for non-recurring sales relating to 2 in-licensed products. European injectable sales rose by 25.7%. Europe now represents 46.7% of our Injectables business compared with 52.5% in 2007. We have appointed a new management team for the oncology business that will be expanding our product portfolio and also marketing these products in markets outside Germany in 2009, particularly in the MENA region. Injectables gross proﬁt increased by 17.0% to $63.4 million, compared with $54.2 million in 2007, but gross margin decreased to 42.4% compared with 44.7% in 2007. The decrease in gross margin reﬂects, in part, the inclusion for a full year of the Thymoorgan contract manufacturing business that has a lower gross margin than the rest of Hikma’s Injectables business. It also reﬂects the consolidation of some low margin injectable sales contracts at APM that will not be renewed on completion. Excluding the acquisitions of Thymoorgan and APM, the Injectables gross margin was 45.1%, slightly below the 2007 level of 45.7%. Injectables operating proﬁt increased by 8.0% to $22.1 million, compared with $20.5 million in 2007. Injectables operating margin decreased to 14.8% in 2008, down from 16.9% in 2007, primarily as a result of the consolidation of APM’s lower margin injectable sales. Excluding the consolidation of APM and amortisation of intangibles (excluding software), the Injectables operating margin was slightly higher at 17.3%. During 2008, the Injectables business received 60 regulatory approvals across all markets, including 37 in the MENA region, 16 in Europe and the rest of the world and seven ANDA approvals in the US. A total of 61 products were launched, including nine new products. T r u s t e d t o d e l i v e r O u r s t r a t e g y 12751_p26_p57.qxp 31/3/09 01:02 Page 44 44 Our strategy Hikma Pharmaceuticals PLC Annual report 2008 Increasing the scale of our speciality injectables business. We see considerable scope to develop our market positions in each of our injectables markets. In MENA, we have an excellent opportunity to gain market share in both existing and new markets by leveraging our extensive product portfolio and pipeline. In Europe and the US where we beneﬁt from expanding product pipelines and expect a steady stream of new product launches, we also have scope to continue to develop our growing market positions. Building our oncology business will be a key priority across all our markets. In 2009 we expect to launch a number of these products in MENA and Europe and we will begin to register these products for the US market. A leading injectables supplier in MENA In the MENA region, we are the sole generic supplier of six injectable products. This has helped us to build brand recognition and gain market share, while at the same time bringing a lower cost alternative to the originator into the market. Sales of our injectables in MENA grew by more than 40%. Our aim is to differentiate ourselves from our competitors by focusing on high value added products such as Iyophilised, oil suspension and oncology products where we beneﬁt from a growing expertise. 12751_p26_p57.qxp 31/3/09 01:03 Page 45 Dr Ragheb Al-Shakhshir joined Hikma in 2000 as an R&D manager. He currently works in our Jordan facility as Vice-President R&D and is also responsible for analytical research reporting. T r u s t e d t o d e l i v e r O u r s t r a t e g y “Quality differentiates us.” 12751_p26_p57.qxp 1/4/09 23:41 Page 46 46 Our strategy Hikma Pharmaceuticals PLC Annual report 2008 Business and ﬁnancial review continued Generics revenues $million -14.9% 2007 124.2 2006 113.7 2008 105.7 9797 9898 9898 9999 0000 Metoprolol is part of the beta-blockers’ group which affect the heart and circulation. This drug is used to treat angina (chest pain), hypertension (high blood pressure) as well as heart attack. In the US, metoprolol was the highest selling new product for 2008. Generic Pharmaceuticals Our Generics business is entirely focused on the US market for oral generics. Sales of injectable generics in the US market are included in our Injectables segment. Revenue in our Generics business decreased by 14.9% to $105.7 million, compared with $124.2 million in 2007. This decline resulted initially from lower sales of the antihypertensive lisinopril following the completion, in December 2007, of our contract to supply the Department of Veterans Affairs. The absence of these revenues in 2008 was exacerbated by continued price erosion across other product lines and lower than expected demand for new products. In addition, as reported in our interim results, we made a one-off provision of $4.8 million relating to revisions in our estimates for chargebacks, rebates and returns. All of these factors, as well as higher than expected production and API costs, led to a 67% decline in the Generics gross proﬁt to $19.3 million, compared with $58.6 million in 2007. The Generics gross margin was 18.3%, compared with 47.2% in 2007. Consequently, the Generics business realised an operating loss of $5.8 million compared with an operating proﬁt of $31.6 million in 2007. We focused on stemming the losses in this business as quickly as possible and made several management changes. These included the appointments of a new General Manager and a new Vice-President, Sales and Marketing for all US operations. This strengthened management team undertook a comprehensive review of the business in the second half of 2008 and identiﬁed a number of approaches to improving operating performance. Following an in-depth examination of proﬁtability by product and by customer, we withdrew from the supply of some low margin products, implemented price increases where possible, secured lower cost sources of APIs, improved our manufacturing and distribution efﬁciencies, raised service levels and renegotiated our standard terms of trade. We are pleased to report that these actions resulted in the Generics business returning to proﬁtability in the closing months of 2008, although the proﬁt achieved was not sufﬁcient to offset losses incurred earlier in the year. We expect proﬁtable trading to be sustained during 2009 as we continue to focus on implementing these actions. We have also noted a recent improvement in the prices of certain products in the US following the FDA-enforced withdrawal of some non-US suppliers in 2008. During 2008, the Generics business received three regulatory approvals, of which two were new products. A total of seven products were launched, including two new products. Other business Our other business segment consists primarily of Arab Medical Containers, a manufacturer of plastic specialised packaging, and International Pharmaceuticals Research Centre, which conducts bio-equivalency studies. These businesses, which supply third parties as well as other Group operations, had aggregate revenues of $4.8 million in 2008, compared with aggregate revenue of $4.5 million in 2007. This represented 0.8% of Group revenues in 2008. These Other businesses delivered an operating loss of $3.7 million in 2008, compared with an operating loss of $3.4 million in 2007. This loss can be attributed primarily to corporate research and development costs that cannot be allocated to speciﬁc business segments. 12751_p26_p57.qxp 1/4/09 23:42 Page 47 Hikma Pharmaceuticals PLC Annual report 2008 47 “Efforts to improve operating performance in the Generics business resulted in a return to proﬁtabilty in the last quarter of 2008.” Said Darwazah Chief Executive Ofﬁcer Financial performance Finance income and costs Net ﬁnancing cost for the year was $16.7 million compared with $8.8 million during 2007. The increase is due to higher average debt levels during 2008 compared to 2007. Proﬁt before tax Proﬁt before taxes for the Group decreased by $19.8 million, or 23.6%, to $64.0 million, compared with $83.8 million in 2007. Tax The Group had a tax expense of $6.9 million in 2008. The effective tax rate was 10.8%, a year-on-year decrease of 12.7 percentage points. This improvement reﬂects the absence of proﬁts in the USA and a further increase in the proportion of sales and proﬁts generated in the MENA region. Minority interest Hikma’s minority interest was nil in 2008, compared with $1.6 million in 2007. This was primarily due to a decline in the proﬁtability of Hikma’s 51% owned subsidiary in Sudan. Proﬁt for the year The Group’s proﬁt for the year attributable to equity holders of the parent decreased by 8.7% to $57.1 million for the year ended 31 December 2008, compared with $62.6 million in 2007. Adjusted proﬁt for the year Excluding the amortisation of intangible assets (other than software) and exceptional items, which include integration costs and revisions to estimates for charge-backs, rebates and returns, the Group’s adjusted proﬁt for the year attributable to equity holders of the parent increased by 4.5% to $67.4 million for the year ended 31 December 2008, compared with $64.5 million in 2007. Earnings per share Diluted earnings per share for the year to 31 December 2008 were 29.6 cents, down by 16.4% from 35.4 cents in 2007. Dividend The Board has recommended a ﬁnal dividend of 4.0 cents per share (approximately 2.8 pence per share), which will make the dividend for the full year of 7.5 cents per share, the same amount paid in 2007. The proposed ﬁnal dividend will be paid on 2 June 2009 to shareholders on the register on 1 May 2009, subject to approval at the Annual General Meeting. Operating cash ﬂow and investment Net cash inﬂow from operating activities was $75.0 million, compared with $53.3 million in 2007. The previously reported 2007 operating cash ﬂow has be reclassiﬁed and increased by $8.1 million. This improvement came as a result of our focus on effective working capital management where, excluding acquisitions, receivable days decreased by nine days and inventory days decreased by 21 days. Net cash used for investing activities was $66.1 million, compared with $348.9 million in 2007. The latter included just under $300 million of expenditure on acquisitions ($71.7 million for Ribosepharm and Thymoorgan, $58.7 million for Alkan Pharma in Egypt and $163.4 million for Arab Pharmaceutical Manufacturing in Jordan). Capital expenditure amounted to $56.2 million, compared with $50.4 million in 2007. This expenditure related primarily to expansion projects in the Branded and Injectables businesses. During the year the Group also made regular investments to upgrade and maintain existing facilities. On 17 January 2008 we successfully raised gross proceeds of £81.6 million (approximately $160 million) in an equity placing of shares, funding the acquisition of APM, strengthening our balance sheet and enhancing our ﬂexibility to ﬁnance future growth. T r u s t e d t o d e l i v e r O u r s t r a t e g y 12751_p26_p57.qxp 31/3/09 01:07 Page 48 48 Our strategy Hikma Pharmaceuticals PLC Annual report 2008 Leveraging our expertise and capacity in the US market. % %% %%% Our Generics business operates in the competitive US market, by far the largest generics market in the world. Our experienced sales and marketing team is organized to meet the needs of this commoditized market with the support of our world class manufacturing facilities and an excellent regulatory record. With our renewed commitment to customer service, we continue to build on our solid relationships with our key customers across the various classes of trade in the US. In particular, we also support our business in the ﬁeld through dedicated representatives who call on our hospital customers. High proﬁle marketing In addition to our sales directors and managers who service and strengthen our relationships with retailers, wholesalers and distributors across the country, we have a specialist hospital sales team that covers 34 states in the USA. This team works closely with the hospital pharmacists and buyers, to ensure excellent customer service and prompt product delivery in order that patients beneﬁt from Hikma’s quality products. 12751_p26_p57.qxp 31/3/09 10:22 Page 49 “Helping hospitals treat patients” T r u s t e d t o d e l i v e r O u r s t r a t e g y Mary Beth Mobley is one of our US Specialist hospital medical representatives, she covers the south east of the US and provides a support service for the hospital pharmacists. 12751_p26_p57.qxp 31/3/09 00:51 Page 50 50 Our strategy Hikma Pharmaceuticals PLC Annual report 2008 Business and ﬁnancial review continued “Our solid balance sheet and our focus on operating cash ﬂow will enable us to pursue our growth strategy.” Said Darwazah Chief Executive Ofﬁcer 7 As of 16 March 2009, the exchange rate against the US dollar of the Algerian dinar was 73.846 and of the Euro was 0.77378 (Source Oanda Corporation www.oanda.com) Outlook Given the prevailing economic conditions, in 2009 we are expecting Group revenues to grow by 10-15%, with an improvement in our gross margin of 1-2%. This will be driven by organic growth and supported by the acquisitions and investments we have made over the past two years. The higher end of these ranges is based on constant exchange rates while the lower end can be expected if the 2009 average exchange rate is at the current level.7 With over 60% of sales now generated in the MENA region, we should continue to beneﬁt from the growth in that pharmaceutical market, which remains much higher than the global market. Our share of the MENA market should also continue to increase as we further penetrate existing markets, expand into new markets and grow our portfolio of own-brand and in-licensed products. With new products and new markets, we believe that there remains considerable scope for us to grow our global Injectables business, particularly in the MENA region where we will be starting to launch our portfolio of oncology products. In our US Generics business, which returned to proﬁtability in the fourth quarter of 2008, we will continue to implement the changes that helped to turn this business around and beneﬁt from improving market conditions in the US. Our solid balance sheet and continued focus on operating cash ﬂow generation will give us the ﬁnancial ﬂexibility to pursue strategic acquisitions that will enhance our strong organic growth. We are conﬁdent that the proven strength of Hikma’s business model will enable us to deliver a strong performance in 2009 and the years ahead. Basis of preparation and forward-looking statements This Business and Financial review has been prepared solely to provide additional information to shareholders to assess the Company’s strategies and the potential for those strategies to succeed, and should not be relied on by any other party or for any other purpose. Certain statements in the above review are forward-looking statements – using words such as “intends”, “believes”, “anticipates” and “expects”. Where included, these have been made by the Directors in good faith based on the information available to them up to the time of their approval of this report. By their nature, forward-looking statements are based on assumptions and involve inherent risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements, and should be treated with caution. These risks, uncertainties or assumptions could adversely affect the outcome and ﬁnancial effects of the plans and events described in this review. Forward-looking statements contained in this review regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which speak as only of the date of the approval of this report. Except as required by law, the Company is under no obligation to update or keep current the forward-looking statements contained in this review or to correct any inaccuracies which may become apparent in such forward-looking statements. Principal risks and uncertainties The Group’s business faces risks and uncertainties. The section below includes the principal risks and uncertainties that the Group considers could have a signiﬁcant effect on its ﬁnancial condition, results of operations or future performance. The list is not set out in order of priority and other risks, currently unknown or not considered material, could have a similar effect. 12751_p26_p57.qxp 31/3/09 01:16 Page 51 Hikma Pharmaceuticals PLC Annual report 2008 51 Risk management: Operational risks Regulatory Hikma is subject to extensive regulation on the approval, manufacture and distribution of its products in all its markets. There is no single worldwide harmonised set of regulations relating to the development, manufacture and sale of pharmaceutical products and the Group is therefore subject to different laws, regulations and codes depending on the regions or countries in which products are marketed. This is particularly relevant in the MENA region where there is no mutually-recognized regional regulatory body. Speciﬁc jurisdictions can therefore refuse to register a product or may require additional information even though it is approved in another jurisdiction. This can create signiﬁcant compliance costs, and can also increase the time it takes to realise the full penetration of products into all markets. The Group operates in diverse markets and geographic regions and is therefore subject to a broad range of industry, economic and political dynamics. The laws and regulations governing the manufacture and supply of our products are subject to change, which may lead to unanticipated business interruption or increased costs for compliance. Whilst the cost of such disruption of compliance can be signiﬁcant, we believe that the wide geographic spread of our operations gives the Group the strength and ﬂexibility to lessen the impact on the Group’s results and ﬁnancial condition of any such disruption. Economic and political dynamics The Group operates in emerging markets, some of which have less developed political and legal systems, or which have a history of political volatility and therefore present greater challenges to the conduct of business than more developed markets. Whilst the Group has a wide geographical spread of operations, the failure of control, a change in the economic conditions or political environment or sustained civil unrest in any particular market or country could adversely affect the ﬁnancial condition of the Group. Risk of interruption of production Product manufacture is subject to continual regulatory control, and products must be produced in accordance with good manufacturing practice regulations. Our manufacturing sites are subject to approval and ongoing inspection by a large number of regulatory agencies. In addition, small changes in manufacturing processes may require further regulatory approval. These issues could result in additional compliance expense, and compliance failure could result in interruptions to production, product recalls, closure of manufacturing sites and other sanctions, which could adversely affect our business and its ﬁnancial condition. Regulated and other suppliers A compliance failure by any of our regulated suppliers – for both active and bulk ingredients – could lead to delays in production, product recalls, the potential for product liability claims and other regulatory sanctions. The business undertakes supply chain planning, and alternative sourcing of key products. However, for some components we may have to rely on single sourcing, which creates a greater risk of disruption to production in the event of regulatory non-compliance or interruption of supply. While the Group does not believe that any third-party supplier relationship is individually signiﬁcant in terms of the entire Group, a failure in supply could disrupt production and restrict sales. Government tender bids Whilst the majority of Group sales are to the private sector, each of our three businesses participates in government tenders. The timing and outcome of these tenders are unpredictable, and the Group’s results could be affected by the gain or loss of a signiﬁcant government contract. T r u s t e d t o d e l i v e r O u r s t r a t e g y 12751_p26_p57.qxp 1/4/09 23:45 Page 52 52 Our strategy Hikma Pharmaceuticals PLC Annual report 2008 „„ „ Maintaining our world-class manufacturing and API sourcing capabilities We are extremely proud of our 12 world-class manufacturing facilities, most of which have passed inspections by regulators from multiple jurisdictions. Five of our facilities have been FDA approved. We are committed to maintaining an excellent compliance record at all of our facilities and to this end we make continuous investment in training our excellent workforce. API sourcing also remains a key priority. Our dedicated API sourcing team is focused on identifying high quality, cost effective suppliers for all our markets. One more FDA approved manufacturing plant We continually seek to improve our production facilities. During 2008 Hikma Portugal’s new cephalosporin plant was granted FDA approval and the same approval process was started at Thymoorgan. In Portugal we have commenced construction of a third plant containing state of the art liquid nitrogen freeze drying capacity and a high speed liquid ﬁling line. FDA appoval of this plant is expected towards the end of 2010. 12751_p26_p57.qxp 31/3/09 01:34 Page 53 A technician at our Portuguese plant Hikma’s commitment to providing high-quality products starts with continuous training of our workforce and is an integral part of maintaining high manufacturing standards. “Focused on high quality products” T r u s t e d t o d e l i v e r O u r s t r a t e g y 12751_p26_p57.qxp 1/4/09 23:47 Page 54 54 Our strategy Hikma Pharmaceuticals PLC Annual report 2008 Business and ﬁnancial review continued Research and development and commercialisation of new products The Group’s results of operations may be impacted signiﬁcantly by the timeliness of its research and development and product commercialisation activities. In order to bring a pharmaceutical product to market successfully, the Group must identify products for which it can generate attractive margins and growth, undertake the required research and development and obtain regulatory approvals. Additional costs may be incurred, and sales opportunities lost, if there is any signiﬁcant delay in any of these steps. Given the importance of research and development, Hikma has expanded its investment in research and development, particularly in Jordan where it can beneﬁt from lower labour and bio-equivalency costs. API and other raw material costs Raw material costs represented over 30% of the Group’s net sales in the year ended 31 December 2008, with the most signiﬁcant portion of these costs relating to APIs. Whilst the prices of the APIs that the Group uses have in general fallen in recent years, these prices are volatile and can vary signiﬁcantly from supplier to supplier. In some cases, increase in API and other raw material costs may not be able to be passed on to customers and can therefore have a signiﬁcant impact on the Group’s results of operations. Hikma has a dedicated API sourcing function that has been successful in sourcing lower cost API’s through more competitive suppliers in Asia. Seasonality The Group’s business, in particular the Branded Pharmaceuticals business, is seasonal, and it generally experiences higher net sales and net proﬁt in the ﬁrst half of each ﬁnancial year, as compared to the second half of its ﬁnancial year. Accordingly, the Group’s outstanding borrowings historically have been higher during the ﬁrst half of the ﬁnancial year in order to ﬁnance the working capital requirements of the Group. Acquisitions and strategic alliances Acquisitions remain a key part of the Group’s strategy to develop and grow its business. The Group also seeks long-term licensing arrangements and strategic alliances to expand its product portfolio and geographical presence. The risks associated with this strategy include the availability of suitable acquisition candidates and assimilating and integrating acquired companies into the Group. Other risks include delays in implementation or unexpected costs or liabilities. The Group may be at risk of failing to realise operating beneﬁts or synergies from completed acquisitions. The Group mitigates these risks by implementing a structured integration process which can include placing experienced management into the acquired company to effect the swift installation of internal controls and by subjecting management processes to close monitoring and review by internal audit and senior management. In respect of long-term licensing arrangements, a failure to agree appropriate commercial terms on renewal of such agreements could lead to a reduction in revenues as replacement products are sourced. Risk management: Financial risks Group Treasury is responsible for Financial Risk Management and setting the appropriate controls and risk policies. Group Treasury is supported by treasury departments at the operating company and segmental levels and reports to the Chief Financial Ofﬁcer. Foreign exchange risk The Group uses the US Dollar as its reporting currency and is therefore exposed to foreign exchange movements, primarily in the European, Algerian, Sudanese and Egyptian currencies, that could materially affect the 12751_p26_p57.qxp 1/4/09 23:47 Page 55 Hikma Pharmaceuticals PLC Annual report 2008 55 Group’s ﬁnancial results. Group Treasury attempts to mitigate this risk through various methods: entering into currency derivative contracts where possible, foreign currency borrowing and matching foreign currency revenues and costs. Using these methods has not had a material impact on the Group’s ﬁnancial position at 31 December 2008. See Note 29 to the Group’s consolidated ﬁnancial statements for a description of the Group’s Foreign Exchange risks. Interest rate risk The Group manages its exposures to interest rate risks by changing the proportion of ﬁxed rate debt and variable rate debt in its total debt portfolio. To manage this mix the Group may enter into interest rate swap agreements, in which it exchanges the periodic payments based on notional amounts and agreed upon ﬁxed and variable interest rates. Using these swap agreements has not had a material impact on the Group’s ﬁnancial position at 31 December 2008. See Note 29 to the Group’s consolidated ﬁnancial statements for a description of the Group’s interest rate risks. Credit risk In most cases, the Group grants its buyers credit terms for settlement of sales invoices. Credit risk is managed through the Group Credit policy and the use of various ﬁnancial instruments such as letters of credit, factoring and credit insurance arrangements. Further details are set out in Note 29 of the Group’s consolidated ﬁnancial statements. T r u s t e d t o d e l i v e r Liquidity risk The Group has constant ﬁnancing requirements, both for short-term working capital needs and for long-term strategic plans. Corporate Treasury ensures the Group debt/capital structure and banking arrangements can accommodate these ﬁnancing needs. Corporate Treasury also endeavours to efﬁciently utilise excess liquidity from one subsidiary to another, while complying with any foreign currency, legal or tax restrictions. O u r s t r a t e g y Going concern Although, the current economic conditions may affect short-term demand for our products, as well as place pressure on customers and suppliers which may face liquidity issues, the Group’s geographic spread, product diversity and large customer and supplier base substantially mitigate these risks. In addition, the Group operates in the relatively defensive generic pharmaceuticals industry which we expect to be less affected compared to other industries that are subject to greater cyclical changes. The Group has $229 million of banking facilities of which $121 million were undrawn as at 31 December 2008. These facilities are well diversiﬁed across the operating subsidiaries of the Group with a number of ﬁnancial institutions. The majority of these facilities are short term, uncommitted working capital related. See Notes 24, 27 and 29 for details. However, we continue to expect them to be renewed annually. In addition the Group maintained cash balances of $63.5 million as at 31 December 2008. The Group’s forecasts, taking into account reasonable possible changes in trading performance, facility renewal sensitivities and maturities of long-term debt, show that the Group should be able to operate well within the levels of its facilities and their related covenants. After making enquiries, the Directors believe that the Group is adequately placed to manage its business and ﬁnancing risks successfully despite the current uncertain economic outlook. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts, as stated in the Directors’ report. Inﬂation risk Hikma believes it is not subject to material risk due to inﬂation in any of its core markets at present. 12751_p26_p57.qxp 31/3/09 00:52 Page 56 56 Our strategy Hikma Pharmaceuticals PLC Annual report 2008 Business and ﬁnancial review continued Taxation Almost all of the Group’s earnings are derived in jurisdictions other than the United Kingdom and are taxed there. Some of these overseas countries offer more favourable tax rates in comparison to each other and the United Kingdom. In addition to the United Kingdom, tax laws and regulations in many of the countries where the Group operates include international rules that aim to protect the tax base of such country. Any change to such rules could negatively affect the effective tax rate of the Group or could create costly compliance requirements. Therefore, the management maintains close observation of any intended or proposed changes to such rules, both in the United Kingdom and in other key countries where the Group operates. Critical accounting policies and estimates The Group’s accounting policies are more fully described in Note 2 of the Group’s consolidated ﬁnancial statements. However, certain of the Group’s accounting policies are particularly important to the presentation of the Group’s results and require the application of signiﬁcant judgement by the Group’s management. In applying these policies, the Group’s management uses its judgement to determine the appropriate assumption to be used in the determination of certain estimates used in the preparation of the Group’s results. These estimates are based on the Group’s previous experience, the terms of existing contracts, information available from other outside sources and other factors, as appropriate. The Group’s management believes that, among others, the following accounting policies that involve management judgements and estimates are the most critical to understanding and evaluating the Group’s ﬁnancial results. Revenue recognition Revenue represents sales of products to external third parties and excludes inter- company income and value added taxes. Sales of goods are recognised when the risk of loss and title are transferred to customers and reliable estimates can be made of relevant deductions. The Group’s revenue recognition policies require management to make a number of estimates, with the most signiﬁcant relating to charge backs, product returns, rebates and price adjustments which vary by product arrangements and buying groups. Charge backs The provision for charge backs is the most signiﬁcant and complex estimate used in the recognition of revenue. In the US, the Group sells its products directly to wholesalers, generic distributors, retail pharmacy chains and mail-order pharmacies. The Group also sells its products indirectly to independent pharmacies, managed care organisations, hospitals, and group purchasing organisations, collectively referred to as “indirect customers.” The Group enters into agreements with its indirect customers to establish pricing for certain products. The indirect customers then independently select a wholesaler from which they purchase the products at agreed-upon prices. The Group will provide credit to the wholesaler for the difference between the agreed-upon price with the indirect customer and the wholesaler’s invoice price. This credit is called a “charge back”. The provision for charge backs is based on historical sell-through levels by the Group’s wholesale customers to the indirect customers, and estimated wholesaler inventory levels. As sales are made to the large wholesalers, the Group continually monitors the reserve for charge backs and makes adjustments when it believes that actual charge backs may differ from estimated reserves. 12751_p26_p57.qxp 27/3/09 22:37 Page 57 Hikma Pharmaceuticals PLC Annual report 2008 57 Accounts receivable and bad debts The Group estimates, based on its historical experience, the level of debts that it believes will not be collected. Such estimates are made when collection of the full amount of the debt is no longer probable. These estimates are based on a number of factors including speciﬁc customer issues and industry, economic and political conditions. Bad debts are written off when identiﬁed. Goodwill and intangible assets The Group has signiﬁcant investments in goodwill and intangible assets as a result of acquisitions of businesses and purchases of assets such as product development and marketing rights. Under IFRS, goodwill and intangibles with indeﬁnite useful economic lives are held at cost and tested annually for impairment, whilst the remaining intangibles are amortised over their estimated useful lives. Estimated useful lives are reviewed annually and impairment reviews are undertaken if events occur which indicate impairment to the carrying values of the assets. Purchases of intellectual property and product rights to supplement our R&D portfolio are capitalised as intangible assets. Such intangible assets are amortised from the launch of the underlying products and are tested for impairment. This policy is in line with practice adopted by other major pharmaceutical companies. The critical area of judgement is in relation to the useful economic life of these product-related intangibles and the impairment tests for that are performed at least annually. Contingent liabilities In the normal course of business, contingent liabilities may arise from product- speciﬁc and general legal proceedings, from guarantees or from environmental liabilities connected with our current or former sites. These potential liabilities are considered to have a remote probability of crystallising and are therefore treated as contingent liabilities in the Group ﬁnancial statements, and accordingly disclosed in Note 36. Although there can be no assurance regarding the outcome of legal proceedings, we do not expect them to have a materially adverse effect on our ﬁnancial position or proﬁtability. Tax The Group provides for income tax according to the laws and regulations prevailing in the countries where it operates and the likelihood of settlement. The tax expense represents the sum of the current and deferred tax and the tax currently payable is based on taxable proﬁt for the year. Taxable proﬁt differs from net proﬁt as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. T r u s t e d t o d e l i v e r O u r s t r a t e g y 12751_p58_p65.qxp 27/3/09 22:40 Page 58 58 Hikma Pharmaceuticals PLC Annual report 2008 to deliver responsibly How we are ensuring that what we do and the way we do it has a positive impact on the world and people who our business touches. 12751_p58_p65.qxp 31/3/09 01:38 Page 59 Hikma Pharmaceuticals PLC Annual report 2008 59 What we stand for We continue to align our desire to act responsibly with our strategic business objectives. Our core values remain: Honesty, integrity and the highest ethical standards A focus on quality in all aspects of our business Dedication to the welfare and education of our employees Investment in the communities in which we work Care and preservation of our environment Respect for all people, regardless of race, religion, gender or background T r u s t e d t o d e l i v e r R e s p o n s i b l y 12751_p58_p65.qxp 31/3/09 01:45 Page 60 60 Responsibly Hikma Pharmaceuticals PLC Annual report 2008 Corporate and social responsibility report The CSR programme we established in 2007 has continued apace, and is a key part of our strategic commitment to our core values. Introduction Acting responsibly has been a core value of Hikma since its foundation and a value we strive to bring to life in our day-to-day work. In 2008 we continued to formalise our CSR programme and reporting, and remained focused on working to integrate sustainable behaviour into our business. This report demonstrates how we continue to extend our engagement with the communities in which we operate, support our people, develop our business practices, and improve awareness of how to minimise our impact on the environment. Acting responsibly exists at the core of the way Hikma does business, with the ultimate intention of improving the well-being of the patients using our products and building strong relationships with other stakeholders. Hikma responsibility structure Aligning business and CSR Board of directors 3 Steering Committee 3 Working Committee 3 CSR Champions “Responsibility has been one of Hikma’s core values since its foundation in 1978.” The year ended with a signiﬁcant review of our CSR governance structure in line with our ongoing aim of embedding CSR throughout the Hikma group and driving the CSR programme from the Board and senior management, to operational functions. The changes seek to ensure that our CSR activities are consistently aligned with the Company’s ongoing business objectives. This new structure provides for a Board-level Steering Committee and an expanded Working Committee. The Steering Committee, is chaired by Hikma’s Vice Chairman, and comprises an independent Non-Executive Director (Ronald Goode) the Corporate Vice President of Finance and the General Counsel. It is responsible for oversight of the Group’s CSR activity, its strategic direction and implementation and reporting to the Board of Directors. The Working Committee is composed of key executives – covering VP Regional Operations, supply chain and ﬁnance – together with the Director of Investor Relations, the Director of Corporate Communication, and the Group CSR Manager. These new committees will bring consideration of social, economic and environmental issues to a wider audience within Hikma, deliver implementation of CSR policies and practice throughout the Group and improve feedback from business units to ensure the continued relevance of the CSR programme. The committees have set goals for Hikma’s 2009 CSR programme in the areas of reporting, the Hikma Volunteering Day and the appointment of CSR Champions. In 2008 we saw increasing levels of activity from our CSR Champions. Based in six of Hikma’s manufacturing units, the Champions play a critical role in implementing CSR practice within the operating units and attaining employee engagement for our growing number of initiatives. In early 2009 we appointed CSR Champions at our manufacturing sites in Egypt, APM (Jordan), Italy and Thymoorgan (Germany). Number of CSR champions Reporting 10 This year we have selected a number of champions at our plants in Egypt, APM (Jordan), Italy and Thymoorgan (Germany) and are seeking to raise awareness of the work the champions do in promoting the CSR agenda. We are guided by the Global Reporting Initiative’s (GRI) G3 guidelines, in particular focusing on data gathering on: community investments; environmental impacts; and employee and labour practices. 12751_p58_p65.qxp 31/3/09 19:48 Page 61 Hikma Pharmaceuticals PLC Annual report 2008 61 Community $350,000 In 2008, we donated a total of $350,000 to the King Abdullah Fund to ﬁght poverty in Jordan. Gifts in kind $1.4m The Company donated $1,411,000 of medicines in 2008. Above: For the ﬁrst time in 2008 Hikma employees joined together for a volunteering day. Through GRI reporting, we have started to identify performance improvements on some key metrics. Measurement of this data will not only help to identify the beneﬁts derived in our targeted units but also to benchmark good performance between business units. 2008 was our second year of GRI data gathering. We saw improvements in both the quality and consistency of data gathered, but with only two data points available, establishing trends remains at a preliminary stage. During 2009 we will implement a dedicated software system to improve data gathering and analysis, to gain better and more consistent data and enable analysis of trends in our business. We continue to review the need for additional indicators – for example, on emissions – to ensure that reporting is aligned with our overall business strategy. People We value our employees as our most important asset, ensuring that we recruit and retain the quality of people that distinguishes us from our competitors. We aim to be recognised as a leading employer and repay our employees’ loyalty by investing in their future. With our commitment to GMP (Good Manufacturing Processes), technical training has always been very strong across the business. GRI data has shown that non-GMP training represents approximately 25% of all training, helping us identify areas of need for further non-technical training. In 2009 this will include additional training for the CSR Champions and employee training on CSR Policies and the Code of Conduct. In 2008, we also continued our Continuing Education Scheme which supports employees in fully funded further education programmes. We continue to focus on employee welfare. In November 2008, we celebrated World Diabetes Day, raising employee awareness by the distribution of posters throughout our business, e-mails to employees and hosting an internal lecture in Jordan. We also undertook a breast cancer awareness day, which alerted employees to issues and preventative screening, and have implemented a life insurance scheme for all employees in Algeria. Community: A Core Value We remain resolute in our belief that investment in our communities brings beneﬁt both to us and to those around us. This idea was embedded at the foundation of Hikma as a family-owned company. In many cases, our community involvement focuses on supporting young people with the aim of developing their professional skills, while at the same time providing a broader pool of talented recruits for Hikma. We have continued to build our university partnerships by providing student scholarships. Following on from our 2007 acquisition in Egypt, 150 students from Egyptian universities were supported through cross-departmental training at Hikma. In 2008 we launched a collaboration with the German Jordanian University in Amman, whereby three students will receive six-month technical training scholarships at Hikma’s German plant. We continue to give signiﬁcant donations both ﬁnancial and in kind. In 2008, the total value of our community investments was US$2,490,632. We also encourage employees to donate their time through volunteering to add capacity to the ﬁnancial donations made by the Group. T r u s t e d t o d e l i v e r R e s p o n s i b l y 12751_p58_p65.qxp 31/3/09 14:35 Page 62 University Partnerships Hikma has continued to build partnerships with universities in MENA, this enables students to engage in valuable work experience whilst encouraging future graduates to consider Hikma as an employer of choice. 12751_p58_p65.qxp 1/4/09 23:49 Page 63 Corporate and social responsibility report continued Hikma Pharmaceuticals PLC Annual report 2008 63 We have chosen to focus our community support on helping those with cancer and diabetes, because of the increasing recognition of the effect of these diseases in MENA and in Hikma’s developments in therapeutic areas. During the year we: signed an agreement with the King Hussein Cancer Foundation in Jordan, providing US$140,000 of funding which has helped with the reprinting of Cancer Awareness Booklets for public distribution. introduced Hikma’s breast cancer awareness day – with more than 50% of our employees being female, we chose to undertake this project to raise awareness and encourage dialogue around the risks that we face. In April 2008 we undertook a group-wide Volunteering Day which focused on raising cancer awareness and supporting patients suffering from cancer. We encouraged employees across the business to spend one day giving their time, and 500 employees were involved in the projects. Activities ranged from assisting a ﬁeld survey related to early detection of breast cancer, to spending the day at pediatric oncology hospital units with child cancer patients, to renovating and painting a cancer hospital ward. We also continued to work with charities in our communities helping to ﬁght poverty. In Jordan we: Value of community investment $2.49 million sponsored an SOS Children’s Village home. Our donation of US$17,000 covered the costs of the home for 12 children. Donations $593,834 Products in Kind $1,411,341 Sponsorship $331,805 Volunteering Day $153,652 donated US$ 350,000 to the King Abdullah 2nd Fund to Fight Poverty, which supports the building of houses for underprivileged people in a number of locations in Jordan. Hikma Algeria was the key sponsor for Algeria’s ﬁrst Scientiﬁc Forum on Health, Sport and Food, which brought together students for sporting events and provided advice on balanced nutrition and awareness-raising of diseases to which young people can be susceptible. Finally, we continued to use our experience to inﬂuence business and social development in the Middle East. Hikma was a regional partner for the World Economic Forum Middle East summit in May and was invited to speak on the panel at sessions focused on identifying and building opportunities to improve the global competitiveness of businesses operating in the Middle East. Health and Safety Hikma’s dedication to quality extends across all areas of our business. It cannot be upheld without a continued commitment to providing a safe working environment and ensuring that the health and safety of our employees is given critical attention. Following its development in 2007, 2008 brought the initial implementation of Hikma’s Health and Safety Policy, which requires the appointment of an HSE supervisor in each business unit. In 2008 we saw the ﬁrst appointments to this role, but fell short of our target of appointments in all main business units. The necessary additional appointments will be made during 2009. During 2008, many of our units implemented the necessary health and safety processes through the use of external HSE advisors. The process of employee education on the Group Health and Safety Policy, which was not fully realised in 2008, remains a key priority for 2009. T r u s t e d t o d e l i v e r R e s p o n s i b l y 12751_p58_p65.qxp 27/3/09 22:41 Page 64 64 Responsibly Hikma Pharmaceuticals PLC Annual report 2008 Corporate and social responsibility report continued Environmental initiatives launched in 2008 Jordan: Installed solar system for hot water. US: Overnight lighting procedures introduced. ISO 14001 Hikma Jordan and AMC Jordan plants achieved ISO 14001 certiﬁcation in 2008. “We aim to improve our performance by integrating our policies into all activities at all Hikma locations.” Nevertheless, our strong commitment to conducting our business within the Health and Safety Policy delivered results during the year. New health and safety initiatives developed during 2008 include the opening of a weekly health clinic at our Algerian factory. Attended by local GP, this enables all employees to be given an annual general health check. We were also delighted to receive external recognition for our commitment to health and safety. Firstly this was gained through the award of the OHSAS 18001 certiﬁcation at our AMC facility in Jordan, with the main Hikma Jordan facility also working towards this certiﬁcation. Secondly, Hikma Jordan was granted the Award of Excellence in Health and Safety as the best private sector pharmaceutical company in Jordan, a prestigious award granted by the country’s Social Security Corporation, the most comprehensive ofﬁcial body tracking occupational injuries in Jordan. During 2008 we focused on the collection and analysis of GRI data on absenteeism and occupational injury rates to enable a clearer understanding for ongoing policy development. 2009 will see further emphasis on employee training on the Health and Safety Policy and target a zero level of occupational injuries across all business units. Environment Our Environmental Policy states that we will manage our operations to minimise our impact on the environment where possible. Our critical priorities remain the reduction of: energy consumption; water usage; and waste production. We aim to improve our performance through integrating our Environmental Policy into all activities at Hikma, and our key performance metrics reﬂect these priorities. A signiﬁcant achievement during the year, incorporating all three of these areas, was the certiﬁcation of our main Hikma Jordan and AMC Jordan manufacturing plants to ISO14001 standard. Energy consumption GRI data collection has heightened awareness of energy usage and is helping us to identify ways to drive energy reduction across the units. New initiatives that have helped to reduce energy usage in 2008 include: The installation of a solar system for hot water usage in Jordan – assessment is ongoing for Algeria and Portugal. The calibration of the Hikma Jordan boiler system to reduce diesel consumption and reduce CO2 emissions. Amending overnight lighting procedures at West-ward’s warehouses in the US. The use of low energy light bulbs in Saudi Arabia and Portugal. 12751_p58_p65.qxp 27/3/09 22:41 Page 65 Hikma Pharmaceuticals PLC Annual report 2008 65 “Honesty and integrity lie at the core of our business values, with all activities covered by our Code of Conduct.” Ethics targets in 2009 Undertake regular training on anti-corruption policies and procedures at our main manufacturing sites. Provide training on whistleblowing and share dealing code. Initial reporting from our manufacturing site in Portugal, which was designed to operate to high environmental standards, indicates a reduction in electricity and gas usage which we hope will be conﬁrmed with further data. Whilst investigations during 2008 into renewable energy sources for our US business were not successful, we continue to seek ways to implement our Environmental Policies in this business. During the year we worked in Jordan with the Royal Scientiﬁc Society’s Environment Research Centre and at AMC Jordan started an energy saving study in association with National Energy Research Centre (NERC) to identify additional methods for reducing energy consumption. The primary data suggest that AMC can save up to 25% of its total energy costs. Water usage With a signiﬁcant manufacturing presence in the Middle East water scarcity continues to be a major concern. A number of new initiatives have quickly led to signiﬁcant improvements in our water usage. Water usage decreased by just over 50% at our main Hikma Jordan plant, attributable to the installation of new external cleaning pumps, replacement of corroded pipes, and employee education on water resources. Waste production We continue to measure our waste and focus on reduction. Our Environmental Policy commits us to encourage the reuse or recycling of all non- hazardous waste and initial GRI data collected indicates that there has been success in this area, in particular with the introduction of employee led recycling initiatives. ISO 14001 certiﬁcation in Jordan also mandates speciﬁc procedures for processing hazardous and specialised waste. Central to all of these changes are education, communication and awareness- raising, and we remain committed to communicating our Environmental Policy to employees, customers and other stakeholders. For example, at AMC a booklet was developed for contractors, employees and visitors that contains an overview of, and advice about, the Company’s Environmental, Health and Safety Policies. Ethics Honesty and integrity lie at the core of our business values. Ethical issues continue to be overseen by the Ethics Committee, which is chaired by Ronald Goode an independent non-executive Director, and reports to the Board of Directors. Through our partnership with PACI (Partnering Against Corruption Initiative) we are committed to a zero tolerance policy to all forms of bribery and corruption. We have also committed to developing and implementing internal systems and controls for that policy, which are supported by the ongoing delivery of anti- corruption training. We previously committed to all Hikma management signing the Company- wide Code of Conduct, and this undertaking continues. The Company continues to operate a whistle-blowing policy – to encourage reporting of activities that are not in compliance with the Code of Conduct, ethics or ﬁnancial reporting guidelines – which along with Share Dealing Code and Disclosure Policies will be the subject of further education in 2009. We have continued to work with our suppliers to understand their ethical policies (including human rights and environmental behaviour), targeting certain key suppliers with a questionnaire to investigate this further. During 2009 the CSR Committee will work to identify where action may need to be taken with suppliers to align their values with those of Hikma. A copy of this report and ongoing updates about Hikma’s CSR programme can be found at www.hikma.com/csr T r u s t e d t o d e l i v e r R e s p o n s i b l y 12751_p66_p98.qxp 27/3/09 22:43 Page 66 66 Hikma Pharmaceuticals PLC Annual report 2008 12751_p66_p98.qxp 1/4/09 23:57 Page 67 Hikma Pharmaceuticals PLC Annual report 2008 67 Governance and ﬁnancial results 68 Board of Directors 70 Senior management 72 Corporate Governance report 78 Directors’ report 81 Remuneration Committee report 92 Statement of Directors’ responsibilities 93 Independent auditors’ report 95 Consolidated income statement 96 Consolidated balance sheet 97 Consolidated statement of changes in equity 98 Consolidated cash ﬂow statement 99 Notes to the consolidated ﬁnancial statements 141 Hikma Pharmaceutical PLC accounts 150 Shareholder information 152 Principal Group companies 152 Advisers G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p66_p98.qxp 31/3/09 02:08 Page 68 68 Governance Hikma Pharmaceuticals PLC Annual report 2008 Board of Directors 1 2 3 4 1. Samih Darwazah Non-Executive Chairman, 78 Samih Darwazah, remained as Chairman of the Company following his resignation as Chief Executive Ofﬁcer in July 2007. Mr Darwazah is a qualiﬁed pharmacist, and he held various managerial positions with Eli Lilly prior to establishing Hikma Pharmaceuticals in 1978. Between 1995 and 1996 he served as Minister of Energy and Mineral Resources in Jordan and was a member of the Advisory Economic Council to His Majesty the King of Jordan. He also founded the Jordan Trade Association. Samih holds a masters degree from the St. Louis College of Pharmacy, Missouri. He is also Chairman of Labatec Pharma SA. 2. Said Darwazah Chief Executive Ofﬁcer, 51 Said was appointed Chief Executive Ofﬁcer in July 2007. He joined Hikma in 1981, and was Chairman and CEO of the Group holding company from 1994-2003. Said played a key role in the development of the Group strategy including the acquisition of West-ward Pharmaceuticals in the USA and the development of the Injectables business in Europe and the MENA region. During this period the Company’s facilities in the USA, Jordan, and Portugal received FDA approval. Said was Minister of Health for the Hashemite Kingdom of Jordan from 2003-2006. He is currently on the board of the Central Bank of Jordan and Chairs the Dead Sea Touristic and Real Estate Investments and Health Care Accreditation Council of Jordan. He has a degree in industrial engineering from Purdue University in the US and an MBA from INSEAD. 3. Mazen Darwazah Executive Vice-Chairman, CEO of MENA, 50 Mazen Darwazah was appointed Executive Vice- Chairman in 2005. Since joining Hikma in 1985 he has held various positions, including Chairman and CEO of Hikma Pharmaceuticals Limited (Jordan), Chairman of Trust Pharma Limited and Pharma Ixir Co. Ltd. He is a director of Jordan International Insurance Company and has served as the President of the Jordanian Association of Manufacturers of Pharmaceuticals and Medical Appliances. Mazen is currently a Non-Executive Director on various non- governmental and educational organisations. Mazen holds a BA in Business Administration from Beirut University, Lebanon. 4. Ali Al-Husry Non-Executive Director, 51 Ali Al-Husry has been a Director of Hikma Pharma Limited and other companies within the Hikma Group since 1991. He was a founder of The Capital Bank of Jordan and its Chief Executive Ofﬁcer from its establishment in 1995 until 2007. He brings great ﬁnancial experience to the Board as well as an in-depth knowledge of the MENA region. Ali has a degree in mechanical engineering from the University of Southern California and an MBA from INSEAD. 12751_p66_p98.qxp 1/4/09 23:52 Page 69 Hikma Pharmaceuticals PLC Annual report 2008 69 5 6 7 8 Board Committee membership key * Audit Committee † Remuneration Committee • Nomination Committee 5. Michael Ashton * † • Independent Non-Executive Director, 63 Michael Ashton was appointed to the Board in October 2005 and is Chairman of the Remuneration Committee. Michael has over 30 years’ experience in the pharmaceutical industry, having worked with Pﬁzer, Inc., Merck, Inc., and held the positions of Chairman, President and Chief Executive of Faulding, Inc and Chief Executive of Skyepharma PLC. He serves on the boards of Transition Therapeutics, Proximagen, and Phosphagenics Limited. 6. Breffni Byrne *† • Independent Non-Executive Director, 63 Breffni Byrne was appointed to the Board in October 2005 and is Chairman of the Audit Committee. As a chartered accountant with over 30 years of experience in public practice, including signiﬁcant international responsibilities, he has extensive experience in ﬁnancial reporting, corporate governance and general ﬁnancial and commercial matters. Breffni is Chairman of NCB Stockbrokers, a director of Irish Life and Permanent plc, Cpl Resources plc, Coillte Teoranta (the Irish state forestry company) and other companies. 7. Sir David Rowe-Ham *† • Senior Independent Non-Executive Director, 73 Sir David Rowe-Ham was appointed to the Board in October 2005 and holds the position of Chairman of the Nomination Committee. Sir David brings to Hikma a wide experience in ﬁnancial matters, corporate governance, public affairs and the development of listed companies. He is also Chairman of Arden Partners plc, and Olayan Europe Ltd. 8. Dr. Ronald Goode *†• Independent Non-Executive Director, 65 Ronald Goode was appointed to the Board in December 2006. Ron has spent over 30 years in the international pharmaceutical industry, including having held senior positions with Pﬁzer and Searle. He is the chairman of The Goode Group, advisers to the pharmaceutical industry and a director of Greystone Pharmaceuticals. He sits on the Advisory Board of ART Recherches et Technologies Avancees Inc. (a TSX-listed company), and is a director of Mercy Ships International and a trustee of Thunderbird School of Global Management. He was formerly President and Chief Executive Ofﬁcer of Unimed Pharmaceuticals, Inc. and eXegenics Inc. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p66_p98.qxp 31/3/09 13:56 Page 70 70 Governance Hikma Pharmaceuticals PLC Annual report 2008 Senior management 1 2 3 4 5 1. Bassam Kanaan, Executive Vice President & Chief Financial Ofﬁcer Bassam joined Hikma in 2001 and played a leading role in preparing the Company for its IPO in 2005. Prior to joining Hikma, he started his career in 1986 with Deloitte & Touche in Los Angeles where he worked until 1992 in the position of audit manager. Between 1994 and 2001 he was the CFO of PADICO. He currently serves on the board of Zara Holding, and Aqaba Development Co in Jordan. He previously served as a board member of Palestine Telecommunication Co. and Central Electricity Generation Company in Jordan. He qualiﬁed as a CPA and holds an Executive MBA from Northwestern University and a BA from Claremont McKenna College in the United States. From February 2009, in addition to his role as CFO, Bassam assumed responsibility for Operations, Manufacturing and Supply Chain management in Europe & MENA. 2. Nabil Rizk, Corporate Vice President & Chairman of West-ward Pharmaceuticals Nabil joined the Company in 1991 from Pioneer Pharmaceuticals, Inc., a division of Dow Chemical, where he worked as Vice President of Operations. From 1976 to 1983 he served in various capacities with Hudson Pharmaceuticals, a division of Cadence Corporation including Manager of Quality Control and Quality Assurance and Laboratory Supervisor (Research & Development). Nabil holds a masters degree in chemistry from the New Jersey Institute of Technology and a BSc in applied chemistry from Cairo University. 3. Taghreed Al-Shunnar, Executive Vice President Head of Pharma Taghreed joined the Company in 1988 after graduating from the University in Jordan with a degree in pharmacy. In 1995, she was appointed as Marketing Planning Director of Hikma Pharmaceuticals Limited and in 2002, promoted to General Manager of Hikma Pharmaceuticals Limited. In 2005, Taghreed became Corporate Vice President of Branded Pharmaceuticals MENA. Taghreed completed her Executive MBA from INSEAD in December 2007. From February 2009, Taghreed assumed responsibility for Sales & Marketing, R&D & Business Development MENA & EU. 4. Majda Labadi, Corporate Vice President Human Resources Majda joined the Company in 1985 as a purchasing manager at Hikma Pharmaceuticals Limited. Majda was promoted to Vice President of Injectables and General Manager Hikma Farmacêutica in 2001 and held this position until February 2009 when she was appointed Group Vice President for Human Resources. Majda holds a masters degree in health economics and a BA from the American University of Beirut. 5. Henry Knowles, General Counsel and Company Secretary Henry joined the Company in September 2005. Before joining Hikma, he worked for the international law ﬁrm, Ashurst. Since joining Hikma, Henry has advised on all aspects of the Group’s business, supervised corporate governance and compliance and contributed to the execution of the Group’s acquisition strategy. Henry is admitted as a solicitor in England and Wales and holds an MA in Social and Political Science from Cambridge University. 12751_p66_p98.qxp 31/3/09 10:14 Page 71 Hikma Pharmaceuticals PLC Annual report 2008 71 7 6 8 9 10 11 6. Susan Ringdal, Investor Relations Director Susan joined the Company in November 2005, having previously worked for the pharmaceutical distribution and retail pharmacy group Alliance UniChem plc as Investor Relations Manager. She also has experience as an equity analyst at Morgan Stanley in London. Susan holds a BA in history from Cornell University and an MBA from London Business School. 7. Dr Ibrahim Jalal, Corporate Vice President Technical Affairs Ibrahim joined Hikma in June 1979 as Technical Director. He was promoted to Corporate Technical Vice President for Compliance in 1998 and to Senior Corporate Vice President for R&D in 2008. He has played a leading role in obtaining FDA approval for Hikma manufacturing units. Ibrahim holds a PhD in pharmacy from the University of Wisconsin/Madison in the United States. 8. Fadi Nassar, Corporate Vice President, Active Pharmaceutical Ingredients (API) Fadi joined Hikma in 1988 and has worked in many areas across the Group including Operations, Purchasing and Business Development. He was promoted to Corporate Vice President, API in 2007. Fadi holds a bachelors degree in chemical engineering from Newcastle University and a master’s degree in chemical engineering from Leeds University. Fadi is also a graduate of INSEAD’s International Executive Program. 9. Michael Raya, Corporate Vice President & CEO West-ward Michael joined the Company in 1992 from Vitarine Pharmaceuticals where he worked from 1984 until 1992 in various capacities, including Vice President, Quality Control. Prior to Vitarine, Michael worked at Schering-Plough and Hoffman LaRoche. Michael is a member of Hikma’s Corporate Ethics Committee and is in charge of the Corporate CAPEX Committee. Michael holds a master’s degree in industrial pharmacy from Long Island University and a bachelor’s degree in chemistry from St. Francis College. Michael is also a graduate of INSEAD’s International Executive Program. 10. Khalid Nabilsi, Corporate Vice President for Finance Khalid joined Hikma in 2001 and was a member of the IPO team in 2005. Prior to assuming his current role Khalid held several senior positions in the Finance department including Group Financial Controller. Following qualiﬁcation as a CPA he held a variety of roles in ﬁnancial accounting, reporting and ﬁnancial advisory services, most recently with Atlas Group where he was involved in merger and acquisition advisory services and as a senior audit manager at Arthur Andersen in Amman, Jordan. Khalid has an MBA from the University of Hull in UK. 11. Ragheb Al-Shakhshir, Corporate Vice President Research & Development Ragheb joined Hikma in 2000 as a Research & Development Manager. Prior to joining Hikma he held a variety of roles as Senior Scientist at Novartis Pharmaceuticals, and at Alcon Labs. From 2003-2008 Ragheb led the Hikma R&D Injectable team and from February 2009 assumed the responsibility of Vice President for Research and Development. Ragheb has a PhD in Industrial and Physical Pharmacy from Purdue University and a BA in Chemical Engineering from the University of Wisconsin- Madison. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p66_p98.qxp 27/3/09 22:44 Page 72 72 Governance Hikma Pharmaceuticals PLC Annual report 2008 Corporate Governance report Combined Code Composition of the Board The Board is responsible for, and committed to, meeting the standards of good corporate governance set out in the Combined Code on Corporate Governance published by the Financial Reporting Council in June 2006 (as revised) (the “Combined Code”) and the corporate governance principles set out in the Markets Law of the Dubai Financial Services Authority (the “Markets Law”) (together the “Corporate Governance Principles”). This report, the Audit Committee report set out on pages 75 to 77 and the Directors’ Remuneration Report set out on pages 81 to 91 describe how the Board applied the Corporate Governance Principles during the year under review. During the year under review, the Company applied the principles set out in Section 1 of the Combined Code, including both the main principles and the supporting principles, and the corporate governance principles. At the year end the Company was in full compliance with the Corporate Governance Principles. The Listing Rules of the Financial Services Authority and the Markets Law require the Group to report on their application of the principles of good governance and the extent of their compliance with the Corporate Governance Principles. This statement provides details on how the Group has applied these principles. The Board The Group is led and controlled by the Board of Directors. The Board’s role is to determine the Group’s long-term strategy; to monitor the achievement of its business objectives; to ensure the Group has adequate resources available to meet these objectives; to promote good corporate governance; and to ensure that the Group meets its responsibilities to shareholders, employees, suppliers, customers and other stakeholders. There is a formal schedule of matters reserved to the Board for consideration and decision, which is reviewed and, if necessary updated annually. This includes approval of strategic plans, approval of ﬁnancial statements and the annual Group budget, approval of material investment decisions, acquisitions and divestments, and review of the effectiveness of the Group’s systems of internal control. No individual or group of individuals dominates the Board’s decision making process. Except for the matters formally reserved for the Board, and in accordance with the Company’s Articles of Association, the Board has delegated responsibility for the management of the Group, through the Chief Executive Ofﬁcer, to its executive management team. The Board currently comprises eight members: a Non-Executive Chairman, four independent Non-Executive Directors, one Non-Executive Director not classiﬁed as independent for the purposes of the Combined Code and two Executive Directors. The names of the Directors and their biographical details are set out on pages 68 and 69. The Chairman and the Executive Vice-Chairman were appointed to the Board on the incorporation of the Company on 8 September 2005. The Chief Executive Ofﬁcer was appointed to the Board on 1 July 2007, and save for Ronald Goode, who joined the Board on 12 December 2006, each of the Non-Executive Directors joined the Board on 14 October 2005. The Non-Executive Directors, who have diverse business backgrounds, skills and experience, bring independent judgement to bear on issues of strategy, performance, resources, key appointments, standards of conduct and other matters presented to the Board. The Chairman, Executive Vice-Chairman and each of the Non-Executive Directors except Ronald Goode, offer themselves for re-election at the Annual General Meeting. The roles of the Chairman and Chief Executive Ofﬁcer are separate, and their responsibilities are deﬁned in writing and approved by the Board. These guidelines are reviewed annually by the Board. Prior to the appointment of the current Chief Executive Ofﬁcer the Board undertook consultation with its major shareholders and external advisers regarding the continuation of Samih Darwazah in his role as Chairman. The Board concluded that his former executive role should not prevent him from remaining as Chairman, thus enabling the Group to continue to receive important guidance through the Board in his capacity as Non-Executive Chairman. The Board does not classify Ali Al-Husry, as an independent Director for the purposes of the Combined Code as a result of his close links to the Darwazah family through Darhold Limited, the Company’s largest shareholder. However, he continues to bring broad ﬁnancial experience to the Board as well as a detailed knowledge of the MENA region which is signiﬁcant to the Group’s business. The Senior Independent Director is Sir David Rowe-Ham. Sir David is Chairman of the Nomination Committee and responsible for chairing the meetings of Non-Executive Directors conducted without the presence of the Chairman or executive management. He is also the key contact for shareholders, should they have concerns that they do not wish to raise with the Chairman. 12751_p66_p98.qxp 27/3/09 22:44 Page 73 Hikma Pharmaceuticals PLC Annual report 2008 73 Information ﬂow Board and committee papers are circulated to members in advance of the meetings. In addition to formal meetings, the Chairman and Non-Executive Directors maintain regular contact with executive management. The Chairman also holds informal meetings with Non-Executive Directors without the executive management present to discuss issues affecting the Group. Senior executives attend Board meetings and make presentations on the results and strategies of their business units. All Directors have access to the advice and services of the Company Secretary, who is responsible for ensuring that good Board procedures are followed and for advising the Board through the Chairman on all matters of corporate governance. The appointment and removal of the Company Secretary is a matter reserved for the Board. To the extent necessary, the Directors are able to obtain independent professional advice at the Company’s expense in the performance of their duties as Directors. Board training/continuing professional development The directors maintain a close dialogue between board meetings, ensuring that, amongst other things, the Non-Executive Directors are kept up to date with major developments in the Group’s business. The Board is also encouraged to visit the major business units and to meet the senior management teams in order to facilitate a better understanding of the key issues facing business. In the year under review, Board meetings were held in Egypt and the USA. The company’s brokers also present industry and market updates to the Board. These sessions are in addition to the written brieﬁngs on areas of regulatory and legislative change presented at each Board meeting. Board meetings During the year under review, the Board held eight scheduled meetings and ﬁve other meetings. The Company Secretary attended all Board meetings and Committee meetings. A table showing attendance at these meetings is set out below. Whilst in 2008 all Directors attended meetings of the Board and committees of which they are members, to the extent they are unable to attend additional meetings called on short notice, or where prevented from doing so by prior commitments, Directors receive and read the papers for consideration at that meeting, relay their comments in advance and, where necessary, follow up with the Chairman on the decisions taken. Meeting record Scheduled Board Other Audit Remuneration Nomination Number of meetings Samih Darwazah Said Darwazah Mazen Darwazah Ali Al-Husry Michael Ashton Breffni Byrne Sir David Rowe-Ham Ronald Goode 8 8 8 8 8 8 8 8 8 5 5 5 5 5 5 5 5 5 8 8 8 8 8 5 5 5 5 5 1 1 1 1 Board performance evaluation All Directors other than Said Darwazah who was appointed on 1 July 2007 and elected by shareholders on 15 May 2008, and Ronald Goode who was appointed on 12 December 2006 and elected by the shareholders at the AGM held on 6 June 2007, were elected by shareholders at the ﬁrst Annual General Meeting, held on 25 May 2006 and will therefore be subject to re-election by shareholders at the Annual General Meeting to be held on 14 May 2009. All Directors are subject to re-election at intervals of no more than three years. Non-Executive Directors are appointed for an initial term of three years, which can be renewed and extended for not more than two further three-year terms. As required by the Combined Code, a formal evaluation of the performance of the Board, the Chairman, the Committee Chairmen and the individual Non-Executive Directors was undertaken during the period under review. The evaluation process was led by the Senior Independent Director, who met with each of the Directors and the Committee Chairmen to undertake a formal appraisal of the performance of the Board, its committees and each of the individual Directors. These discussions focused on Board and Committee performance, membership, timetabling, internal and external support, the quality and timely availability of relevant Board information and the contribution of, preparation for and performance by individual Directors at Board and Committee meetings. The results of the evaluation process and feedback were reviewed with the Chairman and formed part of his appraisal of the overall effectiveness of the Board and its members. Overall the review concluded that the Board functions well, with good communication, and with issues raised in good time to allow for consultation, debate and effective decision-making. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p66_p98.qxp 27/3/09 22:44 Page 74 74 Governance Hikma Pharmaceuticals PLC Annual report 2008 Corporate Governance report continued In addition to the matters set out above in respect of all Directors, the Senior Independent Director met with the Non-Executive Directors to undertake a formal appraisal of the performance of the Chairman. This review also addressed the effectiveness of his leadership, the setting of the Board agenda, communication with shareholders, internal communication and Board efﬁciency. Directors’ service arrangements and terms of appointment Details of the Executive Directors’ service arrangements and Non-Executive Directors’ letters of appointment are contained in the Remuneration report on page 87. Directors’ remuneration Details of the remuneration of the Executive and Non-Executive Directors are contained in the Remuneration report set out on pages 87 and 88. Board committees In accordance with the principles of good corporate governance and in compliance with the Combined Code and the Markets Law, the Board maintains three committees – the Audit Committee, Nomination Committee and Remuneration Committee. The Group also has an Executive Committee, an Ethics Committee and a Corporate Social Responsibility Committee. All draw their members from the Board and the senior management of the Group. Each of the three Combined Code committees has terms of reference, which were reviewed during the year. Copies are published on the corporate website at www.hikma.com. Their Chairmen give regular reports of the committees’ business to the Board. Nomination Committee The Nomination Committee consists of two independent Non-Executive Directors – Sir David Rowe-Ham (Committee Chairman) and Michael Ashton – and the Executive Vice-Chairman, Mazen Darwazah. As required by the Corporate Governance Principles, the majority of the members of the Committee are independent Non-Executive Directors and an independent Non-Executive Director holds the Chairmanship of the Committee. The Nomination Committee is responsible for succession planning and for ensuring that all appointments to the Board are made on objective criteria. In accordance with its terms of reference, the Committee is required to take into account the skills, knowledge and experience of the Board in making its decisions and is able to use external search ﬁrms or open advertising to compile shortlists of candidates for the Board. It is also charged with reviewing the appropriateness of the size, structure and composition of the Board. The Nomination Committee met once during the year, with full attendance. Remuneration Committee The Remuneration Committee consists of the Company’s four independent Non-Executive Directors – Michael Ashton (Committee Chairman), Breffni Byrne, Sir David Rowe-Ham and Ronald Goode. The Remuneration Committee therefore complies with the membership requirements laid out in the Corporate Governance Principles. The Committee met ﬁve times during the year with full attendance. The Committee is responsible for setting and reviewing executive remuneration and that of the Company Secretary and is able to take advice from external consultants when required. A full report on the role of the Remuneration Committee is set out in the Directors’ remuneration report on pages 81 to 91. Audit Committee The Audit Committee consists of four independent Non-Executive Directors – Breffni Byrne (Committee Chairman), Michael Ashton, Sir David Rowe-Ham and Ronald Goode. The Audit Committee therefore complies with the membership requirements laid out in the Corporate Governance Principles. The Committee met eight times during the year with full attendance. A full report of the role of the Audit Committee and the details of how it carried out its duties is set out in the Audit Committee report on pages 75 to 77. Executive Committee The Executive Committee is made up of the Executive Directors and senior management of the Group. The Committee oversees the Group’s operations and implements the decisions of the Board. Ethics Committee The Ethics Committee is chaired by Ronald Goode and draws its members from the Board and senior management across the Group. The Ethics Committee aims to monitor ethical behaviour and integrity across all areas of the Group’s business. Thus, the Committee is responsible for the review and approval of statements and policies on ethics, conduct, values and principles within the Group. CSR Steering Committee The CSR Steering Committee is chaired by the Executive Vice-Chairman, Mazen Darwazah and draws its members from the Board (Ronald Goode) and senior management. The CSR Committee is responsible for reviewing and implementing the strategy and direction of all matters within the Group pertaining to social, community and environmental matters. The Committee is also responsible for the appointment of the CSR Working Committee to undertake the implementation of the Group’s CSR programme. 12751_p66_p98.qxp 27/3/09 22:45 Page 75 Hikma Pharmaceuticals PLC Annual report 2008 75 Internal control Audit Committee report The Board of Directors has overall responsibility for the Group’s systems of internal control and risk management and has complied with the requirements of the Corporate Governance Principles in establishing a continuous process for identifying, evaluating and managing the risks the Group faces. The Board is responsible for monitoring the effectiveness of these systems on an ongoing basis and, at least annually, conducting a formal review of the Group’s policies on internal control. The system of internal control provides reasonable but not absolute assurance against material misstatement or loss. The key elements are as follows: a reporting structure with clear procedures, authorisation limits, segregation of duties and delegated authorities; annual budgets, updated forecasting, and long-term business plans for the Group that identify risks and opportunities which are reviewed and approved by the Board; a comprehensive system of internal ﬁnancial reporting which includes regular comparison of ﬁnancial results and key performance indicators against budget and forecast, informed by management commentary; a clearly deﬁned process for controlling capital expenditure and other ﬁnancial commitments, including appropriate authorisation levels, which are monitored and approved by the Board as appropriate; written policies and procedures for all material functional areas with speciﬁc responsibility allocated to individual managers. During the year under review, Ernst & Young continued its management and execution of the Group’s internal audit function on a global basis under a three year contract which commenced in 2006. This involves a risk-driven approach to internal audit which is overseen by the Audit Committee. The internal audit process focuses on reviewing areas of business risk, internal controls over ﬁnancial reporting and other systems in the Company’s main subsidiaries and at the corporate level, with regular reports of its ﬁndings made to the Audit Committee. Ernst & Young have direct access to the Audit Committee and the Board Chairman. The Board conﬁrms that, in accordance with the requirements of the Corporate Governance Principles, a review of the effectiveness of the Group’s systems of internal controls was conducted during the year. Insurance The Company maintains an appropriate level of Directors’ and Ofﬁcers’ insurance in respect of action taken against Directors. The Combined Code requires that this Annual Report separately describes the work of the Audit Committee and how it discharges its responsibilities. Terms of reference The Audit Committee terms of reference include all matters indicated by the Corporate Governance Principles and clearly sets out its authority and duties. These can be found on the Company’s website at www.hikma.com and are summarised as follows: monitor the integrity of the ﬁnancial statements and any other formal announcements relating to the Group’s ﬁnancial performance and review summary ﬁnancial statements and signiﬁcant ﬁnancial returns to regulators; review and challenge accounting policies and accounting for signiﬁcant or unusual transactions; review and challenge the adoption of accounting standards, estimates and judgements and the clarity of disclosure in ﬁnancial reports; review and challenge compliance with stock exchange, UK Listing Authority and legal requirements including the requirements of the Combined Code and Markets Law; review arrangements for employees to raise concerns, in conﬁdence, about possible wrongdoing in ﬁnancial reporting or other matters; monitor and review the internal ﬁnancial controls and the Group’s overall risk identiﬁcation and management systems; consider and approve the remit and effectiveness of the internal audit function, its annual plan, its resources and access to information and its freedom from management or other restrictions; review and monitor management’s responsiveness to the ﬁndings and recommendations of the internal auditors; consider and make recommendations for appointment, re-appointment and removal of the Company’s external auditor, and oversee the relationship with the external auditor; review and monitor the quality, independence and objectivity of the external auditor (accounting for relevant UK and professional regulatory requirements) and approve their remuneration and terms of engagement; develop and implement a policy on the supply by the external auditor of non-audit services, taking into account relevant ethical guidance and potential conﬂicts of interest. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p66_p98.qxp 27/3/09 22:45 Page 76 76 Governance Hikma Pharmaceuticals PLC Annual report 2008 Corporate Governance report continued The Audit Committee’s terms of reference were reviewed by the Audit Committee during the period under review and amended to include responsibility for the operation of the Company’s policies for monitoring directors’ conﬂicts of interest. The terms of reference were subsequently reviewed and approved by the Board. Composition Hikma’s Audit Committee comprises four members – Breffni Byrne, Michael Ashton, Sir David Rowe-Ham, and Ronald Goode – all of whom are independent Non-Executive Directors, and whose biographical details are set out on page 69. The Committee is chaired by Breffni Byrne, who is a chartered accountant and who is considered by the Board to have recent and relevant ﬁnancial experience. No members of the Committee have links with the Company’s external auditors. The Company therefore considers that it complies with the Corporate Governance Principles regarding the composition of the Audit Committee. The Committee Chairman receives additional remuneration to compensate him for his additional responsibilities. Responsibilities The Audit Committee assists the Board in discharging its responsibilities with regard to ﬁnancial reporting, external and internal audit and internal control. This includes reviewing the Company’s annual ﬁnancial statements, interim report, interim management statements and trading updates, reviewing and monitoring the extent of non-audit work undertaken by external auditors, and monitoring the effectiveness and output of the Company’s internal audit activities, internal controls and risk management systems. The Audit Committee is also responsible for making recommendations to the Board on the appointment, re-appointment and removal of the external auditors, as well as the effectiveness of the audit process. The ultimate responsibility for reviewing and approving the annual report and ﬁnancial statements and the half-yearly reports remains with the Board. This year the Board delegated responsibility for the operation of the Company’s policies on monitoring directors’ conﬂicts of interest to the Audit Committee. This responsibility has been included in the terms of reference. Meetings The Audit Committee met eight times during the year under review, with the Chief Financial Ofﬁcer and the Company Secretary in attendance. The Audit Committee reviewed the 2007 annual report and ﬁnancial statements, the 2008 interim report the two interim management statements released by the Company and each of the regulatory statements made by the Company in respect of trading and results issued during the year. The Committee also reviewed and approved the audit plans for 2009 for both internal and external auditors and the related scope of internal audit work to be undertaken. The Committee reviewed the effectiveness of the Group’s internal controls and risk management processes and the disclosures made in the annual report and ﬁnancial statements on these matters. The Committee also reviewed its own terms of reference and general effectiveness, both speciﬁcally and in the context of the overall annual review of corporate governance matters conducted by the Company. The Group’s external auditors, Deloitte LLP, attended four Audit Committee meetings for the purposes of presenting their 2007 audit results and ﬁndings, the results of the 2008 interim review and their audit plan for 2009. The internal auditors, Ernst & Young presented the results of their audit programme for 2008 to the Audit Committee together with their proposed audit plan for 2009. The Audit Committee continues to review the response by management, proposed action plans and the overall effectiveness of the internal audit function. In accordance with the Combined Code, the Audit Committee also met with the Group’s external auditor and internal auditor without executive management present. In addition, during 2008, the Audit Committee met with the external auditor in the United States and the Audit Committee Chairman met with external auditors in Jordan and Algeria. The Audit Committee Chairman also met with Ernst & Young in Jordan to discuss the results of the 2008 internal audit programme. Attendance of members at Audit Committee meetings is shown on page 73 of the report on corporate governance. External auditors The Audit Committee is responsible for the development, implementation and monitoring of the Group’s policy on external audit, and has adopted a policy in relation to the provision of non-audit services by the external auditors. Fees paid in respect of audit, audit-related and non-audit services are outlined in Note 6 to the Group Financial Statements. Audit-related services are services carried out by the external auditor by virtue of its role as auditor and principally include assurance-related work and accounting advice. In line with audit independence requirements the external auditor does not provide services such as information system design and valuation or advocacy work which could be considered to be inconsistent with the audit role. In addition audit related and non-related services provided by the external auditor in excess of certain monetary limits require prior approval by the Audit Committee. The Committee has reviewed the non-audit services provided by the external auditor and is satisﬁed that the nature of these services has not compromised the auditors’ independence. 12751_p66_p98.qxp 27/3/09 22:45 Page 77 Hikma Pharmaceuticals PLC Annual report 2008 77 A policy has also been adopted whereby prior approval by the Audit Committee is required before the recruitment of a senior member of the audit team or the recruitment of an employee of the external auditors to a senior ﬁnance position within the Group. The Group Whistleblowing Policy contains arrangements for the Chairman of the Audit Committee, the Senior Independent Director, and Ronald Goode (as a US-based member of the Audit Committee) to receive, in conﬁdence, complaints on accounting, risk issues, internal control and other instances of allegedly improper behaviour by Group employees. The Board is kept updated on the views of shareholders and the market in general through the feedback from the investor meeting programme and results presentations. Analysts’ reports are circulated to the Board members together with monthly Investor Relations reports. Procedures to deal with conﬂict of interests The Company has implemented procedures to deal with Directors’ conﬂicts of interest or potential conﬂicts of interest. Responsibility has been delegated to the Audit Committee to operate, monitor and review the procedures, which have operated effectively. Overview The Audit Committee concludes that it has acted in accordance with its terms of reference and ensured the independence of external auditors. The Audit Committee also reviewed the effectiveness of the external auditors and recommends to the Board that they be re-appointed. The Chairman of the Audit Committee will be available at the Annual General Meeting to answer questions on the work of the Committee. Dialogue with shareholders Ongoing communication with shareholders is a high priority. The Company undertakes a continuous programme of meetings with institutional shareholders in the UK, Europe, the United States and the MENA region. This programme includes but is not limited to one-on-one meetings, investor days, conference calls and presentations at investor conferences. In addition the Company makes formal presentations at the time of its annual and interim results which are webcast and disseminated on the Company’s website. The Chief Executive Ofﬁcer, Executive Vice-Chairman, Chief Financial Ofﬁcer and other senior corporate executives have all participated in the investor programme during the period under review. The principal ongoing communication with shareholders is through the publication of the Company’s annual report and accounts, interim results and interim management statements, together with the opportunity to question the Board and committees at the Annual General Meeting. Shareholders are encouraged to attend the AGM and if unable to do so are encouraged to vote by proxy. Copies of presentations made at the AGM are available on the website after the event together with the results of the voting. The full Board is present at the AGM. The Company maintains a website (www.hikma.com) containing ﬁnancial and other information which is updated regularly. Additionally, the Company presents a balanced view of the Group’s performance and prospects through the release of appropriate press announcements and other updates. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p66_p98.qxp 1/4/09 23:56 Page 78 78 Governance Hikma Pharmaceuticals PLC Annual report 2008 Directors’ report The Directors are pleased to present their report and audited ﬁnancial statements for the year ended 31 December 2008. Business review The Company is required by the Companies Act 2006 to set out a fair review of the business during the year and a description of the principal risks and uncertainties facing the Company, noting the performance and development of the Company during the year and the position at the year end. The information that fulﬁls these requirements and which is incorporated into this report by reference, is included in the following sections of the Annual Report: a review of the business and strategy and expected future developments is set out in the Chairman’s statement on pages 6 to 7, the Chief Executive’s review on pages 28 to 31 and the Business and Financial review on pages 34 to 57; the principal risks and uncertainties are set out on pages 50 to 54 and ﬁnancial risks are described on pages 54 to 57; key ﬁnancial performance indicators are described on pages 34 to 36; information on environmental, social and community issues is set out in our Corporate and Social Responsibility report on pages 58 to 65, which also provides key performance indicators in this area; the principal operating subsidiaries are set out on page 152. Principal activity The principal activities of the Group are the development, manufacture and marketing of a broad range of generic and in-licensed pharmaceutical products in solid, semi-solid, liquid and injectable ﬁnal dosage forms. Hikma’s operations are conducted through three business segments: Branded Pharmaceuticals, Generic Pharmaceuticals and Injectable Pharmaceuticals. The majority of Hikma’s operations are in the MENA region, the United States and Europe. The Group’s net sales, gross proﬁt and operating proﬁt are shown by business segment in Note 4 to the consolidated ﬁnancial statements. Results and dividends The Group’s proﬁt for the year attributable to shareholders in 2008 was $57.1 million (2007: $62.6 million). The Board is recommending a ﬁnal dividend of 4.0 cents per share (approximately 2.8 pence). The proposed ﬁnal dividend will be paid on 2 June 2009 to shareholders on the register on 1 May 2009, subject to approval at the Annual General Meeting. An interim dividend of 3.5 cents per share was paid on 17 October 2008 (approximately 1.9 pence per Ordinary Share) which together with the ﬁnal dividend, will make a total of 7.5 cents per share for the period (2007: 7.5 cents). Directors and their interests The names of the Directors as at the date of this report, together with details of their roles, backgrounds and abilities, are set out in the Directors’ biographies on pages 68 and 69. Details of the independence of Non-Executive Directors are set out in the report on corporate governance on page 72. The Executive and Non-Executive Directors served the Company throughout the year. At the 2009 Annual General Meeting, all of the Directors other than Said Darwazah and Ronald Goode will retire in accordance with Article 104 of the Articles of Association, and, being eligible, will offer themselves for re-election. The explanatory notes to the Notice of Annual General Meeting sets out why the Board believes these Directors should be re-elected. Details of Directors’ share-based incentives and interests in the Ordinary Shares of the Company are provided in the Directors’ remuneration report on pages 90 and 91. Creditor payment policy The Company’s policy, which is also applied by the Group, is to settle terms of payment with suppliers when agreeing the terms of each transaction, ensure that suppliers are made aware of and abide by the terms of payment and abide by the terms of payment. Trade creditors of the Company at 31 December 2008 were equivalent to 48 days’ purchases (2007: 81 days), based on the average daily amount invoiced by suppliers during the year. Charitable and political contributions During the year the Group made charitable donations of approximately $2.4 million (2007: $1.3 million), principally to local charities serving the communities in which the Group operates. [Other disclosures of charitable donations]. Donations of medicines accounted for approximately $1.4 million(2007: $590,000) of total donations made. The Group does not make political donations. Research and Development (R&D) The Group’s investment in Research and Development during 2008 represented 3.8% of Group revenue (2007: 4.3%). Further details on the Group’s R&D activities can be found on page 38. Going concern The Directors have formed a judgement, that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, and the Directors continue to adopt the going concern basis in preparing the ﬁnancial statements. Further details are provided in the Financial risks section of the Financial and Business review on pages 54 to 57. 12751_p66_p98.qxp 27/3/09 22:45 Page 79 Hikma Pharmaceuticals PLC Annual report 2008 79 Capital structure Details of the authorised and issued share capital, together with movements in the issued share capital during the year can be found in Note 31 to the consolidated ﬁnancial statements. The Company has one class of Ordinary Shares which carries no right to ﬁxed income. Each share carries the right to one vote at general meetings of the Company. As at 31 December 2008, the Company had 189,237,607 Ordinary Shares of 10 pence each in issue. During 2008 the Company issued 1,503,800 Ordinary Shares pursuant to the exercise of options under the Hikma Pharmaceuticals PLC 2004 Stock Option Plan, and 17,000,000 Ordinary Shares pursuant to a placing to institutional and other shareholders to reﬁnance the debt incurred in respect of the acquisition of the entire issued share capital of Arab Pharmaceutical Manufacturing Co. made in December 2007, undertaken on 17 January 2008. There are no speciﬁc restrictions on the size of a holding or on the transfer of shares, which are both governed by the general provisions of the Company’s Articles of Association and prevailing legislation. The Directors are not aware of any agreements between holders of the Company’s shares that may have resulted in restrictions on the transfer of securities or on voting rights. No person has any special rights with regard to the control of the Company’s share capital and all issued shares as fully paid. Details of the employee share schemes are set out in Note 37 to the ﬁnancial statements. Shares are also held by the Hikma Pharmaceuticals Employee Beneﬁt Trust (“EBT”) and are detailed in Note 34 to the ﬁnancial statements. The EBT has waived its right to vote on the shares it holds and also to its entitlement to a dividend. At the Annual General Meeting on 15 May 2008, the Directors were authorised to issue relevant securities up to an aggregate nominal amount of £6,276,920, and to be empowered to allot equity securities for cash on a non pre-emptive basis up to an aggregate nominal amount of £941,538, at any time up to 14 August 2009. The Directors propose to renew these authorities at the Annual General Meeting to be held on 14 May 2009 for a further year. In the year ahead, other than in respect of the Company’s obligations to satisfy rights granted to employees under its various share-based incentive arrangements, the Directors have no present intention of issuing any of the authorised but unissued share capital of the Company. The powers of the Directors are determined by its Articles of Association, the Combined Code and other relevant UK legislation. Directors’ powers are detailed in the Corporate Governance report starting on page 72. The articles give the Directors the power to appoint and remove Directors and they also provide for re-election at three year intervals. The power to issue and allot shares contained in the Articles, are subject to shareholder approval at each annual general meeting. The articles, which are available on the website, may be amended by special resolution of the shareholders. Signiﬁcant agreements and contracts Due to the nature of the Group’s business, members of the Group are party to agreements that could alter or be terminated upon a change of control of the Group following a takeover. However, none of these agreements is individually deemed to be signiﬁcant in terms of its potential impact on the business of the Group taken as a whole. The Directors are not aware of any agreements between the Company and its Directors or employees that provide for compensation for loss of ofﬁce or employment that occurs because of a takeover bid. There are no persons with whom the Company has contractual or other arrangements, which are deemed to be essential to the business of the Company. Pre-emptive issue of Ordinary Shares During the year under review, and in the period since 1 November 2005, the date of the Company’s IPO, the Company did not issue any Ordinary Shares pursuant to an authority given by shareholders at Annual General Meeting to issue Ordinary Shares for cash on a non pre-emptive basis, other than in respect of the placing undertaken on 17 January 2008, detailed above. Directors’ indemnities The Company has made qualifying third-party indemnity provisions for the beneﬁt of its Directors, which were made during the year and remain in force at the date of this report. These indemnities are uncapped in amount in relation to losses and liabilities which Directors may incur to third parties in the course of the performance of their duties. Substantial shareholdings As at the date of this document, the Company had been notiﬁed pursuant to sections 89A to 89L of the Financial Services and Markets Act 2000 and Rule 5 of the Disclosure and Transparency Rules of the UKLA of the following interests in the voting rights attaching to shares in the capital of the Company: Name of shareholder Darhold Limited* Number of shares Percentage held 57,183,028 30.22% * Messrs Samih Darwazah, Said Darwazah, Mazen Darwazah and Ali Al-Husry, each being a Director and shareholder of the Company, are shareholders in the capital of Darhold Limited, Samih Darwazah, Said Darwazah and Mazen Darwazah are also Directors of Darhold Limited. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p66_p98.qxp 1/4/09 23:54 Page 80 80 Governance Hikma Pharmaceuticals PLC Annual report 2008 Directors’ report continued The Takeover Code – Rule 9 Auditors Each person who was a Director of the Company at the date when this report was approved conﬁrms that: so far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and the Director has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. This conﬁrmation is given and should be interpreted in accordance with the provisions of section 234ZA of the Companies Act 1985. Deloitte LLP have expressed their willingness to continue in ofﬁce as auditors and a resolution to re-appoint them will be proposed at the forthcoming Annual General Meeting. Annual General Meeting The Annual General Meeting of the Company will be held at 88 Wood Street, London, EC2V 7RS on Thursday, 14 May 2009, starting at 11.00 a.m. The Notice convening the meeting is given in a separate document accompanying this document, and includes a commentary on the business of the AGM, and notes to help shareholders exercise their rights at the meeting. Approved by the Board of Directors on 16 March 2009 and signed on its behalf by Henry Knowles Company Secretary 16 March 2009 At the Annual General Meeting held on 6 June 2007, a vote of the independent shareholders of the Company approved the award of up to an aggregate of 437,141 Ordinary Shares pursuant to the Company’s 2006 Long-Term Incentive Plan to Said Darwazah and Mazen Darwazah (the “LTIP Holders”). Because of the relationship of the LTIP Holders with Darhold Limited, who at the time of the Annual General Meeting held 52,649,972 Ordinary Shares (at 25 April 2007 representing 31.129%. of the issued share capital of the Company, and as at 16 March 2009 being the latest practicable date prior to the publication of this document, holding 57,183,028 Ordinary Shares, representing 30.22% of the issued share capital of the Company), each of the LTIP Holders (together with certain other identiﬁed individuals at that date) was treated as acting in concert with Darhold Limited for the purposes of the Takeover Code (the “Concert Party”). As at 25 April 2007, the Concert Party held, in aggregate, interests in 60,550,416 Ordinary Shares in the capital of Hikma (then representing 35.800% of the then issued share capital of the Company). As at 16 March 2009 being the latest practicable date prior to the publication of this document, the Concert Party held, in aggregate, interests in 66,097,758 Ordinary Shares in the capital of Hikma (representing 34.917% of the then issued share capital of the Company). On full exercise of the options under the Hikma Pharmaceuticals 2004 Stock Option Plan (the “2004 Plan”) and full vesting of the LTIPs, the Concert Party would potentially have, in aggregate, interests in 67,077,258 shares in the capital of the Company (representing 35.252% of the enlarged issued share capital of the Company, on the basis that no Ordinary Shares were issued other than pursuant to the exercise of such options or vesting of LTIPs). During the period from the Annual General Meeting in 2007 to 16 March 2009, the LTIP Holders together with other members of the Concert Party who hold options over Ordinary Shares pursuant to the 2004 Plan (the “Option Holders”) have exercised, in aggregate, options over 1,000,000 Ordinary Shares in the capital of the Company, of which 200,000 Ordinary Shares were sold immediately upon exercise, and 480,000 Ordinary Shares were retained and 320,000 were retained but subsequently disposed of by the Options Holders. 12751_p66_p98.qxp 2/4/09 09:23 Page 81 Hikma Pharmaceuticals PLC Annual report 2008 81 Remuneration Committee report Introduction This report has been prepared in accordance with The Directors’ Remuneration Report Regulations 2002, (the “Regulations”). The report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the principles and complied with the provisions of the Combined Code and the Markets Law relating to directors’ remuneration. As required by the Regulations, an advisory resolution to approve this report will be proposed at the Annual General Meeting of the Company at which the ﬁnancial statements will be approved. The auditors are required to report on the “auditable” part of this report and to state whether, in their opinion, that part of the report has been properly prepared in accordance with the Companies Act 1985 (as amended by the Regulations). The report is therefore divided into separate sections for unaudited and audited information. Unaudited information Remuneration Committee The Directors who were members of the Committee during the year under review are set out on page 74 in the Corporate Governance report. The responsibility for the establishment of a remuneration policy and its cost is a matter for the full Board, on the advice of the Remuneration Committee. The ongoing recommendations of the Remuneration Committee have been approved without amendment by the Board for submission to shareholders. The Remuneration Committee is responsible for developing policy on remuneration for Executive Directors and senior management and for determining speciﬁc remuneration packages for each of the Executive Directors. The Remuneration Committee members have no personal ﬁnancial interest other than as shareholders in matters to be decided, no potential conﬂicts of interests arising from cross directorships and no day-to-day involvement in running the business. The Remuneration Committee sought the assistance of the Chairman, the Chief Executive Ofﬁcer and Executive Vice Chairman on matters relating to Directors’ performance and remuneration in respect of the period under review. The Chairman, Chief Executive Ofﬁcer, Executive Vice Chairman and General Counsel may attend meetings by invitation except when their individual remuneration arrangements are discussed. No Director takes part in discussions relating to his own remuneration or beneﬁts. As detailed below, during the year the Remuneration Committee received wholly independent advice on executive compensation from Halliwell Consulting. Halliwell Consulting also provided administrative support for the operation of the Company’s share plans. No services other than those detailed in this report were provided to the Company by Halliwell during the year under review. The Remuneration Committee is formally constituted with written terms of reference with the full remit of the Committee role described. The terms of reference are available on the Company’s website or on request by shareholders in writing from the Company Secretary. Philosophy behind Remuneration Committee’s approach The Company’s remuneration policy is designed to encourage, reward and retain executives and the Remuneration Committee believes that shareholders’ interests are best served by remuneration packages which have a large emphasis on performance related pay, thus encouraging executives to focus on delivering the Group’s business strategy. By providing meaningful incentives to executives the Company’s policy seeks to ensure that the appropriate balance between ﬁxed and performance related pay is maintained. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p66_p98.qxp 27/3/09 22:45 Page 82 82 Governance Hikma Pharmaceuticals PLC Annual report 2008 Remuneration Committee report continued Remuneration policy 2008 Overall policy The Remuneration Committee’s policy during the year under review was to set the main elements of the remuneration package at the following quartiles in comparison to the Company’s Comparator Group: Potential total short-term remuneration available Potential total compensation value Potential annual share awards Annual bonus potential Beneﬁts in kind Base salary Pension Lower quartile to median Upper quartile [Lower quartile to median] Median to upper quartile Upper quartile Median to upper quartile This supports the performance-based culture of the Company. Fixed costs are minimised and total short-term remuneration will only reach and exceed the median if the performance-based bonus is earned for the relevant ﬁnancial year. The policy in respect of long-term incentives and potential compensation value is an extension of the policy on total short-term remuneration. Executives will only receive a market competitive package if the annual bonus and long-term incentives are earned. 2008 Comparator Group The constituents of the Company’s Comparator Group (“CG”) for benchmarking remuneration during 2008 were as follows: Name Name Name Acambis Plc Alizyme Plc Allergan Inc Alpharma Inc AstraZeneca PLC Axis-Shield Plc Barr Pharmaceuticals Inc Forest Laboratories Inc King Pharmaceuticals Inc Mylan Laboratories Inc Oxford Biomedica Plc Protherics Plc Shire Pharmaceuticals PLC SkyePharma Plc Vernalis PLC Watson Pharmaceuticals Inc Factors the Remuneration Committee took into account when selecting the Comparator Group included: the industry within which the Company operates, speciﬁcally taking into account both the international nature of the Company’s business and its competitors; the international nature of the Company’s current executive team and potential recruits to that team; the market capitalisation, turnover and number of employees of the Company; and the UK listing environment of the Company. Throughout this report, references to quartiles are to quartiles in the Comparator Group. Neutec Pharma Plc and CAT Group PLC were removed from the 2008 Comparator Group due to their acquisition during 2007. Towards the end of 2008, Barr Pharmaceuticals Inc, Acambis Plc, Protherics Plc and Alpharma Inc were also acquired by other companies. Therefore, the Remuneration Committee will take the opportunity in 2009 to review the constituents of the whole Comparator Group to ensure a Comparator Group which is appropriate for 2009 and on an ongoing basis. It is currently anticipated that the core of the 2009 Comparator Group will be based on those companies remaining from the 2008 Comparator Group. The new 2009 Comparator Group will be used as the total shareholder return performance condition comparator group for awards granted in 2009 under the Hikma Pharmaceuticals PLC 2006 Long-Term Incentive Plan (“LTIP”). The Company has historically used the same comparators for both benchmarking remuneration and the performance condition for awards granted during the relevant year. The Remuneration Committee will also consider whether to introduce a control benchmarking group based on the FTSE 250 due to the international nature of the 2008 Comparator Group and its likely successor. 12751_p66_p98.qxp 27/3/09 22:45 Page 83 Hikma Pharmaceuticals PLC Annual report 2008 83 Ongoing review The Remuneration Committee continues to review the remuneration policy on an annual basis to ensure it remains appropriate for the ﬁnancial year under review. Factors taken into account by the Remuneration Committee include: market conditions affecting the Company; the recruitment market in the Company’s sector; changing market practice; changing views of institutional shareholders and their representative bodies; and the current economic climate. It is the current intention of the Remuneration Committee to apply the 2008 policy in 2009. 2008 balance between ﬁxed and variable performance-based compensation The chart below demonstrates the balance between the potential ﬁxed and variable performance-based compensation for each Executive Director for the year ended 31 December 2008. Said Darwazah Mazen Darwazah Elements of Executive Directors’ remuneration Fixed compensation is calculated as: Variable performance compensation is calculated as: Salary Beneﬁts Pension contribution Maximum bonus available Fair market value of maximum potential LTIP award 38% 41% 62% 59% Base salary Policy 2008 and 2009 – Lower quartile to median The Company’s remuneration policy is to set the levels of base salary for the Executive Directors below the median to support a performance-based culture. When determining the base salary of the Executives the Committee takes into consideration: the levels of base salary for similar positions with comparable status, responsibility and skills in organisations of broadly similar size and complexity, in particular the lower quartile and median salary levels of those comparable companies within the pharmaceuticals industry and the Comparator Group; the performance of the individual Executive Director; the individual Executive Director’s experience and responsibilities; and pay and conditions throughout the Company. The following tables summarises the base salary of Executive Directors: Name Said Darwazah Median Lower quartile Mazen Darwazah Median Lower quartile Median rise in Comparator Group 8.8% Rise 0% 2008 salary 2009 salary $630,000 $630,000 $886,000 $574,000 $420,000 $420,000 0% 5.0% $458,000 $345,000 G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s After reviewing the above criteria, the Committee has elected not to increase Executive Directors’ salaries for 2009. It remains the Committee’s ongoing policy that, save in exceptional circumstances, only modest rises in base salary should be required. 12751_p66_p98.qxp 31/3/09 07:48 Page 84 84 Governance Hikma Pharmaceuticals PLC Annual report 2008 Remuneration Committee report continued Annual performance related bonus Policy 2008 and 2009 – Upper quartile bonus potential Bonus payments are not pensionable. The following tables summarise the main features of the Company’s executive bonus plan. Bonus Company bonus potential Upper quartile CG Median CG 2008 bonus paid as percentage of salary Upper quartile bonus payments in the CG as a percentage of salary Said Darwazah Mazen Darwazah 100% 125% 100% 51% 88% 100% 94% 60% 65% 60% The maximum target bonus potential is 100% of salary. It is possible for exceptional performance to earn up to a total maximum bonus of 200% of salary. The maximum bonus potentials for 2009 will remain the same as those applied for 2008. The bonuses for 2008 have been paid on the basis of the level of the satisfaction of the performance targets. The table below shows the principal performance targets used for 2008 and their percentage satisfaction. Said Darwazah Proﬁt after tax Operational milestones Personal business targets Total Mazen Darwazah Proﬁt after tax Operational milestones Personal business targets Total Percentage of maximum bonus potential subject to target Percentage satisfaction of bonus target Percentage of salary payable 50% 30% 20% 50% 30% 20% 30% 66% 80% 30% 100% 100% 15% 20% 16% 51% 15% 30% 20% 65% The targets for the annual bonus plan are reviewed and agreed by the Remuneration Committee each year to ensure that they are appropriate to the current market conditions and position of the Company in order to ensure that they continue to remain challenging. Underlying performance targets for Executive Directors’ bonuses were reviewed during 2008 as a part of an overall review of key performance indicators within the Group to ensure that they remained in line with the Group’s overall business strategy in 2009. It is the opinion of the Committee that the overall nature of the conditions remains appropriate for the requirements of the Group in 2009. Share incentives Policy 2008 and 2009 – upper quartile The Remuneration Committee’s policy is to provide annual share grants to senior executives at a maximum of the upper quartile level compared to the Comparator Group. Ongoing share incentives are provided to the Executive Directors solely through the LTIP. The Remuneration Committee believes that share awards under the LTIP enable the Company to provide a competitive incentive and retention tool which is also cost effective in respect of both shareholder dilution and income statement expense. Furthermore, the proposed grant of awards with the attached performance condition ensures that the Company’s comparative Total Shareholder Return (“TSR” )1 performance against the Comparator Group is at least at the upper quartile before executives will receive the full beneﬁt of their share incentives. This structure demonstrates the Remuneration Committee’s desire to correlate incentive arrangements with the achievement of substantial performance. The Remuneration Committee granted the following awards to Executive Directors during 2008. Name Said Darwazah Mazen Darwazah Percentage of salary 131.68% 118.52% UQ in CG percentage of salary 223% 150% 1 Total Shareholder Return (“TSR”) – is a measure showing the return on investing in one share of the Company over the performance period (the return is the value of the capital gain and reinvested dividends). It is normally used comparatively and the Company which achieves the best return is ranked number one. 12751_p66_p98.qxp 27/3/09 22:45 Page 85 Hikma Pharmaceuticals PLC Annual report 2008 85 The Remuneration Committee granted lower levels of LTIP awards to Executive Directors than indicated in its 2007 report, due to a wider population being granted awards than was originally envisaged and the Company wishing to manage the overall cost of the programme. This resulted in a scaling down of awards including those made to Executive Directors. In 2009 the Company will introduce a new Management Incentive Plan (detailed later in this report), and will therefore consider LTIP award levels in 2009 in conjunction with the introduction of this new plan, and the consequently smaller population of participants in the LTIP. The following table summarises the main features of the LTIP in 2008 and its proposed operation during 2009. Maximum annual grant face value2 as percentage of salary and performance condition Maximum annual grant 300% (current normal operating maximum set by the Remuneration Committee 200%) The Awards will be subject to comparative TSR performance against the Comparator Group. 20% of Awards will be released for median performance with full release occurring for upper quartile comparative performance. The Remuneration Committee will also ensure that the underlying ﬁnancial performance of the Company is consistent with its TSR performance. When considering this underlying ﬁnancial performance the factors taken into account by the Remuneration Committee will include proﬁt after tax, revenue growth and the achievement of operational milestones. Maximum grants for 2009 face value as a percentage of salary 2 Face Value for awards under the LTIP face value is the aggregate market value of the shares subject to the award at the date of grant. Said Darwazah Mazen Darwazah 200% 200% It should be noted that the real value received by the Executive Directors under the share incentive arrangements will be dependent upon the degree to which the performance conditions are satisﬁed at the end of the three year performance period and the share price of the Company at this time. Basis of performance condition selection and measurements Comparative TSR was selected as the performance condition for the proposed awards by the Remuneration Committee as it ensures that the executives have outperformed their peers over the measurement period in delivering shareholder value before being entitled to receive any of their awards irrespective of general market conditions. The Remuneration Committee will provide a full explanation and justiﬁcation at the time of the release of the award and why it believes that the underlying ﬁnancial performance of the Company is consistent with this TSR performance. The Remuneration Committee determines whether the performance conditions for share awards are satisﬁed. The Committee has appointed PricewaterhouseCoopers LLP to assist in the ongoing calculation of TSR in accordance with the rules of the LTIP. The Committee will approve these ﬁgures prior to the release of any award. Dilution In accordance with the guidelines set out by the Association of British Insurers (“ABI”) the Company can issue a maximum of 10% of its issued share capital in a rolling ten year period to employees under all its share plans. Under the LTIP rules, grants of no more than 3% of the issued ordinary share capital of the Company may be awarded in the ﬁrst three years following the Company’s IPO, undertaken in 2005. The following table summarises the current level of dilution resulting from Company share plans following the IPO: Type of plan All Employee Share Plans Discretionary Share Plans Share awards as a percentage of issued share capital as at 1 December 2008 in a rolling ten year period Share awards as a percentage of issued share capital as at 31 December 2008 granted during the year 0% 1.375% 0% 0.965% The Company has not implemented any all employee share incentive arrangements. It is the Company’s current intention that the awards granted in 2009 will be satisﬁed by newly issued shares. No awards will be issued to satisfy awards under the MIP (a summary of which is set out below) without prior shareholder approval. Post employment beneﬁts Policy 2008 and 2009 – Lower quartile to median The Executive Directors participate in the Hikma Pharmaceuticals Deﬁned Contribution Retirement Beneﬁt Plan (the “Beneﬁt Plan”) in accordance with the Rules of the Beneﬁt Plan relevant to employees of the Group based in Jordan. Under the Beneﬁt Plan the Group matches employee contributions made to the Beneﬁt Plan. These are ﬁxed at 5% of applicable salary. Participants are entitled to 30% of the Group’s contributions to the Beneﬁt Plan after three years of employment with the Group, and an additional 10% in each subsequent year. The participant’s interest in the Group’s contribution fully vests after ten years of employment. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p66_p98.qxp 31/3/09 15:29 Page 86 86 Governance Hikma Pharmaceuticals PLC Annual report 2008 Remuneration Committee report continued The following table sets out the percentage post employment contributions compared to the Comparator Group. Company Upper quartile Median Lower quartile Said Darwazah Mazen Darwazah 1.35% 19% 18% 8% 1.86% 20% 18% 10% In addition, pursuant to applicable law, each of the Executive Directors receives contributions as a percentage of salary which is paid by the Group into government social security systems. Beneﬁts in kind Policy 2008 and 2009 – Market practice The Company provides the normal beneﬁts in kind for executives of this level in a company of this size, such as company cars, healthcare and life insurance. Total compensation Policy 2008 and 2009 – Median to upper quartile depending on performance The following table shows the value of each of the main elements of the remuneration package provided to the Executive Directors during the year ended 31 December 2008. Name Said Darwazah Mazen Darwazah Other remuneration matters Salary $000s 630 420 Paid bonus $000s Beneﬁts Total payments $000s $000s Total FMV LTIP Actual and FMV $000s $000s Total in 2008 CG at median $000s 320 275 63 70 1,013 765 494 296 1,508 1,061 1,892 940 Directors’ shareholding policy The Company does not currently have a formal Directors’ shareholding requirement due to the substantial shareholdings of the Executive Directors. The Committee, however, wholeheartedly supports the alignment of interests created by a minimum level of executive shareholding and should the make-up of the Board change would consider the introduction of a formal shareholding requirement. All employee share arrangements During 2008, the Company reviewed the overall structure of management and employee share-based incentives, including the potential beneﬁts of operating an All Employee Share plan. The Remuneration Committee assessed the potential cost of implementation of an all employee plan against its anticipated take-up by employees within the Group. Following this review, the Remuneration Committee resolved that, given the geographical diversity of the Group’s employees, the costs of implementation would not be justiﬁed by the potential beneﬁts that could derive from such a plan. Consequently, implementation will be placed on hold, though the matter will be kept under ongoing review. As part of the review of management and employee incentive structure, the Remuneration Committee resolved to implement a targeted programme to reward the management who are the key value drivers in the business. Details of this plan are set out below. Management Incentive Plan (“MIP”) Under the MIP, the Company will make grants of nil cost option awards to executive management across the Group based on the satisfaction of annual performance targets. The key features of the MIP are as follows: the MIP is open to management level employees across the Group below senior executive level; participation in the LTIP will preclude participation in the MIP; participants will be notiﬁed of a maximum monetary entitlement, (the maximum award level is currently anticipated to be 50% of salary p.a.) the value of which will be awarded to participants in the form of nil cost options over shares, based on annual performance against individual and Group KPIs; nil cost options will vest two years after the date of award (being approximately three years after the commencement of the ﬁnancial year to which the award relates), subject to the participant remaining in employment with the Group during this period. Once the options have been awarded, the continued employment requirement is the only condition for vesting; awards are expected to be satisﬁed out of shares held for the purpose in the Group’s Employment Beneﬁt Trust. no shares will be issued by the Company to satisfy awards without prior shareholder approval in general meeting. 12751_p66_p98.qxp 27/3/09 22:46 Page 87 Hikma Pharmaceuticals PLC Annual report 2008 87 Executive Directors’ contracts Details of the service contracts of the Executive Directors of the Company in force at the end of the year under review are as follows: Name Unexpired term of contract Company notice period Contract date Potential termination payment Said Darwazah Mazen Darwazah 12 months 1 July 2007 Rolling contract 12 months 25 May 2006 Rolling contract 12 months salary and beneﬁts 12 months salary and beneﬁts The Executive Directors’ contracts are on a rolling basis, unless terminated by at least 12 months’ written notice. This arrangement is in line with best corporate practice for listed companies. In the event of the termination of an executive’s contract, salary and beneﬁts will be payable during the notice period (there will, however, be no automatic entitlement to bonus payments or share incentive grants during the period of notice other than in accordance with the rules of the relevant incentive plan). The Remuneration Committee will ensure that there have been no unjustiﬁed payments for failure on an Executive Director’s termination of employment. There are no special provisions in the contracts of employment extending notice periods on a change of control, liquidation of the Company or cessation of employment. Mazen Darwazah, who has an executive service contract with the Company as detailed above, will be proposed for re-election at the next Annual General Meeting of the Company, to be held on 14 May 2009. External appointments The Committee recognises that Executive Directors may be invited to take up non-executive directorships or public sector appointments, and that these can broaden the experience and knowledge of the Director, from which the Company can beneﬁt. Executive Directors may therefore accept non-executive appointments as long as they do not lead to a conﬂict of interest, and are allowed to retain any fees paid under such appointments. During the year under review, Said Darwazah and Mazen Darwazah received fees of US$11,850 and US$26,100 respectively, in respect of such appointments. Non-Executive Directors’ fees Policy 2008 – Upper quartile The remuneration of the non-executive directors is determined by the Board based upon recommendations from the Chief Executive Ofﬁcer and Executive Vice Chairman and is within the limits set by the Articles of Association. The nature of the Company’s business is international, requiring the Non-Executive Directors to travel to the USA, Middle East and Europe. The Board is therefore made up of Non-Executive Directors with a wide range of experience both in the UK and internationally. The use of options for Non-Executive Directors is very prevalent in the US and also to some extent internationally. However, as a UK listed company complying with UK best practice it is not considered appropriate to grant options to the Company’s Non-Executive Directors. To ensure that the Company remains able to attract the appropriate calibre of candidate and to take account of its inability to grant options, the Board has therefore set its fee policy at the upper quartile. The individual basic and committee fees, which are paid in £Sterling, are as follows: Name Samih Darwazah Michael Ashton Ali Al-Husry Breffni Byrne Ronald Goode Sir David Rowe-Ham 2008 Total fee £000s 150 64 57 71 57 64 Basic fee £000s Committee fee £000s 157.5 60 60 60 60 60 – 7.5 – 15 – 7.5 2009 Total fee £000s 157.5 67.5 60 75 60 67.5 Upper quartile fees in CG £000s 169 90 69 90 80 90 G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p66_p98.qxp 2/4/09 09:23 Page 88 88 Governance Hikma Pharmaceuticals PLC Annual report 2008 Remuneration Committee report continued A review of the level of Non-Executive Director fees was conducted during 2008. As no review was undertaken in 2007, in 2008 NED fees fell below the benchmark set by the Group remuneration policy. The Board therefore commissioned Halliwell Consulting to conduct a study of non-executive remuneration against the Comparator Group, which showed that, in relation to the overall NED fee policy set by the Group, Hikma’s NED fees were signiﬁcantly out of step with those of its peers. The Board has therefore resolved that from 1 January 2009, the fees of Non-Executive Directors should be increased. Given the current economic climate, it was resolved to grant Non-Executive Directors’ fees for 2009 in the amounts set out above, which represent an approximately 5% increase in the annual fees for all Non-Executive Directors. The increases move non-executive fees back towards the Group’s stated policy, though overall non-executive fees remain below the level set by Group policy. The Board continues to believe that it is important to ensure that the fees paid to non-executives remain competitive, that they reﬂect the increasingly important role played by non-executives and allow the Nomination Committee to recruit Non-Executive Directors of the appropriate calibre in accordance with the requirements of succession planning. Non-Executive Directors do not participate in any bonus plan or share incentive programme operated by the Company and are not entitled to pension contributions or other beneﬁts provided by the Company. The Non-Executive Directors do not have service contracts, but have letters of appointment with the Company. Each appointment is terminable on one month’s notice from either the Company or the Director, but is envisaged to be for an initial period of up to 36 months, subject to the terms of the Company’s Articles of Association, the Companies Act and shareholder approval. Name Samih Darwazah Michael Ashton Ali Al-Husry Breffni Byrne Ronald Goode Sir David Rowe-Ham Date of original appointment Notice payment 17 July 2007 14 October 2005 14 October 2005 14 October 2005 12 December 2006 14 October 2005 1 month 1 month 1 month 1 month 1 month 1 month Total Shareholder Return performance graph The graph shows the Company’s performance, measured by total shareholder return (“TSR”), compared to the constituents of the Comparator Group and FTSE 250 Index from 1 November 2005 to 31 December 2008. The Comparator Group has been selected as it is the group of companies whose performance the Company is compared to in determining the release of awards under the LTIP. The FTSE 250 Index has been selected to provide a broader comparator of the Company’s performance and is the main Index in which the Company’s shares are included. Total Shareholder Return from 1 November 2005 (percent) FTSE 250 Index Hikma Pharmaceuticals PLC Comparator Group 100 50 0 –50 11/06 01/07 03/07 05/07 08/07 10/07 12/07 03/08 05/08 07/08 10/08 12/08 12751_p66_p98.qxp 27/3/09 22:46 Page 89 Hikma Pharmaceuticals PLC Annual report 2008 89 Audited information Aggregate Directors’ remuneration for 2008 and 2007 The total amounts for Directors’ remuneration were as follows: Emoluments Compensation for loss of ofﬁce Non-discretionary statutory entitlement Gains on exercise of share options Amounts receivable under long-term incentive schemes Money purchase pension contributions Total Directors’ emoluments and compensation Director Executives Said Darwazah** Mazen Darwazah Non-executives Samih Darwazah*** Ali Al-Husry Michael Ashton Breffni Byrne Ronald Goode Sir David Rowe-Ham Aggregate emoluments 2008 US$ 2007 US$ 2,637,686 3,328,197 – – – 687,139 4,120,020 5,844,823 – – – – 6,757,706 9,860,159 Fees/Basic salary US$ Other beneﬁts* Annual bonuses US$ US$ 2008 Total US$ 2007 Total US$ 630,000 420,000 278,255 105,616 118,829 132,043 105,616 118,829 63,011 320,000 1,013,011 603,067 70,487 275,000 765,487 796,137 – – – – – – – – – – 278,255 1,294,088 105,616 114,461 118,829 128,781 132,043 143,101 105,616 119,781 118,829 128,781 1,909,188 133,498 595,000 2,637,686 3,328,197 *Other beneﬁts include provision of health insurance, company car, medical expenses and statutory contributions to government social security funds. ** Mr Said Darwazah was appointed as CEO on 1 July 2007. Therefore the ﬁgures disclosed above for 2007 relate to that six month period. *** Mr Samih Darwazah was Chief Executive Ofﬁcer of the Company until 30 June 2007. The ﬁgures above for 2007 reﬂect his executive salary for that six month period and also the one-off compulsory statutory social security payment made on the termination of his executive role. Directors’ post employment beneﬁts Each of the Executive Directors received contributions to the Hikma Pharmaceuticals Deﬁned Contribution Retirement Beneﬁt Plan (Jordan) during the year under review. The contributions paid by the Group were as follows: Director Samih Darwazah* Said Darwazah Mazen Darwazah *Mr Samih Darwazah relinquished his post as an Executive Director of the Company on 30 June 2007. Therefore no post employment beneﬁts were paid in 2008. 2008 US$ – 8,505 7,818 2007 US$ 3,133 1,417 7,693 G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p66_p98.qxp 27/3/09 22:46 Page 90 90 Governance Hikma Pharmaceuticals PLC Annual report 2008 Remuneration Committee report continued Directors’ interests in shares The table below details the directors’ holdings in the share capital of the Company, including the changes between 31 December 2008 and the date of this document Ordinary shares of 10 pence Director Samih Darwazah Said Darwazah Mazen Darwazah Michael Ashton Ali Al Husry Breffni Byrne Ronald Goode Sir David Rowe-Ham Total shares: 1 January 2008 31 December 2008 16 March 2009 1,706,506 2,195,450 2,195,450 612,780 413,445* 413,445 561,958 777,591 777,591 4,566 4,566 4,566 1,109,748 1,109,748 1,109,748 10,000 10,000 10,000 6,000 9,000 9,000 10,000 10,000 10,000 4,021,558 4,529,800 4,529,800 Each of Samih Darwazah, Said Darwazah, and Mazen Darwazah are directors of Darhold Limited, which is therefore a connected person of these individuals for the purposes of the Listing Rules and the Disclosure and Transparency Rules of the Financial Services Authority. Samih Darwazah, Said Darwazah Mazen Darwazah and Ali Al-Husry are also shareholders of Darhold Limited. At the date of this document, Darhold Limited held 57,183,028 Ordinary Shares in the capital of the Company. *On 12 November 2008 Said Darwazah transferred 260,000 shares to his spouse. Directors’ share options The aggregate emoluments disclosed above do not include any amounts or the value of options to acquire Ordinary Shares in the capital of the Company granted or held by the Executive Directors. Options granted under the 2004 Plan are not subject to performance criteria, though vesting of options under the 2004 Plan was conditional on the successful listing of the Company’s share on the London Stock Exchange. Samih Darwazah continues to hold options over shares awarded to him during his period as an executive of the Company, as he remains a qualiﬁed holder under the terms of the 2004 Stock Option Plan. During the year, Samih Darwazah exercised options over 320,000 ordinary shares of the Company, and Mazen Darwazah exercised options over 320,000 ordinary shares of the Company. No other options were exercised by Directors during the year and no options expired unexercised. Furthermore, there were no variations to the terms and conditions of share options during the year. Hikma Pharmaceuticals PLC 2004 Stock Option Plan Director Samih Darwazah Said Darwazah Mazen Darwazah Number of options As at 31 December 2008 As at 1 January 2008 No. of options exercised during the year Exercise price (US$) Price paid for award Initial date of vesting** Date of expiry 320,000 640,000 320,000 0.9075* – – – – 320,000 640,000 320,000 0.9075* – – – 1 Nov 2005 – 1 Nov 2005 11 Oct 2014 – 11 Oct 2014 *Representing the Exercise Price of options following the share re-organisation undertaken on 31 October 2005. Options were awarded on 12 October 2004 with an exercise price of US$3.63. ** Share Options became exercisable following the successful listing of the Company’s shares on the London Stock Exchange. Options under the 2004 Plan have phased vesting over ﬁve years, with 20% vesting each year on the anniversary of award, being 12 October. 12751_p66_p98.qxp 27/3/09 22:46 Page 91 Hikma Pharmaceuticals PLC Annual report 2008 91 The gains/notional gains made by Directors on the exercise of their stock options during the year were as follows: Gain (US$) Share price (£) Exchange rate (US$) Options exercised Director Date Samih Darwazah Mazen Darwazah Total 320,000 160,000 160,000 13 Oct 2008 4 Jan 2008 15 April 2008 Hikma Pharmaceuticals PLC 2006 Long Term Incentive Scheme 3.1878 1.71 1,453,964 Held/Sold Held 4.8500 1.98 1,391,280 Sold 4.5050 1.97 1,274,776 Held 4,120,020 Director Said Darwazah Mazen Darwazah No. of LTIP Shares 100,000 90,000 50,000 54,000 Price paid for award Exercise price – – – – Nil Nil Nil Nil Date of award 10 Sept 2007 29 April 2008 10 Sept 2007 29 April 2008 Initial date of vesting 10 Sept 2010 29 April 2011 10 Sept 2010 29 April 2011 Date of expiry 10 Sept 2017 29 April 2018 10 Sept 2017 29 April 2018 The closing market price for the Ordinary Shares on 31 December 2008 was 348.25 pence. During the period from 1 January 2008 to the year-end the share’s closing price ranged from a low of 250.00 pence to a high of 518.00 pence. Audit The emoluments and Directors’ interests’ information disclosed in the Directors’ report on remuneration, which is required by Part 3 of Schedule 7A of the Companies Act 1985 (as amended), has been audited. Approved by the Board of Directors on 16 March 2009 and signed on its behalf Michael Ashton Chairman of the Remuneration Committee G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s We conﬁrm to the best of our knowledge: the ﬁnancial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, ﬁnancial position and proﬁt or loss of the company and the undertakings included in the consolidation taken as a whole; and the business review, which is incorporated into the Directors’ report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face. By order of the Board Said Darwazah Chief Executive Ofﬁcer 16 March 2009 12751_p66_p98.qxp 27/3/09 22:46 Page 92 92 Governance Hikma Pharmaceuticals PLC Annual report 2008 Directors’ responsibility statement The Directors are responsible for preparing the Annual Report and the ﬁnancial statements. The Directors are required to prepare ﬁnancial statements for the Group in accordance with International Financial Reporting Standards as adopted by the EU (IFRSs) and have also elected to prepare ﬁnancial statements for the Company in accordance with IFRSs. Company law requires the Directors to prepare such ﬁnancial statements in accordance with IFRSs, the Companies Act 1985 and Article 4 of the IAS Regulations. International Accounting Standard 1 requires that ﬁnancial statements present fairly for each ﬁnancial year the Company’s ﬁnancial position, ﬁnancial performance and cash ﬂows. This requires the faithful representation of the effects of transactions, other events and condition in accordance with the deﬁnitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s “Framework for the Preparation and Presentation of Financial Statements”. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. Directors are also required to: properly select and apply accounting policies; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and provide additional disclosures when compliance with the speciﬁc requirements in IFRSs is insufﬁcient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s ﬁnancial position and ﬁnancial performance. The Directors responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the ﬁnancial position of the Company, for safeguarding the assets, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of a Directors’ report and Director’s remuneration report which comply with the requirements of the Companies Act 1985. The Directors are responsible for the maintenance and integrity of the Company website. Legislation in the United Kingdom governing the preparation and dissemination of ﬁnancial statements differs from legislation in other jurisdictions. 12751_p66_p98.qxp 27/3/09 22:46 Page 93 Hikma Pharmaceuticals PLC Annual report 2008 93 Independent auditors’ report to the members of Hikma Pharmaceuticals PLC We have audited the Group ﬁnancial statements of Hikma Pharmaceuticals PLC for the year ended 31 December 2008 which comprise the consolidated income statement, the consolidated balance sheet, the consolidated cash ﬂow statement, the consolidated statement of changes in equity and the related Notes 1 to 41. These Group ﬁnancial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ remuneration report that is described as having been audited. We have reported separately on the parent company ﬁnancial statements of Hikma Pharmaceuticals PLC for the year ended 31 December 2008. This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditors The Directors’ responsibilities for preparing the Annual Report, the Directors’ remuneration report and the Group ﬁnancial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the Group ﬁnancial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the Group ﬁnancial statements give a true and fair view, whether the Group ﬁnancial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation and whether the part of the Directors’ remuneration report described as having been audited has been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the Directors’ Report is consistent with the Group ﬁnancial statements. In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information speciﬁed by law regarding Director’s remuneration and other transactions is not disclosed. We review whether the Corporate Governance Statement reﬂects the Company’s compliance with the nine provisions of the 2006 Combined Code speciﬁed for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. We read the other information contained in the Annual Report as described in the contents section and consider whether it is consistent with the audited Group ﬁnancial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group ﬁnancial statements. Our responsibilities do not extend to any further information outside the Annual Report. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group ﬁnancial statements and the part of the Directors’ remuneration report to be audited. It also includes an assessment of the signiﬁcant estimates and judgements made by the Directors in the preparation of the Group ﬁnancial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufﬁcient evidence to give reasonable assurance that the Group ﬁnancial statements and the part of the Directors’ remuneration report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Group ﬁnancial statements and the part of the Directors’ remuneration report to be audited. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p66_p98.qxp 27/3/09 22:46 Page 94 94 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Independent auditors’ report to the members of Hikma Pharmaceuticals PLC continued Opinion In our opinion: the Group ﬁnancial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s affairs as at 31 December 2008 and of its proﬁt for the year then ended; the Group ﬁnancial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; the part of the Directors’ remuneration report described as having been audited has been properly prepared in accordance with the Companies Act 1985; and the information given in the Directors’ report is consistent with the Group ﬁnancial statements. Separate opinion in relation to IFRSs As explained in Note 2 to the Group ﬁnancial statements, the Group in addition to complying with its legal obligation to comply with IFRSs as adopted by the European Union, has also complied with the IFRSs as issued by the International Accounting Standards Board. In our opinion the Group ﬁnancial statements give a true and fair view, in accordance with IFRSs, of the state of the Group’s affairs as at 31 December 2008 and of its proﬁt for the year then ended. Deloitte LLP Chartered Accountants and Registered Auditors, London, United Kingdom 16 March 2009 12751_p66_p98.qxp 27/3/09 22:46 Page 95 Hikma Pharmaceuticals PLC Annual report 2008 95 Consolidated income statement for the year ended 31 December 2008 Continuing operations Revenue Cost of sales Gross proﬁt Sales and marketing costs General and administrative expenses Research and development costs Other operating expenses (net) Total operating expenses Adjusted operating proﬁt Exceptional items: – Revision to estimates for chargebacks, returns and rebates – Acquisition integration costs Intangible amortisation* Operating proﬁt Finance income Finance expense Other income Proﬁt before tax Tax Proﬁt for the year Attributable to: Minority interest Equity holders of the parent Earnings per share (cents) Basic Diluted *Intangible amortisation comprises the amortisation on intangible assets other than software. Notes 2008 $000’s 2007 $000’s 4 4 4 580,656 448,796 (324,174) (227,263) 256,482 221,533 (90,560) (61,021) (56,853) (46,012) (22,172) (19,342) 8 (6,215) (2,760) (175,800) (129,135) 94,326 95,061 5 5 5 4 9 (4,800) (1,629) (7,215) – – (2,663) 80,682 92,398 817 2,029 10 (17,545) (10,837) 80 199 64,034 83,789 (6,915) (19,596) 57,119 64,193 (6) 57,125 57,119 1,617 62,576 64,193 30.4 29.6 37.0 35.4 11 6 32 13 13 G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p66_p98.qxp 27/3/09 22:47 Page 96 96 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Consolidated balance sheet at 31 December 2008 Non-current assets Intangible assets Property, plant and equipment Interest in joint venture Deferred tax assets Available for sale investments Financial and other non-current assets Current assets Inventories Income tax recoverable Trade and other receivables Collateralised cash Cash and cash equivalents Other current assets Total assets Current liabilities Bank overdrafts and loans Obligations under ﬁnance leases Trade and other payables Income tax provision Other provisions Other current liabilities Net current assets/(liabilities) Non-current liabilities Long-term ﬁnancial debts Deferred income Obligations under ﬁnance leases Deferred tax liabilities Total liabilities Net assets Equity Share capital Share premium Own shares Other reserves Equity attributable to equity holders of the parent Minority interest Total equity * The 2007 comparatives have been restated due to the ﬁnalisation of 2007 acquisition accounting. See note 33. The ﬁnancial statements were approved by the Board of Directors and signed on its behalf by: Said Darwazah Director 16 March 2009 Notes 2008 $000’s 2007 (Restated)* $000’s 14 15 16 17 18 19 20 21 22 23 24 28 25 26 27 28 17 31 34 32 258,228 271,650 5,453 13,305 540 2,077 551,253 154,756 – 195,843 819 62,727 1,061 415,206 966,459 117,300 1,221 82,003 12,016 5,392 10,502 228,434 186,772 110,414 695 5,496 12,425 129,030 357,464 608,995 33,857 269,973 (1,124) 300,503 603,209 5,786 608,995 259,841 246,656 4,543 14,503 1,008 1,290 527,841 140,409 358 188,275 5,628 28,905 2,625 366,200 894,041 276,537 1,455 84,324 10,583 4,475 16,662 394,036 (27,836) 57,662 279 5,698 11,709 75,348 469,384 424,657 30,229 114,059 – 274,192 418,480 6,177 424,657 12751_p66_p98.qxp 27/3/09 22:47 Page 97 Hikma Pharmaceuticals PLC Annual report 2008 97 Consolidated statement of changes in equity for the year ended 31 December 2008 Merger reserve $000’s Revaluation reserves $000’s Translation reserves $000’s Retained earnings $000’s Total reserves $000’s Share capital $000’s Share premium $000’s Own shares $000’s Total equity attributable to equity shareholders of the parent $000’s Minority interest $000’s Total equity $000’s 33,920 4,807 3,566 161,631 203,924 29,712 111,431 – 345,067 4,732 349,799 – – 517 2,628 – – 1,601 1,601 Balance at 1 January 2007 Issue of equity shares Cost of equity settled employee share scheme Deferred and current tax arising on share-based payments Dividends on ordinary shares Dividends paid to minority shareholders Proﬁt for the year Cumulative effect of change in fair value of available for sale investments Cumulative effect of change in fair value of ﬁnancial derivatives Realisation of revaluation reserve Currency translation gain Balance at 31 December 2007 and 1 January 2008 Issue of equity shares Acquisition of own shares Cost of equity settled employee share scheme Deferred tax arising on share-based payments Dividends on ordinary shares Dividends paid to minority shareholders Proﬁt/(loss) for the year Cumulative effect of change in fair value of available for sale investments Cumulative effect of change in fair value of ﬁnancial derivatives Realisation of revaluation reserve Currency translation loss Balance at 31 December 2008 – – – – – – – – (180) – – – – – – – – – – – 2,968 2,968 – (12,696) (12,696) – – – – – – – 62,576 62,576 (151) (151) (256) (256) 180 – – 16,226 – 16,226 – – – – – – – – – – – – – – – – – – – – (180) – – – – – – – – – – – – – – 3,384 3,384 (4,299) (4,299) (14,151) (14,151) – – 57,125 57,125 (216) (216) (78) (78) 180 – – (15,454) – (15,454) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 3,145 1,601 – – 3,145 1,601 – 2,968 – 2,968 – (12,696) – (12,696) – – – – – – – (172) (172) 62,576 1,617 64,193 (151) (256) – 16,226 – – – – (151) (256) – 16,226 – – – – (1,124) 3,384 (4,299) (14,151) 3,384 (4,299) (14,151) – (385) (385) 57,125 (6) 57,119 G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s – – – – (216) (78) – (15,454) (216) (78) – (15,454) – – – – – – – – – 33,920 4,627 19,792 215,853 274,192 30,229 114,059 – 418,480 6,177 424,657 3,628 155,914 – 159,542 – 159,542 (1,124) (1,124) 33,920 4,447 4,338 257,798 300,503 33,857 269,973 (1,124) 603,209 5,786 608,995 12751_p66_p98.qxp 27/3/09 22:47 Page 98 98 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Consolidated cash ﬂow statement for the year ended 31 December 2008 Net cash from operating activities Investing activities Purchases of property, plant and equipment Proceeds from disposal of property, plant and equipment Purchase of intangible assets Proceeds from disposal of intangible assets Investment in joint venture Investment in ﬁnancial and other non current assets Proceeds/(investment) in available for sale investments (net) Acquisition of subsidiary undertakings, net of cash acquired Subsequent payments relating to prior year acquisitions Finance income Net cash used in investing activities Financing activities Decrease/(increase) in collateralised cash Increase in long-term ﬁnancial debts Repayment of long-term ﬁnancial debts (Decrease)/increase in short-term borrowings (Decrease)/increase in obligations under ﬁnance leases Dividends paid Dividends paid to minority shareholders Purchase of own shares Interest paid Proceeds from issue of new shares Costs of issue of new shares Net cash from ﬁnancing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Foreign exchange translation movements Cash and cash equivalents at end of year Notes 35 2008 $000’s 2007 $000’s 74,969 53,283 (56,205) (50,402) 1,003 906 (9,313) (4,586) 1,257 (910) (787) 252 – – 329 (226) – (296,903) (2,234) – 817 2,029 (66,120) (348,853) 4,809 (291) 101,685 42,464 (48,933) (13,546) (159,237) 229,658 (436) 126 (14,151) (12,834) (385) (1,124) (166) – (17,097) (10,166) 162,026 3,145 (2,484) – 24,673 238,390 33,522 28,905 300 (57,180) 86,227 (142) 62,727 28,905 12751_p99_p152.qxp 31/3/09 02:37 Page 99 Notes to the consolidated ﬁnancial statements Hikma Pharmaceuticals PLC Annual report 2008 99 1. Adoption of new and revised standards In the current year, two Interpretations issued by the International Financial Reporting Interpretations Committee are effective for the current period. These are: IFRIC 11 IFRS 2 – Group and Treasury Share Transactions and IFRIC 14 IAS 19 – The Limit on a Deﬁned Beneﬁt Asset, Minimum Funding Requirements and their Interaction. The adoption of these Interpretations has not led to any changes in the Group’s accounting policies. At the date of authorisation of these ﬁnancial statements, the following Standards and Interpretations which have not been applied in these ﬁnancial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU): IFRS 1 (amended)/IAS 27 (amended) Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate IFRS 2 (amended) IFRS 3 (revised 2008) IFRS 8 IAS 1(revised 2007) IAS 23 (revised 2007) IAS 27 (revised 2008) Share-based Payment – Vesting Conditions and Cancellations Business Combinations Operating Segments Presentation of Financial Statements Borrowing Costs Consolidated and Separate Financial Statements IAS 32 (amended)/IAS 1 (amended) Puttable Financial Instruments and Obligations Arising on Liquidation IFRIC 12 IFRIC 15 IFRIC 16 Service Concession Arrangements Agreements for the Construction of Real Estate Hedges of a Net Investment in a Foreign Operation Improvements to IFRSs (May 2008) The Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the ﬁnancial statements of the Group except for the following, which may have impact depending on the future activities of the Group: additional segment disclosures when IFRS 8 comes into effect for periods commencing on or after 1 January 2009; and treatment of acquisition of subsidiaries when IFRS 3 comes into effect for business combinations for which the acquisition date is on or after the beginning of the ﬁrst annual period beginning on or after 1 July 2009. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:49 Page 100 100 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 2. Signiﬁcant accounting policies Basis of accounting Hikma Pharmaceuticals PLC’s consolidated ﬁnancial statements are prepared in accordance with International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board. The ﬁnancial statements have also been prepared in accordance with IFRSs adopted for use in the European Union and therefore comply with Article 4 of the EU IAS Regulation. The ﬁnancial statements have been prepared under the historical cost convention, except for the revaluation to market of certain ﬁnancial assets and liabilities. Comparative ﬁgures for 31 December 2007 have been adjusted for revisions to the provisional acquisition balance sheet of the companies acquired by the Group in 2007. Further details are provided in Note 33. In addition, in the consolidated cash ﬂow statement and supporting Notes interest paid has been reclassiﬁed to ﬁnancing activities and ﬁnance income has been reclassiﬁed to investing activities to better reﬂect the nature of the ﬂows, following the recent acquisitions. Going concern risks are discussed in the risk management section of the Business and Financial Review. The Group’s previously published ﬁnancial statements were also prepared in accordance with International Financial Reporting Standards. The presentational and functional currency of Hikma Pharmaceuticals PLC is the US Dollar as the majority of the Company’s business is conducted in US Dollars ($). The signiﬁcant accounting policies are set out below. Basis of consolidation The consolidated ﬁnancial statements incorporate the results of Hikma Pharmaceuticals PLC (the “Company”) and entities controlled by the Company (together the “Group”) and the Group’s share of the results and net assets of its associates. Control is achieved where the Company has the power to govern the ﬁnancial and operating policies either directly or indirectly of an investee entity so as to obtain beneﬁts from its activities. On acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identiﬁable net assets acquired is recognised as goodwill. Minority interests in the net assets of consolidated subsidiaries are identiﬁed separately from the Group’s equity therein. The interest of minority shareholders is stated at the minority’s proportion of the fair values of the assets and liabilities recognised. Subsequently, any losses applicable to the minority interest in excess of the minority interest are allocated against the interests of the parent. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the ﬁnancial statements of subsidiaries to bring the accounting policies used in line with those used by the Group. All intra-Group transactions, balances, income and expenses are eliminated on consolidation. The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identiﬁable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 are recognised at their fair value at the acquisition date. Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identiﬁable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identiﬁable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in the income statement. The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. 12751_p99_p152.qxp 27/3/09 22:49 Page 101 Hikma Pharmaceuticals PLC Annual report 2008 101 2. Signiﬁcant accounting policies continued Investment in associates An associate is an entity over which the Group is in a position to exercise signiﬁcant inﬂuence, but not control or joint control, through participation in the ﬁnancial and operating policy decisions of the investee. The results and assets and liabilities of associates are incorporated in the ﬁnancial statements using the equity method of accounting except when classiﬁed as held for sale. Signiﬁcant inﬂuence is the power to participate in the ﬁnancial and operating policy decisions of the investee, but not control or joint control over these policies. Investment in joint venture A joint venture is a contractual arrangement whereby the Group and a third party undertake an economic activity that is subject to joint control. Joint control is the contractually agreed sharing of control over an economic activity, and exists only when the strategic ﬁnancial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers). Each venturer contributes cash or other resources to the jointly controlled entity. These contributions are included in the accounting records of the venturer and recognised in its ﬁnancial statements as an investment in the jointly controlled entity. The Group recognises its interest in the joint venture using proportionate consolidation. The application of proportionate consolidation means that the balance sheet of the Group includes its share of the assets that it controls jointly and its share of the liabilities for which it is jointly responsible. Intangible assets (a) Goodwill: arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identiﬁable assets and liabilities of a subsidiary at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill which is recognised as an asset is reviewed for impairment at least annually. Any impairment is recognised immediately in proﬁt or loss and is not subsequently reversed. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequent when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated ﬁrst to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the proﬁt or loss on disposal. (b) Marketing rights: are amortised over their useful lives commencing in the year in which the rights ﬁrst generate sales. (c) Customer relationships: represent the value attributed to the long-term relationships held with existing customers at the date of acquisition and are amortised over their useful economic life. (d) Product related intangibles: (i) product ﬁles and under-licenced products are assigned indeﬁnite useful lives which are reviewed for impairment at least annually; and (ii) under-licence agreements and product dossiers are amortised over their useful lives in the year of acquisition. (e) Purchased software: is amortised over the useful economic lives when the asset is available for use. (f) In process research and development recognised on acquisition: is amortised over the useful life in the year of acquisition. (g) Trade name: some trade names are assigned indeﬁnite useful lives and others have ﬁnite useful lives over which they are amortised where applicable, in the period from acquisition. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:49 Page 102 102 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 2. Signiﬁcant accounting policies continued Foreign currencies For the purpose of the consolidated ﬁnancial statements, the results and ﬁnancial position of each Group company are expressed in US Dollars, the functional currency of Hikma Pharmaceuticals PLC and the presentation at currency of the consolidated ﬁnancial statements. Transactions in currencies other than local currency are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Gains and losses arising on retranslation are included in net proﬁt or loss for the period, except for exchange differences arising on non-monetary assets and liabilities where the changes in fair value and the related foreign exchange are recognised directly in equity. On consolidation, the assets and liabilities of the Group’s overseas operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are classiﬁed as equity and transferred to the Group’s translation reserve. Such cumulative translation differences are recognised as income or as expenses in the period in which the operation is disposed of. 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. Revenue recognition Revenue is recognised in the income statement when goods or services are supplied or made available to external customers against orders received and when title and risk of loss has passed. Revenue represents the amounts receivable after the deduction of discounts, value added tax, other sales taxes, 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 historical information and past experience. Chargebacks The provision for chargebacks is the most signiﬁcant and complex estimate used in the recognition of revenue. In the USA the Group sells its products directly to wholesale distributors, generic distributors, retail pharmacy chains and mail-order pharmacies. The Group also sells its products indirectly to independent pharmacies, managed care organisations, hospitals, and Group purchasing organisations, collectively referred to as “indirect customers”. The Group enters into agreements with its indirect customers to establish pricing for certain products. The indirect customers then independently select a wholesaler from which they purchase the products at agreed-upon prices. The Group will provide credit to the wholesaler for the difference between the agreed-upon price with the indirect customer and the wholesaler’s invoice price. This credit is called a chargeback. The provision for chargebacks is based on historical sell-through levels by the Group’s wholesale customers to the indirect customers, and estimated wholesaler inventory levels. As sales are made to the large wholesale customers, the Group continually monitors the reserve for chargebacks and makes adjustments when it believes that actual chargebacks may differ from estimated reserves. 12751_p99_p152.qxp 27/3/09 22:49 Page 103 Hikma Pharmaceuticals PLC Annual report 2008 103 2. Signiﬁcant accounting policies continued Returns and rebates In certain countries and consistent with industry practice, the Group has a product return policy that allows selected customers to return the product within a speciﬁed period prior to and subsequent to the expiration date, in exchange for a credit to be applied to future purchases. The Group estimates its provision for returns and rebates based on historical experience, changes to business practices and credit terms. While such experience has allowed for reasonable estimations in the past, history may not always be an accurate indicator of future returns. The Group continually monitors the provisions for returns and rebates, and makes adjustments when it believes that actual product returns may differ from established reserves. Price adjustments Price adjustments, also known as “shelf stock adjustments,” are credits issued to reﬂect decreases in the selling prices of the Group’s products that customers have remaining in their inventories at the time of the price reduction. Decreases in selling prices are discretionary decisions made by Group management to reﬂect competitive market conditions. Amounts recorded for estimated shelf stock adjustments are based upon speciﬁed terms with direct customers, estimated declines in market prices and estimates of inventory held by customers. The Group regularly monitors these and other factors and re-evaluates the reserve as additional information becomes available. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily 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 or sale. To the extent that variable rate borrowings are used to ﬁnance a qualifying asset and are hedged in an effective cash ﬂow hedge of interest rate risk, the effective portion of the derivative is deferred in equity and released to proﬁt or loss when the qualifying asset impacts proﬁt or loss. To the extent that ﬁxed rate borrowings are used to ﬁnance a qualifying asset and are hedged in an effective fair value hedge of interest rate risk, the capitalised borrowing costs reﬂect the hedged interest rate. Investment income earned on the temporary investment of speciﬁc borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in proﬁt or loss in the period in which they are incurred. Dividend income Income from investments is recognised when the shareholders’ rights to receive payment have been established. Leasing Leases are classiﬁed as capital leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classiﬁed as operating leases. Rentals payable under operating leases are charged to income on a straight-line basis over the term of the operating lease. Beneﬁts received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term. Assets held under capital leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a capital lease obligation. Lease payments are apportioned between ﬁnance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Government grants Government grants relating to property, plant and equipment are treated as deferred income and released to the income statement over the expected useful lives of the assets concerned. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:49 Page 104 104 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 2. Signiﬁcant accounting policies continued Research and development Research and development expenses are fully charged to the income statement, as the Group considers that the regulatory and other uncertainties inherent in the development of its products generally mean that the recognition criteria in IAS 38 “Intangible assets” are not met. Where, however the recognition criteria are met, intangible assets will be recognised and amortised over their useful economic life. Retirement beneﬁt costs Payments to deﬁned contribution retirement beneﬁt schemes are charged as an expense as they fall due. Payments made to state-managed retirement beneﬁt schemes are dealt with as payments to deﬁned contribution schemes where the Group’s obligations under the schemes are equivalent to those arising in a deﬁned contribution retirement beneﬁt scheme. Tax The Group provides for income tax according to the laws and regulations prevailing in the countries where the Group operates. Furthermore, the Group computes and records deferred tax assets and liabilities according to IAS 12 “Income Taxes”. The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable proﬁt for the year. Taxable proﬁt differs from net proﬁt as reported in the income statements because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the ﬁnancial statements and the corresponding tax bases used in the computation of taxable proﬁt, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable proﬁts will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax proﬁt nor the accounting proﬁt. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufﬁcient taxable proﬁts will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Share-based payment transactions Employees (including directors) of the Group receive remuneration in the form of share-based payments, whereby employees render services in exchange for shares or rights over shares (“equity-settled transactions”). 12751_p99_p152.qxp 27/3/09 22:49 Page 105 Hikma Pharmaceuticals PLC Annual report 2008 105 2. Signiﬁcant accounting policies continued Share-based payments IFRS 2 “Share-based Payments” requires an expense to be recognised when the Group buys goods or services in exchange for share or rights over shares (“share-based payments”) or in exchange for other equivalent assets. The cost of share-based payments’ transactions with employees is measured by reference to the fair value at the date at which the share-based payments are granted. The equity settled stock options scheme fair value is determined using a binomial model. The long-term incentive plan fair value is determined using a MonteCarlo valuation model. The expected life used in the models has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations (further details are given in Note 37). In valuing share-based payments, no account is taken of any performance conditions, other than conditions linked to the market price of the shares of Hikma Pharmaceuticals PLC. The cost of share-based payments is recognised, together with a corresponding increase in equity, on a straight-line basis over the vesting period based on the Group’s estimate of shares that will eventually vest. No expense is recognised for awards that do not ultimately vest. Where the terms of a share-based payments are modiﬁed, as a minimum an expense is recognised as if the terms had not been modiﬁed. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modiﬁcation, as measured at the modiﬁcation date. Where a share-based payments award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for a cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modiﬁcation of the original award, as described in the previous paragraph. The dilutive effect of outstanding share-based payments is reﬂected as additional share dilution in the computation of diluted earnings per share. Property, plant and equipment Property, plant and equipment have been valued at cost on acquisition and are depreciated, except for land, on a straight- line basis at the following depreciation rates: Buildings Vehicles 2% to 4% 10% to 20% Fixtures & equipment 8% to 33% Projects under construction are not depreciated until construction has been completed. Any additional costs that extend the useful life of property, plant and equipment are capitalised. Property, plant and equipment which are ﬁnanced by leases giving Hikma Pharmaceuticals PLC substantially all the risks and rewards of ownership are capitalised at the lower of the fair value of the asset and the present value of the minimum lease payments at the inception of the lease, and depreciated in the same manner as other property, plant and equipment over the shorter of the lease term or their useful life. Whenever the recoverable amount of an asset is impaired, the carrying value is reduced to the recoverable amount and the impairment loss is taken to the income statement. Projects under construction are carried at cost, less any recognised impairment loss. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:49 Page 106 106 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 2. Signiﬁcant accounting policies continued Inventories Inventories are stated at the lower of cost and net realisable value. Purchased products are valued at acquisition cost and all other costs incurred in bringing each product to its present location and condition. Cost of own-manufactured products comprises direct materials and, where applicable, directs labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. In the balance sheet, inventory is primarily valued at standard cost, which approximates to historical cost determined on a moving average basis, and this value is used to determine the cost of sales in the income statement. Net realisable value represents the estimated selling price in the ordinary course of business, less all estimated costs of completion and all estimated costs necessary to make the sale. Provisions are made for inventories with net realisable value lower than cost or for slow moving inventory. Financial instruments Financial assets and ﬁnancial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. Derivative ﬁnancial instruments are used to manage the Group’s exposure to interest rate and foreign exchange risks. The principal derivative instruments used by the Group are interest rate swaps and foreign exchange forward and option contracts. The Group does not hold or issue derivative ﬁnancial instruments for trading or speculative purposes. Derivative ﬁnancial instruments are initially recognised in the balance sheet at cost and then remeasured at subsequent reporting dates to fair value. Hedging derivatives are classiﬁed on inception as fair value hedges, cash ﬂow hedges or net investment hedges. Changes in the fair value of derivatives designed as fair value hedges are recorded in the income statement, with the changes in the fair value of the hedged asset or liability. Changes in the fair value of derivatives designed as cash ﬂow hedges are recognised in equity. Amounts deferred in equity are transferred to the income statement in line with the hedged forecast transaction. Hedges of net investments in foreign entities are accounted for in a similar way to cash ﬂow hedges. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement. Investments Available for sale investments with quoted market prices are initially recognised at cost on acquisition and remeasured to their fair values at year-end. Gains or losses on remeasurement to fair value are recognised in shareholders’ equity until the investments are sold, disposed of, or determined to be impaired, at which time the cumulative gains or loss relating to these investments previously recognised in equity is included in the income statement. Available for sale ﬁnancial assets without market prices and the fair value of which cannot be reliably measured are stated at cost, less a provision for any impairment loss, which is taken to the income statement. The fair value of quoted ﬁnancial assets represents the closing price in the ﬁnancial markets at the date of the ﬁnancial statements. However, the fair value of unquoted ﬁnancial assets, or those with no declared price are estimated by comparing the fair value of a similar ﬁnancial instrument or through a discounted cash ﬂow method. Accounts receivable Trade receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in proﬁt or loss when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset’s carrying amount and the present value of estimated future cash ﬂows discounted at the effective interest rate computed at initial recognition. 12751_p99_p152.qxp 27/3/09 22:49 Page 107 Hikma Pharmaceuticals PLC Annual report 2008 107 2. Signiﬁcant accounting policies continued Cash and cash equivalents Cash and cash equivalents include highly liquid investments with original maturities of three months or less and are subject to an insigniﬁcant risk of changes in value. Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the income statement using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Trade payables Trade payables are not interest bearing and are stated at fair value. Equity instruments Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outﬂow of resources will be required to settle the obligations and a reliable estimate can be made of the amount of the obligation. Impairment of tangible and intangible assets excluding goodwill At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. An intangible asset with an indeﬁnite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell 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 which the estimates of future cash ﬂows have not been adjusted. If the recoverable amount of an asset (or income-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (income-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately. 3. Critical accounting judgements and key sources of estimation uncertainty In the application of the Group’s accounting policies, which are described in Note 2, the directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The critical accounting policies and key estimates are set above. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:50 Page 108 108 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 4. Business and geographical segments For management purposes, the Group is currently organised into three operating divisions – Generic, Branded and Injectables. These divisions are the basis on which the Group reports its primary segment information. Segment information about these businesses is presented below. Year ended 31 December 2008 Revenue Cost of sales Gross proﬁt Result Adjusted segment result Exceptional items: – Revision to estimates for chargebacks, returns and rebates – Acquisition integration costs Intangible amortisation* Segment result Unallocated corporate expenses Operating proﬁt Finance income Finance expense Other income Proﬁt before tax Tax Proﬁt for the year Attributable to: Minority interest Equity holders of the parent Branded $000’s Injectables $000’s Generic $000’s Others $000’s Group $000’s 320,837 149,320 105,696 4,803 580,656 (148,023) (85,942) (86,385) (3,824) (324,174) 172,814 63,378 19,311 979 256,482 93,591 24,688 (839) (3,738) 113,702 – (1,629) (4,478) – – (4,800) – (2,587) (150) – – – (4,800) (1,629) (7,215) 87,484 22,101 (5,789) (3,738) 100,058 (19,376) 80,682 817 (17,545) 80 64,034 (6,915) 57,119 (6) 57,125 57,119 *Intangible amortisation comprises the amortisation on intangible assets other than software. “Others” mainly comprises of Arab Medical Containers LTD and International Pharmaceutical Research Center LTD and the chemicals division of Hikma Pharmaceuticals LTD Jordan. Unallocated corporate expenses are primarily made up of employee costs, ofﬁce costs, professional fees and donations. Other information 2008 Additions to property, plant and equipment (cost) Additions to intangible assets Branded $000’s 34,226 3,801 Injectables $000’s 12,981 4,781 Generic $000’s 8,037 463 Corporate and Other $000’s 1,427 1,601 Group $000’s 56,671 10,646 Total property, plant and equipment and intangible assets (net book value) 336,839 150,282 32,185 10,572 529,878 Depreciation and amortisation 18,666 8,540 4,613 1,303 33,122 Balance sheet Total assets Segment assets Total liabilities Segment liabilities 642,397 196,894 95,456 31,712 966,459 196,924 82,804 28,191 49,545 357,464 12751_p99_p152.qxp 27/3/09 22:50 Page 109 4. Business and geographical segments continued Year ended 31 December 2007 Revenue Cost of sales Gross proﬁt Result Adjusted segment result Intangible amortisation* Segment result Unallocated corporate expenses Operating proﬁt Finance income Finance expense Other income Proﬁt before tax Tax Proﬁt for the year Attributable to: Minority interest Equity holders of the parent Hikma Pharmaceuticals PLC Annual report 2008 109 Branded $000’s Injectables $000’s Generic $000’s Others $000’s Group $000’s 198,942 121,164 124,229 4,461 448,796 (90,925) (67,005) (65,644) (3,689) (227,263) 108,017 54,159 58,585 772 221,533 62,162 22,654 31,644 (3,396) 113,064 (466) (2,197) – – (2,663) 61,696 20,457 31,644 -3,396 110,401 (18,003) 92,398 2,029 (10,837) 199 83,789 (19,596) 64,193 1,617 62,576 64,193 *Intangible amortisation comprises the amortisation on intangible assets other than software. “Others” mainly comprises of Arab Medical Containers LTD and International Pharmaceutical Research Center LTD and the chemicals division of Hikma Pharmaceuticals LTD Jordan. Unallocated corporate expenses are primarily made up of employee costs, ofﬁce costs, professional fees and donations. Other information (Restated)* 2007 Additions to property, plant and equipment (cost) Acquisition of subsidiary’s property, plant and equipment (cost)* Additions to intangible assets Intangible assets arising on acquisition* Branded $000’s 28,366 56,380 1,453 Injectables $000’s 15,811 9,213 2,557 164,230 62,495 Generic $000’s 4,189 – 445 – Total property, plant and equipment and intangible assets (net book value)* 321,072 148,252 28,304 Depreciation and amortisation 9,740 7,054 5,153 Corporate and Other $000’s 990 – 131 Group $000’s 49,356 65,593 4,586 – 226,725 8,869 1,486 506,497 23,433 Balance sheet Total assets Segment assets Total liabilities Segment liabilities *The 2007 comparatives have been restated due to the ﬁnalisation of 2007 acquisitions. See Note 33. 575,613 196,337 97,355 24,736 894,041 168,575 78,723 9,781 212,305 469,384 G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 31/3/09 03:22 Page 110 110 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 4. Business and geographical segments continued The following table provides an analysis of the Group’s sales by geographical market, irrespective of the origin of the goods/services: Middle East and North Africa Europe and Rest of the World United States Sales revenue by geographical market for the year ended 31 December 2008 $000’s 2007 $000’s 365,922 229,196 84,128 76,090 130,606 143,510 580,656 448,796 The following is an analysis of the additions and total property, plant and equipment and intangible assets and an analysis of total assets by the geographical area in which the assets are located: Middle East and North Africa Europe United States Additions to property, plant and equipment and intangibles in the year Total property, plant and equipment and intangibles as at December 31 Total assets as at December 31 2008 $000’s 2007* (Restated) $000’s 2008 $000’s 2007* (Restated) $000’s 2008 $000’s 2007* (Restated) $000’s 40,047 251,457 345,992 329,646 657,901 589,457 18,770 90,169 151,701 148,547 213,102 208,388 8,500 4,634 32,185 28,304 95,456 96,196 67,317 346,260 529,878 506,497 966,459 894,041 *The 2007 comparatives have been restated due to the ﬁnalisation of 2007 acquisition accounting. See Note 33. Additions in 2007 include property, plant and equipment and intangibles acquired with and arising on the acquisition of subsidiary undertakings. 5. Exceptional items and intangible amortisation Exceptional items are disclosed separately in the consolidated income statement to assist in the understanding of the Group’s underlying performance. Revision to estimates for chargebacks, returns and rebates Acquisition integration costs Exceptional items Intangible amortisation Exceptional items and intangible amortisation* Tax effect Impact on proﬁt for the year For the years ended 31 December 2008 $000’s (4,800) (1,629) (6,429) (7,215) (13,644) 3,408 2007 $000’s – – – (2,663) (2,663) 736 (10,236) (1,927) *Intangible amortisation comprises the amortisation of intangible assets other than software. Revision to estimates for chargebacks, returns and rebates represents a one off charge taken against revenue during 2008. Acquisition integration costs represent expenses incurred in integrating APM and Hikma Pharma SAE (Egypt) into the Group. These are included within sales and marketing and general and administrative expenses. 12751_p99_p152.qxp 31/3/09 02:38 Page 111 Hikma Pharmaceuticals PLC Annual report 2008 111 6. Proﬁt for the year Proﬁt for the year has been arrived at after charging/(crediting): Net foreign exchange gains Research and development costs Gain on sale of property, plant and equipment Depreciation of property, plant and equipment Amortisation of intangible assets Bad debt expense Cost of inventories recognised as an expense Staff costs (see Note 7) Auditors’ remuneration (see below) A more detailed analysis of the Group’s auditors’ remuneration on a Group basis is provided below. Audit of the Company’s annual accounts Audit of the Company’s subsidiaries pursuant to legislation Total audit fees Audit related services* Total audit and audit related fees – Tax compliance services – Tax advisory services – Transaction due diligence services Total non-audit fees Total fees For the years ended 31 December 2008 $000’s 2007 $000’s (1,012) (1,698) 22,172 19,342 (6) (202) 25,067 19,374 8,055 2,366 4,059 1,064 210,514 142,541 140,259 102,639 1,524 1,630 For the years ended 31 December 2008 $000’s 397 661 1,058 268 1,326 7 129 62 198 2007 $000’s 452 606 1,058 188 1,246 84 170 130 384 1,524 1,630 *These fees predominantly relate to review procedures in respect of the interim ﬁnancial information. A description of the work of the audit committee is set out in the Audit Committee report on page 75 and includes an explanation of how auditor objectivity and independence is safeguarded when non-audit services are provided by the auditors. 7. Staff costs The average monthly number of employees (including Executive Directors) was: Production Selling and marketing Research and development General and administrative For the years ended 31 December 2008 Number 2,554 1,254 176 647 2007 Number 1,817 888 213 379 4,631 3,297 G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:50 Page 112 112 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 7. Staff costs continued Their aggregate remuneration comprised: Wages and salaries Social security costs Post employment beneﬁts End of service indemnity Share-based payments Car allowance Housing allowance Medical Expenses and Insurance Other costs* *Other costs mainly consist of health insurance, housing and living allowances. 8. Other operating expenses (net) Other operating expense Other operating income For the years ended 31 December 2008 $000’s 2007 $000’s 101,498 72,448 8,766 3,032 4,189 3,384 5,734 4,240 4,829 4,587 6,755 2,477 2,696 1,601 2,385 2,880 3,664 7,733 140,259 102,639 For the years ended 31 December 2008 $000’s 2007 $000’s (9,903) (5,316) 3,688 2,556 (6,215) (2,760) Other operating expenses consist mainly of the increase in provisions against slow moving inventory items. Other operating income consists mainly of foreign exchange gains on trading activities and gain on sale of intangible assets. 9. Finance income Interest income 10. Finance expense Interest on bank overdrafts and loans Interest on obligations under ﬁnance leases Other bank charges Net foreign exchange loss For the years ended 31 December 2008 $000’s 817 2007 $000’s 2,029 For the years ended 31 December 2008 $000’s 13,320 340 3,652 233 2007 $000’s 7,789 306 2,632 110 17,545 10,837 12751_p99_p152.qxp 27/3/09 22:50 Page 113 11. Tax Current tax: UK current tax Double tax relief Foreign tax Prior year adjustments Deferred tax (Note 17) Hikma Pharmaceuticals PLC Annual report 2008 113 For the years ended 31 December 2008 $000’s 2007 $000’s 2,280 13,664 (2,280) (13,664) 9,268 20,552 76 (1,000) (2,429) 44 6,915 19,596 UK corporation tax is calculated at 28.5% (2007: 30%) of the estimated assessable proﬁt made in the UK for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdiction. The charge for the year can be reconciled to proﬁt before tax per the income statement as follows: Proﬁt before tax: Tax at the UK corporation tax rate of 28.5% (2007: 30%) Proﬁts taxed at different rates UK tax on dividend income Double tax relief offset Permanent differences Losses for which no beneﬁt is recognised Other tax adjustments Prior year adjustments Tax expense for the year 12. Dividends Amounts recognised as distributions to equity holders in the year: Final dividend for the year ended 31 December 2007 of 4.0 cents (2006: 4.0 cents) per share Interim dividend for the year ended 31 December 2008 of 3.5 cents (2007: 3.5 cents) per share 2008 $000’s 64,034 18,250 2007 $000’s 83,789 25,137 (15,089) (7,100) 2,280 13,664 (2,280) (13,664) 2,886 792 – 76 2,314 713 (468) (1,000) 6,915 19,596 2008 $000’s 2007 $000’s 7,542 6,609 6,765 5,931 14,151 12,696 The proposed ﬁnal dividend for the year ended 31 December 2008 is 4.0 cents (2007: 4.0 cents) per share, bringing the total dividends for the year to 7.5 cents (2007: 7.5 cents) per share. 13. Earnings per share The calculation of the basic and diluted earnings per share is based on the following data: Earnings for the purposes of basic and diluted earnings per share being net proﬁt attributable to equity holders of the parent For the years ended 31 December 2008 $000’s 2007 $000’s 57,125 62,576 G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:50 Page 114 114 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 13. Earnings per share continued Number of shares Weighted average number of Ordinary Shares for the purposes of basic earnings per share Effect of dilutive potential Ordinary Shares; Share options and LTIP Weighted average number of Ordinary Shares for the purposes of diluted earnings per share Number ‘000 Number ‘000 187,876 169,216 5,295 7,631 193,171 176,847 2008 Earnings per share Cents 30.4 29.6 2007 Earnings per share Cents 37.0 35.4 Basic Diluted 14. Intangible assets Cost Balance at 1 January 2007 Additions Acquisition of subsidiaries (Restated)* Subsequent adjustments Translation adjustments Balance at 1 January 2008 (Restated)* Additions Reclassiﬁcation Disposals Goodwill $000’s Marketing rights $000’s Customer relationships $000’s Product related intangibles $000’s In process R&D $000’s Trade names $000’s Other acquisition related intangibles $000’s Software $000’s Total $000’s 8,924 – 2,459 2,705 4,946 – 6,874 651 – – – – – 131 4,102 1,099 27,305 4,586 143,200 394 4,674 157,192 – – – – – 5,412 2,660 (1,114) – (209) 58,224 12,089 4,576 5,754 2,882 248 2,199 – – 391 – 33 – 639 – 276 65,369 20,005 4,609 6,393 3,289 – – – (938) 1,987 990 (305) (283) – – (129) (10) – – – 226,725 394 8,460 5,201 5,940 267,470 10,646 – – – (434) 44 – – (138) (185) (4,009) 3,195 10,956 273,673 – (371) – 6 (365) (205) – – 2 (2,378) (1,396) – – (3,774) (840) (30) – 36 (3,365) (4,059) (72) (133) (7,629) (8,055) – 10 229 15 124 – (249) 6,283 – – – – – – – – – – (304) (19) – – 1 – – – Translation adjustments (1,997) Balance at 31 December 2008 155,195 6,749 64,431 22,394 4,470 Amortisation Balance at 1 January 2007 (608) Charge for the year Acquisition of subsidiaries Translation adjustments – – – Balance at 1 January 2008 (608) Charge for the year Reclassiﬁcation Disposals Translation adjustments – – – – (254) (303) – (35) (592) (704) (11) – 42 – (1,512) – (92) (1,604) (4,383) 253 – 70 (125) (477) (72) (12) (686) (1,600) (212) 10 78 Balance at 31 December 2008 (608) (1,265) (5,664) (2,410) (303) (19) (568) (4,608) (15,445) Carrying amount At 31 December 2008 At 31 December 2007 154,587 156,584 5,484 4,820 58,767 63,765 19,984 19,319 4,167 4,609 6,264 6,393 2,627 2,924 6,348 1,427 258,228 259,841 * The 2007 comparatives have been restated due to the ﬁnalisation of 2007 acquisitions. See Note 33. 12751_p99_p152.qxp 27/3/09 22:50 Page 115 Hikma Pharmaceuticals PLC Annual report 2008 115 14. Intangible assets continued Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (CGUs) that are expected to beneﬁt from that business combination. The carrying amount of goodwill has been allocated as follows: Branded Arab Pharmaceuticals Manufacturing Company Al Jazeera Pharmaceutical Industries Hikma Pharma Egypt Injectables Hikma Pharma (Germany)** Thymoorgan Hikma Italia Others Arab Medical Containers IPRC and STD Total 2008 $000’s 2007 (Restated)* $000’s 74,399 74,399 6,752 6,752 34,680 35,002 115,831 116,153 13,212 23,950 757 13,806 25,031 757 37,919 39,594 742 95 837 742 95 837 154,587 156,584 *The 2007 comparatives have been restated due to the ﬁnalisation of 2007 acquisitions. See Note 33. **Hikma Germany comprises the combined operations of Ribosepharm GmbH and Hikma Pharma GmbH, which were merged during 2008. The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill may be impaired. Each company is considered as a cash generating unit for the purpose of goodwill impairment testing. The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates and short-term growth rates. Management estimates discount rates using WACC rates that reﬂect the current market assessments of the time value of money and the risks speciﬁc to the CGUs. The discount rates used varied between 8% and 13%. The short-term growth rates are in line with historical performance and/or forecast budget with growth rates of 2% in perpetuity. Short-term growth rates used varied between 13% and 26%. Other intangible assets Amortisation of all intangibles assets with ﬁnite useful lives is charged on a straight-line basis. Marketing rights Marketing rights are amortised over their useful lives commencing on the year in which the rights ﬁrst generate sales. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:50 Page 116 116 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 14. Intangible assets continued Product related intangibles Product related intangibles include three types: a. Product ﬁles and under-licenced products: The product ﬁles and under-licence products intangibles are assessed as having indeﬁnite useful life due to the expected longevity of the products with an indeﬁnite useful life. These assets are being reviewed for impairment at least annually. The carrying value of these assets is USD 5,837,000 (2007: USD 5,837,000). b. Under-licence agreements: Under-licence agreements have an average estimated useful life of 11 years (2007: 11 years). c. Product dossiers: Product dossiers have an average estimated useful life of 15 years (2007: 15 years). Customer relationships Customer relationships represent the value attributed to the existing direct customers that the Company acquired on the acquisition of subsidiaries. The customer relationships have an average estimated useful life of 15 years (2007: 15 years). In process R&D In process R&D represents the pipeline of products under development that were recognised on the acquisition of Arab Pharmaceutical Manufacturing Company and Alkan Pharma SAE. The In process R&D has an average estimated useful life of 15 years (2007: 15 years). Trade name Trade names were recognised on the acquisition of Ribosepharm and Arab Pharmaceutical Manufacturing Company. The trade name recognised on the acquisition of Ribosepharm is expected to have an indeﬁnite economic useful life due to its expected longevity. The carrying value of Ribosepharm’s trade name is USD 5,904,000 (2007: USD 6,169,000), the movement has arisen due to retranslation. The trade name recognised on the acquisition of Arab Pharmaceutical Manufacturing Company has an estimated useful life of 12 years (2007: 12 years). Software Software intangibles mainly represent the Enterprise Resource Planning solution that is being implemented in different operations across the Group. The software has an average estimated useful life of ﬁve years. Other acquisition related intangibles This mainly represents intangible assets recognised on the acquisition of Thymoorgan which relate to its specialist manufacturing capabilities. The estimated useful lives vary from 10 years to indeﬁnite useful life. The carrying value of assets with indeﬁnite lives is USD 1,057,000 (2007: USD 1,105,000), the movement has arisen due to retranslation. 12751_p99_p152.qxp 27/3/09 22:51 Page 117 Hikma Pharmaceuticals PLC Annual report 2008 117 15. Property, plant and equipment Cost Balance at 1 January 2007 Additions Acquisition of subsidiaries (Restated)* Disposals Transfers Translation adjustment Balance at 1 January 2008 (Restated)* Additions Disposals Transfers Translation adjustment Balance at 31 December 2008 Accumulated depreciation Balance at 1 January 2007 Charge for the year Acquisition of subsidiaries Disposals and transfers Translation adjustment Balance at 1 January 2008 Charge for the year Disposals and transfers Translation adjustment Land and buildings $000’s Vehicles $000’s Machinery and equipment $000’s Fixtures and equipment $000’s Projects under construction $000’s Total $000’s 68,187 4,371 31,705 – 24,584 2,173 131,020 4,731 (68) 4,854 (2,040) 5,829 3,045 766 (792) 270 99 9,217 1,689 (671) 32 (128) 109,192 17,152 36,616 236,976 13,250 24,142 (3,202) 18,618 4,198 5,867 4,864 (521) 22,823 4,116 (233) 2,520 (45,992) 49,356 65,593 (4,748) – 615 2,957 10,042 166,198 30,497 20,287 357,219 6,531 33,937 9,783 (4,213) 2,922 (2,705) (2,079) 113 (426) (991) (7,921) 56,671 (8,022) – (776) (6,075) 138,497 10,139 171,985 34,636 44,536 399,793 12,579 2,713 3,150 (3) 601 19,040 4,058 485 (438) 2,562 1,126 344 (496) 47 3,583 1,456 (431) (66) 56,433 12,217 6,820 (3,152) 1,514 73,832 15,270 (5,448) (1,061) 8,557 3,318 2,302 (393) 324 14,108 4,283 (282) (246) – – – – – – – – – – 80,131 19,374 12,616 (4,044) 2,486 110,563 25,067 (5,676) (1,811) 128,143 Balance at 31 December 2008 23,145 4,542 82,593 17,863 Net book value 31 December 2008 Net book value 115,352 5,597 89,392 16,773 44,536 271,650 31 December 2007 (Restated)* 111,980 5,634 92,366 16,389 20,287 246,656 *The 2007 comparatives have been restated due to the ﬁnalisation of 2007 acquisitions. See Note 33. The net book value of the Group’s machinery and equipment includes an amount of USD 6,028,000 (2007: USD 11,738,000) in respect of assets held under ﬁnance lease. As at 31 December 2008 the Group had pledged property, plant and equipment having a carrying value of USD 87,289,000 (2007: USD 63,207,000) as collateral for various long-term loans. This amount includes both speciﬁc items around the Group and the net property, plant and equipment of the Group’s businesses in Portugal, Saudi Arabia and US. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 2/4/09 00:08 Page 118 118 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 15 Property, plant and equipment continued In 1994, the Portuguese Government granted Hikma Farmaceutica an amount of Euro 1,600,000 to build the Company’s factory in accordance with the SINPEDIP programme. During 2008, the German Government provided Thymoorgan Pharmazie GmbH a grant of Euro 560,000 (2007: Euro nil) being a contribution towards the acquisition of two freeze dryers and additional equipment. The carrying value of the grants as of 31 December 2008 were USD 153,000 (2007: USD 279,000) for Hikma Farmaceutica and USD 542,000 (2007: USD nil) for Thymoorgan Pharmazie GmbH. During the year 2008, the Group entered into contractual commitments for the acquisition of property, plant and equipment amounting to USD 7,412,000 (2007: USD 7,020,000). The amount of borrowing costs that have been capitalised in the year within the projects under construction is USD 426,000 (2007: USD 541,000). The capitalisation rate used ranges between 2.0%–3.9%. (2007: 5.5%–6.0%). 16. Interest in joint venture APM was acquired by the Group on 27 December 2007. During 2005, APM entered in a 50% joint venture agreement with another Jordanian company to establish a new manufacturing plant in Algeria (Al Dar Al Arabia Pharmaceutical Manufacturing Company). APM’s share of the joint venture as at 31 December 2008 is USD 5,453,000 (2007: USD 4,543,000), being the amount paid at the balance sheet date to ﬁnance the construction of the plant. 17. Deferred tax The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting year. At 1 January 2007 Credit/(charge) to income Credit to equity Acquisition of subsidiaries (Restated)* Adjustments Exchange differences At 1 January 2008 Charge to income Charge to equity Adjustments and reclassiﬁcations Exchange differences At 31 December 2008 Deferred R&D costs $000’s Other short-term temporary differences $000’s Amortisable assets $000’s Fixed assets $000’s Stock options $000’s Total $000’s (283) (2,857) 962 2,833 (3,243) (4,024) 8 – – – – (275) – – (33) 13 (1,286) 1,576 – – (130) 4,329 – – (4,273) (4,658) – (365) 1 364 (234) 6,997 407 – 38 38 200 – (16) – (7) (371) (2,956) – – – 3,010 (6,570) 365 – 571 (89) – 4,299 (244) – 44 (2,956) 4,183 364 (405) (2,794) (2,429) 4,299 79 (35) Tax losses $000’s (1,436) (83) – – – (164) (1,683) 1,457 – 112 2 (112) (295) (9,295) 7,480 3,857 (2,515) (880) *The 2007 comparatives have been restated due to the ﬁnalisation of 2007 acquisitions. See Note 33. 12751_p99_p152.qxp 27/3/09 22:51 Page 119 Hikma Pharmaceuticals PLC Annual report 2008 119 17. Deferred tax continued Certain deferred tax assets and liabilities have been appropriately offset. The following is the analysis of the deferred tax balances (after offset) for ﬁnancial reporting purposes: Deferred tax liabilities Deferred tax assets 2008 $000’s 2007 $000’s 12,425 11,709 (13,305) (14,503) (880) (2,794) Tax losses for which no deferred tax asset is recognised total USD 6,647,000 (2007: USD 4,506,000) due to the unpredictability of the related future proﬁt streams. These losses may be carried forward for ﬁve years before expiry. In addition, there are unused foreign tax credits of USD 10.4 million (2007: USD 5.0 million) for which no deferred tax asset is recognised due to the unpredictability of the related future dividend streams. As at 31 December 2008, the undistributed earnings of foreign subsidiaries amounted to USD 246 million (2007: USD 195 million). No income taxes have been provided on the Company’s share of these undistributed earnings due to management’s ability and intent to reinvest such amounts indeﬁnitely. A determination of the amount of the unrecognised deferred tax liability has not been made because it is not practical to do so. A portion of these earnings can be distributed without incurring additional taxes. 18. Available for sale investments Available for sale investments represents investments in listed equity securities and unlisted securities that are recorded at the fair value based on either quoted market price for similar listed companies or using other valuation methods for unlisted companies. 1 January Additions Disposals Provision charged to income statement Fair value adjustments recognised in equity Acquisition of subsidiary 31 December 2008 Non Listed* $000’s 142 158 – – (10) – 290 Listed $000’s 866 – (410) – (206) – 250 Total $000’s 1,008 158 (410) – (216) – 540 Listed $000’s 606 – – – (151) 411 866 2007 Non Listed* $000’s 170 – – (28) – – Total $000’s 776 – – (28) (151) 411 142 1,008 *Included in this amount is an investment in a non-listed US company (MENA Innovative Technologies Inc.) of USD 62,000 (2007: USD 62,000) that represents 32.5% (2007: 32.5%) of its common share capital (see Note 39). The Group does not exert signiﬁcant inﬂuence over this entity. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:51 Page 120 120 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 19. Financial and other non-current assets Investments recorded at cost Amounts due from investments recorded at cost Amounts due from related parties Other ﬁnancial assets As at 31 December 2008 $000’s 485 490 474 628 2007 $000’s 485 602 – 203 2,077 1,290 Investments recorded at cost represent the Group’s share of 32% (2007: 32%) in Societe D’Industries Pharmaceutiques Ibn Al Baytar S.A. – Tunisia over which the Company does not exert signiﬁcant inﬂuence. This company owns another Tunisian company (Societe Hikma Medicef Limited – Tunisia), which is therefore a related party. Amounts due from investments recorded at cost consist of amounts due from the same Tunisian investment. 20. Inventories Finished goods Work-in-progress Raw and packing materials Goods in transit** As at 31 December 2008 2007 (Restated)* $000’s $000’s 45,585 23,609 71,733 13,829 36,029 31,673 62,327 10,380 154,756 140,409 *The 2007 comparatives have been restated due to the ﬁnalisation of 2007 acquisitions. See Note 33. **Goods in transit include inventory held at third parties whilst in transit between Group companies. Provision for slow moving inventory As at 31 December 2007 $000’s 8,309 Additions $000’s 7,756 Utilisation $000’s (7,399) Translation adjustments $000’s At at 31 December 2008 $000’s (113) 8,553 The total expense in the income statement for the write-off of inventory including provision for such write offs was USD 8,589,000 (2007: USD 4,646,000). 21. Trade and other receivables Trade receivables Prepayments Value added tax recoverable Interest receivable Employee advances *The 2007 comparatives have been restated due to the ﬁnalisation of 2007 acquisitions. See Note 33. As at 31 December 2008 2007 (Restated)* $000’s $000’s 173,958 171,393 14,345 12,629 5,306 108 2,126 3,647 302 304 195,843 188,275 12751_p99_p152.qxp 27/3/09 22:51 Page 121 Hikma Pharmaceuticals PLC Annual report 2008 121 21. Trade and other receivables continued Trade receivables are stated net of provisions for chargebacks, doubtful debts and expired goods as follows: Chargebacks and returns Doubtful debts Expired goods As at 31 December 2007 $000’s Additions $000’s Utilisation $000’s 21,247 103,348 (99,692) 13,315 5,261 2,366 3,992 (342) (2,610) 39,823 109,706 (102,644) Translation adjustments $000’s As at 31 December 2008 $000’s – (188) (15) (203) 24,903 15,151 6,628 46,682 The following table sets forth a summary of the age of trade receivables: At 31 December 2008 Total trade receivables as of 31 December 2008 Not past due on the reporting date $000’s less than 90 days $000’s between 91 and 180 days $000’s between 181 and 360 days $000’s Past due Over one year $000’s Impaired $000’s Total $000’s 155,818 31,272 11,396 5,744 1,260 15,151 220,641 Related allowance for doubtful debts – – – – – (15,151) (15,151) 155,818 31,272 11,396 5,744 1,260 – 205,490 Chargebacks provision Expired goods provision Net receivables At 31 December 2007 Total trade receivables as of 31 December 2007 (24,903) (6,629) 173,958 Not past due on the reporting date $000’s less than 90 days $000’s between 91 and 180 days $000’s between 181 and 360 days $000’s Past due Over one year $000’s Impaired $000’s Total $000’s 140,127 34,037 8,718 10,680 4,339 13,315 211,216 Related allowance for doubtful debts – – – – – (13,315) (13,315) 140,127 34,037 8,718 10,680 4,339 – 197,901 Chargebacks provision Expired goods provision Net receivables (21,247) (5,261) 171,393 The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of speciﬁc trade and other receivables where it is deemed that a receivable may not be recoverable. When the debt is deemed irrecoverable, the allowance account is written off against the underlying receivable. 22. Collateralised cash Collateralised cash represents an amount equal to 100% of a portion of bank facilities granted to the Group’s Egyptian and Jordanian operations (2007: Algerian operations). G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:51 Page 122 122 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 23. Cash and cash equivalents Cash at banks and on hand Time deposits Money market deposits Cash and cash equivalents include highly liquid investments with maturities of three months or less. 24. Bank overdrafts and loans Bank overdrafts Import and export ﬁnancing Short-term loans Current portion of long-term loans (Note 27) The weighted average interest rates paid were as follows: Bank overdrafts Bank loans (including the non-current bank loans) As at 31 December 2008 $000’s 21,374 41,251 102 2007 $000’s 24,209 3,380 1,316 62,727 28,905 As at 31 December 2008 $000’s 20,244 29,398 42,272 25,386 2007 $000’s 22,419 22,276 216,096 15,746 117,300 276,537 2008 % 6.00 3.85 2007 % 6.85 5.76 Import and export ﬁnancing represents short-term ﬁnancing for the ordinary trading activities of the business. As at 31 December 2007, the Group was in a net current liabilities position and as a result it was in breach of certain ﬁnancial covenants related to its short-term debt. The breach arose as a result of short-term debt taken out to fund the acquisition of APM on 27 December 2007. The relevant ﬁnancial institution was made aware of this fact prior to the breach and gave its consent. The proceeds of the equity placing on 17 January 2008 were applied to repay short-term debt and as such the breach was remedied as at the 31 December 2008, the Group is not in breach of any of its covenants. More details of the equity placing are provided in Note 31. 25. Trade and other payables Trade payables Accrued expenses Employees’ provident fund* VAT and sales tax payables Dividends payable** Social security withholdings Income tax withholdings Other payables As at 31 December 2008 $000’s 42,632 29,823 2,753 1,408 2,495 745 1,037 1,110 2007 $000’s 49,143 25,392 3,158 543 3,490 1,026 588 984 82,003 84,324 *The employee’s provident fund liability mainly represents the outstanding contributions due to the Hikma Pharmaceuticals Limited – Jordan retirement beneﬁt plan, on which the fund receives 5% interest. **Dividends payable includes USD 2,303,000 (2007: USD 3,261,000) due to the previous shareholders of APM. 12751_p99_p152.qxp 27/3/09 22:51 Page 123 Hikma Pharmaceuticals PLC Annual report 2008 123 26. Other provisions Other provisions represent end of service indemnity provisions of Hikma Pharmaceuticals Limited – Jordan, Hikma Italia, JPI, AMC, APM, Hikma Pharma Co. (Tunisia) and Pharma Ixir Co. Ltd (Sudan). This end of service indemnity comprises one months’ salary payable for each year employed for each employee in all the above companies except Hikma Italia. The provision for end of service indemnity for Hikma Italia is calculated (as required by Italian law) by dividing the employees’ remuneration for the year by 13.5 and it is subject to revaluation on an annual basis. Movements on the provision for end of service indemnity: 1 January Additions Acquisition of subsidiaries Utilisation Translation adjustments 31 December 27. Long-term ﬁnancial debts Total loans Less: current portion of loans (Note 24) Long-term ﬁnancial loans Breakdown by maturity: Within one year In the second year In third year In the fourth year In the ﬁfth year Thereafter Breakdown by currency: USD Euro Jordanian Dinar Algerian Dinar Saudi Riyal Egyptian Pound 2008 $000’s 4,475 1,592 – (625) (50) 2007 $000’s 2,577 1,200 820 (178) 56 5,392 4,475 As at 31 December 2008 $000’s 2007 $000’s 135,800 73,408 (25,386) (15,746) 110,414 57,662 As at 31 December 2008 $000’s 2007 $000’s 25,386 41,023 22,705 20,896 15,261 10,529 15,746 16,149 11,019 21,950 4,317 4,227 135,800 73,408 81,287 32,345 2,666 11,960 6,242 1,300 30,750 30,622 5,259 – 5,611 1,166 135,800 73,408 G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s The loans are shown on an undiscounted basis. At 31 December 2008, import and export ﬁnancing, short-term loans and the current and long-term portion of long-term loans total USD 207,470,000 (2007: USD 311,780,000). Loans amounting to USD 42,872,000 (2007: USD 32,594,000) are secured on property, plant and equipment. 12751_p99_p152.qxp 27/3/09 22:51 Page 124 124 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 28. Obligations under ﬁnance leases Amounts payable under ﬁnance leases: Within one year In the second to ﬁfth years inclusive Less: Interest lease charges Present value of minimum lease payments payable Minimum lease payments Present value of minimum lease payments 2008 $000’s 2007 $000’s 2008 $000’s 2007 $000’s 1,512 6,173 7,685 (968) 6,717 1,775 6,306 8,081 (928) 7,153 1,221 5,496 6,717 1,455 5,698 7,153 It is the Group’s policy to lease certain of its ﬁxtures and equipment under ﬁnance leases. The average lease term is ﬁve years (2007: ﬁve years). For the year ended 31 December 2008, the average effective borrowings rate was between 3.9% and 7.0% (2007: between 3.9% and 7.5%). 29. Financial policies for risk management and their objectives Credit and concentration of risk The Group’s principal ﬁnancial assets are cash and cash equivalents, trade and other receivables, and investments. The Group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful debts, chargebacks in the US, expired goods and without recourse discounts. A provision for impairment is made where there is an identiﬁed loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash ﬂows. The credit risk on liquid funds and derivative ﬁnancial instruments is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies. In line with local market practice, clients in the MENA region are offered relatively longer payment terms compared to clients in Europe and the US. As at 31 December 2008, the Group’s largest three clients in the MENA region represented respectively 15% of Group turnover (located in Saudi Arabia); 3% of Group turnover (located in Algeria) and 2% of Group turnover (located in Algeria). The amount of receivables due from customers based in Algerian market at 31 December 2008 is USD 32,784,000 (2007: USD 34,979,000) and Saudi Arabia is USD 18,453,000 (2007: USD 13,719,000). The Group manages this risk through the implementation of stringent credit policies and procedures and certain credit insurance agreements. Trade receivable exposures are managed locally in the operating units where they arise. Credit limits are set as deemed appropriate for the customer, based on a number of qualitative and quantitative factors related to the credit worthiness of a particular customer. The Group is exposed to a variety of customers ranging from government backed agencies and large private wholesalers to privately owned pharmacies, and the underlying local economic risks vary across the Group. Typical credit terms in the US range from 30– 60 days, in Europe 60–120 days, and MENA 180–360 days. Where appropriate, the Group endeavours to minimise risks by the use of trade ﬁnance instruments such as letters of credit and insurance. Market risk The Group’s objective is to reduce, where it is deemed appropriate to do so, ﬂuctuations in earnings and cash ﬂow associated with changes in interest rates and foreign currency rates. The Group is exposed to foreign exchange and interest rate risk. Management actively monitors these exposures to manage the volatility relating to these exposures by entering into a variety of derivative ﬁnancial instruments. Foreign exchange risk The Group uses the USD as its functional currency and is therefore exposed to foreign exchange movements primarily in Euro and Algerian Dinar. Consequently, where possible the Group enters into various contracts, which change in value as foreign exchange rates change to hedge against the risk of movement in foreign denominated assets and liabilities. 12751_p99_p152.qxp 27/3/09 22:51 Page 125 Hikma Pharmaceuticals PLC Annual report 2008 125 29. Financial policies for risk management and their objectives continued Interest rate risk The Group manages its exposures to interest rate risks by changing the proportion of debt that is ﬁxed by entering into interest rate swap agreements. Using these derivative ﬁnancial instruments has not had a material impact on the Group’s ﬁnancial position at 31 December 2008 or the Group’s results of operations for the year then ended. The table below shows the split of ﬁxed and ﬂoating rate ﬁnancial assets and liabilities, including ﬁnance leases: As at 31 December 2008 As at 31 December 2007 Fixed rate $000’s Floating rate $000’s Total $000’s Fixed rate $000’s Floating rate $000’s Total $000’s Financial liabilities Interest bearing loans and borrowings 31,670 202,761 234,431 51,625 289,727 341,352 Financial assets Cash and cash equivalents – 62,727 62,727 – 28,905 28,905 An interest rate sensitivity analysis assumes an instantaneous 100 basis point change in interest rates in all currencies from their levels at 31 December 2008, with all other variables held constant. Based on the composition of our debt portfolio as at 31 December 2008, a 1% increase/decrease in interest rates would result in an additional USD 2.0 million in interest expense/income being incurred per year. Fair value of ﬁnancial assets and liabilities The fair value of ﬁnancial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following methods and assumptions were used to estimate the fair value: cash and cash equivalents – approximates to the carrying amount; short-term loans and overdrafts – approximates to the carrying amount because of the short maturity of these instruments; long-term loans – approximates to the carrying amount in the case of ﬂoating rate bank loans and other loans; forward exchange contracts – based on market prices and exchange rates at the balance sheet date; and receivables and payables – approximates to the carrying amount; and lease obligations – approximates to the carrying value. Management considers that the book value of the Group’s ﬁnancial assets and liabilities do not materially differ from their fair value. Currency risk Currency risks as deﬁned by IFRS 7 arise on account of ﬁnancial instruments being denominated in a currency that is other than the functional currency of the booking entity and being of a monetary nature. The currencies that have a signiﬁcant impact on the Group accounts and the exchange rates used are as follows: USD/EUR USD/Sudanese Pound USD/Algerian Dinar USD/Saudi Riyal USD/British Pound USD/Jordanian Dinar USD/Egyptian Pound Period end rates Average rates 2008 2007 2008 2007 1.4097 0.4579 0.0141 0.2667 1.4479 1.4104 0.1806 1.4729 0.4872 0.0150 0.2667 1.9973 1.4104 0.1823 1.4713 0.4779 0.0155 0.2667 1.8552 1.4104 0.1833 1.3707 0.4961 0.0144 0.2667 2.0018 1.4104 0.1821 The Jordanian Dinar and Saudi Riyal have no impact on the income statement as those currencies are pegged against the US Dollar. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:52 Page 126 126 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 29. Financial policies for risk management and their objectives continued The following table illustrates ﬁnancial assets and liabilities for the Group demonstrated in different currencies: 2008 Functional currency of entity: – Jordanian Dinar – Euro – Algerian Dinar – Saudi Riyal – Sudanese Pound – Egyptian Pound Sensitivity analysis: 2008 Functional currency of entity: – Jordanian Dinar – Euro – Algerian Dinar – Saudi Riyal – Sudanese Pound – Egyptian Pound 2007 Functional currency of entity: – Jordanian Dinar – Euro – Algerian Dinar – Saudi Riyal – Sudanese Pound – Egyptian Pound Net foreign currency ﬁnancial assets/(liabilities) US Dollar $000’s Euro $000’s Sterling $000’s Algerian Dinar $000’s Japanese Yen $000’s Others $000’s (701) (24) 33,112 (1,143) (31,718) (2,085) (13,697) 374 (7,068) – (43) 813 – 435 509 – (2) (15) – – – – – – – 543 (70) – – – – (15,157) (5,863) 492 543 (771) – – – – (29) (53) Income statement impact assuming 1% appreciation of column currency against the functional currency of the entity as at year end US Dollar $000’s Euro $000’s Sterling $000’s Algerian Dinar $000’s Japanese Yen $000’s Others $000’s 331 (11) (317) (21) (137) 4 (151) (71) – – 8 – 4 (59) 5 – – – – – 5 – – – 5 – – 5 (7) – – (1) – – (8) Net foreign currency ﬁnancial assets/(liabilities) US Dollar $000’s Euro $000’s Sterling $000’s Algerian Dinar $000’s Japanese Yen $000’s 19,254 (6,561) (29,797) (1,437) (4,640) 1,049 (9,191) 64 – (20) 596 – (358) – – – – 5 – – – 1,148 – – (1,305) – – – – – – – – – – – – Others $000’s (64) – – (839) – (950) (22,132) (8,973) 69 1,148 (1,305) (1,853) 12751_p99_p152.qxp 2/4/09 00:05 Page 127 Hikma Pharmaceuticals PLC Annual report 2008 127 29. Financial policies for risk management and their objectives continued Sensitivity analysis: 2007 Functional currency of entity: – Jordanian Dinar – Euro – Algerian Dinar – Saudi Riyal – Sudanese Pound – Egyptian Pound Liquidity risk of assets /(liabilities) 2008 Cash and cash equivalents Trade receivables Interest-bearing loans and borrowings Interest-bearing overdrafts Interest-bearing ﬁnance lease Trade payables 2007 Cash and cash equivalents Trade receivables Interest-bearing loans and borrowings Interest-bearing overdrafts Interest-bearing ﬁnance lease Trade payables Income statement impact assuming 1% appreciation of column currency against the functional currency of the entity as at year end US Dollar $000’s Euro $000’s Sterling $000’s Algerian Dinar $000’s Japanese Yen $000’s Others $000’s 193 (66) (298) (14) (46) 10 (221) (92) – – 6 – (4) (90) 1 – – – – – 1 – – – 11 – – 11 (13) – – – – – (13) (1) – – (8) – (10) (19) Less than one year $000’s Greater than one year $000’s Total $000’s 62,727 173,958 – – 62,727 173,958 (97,056) (110,414) (207,470) (20,244) – (20,244) (1,512) (6,173) (7,685) (42,632) – (42,632) 75,241 (116,587) (41,346) Less than one year $000’s Greater than one year $000’s Total $000’s 28,905 171,393 – – 28,905 171,393 (248,304) (81,256) (329,560) (22,869) – (22,869) (1,775) (6,306) (8,081) (49,018) (125) (49,143) 121,668 (87,687) 209,355 For liquid assets and liabilities maturing in less than one year, the Group moved from a net liabilities position of USD 119,229,000 as at 31 December 2007 to a net assets position of USD 75,241,000 as at 31 December 2008. This was primarily as a result of repayment of short-term debts during 2008 subsequent to the funds raised. As at 31 December 2008 the Group had undrawn facilities of USD 120,800,000 of this USD 33,000,000 was committed and the remainder uncommitted. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:52 Page 128 128 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 30. Derivative ﬁnancial instruments Currency derivatives The Group utilises currency derivatives to hedge signiﬁcant future transactions and cash ﬂows. The Group is party to a variety of foreign currency forward contracts and options in the management of its exchange rate exposures. The instruments purchased are primarily denominated in the currencies of the Group’s principal markets. At the balance sheet date, total notional amount of outstanding forward foreign exchange contracts that the Group was committed to, are translated at December 31 exchange rates as below. Foreign exchange forward contracts and options (Euro) Foreign exchange forward contracts (Yen) 2008 $000’s 3,552 443 2007 $000’s 1,471 578 These arrangements are designed to address signiﬁcant exchange exposures. At 31 December 2008 the fair value of the Group’s currency derivatives all of which are designated as effective cash ﬂow hedges was an asset of USD 382,000 (2007 liability of: USD 25,000). The movement in fair value resulted in a gain of USD 407,000 (2007: USD 25,000 net loss) has been reﬂected in equity. These amounts are based on market values of equivalent instruments at the balance sheet date. The Group believes that the effect on the value of cash ﬂow hedges of currency and interest rate ﬂuctuations is not signiﬁcant and will not materially affect the ﬁnancial position of the Group. Interest rate swaps The Group uses interest rate swaps to manage its exposure to interest rate movements on its bank borrowings. These contracts have nominal values of USD 22.8 million (2007: USD 23.8 million) and have ﬁxed interest payments at rates ranging from 3.9% to 4.75% for periods up until 2017 and have ﬂoating interest receipts at LIBOR or EURIBOR. The fair value of swaps entered into by the Group is estimated as a liability of USD 896,000 (2007: liability of USD 82,000). These amounts are based on market values provided by the banks that originated the swaps and are based on equivalent instruments at the balance sheet date. Some of these interest rate swaps are designated as effective cash ﬂow hedges and the movement in fair value totalling a loss of USD 485,000 (2007: USD loss of 231,000) has been reﬂected in equity. The ineffective element of the cash ﬂow hedges are taken to the income statement. A loss of USD 329,000 has been recognised in the income statement for the year ended 31 December 2008 (2007: USD nil). The Group believes that the effect on the value of interest rate swaps by interest rate ﬂuctuations will not materially affect the ﬁnancial position of the Group. 12751_p99_p152.qxp 27/3/09 22:52 Page 129 Hikma Pharmaceuticals PLC Annual report 2008 129 31. Share capital Authorised: 500,000,000 Ordinary Shares of 10p each Issued and fully paid – included in shareholders’ equity At 1 January Issued during the year At 31 December 2008 $000’s 2007 $000’s 88,700 88,700 2008 Number ’000 ’000 Number ’000 2007 ’000 170,734 30,229 168,164 29,712 18,504 3,628 2,570 517 189,238 33,857 170,734 30,229 On 17 January 2008, a total of 17,000,000 new ordinary shares of 10 pence each in the Group were placed at a price of 480 pence per share, raising gross proceeds of approximately GBP 81.6 million (USD 160.3 million). As part of the Placing 5.23 million shares were placed with Darhold Limited at the Placing Price and 333,000 shares were placed with the Darwazah family and other connected individuals at the Placing Price. The total number of shares issued represents 9.96% of Hikma’s issued ordinary share capital prior to the placing. The Group used the proceeds from the placing to reduce borrowings incurred in connection with its JOD 116.0 million (USD 163.8 million) acquisition of Arab Pharmaceutical Manufacturing Company thereby providing the Group with increased ﬂexibility to ﬁnance future growth. The costs of the placing of USD 2,484,000 were offset against share premium. 32. Minority interest At 1 January Minority interest share of (loss)/proﬁt Other movements including dividends paid At 31 December 2008 $000’s 6,177 (6) (385) 5,786 2007 $000’s 4,732 1,617 (172) 6,177 G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:52 Page 130 130 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 33. Acquisitions of subsidiaries In accordance with IFRS 3 the Group balance sheet as at 31 December 2007 has been restated to reﬂect the ﬁnal fair value adjustments in relation to the acquisitions made during 2007: Non-current assets Intangible assets Property, plant and equipment Interest in joint venture Deferred tax assets Available for sale investments Financial and other non-current assets Current assets Inventories Income tax recoverable Trade and other receivables Collateralised cash Cash and cash equivalents Other current assets Total assets Current liabilities Bank overdrafts and loans Obligations under ﬁnance leases Trade and other payables Income tax provision Other provisions Other current liabilities Net current (liabilities) Non-current liabilities Long-term ﬁnancial debts Deferred income Obligations under ﬁnance leases Deferred tax liabilities Total liabilities Net assets 2007 (as previously reported) $000’s 251,340 243,901 4,543 14,503 1,008 1,290 Final fair value adjustments $000’s 2007 (Restated) $000’s 8,501 2,755 259,841 246,656 – – – – 4,543 14,503 1,008 1,290 516,585 11,256 527,841 147,670 (7,261) 140,409 358 – 358 190,714 (2,439) 188,275 5,628 28,905 2,625 375,900 892,485 276,537 1,455 84,324 10,583 4,475 14,542 391,916 – – – 5,628 28,905 2,625 (9,700) 366,200 1,556 894,041 – – – – – 2,120 2,120 276,537 1,455 84,324 10,583 4,475 16,662 394,036 (16,016) (11,820) (27,836) 57,662 279 5,698 12,273 75,912 467,828 424,657 – – – (564) (564) 57,662 279 5,698 11,709 75,348 1,556 469,384 – 424,657 12751_p99_p152.qxp 27/3/09 22:52 Page 131 Hikma Pharmaceuticals PLC Annual report 2008 131 33. Acquisitions of subsidiaries continued In the year, the Group has ﬁnalised the acquisitions accounting for the acquisitions made in 2007. The tables below show the amendments made: Thymoorgan Pharmazie GmbH acquired on 31 May 2007 Net assets acquired: Other related intangibles Cash and cash equivalent Accounts receivable, net Other current assets Inventories Property, plant and equipment Financial debts Capital lease obligations – current portion Trade accounts payable Other current liabilities Income tax provision Long-term ﬁnancial debts Capital lease obligations – long term Net deferred tax liabilities Net assets acquired (100%) Goodwill Total consideration Provisional fair value $000’s Adjustment $000’s Final fair value $000’s 2,882 47 743 566 1,124 7,781 (46) (276) (621) (395) (62) (2,426) (974) (363) 7,980 22,614 30,594 – – – – 147 – – – – – – – – – 147 (147) – 2,882 47 743 566 1,271 7,781 (46) (276) (621) (395) (62) (2,426) (974) (363) 8,127 22,467 30,594 The increase in inventory arises from the release of an excess provision for slow moving items. Management considers that this provision is no longer needed. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:52 Page 132 132 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 33. Acquisitions of subsidiaries continued APM acquired on 27 December 2007 Net assets acquired: Trade name Customer relationships Product related intangibles In-process research and development Cash and cash equivalents Accounts receivable, net Other current assets Inventories Financial and other non current assets Investment in associated companies Property, plant and equipment Financial debts Trade accounts payable Other current liabilities Income tax provision Provisions Deferred tax liabilities Net assets acquired (100%) Goodwill Total consideration Provisional fair value $000’s Adjustment $000’s Final fair value $000’s 225 24,314 9,152 3,521 470 – – – – – 225 24,314 9,152 3,521 470 a b 25,511 (1,630) 23,881 256 – 256 24,806 (7,408) 17,398 411 4,542 – – 411 4,542 c 33,707 2,755 36,462 d e (7,401) (3,568) (7,449) (28) (2,577) (4,962) – – (2,120) – – 483 (7,401) (3,568) (9,569) (28) (2,577) (4,479) 100,930 (7,920) 93,010 66,480 167,410 7,920 74,400 – 167,410 The adjustments to the fair values of APM are from: a. Certain receivables arising from a cut-off error in 2007 have been reversed. b. An incorrect classiﬁcation of certain items of inventory has been reclassiﬁed as property, plant and equipment, in addition to certain inventory write downs. c. Property, plant and equipment has been adjusted to write down certain assets to fair value and other assets were reclassiﬁed from inventory. d. Additional liabilities arising from onerous provision has been taken for above items. e. The deferred tax adjustment on the items noted above. 12751_p99_p152.qxp 27/3/09 22:52 Page 133 33. Acquisitions of subsidiaries continued Alkan acquired on 6 September 2007 Net assets acquired: Customer relationships Product related intangibles In-process research and development Cash and cash equivalents Accounts receivable, net Other current assets Inventories Deferred taxes asset Property, plant and equipment Financial debts Trade accounts payable Other current liabilities Income tax provision Provisions Long-term ﬁnancial debts Deferred tax liabilities Net assets acquired (100%) Goodwill Total consideration The adjustments to the fair values of Alkan are from: a. Provision for returns of good sold pre-acquisition. b. Resulting decrease in deferred tax liabilities. 34. Own shares Hikma Pharmaceuticals PLC Annual report 2008 133 Provisional fair value $000’s Adjustment $000’s Final fair value $000’s a 16,121 1,476 1,055 1,856 7,088 255 3,559 220 8,235 (3,539) (1,324) (1,521) (328) (75) (883) – – – – (809) – – – – – – – – – – b (4,361) 27,834 33,232 61,066 81 (728) 728 – 16,121 1,476 1,055 1,856 6,279 255 3,559 220 8,235 (3,539) (1,324) (1,521) (328) (75) (883) (4,280) 27,106 33,960 61,066 Own shares represent 250,000 (2007: Nil) ordinary shares in the Company held by Lloyds TSB Offshore trust, an independent trustee, having market value at 31 December 2008 of GBP 875,000 (2007: Nil). The consideration paid to acquire those shares was USD 1,124,000. The trust holds these shares to meet long-term commitments in relation to employee share plans. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:52 Page 134 134 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 35. Net cash from operating activities Proﬁt before tax Adjustments for: Depreciation, amortisation and impairment of: Property, plant and equipment Intangible assets Gains on disposal of property, plant and equipment Gains on disposal of intangible assets Movement on provisions Movement on deferred income Cumulative effect of change in fair value of derivatives Cost of equity settled employee share scheme Finance income Interest and bank charges Cash ﬂow before working capital Change in trade and other receivables Change in other current assets Change in inventories Change in trade and other payables Change in other current liabilities Cash generated by operations Income tax paid Net cash generated from operating activities 36. Contingent liabilities 2008 $000’s 2007 $000’s 64,034 83,789 25,067 19,374 8,055 (6) (832) 917 416 (78) 4,059 (202) – 1,078 (78) (256) 3,384 1,601 (817) (2,029) 17,545 10,837 117,685 118,173 (10,903) (29,453) 1,564 (47) (19,327) (29,065) (615) 17,774 (5,751) (6,112) 82,653 71,270 (7,684) (17,987) 74,969 53,283 The Group was contingently liable for letters of guarantee and letters of credit totalling USD 23.6 million (2007: USD 17.8 million). The integrated nature of the Group’s worldwide operations, involving signiﬁcant investment in research and strategic manufacture at a limited number of locations, with consequential cross-border supply routes into numerous end-markets, gives rise to complexity and delay in negotiations with revenue authorities as to the proﬁts on which individual Group companies are liable to tax. Disagreements with, and between, revenue authorities as to intra-Group transactions, in particular the price at which goods and services should be transferred between Group companies in different tax jurisdictions, can produce conﬂicting claims from revenue authorities as to the proﬁts to be taxed in individual territories. Resolution of such issues is ongoing. In common with many other companies in the pharmaceutical industries the Group is subject to certain legal and product liability claims from time to time. Whilst provisions have been made for probable losses that management deems to be reasonable or appropriate there are inherent uncertainties connected with these estimates. The Group does not expect the resolution of uncertainties to have a material effect on the consolidated ﬁnancial statements. 12751_p99_p152.qxp 27/3/09 22:52 Page 135 Hikma Pharmaceuticals PLC Annual report 2008 135 37. Share-based payments Equity settled share option scheme During the year ended 31 December 2008 and 2007, the Company had two stock option compensation schemes settled by equity instruments with three separate grant dates. The options over these instruments are settled in equity once exercised. Details of the grants under the scheme are shown below: 2008 Type of arrangement General employee share option plan Date of grant Number granted Contractual life Vesting conditions 29 April, 2008 1,041,500 Ten years 20% per year for ﬁve years beginning on the ﬁrst anniversary of the grant date The estimated fair value of each share option granted in the general employee share option plan is $2.61. This was calculated by applying a binomial option pricing model. The model inputs were the share price at grant date of $9.19, exercise price of $9.19, expected volatility of 31.5%, expected dividend yield of 0.08%, expected average contractual life of 3.8 years, and a risk-free interest rate of 4.54%. It was assumed that each Option tranche will be exercised within one year of the date of vesting apart from the ﬁnal Option tranche which will be exercised immediately on vesting given the ﬁve-year time scale. 2005 Type of arrangement General employee share option plan Date of grant Number granted Contractual life Vesting conditions 13 October 2005 1,600,000 Ten years 20% per year for ﬁve years beginning on the ﬁrst anniversary of the grant date The estimated fair value of each share option granted in the general employee share option plan is $0.74. This was calculated by applying a binomial option pricing model. The model inputs were the share price at grant date of $4.50, exercise price of $4.50, expected volatility of 26.2 %, expected dividend yield of 6.67%, expected contractual life of 7.5 years, and a risk-free interest rate of 4.54 %. To allow for the effects of early exercise, it was assumed that the employees would exercise the options immediately after vesting date. 2004 Type of arrangement General employee share option plan Date of grant Number granted Contractual life Vesting conditions 12 October 2004 9,520,000 Ten years 20% per year for ﬁve years beginning on the ﬁrst anniversary of the grant date The estimated fair value of each share option granted in the general employee share option plan is $0.35. This was calculated by applying a binomial option pricing model. The model inputs were the share price at grant date of $0.91, exercise price of $0.91, expected volatility of 44.8%, expected dividend yield of 3.85%, expected contractual life of 7.5 years, and a risk-free interest rate of 4.22%. To allow for the effects of early exercise, it was assumed that the employees would exercise the options immediately after vesting date. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:52 Page 136 136 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 37. Share-based payments continued Further details of the general employee share option plan are as follows: Outstanding at 1 January Granted during the year Exercised during the year Expired during the year Outstanding at 31 December Exercisable at 31 December 2008 Weighted average exercise price (in $) Number of shares options 2007 Weighted average exercise price (in $) 1.43 9,598,200 9.19 – Number of shares options 6,859,400 1,041,500 (1,503,800) 1.12 (2,569,600) (195,300) 4.47 (169,200) 6,201,800 2,830,400 2.73 6,859,400 1.39 2,046,733 1.44 – 1.21 4.25 1.43 1.00 The cost of the equity settled share option scheme of USD 1,487,000 (2007: USD 865,000) has been recorded in the income statement as part of general and administrative expenses. The weighted average share price at the date of exercise for share options exercised during the year was USD 8.18. The options outstanding at 31 December 2008 had a weighted average remaining contractual life of one to two years. Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three to four years. Long-Term Incentive Plan During 2008 and 2007 year, the Company granted awards under Hikma Long-Term Incentive Plan (“LTIP”) to certain employees. Under the LTIP, conditional awards of nominal cost share options are made which vest after three years subject to a total shareholder return (“TSR”) performance condition. This condition measures the Group’s TSR relative to a comparator group of other pharmaceutical companies. In this case, the vesting schedule dictates that 20% of awards vest for median performance and 100% for upper quartile performance, with pro-rata vesting in between these points. No awards vest for performance which is below the median. Details of the grants under the plan are shown below: 29 April 2008 Type of arrangement Long-Term Incentive Plan Date of grant Number granted Contractual life Vesting conditions 29 April 2008 700,000 Ten years After three years subject to a TSR performance condition The estimated fair value of each share option granted in the LTIP is $5.46. This was calculated by applying the Monte Carlo Simulation methodology for estimation of the fair value. The model inputs were as follows: (a) the exercise price of the share award of nil; (b) the life of the share award of three years; (c) the current price of the underlying shares on the date of grant of $9.22; (d) the volatility of the Company’s share returns of 31.47%; (e) expected dividend yield of 0.08%; and (f) the risk-free interest rate for the life of the share award of 4.5%. 12751_p99_p152.qxp 27/3/09 22:53 Page 137 Hikma Pharmaceuticals PLC Annual report 2008 137 37. Share based payments continued 10 September 2007 Type of arrangement Date of grant Number granted Contractual life Vesting conditions Long-Term Incentive Plan 10 September 2007 150,000 Ten years After three years subject to a TSR performance condition The estimated fair value of each share option granted in the LTIP is $4.70. This was calculated by applying the Monte Carlo Simulation methodology for estimation of the fair value. The model inputs were as follows: (a) the exercise price of the share award of nil; (b) the life of the share award of three years; (c) the current price of the underlying shares on the date of grant of $8.28; (d) the volatility of the Company’s share returns of 34.64%; (e) expected dividend yield of 0.075%; and (f) the risk-free interest rate for the life of the share award of 4.998%. 23 April 2007 Type of arrangement Long-Term Incentive Plan Date of grant Number granted Contractual life Vesting conditions 23 April 2007 466,000 Ten years After three years subject to a TSR performance condition The estimated fair value of each share option granted in the LTIP is $4.47. This was calculated by applying the Monte Carlo Simulation methodology for estimation of the fair value. The model inputs were as follows: (a) the exercise price of the share award of nil; (b) the life of the share award of three years; (c) the current price of the underlying shares on the date of grant of $7.69; (d) the volatility of the Company’s share returns of 34.64%; (e) expected dividend yield of 0.075%; and (f) the risk-free interest rate for the life of the share award of 5.45%. 2 April 2007 Type of arrangement Long-Term Incentive Plan Date of grant Number granted Contractual life Vesting conditions 2 April 2007 160,000 Ten years After three years subject to a TSR performance condition The estimated fair value of each share option granted in the LTIP is $4.33. This was calculated by applying the Monte Carlo Simulation methodology for estimation of the fair value. The model inputs were as follows: (a) the exercise price of the share award of nil; (b) the life of the share award of three years; (c) the current price of the underlying shares on the date of grant of $7.46; (d) the volatility of the Company’s share returns of 34.64%; (e) expected dividend yield of 0.075%; and (f) the risk-free interest rate for the life of the share award of 5.40%. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:53 Page 138 138 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 37. Share-based payments continued Further details on the number of shares granted are as follows: Year 2008 Outstanding at 1 January Granted during the year Expired during the year Outstanding at 31 December 2008 Year 2007 Granted during the year Expired during the year Outstanding at 31 December 2007 2008 grant 29 April Number 2007 grants 2 April Number 23 April Number 10 September Number Total Number – 160,000 453,000 150,000 763,000 700,000 (15,000) – – – (44,000) – – 700,000 (59,000) 685,000 160,000 409,000 150,000 1,404,000 2007 grants 2 April Number 23 April Number 10 September Number Total Number 160,000 466,000 150,000 776,000 – (13,000) – (13,000) 160,000 453,000 150,000 763,000 The cost of the Long-Term Incentive Plan of USD 1,897,000 (2007: USD 735,000) has been recorded in the income statement as part of general and administrative expenses. 38. Operating lease arrangements Minimum lease payments under operating leases recognised in the income statement for the year 2008 $000’s 2,334 2007 $000’s 2,005 At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non- cancellable operating leases, which fall due as follows: Within one year In the second to ﬁfth years inclusive After ﬁve years 2008 $000’s 1,742 5,340 1,918 9,000 2007 $000’s 1,348 4,482 2,877 8,707 Operating lease payments represent rentals payable by the Group for certain of its ofﬁce properties. Leases are negotiated for a term of 1 to 7.5 years. 39. Related party balances Transactions between the Company and its subsidiaries have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint venture and other related parties are disclosed below. Trading transactions: During the year, Group companies entered into the following transactions with related parties: Darhold Limited: is a related party of the Group because it is considered one of the major shareholders of Hikma Pharmaceuticals PLC with ownership percentage of 30.2% at the end of 2008 (2007: 30.8%). Further details on the relationship between Mr. Samih Darwazah and Darhold Limited are given in the Remuneration Report. Other than dividends (as paid to all shareholders), there were no transactions between the Group and Darhold Limited in the year. 12751_p99_p152.qxp 2/4/09 00:26 Page 139 Hikma Pharmaceuticals PLC Annual report 2008 139 39. Related party balances Capital Bank – Jordan: is a related party of the Group because during the year two board members of the Bank were also Board members at Hikma Pharmaceuticals PLC. As at 31 December 2008, those two Board members were no longer board members of the Capital Bank. Total cash balances at Capital Bank – Jordan were USD 217,000 (2007: USD 155,000). Loans and overdrafts granted by Capital Bank to the Group amounted to USD 207,000 (2007: USD 389,000) with interest rates ranging between 8.75% and LIBOR + 1. Total interest expense and bank charges incurred against Group facilities was USD 86,000 (2007: USD 47,000). Total interest income received was USD 1,500 (2007: USD 10,000) and total commission paid in the year was USD 11,300 (2007: USD 9,000). Jordan International Insurance Company: is a related party of the Group because one board member of the company is also a Board member at Hikma Pharmaceuticals PLC. Total insurance premiums paid by the Group to Jordan International Insurance Company during the year were USD 1,351,000 (2007: USD 1,107,000). The Group’s insurance expense for Jordan International Insurance Company contracts in the year 2008 was USD 1,490,000 (2007: USD 1,360,000). The amounts due to Jordan International Insurance Company at the year end were USD 93,000 (2007: USD 143,000). Mena Innovative Technology: is a related party because the Group holds a minority stake in this company (see Note 18) and because the majority shareholder is the wife of Mr. Nabil Rizk – the Chairman of West-ward Pharmaceuticals. Total purchases during the year were USD 1,000 (2007: USD 76,000). Purchases were made at market price discounted to reﬂect the quantity of goods purchased. At 31 December 2008, the Group had no outstanding balance with Mena Innovation Technology (2007: USD nil). Tunisian Companies: Amounts due from the two Tunisian companies the Group has invested in net of provisions are USD 474,000 (2007: USD 270,000) and USD 793,000 (2007: USD 486,000) due from Societe Hikma Medicef Limited – Tunisia and Societe D’Industries Pharmaceutiques Ibn Al Baytar S.A. – Tunisia, respectively. The provision for doubtful debts related to balances above was USD 303,000 (2007: USD 154,000). West-ward Pharmaceuticals Corp: In prior years, certain expenses of the Chairman were paid in the USA by West-ward Pharmaceuticals Corp and reimbursed by the Chairman. This practice has now ceased, and at 31 December 2008, the Group has no outstanding balance with the Chairman (2007: USD 11,000). Mr. Yousef Abd Ali: Mr. Yousef Abd Ali is a related party of the Group because he holds a minority interest in Hikma Lebanon of 33%. The amount owed to Mr. Yousef by the Group as at 31 December 2008 was USD 161,000 (2007: nil). Labatec Pharma SA: is a related party of the Group because it is owned by Mr. Samih Darwazah. During 2008 the Group total sales to Labatec Pharma amounted to USD 30,000 (2007: USD nil). At 31 December 2008 the Group had no outstanding balance with Labatec Pharma (2007: Nil). Remuneration of key management personnel The remuneration of the key management personnel (comprising the Executive and Non-Executive Directors and the members of senior management as set out in the Directors’ report) of the Group is set out below in aggregate for each of the categories speciﬁed in IAS 24 “Related Party Disclosures”. Further information about the remuneration of the individual directors is provided in the audited part of the Directors’ Remuneration Report on pages 89 to 91. Short-term employee beneﬁts Share-based payments Post-employment beneﬁts 2008 $000’s 5,363 1,312 61 2007 $000’s 5,615 638 731 6,736 6,984 G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:53 Page 140 140 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the consolidated ﬁnancial statements continued 40. Hikma Pharmaceuticals PLC main subsidiaries The main subsidiaries of Hikma Pharmaceuticals PLC are as follows: Company’s name Hikma Pharmaceuticals Limited Arab Pharmaceutical Manufacturing Co. (“APM”) SARL Hikma Pharma Algeria Hikma Farmaceutica S.A. West-ward Pharmaceuticals Corp. Pharma Ixir Co. Ltd Hikma Pharma SAE Thymoorgan Pharmazie GmbH Hikma Pharma GmbH Hikma Italia S.p.A Al Jazeera Pharmaceutical Industries Ltd (“JPI”) 41. Hikma Pharmaceuticals PLC deﬁned contribution retirement beneﬁt plan Established in Jordan Jordan Algeria Portugal U.S.A. Sudan Egypt Germany Germany Italy K.S.A Ownership% Ownership% Ordinary Shares Ordinary Shares 2007 2008 100 100 100 100 100 51 100 100 100 100 100 100 100 100 100 100 51 100 100 100 100 100 Hikma Pharmaceuticals PLC has deﬁned contribution retirement plans in two of its subsidiaries: West-ward Pharmaceuticals Corp and Hikma Pharmaceuticals Limited – Jordan. The details of each contribution plan are as follows: Hikma Pharmaceuticals Limited – Jordan: The Group currently has an employee saving plan wherein the Group fully matches employee’s contributions, which are ﬁxed at 5% of salary. Employees are entitled to 30% of the Group contributions after three years of employment with the Group and an additional 10% for each subsequent year. Employees fully vest in the Group contributions after ten years of employment. The Group’s contributions for the year ended 31 December 2008 were USD 613,000 (2007: USD 618,000). West-ward Pharmaceuticals Corp: (401 (k) salary saving plan) Prior to 2001, West-ward Pharmaceuticals Corp established a 401 (k) deﬁned contribution plan, which allows all eligible employees to defer a portion of their income through contributions to the plan. All employees not covered by any collective bargaining agreement are eligible after being employed for one year. Employees can defer up to 25% of their gross salary into the plan, not to exceed USD 15,500 and USD 15,500 for 2008 and 2007, respectively, not including catch-up contributions available to eligible employees as outlined by the Internal Revenue Service. The company matches 40% of the employees’ eligible contribution. Employer contributions vest 0% after one year of service, 50% after two years of service and 100% after three years of service. Employees are considered to have completed one year of service for purposes of vesting upon the completion of 1,000 hours of service at any time during a plan year. Employer contributions to the plan for the year ended 31 December 2008 were USD 365,000 (2007: USD 315,000). The assets of the plans are held separately from those of the Group. The only obligation of the Group with respect to the retirement beneﬁt plans is to make speciﬁed contributions. 12751_p99_p152.qxp 27/3/09 22:53 Page 141 Directors’ responsibility statement Hikma Pharmaceuticals PLC Annual report 2008 141 The Directors are responsible for preparing the Annual report and the ﬁnancial statements. The Directors are required to prepare ﬁnancial statements for the Group in accordance with International Financial Reporting Standards as adopted by the EU (IFRSs) and have also elected to prepare ﬁnancial statements for the Company in accordance with IFRSs. Company law requires the Directors to prepare such ﬁnancial statements in accordance with IFRSs, the Companies Act 1985 and Article 4 of the IAS Regulations. International Accounting Standard 1 requires that ﬁnancial statements present fairly for each ﬁnancial year the Company’s ﬁnancial position, ﬁnancial performance and cash ﬂows. This requires the faithful representation of the effects of transactions, other events and condition in accordance with the deﬁnitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s “Framework for the Preparation and Presentation of Financial Statements”. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. Directors are also required to: Properly select and apply accounting policies; Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and Provide additional disclosures when compliance with the speciﬁc requirements in IFRSs is insufﬁcient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s ﬁnancial position and ﬁnancial performance. The Directors responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the ﬁnancial position of the Company, for safeguarding the assets, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of a Directors’ report and Director’s remuneration report which comply with the requirements of the Companies Act 1985. The Directors are responsible for the maintenance and integrity of the Company website. Legislation in the United Kingdom governing the preparation and dissemination of ﬁnancial statements differs from legislation in other jurisdictions. We conﬁrm to the best of our knowledge: The ﬁnancial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, ﬁnancial position and proﬁt or loss of the company and the undertakings included in the consolidation taken as a whole; and The Business review, which is incorporated into the Directors’ report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face. By order of the Board Said Darwazah Chief Executive Ofﬁcer 16 March 2009 G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:53 Page 142 142 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Independent auditors’ report to the members of Hikma Pharmaceuticals PLC We have audited the parent company ﬁnancial statements of Hikma Pharmaceuticals PLC for the year ended 31 December 2008 which comprise the balance sheet, the cash ﬂow statement, the statement of changes in shareholders’ equity and the related notes 1 to 15. These parent company ﬁnancial statements have been prepared under the accounting policies set out therein. We have reported separately on the Group ﬁnancial statements of Hikma Pharmaceuticals PLC for the year ended 31 December 2008 and on the information in the Directors’ remuneration report that is described as having been audited. This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditors The Directors’ responsibilities for preparing the Annual report and the parent company ﬁnancial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors’ responsibilities. Our responsibility is to audit the parent company ﬁnancial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the parent company ﬁnancial statements give a true and fair view and whether the parent company ﬁnancial statements have been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the Directors’ report is consistent with the parent company ﬁnancial statements. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information speciﬁed by law regarding Directors’ remuneration and other transactions is not disclosed. We read the other information contained in the Annual report as described in the contents section and consider whether it is consistent with the audited parent company ﬁnancial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the parent company ﬁnancial statements. Our responsibilities do not extend to any further information outside the Annual report. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent company ﬁnancial statements. It also includes an assessment of the signiﬁcant estimates and judgements made by the Directors in the preparation of the parent company ﬁnancial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufﬁcient evidence to give reasonable assurance that the parent company ﬁnancial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the parent company ﬁnancial statements. Opinion In our opinion: the parent company ﬁnancial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the Company’s affairs as at 31 December 2008; the parent company ﬁnancial statements have been properly prepared in accordance with the Companies Act 1985; and the information given in the Directors’ report is consistent with the parent company ﬁnancial statements. Deloitte LLP Chartered Accountants and Registered Auditors, London, United Kingdom 16 March 2009 12751_p99_p152.qxp 27/3/09 22:53 Page 143 Company balance sheet at 31 December 2008 Hikma Pharmaceuticals PLC Annual report 2008 143 Non-current assets Investment in subsidiaries Due from subsidiaries Intangible assets Property, plant and equipment Current assets Other current assets Cash and cash equivalents Due from subsidiaries Account receivables Total assets Current liabilities Other payables Other current liabilities Short-term debt Due to subsidiaries Net current liabilities Total liabilities Net assets Equity Share capital Share premium Own shares Retained earnings Equity attributable to equity holders to the parent The ﬁnancial statements were approved by the Board of Directors and signed on its behalf by: Said Darwazah Director 16 March 2009 Notes 2008 $000’s 2007 $000’s 3 1,523,127 1,353,367 4 70,158 60,443 246 321 – 458 1,593,852 1,414,268 5 4 6 7 8 161 13,176 877 2,404 108,383 306,886 42 15 121,762 310,182 1,715,614 1,724,450 201 1,588 976 2,146 40,000 198,000 592,801 592,083 634,590 793,205 512,828 483,023 634,590 793,205 1,081,024 931,245 13 14 33,857 30,229 977,342 821,428 (1,124) – 15 70,949 79,588 1,081,024 931,245 G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:53 Page 144 144 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Company statement of changes in equity for the year ended 31 December 2008 Paid up capital $000’s Share premium $000’s Retained earnings $000’s Own shares $000’s At 1 January 2007 Issue of share capital Cost of equity settled employee share scheme Net income for the year Dividends paid 29,712 818,800 49,654 517 2,628 – – – – – – – 1,601 41,029 (12,696) At 31 December 2007/1 January 2008 30,229 821,428 79,588 Total $000’s 898,166 3,145 1,601 41,029 (12,696) 931,245 159,542 – – – – – – – Issue of share capital Own shares Cost of equity settled employee share scheme Net income for the year Dividends paid At 31 December 2008 3,628 155,914 – – – – – – – – – – 3,384 2,128 (14,151) (1,124) (1,124) – – – 3,384 2,128 (14,151) 33,857 977,342 70,949 (1,124) 1,081,024 As permitted by section 230 of the Companies Act 1985, the income statement of the Company is not presented as part of these accounts. 12751_p99_p152.qxp 2/4/09 00:09 Page 145 Company cash ﬂow statement for the year ended 31 December 2008 Hikma Pharmaceuticals PLC Annual report 2008 145 Proﬁt before tax Cost of equity settled employee share scheme Interest income Interest expense Change in other current assets Change in other payables Depreciation of property, plant and equipment Amortisation of intangible assets Losses on disposal of property, plant and equipment Change in accounts receivable Change in amounts due from/to subsidiaries Change in other current liabilities Net cash from/(used in) operating activities Investing activities Change in amounts due (from)/to subsidiaries Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Purchase of intangible assets Investment in subsidiary Interest income Net cash (used in)/from investing activities Financing activities Proceeds from share issuance Costs of share issue (Decrease)/increase in short-term debts Interest paid Purchase of own shares Dividends paid Net cash (used in)/from ﬁnancing activities Net increase/(decrease in) cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year 2008 $000’s 2007 $000’s 2,128 41,029 709 327 (2,864) (3,793) 1,410 1,012 716 (775) 168 1 5 (27) 109 522 149 – – 3 201,896 (306,093) (444) 409 202,923 (266,326) (179,475) 11,596 (40) 4 (247) – (10) – – (25) 2,864 3,793 (176,894) 15,354 162,026 3,145 (2,484) – (158,000) 198,000 (1,524) (1,124) (515) – (14,151) (12,696) (15,257) 187,934 10,772 (63,038) 2,404 65,442 13,176 2,404 G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:53 Page 146 146 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the Company ﬁnancial statements 1. Adoption of new and revised Standards The impact on the company of new and revised standards is the same as for the Group. Details are given in Note 1 to the Group accounts. 2. Signiﬁcant accounting policies The separate ﬁnancial statements of the Company are presented as required by the Companies Act 1985. As permitted by that Act, the separate ﬁnancial statements have been prepared in accordance with International Financial Reporting Standards and UK law. In the consolidated cash ﬂow statement interest paid has been reclassiﬁed to ﬁnancing activities and ﬁnance income has been reclassiﬁed to investing activities to better reﬂect the nature of the ﬂows, following the recent acquisitions. The ﬁnancial statements have been prepared on the historical cost basis. The principal accounting policies adopted are the same as those set out in Note 2 to the consolidated ﬁnancial statements with the addition of the policy as noted below. Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment. 3. Investment in subsidiaries Investment in subsidiaries represents the following: Company’s name Hikma Pharma Limited – Jersey Hikma Holdings (UK) Limited Al Jazeera Pharmaceutical Industries Limited (“JPI”) Hikma Pharmaceuticals Limited Established in UK UK K.S.A Jordan Ownership% Ownership% Ordinary Shares Ordinary Shares 2007 2008 100 100 52.5* 22.8* 100 100 52.5* – On 23 July 2008 a loan of USD 169,760,000 from the Company to Hikma Pharmacuticals Limited – Jordan was converted to equity, giving the Company a 22.8% share. *The remaining share is held by other Group companies. 12751_p99_p152.qxp 27/3/09 22:54 Page 147 Hikma Pharmaceuticals PLC Annual report 2008 147 4. Due from subsidiaries Non-current assets Hikma UK Limited Hikma Investments West-ward Pharmaceuticals Corp Hikma Italia S.p.A. Hikma Pharma Limited – Jersey Thymoorgan Phomaze GmbH Current assets Hikma Pharma Limited – Jersey Hikma Pharmaceuticals – Jordan Hikma Pharma Germany Hikma Pharma Portugal Hikma UK Limited Hikma Limited Others 5. Financial assets As at 31 December 2008 $000’s – 2007 $000’s 200 55,459 55,075 8,000 4,234 2,465 – 4,063 – – 1,105 70,158 60,443 As at 31 December 2008 $000’s 2,736 97 587 208 2007 $000’s 630 170,346 68 – 103,544 135,200 429 782 497 145 108,383 306,886 Cash and cash equivalents These comprise cash held by the Company and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates to their fair value. 6. Financial liabilities Other payables The Directors consider that the carrying amount of other payables approximates to their fair value. 7. Short-term debt Short-term debt at 31 December 2008 represents the drawdown of USD 40 million under a USD 60 million credit line. Short-term debt at 31 December 2007 represents the drawdown of USD 170 million of a bridge loan to ﬁnance the acquisition of APM and drawdown of USD 28 million under the USD 40 million credit line. As a result the Company was in a net current liabilities position and as a result it was in breach of certain ﬁnancial covenants related to its short-term debt. See Note 24 in the Group accounts for further details. 8. Due to subsidiaries Due to subsidiaries represents a short-term loan due to Hikma Holdings (UK) Ltd, which is a non-interest bearing loan repayable on-demand. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:54 Page 148 148 Financial results Hikma Pharmaceuticals PLC Annual report 2008 Notes to the Company ﬁnancial statements continued 9. Financial policies for risk management and their objectives Currency risk: Currency risks as deﬁned by IFRS 7 arise on account of ﬁnancial instruments being denominated in a currency that is not the functional currency and being of a monetary nature. The following table illustrates ﬁnancial assets and liabilities for the Company in different currencies: Euro GBP 2008 $000’s 88 1,042 Liabilities 2007 $000’s – 926 2008 $000’s 162 193 Assets 2007 $000’s 31 57 Further details on how the company manages the currency risk are given in Note 29 to the Group accounts. Liquidity risk: 2008 Cash and cash equivalents Trade receivables Interest bearing loans and borrowings Trade payables 2007 Cash and cash equivalents Interest bearing loans and borrowings Trade payables Less than one year $000’s 13,176 42 (40,000) (201) (26,983) More than one year $000’s – – – – – Total $000’s 13,176 42 (40,000) (201) (26,983) Less than one year $000’s 2,404 (198,000) (976) (196,572) More than one year $000’s – – – – Total $000’s 2,404 (198,000) (976) (196,572) Weighted average effective interest rate % The Company believes that given the Group’s forecast operating cash ﬂow during 2009, it has the ability to satisfy its liability commitments. Interest rate risk An interest rate sensitivity analysis assumes an instantaneous 100 basis point change in interest rates in all currencies from their levels at 31 December 2008, with all other variables held constant. Based on the composition of our debt portfolio as at 31 December 2008, a 1% increase in interest rates would result in an additional USD 400,000 in interest expense being incurred per year. Further details on how the Company manages the currency risk are given in Note 29 to the Group accounts. 12751_p99_p152.qxp 2/4/09 00:17 Page 149 Hikma Pharmaceuticals PLC Annual report 2008 149 10. Staff costs Hikma Pharmaceuticals PLC currently has seven employees (2007: ﬁve) (excluding Executive Directors); total compensation paid to them amounted to USD 1,361,000 (2007: USD 1,279,000) of which salaries and wages comprise an amount of USD 1,014,000 (2007: USD 763,000) the remaining balance of USD 347,000 (2007: USD 515,000) represent social security and other beneﬁts. 11. Stock options The details of the stock compensation scheme are provided in Note 37 to the Group accounts. The number of options granted to the employees of the Company (including Directors) was 2,600,000 (2007: 2,600,000) and the total amount of the compensation expenses charged to income statement is USD 196,400 (2007: USD 196,400). 12. Long-Term Incentive Plans (LTIPs) The details of the LTIP scheme were provided in note 37 to the Group accounts. The number of awards granted to the employees of the Company (including Directors) was 391,000 shares (2007: 205,000) and the total amount of the compensation expenses charged to income statement is USD 513,037 (2007: USD 130,800). 13. Share capital Authorised: 500,000,000 ordinary shares of 10p each Issued and fully paid – included in ordinary shareholders’ equity 189,237,607 (2007: 170,733,807) ordinary shares of 10p each The details of the issue of the share capital in the year are given in Note 31 to the Group accounts. 14. Share premium At 1 January 2008 Premium arising on share placing Premium arising on exercise of stock options Balance at 31 December 2008 15. Net income for the year 2008 $000’s 2007 $000’s 88,700 88,700 33,857 30,229 Share premium $000’s 821,428 154,503 1,411 977,342 Included in the net income for the year is an amount of USD 8,000,000 (2007: USD 45,545,000) representing dividends received and USD 709,000 (2007: USD 327,000) representing the current year charge of stock option and LTIPs expenses relating to the Company’s employees. The remaining USD 2,675,000 (2007: USD 1,274,000) of the Group’s stock option and LTIPs charge is recharged to subsidiary companies. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 27/3/09 22:54 Page 150 150 Hikma Pharmaceuticals PLC Annual report 2008 Shareholder information 2009 ﬁnancial calendar 17 March 29 April 1 May 14 May 2 June 26 August* 16 September* 18 September* 16 October* *Provisional date. 2008 preliminary results and ﬁnal dividend announced 2008 ﬁnal dividend ex-dividend date 2008 ﬁnal dividend record date Annual General Meeting 2008 ﬁnal dividend paid to shareholders 2009 interim results and interim dividend announced 2009 interim dividend ex-dividend date 2009 interim dividend record date 2009 interim dividend paid to shareholders Shareholding enquiries Enquiries or information concerning existing shareholdings should be directed to the Company’s registrars, Capita Registrars either: in writing to Shareholder Services, Capita Registrars, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU; by telephone from within the UK on 0870 162 3100; by telephone from outside the UK on +44 208 639 2157; or through the website www.capitaregistrars.co.uk. In addition to general enquiries for example changes of address, change of name, loss of a share certiﬁcate the Registrar can also assist with the following: Mandating the dividend payments Shareholders who currently receive their dividend by cheque can request a dividend mandate form from the registrar and have their dividend paid direct into their bank account on the same day as the dividend is paid. The tax voucher is sent direct to the shareholders registered address. International Payment System If you are an overseas shareholder the registrar is now able to pay dividends in several foreign currencies for an administrative charge of £5.00., which is deducted from the payment. Contact the registrar for further information. Dividend Payments – Currency elections The Company declares dividends in US Dollars. Shareholders can opt to receive the dividend in sterling by completing the Currency Election Form that is sent to them following the announcement of the interim and ﬁnal dividend. Website Press releases, the share price and other information on the Group are available on the Company’s website www.hikma.com. 12751_p99_p152.qxp 27/3/09 22:54 Page 151 Hikma Pharmaceuticals PLC Annual report 2008 151 Share listings London The Company’s Ordinary Shares are listed on the London Stock Exchange. They are listed under EPIC – HIK, SEDOL – B0LCW08 GB and ISIN – GB00B0LCW083. Further information on this market, its trading systems and current trading in Hikma Pharmaceuticals PLC shares can be found on the London Stock Exchange website www.londonstockexchange.com. Global Depository Receipts The Company also has listed Global Depository Receipts (“GDRs”) on NasdaqDubai. They are listed under EPIC – HIK and ISIN – US4312882081. Further information on NasdaqDubai, its trading systems and current trading in Hikma Pharmaceuticals PLC GDRs can be found on the website www.nasdaqdubai.com. Boiler room scams The Financial Services Authority has issued a number of warnings to shareholders regarding boiler room scams. Over the last year many companies have become aware that shareholders have received unsolicited phone calls or correspondence concerning investment matters. These are typically from overseas based “brokers” who target UK shareholders, offering to sell them what often turn out to be worthless or high risk shares in US or UK investments. These operations are commonly known as boiler rooms. These brokers can be very persistent and extremely persuasive. Shareholders are advised to be very cautious of unsolicited advice, offers to buy shares at a discount or offers of free company reports. If you receive any unsolicited investment advice: Obtain the correct name of the person and organisations. Check they are authorised by the FSA by looking the ﬁrm up on www.fsa.gov.uk/register. Report the matter to the FSA either by calling 0845 606 1234 or visit www.moneymadeclear.fsa.gov.uk. If the caller persists, hang up. Details of the share dealing facilities sponsored by the Company are included in Company mailings and are on the Company website. G o v e r n a n c e a n d ﬁ n a n c i a l r e s u l t s 12751_p99_p152.qxp 31/3/09 02:43 Page 152 152 Hikma Pharmaceuticals PLC Annual report 2008 Principal Group companies Hikma Pharmaceuticals PLC Registered in England and Wales number 5557934 Registered ofﬁce: 13 Hanover Square W1S 1HW London Telephone: Facsimile: E-mail: Website: +44 (0)20 7399 2760 +44 (0)20 7399 2761 susan.ringdal@hikma.uk.com www.hikma.com Principal Group companies Hikma Pharmaceuticals Limited P.O. Box 182400 11118 Amman Jordan Telephone: Facsimile: +962 6 5802900 +962 6 5827102 West-ward Pharmaceutical Corporation 465 Industrial Way West Eatontown, New Jersey 07724 USA Telephone: Facsimile: +1 732 542 1191 +1 732 542 6150 Hikma Farmacêutica S.A. Estrada Rio Da Mo no. 8 8A, 8B – Fervença 2705-906 Terrugem SNT Portugal Telephone: Facsimile: +351 21 9608410 +351 21 9615102 Advisers Auditors Deloitte LLP 2 New Street Square London EC4A 3BZ UK Brokers Citigroup Global Markets Limited Citigroup Centre Canada Square London E14 5LB UK Merrill Lynch Merrill Lynch Financial Centre 2 King Edward Street London EC1A 1HQ UK Legal Advisers Ashurst Broadwalk House 5 Appold Street London EC2A 2HA UK Public Relations Brunswick Group LLP 16 Lincoln’s Inn Fields London WC2A 3ED UK 12751_Cover.qxp 2/4/09 13:40 Page 2 Hikma Pharmaceuticals PLC Over the 30 years since Hikma was founded, we have grown into a successful speciality pharmaceutical group. Our business today is diverse in its product line and the breadth of its geographic coverage. This diversiﬁcation will ensure that we maintain our track record of strong growth. For more information visit our website www.hikma.com Designed and produced by Radley Yeldar www.ry.com This report is printed on Era Silk paper. The paper contains 50% de-inked post-consumer waste and virgin wood ﬁbre from well-managed forests independently certiﬁed according to the rules of the Forest Stewardship Council (FSC). It is manufactured at a mill that is certiﬁed to ISO14001 and EMAS environmental standards. The mill uses pulps that are elemental chlorine free (ECF) and the inks in printing this report are all vegetable-based. Printed at St Ives Westerham Press Ltd, ISO14001, FSC certiﬁed and CarbonNeutral® 12751_Cover.qxp 2/4/09 13:40 Page 1 Hikma Pharmaceuticals PLC 13 Hanover Square London W1S 1HW UK www.hikma.com Hikma Pharmaceuticals PLC Annual report 2008 Trusted... i H k m a P h a r m a c e u t i c a l s P L C A n n u a l r e p o r t 2 0 0 8

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