Hikma Pharmaceuticals Annual Report 2012

Plain-text annual report

H i 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 1 2 iMProviNG LiveS... Hikma PHarmaceuticals Plc annual rePort 2012 who we are... Hikma PHarmaceuticals Plc Since hikma was founded, it has rapidly grown to become a successful multinational pharmaceutical group with operations across the Middle east and North africa, the United States and europe. our business has a broad product portfolio, selling a wide range of branded and non-branded generics as well as innovative, patented products under license. our robust and diversified business model has quality at the heart of everything we do and will enable us to maintain our track record of strong growth. For more inFormation, visit our website www.hikMa.coM how & where we are improving Lives 2012 CONTENTS improving Lives... Strengthening our leading position in the MENA region See page 12 improving Lives... Extending our reach and diversity through partnerships See page 24 improving Lives... Leveraging our expertise and capacity in the US market See page 32 overview 02 / how we performed in 2012 04 / Chairman’s statement strategiC review 07 / BUsiness modeL 08 / groUp at a gLanCe 10 / Chief exeCUtive offiCer’s review 17 / Key performanCe indiCators BUsiness and finanCiaL review 21 / Branded 26 / injeCtaBLes 30 / generiCs 34 / groUp performanCe 38 / prinCipaL risKs and UnCertainties sUstainaBiLity 41 / ensUring the sUstainaBiLity of oUr BUsiness Corporate governanCe 56 / aBoUt this governanCe report 58 / governanCe report 72 / Committee reports 82 / remUneration report 104 / direCtors’ responsiBiLities finanCiaL statements 112 / independent aUditor’s report 113 / ConsoLidated finanCiaL statements 118 / notes to the ConsoLidated finanCiaL statements 157 / Company finanCiaL statements 160 / notes to the Company finanCiaL statements 164 / sharehoLder information iBC / prinCipaL groUp Companies – advisers 1 improving Lives... Developing our global product range in growing therapeutic areas See page 18 improving Lives... Increasing the scale of our specialty Injectables business See page 28 improving Lives... Building on our world-class manufacturing and API sourcing capabilities See page 52 Hikma PHarmaceuticals Plc / annual rePort 2012how we performed in 2012 another sUCCessfUL year hiKma deLivered exCeLLent revenUe and earnings growth 2012 rEvENUE 2007–12 2012 rEvENUE CAgr ADjUSTED OPEr ATINg MArgIN $1,108.7m +19.8% 17.5% 2012 2012 2012 PrODUCTS MArkETED OPEr ATINg CASH fLOw EMPLOyEES 826 $182.2m 6,649 2012 REVENUE BY SEGMENT (%) 2012 REVENUE BY REGION (%) 4 1 3 1. Branded 2. Injectables 3. Generics 4. Others 47.7% 42.4% 9.4% 0.5% 3 1 1. MENA* 2. US 3. Europe and the rest of the world 55.8% 36.1% 8.1% 2 2 * Middle East and North Africa region (“MENA”) 2 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 2012 highLights REVENUE ($ MILLION) +20.8% 12 11 EBITDA2 ($ MILLION) +35.9% 12 11 ADJUSTED1 OPERATING PROFIT ($ MILLION) +32.9% 1,108.7 918.0 12 11 PROFIT ATTRIBUTABLE TO SHAREHOLDERS ($ MILLION) +25.2% 225.2 165.7 12 11 DIVIDEND PER SHARE (CENTS) EARNINGS PER SHARE (CENTS) +23.1% 12 11 +23.8% 16.0 13.0 12 11 1 Before the amortisation of intangible assets (excluding software) and exceptional items 2 Earnings before interest, tax, depreciation and amortisation 193.8 145.8 100.3 80.1 51.1 41.3 3 Hikma PHarmaceuticals Plc / annual rePort 2012Chairman's statement an exCeLLent performanCe we deLivered very strong growth in 2012, with revenUe Up 21% and eps Up 24% samih darwazah Non-Executive Chairman 4 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 TOTAL SHAREHOLDER RETURN FROM JANUARY 2007 (%) +123% 200 150 100 50 0 -50 -100 HIKMA PHARMACEUTICALS PLC FTSE 350 PHARMACEUTICALS & BIOTECHNOLOGY JAN 07 JAN 08 JAN 09 JAN 10 JAN 11 JAN 12 JAN 13 FTSE 250 Our robust business model continues to drive high growth as we leverage our diverse geographic presence, broad product portfolio and high quality manufacturing facilities. Our business in MENA grew by over 20% in 2012. we are seeing the results of our steadfast commitment to the region, demonstrated by the ongoing investment we have been making in these markets. we continue to be the leading regional manufacturer in MENA and we remain focused on strengthening our presence in our key markets through capital expenditure and acquisitions. Our investment has continued in 2013 with the acquisition of the Egyptian Company for Pharmaceuticals and Chemical Industries (“EPCI”), which adds new products and manufacturing capabilities in Egypt. During 2012, we made excellent progress developing our global Injectables business. we achieved strong revenue growth and delivered transformational improvements to our manufacturing operations, enabling a step-change in the profitability of this business. we maintained our track record of excellent regulatory compliance in our Injectables facilities and proved ourselves to be a reliable supplier of high quality injectable products during a challenging time in the US market. we are encouraged by the prospects for the global Injectables market and believe our Injectables business is well positioned for strong growth over the medium and long-term. Our US oral generics business performed below our expectations in 2012, due to ongoing compliance work at our Eatontown facility. Towards the end of the year, the Board initiated a review of the strategic options for this business, which has now been completed. following this review, remediation of the Eatontown facility remains the priority, as does bringing the facility back to profitability. At the same time, we have initiated strategic discussions with third parties to evaluate alternative options for the business. As part of our strategy of investing in our people and in recognition of the importance of having highly trained and dedicated employees, we are focused on ensuring that middle management take on greater responsibility and authority. In 2012, we launched a leadership training programme for middle managers with the American University of Beirut (AUB) to provide them with the knowledge and skills required for current and future positions within Hikma. As we train and empower our managers, we ensure that Hikma’s values continue to be well communicated and understood by all of our people. During 2012, the Board initiated a comprehensive review of our Code of Conduct. we have since adopted and published an enhanced Code that demonstrates our commitment to upholding the highest standards of integrity and transparency across the group. I was extremely pleased that our commitment to our local businesses and sustainability was recognised when we received the 2012 IfC Client Leadership Award for our sustainable development initiatives, excellence in corporate governance and commitment to local communities. we were also awarded Healthcare Company of the year by Arabian Business Achievement Awards, where we were chosen from among 900 candidates. This award was presented in recognition of Hikma’s performance and growth as a listed company. The Board is recommending a final dividend of 10.0 cents per share (approximately 6.7 pence per share), which will make a dividend for the full year of 16.0 cents per share, an increase of 23% on 2011. The proposed final dividend will be paid on 23 May 2013 to shareholders on the register on 19 April 2013, subject to approval by shareholders at the Annual general Meeting. from 1 january 2007 through to the end of 2012, we have delivered a total shareholder return of 123%. we are delighted with this performance, which exceeds that of the fTSE 250 index and the fTSE Pharmaceutical index, which gave a total shareholder return of 31% and 41% respectively, over the same period. Our ongoing commitment to our MENA business and the investment we have made in our global Injectables business means we are well positioned to drive continued growth in 2013 and beyond. samih darwazah Non-Executive Chairman 5 Hikma PHarmaceuticals Plc / annual rePort 2012strategiC review a diversified BUsiness modeL and proven strategy for deLivering growth and Creating sharehoLder vaLUe 6 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 strategiC review BUsiness modeL oUr aim is to improve the Lives of oUr patients aCross oUr gLoBaL marKets we achieve this through our robust and diversified business model. By selling both innovative and generic products and establishing a unique and differentiated market position, we are able to drive strong and sustainable growth, increase patients’ access to high quality, affordable medicines and create shareholder value. how we Create vaLUe OUr AIM IS TO... wE ACHIEvE THIS THrOUgH OUr... wE AIM TO DELIvEr... improve Lives aCross oUr gLoBaL marKets HIgH qUALITy, AffOrDABLE gENErICS PATIENT BENEfITS INNOvATIvE IN-LICENSED PrODUCTS PrODUCTS TAILOrED TO PATIENT NEEDS HIgH qUALITy MANUfACTUrINg BrOAD r&D CAPABILITIES ExPErIENCED SALES & MArkETINg TEAMS STrONg PArTNErSHIPS wITH LICENSOrS DEDICATED EMPLOyEES SUSTAINABLE grOwTH ESTABLISHED LOCAL PrESENCE fINANCIAL BENEfITS STrONg PrOfITABILITy SHArEHOLDEr vALUE 7 Hikma PHarmaceuticals Plc / annual rePort 2012groUp at a gLanCe what we do & where we deveLop, manUfaCtUr e and marKet a Broad r ange of Br anded and non-Br anded generiC pharmaCeUtiCaL prodUCts aCross the middLe east and north afriCa, the United states and eUrope. we are aLso a Leading LiCensing partner in the mena region. oUr oper ations span over 45 CoUntries and are CondUCted throUgh three BUsiness segments COrE BUSINESS DIvISION: gEOgrAPHICAL ArEA: generiCs SELLINg OrAL gENErIC PrODUCTS ACrOSS THE US 2012 rEvENUE: $103.7m –33.0% US TOP PrODUCTS: Amoxicillin Doxycycline Isosorbide mononitrate Methocarbamol Prednisone Long-standing presence in the US oral generics market focus on quality manufacturing and high service levels Strong emphasis on niche products, including controlled substances Leveraging our efficient and lower cost US fDA approved manufacturing facilities in jordan and Saudi Arabia More information see page 30 View our business model on page 7 41 products in 103 dosage forms and strengths1 8 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 COrE BUSINESS DIvISION: gEOgrAPHICAL ArEA: injeCtaBLes SELLINg SPECIALISED INjECTABLE PrODUCTS gLOBALLy US, Europe, MENA TOP PrODUCTS: fentanyl Iron gluconate Morphine Ondansetron Hydromorphone 2012 rEvENUE: $470.0m +48.9% A leading global manufacturer of quality sterile injectables US fDA approved manufacturing facilities in the US, Portugal and germany range of manufacturing capabilities including sterile liquid, powder, lyophilised and cytotoxic products Broad product portfolio including CNS, anti-infective, cardiovascular and oncology products More information see page 26 View our business model on page 7 179 products in 361 dosage forms and strengths COrE BUSINESS DIvISION: gEOgrAPHICAL ArEA: Branded SELLINg BrANDED gENErICS AND IN-LICENSED PATENTED PrODUCTS ACrOSS THE MENA rEgION 2012 rEvENUE: $528.9m +19.7% More information see page 21 View our business model on page 7 MENA TOP PrODUCTS: Amoclan® Blopress® Omnicef® Suprax® Zomax® fifth largest pharmaceutical manufacturer in the MENA region 36.9% of Branded sales from in-licensed products 1,684 reps targeting physicians and pharmacists across the region Strong anti-infective franchise and increasing focus on cardiovascular, diabetes and CNS products US fDA approved manufacturing facilities in jordan and Saudi Arabia 606 products in 1,630 dosage forms and strengths 9 kEy: 26 MANUfACTUrINg PLANTS 6 r&D CENTrES 1 Products marketed during 2012 Hikma PHarmaceuticals Plc / annual rePort 2012 Chief exeCUtive offiCer’s review deLivering oUr strategy throUgh the diversifiCation of oUr oper ations and oUr UniqUe BUsiness modeL, we are sUCCessfULLy deLivering oUr str ategy for growth said darwazah Chief Executive Officer 10 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 oUr str ategy for growth STrENgTHEN DEvELOP ExTEND INCrEASE LEvErAgE BUILD OUr LEADINg POSITION IN THE MENA rEgION OUr gLOBAL PrODUCT rANgE IN grOwINg THErAPEUTIC ArEAS OUr rEACH AND DIvErSITy THrOUgH PArTNErSHIPS THE SCALE Of OUr SPECIALTy INjECTABLES BUSINESS OUr ExPErTISE AND CAPACITy IN THE US MArkET ON OUr wOrLD-CLASS MANUfACTUrINg AND API SOUrCINg CAPABILITIES Our performance this year reflects the excellent results achieved by our Injectables business in the US, the strength of our businesses in MENA and a solid performance in Europe. It also demonstrates the strength of our unique business model and our focus on the strategic priorities we have identified for future growth. we made good progress delivering our strategy this year. we have continued to strengthen our competitive position and gain share in our key markets, develop our global portfolio of higher value, more differentiated products, expand our manufacturing capacity and drive greater operational efficiencies. strengthening our leading position in the mena region Since our IPO in 2005, we have made eight acquisitions in MENA. we have invested over $200 million in capex, expanded our geographic reach, strengthened our manufacturing capabilities, developed our product portfolio and grown our sales teams. Through these investments we have built a very strong position in the MENA region. In 2012, we successfully leveraged these investments and our position as the leading regional pharmaceutical manufacturer to drive revenue growth in the MENA of over 20%. Our performance was strongest in markets such as Egypt and Algeria, where recent investment to expand manufacturing capacity has enhanced our ability to meet the growing demand for our products. This strong performance was achieved despite the challenges we are facing in many of our MENA markets as competition increases, political and social issues cause disruptions and costs increase due to higher inflation. By continuing to invest in our facilities, optimise our product portfolios and improve operational efficiency, we have been able to build stronger market positions across all our MENA markets. we remain very positive about the outlook for our businesses in MENA. we have a long track record of operating successfully in this region, despite the economic and geopolitical challenges and we see excellent opportunities to grow our MENA revenue and profitability over the medium and long-term. developing our global product range The development of our global product portfolio, particularly the continuous introduction of new, higher value products, is a key strategic focus across the group. To achieve this, we have continued to invest in r&D. we are also broadening our sources of new products beyond our own in-house capabilities to include alliances with external partners and product acquisitions. In 2012, we continued to grow our portfolio through the launch of 14 new products and 17 new dosage forms and strengths across the group and 77 total launches across all countries. In our MENA markets, we continue to deliver strong sales growth from our leading portfolio of anti-infective products, whilst developing our cardiovascular, diabetes, central nervous system (“CNS”), oncology and respiratory portfolios. Our strategy is to continue bringing new branded generics to market as well as innovative, patented products under license from our growing number of global partners. Acquisitions also contribute to the growth in our product portfolio and can bring new in-license relationships and additional therapeutic categories. In 2012, we launched 47 oral and 15 injectable products across our MENA markets. In the US, we are continuing to deliver a steady stream of new ANDAs, with four oral and eight injectable approvals in 2012. we are successfully introducing higher value, more differentiated products to our portfolio including products such as argatroban, iron gluconate, phenylephrine and testosterone – all excellent products with strong market positions. In Europe, we launched 10 products during 2012. extending our reach and diversity through partnerships Since Hikma’s inception, partnerships have been an integral part of our strategy for developing a portfolio of differentiated, innovative and high quality products for sale across the group. 11 Hikma PHarmaceuticals Plc / annual rePort 2012strengthening oUr Leading position in the mena region improving Lives... ...THrOUgH A STrONg COMMITMENT TO OUr MENA MArkETS In recent years, we have been developing our business in Libya, building a strong sales team and good customer relationships. In 2011, Libyan political unrest severely disrupted our sales operations, restricting our ability to operate commercially for most of the year. we maintained our market presence with donations of much needed medicines and kept our employees on the payroll during this time. As the market stabilised, we were the first pharmaceutical company to re-enter the market and resume sales operations. Our commitment to the Libyan market and the dedication of our employees has enabled us to rapidly rebuild our business and establish Hikma as the number one1 pharmaceutical company in Libya. going forward, our Libyan business will increasingly benefit from our ability to leverage our manufacturing facilities in jordan, Saudi Arabia, Egypt, Tunisia and Morocco to export to Libya. By providing patients with access to a broad portfolio of high quality, affordable pharmaceutical products, across a range of important therapeutic areas, we are helping to improve lives in Libya. The responsiveness of our local sales team enabled us to very quickly re-establish our operations in Libya. COUNTry LiBya POPULATION SIZE (MILLION)2 HEALTHCArE ExPENDITUrE (% Of gDP)2 LIfE ExPECTANCy (yEArS)2 6.0 3.9% 78 1 Advanced marketing statistics, MAT October 2012 2 CIA – The world factbook 12 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 13 Hikma PHarmaceuticals Plc / annual rePort 2012Chief exeCUtive offiCer’s review Continued In MENA, we have continued our track record of working with strategic partners to in-license patented products, supporting our strategy of bringing innovative products to MENA and increasing patients’ access to more affordable medicines. In 2012, revenue from in-licensed products grew by 12% and represented 36.9% of our sales in MENA. The strength of our sales operations and manufacturing capabilities across MENA, including a team of over 1,600 reps, has established Hikma as the partner of choice in the region. As well as continuing to build on our long-term relationships with key licensors, we are actively establishing new partnerships. In 2012, we signed seven new licensing agreements for eight products. In the US, we have established a successful r&D partnership with Exela, a North Carolina based r&D company that develops and manufactures innovative and generic injectable products. This has resulted in the approval of an NDA for argatroban that we launched towards the end of 2012. we are delighted to have demonstrated the effectiveness of this partnership model and we are continuing to work with Exela on a number of other product opportunities. In Europe, we are increasingly working with third parties, both to enhance our portfolio through new in-license arrangements, as well as to distribute our products in markets where we do not currently have an established sales presence, successfully enabling us to enter new European markets. following the strategic investment we made in Unimark in India in 2011, we signed an agreement with the company in 2012 to collaborate with them on the development of 17 ANDAs for sale in the US market. increasing the scale of our specialty injectables business In recent years, we have been rapidly growing our global Injectables business through a combination of strategic acquisitions, the expansion of existing manufacturing facilities and focused investment in r&D to develop a broad product portfolio. Having transformed the scale of our global Injectables business, our investment focus is now on building market share, entering new markets, optimising our manufacturing capacity, broadening our technical capabilities, developing our global product portfolio and continuing to drive greater operational efficiencies. During 2012, we significantly enhanced and expanded our Injectables manufacturing capacity in the US. At the same time we increased production in our European facilities and made good progress with the re-allocation of production across our facilities to maximise utilisation and cost efficiencies. This resulted in a reduction in unit costs, benefiting us across all our geographies. 14 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 Since the MSI acquisition, our strategic focus has been on integrating our sales and marketing teams and leveraging our new local manufacturing platform. Now, as one of the largest suppliers by volume in the US generic injectables market, we have been able to build good relationships with the group Purchasing Organisations (“gPOs”) and wholesalers. These relationships were strengthened in 2012 as we were able to provide our customers with a reliable supply of high quality injectable products at a time of severe market shortages. A core element of delivering our US sales strategy is our ability to supply the US market from our high quality fDA-approved manufacturing facilities in jordan, Saudi Arabia, Portugal and germany. In 2012, approximately 25% of our US sales were manufactured in our overseas facilities. we have recently completed a review to assess the strategic options for the generics segment of the Hikma group, which sells unbranded oral generics products in the US market. following completion of the review, we have initiated discussions with third parties to evaluate the alternative options for the business. The regulatory environment remained challenging in 2012 and many of our competitors continued to struggle with compliance issues. Our excellent track record of quality and reliability in Injectables manufacturing provided us with a strong competitive advantage, particularly in the US, and also helped to drive growth in our contract manufacturing business. During the year, we continued to focus on the development of our product portfolio, through the introduction of more differentiated, higher value products. we also placed a greater focus on the development of global products – where a single product file meets the requirements of multiple regulatory authorities. This increases the cost efficiency of our r&D processes and accelerates the speed at which we can register and launch new products across all of our markets. This approach is proving to be particularly successful in the development of our oncology portfolio. Leveraging our expertise and capacity in the Us market Our presence in the US, the world’s largest pharmaceutical market, has been a key source of diversification for Hikma since we entered this market in the early 1990s. The acquisition of Baxter’s Multi-Source Injectables business (“MSI”) in May 2011 doubled the size of our existing US business and in 2012, our US sales reached $400 million, over 35% of group revenue. 15 Hikma PHarmaceuticals Plc / annual rePort 2012Chief exeCUtive offiCer’s review Continued Building on our world-class manufacturing and api sourcing capabilities we are committed to maintaining the highest standards of quality and compliance across all of our manufacturing facilities. As industry standards continue to be raised across our geographies, we must work harder every year to make the necessary investment in our facilities and people to ensure we meet the multiple international regulatory requirements across all of our jurisdictions. During 2012 our global facilities were subject to multiple regulatory inspections, as well as audits by licensing partners and customers. In particular, our injectables facility in Cherry Hill, New jersey and our oral solid dosage manufacturing facilities in Amman, jordan and riyadh, Saudi Arabia were inspected by the US food and Drug Administration (“US fDA”) and passed successfully. At our oral solid dosage manufacturing facility in Eatontown, New jersey we undertook extensive compliance work during 2012, including a voluntary shutdown of the facility during November and December, to address observations made by the US fDA in a warning letter we received in february 2012. The remediation work is ongoing and we are committed to working with the fDA to address the issues raised. Across the group, we regard our ability to meet highest standards of quality and compliance as critical to our success. In 2012, we have been developing our relationships with Unimark in India and Haosun in China to strengthen our API sourcing capabilities. we have also made a capex investment to expand our own Chemical facility in jordan. Making these strategic investments and developing our own in-house capabilities will enable us to increase our access to high quality, reliable API supply for strategic APIs. In particular, this selective vertical integration is an important element in our strategy to accelerate our pipeline of new oncology products. Looking ahead The excellent performance we have delivered in 2012 reflects our track record of investing in future growth. Our continued progress in meeting our strategic objectives will support continued growth in 2013 and beyond. said darwazah Chief Executive Officer 16 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 hiKma’s Key performanCe indiCators kPI DEfINITION COMMITMENTS PErfOrMANCE 2010 2011 2012 revenUe growth Percentage increase or decrease in the current year’s revenue compared with the prior year’s revenue we aim to deliver strong group revenue growth – organically and through acquisitions Strong group revenue growth of 20.8%, with organic growth of 5.3% +14.8% +25.6% +20.8% adjUsted4 operating profit growth Measures the growth in underlying profitability, excluding the impact of amortisation and exceptional items we aim to increase our underlying profitability year-on-year whilst driving revenue growth Significant growth in adjusted operating profit, driven by the excellent performances of our Branded and Injectables businesses growth in adjUsted diLUted earnings per share Calculated as growth in adjusted profit attributable to shareholders divided by the weighted average number of shares in issue we aim to deliver high growth in earnings and to meet the expectations of our shareholders growth in adjusted diluted earnings per share reflects the group’s improved profitability +24.6% +2.0% +32.9% +21.4% -2.6% +19.2% net Cash generated from operating aCtivities/ revenUe Measures the Group’s cash conversion. Calculated as operating cash flow divided by revenue we target a cash conversion ratio of 15% to 20% Our cash conversion improved in 2012, largely as a result of improved profitability 20.9% 13.8% 16.4% 12.4% 8.1% 11.6% Our return on invested capital increased in 2012, benefiting from our long track record of investment in our businesses and facilities across the group – through company and product acquisitions, capex and r&D retUrn on invested CapitaL Measures the Group’s efficiency in allocating capital to profitable investments. we aim to maximise shareholder value by investing in long-term growth Calculated as operating profit after interest income and tax (including non-controlling interest share of profit) divided by invested capital (calculated as total equity (including the equity attributable to non- controlling interests) plus total debt and obligations under finance leases) 4 Before the amortisation of intangible assets (excluding software) and exceptional items 17 Hikma PHarmaceuticals Plc / annual rePort 2012 18 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 deveLoping oUr gLoBaL prodUCt r ange in growing ther apeUtiC areas improving Lives... ...By BUILDINg OUr ONCOLOgy POrTfOLIO In 2012, we invested in the expansion of our in-house API manufacturing capabilities in jordan and continued to work with our partner in China, Hauson, to develop strategic oncology APIs that will support future product registrations. we have also been working to promote doctors’ acceptance of generic oncology products in MENA through in-market trials at the king Hussein Cancer Center in jordan. By providing doctors and patients with an alternative source of high quality, affordable oncology products we are improving lives across our MENA markets. As our global oncology business develops, it will be a key driver of growth across all of our geographies. we currently market 4 oral and 11 injectable oncology products across our markets. These products are produced at our dedicated cytotoxic injectables facility in germany and a specialised oral facility in jordan. we are well established in the oncology market in Europe, where we market a broad oncology portfolio through a specialised sales team. we are building our presence in the oncology market in MENA, where the penetration of generic oncology products is very low. we have a strong pipeline, with 77 products pending approval across all of our markets. we also continue to add new licensing agreements, such as gP Pharm’s treatment for prostate cancer, Lutrate® 1 month. COUNTry LeBanon POPULATION SIZE (MILLION)1 HEALTHCArE ExPENDITUrE (% Of gDP)1 LIfE ExPECTANCy (yEArS)1 4.1 7.0% 75 1 CIA – The world factbook 19 Hikma PHarmaceuticals Plc / annual rePort 2012 BUsiness and finanCiaL review the groUp onCe again deLivered a very strong performanCe 20 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 20 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 BUsiness and finanCiaL review Branded strong revenUe growth in oUr Key mena marKets overview of the marketplace Hikma’s Branded business manufactures and markets generic and in-licensed originator products across the MENA region. The pharmaceutical markets in MENA tend to be branded markets in which products, both generic and patented, are marketed under specific brand names through large sales and marketing teams. In spite of the recent political unrest, pharmaceutical sales for the top nine private retail markets in the MENA region grew by 9.3% in 2012, to reach $10.3 billion, according to IMS Health. This figure does not capture the additional value of sales from government tenders or from other smaller but fast growing MENA markets such as Iraq, Libya and Sudan. The growth in the MENA pharmaceutical market continues to be underpinned by the favourable demographics of a young, fast growing population, coupled with a sizeable elderly population. whilst the historically strong demand for anti-infective products remains, economic development in MENA and changes in lifestyle are driving higher incidences of chronic diseases such as diabetes. Pharmaceutical companies in the region are rapidly developing their portfolios to meet the growing demand for cardiovascular, diabetes, central nervous system and oncology products. 2012 HIgHLIgHTS 3 BrANDED rEvENUE INCrEASED By 19.7% 11.3% wITH OrgANIC rEvENUE UP 3 BrANDED ADjUSTED OPErATINg PrOfIT INCrEASED By 17.6% wITH AN ADjUSTED OPErATINg MArgIN Of 23.4% 3 LAUNCHED 47 prodUCts AND SIgNED fOUr NEw IN-LICENSE AgrEEMENTS 2121 Hikma PHarmaceuticals Plc / annual rePort 2012Hikma PHarmaceuticals Plc / annual rePort 2012 Branded Continued BRANDED REVENUE ($ MILLION) +19.7% 12 11 528.9 441.9 Branded performance Branded revenue increased by 19.7% in 2012 to $528.9 million, compared with $441.9 million in 2011. On a constant currency basis, Branded revenue growth was 23.1%. Organic revenue grew 11.3% to $480.7 million, with the recently acquired Promopharm and Savanna businesses in Morocco and Sudan respectively, contributing a further $48.1 million. Over the year, we delivered particularly strong performances in Algeria, Egypt and Libya. Across all of our MENA markets we have benefited from the recent investments we have made to expand our local manufacturing presence, launch new products and restructure our sales and marketing teams. Our Egyptian business had an excellent year with over 25% revenue growth, reflecting increased manufacturing capacity and new product launches. The Egyptian team successfully restructured its sales force to enable a greater focus on strategic, higher value products. On 22 january 2013, we completed the acquisition of the Egyptian Company for Pharmaceuticals and Chemical Industries (“EPCI”) for an aggregate cash consideration of $20.5 million. This is an important strategic acquisition, bringing a complementary portfolio of 35 products and enhancing our local manufacturing capabilities, including the addition of a dedicated cephalosporin facility. The acquisition of EPCI significantly enhances our growth potential in the Egyptian market. In Algeria, an increase in the volume of locally manufactured products and investment in our sales force helped drive revenue growth of close to 20%. In Libya, we saw a very strong recovery this year following the political unrest in 2011. Our ongoing commitment to this market enabled us to restart our operations quickly following the disruptions and rapidly establish Hikma as the leading pharmaceutical company in this market.1 In Morocco, where we have been progressing with the integration of Promopharm, we have successfully submitted six of Hikma’s leading products for registration. In Iraq, whilst sales were disrupted at the beginning of the year due to the change we made to our distributor, we saw accelerating sales in the second half. In Sudan, where a significant devaluation of the Sudanese pound caused pricing uncertainty and delayed shipments during the first half of the year, we were able to deliver much stronger growth in the second half and for the full year overall. we believe that Iraq and Sudan are attractive markets that will offer excellent growth potential over the medium and long-term. we continue to strengthen our sales force in the Iraqi market and build our product portfolio. In Sudan, we are upgrading the manufacturing facility we acquired in 2011, which will further strengthen our leading position in this market. 22 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 1 Advanced Marketing Statistics, MAT October 2012 The mena5 pharmaceutical market top 9 mena markets egypt saudi arabia algeria morocco Uae Lebanon tunisia jordan Kuwait 2012 value $m 10,282 2,510 2,351 2,110 962 821 585 532 228 183 growth +9.3% +15.6% +11.4% +8.0% -1.0% +10.6% +1.7% +8.3% +5.2% +4.7% During 2012, the Branded business launched a total of 47 products across all markets, including six new compounds and nine new dosage forms and strengths. The Branded business also received 36 regulatory approvals across the region, including three for new products. revenue from in-licensed products increased from $174.8 million to $195.3 million in 2012, supported by the revenue contribution from Promopharm’s in-license agreements. In-licensed products represented 36.9% of Branded revenue compared to 39.6% in 2011. Strong revenue growth from our leading in-licensed products is being offset by lower sales of Actos following the withdrawal of this product in some of our markets in 2011. we signed four new licensing agreements for innovative oral products during 2012, which will support our continued focus on growing our portfolio of higher value products in growing therapeutic categories. Branded gross profit grew by 20.2% to $257.3 million in 2012 and gross margin was 48.7%, compared with 48.4% in 2011. Despite higher inflationary pressure across the region in the wake of the Arab Spring, we maintained a stable gross margin by focusing on higher value, strategic products, reducing procurement costs and driving greater operational efficiencies. Operating profit in the Branded business increased by 13.1% to $111.4 million, compared with $98.5 million in 2011. Adjusted operating profit increased by 17.6% to $123.6 million. Adjusted operating margin was 23.4%, compared with 23.8% in 2011, after excluding the amortisation of intangibles, integration costs and severance costs incurred as a result of restructuring our MENA operations during 2012. Excluding the impact of adverse currency movements, particularly the Sudanese pound and the Algerian dinar, which reduced adjusted operating profit by around $10.9 million, adjusted operating margin was 24.7%. The impact of higher salaries and benefits and increased operating costs are being more than offset by our ongoing success in restructuring our sales and marketing teams and driving efficiency savings across our operations. On a constant currency basis, we expect Branded revenue growth of around 11% in 2013 and a slight improvement in adjusted operating margin. This reflects our ability to continue offsetting increased inflationary pressure across the MENA region with the launch of higher value products and by driving cost and operating efficiencies. On a reported basis, taking into account exchange rate movements since the beginning of 2013, Branded revenue growth is currently expected to be around 9% this year, with margins in line with 2012. 5 All market data sourced from IMS Health yTD December 2012. figures reflect private retail sales only. 232323 Hikma PHarmaceuticals Plc / annual rePort 2012Hikma PHarmaceuticals Plc / annual rePort 2012Hikma PHarmaceuticals Plc / annual rePort 2012extending oUr r eaCh and diversity throUgh partnerships improving Lives... ...By LEvErAgINg OUr LArgE AND ExPErIENCED SALES TEAM It is the strength of our sales and marketing teams across MENA that establishes us as the partner of choice in the region and enables us to bring innovative new products to our markets. In 2012, we continued to invest in strengthening our sales teams across the region and we are seeing significant benefits from this strategy. we are restructuring our sales and marketing teams and optimising the allocation of promotional spend across our product portfolio to drive efficiency gains and improve productivity. At the same time, we are implementing an enhanced reward structure that incentivises our reps to focus on higher value products in growing therapeutic areas. Enhancements to our sales operations are helping to drive strong growth in sales of important in-license products such as Blopress, a leading treatment for hypertension. This is supported by our ongoing efforts to raise doctor and patient awareness of chronic diseases through awareness days and medical symposiums. By driving growth in the use of innovative in-licensed products to treat chronic illnesses such as heart disease and diabetes, we are improving lives across MENA. COUNTry Uae POPULATION SIZE (MILLION)1 HEALTHCArE ExPENDITUrE (% Of gDP)1 LIfE ExPECTANCy (yEArS)1 5.5 3.7% 77 1 CIA – The world factbook 24 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 25 Hikma PHarmaceuticals Plc / annual rePort 2012BUsiness and finanCiaL review injeCtaBLes very strong revenUe growth with signifiCant margin improvement 2012 HIgHLIgHTS 3 INjECTABLES rEvENUE grEw By 48.9% TO $470.0 MILLION, wITH OrgANIC rEvENUE UP 22.3% 3 STrONg PErfOrMANCES ACrOSS OUr gEOgrAPHIES – US, MENA AND EUrOPE 3 SIgNIfICANT IMPrOvEMENT IN INjECTABLES ADjUSTED OPErATINg MArgIN, UP frOM 17.4% TO 26.2% overview of the marketplace Hikma’s Injectables business manufactures and markets branded and non-branded generic injectable products in the US, Europe and MENA. Injectable products represent the second largest segment of the global pharmaceutical market in terms of delivery mechanism after oral products. The value of the global generic injectables market is estimated to exceed $11.0 billion.1 Injectable products are produced in either liquid, powder or lyophilized (freeze-dried) forms. The manufacture of injectable products requires specialised and sterile manufacturing facilities and techniques, which must meet the strict quality standards imposed by the regulatory authorities. These factors have created a market with high barriers to entry and, as a result, a limited number of competitors. The global injectables market is expected to benefit from the key drivers of generics growth as well as from the patent expiries of a number of high value injectable products. injectables performance injectables revenue by region Us mena europe 2012 63.0% 20.5% 16.5% 2011 51.3% 23.9% 24.8% revenue in our global Injectables business increased by 48.9% to $470.0 million, compared with $315.7 million in 2011. Organic revenue increased by 22.3% to $237.5 million. US Injectables revenue grew by $134.0 million, or 82.6%, to $296.2 million. This excellent performance reflects a full year contribution from the Multi-Source Injectables (“MSI”), our success in maximising the potential of our existing product portfolio, stronger customer relationships, new product launches and product acquisitions. It is also due to the operational excellence of our Cherry Hill and Portuguese facilities, which significantly increased output through better management and additional capacity. Our strong quality track record has helped to differentiate our business in the US market and enabled us to benefit from the favourable market conditions created by the supply constraints of some of our competitors. In the MENA region, Injectables revenue increased by 27.5% to $96.1 million, compared with $75.4 million in 2011. This reflects particularly strong growth in Saudi Arabia, Algeria, Libya and jordan, due to strong demand in the private market and more tender wins, as well as the full year contribution from Promopharm. revenue in our European Injectables business of $77.8 million was in line with revenue of $78.2 million in 2011. However, on a constant currency basis, European Injectables revenue grew by 7.3%, reflecting new product growth and continuing demand for contract manufacturing. we also successfully offset double-digit price erosion with strong volume growth. 26 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 1 Espicom Business Intelligence INJECTABLES REVENUE ($ MILLION) +48.9% 12 11 470.0 315.7 Injectables gross profit increased by 71.4% to $218.7 million, compared with $127.6 million in 2011. gross margin increased significantly to 46.5%, compared with 40.4% in 2011. This reflects our efforts to actively manage our existing product portfolio, favourable market conditions, strong operational management, increased plant utilisation and greater economies of scale. Operating profit of the Injectables business increased by 154.3% to $115.5 million. Adjusted operating profit increased by 123.8% to $123.0 million. Adjusted operating margin increased from 17.4% to 26.2%. This excellent margin expansion reflects the improvement in gross margin, significantly better operating leverage and tight control of operating costs. we remain focused on strengthening our global Injectables product portfolio, with a particular emphasis on more differentiated products. In 2012, we received approval for a New Drug Application (“NDA”) for argatroban injection, which we launched at the end of the year. In May 2012, we purchased the Abbreviated New Drug Application (“ANDA”) for sodium ferrous gluconate injection from generaMedix Pharmaceuticals. These are both excellent products with strong market positions. During 2012, the Injectables business launched a total of 41 products across all markets, including 8 new compounds and 8 new dosage forms and strengths. The Injectables business also received a total of 41 regulatory approvals across all regions and markets, namely 11 in MENA, 22 in Europe and 8 in the US. we signed 4 new licensing agreements during 2012 to add innovative injectable products to our MENA portfolio. we expect our global Injectables business to continue to perform well and currently expect Injectables revenues will grow in the low double-digits in 2013. we also see excellent prospects for the global Injectables business over the medium and long-term. As previously announced, we are undertaking a review of the strategic options for the Injectables business. we have received a number of unsolicited expressions of interest for the business and will consider the best option for shareholders. 272727 Hikma PHarmaceuticals Plc / annual rePort 2012Hikma PHarmaceuticals Plc / annual rePort 2012Hikma PHarmaceuticals Plc / annual rePort 201228 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 inCreasing the sCaLe of oUr speCiaLty injeCtaBLes BUsiness improving Lives... ...By INCrEASINg PATIENT ACCESS TO HIgH qUALIT y, AffOrDABLE gENErIC INjECTABLES In recent years we have been rapidly growing our global Injectables business through a combination of strategic acquisitions, the expansion of existing manufacturing facilities and investment in r&D. In May 2011, the acquisition of MSI more than doubled our Injectables business and established Hikma as one of the leading global suppliers by volume of generic injectables. Since the acquisition, we have significantly increased production output at the Cherry Hill facility through capex investment, productivity gains and efficiency improvements. At the same time, we have built strong relationships with key customers and embedded a nationwide sales team which is enabling us to reach patients across the US market. we have a broad product portfolio, which we are continuing to expand. Our focused investment in r&D is also enabling us to bring more differentiated products, such as argatroban, to the US market. The MSI acquisition has significantly increased our ability to supply high quality, cost effective generic injectables to improve the lives of patients in the US. COUNTry Us POPULATION SIZE (MILLION)1 HEALTHCArE ExPENDITUrE (% Of gDP)1 LIfE ExPECTANCy (yEArS)1 317 17.9 78 1 CIA – The world factbook 29 Hikma PHarmaceuticals Plc / annual rePort 2012 BUsiness and finanCiaL review generiCs performanCe impaCted By remediation worK at oUr eatontown faCiLity 2012 HIgHLIgHTS 3 gENErICS rEvENUE DECrEASED By 33.0% TO $103.7m 3 OPErATINg LOSS Of $20.9m rEfLECTS THE IMPACT Of ADDITIONAL COMPLIANCE wOrk AT OUr EATONTOwN fACILITy 3 ExCEPTIONAL COSTS Of $7.4m rELATED TO rEMEDIATION AND rESTrUCTUrINg overview of the marketplace Hikma’s generics business manufactures non-branded oral generic products for sale in the US market. The US represents the world’s largest generic market and generics now account for around 79% of all retail prescriptions dispensed in the US.1 According to IMS Health, the market for oral generic products in the US grew by 22% in 2012, reaching a total market value of $37.9 billion and the number of oral generic prescriptions written grew by 7% in 2012. The growth in the generics market results from the greater availability of molecules in generic form as patents expire, along with patients choosing lower cost options. The US generic pharmaceutical industry is very competitive and has experienced significant pricing pressure in recent years. going forward, we expect that significant patent expiries and increased demand for cost-effective medicines will offset pricing pressures and drive future generic market growth. generics performance generics revenue was $103.7 million, down 33.0% compared with $154.8 million in 2011. This decline is due to the slowdown in production at our Eatontown facility during 2012, while we undertook the compliance work necessary to address the observations raised by the US food and Drug Administration (“US fDA”) in its warning letter of february 2012. This led us to voluntarily halt commercial production at this facility during the last two months of 2012. generics gross profit was $23.3 million, compared with $52.2 million in 2011, and gross margin was 22.5%, compared with 33.7% in 2011. This reflects reduced operating leverage as a result of the significant slowdown in sales. The generics business made an operating loss of $20.9 million in 2012, compared with an operating profit of $17.1 million in 2011. The loss included $7.4 million of one-off costs associated with the remediation and restructuring work. GENERICS REVENUE ($ MILLION) -33.0% 12 11 103.7 154.8 30 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 1 IMS Health, yTD December 2012 In late December 2012, we restarted manufacturing at the Eatontown facility and we are bringing products back gradually. we expect to complete the remediation work in the second half of the year. As the remediation process has been slower than expected, we remain focused on driving sustainable cost reduction and continue to look for further opportunities to cut costs across the business. following the completion of a strategic review, we have also initiated discussions with third parties to evaluate the alternative options for this business. The impact of continued remediation in 2013 is currently being offset by a market opportunity that is driving strong demand for one of our products. we expect to maintain generics revenue at 2012 levels and to breakeven for the full year. other businesses Other businesses, which primarily comprise Arab Medical Containers, a manufacturer of plastic specialised packaging, International Pharmaceuticals research Centre, which conducts bio-equivalency studies, and the chemicals division of Hikma Pharmaceuticals Limited, contributed revenue of $6.2 million, compared with $5.6 million in 2011. These other businesses delivered an operating loss of $3.3 million in 2012, compared with a loss of $2.4 million in 2011. 313131 Hikma PHarmaceuticals Plc / annual rePort 2012Hikma PHarmaceuticals Plc / annual rePort 2012Hikma PHarmaceuticals Plc / annual rePort 2012 Lever aging oUr expertise and CapaCity in the Us marKet improving Lives... ...THrOUgH OUr fOCUS ON qUALITy MANUfACTUrINg Our US operations generated $400 million, or just over 35% of group revenue, in 2012, up from $317 million in 2011. The acquisition of Baxter’s Multi-Source Injectables business in May 2011 doubled the size of our existing US business and significantly enhanced our injectables capabilities in the US. Since the MSI acquisition, we have made investments to significantly increase production output and enhance operational management. Our strategic focus has been on integrating our sales and marketing teams and leveraging our new US manufacturing platform. Now, as one of the largest suppliers by volume in the US generic injectables market, we have been able to build stronger relationships with group Purchasing Organisations (“gPOs”) and wholesalers. These relationships were strengthened in 2012, as we were able to provide our customers with a reliable supply of high quality injectables products at a time of severe market shortages. Our high quality and expanding US platform has made us a reliable and valued partner who is committed to improving the lives of patients in the US. COUNTry Us POPULATION SIZE (MILLION)1 HEALTHCArE ExPENDITUrE (% Of gDP)1 LIfE ExPECTANCy (yEArS)1 317 17.9 78 1 CIA – The world factbook 32 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 33 Hikma PHarmaceuticals Plc / annual rePort 2012BUsiness and finanCiaL review groUp performanCe oUr sUCCess is Underpinned By oUr diverse BUsiness modeL, whiCh ComBines oUr extensive presenCe in the mena marKets and a growing gLoBaL injeCtaBLes BUsiness GROUP REVENUE ($ MILLION) +20.8% 12 11 1,108.7 918.0 group revenue increased by 20.8% to $1,108.7 million in 2012. Excluding the contributions from MSI in the US, Promopharm in Morocco and Savanna in Sudan, organic revenue growth was 5.2%. The group’s gross profit increased by 26.8% to $501.1 million, compared with $395.3 million in 2011. group gross margin was 45.2%, compared with 43.1%, with the significant gross margin improvement of the global Injectables business more than offsetting the lower generics gross margin. group operating expenses grew by 20.8% to $334.3 million, compared with $276.7 million in 2011. Excluding the amortisation of intangible assets (excluding software) and exceptional items, adjusted group operating expenses grew by 24.0% to $311.7 million. The paragraphs below address the group’s main operating expenses in turn. expenses increased by $17.0 million, or 15.8%, to $124.6 million in 2012. Excluding non-recurring items, g&A expenses as a percentage of revenue were 10.7% in 2012, compared with 9.9% in 2011. This reflects the increase in employee salaries and benefits in MENA and the high fixed cost base of the generics business during the slowdown in production during 2012. we continued to grow our investment in r&D, with a 9.0% increase in expenditure across the group to reach $34.0 million. Total investment in r&D represented 3.1% of group revenue, compared with 3.4% in 2011. whilst this is lower than originally planned, we were able to replace some expected expenditure through product acquisitions. we expect further growth in r&D spend in 2013 as we continue to execute plans to develop our product pipeline, particularly for injectable products. Sales and marketing expenses were Other net operating expenses increased $152.8 million, or 13.8% of revenue, compared with $125.3 million and 13.6% of revenue in 2011. Excluding non-recurring costs in 2012, sales and marketing expenses represented 13.4% of revenue. The strong growth in our global Injectables business, where relatively low incremental sales and marketing investments required to generate new sales, offset an increase in MENA sales and marketing expenditure due to higher wages and employee benefits. As a percentage of revenue, general and administrative expenses were 11.2%, compared with 11.7% in 2011. general and administrative by $10.4 million to $23.0 million, reflecting an increase in slow moving inventory provisions, primarily in the US, and higher transactional foreign exchange losses, primarily due to movements in the Sudanese pound against the US Dollar. Operating profit for the group increased by 40.5% to $166.8 million in 2012. group operating margin increased to 15.0%, compared with 12.9% in 2011. On an adjusted basis, group operating profit increased by $48.0 million, or 32.9%, to $193.8 million and operating margin increased to 17.5%, up from 15.9% in 2011. 34 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 summary p&L $ million Revenue Gross profit gross margin Operating profit Adjusted6 operating profit adjusted operating margin EBITDA7 Profit attributable to shareholders Adjusted8 profit attributable to shareholders Earnings per share (cents) Dividend per share (cents) Net cash flow from operating activities 2012 2011 Change 1,108.7 501.1 45.2% 166.8 193.8 17.5% 225.2 100.3 120.5 51.1 16.0 182.2 918.0 395.3 43.1% 118.7 145.8 15.9% 165.7 80.1 100.9 41.3 13.0 126.4 +20.8% +26.8% +2.1 +40.5% +32.9% +1.6 +35.9% +25.2% +19.4% +23.8% +23.1% +44.1% net finance expense Net finance expense increased to $34.5 million, compared with $22.9 million in 2011. This primarily reflects the annualised interest charge on the loans we acquired to finance the MSI and Promopharm acquisitions made in 2011. we have also increased our loans in local currencies in 2012, which carry higher financing charges but help to reduce our exposure to exchange rate fluctuations in markets such as Algeria and Egypt. This is explained in more detail in the net cash flow, working capital and net debt section below. In 2013, we expect a net finance expense of around $40 million, reflecting a further increase in local loans and additional working capital financing. profit before tax Profit before tax for the group increased by 40.6% to $132.0 million, compared with $93.9 million in 2011. Adjusted profit before tax increased by 31.5% to $159.1 million. tax The group incurred a tax expense of $24.8 million, compared with $10.4 million in 2011. The effective tax rate was 18.8%, compared with 11.1% in 2011. The increase in the tax rate is mainly attributable to the increased profitability in higher tax jurisdictions, such as the US, North Africa and Portugal. The operating loss in the generics business meant that the tax rate in 2012 was slightly lower than our previous expectations, but for 2013, we expect the effective tax rate to increase to between 23% and 24%. profit for the year The group’s profit attributable to equity holders of the parent increased by 25.2% to $100.3 million in 2012. Adjusted profit attributable to equity holders of the parent increased by 19.4% to $120.5 million. earnings per share Basic earnings per share increased by 23.8% to 51.1 cents, compared with 41.3 cents in 2011. Diluted earnings per share increased by 24.9% to 50.6 cents, compared with 40.5 cents in 2011. Adjusted diluted earnings per share was 60.8 cents, an increase of 19.2% over 2011. dividend The Board has recommended a final dividend of 10 cents per share (approximately 6.7 pence per share), which will make a dividend for the full year of 16.0 cents per share, an increase of 23.1% compared with 2011. The proposed final dividend will be paid on 23 May 2013 to eligible shareholders on the register at the close of business on 19 April 2012, subject to approval by shareholders at the Annual general Meeting. The ex-dividend date is 17 April 2013 and the final date for currency elections is 3 May 2013. 6 Before the amortisation of intangible assets (excluding software) and exceptional items. 7 Earnings before interest, tax, depreciation and the amortisation of intangible assets. 8 In 2012, amortisation of intangible assets (excluding software) was $12.7 million (2011: $9.0 million). In 2012, exceptional items included within operating expenses were $9.9 million (2011: $16.4 million). 353535 GROUP ADJUSTED OPERATING PROFIT ($ MILLION) +32.9% 12 11 193.8 145.8 Hikma PHarmaceuticals Plc / annual rePort 2012Hikma PHarmaceuticals Plc / annual rePort 2012Hikma PHarmaceuticals Plc / annual rePort 2012groUp performanCe Continued net cash flow, working capital and net debt The group generated operating cash flow of $182.2 million in 2012, up $55.8 million from $126.4 million in 2011. This significant increase was partly due to the impact of a $21.1 million non-recurring cash injection in 2011 to fund the working capital requirement of MSI at the time of the acquisition, which reduced that year’s operating cash flow. Excluding this impact, the underlying increase in cash generation of $34.7 million, or 23.5%, reflects the strong improvement in profitability in 2012. This excellent growth in cash flow was achieved with relatively flat working capital days of 194 days, compared with 193 days in 2011. whilst group receivable and payable days improved – receivable days reduced by 8 days to 97 days at 31 December 2012 and payable days increased by 5 days to 66 days – inventory days increased by 15 days to 164 days. This was primarily driven by our US business, where we significantly increased the production output of the Injectables business and were holding more normalised stock levels at December 2012, compared to December 2011. Capital expenditure was $51.4 million, compared with $69.0 million in 2011. Around $32.0 million of that was spent in MENA, principally to maintain our manufacturing facilities across the region, to invest in our recently acquired facility in Sudan and to develop our chemical plant in jordan. Around $13.1 million was spent in the US, primarily at our facility in Cherry Hill, New jersey, to expand manufacturing capacity. In Portugal, investments included warehouse improvements and new machinery purchases. The group purchased $38.8 million of intangible assets during 2012, including around $30.7 million in respect of new products and around $8.1 million related to the implementation of SAP at our Cherry Hill facility. group net debt decreased from $421.9 million at 31 December 2011 to $406.5 million at 31 December 2012. This reflects higher cash balances from increased profitability, partially offset by increased borrowings in 2012 to finance capital expenditure, the purchase of intangible assets, the purchase of additional shares in Promopharm, the payment of the deferred consideration related to the MSI acquisition and the EPCI acquisition in january 2013. Balance sheet During the period, shareholder equity was negatively impacted by unrealised foreign exchange losses of $21.2 million, primarily reflecting the depreciation of the Sudanese pound, the Egyptian pound and the Algerian dinar against the US Dollar and the revaluation of net assets denominated in these currencies. summary and outlook we delivered a strong performance in 2012, with a 20.8% increase in revenue and a 23.8% increase in earnings per share. This reflects strong growth in the Branded business and the excellent performance of the Injectables business. we remain confident in our medium and long-term growth prospects. we have made a good start to 2013 and expect to deliver group revenue growth of around 10% this year. 36 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 OPErATINg CASH fLOw (grOUP) $182.2m UP $55.8m hikma’s product portfolio total marketed products Compounds dosage forms and strengths new compounds products launched in 2012 new dosage forms and strengths total launches across all countries in 201211 Branded injectables generics Group hikma’s product pipeline 60610 179 41 826 1,63010 361 103 2,094 6 8 – 14 9 8 – 17 47 30 – 77 products approved in 2012 products pending approval as at 31 december 2012 new compounds new dosage forms and strengths 3 10 4 17 5 12 4 21 total approvals across all countries in 201211 36 41 4 81 Branded injectables generics Group new compounds new dosage forms and strengths total pending approvals across all countries as of 31 december 201211 research & development9 The group’s product portfolio continues to grow as a result of our in-house product development efforts. During 2012, we launched 14 new compounds, expanding the group portfolio to 826 compounds in 2,094 dosage forms and strengths10. we manufacture and/or sell 94 of these compounds under-license from the originator. Across all businesses and markets, a total of 77 products were launched during 2012. In addition, the group received 81 approvals. To ensure the continuous development of our product pipeline, we submitted 216 regulatory filings in 2012 across all regions and markets. As of 31 December 2012, we had a total of 695 pending approvals across all regions and markets. At 31 December 2012, we had a total 139 89 22 250 222 112 22 356 346 327 22 695 of 73 new products under development, the majority of which should receive several marketing authorisations for different strengths and/or product forms over the next few years. 9 Products are defined as pharmaceutical compounds sold by the group. New compounds are defined as pharmaceutical compounds not yet launched by the group and existing compounds being introduced into a new segment 10 Totals include 123 dermatological and cosmetic compounds in 401 dosage forms and strengths that are only sold in Morocco 11 Totals include all compounds and formulations that are either launched or approved or pending approval across all markets, as relevant 373737 Hikma PHarmaceuticals Plc / annual rePort 2012Hikma PHarmaceuticals Plc / annual rePort 2012Hikma PHarmaceuticals Plc / annual rePort 2012BUsiness and finanCiaL review prinCipaL risK & UnCertainties the groUp’s BUsiness faCes risKs and UnCertainties The group’s business faces risks and uncertainties which could have a significant effect on its financial condition, results of operation or future performance and could cause actual results to differ materially from expected and historical results. operationaL risKs rISk POTENTIAL IMPACT MITIgATION CompLianCe with regULatory reqUirements Failure to comply with applicable regulatory requirements and manufacturing standards (often referred to as ‘Current Good Manufacturing Practices’ or cGMP) regULation Changes Unanticipated legislative and regulatory actions, developments and changes affecting the Group’s operations and products CommerCiaLisation of new prodUCts Delays in the receipt of marketing approvals, the authorisation of price and re-imbursement Lack of approval and acceptance of new products by physicians, patients and other key decision-makers Inability to confirm safety, efficacy, convenience and/or cost-effectiveness of our products as compared to competitive products Inability to participate in tender sales delays in supply or an inability to market or develop the group’s products Commitment to maintain the highest levels of quality across all manufacturing facilities delayed or denied approvals for the introduction of new products product complaints or recalls Bans on product sales or importation disruptions to operations potential for litigation plant closure restrictions on the sale of one or more of our products restrictions on our ability to sell our products at a profit Unexpected additional costs required to produce, market or sell our products increased compliance costs strong global compliance function that oversees compliance across the group remuneration and reward structure that helps retain experienced personnel Continuous staff training and know-how exchange on-going development of standard operating procedures strong oversight of local regulatory environments to help anticipate potential changes Local operations in all of our key markets representation and/or affiliation with local industry bodies diverse geographical and therapeutic business model slowdown in revenue growth from new products experienced regulatory teams able to accelerate submission processes across all of our markets inability to deliver a positive return on investments in r&d, manufacturing and sales and marketing highly qualified sales and marketing teams across all markets a diversified product pipeline with 250 compounds pending approval, covering a broad range of therapeutic areas a systematic commitment to quality that helps to secure approval and acceptance of new products and mitigate potential safety issues 38 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 operationaL risKs continued rISk POTENTIAL IMPACT MITIgATION prodUCt safety interruptions to revenue flow Unforeseen product safety issues for marketed products, particularly in respect of in-licensed products Costs of recall, potential for litigation reputational damage diversification of product portfolio across key markets and therapies working with stakeholders to understand issues as they arise prodUCt deveLopment Failure to secure new products or compounds for development inability to grow sales and increase profitability for the group Lower return on investment in research and development Co-operation with third parties Inability to renew or extend in-licensing or other co-operation agreements with third parties Loss of products from our portfolio revenue interruptions failure to recoup sales and marketing and business development costs experienced and successful in-house r&d team, with specifically targeted product development pathways Continually developing and multi-faceted approach to new product development strong business development team track record of building in-licensed brands position as licensee of choice for our key mena geography investment in long-term relationships with existing in-licensing partners experienced legal team capable of negotiating robust agreements with our partners Continuous development of new partners for licensing and co-operation diverse revenue model with in-house r&d capabilities integration of aCqUisitions Difficulties in integrating any technologies, products or businesses acquired inability to obtain the advantages that the acquisitions were intended to create extensive due diligence undertaken as part of any acquisition process adverse impact on our business, financial condition and results of operations track record of acquisitions and subsequent business integration significant transaction and integration costs could adversely impact our financial results human resources personnel focused on managing employee integration following acquisitions inCreased Competition Loss of market share New market entrants in key geographies On-going pricing pressure in increasingly commoditised markets decreasing revenues on established portfolio disrUptions in the manUfaCtUring sUppLy Chain inability to develop and/or commercialise new products inability to market existing products as planned Inability to procure active ingredients from approved sources Inability to procure active ingredients on commercially viable terms Inability to procure the quantities of active ingredients needed to meet market requirements Lost revenue streams on short notice reduced service levels and damage to customer relationships inability to supply finished product to our customers in a timely fashion Close monitoring of acquisition and integration costs on-going portfolio diversification, differentiation and renewal through internal r&d, in-licensing and product acquisition Continuing focus on expansion of geographies and therapeutic areas alternate approved suppliers of active ingredients Long-term relationships with reliable raw material suppliers Corporate auditing team continuously monitors regulatory compliance of api suppliers focus on improving service levels and optimising our supply chain 393939 Hikma PHarmaceuticals Plc / annual rePort 2012Hikma PHarmaceuticals Plc / annual rePort 2012Hikma PHarmaceuticals Plc / annual rePort 2012BUsiness and finanCiaL review Continued operationaL risKs continued rISk POTENTIAL IMPACT MITIgATION eConomiC and poLitiCaL and Unforeseen events disruptions to manufacturing and marketing plans Lost revenue streams inability to market or supply products The failure of control, a change in the economic conditions (including the Middle East, North Africa and the Eurozone), political environment or sustained civil unrest in any particular market or country Unforeseen events such as fire or flooding could cause disruptions to manufacturing or supply geographic diversification, with 26 manufacturing facilities and sales in more than 40 countries product diversification, with 826 products and 2,094 dosage strengths and forms Litigation financial impact on group results from adverse resolution of proceedings in-house legal counsel with relevant jurisdictional experience Commercial, product liability and other claims brought against the Group reputational damage finanCiaL risKs rISk POTENTIAL IMPACT MITIgATION foreign exChange risK Exposure to foreign exchange movements, primarily in the European, Algerian, Sudanese and Egyptian currencies fluctuations in the group’s net asset values and financial results upon translation into Us dollars interest rate risK fluctuating impact on profits before taxation Volatility in interest rates entering into currency derivative contracts where possible foreign currency borrowing matching foreign currency revenues to in-jurisdiction costs optimisation of fixed and variable rate debt as a proportion of our total debt Use of interest rate swap agreements Credit risK reduced working capital funds Clear credit terms for settlement of sales invoices Inability to recover trade receivables Concentration of significant trade balances with key customers in the MENA region and the US risk of bad debt or default group Credit policy limiting credit exposures Use of various financial instruments such as letters of credit, factoring and credit insurance arrangements LiqUidity risK Insufficient free cash flow and borrowings headroom reduced liquidity and working capital funds Continual evaluation of headroom and borrowing inability to meet short-term working capital needs and, therefore, to execute our long-term strategic plans Committed debt facilities diversity of institution, subsidiary and geography of borrowings tax Changes to tax laws and regulations in any of the markets in which we operate negative impact on the group’s effective tax rate Costly compliance requirements Close observation of any intended or proposed changes to tax rules, both in the UK and in other key countries where the group operates 40 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 sUstainaBiLity sUstainaBiLity remains an integraL part of oUr approaCh to BUsiness 41 Hikma PHarmaceuticals Plc / annual rePort 2012sUstainaBiLity responsiBiLty we aim to improve Lives By providing patients with Better aCCess to high qUaLity, affordaBLe mediCines in Key ther apeUtiC areas The table lists some examples of key initiatives in 2012 across our major Corporate responsibility impact areas and links these initiatives to our strategic goals. 2012 highLights addressing major heaLth issUes patients peopLe STrENgTHENINg OUr LEADINg POSITION IN THE MENA rEgION supported nationwide initiatives in jordan, including the national strategy to Combat Chronic diseases DEvELOP OUr gLOBAL PrODUCT rANgE IN grOwINg THErAPEUTIC ArEAS introduced innovative medicines, including Lutrate® one month from gp pharm for advanced prostate cancer, and Binosto®, the first buffered solution osteoporosis treatment, from effrx engaged pharmacovigilance (pv) consultants to review our pv systems in the mena, eU and Us introduced the first locally produced oncology generic, Cemivil® (imatinib), into the formulary of jordan’s King hussein Cancer Center (KhCC) ExTEND OUr rEACH AND DIvErSITy AS A PArTNEr Of CHOICE IN THE MENA rEgION INCrEASE THE SCALE Of OUr SPECIALITy INjECTABLES BUSINESS LEvErAgE OUr ExPErTISE AND CAPACITy IN THE US MArkET BUILD OUr wOrLD-CLASS MANUfACTUrINg AND API SOUrCINg CAPABILITIES supported the mena chapter partnered with genepharm Collaborated with the susan expanded our chemical plant of the global fund to fight aids, in greece for Bicalutamide for the Komen for the Cure foundation in jordan to support the production tuberculosis and malaria treatment of prostate cancer in the mid-south to support of strategic oncology apis breast cancer research partnered with ameriCares to supply medicines to syria received fda approval for phenylephrine hCl injection and argatroban injection – differentiated products for our Us portfolio addressed critical supply shortages in the Us market maintained high quality standards at our Us fda approved facilities through operational improvements in jordan and saudi arabia, which and capital investment in our both passed recent fda inspections Us and portuguese manufacturing facilities Launched leadership training programme for middle managers with the american University of Beirut (aUB) raised awareness amongst employees on key health issues such as obesity, breast cancer and heart disease active member of the global Completed more than 650 smokefree partnership, and leader employee training hours at of smokefree initiatives in jordan. our Cherry hill injectables hikma has been smokefree manufacturing facility since 1994 supported employees impacted by hurricane sandy and renewed ohsas 18001, the employee health and safety participated in wider relief efforts certification CommUnity set corporate responsibility standard in mena through Cr mapping research with universities sponsored local events to raise awareness of diabetes and obesity, including blood pressure and glucose testing active participant in the world economic forum, influencing mena and global healthcare policies supported children with serious illnesses through the collection and recycling of soda and juice cans recognised by the senator of new jersey, Usa as a “stellar example of fruitful partnerships between business and colleges” honoured by Libyan health ministry for medical donations and community support environment renewed iso 14001 certification in egypt and received the iso 9001 certificate for quality management renewed iso 14001 and successfully completed a surveillance audit at our main plant in jordan Collaborated with international initiated renewable energy organisations on the implemention project at our injectables facility Collaborated with global entity to apply optimal ways to save energy installed energy efficient and low emission machinery at our facilities in jordan of iso 26000, the social responsibility certification, in the mena in portugal, using solar power to drive energy savings BUsiness ethiCs received ifC Client Leadership award for benefit to patient health and sustainability practices Updated Code of Conduct with greater focus on integrity implemented new social media policy to unify image as trusted and responsible company on virtual platforms awarded healthcare Company Launched speak-up line in of 2012 and nominated for Best investor Communications Us and europe maintained commitment not to undertake in-house animal testing and uphold the 3rs – reduce, refine and replace 42 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 2012 highLights addressing major heaLth issUes in jordan, including the national strategy to Combat Chronic diseases STrENgTHENINg OUr LEADINg POSITION IN THE MENA rEgION DEvELOP OUr gLOBAL PrODUCT rANgE IN grOwINg THErAPEUTIC ArEAS supported nationwide initiatives introduced innovative medicines, including Lutrate® one month from gp pharm for advanced prostate cancer, and Binosto®, the first buffered solution osteoporosis treatment, from effrx ExTEND OUr rEACH AND DIvErSITy AS A PArTNEr Of CHOICE IN THE MENA rEgION INCrEASE THE SCALE Of OUr SPECIALITy INjECTABLES BUSINESS LEvErAgE OUr ExPErTISE AND CAPACITy IN THE US MArkET BUILD OUr wOrLD-CLASS MANUfACTUrINg AND API SOUrCINg CAPABILITIES supported the mena chapter of the global fund to fight aids, tuberculosis and malaria partnered with genepharm in greece for Bicalutamide for the treatment of prostate cancer Collaborated with the susan Komen for the Cure foundation in the mid-south to support breast cancer research expanded our chemical plant in jordan to support the production of strategic oncology apis patients peopLe engaged pharmacovigilance (pv) consultants to review our pv systems in the mena, eU and Us introduced the first locally produced oncology generic, Cemivil® (imatinib), into the formulary of jordan’s King hussein Cancer Center (KhCC) partnered with ameriCares to supply medicines to syria received fda approval for phenylephrine hCl injection and argatroban injection – differentiated products for our Us portfolio addressed critical supply shortages in the Us market through operational improvements and capital investment in our Us and portuguese manufacturing facilities maintained high quality standards at our Us fda approved facilities in jordan and saudi arabia, which both passed recent fda inspections Launched leadership training raised awareness amongst programme for middle managers employees on key health issues with the american University such as obesity, breast cancer of Beirut (aUB) and heart disease active member of the global smokefree partnership, and leader of smokefree initiatives in jordan. hikma has been smokefree since 1994 Completed more than 650 employee training hours at our Cherry hill injectables manufacturing facility supported employees impacted by hurricane sandy and participated in wider relief efforts renewed ohsas 18001, the employee health and safety certification CommUnity set corporate responsibility standard in mena through Cr mapping research with universities sponsored local events to raise awareness of diabetes and obesity, including blood pressure and glucose testing active participant in the world economic forum, influencing mena and global healthcare policies supported children with serious illnesses through the collection and recycling of soda and juice cans recognised by the senator of new jersey, Usa as a “stellar example of fruitful partnerships between business and colleges” honoured by Libyan health ministry for medical donations and community support environment renewed iso 14001 certification renewed iso 14001 and in egypt and received the iso 9001 successfully completed a surveillance certificate for quality management audit at our main plant in jordan Collaborated with international organisations on the implemention of iso 26000, the social responsibility certification, in the mena initiated renewable energy project at our injectables facility in portugal, using solar power to drive energy savings Collaborated with global entity to apply optimal ways to save energy installed energy efficient and low emission machinery at our facilities in jordan BUsiness ethiCs received ifC Client Leadership Updated Code of Conduct award for benefit to patient health with greater focus on integrity and sustainability practices implemented new social media policy to unify image as trusted and responsible company on virtual platforms awarded healthcare Company of 2012 and nominated for Best investor Communications Launched speak-up line in Us and europe maintained commitment not to undertake in-house animal testing and uphold the 3rs – reduce, refine and replace 43 Hikma PHarmaceuticals Plc / annual rePort 2012sUstainaBiLity sUstainaBiLity report addressing major heaLth issUes As a leading pharmaceutical company with widespread operations, global manufacturing facilities and a network of international partners, we are in a strong position to aid in addressing major health issues in our key markets. In the MENA, where we generate more than 60% of group sales, demographics are changing rapidly, creating new patient requirements and challenging governments and the private sector to provide relevant and accessible treatments. we are continuously working, through our own r&D and through alliances and partnerships, to bring patients in the region innovative medicines and high quality, affordable generic alternatives that meet their needs across a range of therapeutic areas. A key driver of our performance in the MENA region this year was our focus on the promotion of cardiovascular and diabetes products. The incidence of heart disease and diabetes has increased significantly in recent years and so has the number of molecules in our portfolio in these therapeutic areas. In 2012, we also strengthened our oncology pipeline. Through a licensing and supply agreement with gP Pharm, we added Lutrate® 1 month, which prevents tumour growth in patients with advanced prostate cancer. This critical medication will help to address the issue of prostate cancer among men, which is expected to increase as the MENA faces a progressively ageing population. In 2012, we continued to work with global organisations to find cures for the world’s toughest ailments. As in previous years, we contributed to the global fund to fight AIDS, Tuberculosis and Malaria. we supported the global fund’s MENA chapter and collaborated with the public sector in jordan on the National Strategy to Combat Chronic Diseases, providing full support for awareness and educational initiatives focused on chronic diseases such as diabetes. In the US, we worked with the Susan komen for the Cure foundation, the most widely known breast cancer organisation in the United States, in a “race for the Cure” campaign, raising money to fund the education, prevention and research of breast cancer in the Mid-South. This year, we hosted a team of fellows from Massachusetts Institute of Technology (MIT) Sloan Business School and the International finance Corporation (IfC) that were investigating how companies in emerging markets are investing in sustainability and how they are achieving business success. Moreover, Hikma was awarded the IfC Client Leadership Award, which recognised Hikma for its success in helping to treat patients in more than 50 countries through providing vital affordable medicines. It was also recognised for its commitment to local communities, for its support of female workers, for its commitment to applying high environmental standards in production and for its commitment to education and training, especially through internships for young people. patients The well-being of patients is at the heart of everything we do. As we focus on providing high quality, safe and effective medicines at affordable prices, we must implement best practices in our manufacturing processes and adhere to international good Manufacturing Practices (gMPs). In 2012, our jordan, Saudi Arabia and Cherry Hill facilities were successfully inspected by the US fDA. Cherry Hill also passed its MHrA inspection, a testament to our ongoing commitment to patient safety and high quality standards. During the year, we continued our efforts to provide information and patient education in our core therapeutic categories. At conferences held throughout the year in the areas of anti-infectives, oncology, CNS, cardiovascular and diabetes, we brought doctors and specialists together to discuss the latest advancements and treatments in these critical therapeutic areas. These forums help to educate doctors and improve their advice to patients. As in previous years, we also worked at the patient level, through public awareness programmes and events, to raise awareness of increasingly common health risks like obesity and diabetes. raising public awareness about preventing and curing coronary problems took place in collaboration with the world Heart federation in a global world Heart Day across the group. we also sponsored a campaign with jordan Breast Cancer Program for educating people about breast cancer, early detection and encouraging women aged 40 years and older to have mammograms. 44 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 wOrLD HEArT DAy BrEAST CANCEr PrOgrAM pharmacovigilance Our Medical Affairs department is actively engaged in Pharmacovigilance (“Pv”) practices, relating to the detection, assessment, understanding and prevention of adverse effects or any other drug-related problems. In 2012, we engaged Pv consultants to review our Pv systems in the US, EU and MENA regions. As we execute the recommendations that came out of this review, we expect to drive better harmonization of Pv efforts across all regions. In february 2012, we sponsored the Dubai MENA Drug Safety Summit in Dubai, United Arab Emirates. In December, a Pv group meeting was held in Amman that brought together experts from the Egyptian, jordanian and Tunisian health authorities and national pharmacovigilance centres. This workshop investigated the legislation and guidelines regarding pharmacovigilance and drug safety in the MENA and how they are being applied. The Summit and the group meeting provided opportunities for our Pv team to build stronger relationships with MENA health authorities, to investigate the potential for collaboration and to creating a channel for the advocacy of more harmonized pharmaceutical regulations. Clinical research In the MENA, our Medical Affairs team undertake clinical research activities and work with medical institutions, regulatory authorities and clinical research organisations (CrOs) to advance and improve healthcare in the region. This year, we partnered with Ergomed to conduct the first clinical study in jordan for one of our key anti-cancer products, Cemivil® (imatinib). In 2012, Cemivil® was the first locally produced oncology generic product to be added to the formulary of the jordan king Hussein Cancer Center (“kHCC”). furthermore, we obtained approval of the Cemivil® study protocol, by the Clinical Trial Committee of the jordan food and Drug Administration (“jfDA”), to be initiated in the jordan University Hospital and kHCC. Our decision to work with Ergomed stems from a strong commitment to continuous medical advancement through the use of clinical studies, especially in the field of oncology, and we have plans to extend this study to other MENA markets. 45 Hikma PHarmaceuticals Plc / annual rePort 2012sUstainaBiLity report Continued security of supply Maintaining a good supply of our products remains a key priority for us, particularly in the US market, which has suffered from acute supply shortages of injectable products in recent years. In 2012, we increased production at both our Cherry Hill and Portugal injectable facilities in order to meet market demand for our products and address market shortages. we also worked to alleviate supply shortages in disrupted MENA markets. Through medicinal donations, we worked to bring much needed medicines to areas of crisis. In-kind medicinal donations were donated to Libya, gaza and Syria. medical information we endeavour to provide our patients with accurate, comprehensive and relevant medical information on our products. These practices ensure the ethical and credible promotion of our products. Our responsibility covers delivering scientific knowledge tailored to the sales representatives’ needs. A key step toward the coordination and harmonization of medical and product information this year was the consolidation of a global pharmaceutical product inventory, containing the generic and Hikma brand names, marketing authorisation holders, manufacturing sites and countries where products are registered. The product inventory information is an essential tool for patients and physicians. Medical information efforts also comprised a number of clinical and non-clinical overviews and summaries that were developed to fulfil a new requirement in registration applications in several countries including Algeria, Azerbaijan, jordan, kazakhstan, Morocco, Saudi Arabia and Tunisia. peopLe health and safety Hikma is committed to its employees’ health and safety. we comply with workplace safety standards – OHSAS 18001 standards or their equivalents – in our manufacturing facilities. Mandatory occupational training has been conducted for all manufacturing operators. To sustain a healthy work environment for our people, Hikma is a member of the global Smokefree Partnership (gSP), promoting effective smoke-free environments since 1994. This year, Hikma played an active role in promoting smoke-free environments in the private sector by inviting major jordanian businesses to a session with the Cancer Control Office of the king Hussein Cancer Center to discuss the dangers of smoking in the workplace. As a follow up to this event, an informal coalition of smokefree jordanian businesses was established. During the year, we conducted our annual employee welfare week, the “you Are Hikma” campaign. A global initiative staged at Hikma locations worldwide, “you Are Hikma” celebrates the Company’s core values by raising awareness among its staff of health, safety and environmental issues. It emphasises personal empowerment, encouraging responsible corporate citizenship among Hikma staff and improving their well being and quality of life through positive and valuable educational activities. 46 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 rAISINg AwArENESS DIABETES OBESITy we are an equal opportunity employer, promoting diversity and inclusion. Hikma employs more than 6,500 employees, 83% of which are in the MENA countries, many of which have high unemployment. A quarter of our employees are female, which is double the regional average in the MENA. females also make up 75% of Portugal’s workforce, and they occupy strategic top managerial positions across the group. we invest in the communities in which we are located, hiring local talent and developing the skills of the community’s youth. 60% of employees were below the age of 30 in 2012. training, education and performance measurement Through collaboration with Hr, Cr responsibilities have been officially added to Cr champions’ kPIs. These responsibilities now represent 30% of their overall job responsibilities. we now have 15 champions across the group, following the appointment of new champions in Sudan and Tunisia. These champions drive the implementation of our group-wide Cr strategy in Hikma’s facilities worldwide. we held our annual Hr and Cr training workshops for employees globally in October to touch base on main issues and introduce the latest global trends in sustainable development and further train our Cr champions in grI. In 2012, we launched a leadership training programme for middle managers with the American University of Beirut (AUB). The training provides managers with the knowledge and skills needed for current and future positions at Hikma, thus ensuring management succession planning. we have completed the training for 41 of our managers this year and have already started to see positive results. west-ward Pharmaceuticals, our subsidiary in the US, was recognised by the US Senator of New jersey as a “stellar example of fruitful partnerships between business and colleges” due to our continuous collaboration with Camden County College for the training of more than 300 employees. we also established a dedicated IT Training Center that is preparing training courses for our corporate teams on a range of IT needs, from training in Hikma’s main production systems to human resources and customer relationship management systems and project management (PMP). responsible sales are essential and are achieved by investing in Hikma’s sales and marketing teams. we continuously strive to strengthen the capabilities of our sales and marketing team through training. Such trainings aim at ensuring the communication of evidence-based, well supported and balanced messages to HCPs. Training covers our sales and marketing teams in the entire geographical locations of Hikma’s entities. equal opportunities we believe in the equal treatment of employees, respect for human rights, and a workplace free from discrimination, favouritism or inequality in any form. At Hikma, it is a priority that employees are comfortable in their work environment. we have an open door policy that ensures that grievances are heard and that actions are taken. Throughout the year, rotational meetings were conducted by the CEO with various departments to better understand potential issues and concerns. 47 Hikma PHarmaceuticals Plc / annual rePort 2012 sUstainaBiLity report Continued In Libya, Hikma was honoured by the Libyan Ministry of Health in july 2012 for timely medical donations worth USD 500,000 and continuous community related initiatives. In the US, our team organised and hosted a week long on-site volunteer fair in june. Employees took the time to explore opportunities for community service with different local organisations. In October our US employees took part in the Leukemia and Lymphoma Society’s “Light the Night walk” event and collectively raised over USD 10,000 for the society. In addition to each walker raising money, each facility ran raffles, bake sales, and various other fundraisers. Hurricane Sandy left many along the New jersey shore line and around our Eatontown facility with nothing. Monetary donations, toys, clothes and gift cards were collected from our other US facilities to fund relief efforts and support victims of the hurricane. Also in the US, the Annual Thanksgiving food Drive was held to benefit the foodBank of Monmouth and Ocean Counties in a “Neighbors Helping Neighbors” campaign. This foodbank supports over 200 food pantries, soup kitchens, and children’s meal programmes. CommUnity Through community engagement and health awareness campaigns we are investing in the local communities in which we operate. we held our global volunteering Day in April for the fifth consecutive year. This year, volunteering activities included donating blood, refurbishing orphanages and participating in public awareness campaigns. recognition was given to active volunteers who participate every year, to encourage employee engagement in the community. Our businesses were also active throughout the year in supporting their communities. In Egypt volunteers hosted around 80 children from a local orphanage for a day full of music, puppet-shows and educational games. In jordan, we renewed our partnership with the UNrwA in sponsoring 30,000 underprivileged children to enter the Children’s Museum, an interactive educational museum for children of all ages. 48 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 In 2011, we were invited to collaborate with the International Standards Organization (ISO), the jordan Standards and Metrology Organization (jSMO) and the Swedish International Development Cooperation Agency (SIDA) on a project about the use and implementation of the ISO 26000 certification for Social responsibility within the MENA. In 2012, we took part in a related developing country workshop, where we presented our experiences and joined a panel on social responsibility best practices. environment Across the group, we aim to minimise our environmental impact by integrating environmental policies and activities into our day-to-day business. New machinery installed in two of our facilities in jordan will help lower energy consumption and reduce carbon emissions. while providing a clear environmental benefit, this project will also drive cost savings, through reductions in electric, fuel and water consumption. we are increasingly working to monitor our environmental impact. In 2012, an ISO 14001 surveillance audit was conducted at the main plant in jordan by SgS jordan auditors. This was successfully completed, resulting in re-certification. ISO 14001 certification was also renewed in our plant in Egypt. This facility was also granted the ISO 9001 certificate for quality management, valid until 2015. Hikma partnered with Self Energy and Nakhil jordanian Investment and Trading Company to explore optimal ways to reduce energy costs, carbon emissions and our reliance on electricity. The project included an energy and power utilisation assessment of our facilities in six markets, including jordan, Egypt, Saudi Arabia and Algeria. we also continued to monitor our performance against environmental key Performance Indicators (kPIs). These kPIs are aligned with the Carbon Disclosure Project (CDP) and the global reporting Initiative (grI) reporting guidelines, which we have been reporting against for three years. Carbon emissions were analysed in our operations and this year we supplied information on the six greenhouse gases. Initiatives have been put in place to promote the recycling of old computers, printers and furniture. These are redistributed across business units or donated externally to charitable organisations. Since desertification is an issue in the MENA region, we try to focus on opportunities where we can enhance the local natural environment. This year we hosted an Arbour Day event, encouraging the local community to plant trees and become aware of their natural habitat. we also collaborated with several organisations that promote planting trees. 49 Hikma PHarmaceuticals Plc / annual rePort 2012sUstainaBiLity report Continued “ Upholding the highest standards of ethical conduct is one of our core principles. We are continuously working to ensure all aspects of our global operations are carried out with integrity and reliability. We remain committed to our principle of combating corruption.” animal welfare The welfare of animals is an ethical and essential part of our responsibility. good animal welfare has become a worldwide accepted practice and requirement for pharmaceutical and manufacturing standards as a whole. we are committed to safe guarding the welfare of animals in the choices that it makes. we do not conduct any in-house testing and, where required in a few specific circumstances, the company requests external organisations to conduct animal testing on our behalf. No animal testing was conducted on our behalf in 2012. A specific animal testing policy formalises our activities, and the following is an excerpt from the policy: “where animal testing is required, Hikma is committed to the principles of the 3r research foundation – reduce, refine and replace… The 3rs of animal testing (from the Swiss-based 3r research foundation) are: 3 replace: Use alternatives to animal testing whenever possible 3 reduce: Improve existing methods so that fewer laboratory animals are required 3 refine: refine existing methods so that animals are exposed to as little discomfort and stress as possible.” BUsiness ethiCs Our business ethics are central to the way we do our business. As a leading healthcare company, we strive to overcome today’s social and economic challenges by staying focused on upholding the highest ethical conduct in everything we do. human rights Continuing with our ethical journey, we renewed our membership in UN global Compact in December 2012, renewing our commitment to aligning operations and strategies with the ten universally accepted principles in terms of human rights, labour, environment and anti-corruption. In doing so we have demonstrated how we respect and protect internationally proclaimed human rights, and are not complicit in matters of human rights abuses, child labour, forced and compulsory labour and take proactive measures to eliminate them. for further reading, the Communication On Progress report is available on www.hikma.com and www.unglobalcompact.org. Our updated Code of Conduct was published in the fourth quarter of 2012. The Code and its supporting policies require that our employees uphold the highest ethical standards in their employment and reflect our commitment to human rights. The Code of Conduct was sent out across the group and has been translated into the five main languages of our locations: English, Arabic, Portuguese, french and german and it is available on our website. 50 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 Board oversight – Compliance responsibility and ethics Committee (CreC) The CrEC oversees our ethical business conduct. within its oversight fall the functions of Corporate Compliance and Corporate responsibility. It is through the Compliance framework adopted by CrEC that the Code of Conduct has been updated and launched. for further details of the work of the CrEC in relation to corporate compliance, the CrEC report is available on pages 79 to 81. transparency measures we are dedicated to sustain anti-bribery and anti-corruption mechanisms across its business. The CrEC and Compliance department along with the Corporate responsibility division have joined efforts to maintain transparent and stringent measures against corruption and bribery. The updated Code of Conduct obliges employees to abide by transparency measures and has greater focus on integrity. At Hikma, we conduct our business in adherence to principles of quality, integrity, transparency, dignity and respect for all. Our image as a responsible and trusted organisation is important to us. Communication standards were formalised in 2012 to maintain a unified image across our platforms, which encompass the virtual online platform as well. An extensive social media policy was distributed to our employees worldwide and has become part of their employment contract to ensure responsible and ethical participation in both Hikma endorsed and other social media platforms. we also created formal Hikma accounts in the main and relevant social media outlets. we welcome external stakeholder engagement and are transparent in our business activities. Our sense of responsibility and transparency was displayed in our cooperation and openly responding to ethical audit organisations, which in turn helped our ethical investment opportunities making Hikma a more attractive prospect for “green” investors. As a founding member of Partnering Against Corruption Initiative (PACI), an initiative created by the world Economic forum, we continued to work with businesses around the globe to combat bribery and corruption, as this initiative requires a commitment to zero tolerance of bribery in all its forms. suppliers The supply chain process at our manufacturing facilities chooses significant suppliers that uphold ethical practices and do not break with internationally proclaimed integrity measures. Our suppliers follow good Manufacturing Practices (gMP) and our significant suppliers are ISO 14001 and OHSAS 18001 certified or their equivalent. recognition recognition was received in 2012 for our excellence in implementing ethical standards, transparency measures and high human rights and labour standards in our facilities in all our locations. we were nominated for “Best Investor Communications Award” and were selected for the International finance Corporation (IfC) Award for being an exemplary company in terms of Cr, female employment, community efforts and youth employment. we were also chosen for the Arabian Business Healthcare company of 2012 Award for our leading position in the MENA. In April 2012, the Cr Department of our Saudi Arabian facility, jPI, was registered in the Chamber of Commerce in riyadh as one of the pioneers in this field. 51 Hikma PHarmaceuticals Plc / annual rePort 2012BUiLding on oUr worLd-CLass manUfaCtUring and api soUrCing CapaBiLities improving Lives... ...THrOUgH THE DEvELOPMENT Of A HIgH qUALITy, SECUrE SUPPLy CHAIN In 2012, we invested in developing our in-house Active Pharmaceutical Ingredient (“API”) sourcing capabilities by expanding our fDA approved chemical plant in jordan, we are developing and manufacturing API for certain key strategic products, particularly where there are a limited number of API suppliers in the market or where the API is very expensive or difficult to manufacture. This facility also allows us to develop and manufacture API at an earlier stage in the formulation process, accelerating the speed at which we are able to bring new products to market. Today, this facility is helping us be vertically integrated on key products like enalaprilat, where we produce the API in jordan, manufacture the product in Portugal and sell it in the US market. The expansion of this plant means we can accommodate new lines for manufacturing APIs. This will enable us, for example, to vertically integrate production for certain oncology products in MENA, such as zoledronic acid. we will continue exploring additional opportunities to leverage our API facilities in the production of products across our therapeutic areas. This approach to ensuring a high quality, secure supply chain is helping us to improve lives across our markets. HEALTHCArE ExPENDITUrE (% Of gDP)1 LIfE ExPECTANCy (yEArS)1 8% 80 COUNTry jordan POPULATION SIZE (MILLION)1 6.5 1 CIA – The world factbook 52 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 53 Hikma PHarmaceuticals Plc / annual rePort 2012Corporate governanCe a strong approaCh to Corporate governanCe 54 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 55 Hikma PHarmaceuticals Plc / annual rePort 2012aBoUt this governanCe report wHAT HAvE wE IMPrOvED? we have continued to develop our approach to reporting during the year in order to increase stakeholder understanding of the way our business is governed. we hope this new governance report helps you understand the way we control and develop our business. fOr MOrE INfOrMATION, vISIT OUr wEBSITE www.hiKma.Com 4.1 governanCe report 4.2 Committee reports governanCe in hiKma 58 aUdit 72 58 / message from oUr Chairman 72 / Letter from the Chairman 59 / highLights 59 / priorities in 2013 73 / highLights 73 / memBership and attendanCe 59 / governanCe prinCipLes 59 / diaLogUe with staKehoLders 73 / responsiBiLities 73 / terms of referenCe oUr Board 60 / oUr Board 63 / senior management 67 / roLes and responsiBiLities 67 / Board Composition 67 / Chairman and Chief exeCUtive 68 / independenCe 74 / risK 60 74 / internaL aUdit 75 / internaL ControL 75 / externaL aUdit nomination 76 76 / Letter from the Chairman 77 / highLights 77 / memBership and attendanCe effeCtiveness 68 77 / responsiBiLities 68 / sKiLLs and experienCe 68 / hiKma KnowLedge 68 / training 68 / evaLUation meetings 69 69 / information fLow 69 / Company seCretary 69 / non-exeCUtives 69 / attendanCe 77 / sUCCession 77 / re-eLeCtion 77 / Composition 78 / diversity 78 / Board diversity CompLianCe, r esponsiBiLity and ethiCs 79 79 / Letter from the Chairman 80 / highLights 80 / memBership and attendanCe direCtors 70 80 / responsiBiLities 70 / terms of appointment 70 / externaL Commitments 70 / dUties and Commitment 70 / remUneration 70 / indemnities and insUranCe deLegation of aUthority 71 80 / anti-BriBery and anti- CorrUption 80 / CompLianCe arChiteCtUre 81 / “aBC” risK assessment 81 / Code of CondUCt 81 / aBC poLiCies and proCedUres 81 / training 81 / speaK-Up 71 / matters reserved to the Board 81 / Corporate responsiBiLity 71 / introdUCtion to the Committees 71 / reporting to the Board r emU ner ation 82 82 / see remUneration governanCe whiCh foLLows this seCtion 56 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 4.3 remUneration report 4.4 direCtors’ report remUneration governanCe 82 exeCUtive impLementation 93 direCtors’ report 104 104 / operationaL 105 / finanCiaL 106 / direCtors 106 / eqUity 109 / responsiBiLities 82 / Letter from the Chairman 93 / saLary 94 / pension 95 / Benefits 95 / BonUs 96 / share awards 100 / non-exeCUtive fees 101 / share ownership totaL 102 102 / totaL Compensation 83 / highLights 83 / memBership and attendanCe 84 / remUneration and performanCe sUmmary 86 / remUneration poLiCy sUmmary 87 / remUneration poLiCy enhanCements 87 / responsiBiLities 87 / adviCe and sUpport poLiCy 88 88 / Core prinCipLes 88 / exeCUtive poLiCy 92 / non-exeCUtive 93 / poLiCy for 2013 A U D I T C OMMITTEE T N E M E G G N I T R O P E R A N A K M RIS CSR L A N R E T N L O R T N O C I T I D U A E E C AT N A R N O R P E R V O O C G IN TER N AL A U DIT R E M U N E P O L I C Y R A T I O N EXECUTIVE AND SENIOR EXECUTIVE REMUNERATION R E M U N E R A T I O N C O M M IT T E E ETHICS THE BOARD COMMITTEES S S E G R I T Y B U S I N E I N T SPEA K-U P PERFORM ANCE S H A R E P L A N S S U C C E S SIO N T I N R A D I U N I C N T I G O N A N D I A P P O N T M E N T S NOMINATION C O M M I T T E E S C I H T E D N A Y T I L I B I S N O P S E R , E C N A I L P M O C 57 Hikma PHarmaceuticals Plc / annual rePort 2012 4.1 governanCe report governanCe in hiKma message from oUr Chairman 4.1 gOvErNANCE IN HIkMA CONTENTS 58 / Message from our Chairman 59 / Highlights of 2012 59 / Priorities in 2013 59 / governance principles 59 / Dialogue with stakeholders 58 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 dear shareholders and stakeholders when you look at our Hikma emblem, you will see two words. These are “quality” and “Hikma”, which means “wisdom”. I chose these two words because I wanted them to underpin everything that we do. Being wise and having high standards are, in essence, what good governance is all about. It is not about rushing or planning for the short-term, it is about making sure that the decisions we take today will benefit and keep Hikma strong in the long-term. Our approach to governance is focused on our people, as it is our people who make the decisions and take actions that are representative of Hikma. we are careful when recruiting to select people with the right moral and ethical values, as well as technical skills. we invest in our people with the aim of creating long-term partnerships. At the Board, we are very aware that our duties include communicating our values across the group, empowering our people to fulfil our mission and monitoring the outcomes to ensure that they are in line with our high expectations. As Hikma has expanded throughout the MENA region, we have become recognised as a thought leader and governance best practice operator in the jurisdictions in which we operate. Hikma takes pride in taking this leading role as well as in learning from others in order to continually improve our performance. I have set out below some of our key governance achievements of the past year and some of our aims for the coming year. I continue to be impressed with the value the Board adds to the performance of our business and have been pleased with the improvements that have increased our effectiveness during the year. we believe that it is important not only to comply with the rules of the Uk Corporate governance Code, but also its spirit, and to explain clearly if there are circumstances where Hikma’s approach on a specific issue is different. In 2012 we complied fully with the governance requirements applicable to Hikma. samih darwazah Chairman THE BOARD’S TIME 5 1 1. Financial 2. Operational developments 3. Strategy 2 4 4. Corporate governance 5. Training 3 19% 15% 40% 19% 7% highLights of 2012 XX we enhanced processes for reviewing strategy, with the appointment of a vice President for Strategy and increased use of the Executive Committee XX we developed our approach to reporting in order to increase stakeholder understanding of the way our business is governed XX we provided input into several governance and reporting consultations of the government and other bodies XX we sought to improve corporate communication and transparency on executive pay by changing the format of our remuneration report and clearly separating past pay and future policy XX we appointed a new Company Secretary with a sole focus on governance XX we continued to enhance our externally facilitated board evaluation XX we further developed our Board and senior management succession which is detailed in a new succession manual XX we further developed management level training on Corporate governance and Business Integrity issues XX we continued to develop the Board Corporate governance awareness through Corporate governance presentations and updates on matter relevant to the Board priorities in 2013 XX Continue to contribute to governance practice and thought leadership throughout our jurisdictions of operation XX further develop our Board and senior management succession planning arrangements XX further advanced our commitment to business integrity through the implementation of relevant procedures, policies and training XX Develop further our externally moderated Board evaluation processes governance principles The Board is committed to meeting the standards of good corporate governance set out in the Uk Corporate governance Code (the “Code”) and the Corporate governance Principles set out in the Markets Law of the Dubai financial Services Authority (the “Markets Law”). This report on pages 54 to 109 describes how the Board applied the Corporate governance Principles during the year under review. Throughout the year and up until the date of this report Hikma was in full compliance with the Corporate governance Principles. dialogue with stakeholders Hikma is committed to communicating with shareholders and stakeholders in a clear and open manner. If there are matters on which additional explanation is required, we are always happy to discuss them. The Chairman, Senior Independent Director and Committee Chairmen remain open for discussion on matters under their areas of responsibility, either through contacting Hikma or at the Annual general Meeting (“AGM”). Each Committee has provided shareholders with a separate report on their activities during the year. Ongoing communication with shareholders is a high priority. Hikma 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-to-one meetings, investor days, conference calls and presentations at investor conferences. The Board receives regular updates on investor relations issues, including feedback from analysts. In addition, Hikma makes formal presentations at the time of its annual and interim results which are webcast and disseminated on Hikma’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 Hikma’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. Hikma maintains a website which is updated regularly. Additionally, Hikma continues to communicate with the market in respect of the group’s performance and prospects through the release of appropriate press announcements and other updates. 59 Hikma PHarmaceuticals Plc / annual rePort 20124.1 governanCe report oUr Board samih darwazah Non-Executive Chairman said darwazah Chief Executive Officer mazen darwazah Executive Vice Chairman, CEO of MENA Age: 82 Age: 55 Age: 54 Appointed: 8 September 2005 Appointed: 1 july 2007 Appointed: 8 September 2005 joined Hikma: 1977 Nationality: jordanian joined Hikma: 1981 Nationality: jordanian joined Hikma: 1985 Nationality: jordanian Skills and experience: Samih Darwazah founded Hikma Pharmaceuticals in jordan in 1977 and listed Hikma on the London Stock Exchange in 2005. Samih was Chairman and Chief Executive of Hikma until 2007, when he relinquished his executive responsibilities. In the same year, Samih won Ernst and young’s Middle East Entrepreneur of the year Award. A fulbright scholar, Samih holds a Masters Degree in Industrial Pharmacy from the St. Louis College of Pharmacy, Missouri which he obtained in 1964 and an honorary Doctor of Science degree which he was awarded in 2010. He obtained his BSc Degree in Pharmacy from the American University of Beirut (AUB) in 1954. In 2012, AUB awarded Samih the “Distinguished Alumnus Award” for his accomplishments in the international healthcare industry. Samih served as Minister of Energy and Mineral resources in jordan between 1995 and 1996. He also founded the jordan Exporters’ Association and served as a member of the Senate of the Hashemite kingdom of jordan. Samih was employed at Eli Lilly from 1964 to 1976. Other appointments: Samih is a member of the generics Advisory Board of Pictet, the Swiss Bank’s fund. Skills and experience: Said was appointed Chief Executive Officer in july 2007. Said was Chairman and Chief Executive of the Hikma group holding company from 1994 to 2003 and Minister of Health for the Hashemite kingdom of jordan from 2003 to 2006. During his thirty two years at Hikma, Said has undertaken several executive roles which have provided him with extensive experience in each functional area of Hikma’s global generic pharmaceuticals business and in the broader strategic leadership of an international entrepreneurial organisation. Said has 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. Under Said’s leadership, Hikma’s facilities in the USA, jordan and Portugal received US fDA approval, the leading international pharmaceutical regulatory standard. Said has a degree in industrial engineering from Purdue University and an MBA from INSEAD. Other appointments: Said is founder of the Healthcare Accreditation Council of jordan. Said is Chairman of the Dead Sea Touristic and real Estate Investments. He is a member of the Central Bank of jordan Board. He is a Director of Endeavour jordan, a charitable organization that assists in the development of entrepreneurs, and a Trustee of jordan river foundation, a charitable organization that aims to empower jordanian society. Said is a Trustee at the American University of Beirut. Skills and experience: Mazen was appointed group Executive vice- Chairman and MENA CEO in 2005. During his 28 years’ service at Hikma, he has held an extensive range of positions within the group starting as a medical representative and working in different capacities including Chairman and CEO of Hikma Pharmaceuticals Limited, a major group operational and holding company. As Chief Executive of MENA, Mazen is leading the geographical expansion and consolidation of Hikma in MENA region and the formation of strategic business partnerships. Mazen is the executive lead of Hikma’s corporate social responsibility and business integrity programmes. Mazen holds a BA in Business Administration from the Lebanese American University and an AMP from INSEAD. He has served as the President of the jordanian Association of Manufacturers of Pharmaceuticals and Medical Appliances. Other appointments: Mazen is a Senator of the Hashemite kingdom of jordan and the Chairman of the jordan International Insurance Company. He is vice Chairman of the Capital Bank of jordan. Mazen is also a Member of Board of Trustees of yarmouk University (jordan). He is on the advisory board for the Lebanese American University (LAU) Lebanon, and the Buck Institute for Education, San francisco. Committee membership: Nomination Committee Compliance, responsibility and Ethics Committee Corporate responsibility Committee (Chairman) 60 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 sir david rowe-ham Senior Independent Non-Executive Director ali al-husry Non-Executive Director michael ashton Independent Non-Executive Director Age: 77 Age: 55 Age: 67 Appointed: 14 October 2005 Appointed: 14 October 2005 Appointed: 14 October 2005 joined Hikma: 2005 Nationality: British joined Hikma: 1981 Nationality: jordanian joined Hikma: 2005 Nationality: Australian Skills and experience: Sir David brings to Hikma wide experience in financial matters, corporate governance, public affairs, and the development of listed companies. Sir David is a former Lord Mayor of London, and has held many senior positions in Uk financial institutions including serving as Chairman of Brewin Dolphin Holdings PLC and Arden Partners PLC. He is a past President of The Crown Agents foundation and a former regional director of Lloyds Bank plc. Skills and experience: Ali joined Hikma as director of Hikma Pharma Limited in 1981 and has held various directorships within the group. Ali brings great financial experience to the Board as well as an in-depth knowledge of the MENA region and Hikma Pharmaceuticals. Ali was a founder of The Capital Bank of jordan, which offers commercial and investment banking services, and served as Chief Executive Officer of the Bank until 2007. Skills and experience: Michael has over 30 years’ experience in the pharmaceutical industry, holding senior executive positions with Pfizer and Merck. Michael was Chief Executive Officer of SkyePharma PLC from November 1998 to March 2006 and prior to that was Chairman, President and Chief Executive Officer of faulding. He has held a number of non-executive and advisory positions across the pharmaceutical industry. Other appointments: Sir David is Chairman of Olayan Europe Ltd. Ali has a degree in Mechanical Engineering from the University of Southern California and an MBA from INSEAD. Michael has a Bachelor of Pharmacy degree from Sydney University, and his MBA degree from rutgers University, New jersey. Committee membership: Audit Committee Nomination Committee (Chairman) remuneration Committee Other appointments: Ali is Chairman of Endeavour jordan, a not for profit organisation that assists in the development of entrepreneurs and a director of the Microfund for women, which provides microfinance to low-income female entrepreneurs. Also, he is a member of the Board of Trustees of the jordan Museum. Ali is a director of the Capital Bank of jordan. Other appointments: Michael is a non-executive director at Transition Therapeutics, a therapeutics biopharmaceutical company. He is also Chairman of PuriCore plc, water-based clean technology company, and komix, a children’s educational organisation. Committee membership: Audit Committee Nomination Committee remuneration Committee (Chairman) 61 Hikma PHarmaceuticals Plc / annual rePort 2012oUr Board continued Breffni Byrne Independent Non-Executive Director dr. ronald goode Independent Non-Executive Director robert pickering Independent Non-Executive Director Age: 67 Age: 69 Age: 53 Appointed: 14 October 2005 Appointed: 12 December 2006 Appointed: 1 September 2011 joined Hikma: 2005 Nationality: Irish joined Hikma: 2006 Nationality: American joined Hikma: 2011 Nationality: British Skills and experience: Breffni is a chartered accountant with over 30 years of experience in public practice, including significant international responsibilities. Breffni served as the Managing Partner of the Audit and Business Advisory practice of Arthur Andersen in Ireland and as Director of risk Management of Andersen’s audit practice in Middle East, India, Africa and the Nordic countries. Breffni has extensive experience in financial reporting, international operations, corporate governance and general financial and commercial matters. He is a former non-executive director of Irish Life and Permanent plc. He is considered by the Board to have recent and relevant financial experience. Breffni holds a Masters degree in Economic Science from the University College, Dublin and is a Chartered Accountant. Skills and experience: ron has spent over 30 years in the international pharmaceutical industry, including roles as President of International Operations at Searle and vice President of Clinical and Scientific Affairs at Pfizer. His extensive experience includes leading companies as CEO and acting as an adviser to companies in the pharmaceutical industry. He also advises companies involved in nanotechnology and in the information technology business sectors. ron was formerly President and Chief Executive Officer of Unimed Pharmaceuticals, Inc. and exegenics Inc. He is a trustee of Thunderbird School of global Management, which is ranked by the financial Times as the premier international business school. ron has a PhD from the University of georgia and a MS and BS from the University of Memphis. Other appointments: Breffni is a non-executive director of Aviva Life and Pensions Ireland and NCB Stockbrokers, an independent financial services company. He is also a non-executive director of Tedcastles Holdings, an oil distribution company, and Cpl resources plc, a human resources company. He chairs the audit committee of all of the above companies. Committee membership: Audit Committee (Chairman) Compliance, responsibility and Ethics Committee remuneration Committee Other appointments: ron is the Chairman of The goode group, advisers to the pharmaceutical industry. ron is a director of Mercy Ships International, a medical services charity. He is a Senior Business Adviser to The kinsella group, an investment banking company. Committee membership: Audit Committee, Compliance, responsibility and Ethics Committee (Chairman), remuneration Committee Skills and experience: robert spent 23 years at Cazenove & Co., becoming the first Chief Executive of Cazenove group PLC in 2001. He subsequently served as Chief Executive of jP Morgan Cazenove, until his retirement in 2008. He has extensive experience of capital raising, mergers and acquisitions and of the relationship between quoted companies and investors. robert is a qualified solicitor with a law degree from Lincoln College, Oxford. Other appointments: robert is a non-executive director of Neptune Investment Management, a fund management company and Itau BBA International PLC, the investment bank of the Itaú Unibanco group. He is Chairman of the Trustees of Lincoln College Oxford 2027 Trust. Committee membership: Audit Committee Nomination Committee Compliance, responsibility and Ethics Committee 62 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 4.1 governanCe report senior management majda Labadi Corporate Vice President, Human Resources Khalid nabilsi Chief Financial Officer susan ringdal Vice President, Corporate Strategy and Investor Relations Appointed to current role: 2009 Appointed to current role: 2011 Appointed to current role: 2012 joined Hikma: 1985 Nationality: jordanian joined Hikma: 2001 Nationality: jordanian joined Hikma: 2005 Nationality: American Skills and experience: Susan joined Hikma as Investor relations Director, 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. In early 2012 Susan assumed responsibility for corporate strategy. Susan holds a BA in History from Cornell University and an MBA from London Business School. Skills and experience: During her 28 years at Hikma, Majda has held a variety of roles including Purchasing Manager at Hikma Pharmaceuticals Limited, Strategy Manager at Hikma Investment, general Manager of Hikma farmaceutica and vice President of Injectables. In february 2009 Majda assumed her current position as Corporate vice President, Human resources. She has been responsible for establishing a central human resource practice and leading the development of several group wide initiatives, including the grading structure, performance evaluation process and the group bonus scheme. Majda has completed the Advanced Management Program (AMP) program at INSEAD, holds a BA from the American University of Beirut and masters degree from Hochschule für Okonomie in Berlin, germany. Skills and experience: Prior to assuming his current role, khalid held several senior positions in the Hikma finance department including Corporate vice President, finance and was a key member of the IPO team in 2005. following qualification as a CPA he held a variety of roles in financial accounting, reporting and financial advisory services, and with Atlas Investment group (now AB Invest) where he was involved in mergers and acquisitions advisory services. Prior to Atlas, khalid had managed several multinational audit engagements at Arthur Andersen in Amman, jordan. As Chief financial Officer, khalid has integrated several acquisitions into the financial reporting structure, developed the group internal control framework and implemented new leverage arrangements to fund acquisitions and capital investment. khalid is a US Certified Public Accountant and has an MBA from the University of Hull. Other appointments: khalid is a founder of the jordan Association for Management Accountants and a board member of the jordan Armed forces and Security Apparatuses Credit Union. 63 Hikma PHarmaceuticals Plc / annual rePort 2012senior management continued Bassam Kanaan President and Chief Operating Officer for the MENA and EU regions michael raya President and CEO of the USA riad mishlawi EU Vice President and Global Head of Injectables Appointed to current role: 2011 Appointed to current role: 2008 Appointed to current role: 2011 joined Hikma: 2001 Nationality: jordanian joined Hikma: 1992 Nationality: American joined Hikma: 1990 Nationality: Lebanese Skills and experience: Michael joined Hikma’s US subsidiary west-ward from vitarine Pharmaceuticals where he had worked from 1984 until 1992 in various roles, including vice President, quality Control. Prior to this, Michael worked at Schering-Plough and Hoffman Laroche. At Hikma Michael has previously been responsible for all west-ward’s operations as well as quality/compliance for all worldwide Hikma facilities until his appointment as President and CEO of west-ward in 2008. Michael holds a Masters 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. Skills and experience: riad joined Hikma as a Project Engineer in the engineering department where he was involved in the construction of Hikma’s facility in Portugal. riad spent a significant period in the manufacturing operations of many Hikma sites, was general manager of Hikma Italy and became Head of Injectables Manufacturing Operations before assuming his current role. riad was an executive director at watson Pharmaceuticals from 1998 to 2005, responsible for Injectables operations. riad has led the injectables divisional through a period of rapid growth and has integrated operations into a global operation. riad has a BSc in Engineering and a Masters in Engineering and Management from george washington University. Skills and experience: Bassam started his career in 1986 with Deloitte & Touche (Los Angeles) where he held a variety of roles prior to joining PADICO in 1994 as CfO. Bassam joined Hikma as CfO in 2001 and played a leading role in preparing for Hikma’s IPO in 2005 and in its subsequent M&A activity. In february 2009, in addition to his responsibilities as CfO, Bassam assumed responsibility for Operations, Manufacturing and Supply Chain management in Europe & MENA. In january 2011, Bassam was promoted to the position of President and Chief Operating Officer for the MENA and EU regions. Bassam has led the growth, acquisition, and operational improvement strategy in the MENA region. He also implemented management restructuring initiatives aimed at strengthening local management teams which proved very effective in improving performance. Bassam is qualified as a Certified Public Accountant (CPA) and Chartered financial Analyst (CfA). Bassam has a BA from Claremont Mckenna College and an International Executive MBA from kellogg/recanati Schools of Management. Other appointments: Bassam currently holds non-executive directorships in Arab Bank. He has previously served on the Boards of Aqaba Development Co., jordan Dubai Properties, Zara Holding, Capital Bank of jordan, CEgCO and Paltel. Bassam is active in several non-profit and charity organizations and is currently a member of the Board of Trustees of the welfare Association in jordan. 64 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 henry Knowles General Counsel peter speirs Company Secretary dr ibrahim jalal Senior Corporate Vice President, Technical Affairs Appointed to current role: 2005 Appointed to current role: 2012 Appointed to current role: 2000 joined Hikma: 2005 Nationality: British joined Hikma: 2010 Nationality: British joined Hikma: 1979 Nationality: jordanian Skills and experience: Since joining Hikma, Henry has advised on all legal aspects of the group’s business, including commercial negotiations, litigation and regulatory matters as well as contributing to the execution of the group’s acquisitions. More recently Henry has been responsible for developing the group’s enhanced corporate compliance programme. Before joining Hikma, Henry worked for the international law firm, Ashurst, where he specialised in mergers & acquisitions, equity capital markets and corporate law. Henry is admitted as a solicitor in England and wales and holds an MA in Social and Political Science from Trinity College, Cambridge. Skills and experience: Peter joined Hikma as a Deputy Company Secretary in 2010. Prior to joining Hikma, he worked in the Corporate Secretariat of Barclays and Pool re, the Uk terrorism re-insurer. He also worked at Manifest, a leading Corporate governance Agency. In 2012, Peter assumed the role of Company Secretary. Peter is responsible for advising on governance at the Board and across the group, as well as the share-based compensation arrangements. Peter is a fellow of the Institute of Chartered Secretaries and Administrators and holds a law degree from University of East Anglia. Skills and experience: Ibrahim joined Hikma as Technical Director and has held a variety of roles including Corporate Technical vice President for Compliance and Senior Corporate vice President for r&D. He has played a leading role in Hikma securing fDA approval for its manufacturing units. Ibrahim holds a PhD in Pharmacy from the University of wisconsin-Madison. 65 Hikma PHarmaceuticals Plc / annual rePort 2012senior management continued fadi nassar Corporate Vice President, Active Pharmaceutical Ingredients ragheb al-shakhshir Corporate Vice President, Research & Development Appointed to current role: 2007 Appointed to current role: 2009 joined Hikma: 1988 Nationality: jordanian joined Hikma: 2000 Nationality: jordanian Skills and experience: fadi has worked in various roles within the group including Operations, Purchasing and Business Development. He was promoted to Corporate vice President, API in 2007. fadi is a Director of Hubei Haosun Pharmaceutical Co. Ltd., an Active Pharmaceutical Ingredient manufacturing company in which Hikma purchased a significant minority interest in 2011. fadi holds a BSc in Chemical Engineering from Newcastle University and an MSc in Chemical Engineering from Leeds University. fadi is also a graduate of INSEAD’s International Executive Program. Skills and experience: ragheb joined Hikma 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 in the United States. from 2003–2008 ragheb led the Hikma r&D Injectable team and from february 2009 assumed the responsibility of Corporate vice President, research & Development. ragheb has a PhD in Industrial and Physical Pharmacy from Purdue University, Masters in Engineering from the University of Massachusetts- Amherst and a BSc in Chemical Engineering from the University of wisconsin-Madison. 66 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 4.1 governanCe report Board Composition During 2012, the Board comprised nine Directors: roLes and responsiBiLities The Board is responsible for setting the strategic direction and monitoring the financial performance of the group against its targets. The Board promotes good governance within the group, and seeks to ensure that Hikma meets its responsibilities to shareholders, employees, suppliers, customers and other stakeholders. There is a formal schedule of matters reserved for the Board, which was reviewed in 2012 as part of the annual corporate governance review conducted by the Audit Committee and approved by the Board. The schedule includes approval of strategic plans, financial statements, budget, material investment decisions, acquisitions and divestments, and responsibility for the effectiveness of the group’s systems of internal control. The Board delegates its authority to the Chief Executive who is responsible for delivering Hikma’s strategic objectives. The Chief Executive is assisted in this task by the Executive Committee the members of which meet with the Chief Executive to set strategy and key objectives for their areas of responsibility. The Chief Executive reports on operational progress and corporate actions to the Board. where appropriate, the Chief Executive is assisted by internal and external advisers in presenting operational progress and key strategic decisions to the Board. INTErNAL ADvISErS ExTErNAL ADvISErS XX CEO US XX CfO XX COO MENA XX Ashurst XX Addleshaw goddard XX Bank of America Merrill Lynch XX Company Secretary XX Citigroup XX general Counsel XX Centerview Partners XX vP EU and Injectables XX Deloitte XX vP Human resources XX Ernst & young XX vP Ir and Strategy XX Lintstock XX PwC Board XX One Non-Executive Chairman XX Two Executive Directors XX One Non-Independent Non-Executive Director XX five Independent Non-Executive Directors THE BOARD COMPOSITION 1 1. Chairman 2 2. Executive directors 3. Non-Independent NED 4. Independent NEDs 11% 22% 11% 56% 3 4 The names of the Directors, their biographical details and dates of appointment are set out on pages 60 to 62. The Senior Independent Director is Sir David rowe-Ham who remains available to shareholders should they have concerns that they do not wish to raise directly with the Chairman. Sir David is also responsible for chairing the meetings of the Non-Executive Directors conducted without the presence of the Chairman or executive management. Chairman and Chief executive The roles of the Chairman and Chief Executive Officer are separate, and the Board has approved statements of their respective responsibilities in writing. These statements were reviewed during 2012 as part of the annual corporate governance review. The Chairman previously held the role of Chairman and Chief Executive. In 2007, he relinquished his executive responsibilities and continued as Non-Executive Chairman. 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, especially as he has an in-depth understanding of the group and the business and is able to provide a valuable contribution in his capacity as Non-Executive Chairman. 67 Hikma PHarmaceuticals Plc / annual rePort 20124.1 governanCe report continued independence The Board considers Sir David rowe-Ham, Michael Ashton, ronald goode, Breffni Byrne and robert Pickering to be independent. These individuals provide extensive experience of international pharmaceutical, financial, corporate governance and regulatory matters and were not associated with Hikma prior to the listing of Hikma in 2005. The Board reviewed and considered the independence of the Non-Executive Directors during the year as part of the annual corporate governance review. The Board considers that their diverse business backgrounds, skills and experience enable all the Non-Executive Directors to continue to bring independent judgement to bear on issues of strategy, performance, resources, key appointments, standards of conduct and other matters presented to the Board. The Board does not classify Ali Al-Husry as an Independent Director because of his involvement with Darhold Limited, Hikma’s largest shareholder. He was also a Director of Hikma prior to listing. However, he continues to bring to the Board broad financial experience and a detailed knowledge of the MENA region which represents the majority of the group’s business. effeCtiveness skills and experience The Board keeps the skills and experience of its members under constant review. The Directors believe in the necessity for challenge and debate in the boardroom and consider that existing Board dynamics and processes encourage honest and open debate with the Executive Directors. hikma Knowledge Board members are encouraged to visit the business units and to meet management teams in order to facilitate a better understanding of the key issues facing the business. The Non-Executive Directors undertook several operational visits during the year, and maintain an excellent understanding of the way the business operates. The Chairman, Mr. Ali Al-Husry and the Executive Directors have extensive experience of Hikma from its earliest days to its current day. The directors maintain an appropriate dialogue amongst themselves and senior management, which ensures that non-executive directors are kept up to date with major developments in the group’s business. training The main Board training and development activities this year were: XX External training on the legal and regulatory landscape. XX External training on Anti-Bribery and Anti-Corruption. XX The Company Secretary made regular updates to the Directors on relevant regulatory and governance matters. XX Directors attended several externally provided seminars and discussion forums. further training is scheduled for 2013. XX Hikma’s brokers and financial advisers presented industry and market updates to the Board on several occasions. XX The Investor relations department reported to the Board on its activities and issues arising in the market on a regular basis. evaluation The Board and the Committee undertake an externally moderated evaluation each year. The key points of the programme are: BOArD ExPErIENCE International exposure Pharmaceutical Manufacturing Sales regulatory Listed environment finance gEOgrAPHICAL SPLIT 67% 67% 67% 67% 56% 68 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 XX The process is coordinated by the Senior Independent Director 100% at the request of the Chairman. XX Lintstock, our external moderator prepared online questionnaires for both the Directors and Senior Management designed to build on previously identified themes. XX In 2012 the Board enhanced the evaluation with new questionnaires which were sent to senior management. Such an extra participation injected a wider perspective into the evaluation. 100% XX Lintstock managed the process and reported independently to the Chairman and the Senior Independent Director. Lintstock presented the results and findings to the full Board in the context of Hikma’s business and that of its peers. XX In the fTSE and international markets and provided their independent feedback on the results. XX A similar process was followed for each Committee. The main elements of the questionnaire were: meetings XX Board composition XX Time management XX Board information XX Strategic oversight XX Operational oversight information flow The Company Secretary supports the Chairman in setting the Board agenda, ensuring appropriate reports from executive management and advisors are delivered in a timely manner and that Directors have the information they need in order to make fully-informed decisions. During the year the Board received presentations and considered the following matters: XX Succession planning and human resource management XX financial performance XX Case study XX Priorities for change The key conclusions and observations from the 2012 evaluation were: XX The Board continues to operate effectively XX The views of each member were openly communicated and appropriately taken into account XX The Board will continue to work on Strategy, risk and Succession XX Divisional operational performance and business development XX Legal update XX Corporate governance update XX Executive Committee and Strategic updates XX Committee Chairmen report XX Acquisitions XX Investor relations Significant progress had been made on previously identified issues: XX financial markets performance/broker update OBSErvATIONS ACTION TAkEN focus upon Board and executive succession planning Duplication in reviewing detailed financial information at the Board and Audit Committee Increased communication on Hikma Strategy A succession manual has been approved by the Board and lays down the procedures for Board and executive succession. financial presentation format was changed to improve clarity of information and presentation style. Enhanced use of the Executive Committee to consider group Strategy. In 2013 the Board will consider whether to enhance the externally moderated evaluation with face-to-face Director interviews, based on the continued added value this could bring to the Board’s operations. The results of the evaluation process formed part of the Chairman’s appraisal of the overall effectiveness of the Board and its members. The Senior Independent Director met with the Non-Executive Directors to undertake a formal appraisal of the performance of the Chairman. This review addressed the effectiveness of his leadership, the setting of the Board agenda, communication with shareholders, internal communication and Board efficiency. The Non-Executives concluded that the Chairman gave clear leadership and direction to the Board, and that the Board is run in an appropriate and effective manner. XX risk management XX Insurance XX Human resources XX Compliance XX research and development XX Tax The Board governance Manual contains the policy for Directors to obtain independent legal advice at Hikma’s expense. Company secretary The Company Secretary reports to the Chairman. All directors have access to the advice and services of the Company Secretary, who is responsible for ensuring good information flow to the Board and its committees, and that sound Board procedures are followed. The appointment and removal of the Company Secretary is a matter reserved for the Board. non-executives The Chairman holds meetings with Non-Executive Directors (without the executive management present) to discuss issues affecting the group. As in previous years, the Independent Non-Executive Directors have met without the Chairman or Executive Directors being present on several occasions during the year. attendance During the year under review the Board held nine scheduled meetings and one unscheduled meeting. The annual cycle of the Board’s work is detailed in the Calendar section below. The Company Secretary attended all Board Meetings and Committee Meetings. At the discretion of the Board or relevant committee, senior management are invited to attend meetings and make presentations on developments and results in their business divisions. 69 Hikma PHarmaceuticals Plc / annual rePort 20124.1 governanCe report continued The table below shows attendance at the Board and Committee meetings. To the extent directors were unable to attend additional meetings called on short notice, or were prevented from doing so by prior commitments, they received and read the papers for consideration at that meeting, relayed their comments in advance and, where necessary, followed up with the Chairman on the decisions taken. DIrECTOr samih darwazah said darwazah mazen darwazah ali al-husry sir david rowe-ham Breffni Byrne michael ashton ronald goode robert pickering Total Meetings Held BOArD AUDIT rEMUNErATION NOMINATION COMPLIANCE 100% 100% 100% 100% 100% 100% 100% 100% 100% 9 – – – – 100% 100% 100% 100% 100% 10 – – – – 100% 100% 100% 100% 100% 7 – – 75%* – 100% – 100% – 100% 4 – – 100% – – 100% – 100% 100% 7 * Mr. Mazen Darwazah was unavailable for one Nomination Committee meeting due to his attendance being required at an Executive Committee meeting direCtors terms of appointment Details of the Executive Directors’ service arrangements and Non- Executive Directors’ letters of appointment are contained in the remuneration report on pages 91 to 93. They are made available for inspection before the Annual general Meeting and during business hours at Hikma’s registered office at 13 Hanover Square, London. external Commitments The Directors’ external commitments are detailed in their profiles on pages 60 to 62. The Audit Committee operates, monitors and reviews the conflicts of interest procedures, which have operated effectively during the year. A register of external commitments is maintained by the Company Secretary and is reviewed, updated at each Audit Committee and Board meeting. where new commitments are proposed, these are reviewed in advance by the Audit Committee and where appropriate, recommendations on necessary controls are made to the Board. The Board considers that a degree of outside commitments enhances a Director’s ability to perform the role. duties and Commitment The Directors commit an appropriate amount of time to their roles and are readily available at short notice. The letters of appointment require Non-Executive Directors to commit 20 days during each year to the execution of their duties. However, all of the Non-Executive Directors devote at least 30 days per annum to their Hikma responsibilities. In addition, the committee chairmen spend a significant amount of time on their respective areas of responsibility and Non-Executive Directors take time to meet with management and visit operations where there have particular areas of interest. Consequently, the independent Non-Executive Directors dedicate substantially more time to Hikma than their appointment requires. The duties of the directors, Chief Executive, Chairman and Committee chairmen are set out in the Board governance Manual. remuneration The remuneration report is on pages 82 to 103. indemnities and insurance Hikma maintains an appropriate level of Directors’ and Officers’ insurance. The Directors benefit from qualifying third party indemnities made by Hikma which were in force during the year and as 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. 70 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 deLegation of aUthority introduction to the Committees The Board has an extensive workload and, therefore, has delegated the detailed oversight of certain items to four committees: XX Audit Committee XX Nomination Committee XX remuneration Committee XX Compliance, responsibility and Ethics Committee (“CREC”) Each committee has terms of reference which were reviewed during the year. Copies are published on the group’s website and are available for inspection at the registered office at 13 Hanover Square, London. reporting to the Board The Chairmen of each Committee report on that Committee’s business at every Board meeting. The minutes of each Committee are made available to the entire Board. Each Committee makes a formal annual report to shareholders in the Annual report. for and on behalf of the Board of Directors of Hikma Pharmaceuticals PLC peter speirs Company Secretary 12 March 2013 matters reserved to the Board Hikma maintains a formal schedule of matters reserved to the Board in the Board governance Manual. This includes the following items: XX Operational Management Approval of strategy, operations oversight, performance review XX Structure & Capital Approval of changes to group structure or changes to capital structure XX financial reporting & Controls Approval of financial announcements, accounts, dividends, conducting significant changes to treasury and accountancy practice XX Internal Controls reviewing the effectiveness of the group’s risk and control processes, including an annual assessment XX Contracts Approval of significant contracts, investments and projects which meet pre-set monetary thresholds XX Communication Approval of certain press releases, and all circulars and prospectuses XX Board Membership and Other Appointments Approval of changes to board structure and composition, succession, auditors, company secretary XX remuneration Determining remuneration policy for senior management and Directors and officers, amending or introducing share incentive plans XX Corporate governance Annually reviewing Board, Committees and individual Director performance, and reviewing corporate governance arrangements 71 Hikma PHarmaceuticals Plc / annual rePort 2012 4.2 Committee reports aUdit OPEN fOr DISCUSSION Call +44 20 7399 2760 or E-mail: investors@hikma.uk.com dear shareholder I would like to give you an overview of the operation and scope of the Audit Committee and report on its work over the past year. The membership of the Audit Committee has not changed during the year, it comprised Sir David rowe-Ham, Michael Ashton, ronald goode, robert Pickering and myself. The Committee’s written terms of reference are available on Hikma’s website. The Committee met ten times during the year. we invited the Chief financial Officer, Auditors, Internal Auditors and certain members of the finance team to attend meetings as required. As in previous years, the Committee met with the internal and external auditors without management present. The Committee has an annual cycle of work relating to reviewing financial performance and forecasting, results announcements, internal control, risk management and internal and external audit. The finance department has continued to provide first rate reporting, whilst working on the complex integration of our acquisitions and the development and output of management reporting systems. As an organization Hikma is committed to clear and open communication. As I mentioned last year, I remain open to discussion with shareholders should they have any concerns that they wish to raise directly with me. Breffni Byrne Chairman of the Audit Committee Letter from the Chairman AUDIT rEPOrT 72 / Letter from the Chairman 73 / Our Highlights 73 / Membership and attendance 73 / responsibilities 73 / Terms of reference 74 / risk 74 / Internal Audit 75 / Internal Control 75 / External Audit 72 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 oUr highLights XX reviewed the corporate governance of the group and made recommendations to the Board XX Monitored the performance and findings of the external and internal auditors XX Implemented the results of the 2012 Audit Committee’s evaluation exercise XX Participated in the financial reporting Council (frC) consultation on changes to the Uk Corporate governance Code and the accompanying guidance on audit committees XX responded to an frC survey on the role of internal audit in providing assurance over the control of risks associated with executive remuneration XX Monitored the non-audit services provided by the auditor XX reviewed the preliminary statement, the Interim financial Statements and the Interim Management Statements ALLOCATION OF COMMITTEE’S TIME 1 6 1. Financial performance 2. Announcements/ ﬁnancial results 2 3 3. Forecasts 4. Internal audit 5. External audit 5 4 6. Corporate governance 23% 9% 16% 13% 28% 11% membership and attendance The Audit Committee consists of five Independent Non-Executive Directors – Breffni Byrne (Committee Chairman), Michael Ashton, Sir David rowe-Ham, ronald goode and robert Pickering. MEMBErS Breffni Byrne (Chairman) michael ashton sir david rowe-ham ronald goode robert pickering total meetings MEETINgS ATTENDANCE 100% 100% 100% 100% 100% 10 INTErNAL ADvISErS ExTErNAL ADvISErS XX Chief financial Officer XX Deloitte (Audit) XX Company Secretary XX Ernst & young (Internal Audit) XX financial reporting Director XX Treasury Director XX Budget Director All members of the Committee have extensive financial experience, including international operations. The Committee has significant financial experience. The Chairman has over 30 years’ experience as a public accountant and is considered by the Board to have recent and relevant financial experience. All members have spent a significant portion of their careers in leading positions at financial or pharmaceutical companies. responsibilities The Audit Committee assists the Board in discharging its responsibilities with regard to financial reporting, external and internal audit, internal control and corporate governance. The Committee reviews Hikma’s annual report, financial statements, interim report, interim management statements and trading updates, monitors any non-audit work undertaken by external auditors, and monitors the effectiveness and output of Hikma’s internal audit activities, internal controls and risk management systems. The Committee is responsible for overseeing corporate governance arrangements across the group, including the annual corporate governance review. The Audit Committee advises the Board on the appointment, re-appointment and removal of the external auditors, as well as the effectiveness of the audit process. The Committee operates Hikma’s policies on monitoring Directors’ conflicts of interest. terms of reference The Audit Committee terms of reference include all matters indicated by the Corporate governance Principles and clearly set out its authority and duties. They are approved and reviewed by the Board as part of the annual corporate governance review and one addition was made this year in respect of ensuring the annual report is fair and balanced. The terms of reference are available on the Hikma website and by contacting investors@hikma.uk.com. They are summarised as follows: XX monitor the integrity of the financial statements and any other formal announcement relating to the group’s financial performance; review summary financial statements and Interim Management Statements XX review and challenge the adoption of accounting standards, estimates and judgements and the clarity of disclosure in financial reports XX review and challenge compliance with stock exchange, Uk Listing Authority and legal requirements including the requirements of the Code and Markets Law XX monitor and review the internal financial controls and the group’s overall risk identification and management systems 73 Hikma PHarmaceuticals Plc / annual rePort 2012risk The Committee oversees Hikma’s risk management framework in the context of its responsibilities for internal control and annually reviews the strategic risks facing the group. Part of the work of the group Internal Audit function is, in consultation with management, to prepare an annual assessment of the risks facing the group, identified both as a result of their assurance work on the group’s control environment and through discussions with senior management. Their report covers the group’s approach to strategic, operational, compliance and financial risk. This review is presented to the Audit Committee and forms the basis for subsequent corrective actions and informs the work to be undertaken in the subsequent audit year. Additionally, the Audit Committee discusses business and operational risks with the external auditors to the extent that these are identified by the audit work that they perform. Details of the principal risks facing Hikma and action taken to mitigate and control those risks are detailed on pages 38 to 40. internal audit 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 2009. The internal audit process focuses on reviewing areas of business risk, internal controls, and financial reporting across the group’s systems. The internal auditors report directly to the Chairman of the Audit Committee, with regular reports of its findings made to the Audit Committee. The internal audit programme operates as follows: XX The internal auditors, in consultation with management, prepare an annual risk Assessment, which gives the focus for the Audit Plan and the entities to be targeted. It covers the principal risks and uncertainties facing the group, details of previous geographical and functional reviews, whether new assets/entities have been acquired, the situation and risks identified arising from previous audits XX The risk Assessment and the resulting Internal Audit Plan are presented to the Audit Committee Chairman for review XX following the Chairman’s comments, the final assessment and Audit Plan is presented to and approved by the Audit Committee XX following completion of each review, the Internal Auditors identify areas for remedial action and action plans are discussed and agreed with management. The findings and actions are used to create an Internal Audit report for each subsidiary/geography XX The Internal Audit reports and progress on Action Plans are submitted to the Audit Committee, including reporting if management fall behind agreed action plans XX The Audit Committee reports to the Board on internal audit matters 4.2 Committee reports Audit continued E S P O N S I B ILITY AND ETHICS E , R C N P LI A M C O G E M E N T RIS K M A N A G T I N R O P E R E E T T I M M O C N O I T A N I M O N THE BOARD COMMITTEES INTERNAL CONTROL AUDIT A U D I T C O M M I T T E E C O G O RPO VERN RATE CE N A R E M U NERATION COMMI T T E E I N A T E U R D N I T A L Terms of reference continued XX 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 XX review and monitor management’s responsiveness to the findings and recommendations of the internal auditors XX consider and make recommendations for appointment, re-appointment and removal of Hikma’s external auditor, and oversee the relationship with the external auditor XX review and monitor the quality, independence and objectivity of the external auditor and approve their remuneration and terms of engagement XX review and monitor the directors’ potential conflicts of interest and make recommendations to the Board for the management of those interests XX 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 74 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 internal Control The Board reviewed the effectiveness of the group’s systems of internal controls and risk management during the year and confirms that it accords with the relevant guidance. The Board has overall responsibility for the group’s systems of internal control and has established a continuous process for identifying, evaluating and managing the risks the group faces. This draws on the ongoing output of the finance department on group performance, the work of the internal auditors and issues identified by the external auditors to the extent covered by their audit work. The Board is responsible for monitoring the ongoing effectiveness of these systems and for conducting a formal annual 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. external audit The Audit Committee is responsible for the development, implementation and monitoring of the group’s policy on external audit, which is undertaken by Deloitte LLP and for monitoring the independence and objectivity of the external auditors. The Audit Committee is also the primary point of contact for the auditors with the Board. The group has adopted a policy on the provision of non-audit services by the external auditors, which is included in the Board governance Manual, setting out which non-audit services the external auditors may and may not provide to the group. The group also maintains a policy requiring prior approval by the Audit Committee for 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 key elements are as follows: XX A documented and disseminated reporting structure with clear procedures, authorisation limits, segregation of duties and delegated authorities XX 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 XX A comprehensive system of internal financial reporting which includes regular comparison of results and against budget and forecast, and a review of kPIs, each informed by management commentary XX A system of documented reporting controls over our joint ventures and associates together with direct support from the Hikma finance function XX A defined process for controlling capital expenditure and other financial commitments, including appropriate authorisation levels, which are monitored and approved by the Board as appropriate XX written policies and procedures for material functional areas with specific responsibility allocated to individual managers The group continues to grow through acquisition. Accordingly, the Board and the Committee place significant importance on the swift integration of acquired businesses in terms of internal and financial control. This builds on information gathered in the legal, financial, business and regulatory due diligence undertaken in advance of any transaction, and focuses on financial personnel support, imposition of Hikma reporting policies, IT consistency and subsequent internal audit work. There are no contractual provisions that restrict the Committee’s choice of auditors. It is also the Committee’s policy to consider every year whether there should be an audit tender process and whether using auditors from one audit network continues to ensure the quality of the audit. The Committee reviewed this during the year and concluded that the existing team continue to conduct an effective audit, that the team’s knowledge of the group, particularly the group’s diverse international operations, is advantageous in terms of its ability to identify issues of importance and relay them clearly to the Committee. The Committee believes that there is a strong and open relationship between the audit team leadership and the Audit Committee. The Committee recommended to the Board the re- appointment of the existing external auditor, who has been in place since Hikma listed in 2005. The external auditor is required to rotate the audit partner responsible for the engagement every five years. This is the second year of the current lead audit partner. There are no contractual obligations that restrict the Company’s choice of external auditor. fees paid in respect of audit, audit-related and non-audit services are outlined in Note 6 to the Consolidated 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. During the period under review the group used members of the global Deloitte network in certain jurisdictions for non-audit services. Deloitte are instructed for advisory work only after a competitive tender process and with the approval of the Audit Committee. The Committee regularly reviews the independence safeguards of Deloitte and only authorises non-audit work where the Committee considers it would not be able to obtain advice of similar quality for a reasonable cost. Should shareholders wish to discuss the situation with Hikma, the Chairman of the Audit Committee will be happy to make himself available. for and on behalf of the Audit Committee Breffni Byrne Audit Committee Chairman 12 March 2013 75 Hikma PHarmaceuticals Plc / annual rePort 20124.2 Committee reports nomination OPEN fOr DISCUSSION Call +44 20 7399 2760 or E-mail: investors@hikma.uk.com dear shareholder During 2012, the Nomination Committee’s time has primarily focused on medium-term succession considerations. we have adopted a new, internal succession manual, which outlines certain key policy considerations when considering how to develop the Board. whilst we did not make any changes to the Board over the year, we have considered potential scenarios over the medium-term. As I mentioned last year, when we were seeking a new non- executive, our priority on recruitment is to identify a person who fits with the diverse international culture and management style of Hikma. we are cognisant of the significant advantages of diversity at the level of the Board, senior management and the group as a whole, which assists us in ensuring that the right person is appointed to the role. Hikma has an excellent record leading on diversity across the MENA region. Increasing gender diversity at the board level is high on the list of considerations in our medium-term plans. On other matters during the year under review, Dr. ron goode reached six years’ service. we carefully considered his performance, as well as the diverse range of skills, experience and background required to run our international company. we were pleased to recommend the extension of his term for a further period of three years. As an organisation, Hikma is committed to clear and open communication, and, as the Senior Independent Director, I am open at any time to discussion with shareholders should they have concerns which they wish to raise. sir david rowe-ham Chairman of the Nomination Committee Letter from the Chairman NOMINATION rEPOrT 76 / Letter from the Chairman 77 / Our Highlights 77 / Membership and attendance 77 / responsibilities 77 / Succession 77 / re-election 77 / Composition 78 / Diversity 78 / Board Diversity 76 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 oUr highLights XX Created a succession manual detailing the main governance and operational considerations for each board position XX Continued consideration to medium-term succession developments XX reviewed the composition, diversity and balance of skills on the Board XX Enhanced our oversight and thought on diversity at all levels within Hikma XX Developed the board evaluation process ALLOCATION OF TIME 6 5 1 1. Diversity 2 2. Board evaluation 3. Skills and experience 4. Succession 5. Independence 3 4 6. Corporate governance 12% 24% 8% 24% 16% 16% membership and attendance The Nomination Committee consists of four Directors. Three are independent non-executive directors: Sir David rowe-Ham, Michael Ashton and robert Pickering. The fourth is Mazen Darwazah, the Executive vice Chairman. Sir David rowe-Ham is the Chairman of the Committee. The Committee met four times during the year. with the exception of one meeting where Mr Darwazah had a prior Executive Committee engagement, full attendance was achieved. responsibilities The Nomination Committee is responsible for succession planning, including the progressive refreshing of the Board, for ensuring that all appointments to the Board are made on objective criteria and that candidates have sufficient time to devote to their prospective responsibilities. It is also charged with reviewing the appropriateness of the size, structure and composition of the Board. The Nomination Committee terms of reference include all matters indicated by the Corporate governance Principles and clearly set out its authority and duties. The Committee’s terms of reference are approved and reviewed by the Board on a regular basis. The terms of reference are available on the Hikma website and by contacting investors@hikma.uk.com. succession The Committee has continued its work on planning for board and oversight of senior executive succession. The Committee reviewed and discussed the external guidance and internal processes in place for succession at Board level. During the year the Committee developed a new succession manual which provides a framework for changes at the board level and the key considerations for each position. The Committee continues to actively consider succession and has an appropriate dialogue with the Board and the Chairman in this regard. The Committee continues to plan and review potential scenarios for board change over a three year time horizon. Once a plan of action becomes sufficiently established and to the extent considered necessary, Hikma will consult major shareholders and stakeholders. In terms of the process for identifying candidates, the Committee has the necessary authority to advance the search process to the extent that a shortlist of candidates or a candidate is proposed to the Board. The final decision on any director’s appointment rests with the Board. whilst the selection process may differ depending on the nature of the appointment, the main elements of the selection process are: XX it is led by the Senior Independent Director, in consultation with the Board Chairman MEMBErS MEETINgS ATTENDANCE XX a role and experience profile is established sir david rowe-ham (Chairman) michael ashton mazen darwazah robert pickering total meetings 100% 100% 75% 100% 4 XX an appropriate process for internal and external search is selected XX a short-list of candidates is created and considered XX the identified candidates are interviewed XX the Committee makes a proposal to the Board INTErNAL ADvISErS ExTErNAL ADvISErS XX Chairman XX Chief Executive XX Company Secretary XX Odgers Berndtson XX Lintstock re-election Each member of the Board will submit himself for re-election at the 2013 AgM. Composition The Board continues to keep its composition under review. During the year the Nomination Committee reviewed the skills of its Directors, and the experience they bring the Board for setting the strategic direction of the group, and achieving its objectives. The Committee concluded that together the Directors have a very broad spread of experience, consistent with the needs of the group. for further information on the diverse skills and experience of our Directors, please see the biographical details on pages 60 to 62. 77 * Mr Mazen Darwazah was unavailable for one Nomination Committee meeting due to his attendance being required at an Executive Committee meeting Hikma PHarmaceuticals Plc / annual rePort 20124.2 Committee reports Nomination continued N E R A T I O N COMMITTEE E M U R D N N G A C TI O A I N I N T R U D I N THE BOARD COMMITTEES APPOINTMENTS S U C N O M I N A T I O N C O M M I T T E E P LIA N CE, RESPONSIBILIT Y A N D E T H I C S C E S SIO N E E T T I M M O C T I D U A C O M diversity Hikma is committed to employing and engaging the best people, irrespective of background, gender, orientation, race, age or disability. Hikma has always operated a discrimination-free working environment and is committed to gender diversity at all levels and in all areas of its business. As part of our commitment to diversity, we have improved our internal monitoring and increased the level of information on diversity available to our stakeholders in this report. we consider that our diversity continues to be demonstrated by the broad range of people in our organisation. Board diversity The Committee considered board diversity at several stages through the year. whilst the Board has excellent diversity in terms of culture, age, background, skills and experience, the Committee is cognisant of the need to improve gender diversity at the board level. we continue to believe that diversity targets are inappropriate, as they are unfair to candidates and may prevent Hikma from employing the person who best suits the role. for and on behalf of the Nomination Committee sir david rowe-ham nomination Committee Chairman 12 March 2013 78 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 empLoyee profiLe Age, culture and gender diversity CULTURAL DIVERSITY 1. Middle Eastern 2. European 3. US 1. 19–30 2. 31–40 3. 41–50 4. 50+ 1 3 2 AGE DIVERSITY 1 4 3 2 GENDER DIVERSITY OVERALL 1 1 1. Women 2. Men 2 2 GENDER DIVERSITY IN EXECUTIVE MANAGEMENT 1 1 1. Women 2. Men 2 75% 6% 19% 59% 24% 9% 8% 27% 73% 29% 71% OPEN fOr DISCUSSION Call +44 20 7399 2760 or E-mail: investors@hikma.uk.com 4.2 Committee reports CompLianCe, responsiBiLity and ethiCs Letter from the Chairman COMPLIANCE, rESPONSIBILITy AND ETHICS rEPOrT 79 / Letter from the Chairman 80 / Our Highlights 80 / Membership and attendance 80 / responsibilities 80 / Anti-Bribery and Anti-Corruption (ABC) 80 / Compliance Architecture 81 / ABC risk Assessment 81 / Code of Conduct 81 / ABC Policies and Procedures 81 / Training 81 / Speak-up 81 / Corporate responsibility dear shareholder This has been the second full year of operation for the Compliance, responsibility and Ethics Committee. Over the year we have continued to develop our programme for Anti-Bribery and Anti-Corruption (ABC) compliance and formalised our oversight of Hikma’s Corporate responsibility (Cr) programme. I am pleased to report on the progress we have made towards linking Hikma’s strong culture of ethics with formal processes and procedures to help ensure ABC compliance and strengthen our marketplace activities. Our ABC Programme moved on significantly during the year, following the completion of the risk assessment in 2011. The major developments have been the: 1. Adoption and publication of an enhanced Code of Conduct, which has been translated into the functional languages of Hikma and fully implemented across the group. The new Code of Conduct is available on our website; 2. Drafted a full suite of ABC policies designed to meet the requirements identified by our risk assessment. This was undertaken with the assistance of an external consultant with significant industry experience in this area; and 3. Continuing steps forward in the training and education of our employees enhancing both their understanding of ABC matters and our processes for the discussion of concerns. Our oversight of and input into Hikma’s Cr programme has moved to another level over the course of the year. The key points I would like to highlight to you are: 1. we formalised the reporting relationship for the Corporate responsibility Committee to the CrEC; and 2. The Corporate responsibility team’s regular presentation of developments in Corporate responsibility initiatives to the CrEC. In 2013, the CrEC will be focused on the on-going development of our compliance programme, and further training and education of our employees to build understanding of compliance issues across the group. This will continue to give our people the tools and information they need to make good decisions when they are faced with ethical issues. As an organization Hikma is committed to clear and open communication. I remain open to discussion with shareholders should there be any concerns that they wish to raise directly. dr. ronald goode Chairman of the Compliance, Responsibility and Ethics Committee 79 Hikma PHarmaceuticals Plc / annual rePort 2012 4.2 Committee reports Compliance, Responsibility & Ethics continued oUr highLights XX 64% employees certification against the new Code of Conduct XX Increased understanding and engagement with the ABC programme across Hikma XX full management consultation on the standardisation of ABC policies XX Initiated externally facilitated “speak up” hotlines XX Direct oversight of the CSr programme, with frequent reports and updates. ALLOCATION OF TIME 6 5 1 1. Diversity 2 2. Board evaluation 3. Skills and experience 4. Succession 5. Independence 3 4 6. Corporate governance 12% 24% 8% 24% 16% 16% membership and attendance MEMBErS MEETINgS ATTENDANCE dr ronald goode (Chairman) mazen darwazah Breffni Byrne robert pickering total meetings 100% 100% 100% 100% 7 INTErNAL ADvISErS ExTErNAL ADvISErS XX general Counsel XX Compliance Consultant XX group Compliance Manager XX Company Secretary XX Director of Communications The Compliance, responsibility and Ethics Committee (“CREC”) consists of four members. Three are independent Non-Executive Directors: ronald goode (Committee Chairman), Breffni Byrne and robert Pickering. The fourth member is the Executive vice Chairman, Mazen Darwazah. The CrEC met seven times during the year, and full attendance was achieved. As the CrEC is not a committee mandated by the Code, its membership is not subject to published requirements. However, Hikma believes that the requisite challenge to operational effectiveness is achieved by having an independent non-executive director membership majority. The Chairmanship of the CrEC is held by an independent 80 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 Non-Executive Director, Dr ronald goode, and the Chairman of the Audit Committee is a standing member. within the Company, the Executive vice Chairman champions Hikma’s Anti-Bribery and Corruption (ABC) and Corporate responsibility (CR) programmes. The CrEC first met in November 2010. responsibilities The CrEC sets the overall strategy for the group’s response to bribery and corruption risks and is responsible for approving the contents of all of the business’s policies in areas where ethical judgements are important. The CrEC therefore oversees the group’s ABC Compliance Programme, together with group policies on ethics and business conduct. The CrEC reviews group policy in the area of Cr at a Board level and is supported in this work by the Cr Committee. The CrEC is responsible for overseeing the development of the group’s Code of Conduct (the “Code”), though formal ownership, and final approval of the Code, or any changes to it, lies with the Board of Directors. It is the CrEC’s responsibility to own the framework for ABC compliance within the group and to ensure that it operates adequately and effectively. The CrEC also oversees Hikma’s Speak-Up process for employees to raise ethical concerns, and, where relevant, oversees their investigation. The CrEC’s terms of reference are reviewed by the Board on a regular basis. The terms of reference are available on the Hikma website and by contacting investors@hikma.uk.com. anti-Bribery and anti-Corruption (aBC) quality and excellence have been the heart of Hikma since its foundation, and Hikma has always been committed to the highest standards of integrity and ethics in the conduct of its business. Hikma has a zero tolerance of bribery and corruption. Hikma will not penalise any individual for complying with the principles enshrined in the Code or in our ABC policies, even at the cost of forgoing a business opportunity, losing revenue or profit or disobeying a superior’s instructions. Hikma will discipline staff for ethical breaches in order to maintain its high standards of integrity. Compliance architecture The group has created a framework that sets out the structure of leadership, delegated authority and ownership for Hikma’s ABC compliance programme. Operational responsibility and oversight for compliance is assigned by the Board to the Executive vice Chairman, who then delegates responsibility to his management team. The Head of Compliance reports directly to the CrEC on compliance matters and his leadership of ABC issues is overseen by the CrEC Chairman and the Executive vice Chairman. He is supported by a group Compliance Manager. The heads of each business division have taken responsibility to be the compliance champion for their division. They set the tone for business integrity in their operations. Our Compliance Champions are: XX Bassam kanaan XX riad Mishlawi XX Michael raya Branded Injectables US & generics This aligns the ownership of good compliance behaviours with the day-to-day business operations. aBC risk assessment As reported in last year’s Annual report, in 2011 Hikma undertook a full ABC risk assessment. This was performed by the good Corporation, an independent body who have specialized in business ethics and integrity for over a decade. good Corporation visited each of our major areas of operation to perform this risk assessment. As reported, a significant conclusion from the exercise was that Hikma has a strong ethical culture that is deeply embedded within its operations. been built within the business for the processes and issues of ABC compliance, with training given to functional and geographical teams across the group, with a particular focus on the MENA region. formal board training on ABC compliance issues was also performed during the year. This training and communication continues to enhance employees’ understanding of bribery and corruption risks, and increases the penetration of compliance issues into the decision-making process for business departments as they consider existing and new business structures. Code of Conduct In conjunction with undertaking the development of our ABC policies, we undertook a full review of Hikma’s existing code of conduct. we benchmarked this code against good industry practice and a peer group of international companies. we also undertook a full internal consultation, encompassing a broad cross-section of management – and benefitted from the input of our external Compliance Consultant. The updated Code was reviewed by the CrEC and proposed to the Board, where it was fully supported. The new Code has now been translated into the major functional languages of Hikma: English, Arabic, french, german and Portuguese. Each year Hikma employees are required to confirm that they have read the Code, have understood it and will abide by its terms. Employees also confirm that they understand their obligations to report events of suspected non-compliance with the Code. This was performed in 2012 using the new Code, covering 64 per cent of the employees of the business. The Code is available on our website: http://www.hikma.com/en/corporate-responsibility/code-of-conduct aBC policies and procedures Using the information gained from the ABC risk assessment, our primary focus in 2012 has been the design and development of new ABC policies, aimed to link our ethical culture to more formal processes. we engaged an external Compliance Consultant to assist with thought leadership for the development of our framework and policies. He brought considerable industry expertise to the group – both in relation to the design of effective mechanisms for the management of ABC risks, and also the implementation processes required for the resulting policies and their supporting procedures. During the year, the Compliance Consultant worked with the compliance function to produce a full suite of ABC policies, together with a framework for their operation and procedures for their implementation. A full consultation with executive management is on-going, encompassing the advice and support of the Compliance Champions, and senior functional and line management within each business division and each significant geography. This process has been undertaken in order to ensure that the policies can and will be applied consistently at every level throughout Hikma. The focus of the Compliance Department and the Compliance Champions for 2013 will be to finalise these policies and commence their implementation across the group. training The development of our policies has been undertaken in conjunction with our on-going focus on education and dissemination of ABC compliance information across the business. During the year, our employee induction programmes have been updated to ensure that each new employee can clearly understand the group’s ethical expectations. In addition, increasing awareness has speak-up The Board understands that it is critical for employees to be able to raise concerns on issues of integrity without retribution and that appropriate methods of voicing such concerns be available to them. Hikma has always encouraged an environment in which full, free, and frank discussions can be held on issues that concern its employees. Therefore, Hikma has an open door policy regarding communication so that it can hear from those who have any questions or concerns about the ethics and integrity of the business. As part of their commitment to the Code employees understand that they have a duty to report any suspected violations of the Code, of Hikma’s policies or any applicable law or regulations. Hikma encourages employees to report these concerns, and where employees believe that it is not possible or appropriate to report to line management, they may make reports confidentially to any senior manager within the business. In 2012 we implemented a dedicated and anonymous telephone reporting line in the US, and added to this with additional telephone and online reporting processes in the EU at the beginning of 2013. we also tested a MENA region reporting line, which we are assessing for roll out over the course of this year. reports coming through these lines are reviewed by a management Compliance Committee established for this purpose and by the Chairman of CrEC for potential consideration by the full Committee. Hikma investigates all reports of non-compliance and takes appropriate action. we continue to encourage all our employees to improve our business by taking advantage of our desire for an open and constructive dialogue. Corporate responsibility The Executive vice Chairman champions Hikma’s Corporate responsibility programme within the Company and is Chairman of Hikma’s Corporate responsibility Committee. The Director of Communications is responsible for Cr at an operational level. The CrEC Chairman, Director of Communications, divisional and functional heads, and Company Secretary are members of the Cr Committee. The Cr Committee reviews, supports and promotes Hikma’s Cr activities and reports directly to the CrEC. The Cr team, led by the Director of Communications, regularly present developments to the CrEC. Please see pages 41 to 53 for the group’s Corporate responsibility report. for and on behalf of the Compliance responsibility and Ethics Committee dr. ronald goode Committee Chairman 12 March 2013 81 Hikma PHarmaceuticals Plc / annual rePort 20124.3 remUneration reports remUneration OPEN fOr DISCUSSION Call +44 20 7399 2760 or E-mail: investors@hikma.uk.com Letter from the Chairman 4.3 rEMUNErATION rEPOrTS 82 / governance 88 / Policy 93 / Executive Implementation 102 / Total Compensation dear shareholder In the last year, we completed a thorough review of Hikma’s executive remuneration arrangements with a focus on competitive remuneration linked to performance. we also sought to improve transparency and to provide a clear report on past pay and future policy. we decided to move this report in line with the Department for Business, Innovation and Skills regulations one year early. we developed and implemented clawback arrangements for all bonus and executive share schemes as well as share ownership requirements for Directors and senior management. we also reviewed the performance of our remuneration adviser and conducted a tender exercise. This follows the significant enhancements we implemented last year which enabled us to be nominated for a transparency award. Shareholders will recall that we froze salaries for Executive Directors and senior management in 2009 to 2011 and made an increase in 2012 which was linked to salary rises across the MENA region. At the same time we have continued to review salaries for operational employees to remain competitive and reflect the pressure that exists in a number of our markets. we have established a new bonus scheme throughout the group with enhanced linkage to personal and group objectives and underlying group and business unit performance. The Committee has spent a significant amount of time reviewing potential adjustments to enhance the performance linkage of the existing cash bonus structure. whilst we are not proposing to change the basis of the schemes, we aim to develop our process for linking awards and performance. This builds on last year’s implementation of additional financial performance targets for our long-term incentive plan. 1 This report has been prepared on behalf of the Board in accordance with regulation 11 and Schedule 8 of the Large and Medium-Sized Companies and groups (Accounts and reports) regulations 2008 (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 Uk Corporate governance Code and Markets law relating to Directors’ remuneration. As required by the regulations, an advisory resolution to approve this report will be proposed at the Company’s Annual general Meeting on 16 May 2013. The Auditors are required to report on the certain “auditable” sections of this report and to state whether, in their opinion, that these sections of the report have been properly prepared in accordance with the Companies Act 2006 and the regulations. The auditable sections have been identified in this report. Building Public Trust Awards 2012 highly commended executive remuneration reporting in the ftse 250 82 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 Letter from the Chairman highLights of 2012 3 reviewed and established remuneration policies in respect of clawback provisions, minimum shareholdings requirements and joiners & leavers’ remuneration provisions 3 Nominated for an ifs ProShare award for the most effective communication of an employee share plan 3 Highly recommended for the Building Trust Award for best remuneration Disclosure 3 reviewed and developed the usage of kPIs, the bonus plan and share scheme usage across the group 3 reviewed the performance and competitiveness of our remuneration Advisers 3 Changed structure and lay out of the report 3 Developed the linkage between incentive compensation and performance across the group 3 responded to the Department for Business Innovation and Skills consultation on Executive remuneration 3 reviewed and revised the comparator group composition to enhance the linkage with our comparator criteria 3 Benchmarked executive director, non-executive and senior management compensation 3 Acted as a sounding board for significant projects undertaken by the Human resources department membership and attendance The remuneration Committee consists of four Independent Non-Executive Directors, with an Independent Non-Executive Director holding the chairmanship of the Committee. All members of the Committee have held positions at the highest levels in multi-national organisations and hence have experienced working life at all levels. They have spent a significant proportion of their careers leading teams and in executive management. They understand the need to incentivise top management appropriately, whilst ensuring that rewards are fair throughout all levels of Hikma’s business. MEMBErS MEETINgS ATTENDANCE we have fully engaged with several of the consultations of BIS and other governance bodies. There have been several significant worldwide events during the year and the continuation of the impacts of the Arab Spring and the Eurozone crisis. with Hikma’s focus in the MENA region and significant operations in the EU, the Committee has been impressed with management’s ability to perform in a turbulent time. As an organisation Hikma is committed to clear and open communication. I have always been available to shareholders to raise matters directly and I remain open to discussion with shareholders should there be any concerns that they wish to raise directly. why is the remuneration structure appropriate for hikma? we continue to believe that our remuneration structure is appropriate for Hikma. we have maintained our policy from last year setting remuneration at the median to upper quartile compared to our comparator group. we have a regular programme of meetings with shareholders regarding all aspects of Hikma. During the year and to date, shareholders have not raised any matters of concern. Should we significantly change policy or introduce new share incentive arrangements, we will consult shareholders first. In respect of executive remuneration there have been no departures from normal policy or use of special discretion during the year. michael ashton Chairman of the Remuneration Committee michael ashton (Chairman) sir david rowe-ham Breffni Byrne ronald goode total meetings 100% 100% 100% 100% 7 83 Hikma PHarmaceuticals Plc / annual rePort 2012 4.3 remUneration reports continued remUneration and performanCe sUmmary pERfoRMAnCE CoMponEnts sales profit share price dividend 2011 $918m $146m 620p 13 cents +21% +33% +23% +23% 2012 $1,109m $194m 761p 16 cents employees compensation $38,600 +14% $43,950 shareholder approval 99.1% 96.1% NOTES 3 Adjusted operating profit 3 Last quarter average (dividend excluded) 3 Average per employee 3 It is not possible to estimate 2013 employee remuneration 3 The Arab Spring impacted wage settlements in the MENA region 3 Shareholder approval of the remuneration report at the 2011 and 2012 AgM 3 2012 was the year of the “shareholder spring” totAL REMunERAtion ExECUTIvE DIrECTOr said darwazah mazen darwazah CoMponEnts sALARy said darwazah mazen darwazah Bonus said darwazah mazen darwazah Ltips said darwazah mazen darwazah 2011 ($000) 2,629 1,748 2011 ($000) 630 420 1,008 672 972 648 +25% +21% +20% +20% +19% +20% +36% +23% 84 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 2012 ($000) 3,296 2,114 2012 $000) 750 504 1,200 806 1,324 794 +10% +3% +7% +7% +7% +7% +13% -5% 2013 ($000) (ESTIMATED) NOTES 3,609 2,167 2013 ($000) (ESTIMATED) NOTES 803 539 3 Salaries were frozen for three years (2009-2011), which explains the 2012 20% increase 3 Hikma is lower quartile against our comparator group 1,285 862 3 2013 bonuses are predicted by using an average of 2011 and 2012 percentage of salary applied to the 2013 salary 1,500 756 3 figures represent exercised LTIPs during the year at fair Market value 3 These options were granted 3 years prior to being exercised in the following years CoMponEnts continued pEnsions said darwazah mazen darwazah othER BEnEfits said darwazah mazen darwazah 8.5 7.8 10.5 0 non-ExECutivE DiRECtoRs fEEs non-ExECutivEs Chairman non-executive directors average total fee 2011 (£000) 157.5 79.5 +20% +20% 0% 0% 0% +5% 10.1 9.3 10.5 0 2012 (£000) 157.5 +7% +7% 0% 0% 10.8 10.0 3 Pension contributions are fixed at up to 2% of salary 3 Executives participate in the same pension plan as jordanian employees 3 Significantly below the comparator group 10.5 0 2013 (£000) NOTES +27% 200.0 3 No change in the chairman fee since 2009 83.5 +7% 3 The Chairman waived payment of his fee increase for 2013 to £200k and will be paid £158k 88.5 3 Total directors fee includes basic fee, Committee and Chairmanship fee 3 Increase of fees to move toward the level set by group policy 3 Ensure competitiveness of non-executive directors’ fees 3 fee increased in line with average increases for executives within the Company 85 Hikma PHarmaceuticals Plc / annual rePort 2012 4.3 remUneration reports continued remUneration poLiCy (2013) sUmmary poLiCy ovERviEw how thE CoMMittEE sEts REMunERAtion Salary Pension Benefits Bonus Share award fixed Compensation Lower quartile to Median Performance Based Compensation Median to Upper quartile totaL = Median to Upper quartile 3 The Committee benchmarks compensation against comparable companies (“Comparator group”) and ensure that directors’ fixed compensation is set within the lower/median quartile in the Comparator group. 3 The Committee puts a strong bias on performance based compensation, encouraging executives to perform to the highest of their abilities; only if this occurs will total remuneration exceed the median. fixED CoMpEnsAtion sALARy Salary reference points are reviewed annually and include: 3 Salary levels of the Comparator group 3 Director’s role, experience and performance 3 Pay at group level 3 general economic environment 3 group performance pEnsions 3 Hikma’s contributions to the Defined Contribution retirement Benefit Plan in respect of Executive Directors match those of employees. 3 The Directors do not receive personal pension contributions from the group. BEnEfits 3 Benefits include healthcare, company cars and life insurance. 86 91 92 93 pERfoRMAnCE BAsED CoMpEnsAtion Bonus Bonus potential: 3 Target 100% of Salary 3 Exceptional 200% of Salary Bonus is subject to clawback provisions. Level of bonus determined by: 87/93 3 financial Performance (50%) 3 Operational Milestones (30%) 3 Individual Performance (20%) shARE AwARDs 3 Long Term Incentive Plan (“LTIP”) awards vest after three years and are subject to the following performance conditions: 94 TSr performance against the Comparator group Sales growth EPS growth return on invested capital wEIgHT % 50% 17% 17% 17% 3 Maximum award is 300% of salary (exceptional circumstances) – the operational maximum has been 200%. 3 The level of award depends on threshold performance requirements and no award will be released if the threshold conditions for each criterion are not met. 3 The award is also subject to the clawback provisions. 86 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 rEMUNErATION POLICy ENHANCEMENTS 2012 CLAwBACk PrOvISIONS SHArE OwNErSHIP rEqUIrEMENTS 3 The Committee has implemented clawback provisions for the annual bonuses and LTIP awards of Executive Directors and certain key Executives. 3 All Executive Directors are required to build up and maintain a minimum shareholding in Hikma equal to three times base salary. 89 89 responsibilities The Committee is responsible for setting group remuneration policy and overseeing its application. It takes responsibility for setting the remuneration of the Executive Directors and Chairman and makes recommendations on reward for the senior management team. The Committee reviews performance and strives to ensure Hikma’s remuneration structures mean that the interests of management and shareholders are aligned. The remuneration Committee terms of reference include all matters indicated by the Corporate governance Principles and clearly set out its authority and duties. The Committee’s terms of reference are approved and reviewed by the Board on a regular basis. The terms of reference are available on the Hikma website and by contacting investors@hikma.uk.com. The terms of reference are included in the Board governance Manual. In addition Addleshaw goddard provided legal and regulatory advice to the Committee. Addleshaw goddard has provided other legal advisory services to Hikma during the year, chiefly relating to financing. The Committee undertook an exercise to review remuneration advice. Proposals were obtained from several potential advisers and meetings held. The Committee concluded that the current advisers remained independent and continued to provide high quality service to the Committee. Therefore, no change is justified at this stage. As in previous years, the Committee sought the assistance of senior management on matters relating to policy performance and remuneration in respect of the period under review and maintained a strong contact with management to ensure that its deliberations were fully informed. The Committee ensures that no Director, Executive or employee takes part in discussions or advice relating to his own remuneration or benefits. ALLOCATION OF TIME (%) INTErNAL ADvISErS ExTErNAL ADvISErS 1 4 3 2 1. Setting executive remuneration 2. Remuneration policy 3. Conditions in the group 4. Developing practices 58% 23% 10% 9% XX Chief Executive XX PwC XX vP Human resources XX Addleshaw goddard XX Company Secretary advice and support As in previous years, the remuneration Committee received independent advice on executive compensation from PricewaterhouseCoopers LLP, which supports the committee and Corporate Hr in the delivery and development of our reward and human resources strategy. with the exception of certain taxation advice, this is the only service provided to Hikma by PricewaterhouseCoopers LLP during the year. PricewaterhouseCoopers LLP adheres to the remuneration Consultants group Code of Conduct, which provides a clear framework for our relationship with our advisers while setting high professional standards. E E T T I M M O C T I D U A E S P O N S I B ILITY AND ETHICS E , R C N P LI A M C O N N E R A TIO R E M P O LIC Y U THE BOARD COMMITTEES R E E X E C U T I V E A N D S E N I O R E X E C U T I V E R E M U N E R A T I O N PERFORMANCE M U N E R A T I O N C O M M I T T E E S H N O MINATION COMMI T T E E A R E P L A N S 87 Hikma PHarmaceuticals Plc / annual rePort 2012 executive directors’ remuneration policy The Committee reviewed Hikma’s compensation policy during the year, made certain enhancements and concluded that the policy continues to remain appropriate. The Committee believes that: 3 fixed Compensation (salary, pension and benefits) must be sufficient to attract individuals of the right calibre and ensure that they are not significantly under remunerated when compared to their peers. Compensation that is too low can be a distraction and retention disadvantage. However, fixed compensation is not the prime driver of performance; 3 performance Based Compensation (bonus and share plans) provide executives with the potential to be compensated in line with their peers, providing the overall performance of the group is strong, taking into account the long-term trajectory of the group. Such compensation is discretionary and not pensionable. The Committee views that by putting a strong bias on performance related compensation, executives are encouraged to perform to the highest of their abilities. The policy supports the performance based culture of Hikma. fixed costs are minimised and total short-term compensation (salary, benefits and bonus) 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 compensation. Executives will receive a market competitive package only if solid performance is achieved. In formulating the application of its policy for 2012 and future years, the remuneration Committee has been cognisant of the evolving landscape in compensation. The remuneration Committee also believes that many of the principles proposed by the Department of Business, Innovation and Skills, Uk Corporate governance Code and by institutional shareholders and their representative bodies are already in operation or embedded within Hikma’s compensation framework. 4.3 remUneration reports continued poLiCy our Core principles The remuneration Committee reviews group remuneration policy on an annual basis to ensure it remains appropriate. The Committee aims to ensure that remuneration for the Executive Directors and senior management: 3 Enhances the achievement of Hikma’s strategic aims 3 Takes account of employment conditions both inside and outside Hikma 3 Aligns the interests of all employees, management and directors with those of shareholders 3 Takes account of Hikma’s Corporate social Responsibility programme, including environmental, social and governance issues 3 Is aligned with Hikma’s founding principle of Business integrity The remuneration Committee has oversight of the main compensation structures throughout the group. In addition, in respect of the Committee’s specific review for Executive Directors, the Committee is satisfied that the group’s incentive structures are consistent with the risk profile of Hikma and encourage a long-term sustainable view to be taken by participants. Hikma continues to encourage employees to increase share ownership throughout the group, using its share incentive plans. The Committee has been particularly sensitive to the external factors set out above affecting a number of the countries in which it has operations and has ensured that throughout the group any short-term risks have appropriately been reflected in the remuneration structures. fACTOrS AffECTINg rEMUNErATION POLICy Changing market practice Market conditions affecting the company recruitment market in the Company’s sector grOUP rEMUNErATION POLICy Current economic climate Institutional shareholders and their representative bodies 88 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 Bonus The Committee’s policy position is for bonuses to be in the Median to Upper quartile range and be subject to fulfilment of performance. The maximum levels of bonus that executives may receive are dependent on performance: 3 on target: maximum bonus is 100% of salary 3 Exceptional: maximum bonus is 200% of salary The performance metrics 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 Hikma and in order to ensure that they continue to remain challenging. The performance metrics applied in 2012 were: PrOfIT AfTEr TAx OPErATIONAL MILESTONES PErSONAL BUSINESS TArgETS Threshold weighting between targets 50% 30% 20% TOTAL 100% The remuneration Committee, as stated earlier in the report, will be using the same maximum bonus potential and type of performance conditions for 2013. hikma employee Context The Committee ensures that employee’s remuneration across the group is taken into consideration when reviewing executive remuneration policy. Disclosing a range of what is actually received for each Hr grade is likely to give rise to ever greater remunerations increases across the whole of Hikma and reduces the ability to reward for superior performance. The Committee reviews internal data of the sort described and is satisfied that the level of remuneration is proportionate across the Hr grades. we have disclosed the potential performance related pay below. executive directors senior management management other BONUS 200% 150% 75% 25% SHArE AwArD 300% 200% 50% 0% The pay of employees in the MENA region increased significantly during the year, chiefly as a result of the Arab Spring. As the Executive Directors are based in this region, an element of this rise was taken into account. The Committee does not directly consult employees, but receives regular updates on employee feedback through the group Hr department. management incentive plan The 2009 Management Incentive Plan (“Mip”) was approved by shareholders at the 2010 Annual general Meeting, whereby shareholders consented to Hikma satisfying awards under the MIP from newly issued shares. Under the MIP, Hikma makes grants of conditional awards to management across the group below senior management level. Awards are subject to the satisfaction of individual and group performance targets. 89 Hikma PHarmaceuticals Plc / annual rePort 20124.3 remUneration reports continued MANAGEMENT INCENTIVE PLAN PERCENTAGE OF EMPLOYEES ELIGIBLE (%) Algeria Egypt Germany Jordan Portugal Italy KSA Lebanon Libya Sudan UK USA Yemen 7 2 4 8 3 5 7 4 8 5 13 6 6 Comparator group During 2012, the Committee reviewed its Comparator group to ensure that it remained appropriate for Hikma on an ongoing basis, reflecting the increase in size of Hikma and increasing internationalisation of the business. The Committee has resolved that, having taken account of those companies that have been acquired during the period, the Comparator group did not remain appropriate for the group as the benchmark for 2013. Centerview, Citigroup and Bank of America Merrill Lynch assisted in the selection of comparable Companies. Criteria taken into account by the remuneration Committee when selecting the current Comparator group included the: 3 Type of pharmaceutical specialism 3 International nature of Hikma’s operations 3 International nature of the executive team 3 Market capitalisation and turnover 3 Number of employees 3 Consolidation in the pharmaceutical industry affecting the number of comparable companies 3 Uk listing environment. The Committee seeks to benchmark executive compensation against companies of a similar status, sector, and performance. The Committee is cognisant of the fact that a too slavish devotion to comparators can lead to executive compensation continually rising above those of wider employee compensation. Therefore, the Comparator group is used as a guide to set parameters for compensation and ensure executives are incentivised to perform to the best of their abilities for the long-term. In this context it is only one of a number of factors taken into account by the Committee when determining the level and elements of Hikma’s compensation policy. 90 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 Compensation practices in the Comparator group are used to: 3 Rank hikma Compensation against the Comparator group. This enables the Committee to determine Hikma’s position in relation to other companies and, hence, assess the compensation of Hikma executives to ensure that the Policy is being met (e.g. lower quartile to median salary) 3 Assess tsR performance. The Total Shareholder return (“tsR”) of Hikma compared to its Comparator group is used as the performance target in respect of the executive share scheme (“Ltip”). Only upper quartile performance results in 100% vesting of the TSr components of LTIP awards. The constituents of Hikma’s Comparator group for 2012 were as follows: NAME adcock ingram holdings Ltd* aspen healthcare Limited* astraZeneca pLC Btg pLC egis pLC* endo pharmaceuticals holdings forest Laboratories inc * Six companies added to the Comparator group in 2012 gedeon richter plc* grilfols sa hospira inc impax Labs inc Krka* merck Kgaa mylan inc novartis ag sanofi aventis shire pharmaceuticals pLC stada arzneimittel ag* UCB sa watson pharmaceuticals inc Throughout this report, references to quartiles are to quartiles in the Comparator group. Clawback policy The Committee has certain clawback arrangements in place for the annual bonuses and LTIP awards of Executive Directors and certain key executives. In the event of any of the following situations occurring, the remuneration Committee would reduce or cancel the next bonus and/or reduce or cancel the next vesting of LTIP awards: 3 Hikma’s financial statement or results being negatively restated 3 a participant having deliberately misled management or the market regarding Hikma’s performance 3 a participant causing significant damage to Hikma 3 a participant’s actions amounting to serious misconduct share ownership During the year, the Committee decided to require all executive directors to build and maintain a minimum shareholding equal to three times base salary. The Committee believes that this policy strongly links executive and shareholders’ interests and decided to set the shareholding targets at a level higher than the majority of our peers. This minimum holding must be achieved as quickly as possible and in any case within two years following appointment as a director. Share ownership requirements also apply to Hikma Executive Management who are required to build up and maintain a minimum shareholding equal to two times base salary. These limits will be reviewed periodically by the Committee. The table below demonstrates that the target shareholdings as a percentage of salary were met in full by the Executive Directors. ExECUTIvE DIrECTOr TIME frOM APPOINTMENT TArgET said darwazah mazen darwazah 6 years 9 months 8 years 7 months 3x 3x ACTUAL rEqUIrEMENT fULfILLED? ✓ ✓ 176x 152x service Contracts Details of the service contracts of the Executive Directors of Hikma in force at the end of the year under review, which have not changed during the year, are as follows: NAME said darwazah mazen darwazah COMPANy NOTICE PErIOD CONTrACT DATE UNExPIrED TErM Of CONTrACT POTENTIAL TErMINATION PAyMENT 12 months 1 july 2007 rolling contract 12 months 25 may 2006 rolling contract 12 months salary and benefits 12 months salary and benefits 91 Hikma PHarmaceuticals Plc / annual rePort 2012 4.3 remUneration reports continued The Executive Directors’ contracts are on a rolling basis, unless terminated by 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). There are no special provisions in the contracts of employment extending notice periods on a change of control, liquidation of Hikma or cessation of employment. recruitment of executives In normal circumstances, new Executive Directors will receive a compensation package in accordance with Hikma remuneration policy for salary, benefits, pension, bonuses and LTIP. In exceptional circumstances, the remuneration Committee has discretion to consider higher remuneration levels necessary to attract, retain and motivate high calibre executives. In the event that the Committee exercises this discretion, the Committee will provide an explanation of the exceptional circumstances in the next remuneration report. Leaver’s remuneration policy when considering termination payments, the remuneration Committee takes account of the best interests of Hikma and the individual’s circumstances including the reasons for termination, contractual obligations and LTIPs and pension plan rules. The remuneration Committee will ensure that there are no unjustified payments for failure on an Executive Director’s termination of employment. The Committee’s policy in relation to leavers can be summarised as follows: 3 In the normal course of events, the Executive Director will work their notice period and receive usual compensation payments and benefits during this time. 3 In the event of the termination of an Executive’s contract and Hikma requesting the Executive to cease working immediately, payment in lieu of notice equal to fixed pay, pension entitlements, other benefits and, on a discretionary basis and only where it is in Hikma’s interest, a pro-rated performance related bonus will be payable. 3 The Executive Director may also be considered for a variable pay award upon termination of employment. However, the Executive would not be entitled to any variable pay in situations where the Executive resigned or where Hikma has terminated the Executive’s employment with the contractual right to do so. The performance of Hikma in terms of finance and meeting of operational targets is the prime driver for determining whether to make an award and quantum. 3 In the event of termination for gross misconduct, neither notice nor payment in lieu of notice will be given and the executive will cease to perform his services immediately. In the event that the Committee exercises the discretion detailed in this section, the Committee will provide an explanation in the next remuneration report. external appointments The Committee recognises that Executive Directors may be invited to take up non-executive directorships or public sector and not-for-profit appointments, and that these can broaden the experience and knowledge of the Director, from which Hikma can benefit. Executive Directors may therefore accept such appointments as long as they do not lead to a conflict of interest, and Executive Directors are allowed to retain any fees paid under such appointments. During the year under review, Said Darwazah and Mazen Darwazah received fees of $10,000 (2011: $10,000) and $10,000 (2011: $10,000) respectively, in respect of such appointments which are detailed in their Director profiles on page 60. External appointments are kept under review by the Audit Committee and the process for controlling these appointments is described in the governance Statement on page 73. non-executive The policy for Non-Executive fees is set by the Board taking into account recommendations from the Chief Executive Officer and Executive vice Chairman and the limits set by the Articles of Association. The “Time Commitments” (see page 70) of the Non-Executive Directors to Hikma are above those of an average non-executive. The nature of Hikma’s business is international, requiring the Non-Executive Directors to travel to the USA, Middle East, North Africa 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 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 Hikma’s Non-Executive Directors. To ensure that Hikma 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. 92 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 Non-Executive Directors’ fees are structured into three elements: 3 Directorship: a base fee for undertaking the duties of a Director of Hikma, chiefly regarding board, strategy and shareholder meetings. 3 Committee membership: a one-off fee for taking additional responsibilities in relation to Committee membership. Usually Non-Executives are members of three committees. 3 Committee Chairmanship: committee chairmen undertake additional responsibilities in leading a committee and are expected to act as a sounding board for the Executive that reports to the relevant committee. The chairmanship fee is paid in addition to the membership fee with a higher fee paid to the Audit Committee chairman to reflect the significant demands of this position. Letters of appointment The Non-Executive Directors do not have service contracts, but have letters of appointment with Hikma. Each appointment is terminable on one months’ notice from either Hikma or the Director, but is envisaged to be for an initial period of up to 36 months. This period can be renewed and extended for not more than two further three-year terms, unless exceptional circumstances exist. NAME samih darwazah michael ashton ali al-husry Breffni Byrne ronald goode sir david rowe-ham robert pickering 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 september 2011 1 month 1 month 1 month 1 month 1 month 1 month 1 month senior management The policy for senior management compensation is set in line with policy for the Executive Directors, with a degree of discretion for the Committee to take into account particular issues identified by the Chief Executive, such as the performance of a specific individual or business unit. policy for 2013 2012 was yet again a turbulent year in global markets and in particular in the MENA region where a significant amount of Hikma’s business is conducted. Political upheaval brought pressure on employment conditions across the region. Notwithstanding those significant pressures, Hikma is a global business and the remuneration Committee remains of the view that its existing remuneration policy remains appropriate for the group. Therefore, it is envisaged that no change will be made to the remuneration Policy in 2013. ExECUTIvE IMPLEMENTATION salary The Committee’s salary policy position is Lower Quartile to Median. Salary Pension Benefits fixed compensation Lower quartile to Median with the assistance of PricewaterhouseCoopers LLP, the Committee undertook a benchmarking of Executive Director salaries during 2012. The conclusion was that salaries were below the policy range of Lower quartile to Median, as can be seen in the table below: POLICy POSITION POLICy vALUE ACTUAL SALAry 2012 ADHErENCE TO POLICy Said Darwazah (Chief Executive) Mazen Darwazah (Executive vice Chairman) Lower quartile to median $742k to $1,155K $750,000 within policy position Lower quartile to median $523k to $631k $504,000 Below policy position 93 Hikma PHarmaceuticals Plc / annual rePort 20124.3 remUneration reports continued when determining the base salary of the Executives, the main points the Committee takes into consideration are the: 3 salary levels of the Comparator group 3 performance of the Executive Director 3 performance and development of the group’s business 3 Director’s experience and responsibilities 3 pay and conditions throughout the group The remuneration Committee has access to information on the pay and conditions of other employees in the group when determining the compensation packages for Executive Directors. The remuneration Committee actively considers the relationship between general changes to employees’ pay and conditions and any proposed changes in the compensation packages for Executive Directors to ensure it can be sufficiently robust in its determinations in light of the position of Hikma as a whole. In relation to 2012, the Committee has taken into consideration the following important factors in determining that the Executive Directors’ salaries should be increased by 7%: 3 The robust group performance, with sales and net income growth in excess of 20%. 3 The successful integration of strategic acquisitions. 3 Being positioned significantly below our policy position from a comparison perspective. 3 There being no change to Executive Director salaries during 2009, 2010 and 2011. 3 Despite the high level of political and economic turbulence across the world in 2011 and 2012, particularly in the Middle East, the very strong year for Hikma. said darwazah (Chief executive) mazen darwazah (executive vice Chairman) 2011-2012 $750,000 $504,000 2013 INCrEASE POLICy vALUE ADHErENCE TO POLICy $802,500 $539,280 7% 7% $742k to $1,155K within policy range $523k to $631k within policy range pension The Committee’s pension policy position is Lower Quartile to Median for Executive Directors. Salary Pension Benefits fixed compensation Lower quartile to Median During the year under review, as in previous years, the only pension contributions made by the group in respect of the Executive Directors were contributions to the Hikma Pharmaceuticals Defined Contribution retirement Benefit Plan (jordan). The Executive Directors therefore, do not receive personal pension contributions from the group. 94 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 The Hikma Pharmaceuticals Defined Contribution retirement Benefit Plan (the “Benefit plan”) operates in accordance with the rules relevant to employees of the group based in jordan. Under the Benefit Plan the group matches employee contributions made to the Benefit Plan. These are fixed at a maximum 5% of applicable salary. Participants are entitled to 30% of the group’s contributions to the Benefit Plan after three years of employment with the group, and an additional 10% in each subsequent year. The participant’s interest in the group’s contribution fully vests after ten years of employment. The contributions and their relation to the Comparator group were as follows: DIrECTOr % Of SALAry said darwazah (Chief executive) mazen darwazah (executive vice Chairman) The information in the above table has been audited by Deloitte. 1.35% 1.86% 2011 US$ 8,505 7,818 % Of SALAry 2012 US$ POLICy POSITION POLICy vALUE (% Of SALAry) ADHErENCE TO POLICy 1.35% 1.86% 10,125 Lower quartile to median 9,374 25% 15% Below policy position Below policy position The pension contributions made by the group for the Executive Directors are significantly below the Comparator group. The Executive Directors have indicated that they are content with the existing arrangements and have requested that their pension remains in line with group employment practice by participating in the same pension plan as other employees in jordan. The Committee continues to keep this situation under review. Benefits The Committee’s benefits policy position is Lower Quartile to Median. Salary Pension Benefits fixed compensation Lower quartile to Median Hikma makes available the normal benefits in kind for Executives of their level in a company of Hikma’s size, such as company cars, healthcare and life insurance. Benefits received during the year were: DIrECTOr said darwazah (Chief executive) mazen darwazah (executive vice Chairman) Bonus The Committee’s bonus policy position is Median to upper Quartile. Bonus Share award Performance Based Compensation Median to Upper quartile vALUE Of 2012 BENEfITS $10,536 $nil The 2012 bonuses of the Executive Directors are within the range in the Comparator group Said Darwazah (Chief Executive) Mazen Darwazah (Executive vice Chairman) $1,200k median to Upper quartile $806k median to Upper quartile $1,733k to $2,966k Below policy range $746k to $977k within policy range BONUS 2012 POLICy POSITION POLICy vALUE ADHErENCE TO POLICy 95 Hikma PHarmaceuticals Plc / annual rePort 20124.3 remUneration reports continued achievement of targets 2012 PrOfIT AfTEr TAx OPErATIONAL MILESTONES PErSONAL BUSINESS TArgETS Said Darwazah 2012 (Chief Executive) Mazen Darwazah 2012 (Executive vice-Chairman) 50% 50% 30% 30% 20% 20% TOTAL 100% 100% In relation to 2012, the Committee has assessed performance against the bonus criteria and determined that the thresholds have been met in respect of on target performance. The Committee has considered the achievement of the following important strategic goals by the Executive team and determined that the Operational Milestones and Personal Business targets were exceeded leading to a total bonus of 160% of salary: 3 Adjusted net income achieving the budgeted target of $120m 3 Exceeding the group target of 20% revenue growth, building on the strategic target of doubling revenue every four years 3 Outstanding performance of the global Injectables division, including the successful integration of MSI in the US, the development of new product capabilities and operational efficiency improvements 3 Expansion of market share in key MENA geographies building on the long-term objective of 5% market share in each jurisdiction 3 Successful management of the continued political and cultural disruption in the Arab world 3 Significant enhancements to our research and Development pipeline which will benefit Hikma in the medium-term 3 Advancing the group’s business integrity agenda with executive management, including new Anti-Bribery and anti-Corruption (ABC) policies and Code of Conduct share awards Share award Policy position is Median to Upper quartile. Bonus Share award Performance Based Compensation Median to Upper quartile Executive directors participated in the 2005 Long Term Incentive Plan (“LTIP”). grant The remuneration Committee proposes to grant the following awards to Executive Directors in 2013. NAME said darwazah mazen darwazah The information in the above table has been audited by Deloitte. NO. SHArES 103,000 52,000 fACE vALUE (% Of SALAry) 187% 140% POLICy vALUE 265% to 313% 104% to 399% ADHErENCE TO POLICy Below policy range within policy range As in previous years these awards are made subject to a vote of independent shareholders to be taken at the AgM of Hikma to be held on 16 May 2013. 96 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 exercised It should be noted that the actual value of the shares granted to the Executive Directors that they will receive will depend on the following: 3 The level of vesting of shares based on the satisfaction of the performance conditions at the end of the three year period from the date of grant 3 The share price of Hikma on the date of vesting The 2009 LTIP awards were exercised by the Executive Directors during the year. In respect of these awards, Hikma achieved TSr growth of 100% (7th position out of 21) and the level of vesting was 92%: DIrECTOr DATE Of grANT LTIP ExErCISED DATE Of ExErCISE MArkET PrICE NOTIONAL gAIN said darwazah mazen darwazah The information in the above table has been audited by Deloitte. 19 march 2009 19 march 2009 115,000 69,000 19 march 2012 19 march 2012 £7.27p £7.27p £836,050 £501,630 options outstanding In respect of each of the Executive Directors, the aggregate number of shares outstanding at the year-end under option was: NO. Of LTIP SHArES PrICE PAID fOr AwArD ExErCISE PrICE DATE Of AwArD INITIAL DATE Of vESTINg DATE Of ExPIry DIrECTOr said darwazah total mazen darwazah total The information in the above table has been audited by Deloitte. 105,000 108,000 97,000 310,000 70,000 72,000 65,000 207,000 – – – – – – nil nil nil nil nil nil 2 november 2010 13 may 2011 18 may 2012 2 november 2013 13 may 2014 18 may 2015 2 november 2010 13 may 2011 18 may 2012 2 november 2013 13 may 2014 18 may 2015 2 november 2020 13 may 2021 18 may 2022 (2011: 338,000) 2 november 2020 13 may 2021 18 may 2022 (2011: 217,000) Long term incentive plan The 2005 Long Term Incentive Plan (“Ltip”) was approved by shareholders at the 2006 Annual general Meeting. The LTIP is used to incentivise Executive Directors and senior management through the grant of nil-cost options with performance conditions that are measured over a period of three years. Those who participate in the LTIP are excluded from participating in the 2009 Management Incentive Plan. The remuneration Committee believes that share awards under the LTIP enable Hikma to provide a competitive incentive and retention tool which is also cost effective in respect of both shareholder dilution and income statement expense. The Performance Conditions are detailed separately on page 98 of this report. remuneration Committee’s policy is to provide annual share grants to Executive Directors and senior management at a maximum of the upper quartile level compared to the Comparator group. During 2010 the Committee reviewed the performance criteria for the LTIP resolving that the performance criteria should be expanded to include financial metrics for 50% of each LTIP award. The Committee consulted major shareholders and the main shareholder representative bodies on the proposed change before it was implemented. The Committee was grateful for the time taken by shareholders on the consultation and welcomed the confirmation received that the majority were supportive of the approach. The Committee considers that the financial metrics chosen ensure that absolute performance is taken into account and more closely align the LTIP with the group’s strategy. The advantages of Total Shareholder return (“tsR”) were retained in respect of 50% of the award. 97 Hikma PHarmaceuticals Plc / annual rePort 20124.3 remUneration reports continued The Awards under the LTIP for 2012 and those that will be made in 2013, are therefore subject to the following performance conditions which are measured over a three year period from the date of grant: 3 Comparative tsR performance against the Comparator group 3 financial metrics – Sales growth – EPS growth – return on invested capital The threshold and maximum performance requirements for each of the performance conditions is detailed in the table below. Each criterion is independent of the other criteria. PErfOrMANCE CrITErIA tsr (against comparator) sales growth eps growth return on invested Capital ELEMENT Of AwArD THrESHOLD rEqUIrEMENT MAxIMUM rEqUIrEMENT 50% 17% 17% 17% median 9% 15% 10% Upper quartile 13% 20% 12% Basis of performance Condition selection & measurement Comparative TSr was selected as a performance condition for the proposed awards by the remuneration Committee as it ensures that irrespective of general market conditions the Executives have outperformed their peers over the measurement period in delivering shareholder value before being entitled to receive any of their awards. The Committee believes that the financial metrics link the final award of the LTIPs more closely to the underlying financial performance of the group. The combination of TSr performance and financial metrics allows comparable performance and absolute performance to be taken into account in equal measure. 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 and newly introduced financial metrics in accordance with the rules of the LTIP. The Committee will review and, if appropriate, approve these figures prior to the release of any award. In terms of performance and the vesting of awards in three years time: 3 0% of Awards will be released for achieving below threshold performance 3 20% of Awards will be released for achieving threshold performance 3 100% of Awards will be released for achieving maximum performance 3 Between threshold performance and maximum performance awards vest on a straight line basis where the threshold requirement is achieved, 20% of this element of the award vests and becomes exercisable. where the maximum requirement is achieved all of this element of the award vests and becomes exercisable. Therefore, the performance conditions ensure that: 3 Hikma’s comparative TSr performance against the Comparator group is at least at the upper quartile before executives receive the full benefit of this element of their share incentives; and 3 The underlying financial performance of the group supports the comparative performance before Executives receive their full award. This structure demonstrates the remuneration Committee’s desire to correlate incentive arrangements with the achievement of substantial performance and align incentives with the objectives of shareholders. 98 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 The following chart sets out the level of release of existing LTIP awards if Hikma’s performance measured as at 31 December 2012 for the financial metrics and as at 13 february 2013 (the last available data) for TSr was applied for the whole period. 2012 LTIP grant 12% 2011 LTIP grant TSr 0% 2010 LTIP grant 35% SALES grOwTH EPS grOwTH 17% 17% 17% 0% 0% 0% rOIC 17% 17% 17% TOTAL 46% 34% 69% It should be noted that the real value received by Executive Directors under the share incentive arrangements is dependent upon satisfaction of performance conditions and the share price of Hikma at that time. total shareholder return performance graph The graph shows Hikma’s performance, measured by Total Shareholder return (“tsR”) compared to the fTSE 250 Index and the fTSE 350 Pharmaceuticals & Biotechnology Index from 1 january 2007 to 31 january 2013. The fTSE 250 and 350 Indices have been selected to provide a broader comparator of Hikma’s performance. TOTAL SHAREHOLDER RETURN FROM JANUARY 2007 (%) +123% 200 150 100 50 0 -50 -100 HIKMA PHARMACEUTICALS PLC FTSE 350 PHARMACEUTICALS & BIOTECHNOLOGY JAN 07 JAN 08 JAN 09 JAN 10 JAN 11 JAN 12 JAN 13 FTSE 250 share prices The applicable share prices for Hikma during the period under review were: 1 january 2012 31 december 2012 2012 range (low to high) 12 march 2013 The information in the above table has been audited by Deloitte. MArkET PrICE (CLOSINg PrICE) 620.0p 761.0p 605.5p to 776.5p 975.0p 99 Hikma PHarmaceuticals Plc / annual rePort 20124.3 remUneration reports continued dilution In accordance with the guidelines set out by the Association of British Insurers (“ABi”) Hikma can issue a maximum of 10% of its issued share capital in a rolling ten year period to employees under all its share plans and a maximum of 5% of this 10% for discretionary share plans. The following table summarises the current level of dilution resulting from Company share plans following the Listing of Hikma in 2005: TyPE Of PLAN grANTED IN A rOLLINg TEN yEAr PErIOD grANTED DUrINg THE yEAr discretionary share plans (5% Limit) 3.06% 0.49% It is Hikma’s current intention that LTIP awards and MIP granted in 2013 will be satisfied by newly issued shares on vesting. Hikma has not implemented any all-employee share incentive arrangements. non-executive fees The Board’s Non-Executive fee Policy is Upper quartile. fee Only compensation Upper quartile The individual basic and committee fees, which are paid in pounds Sterling, are as follows: NAME 2012 TOTAL fEE £000 BASIC fEE £000 CHAIrMANSHIP fEE £000 COMMITTEE fEE £000 samih darwazah* sir david rowe-ham Breffni Byrne michael ashton ali al-husry ronald goode robert pickering * The Chairman’s fee has remained unchanged since 2009, despite the fee that has been paid being significantly below the market rate. The Committee reviewed the fee during the year and raised it to £200,000. The Chairman elected to waive payment of the increase of £32,500 for 2013. 200.0 76.0 76.0 76.0 76.0 76.0 76.0 157.5 86.0 93.5 86.0 71.0 86.0 78.5 – 7.5 15.0 7.5 – 7.5 – – 7.5 7.5 7.5 – 7.5 7.5 2013 TOTAL fEE £000 200.0 91.0 98.5 91.0 76.0 91.0 83.5 The Board has resolved that from 1 january 2013, the basic fees of Non-Executive Directors should be increased to the amounts set out above. The increases continue to 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 rises proposed are in line with the general level of rise for senior management across the group. 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. The Non-Executive Directors are not eligible to participate in the group pension arrangements and do not receive personal pension contributions by the group. 100 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 The non-executive fees are within the median to upper quartile range of the comparator group, below the policy position of upper quartile: NAME samih darwazah michael ashton ali al-husry Breffni Byrne ronald goode robert pickering sir david rowe-ham 2013 TOTAL fEE £000 COMPArATOr M-Uq £000 200.0 91.0 76.0 98.5 91.0 83.5 91.0 194 to 268 91 to 179 61 to 147 91 to 180 91 to 176 90 to 169 92 to 170 POLICy POSITION ACTUAL POSITION Upper quartile Upper quartile Upper quartile Upper quartile Upper quartile Upper quartile Upper quartile median median median to Upper quartile median median median median ADHErENCE TO POLICy within policy within policy within policy within policy within policy Below policy Below policy share ownership The table below details all the Directors’ holdings in the share capital of Hikma up until 12 March 2013. DIrECTOr 1 jANUAry 2012 31 DECEMBEr 2012 12 MArCH 2013 OrDINAry SHArES Of 10 PENCE samih darwazah said darwazah mazen darwazah sir david rowe-ham Breffni Byrne michael ashton ronald goode ali al husry robert pickering Total shares: The information in the above table has been audited by Deloitte. 11,481,746 11,168,445 6,517,225 10,000 10,000 18,566 22,700 5,684,748 7,500 34,920,930 11,286,299 11,593,445 6,733,225 10,000 10,000 18,566 22,700 5,684,748 7,500 35,366,483 11,286,299 11,593,445 6,733,225 10,000 10,000 18,566 22,700 5,684,748 7,500 35,366,483 Samih Darwazah, Said Darwazah, Mazen Darwazah and Ali Al-Husry are Directors and shareholders of Darhold Limited. Darhold Limited holds 57,183,028 Ordinary Shares of Hikma. The table below breaks down their shareholding in Hikma by shares effectively owned through Darhold and shares held personally. DIrECTOr samih darwazah said darwazah mazen darwazah ali al husry The information in the above table has been audited by Deloitte. % Of DArHOLD EffECTIvE NO Of HIkMA SHArES MAx AwArD UNDEr LTIP HOLDINg IN OwN NAME/NOMINEE TOTAL SHArEHOLDINg OrDINAry SHArES Of 10 PENCE 16% 19% 10% 8% 9,150,000 10,865,000 5,718,000 4,575,000 310,000 207,000 2,136,299 418,445 808,225 1,109,748 11,286,299 11,593,445 6,733,225 5,684,748 101 Hikma PHarmaceuticals Plc / annual rePort 20124.3 remUneration reports continued totaL Compensation The following charts show the value of each of the main elements of the compensation package provided to the Executive Directors during 2012 and the potential available for 2013 (dependent upon performance). SAID DArwAZAH SALAry $000 803 803 803 750 2013 Low target stretch 2012 actual MAZEN DArwAZAH SALAry $000 539 539 539 504 2013 Low target stretch 2012 actual BONUS $000 0 803 1,606 1,200 BONUS $000 0 539 1,078 806 LTIP $000 0 843 1,767 1,324 LTIP $000 0 567 1,186 794 OTHEr $000 22 22 22 22 OTHEr $000 10 10 10 10 TOTAL $000 825 2,471 4,198 3,296 TOTAL $000 549 1,175 2,813 2,114 The following table shows the total compensation package for the Executive Directors during the year ended 31 December 2012 compared to the on target package provided at the median and upper quartile of the Comparator group: said darwazah (Chief executive) mazen darwazah (executive vice Chairman) POLICy POSITION POLICy vALUE ACTUAL TOTAL COMPENSATION 2012 ADHErENCE TO POLICy median to Upper quartile $5,677k to $6,865k $3,296k Below policy position median to Upper quartile $4,376k to $6,201k $2,114k Below policy position 102 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 This can be broken down amongst the Directors as follows: DIrECTOr executives said darwazah mazen darwazah 2011 TOTAL Us$ 1,648,536 1,092,000 non-executives samih darwazah sir david rowe-ham Breffni Byrne michael ashton ali al-husry ronald goode robert pickering1 Aggregate emoluments The information in the above table has been audited by Deloitte. 1 robert Pickering joined the Board on 1 September 2011 and, therefore, his 2011 fees have been annualised. 252,693 131,561 143,594 131,561 107,495 131,561 119,528 3,758,529 fEES/BASIC SALAry Us$ OTHEr BENEfITS Us$ ANNUAL BONUSES Us$ 2012 TOTAL Us$ 750,000 504,000 254,648 139,046 151,172 139,046 114,794 139,046 126,920 2,318,672 10,536 0 1,200,000 806,400 1,960,536 1,310,400 – – – – – – – [10,536] – – – – – – – 2,006,400 254,648 139,046 151,172 139,046 114,794 139,046 126,920 4,335,608 Closing statement we have further enhanced our approach to remuneration reporting this year and the Committee hopes that this has aided shareholder and stakeholder understanding of our remuneration policy and practices. Hikma remains open to discussion, should there be any areas for further clarification. for and on behalf of the remuneration Committee michael ashton Remuneration Committee Chairman 12 March 2013 103 Hikma PHarmaceuticals Plc / annual rePort 2012 4.4 direCtors’ report direCtors’ report OPEN fOr DISCUSSION Call +44 20 7399 2760 or E-mail: investors@hikma.uk.com The Directors submit their report together with the audited financial statements for the 52 weeks ended 31 December 2012. This report forms the management report for the purposes of the Disclosure and Transparency rules. readers are asked to cross refer to the governance report, remuneration report and sections of other relevant reports which are included in this report to the extent necessary to meet Hikma’s reporting obligations. operationaL Business review Hikma 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 Hikma, noting the performance and development of Hikma during the year and the position at the year end. The information that fulfils these requirements and which is incorporated in this report by reference, is included in the following sections of the Annual report: 4.4 COMMITTEE rEPOrTS review highLights 104 / Operational 105 / financial 106 / Directors 106 / Equity 109 / Directors’ responsibilities 3 A review of the business and strategy and expected future developments is set out in the Chairman’s statement on pages 4 and 5, the Chief Executive’s review on pages 10 to 16 and the financial review on pages 20 to 37 3 The principal risks and uncertainties are set out on pages 38 to 40 and financial risks are described on pages 144 to 148 3 key financial performance indicators are described on page 17 3 Information on environmental, social and community issues is set out in our Corporate responsibility report on pages 41 to 53, which also provides key performance indicators in this area 3 The principal operating subsidiaries are set out on page 56 104 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 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. The group’s pharmaceutical operations are conducted through three business segments: Branded, Injectable, and generic. The majority of the group’s operations are in the MENA region, the United States and Europe. The group does not have overseas branches within the meaning of the Companies Act 2006. The group’s net sales, gross profit and operating profit are shown by business segment in Note 4 to the consolidated financial statements. Hikma has not capitalised any interest payments. finanCiaL results The group’s profit for the year in 2012 was $107.2 million (2011: $83.5 million). dividend The Board is recommending a final dividend of 10 cents per share (approximately 6.7 pence) (2011: 7.5 cents). The proposed final dividend will be paid on 23 May 2013 to shareholders on the register on 19 April 2013, subject to approval at the Annual general Meeting on 16 May 2013. An interim dividend of 6 cents per share was paid on 8 October 2012 (approximately 3.694 pence per ordinary share) (2011: 5.5 cents) which together with the final dividend will make a total of 16 cents per share for the period (2011: 13 cents) Creditor payment policy Hikma’s policy, which is also applied by the group and will continue in respect of the 2013 financial year, is to settle terms of payment with all suppliers when agreeing the terms of each transaction and to ensure that suppliers are made aware of and abide by the terms of payment. Trade creditors of Hikma at 31 December 2012 were equivalent to 66 days’ purchases (2011: 61 days), based on the average daily amount invoiced by suppliers during the year. donations During the year the group made charitable donations of approximately $0.7 million (2011: $3.2 million): AMOUNT DONATED IN 2011 ($) AMOUNT DONATED IN 2012 ($) Local charities serving communities in which the group operates medical (donations in kind) political Total: 1,504,000 1,694,000 nil 3,199,000 304,124 363,740 nil 667,864 group policy prohibits the payment of political donations. research and development The group’s investment in research & Development (“R&D”) during 2012 represented 3.1% of group revenue (2011: 3.4%). further details on the group’s r&D activities can be found on page 37. related party transactions Details of related party transactions are included in Note 37 of the financial Statements on page 155. going Concern The Directors believe that the group is well diversified due to its geographic spread, product diversity and large customer and supplier base. The group operates in the relatively defensive generic pharmaceuticals industry which the Directors expect to be less affected compared to other industries. The group has decreased its year end net debt position to $406.5 million (2011: $421.9 million) following significant capital investment relating to recent acquisitions in 2011. Operating cash flow in 2012 was $182.2 million (2011: $126.4million). The group has $313.0 million (2011: $396.4 million) of undrawn banking facilities. These facilities are well diversified across the operating subsidiaries of the group and are with a number of financial institutions. 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 and political outlook. The Directors have formed a judgement that there is reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future. The Directors therefore continue to adopt the going concern basis in preparing the financial statements. 105 Hikma PHarmaceuticals Plc / annual rePort 2012indemnities The Directors benefit from qualifying third party indemnities made by Hikma which were in force during the year and as 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. eqUity Capital structure Details of the issued share capital, together with movements in the issued share capital during the year can be found in Note 31 to the financial statements. Hikma 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 Hikma. As at 31 December 2012: NOMINAL vALUE IN ISSUE ISSUED DUrINg THE yEAr ordinary 10 pence 197,036,507 1,185,200 During 2012, Hikma issued Ordinary Shares solely pursuant to the exercise of options under the Hikma Pharmaceuticals PLC 2004 Stock Option Plan and 2005 Long Term Incentive Plan. 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 Hikma’s Articles of Association (the “Articles”) and prevailing legislation. The Directors are not aware of any agreements between holders of Hikma’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 Hikma’s share capital and all issued shares are fully paid. Hikma has not placed any shares into treasury during the period under review. share Buy Back At the Annual general Meeting on 17 May 2012, shareholders gave the Directors authority to purchase shares from the market up to an amount equal to 10% of Hikma’s issued share capital at that time. This authority expires at the earlier of 30 june 2013 or the 2013 Annual general Meeting, which is scheduled for 16 May 2013. The Directors are proposing to renew this authority at the 2013 Annual general Meeting. During the year, Hikma did not acquire any of its own shares by direct purchase, nominee purchase or any other means nor did it dispose of such shares previously acquired. Hikma does not have a lien over its own shares. 4.4 direCtors’ report continued significant 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 Hikma 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 Hikma has contractual or other arrangements, who are deemed to be essential to the business of Hikma. auditors Each person who was a Director of Hikma at the date when this report was approved confirms that: 3 So far as the Director is aware, there is no relevant audit information of which Hikma’s auditors are unaware; and 3 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 Hikma’s auditors are aware of that information This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006. Deloitte LLP has expressed its willingness to continue in office as auditors and a resolution to reappoint them will be proposed at the forthcoming Annual general Meeting. direCtors 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 60 to 62. Details of the independence of Non-Executive Directors are set out in the report on corporate governance on page 68. All the Executive and Non-Executive Directors served Hikma throughout the year. It is the Board’s policy that all Directors should retire and seek re-election on an annual basis. Accordingly, Samih Darwazah, Said Darwazah, Mazen Darwazah, Sir David rowe-Ham, Ali Al-Husry, Breffni Byrne, Michael Ashton, ronald goode and robert Pickering will retire and seek re-election at the Annual general Meeting. Shareholders are referred to the Nomination Committee report on pages 76 to 78 and the profiles of each of the Directors on pages 60 to 62. 106 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 share issuance At the Annual general Meeting on 17 May 2012, the Directors were authorised to issue relevant securities up to an aggregate nominal amount of £560,220, and to be empowered to allot equity securities for cash on a non pre-emptive basis up to an aggregate nominal amount of £84,033, at any time up to the earlier of the date of the 2013 Annual general Meeting or 30 june 2013. The Directors propose to renew these authorities at the 2013 Annual general Meeting for a further year. In the year ahead, other than in respect of Hikma’s obligations to satisfy rights granted to employees under its various share-based incentive arrangements, the Directors have no present intention of issuing any share capital of Hikma. directors’ interests Details of Directors’ share-based incentives and interests in the ordinary shares of Hikma are provided in the Directors’ remuneration report on pages 82 to 103. substantial shareholdings As at the date of this document, Hikma 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 the share capital of Hikma: NAME Of SHArEHOLDEr NUMBEr Of SHArES PErCENTAgE HELD Details of the employee share schemes are set out in Note 35 to the financial statements. Shares are also held by the Hikma Pharmaceuticals Employee Benefit Trust (“EBt”) and are detailed in Note 35 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. No other shareholder has waived the right to a dividend. annual general meeting The Annual general Meeting of Hikma will be held at The westbury, Bond Street, Mayfair, London w1S 2yf on Thursday, 16 May 2013, starting at 11 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. The powers of the Directors are determined by the Articles, the Code and other relevant Uk legislation. The Directors’ powers are detailed in the Corporate governance report starting on page 54. The Articles give the Directors the power to appoint and remove Directors and they also provide for re-election at three-yearly intervals. The power to issue and allot shares contained in the Articles is subject to shareholder approval at each annual general meeting. The Articles, which are available on the website, may only be amended by special resolution of the shareholders. darhold Limited* Capita group international sectoral asset management norges Bank dupont Capital management *Messrs Samih Darwazah, Said Darwazah, Mazen Darwazah and Ali Al-Husry, each being a Director and shareholder of Hikma, are shareholders and Directors of Darhold Limited. 57,183,028 17,743,904 8,301,483 7,579,731 5,952,422 28.94% 9.01% 4.21% 3.85% 3.02% pre-emptive issue of shares During the year under review, and in the period since 1 November 2005, the date of Hikma’s IPO, Hikma did not issue any Ordinary Shares pursuant to an authority given by shareholders at an 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. takeover panel – rule 9 said darwazah mazen darwazah may darwazah hana ramadan tareq darwazeh Zeena murad LTIP grANTED 18 MAy 2012 MIP grANTED 18 MAy 2012 97,000 65,000 – – – – – – 794 2,630 1,296 1,570 107 Hikma PHarmaceuticals Plc / annual rePort 20124.4 direCtors’ report continued HOLDINg, 13 APrIL 2012 HOLDINg, 12 MArCH 2013 HOLDINg If ALL ExISTINg SOP, MIP, LTIP ArE ExErCISED HOLDINg If MAxIMUM AwArD grANTED IN 2013 ExErCISED NO Of OrDINAry SHArES PErCENTAgE Of ISSUED SHArE CAPITAL NO Of OrDINAry SHArES PErCENTAgE Of ISSUED SHArE CAPITAL NO Of OrDINAry SHArES PErCENTAgE Of ISSUED SHArE CAPITAL NO Of OrDINAry SHArES PErCENTAgE Of ISSUED SHArE CAPITAL darhold Limited Concert party 57,183,028 64,790,718 29.06% 39.92% 57,183,028 64,024,625 28.94% 32.40% – 64,556,432 – 32.67 – 64,711,432 – 32.61% the MIPs, the Concert Party would potentially have, in aggregate, interests in 64,711,432 shares in the capital of Hikma (representing 32.61 per cent. of the enlarged issued share capital of Hikma, on the basis that no ordinary shares were issued other than pursuant to the exercise of such options or vesting of LTIPs/MIPs). During the period from the Annual general Meeting in 2012 to 12 March 2013, the LTIP/MIP Holders together with other members of the Concert Party who hold options over ordinary shares pursuant to Hikma’s 2005 Long Term Incentive Plan (each an “option holder”) exercised, in aggregate, options over 187,800 ordinary shares in the capital of Hikma. At the Annual general Meeting held on 17 May 2012, a vote of the independent shareholders of Hikma approved the award of up to an aggregate of 162,000 ordinary shares pursuant to Hikma’s 2005 Long Term Incentive Plan to Said Darwazah and Mazen Darwazah (the “Ltip holders”) and 20,000 ordinary shares pursuant to the Management Incentive Plan to Hana ramadan, May Darwazah, Zeena Murad and Tareq Darwazah (the “Mip holders”). Because of the relationship of the LTIP Holders and the MIP Holders with Darhold Limited, who at the time of the Annual general Meeting held 57,183,028 ordinary shares (at 13 April 2012 representing 29.08 per cent. of the issued share capital of Hikma, and as at 12 March 2013 being the latest practicable date prior to the publication of this document, holding 57,183,028 ordinary shares, representing 28.94 per cent. of the issued share capital of Hikma), each of the LTIP Holders and the MIP 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 13 April 2012, the Concert Party held, in aggregate, interests in 64,790,718 ordinary shares in the capital of Hikma (then representing 32.92 per cent. of the then issued share capital of Hikma). As at 12 March 2013 being the latest practicable date prior to the publication of this document, the Concert Party held, in aggregate, interests in 64,024,625 ordinary shares in the capital of Hikma (representing 32.40 per cent. of the then issued share capital of Hikma). On full exercise of the options under the Hikma Pharmaceuticals 2004 Stock Option Plan (the “2004 plan”) and full vesting of the LTIPs and 108 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 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 European Union (“ifRs”) and have also elected to prepare financial statements for Hikma in accordance with the IfrS under EU law. Company law requires the Directors to prepare such financial statements in accordance with IfrS, the Companies Act 2006 and Article 4 of the International Accounting Standard (“iAs”) regulations. IAS 1 requires that financial statements present fairly for each financial year Hikma’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 IfrS. Directors are also required to: 3 Properly select and apply accounting policies 3 Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information 3 Provide additional disclosures when compliance with the specific requirements in IfrS 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 3 Make an assessment of Hikma’s ability to continue as a going concern The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain Hikma’s transactions and disclose with reasonable accuracy at any time the financial position of Hikma, 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 Directors’ remuneration report which comply with the requirements of the Companies Act 2006. The Directors are responsible for the maintenance and integrity of Hikma’s 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: 3 The financial statements, prepared in accordance with International financial reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of Hikma and the undertakings included in the consolidation taken as a whole; and 3 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 Hikma and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face 3 Provide additional disclosures when compliance with the specific requirements in IfrS 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 By order of the Board said darwazah Chief Executive Officer 12 March 2013 mazen darwazah Executive Vice Chairman, CEO MENA 109 Hikma PHarmaceuticals Plc / annual rePort 2012 110 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 finanCiaL statements 111 Hikma PHarmaceuticals Plc / annual rePort 2012independent aUditor’s report to the memBers of hiKma pharmaCeUtiCaLs pLC we have audited the financial statements of Hikma Pharmaceuticals PLC for the year ended 31 December 2012, which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated and Company balance sheets, the consolidated and Company statements of changes in equity, the consolidated and Company cash flow statements, and the related Notes 1 to 57. The financial reporting framework that has been applied in their preparation is applicable law and International financial reporting Standards (“IfrSs”) as adopted by the European Union and, as regards the Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. respective responsibilities of directors and auditor As explained more fully in the Directors’ responsibilities Statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (Uk and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. opinion on financial statements In our opinion: 3 the financial statements give a true and fair view of the state of the group’s and of the Company’s affairs as at 31 December 2012 and of the group’s profit for the year then ended; 3 the group financial statements have been properly prepared in accordance with IfrSs as adopted by the European Union; 112 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 3 the Company financial statements have been properly prepared in accordance with IfrSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and 3 the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS regulation. separate opinion in relation to ifrss as issued by the iasB As explained in Note 2 to the group financial statements, the group in addition to complying with its legal obligation to apply IfrSs as adopted by the European Union, has also applied IfrSs as issued by the International Accounting Standards Board (“IASB”). In our opinion the group financial statements comply with IfrSs as issued by the IASB. opinion on other matters prescribed by the Companies act 2006 In our opinion: 3 the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and 3 the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements. matters on which we are required to report by exception we have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: 3 adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or 3 the Company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or 3 certain disclosures of Directors’ remuneration specified by law are not made; or 3 we have not received all the information and explanations we require for our audit. Under the Listing rules we are required to review: 3 the Directors’ statement, contained within the Directors’ report, in relation to going concern; 3 the part of the Corporate governance Statement relating to the Company’s compliance with the nine provisions of the Uk Corporate governance Code specified for our review; and 3 certain elements of the report to shareholders by the Board on Directors’ remuneration. paul franek fCa (Senior Statutory Auditor) for and on behalf of deloitte LLp Chartered accountants and statutory auditor London, United Kingdom 12 March 2013 ConsoLidated inCome statement for the year ended 31 deCemBer 2012 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: – acquisition and integration related expenses – severance expenses – plant remediation costs – inventory related adjustment intangible amortisation* Operating profit share of results of associated companies finance income finance expense other expense (net) Profit before tax tax Profit for the year attributable to: non-controlling interests Equity holders of the parent Earnings per share (cents) Basic diluted adjusted basic adjusted diluted *Intangible amortisation comprises the amortisation of intangible assets other than software. Note 2012 $000 2011 $000 4 4 4 8 5 5 5 5 5 4 16 9 10 11 6 31 13 13 13 13 1,108,721 (607,603) 501,118 (152,763) (124,560) (34,019) (23,002) (334,344) 193,835 (3,131) (4,469) (6,787) – (12,674) 166,774 892 1,266 (35,717) (1,174) 132,041 (24,826) 107,215 6,895 100,320 107,215 51.1 50.6 61.4 60.8 918,025 (522,676) 395,349 (125,295) (107,540) (31,218) (12,608) (276,661) 145,824 (16,368) – – (1,770) (8,998) 118,688 (1,164) 468 (23,368) (732) 93,892 (10,423) 83,469 3,362 80,107 83,469 41.3 40.5 52.0 51.0 113 Hikma PHarmaceuticals Plc / annual rePort 2012ConsoLidated statement of Comprehensive inCome for the year ended 31 deCemBer 2012 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 exchange difference on translation of foreign operations Total comprehensive income for the year attributable to: non-controlling interests Equity holders of the parent 2012 $000 107,215 (23) (2,120) (26,547) 78,525 2011 $000 83,469 (42) (692) (15,294) 67,441 1,585 76,940 78,525 3,557 63,884 67,441 114 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 ConsoLidated BaLanCe sheet at 31 deCemBer 2012 non-CUrr ent assets intangible assets property, plant and equipment interests in associated companies deferred tax assets financial and other non-current assets CUr r ent assets inventories income tax asset trade and other receivables Collateralised and restricted cash Cash and cash equivalents other current assets Total assets CUrr ent LiaBiLities Bank overdrafts and loans obligations under finance leases trade and other payables income tax provision other provisions other current liabilities Net current assets non-CUr r ent LiaBiLities Long-term financial debts obligations under finance leases deferred tax liabilities derivative financial instruments Total liabilities Net assets eqUity share capital share premium own shares other reserves Equity attributable to equity holders of the parent non-controlling interests Total equity Note 2012 $000 2011 $000 14 15 16 17 18 19 20 21 22 23 27 24 25 26 27 17 29 30 32 31 433,049 419,943 38,337 45,772 11,044 948,145 272,231 1,016 328,147 1,756 176,510 2,307 781,967 1,730,112 192,879 3,480 194,805 23,029 10,664 42,097 466,954 315,013 372,488 15,891 22,921 4,008 415,308 882,262 847,850 35,091 279,116 (86) 518,532 832,653 15,197 847,850 408,804 421,357 37,445 36,072 12,079 915,757 239,260 1,486 315,856 2,595 94,715 5,973 659,885 1,575,642 152,853 3,300 169,212 14,561 9,398 39,622 388,946 270,939 344,895 18,134 23,147 1,886 388,062 777,008 798,634 34,904 278,094 (2,222) 465,799 776,575 22,059 798,634 The financial statements of Hikma Pharmaceuticals PLC, registered number 5557934, were approved by the Board of Directors and signed on its behalf by: said darwazah Director mazen darwazah Director 12 March 2013 115 Hikma PHarmaceuticals Plc / annual rePort 2012ConsoLidated statement of Changes in eqUity for year ended 31 deCemBer 2012 merger reserve $000 revaluation reserves $000 translation reserves $000 retained earnings $000 total reserves $000 share capital $000 share premium $000 own shares $000 33,920 – 4,085 – (12,080) 409,724 435,649 34,525 275,968 (2,220) – 80,107 80,107 – – – total equity attributable to equity shareholders of the parent $000 non- controlling interests $000 total equity $000 743,922 80,107 6,378 750,300 83,469 3,362 Balance at 1 January 2011 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 (loss) Total comprehensive income for the year issue of equity shares purchase of own shares Cost of equity settled employee share scheme exercise of equity settled employee share scheme deferred tax arising on share-based payments Current tax arising on share-based payments dividends on ordinary shares (note 12) acquisition of subsidiaries adjustment arising from change in non-controlling interests issue of equity shares of subsidiary Balance at 31 December 2011 and 1 January 2012 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 (loss) Total comprehensive income for the year issue of equity shares purchase of own shares Cost of equity settled employee share scheme exercise of equity settled employee share scheme deferred tax arising on share-based payments Current tax arising on share-based payments dividends on ordinary shares (note 12) adjustment arising from change in non-controlling interests Balance at 31 December 2012 – – – – – – – – – – – – – – – – – (42) (42) – (181) – – – (15,489) (692) 181 (692) – – (15,489) – – – – – – – – – – – – (42) – (42) (692) – (15,489) – – (692) – 195 (15,294) (181) (15,489) 79,554 – – – – – – 63,884 – – – 379 – – 2,126 – – – (115) 63,884 2,505 (115) 3,557 – – 67,441 2,505 (115) – – – – – – – – – 7,507 7,507 – (113) (113) – (5,644) (5,644) 3,750 – 3,750 – (25,201) (25,201) – – – – – (14,033) (14,033) – – – – – – – – – – – – – – – – – – – 7,507 – 7,507 113 – – – – – – – – – (5,644) – (5,644) 3,750 (25,201) – – 3,750 (100) (25,301) 26,650 26,650 (14,033) (14,914) (28,947) 488 488 – 33,920 – 3,904 – (27,569) 455,544 465,799 34,904 278,094 – – 100,320 100,320 – (2,222) – 776,575 100,320 22,059 798,634 6,895 107,215 – – – – – – – – – – – – – – (23) (23) – (181) – – – (21,237) (2,120) 181 (2,120) – – (21,237) – – – – – – – – – – – – (23) – (23) (2,120) – (21,237) – – (2,120) – (5,310) (26,547) (181) (21,237) 98,358 – – – – – – 76,940 – – – 187 – – 1,022 – – – (158) 76,940 1,209 (158) 1,585 – – 78,525 1,209 (158) – – – – – – 7,961 7,961 – (2,294) (2,294) – 98 98 – 1,411 1,411 – (26,550) (26,550) – – – – – – – 7,961 – 7,961 – 2,294 – 98 – – – 98 1,411 – 1,411 – – – – – – (26,550) (1,271) (27,821) – (86) (4,833) 832,653 (7,176) (12,009) 15,197 847,850 – 33,920 – 3,723 – – (4,833) (48,806) 529,695 518,532 35,091 279,116 (4,833) – 116 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 ConsoLidated Cash fLow statement for the year ended 31 deCemBer 2012 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 acquisition of interest in associated companies investment in financial and other non-current assets acquisition of subsidiary undertakings net of cash acquired payments of costs directly attributable to acquisitions finance income Net cash used in investing activities finanCing aCtivities decrease in collateralised and restricted cash increase in long-term financial debts repayment of long-term financial debts increase in short-term borrowings decrease in obligations under finance leases dividends paid dividends paid to non-controlling shareholders interest paid proceeds from issue of new shares proceeds from non-controlling interest for capital increase in subsidiary acquisition of non-controlling interest in subsidiary Net cash generated by financing activities Net increase 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 Note 33 2012 $000 2011 $000 182,161 126,397 5 (51,405) 989 (38,783) 255 – 151 (11,978) (1,519) 1,266 (101,024) 839 151,997 (124,183) 52,390 (2,122) (26,550) (1,271) (34,188) 1,051 – (12,009) 5,954 87,091 94,715 (5,296) 176,510 (69,032) 696 (8,967) 191 (38,610) (287) (217,779) (10,147) 468 (343,467) 978 335,353 (68,364) 59,095 (2,028) (25,201) (100) (23,758) 2,390 488 (29,196) 249,657 32,587 62,718 (590) 94,715 117 Hikma PHarmaceuticals Plc / annual rePort 2012notes to the ConsoLidated finanCiaL statements 1. adoption of new and r evised standards The following new and revised Standards and Interpretations have been adopted in the current year. Their adoption has not had any significant impact on the amounts reported in these financial statements but, with the exception of the amendment to IfrS 1 and IfrIC 20, may impact the accounting for future transactions and arrangements. amendments to ias 1 Presentation of Financial Statements (Amended June 2011) ias 19 Employee Benefits (revised June 2011) amendments to ifrs 7 Financial Instruments: Disclosure The amendment increases the required level of disclosure within the statement of comprehensive income. The amendments require the recognition of changes in defined benefits obligations and in the fair value of scheme assets when they occur. The amendments increase the disclosure requirements for transactions involving the transfer of financial assets in order to provide greater transparency around risk exposures when financial assets are transferred. amendments to ias 12 Income Taxes The amendments provide a practical approach for measuring deferred tax liabilities and deferred tax assets when investment property is measured using the fair value model in ias 40 ‘investment property’. The amendments introduce a presumption that an investment property is recovered entirely through sale. 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) ifrs 1 (amended) ifrs 7 (amended) ifrs 9 ifrs 10 ifrs 11 ifrs 12 ifrs 13 ias 27 (revised) ias 28 (revised) ias 32 (amended) ifriC 20 Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters Government Loans Disclosures – Offsetting of Financial Assets and Financial Liabilities Financial Instruments Consolidated Financial Statements Joint Arrangements Disclosure of Interests in Other Entities Fair Value Measurement Separate Financial Statements Investments in Associates and Joint Ventures Offsetting Financial Assets and Financial Liabilities Stripping Costs in the Production Phase of a Surface Mine The Directors do not expect that the adoption of the standards listed above will have a material impact on the financial statements of the group in future periods. 118 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 2. signifiCant aCCoUnting poLiCies general information Hikma Pharmaceuticals PLC is a company incorporated in the United kingdom under the Companies Act. The address of the registered office is given on the inside back cover. 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 (“IASB”). 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. The group’s previously published financial statements were also prepared in accordance with IfrSs issued by the IASB and also in accordance with IfrSs adopted for use in the European Union. 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. going concern The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements (see page 105). 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”). Control is achieved where the Company has the ability 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, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the aggregate of consideration, non-controlling interest and fair value of previously held equity interest over the fair values of the identifiable net assets acquired is recognised as goodwill. Non-controlling interests in the net assets of consolidated subsidiaries may initially be measured at fair value or at the non-controlling interests’ proportionate share of the fair value of the acquiree’s identifiable net assets. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount initially recognised plus the non-controlling interests’ share of subsequent changes in equity. Total comprehensive income is attributed to non-controlling interests even if this results in the non-controlling interests having a deficit balance. Changes in the group’s interests in subsidiaries that do not result in a loss of control are accounted for as equity transactions. The carrying amount of the group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the equity shareholders 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. Business combinations The acquisition of subsidiaries is accounted for using the acquisition method. The consideration 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. Acquisition related costs are recognised in the consolidated income statement as incurred. where applicable, the consideration for the acquisition includes any asset or liability resulting from a contingent consideration arrangement, measured at its acquisition-date fair value. Subsequent changes in those fair values can only affect the measurement of goodwill where they occur during the ‘measurement period’ and are as a result of additional information becoming available about facts and circumstances that existed at the acquisition date. All other changes are dealt with in accordance with relevant IfrSs. This will usually mean that changes in the fair value of consideration are recognised in the consolidated income statement. 119 Hikma PHarmaceuticals Plc / annual rePort 2012notes to the ConsoLidated finanCiaL statements Continued 2. signifiCant aCCoUnting poLiCies Continued where a business combination is achieved in stages, the group’s previously-held interests in the acquired entity are remeasured to fair value at the acquisition date (i.e. the date the group attains control) and the resulting gain or loss, if any, is recognised in the consolidated income statement. 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 aggregate of consideration, non-controlling interest and fair value of previously held equity interest over the fair values of the identifiable net assets acquired. 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 consideration, the excess is recognised immediately in the consolidated income statement. The non-controlling interest in the acquiree is initially measured at the non-controlling interest’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see below), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised as of that date. The measurement period is the period from the date of acquisition to the date the group obtains complete information about facts and circumstances that existed as of the acquisition date, and is subject to a maximum of one year. investment in associates An associate is an entity over which the group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee revenue but is not control or joint control over those policies. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for in accordance with IfrS 5 Non-Current Assets Held for Sale and Discontinued Operations. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the group’s share of the net assets of the associate, less any impairment in the value of individual investments. Losses of an associate in excess of the group’s interest in that associate (which includes any long-term interests that, in substance, form part of the group’s net investment in the associate) are recognised only to the extent that the group has incurred legal or constructive obligations or made payments on behalf of the associate. Any excess of the cost of acquisition over the group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the associate recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of that investment. Any excess of the group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in the consolidated income statement. where a group entity transacts with an associate of the group, profits and losses are eliminated to the extent of the group’s interest in the relevant associate. intangible assets An intangible asset is recognised if: • it is identifiable; • it is probable that the expected future economic benefits that are attributable to the asset will flow to the group; and • the cost of the asset can be measured reliably. The probability of expected future economic benefits is assessed using reasonable and supportable assumptions that represent management’s best estimate of the set of economic conditions that will exist over the useful life of the asset. judgement is used to assess the degree of certainty attached to the flow of future economic benefits that are attributable to the use of the asset on the basis of the evidence available at the time of initial recognition, giving greater weight to external evidence. Expenditures on research and development activities are charged to the consolidated income statement, except only when the criteria for recognising an intangible asset are met, which is usually when approval from the relevant regulatory authority is considered probable. (a) Goodwill: arising in a business combination is recognised as an asset at the date that control is acquired (the acquisition date). goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest (if any) in the entity over the net of the acquisition-date fair value of the identifiable assets acquired and the liabilities assumed. 120 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 2. signifiCant aCCoUnting poLiCies Continued If, after reassessment, the group’s interest in the fair value of the acquiree’s identifiable net assets exceeds the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest in the acquiree (if any), the excess is recognised immediately in the consolidated income statement as a bargain purchase gain. 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 frequently 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. An impairment loss recognised for goodwill is not reversed in a subsequent period. On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the consolidated income statement on disposal. (b) Marketing rights: are amortised over their useful lives commencing in the year in which the rights first generate sales (See Note 14). (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) (ii) product files and under-licensed products are assigned indefinite useful lives which are reviewed for impairment at least annually; and under-licence agreements and product dossiers are amortised over their useful lives from the date of acquisition. Intangible assets recognised from development activities are amortised over their useful economic life. (e) Purchased software: is amortised over the useful economic life when the asset is available for use. (f) In process research and development recognised on acquisition: is amortised over the useful life from the date 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. foreign currencies The individual financial statements of each group company are presented in the currency of the primary economic environment in which it operates (its functional currency). 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 presentational currency of the consolidated financial statements. Transactions in currencies other than a company’s functional 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. Exchange differences arising on retranslation of monetary assets and liabilities are recognised in the consolidated income statement in the period in which they arise. 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 other comprehensive income 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 consolidated income statement when goods or services are supplied or made available to external customers against orders received and when title and risk of loss have passed. revenue represents the amounts receivable after the deduction of discounts, value added tax, other sales taxes, allowances given, provisions for chargebacks 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. 121 Hikma PHarmaceuticals Plc / annual rePort 20122. signifiCant aCCoUnting poLiCies Continued 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 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. returns In certain countries the group has a product return policy that allows customers to return the product within a specified period prior to and subsequent to the expiration date. Provisions for returns are recognised in the period in which the underlying sales are recognised, as a reduction of sales revenue. The group estimates its provision for returns based on historical experience, representing management’s best estimate. 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 makes adjustments when it believes that actual product returns may differ from established reserves. rebates In certain countries, rebates are granted to healthcare authorities and under contractual arrangements with certain customers. Products sold in the United States are covered by various programmes (such as Medicaid) under which products are sold at a discount. The group estimates its provision for rebates based on current contractual terms and conditions as well as 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 rebate liabilities. The group continually monitors the provisions for rebates and makes adjustments when it believes that actual rebates may differ from established reserves. All rebates are recognised in the period in which the underlying sales are recognised as a reduction of sales revenue. 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 the consolidated income statement 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 the consolidated income statement 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. 122 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSContinued2. signifiCant aCCoUnting poLiCies Continued Leasing The Group as lessee Leases are classified as finance 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 finance 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 consolidated income statement over the expected useful lives of the assets concerned. 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 consolidated 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. 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 taxable 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 consolidated 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 offset 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’). 123 Hikma PHarmaceuticals Plc / annual rePort 20122. 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 shares 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 fair value of the equity settled stock options scheme is determined using a binomial model. The fair value of the management incentive plan is determined based on the share price as at the date of grant discounted by dividend yield. The fair value of the long-term incentive plan is determined using a Monte Carlo valuation model, for long-term incentive plan awards made from 2010, 50% of the award is subject to a TSr performance condition which is valued by applying the Monte Carlo simulation methodology, the remaining 50% of the award is subject to financial metrics and valued by applying a Black-Scholes 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 35). 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 equity instruments that will eventually vest. The group revises its estimate of the number of equity instruments expected to vest (except for failure to satisfy a market vesting condition) and the impact of the revision of the original estimates, if any, is recognised in the consolidated income statement, such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to equity reserves. where the terms of a share-based payments award 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 above. 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 stated at cost on acquisition and are depreciated on a straight-line basis except for land at the following depreciation rates: Buildings vehicles machinery fixtures and equipment 2% to 4% 10% to 20% 5% to 33% 6% to 33% A units of production method of depreciation is applied to operations in their start up phase, such as the lyophilised manufacturing plant in Portugal, as this reflects the expected pattern of consumption of the future economic benefits embodied in the assets. when these assets are fully utilised, a straight-line method of depreciation is applied. Projects under construction are not depreciated until construction has been completed and assets are considered ready for use. 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 of 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 consolidated 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 consolidated income statement. 124 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSContinued2. signifiCant aCCoUnting poLiCies Continued inventories Inventories are stated at the lower of cost and net realisable value. Purchased products are stated at acquisition cost including all additional attributable costs incurred in bringing each product to its present location and condition. The cost of own-manufactured products comprises direct materials and, where applicable, direct labour costs and any 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 consolidated income statement. Net realisable value represents the estimated selling price in the ordinary course of business, less 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. Financial assets All financial assets are recognised and derecognised on a trade date, where the purchase or sale of a financial asset is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned, and are initially measured at fair value, plus transaction costs, except for those financial assets classified as at fair value through the consolidated income statement, which are initially measured at fair value. financial assets are classified into the following specified categories: financial assets ‘at fair value through profit or loss’ (“fvTPL”), ‘held-to- maturity’ investments, ‘available-for-sale’ (“AfS”) financial assets and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Effective interest method The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. Income is recognised on an effective interest basis for debt instruments other than those financial assets classified as at fvTPL. Loans and receivables Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as ‘loans and receivables’. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. Available for sale financial assets Listed shares and listed redeemable notes held by the group that are traded in an active market are classified as being AfS and are stated at fair value. gains and losses arising from changes in fair value are recognised in other comprehensive income, with the exception of impairment losses, interest calculated using the effective interest method and foreign exchange gains and losses on monetary assets, which are recognised directly in the consolidated income statement. where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognised in the investments revaluation reserve is reclassified to the consolidated income statement. The group’s investments in unlisted shares that are not traded in an active market 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 consolidated income statement. Financial liabilities and equity Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement. Financial liabilities financial liabilities are classified as either financial liabilities ‘at fvTPL’ or ‘other financial liabilities’. Other financial liabilities Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. 125 Hikma PHarmaceuticals Plc / annual rePort 20122. signifiCant aCCoUnting poLiCies Continued derivative financial instruments 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. Hedge accounting The group designates certain hedging instruments, in respect of interest rate and foreign currency risk, as cash flow hedges. Hedges of foreign exchange risk on firm commitments are accounted for as cash flow hedges. At the inception of the hedge relationship, the entity documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. furthermore, at the inception of the hedge and on an ongoing basis, the group documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item. Note 29 sets out details of the fair values of the derivative instruments used for hedging purposes. Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the consolidated income statement. Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to the consolidated income statement in the periods when the hedged item is recognised in the consolidated income statement, in the same line of the income statement as the recognised hedged item. Hedge accounting is discontinued when the group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. Any gain or loss recognised in other comprehensive income at that time is accumulated in equity and is recognised when the forecast transaction is ultimately recognised in the consolidated income statement. when a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognised immediately in the consolidated income statement. 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. 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 property, plant and equipment and intangible assets excluding goodwill At each balance sheet date, the group reviews the carrying amounts of its property, plant and equipment 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 to determine the extent of the impairment loss (if any). where the asset does not generate cash flows that are independent from other assets, the group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment at least 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 cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in the consolidated income statement, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease to the extent that it does not exceed the previous revaluation surplus, and any excess is recognised in the consolidated income statement. where an impairment loss subsequently reverses, the carrying amount of the asset (or 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 (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in the consolidated income statement, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. 126 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSContinued3. 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 group’s Directors believe that, among others, the following accounting policies that involve Directors’ judgements and estimates are the most critical to understanding and evaluating the group’s financial results. revenue recognition The group’s revenue recognition policies require Directors to make a number of estimates, with the most significant relating to chargebacks, product returns, rebates and price adjustments (See Note 2) which vary by product arrangements and buying groups. 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 critical areas of judgement in relation to goodwill and intangible assets are the useful economic lives of the product-related intangibles, the growth rates used in the impairment tests and the discount rates used to determine net present values. Contingent liabilities The group is involved in various legal proceedings considered typical to its business relating to employment, product liability and other commercial disputes. Often this litigation is subject to substantial uncertainties, and therefore the probability of a loss, if any, being incurred or an estimate of the amount of any loss is difficult to ascertain. Consequently, it is often not practicable to make a reasonable estimate of the possible financial effect, if any, that could arise from the ultimate resolution of legal proceedings. In such cases, where the group believes that disclosure is required, information regarding the nature and facts of the case is disclosed. for current matters see Note 34. 127 Hikma PHarmaceuticals Plc / annual rePort 20124. segmentaL r eporting for management purposes, the group is currently organised into three operating divisions – Branded, Injectables and generics. These divisions are the basis on which the group reports its segmental information. The group discloses underlying operating profit as the measure of segmental result, as this is the measure used in the decision-making and resource allocation process of the chief operating decision maker, who is the group’s Chief Executive Officer. Information regarding the group’s operating segments is reported below. The following is an analysis of the group’s revenue and results by reportable segment in 2012: year ended 31 december 2012 revenue Cost of sales Gross profit Adjusted segment result exceptional items: – integration related expenses – severance expenses – plant remediation costs intangible amortisation* segment result Unallocated corporate expenses Adjusted operating profit operating profit results from associated companies finance income finance expense other expense (net) profit before tax tax profit for the year attributable to: non-controlling interest equity holders of the parent Branded $000 528,854 (271,508) 257,346 123,634 (701) (2,527) – (9,029) 111,377 injectables $000 470,030 (251,302) 218,728 122,952 (2,430) (1,380) – (3,614) 115,528 generics $000 103,679 (80,339) 23,340 (13,511) – (562) (6,787) (31) (20,891) others $000 6,158 (4,454) 1,704 (3,338) – – – – (3,338) group $000 1,108,721 (607,603) 501,118 229,737 (3,131) (4,469) (6,787) (12,674) 202,676 (35,902) 193,835 166,774 892 1,266 (35,717) (1,174) 132,041 (24,826) 107,215 6,895 100,320 107,215 *Intangible amortisation comprises the amortisation of intangible assets other than software. “Others” mainly comprises Arab Medical Containers Ltd, 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, donations, and travel expenses. 128 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSContinued4. segmentaL r eporting Continued segment assets and liabilities 2012 additions to property, plant and equipment (cost) additions to intangible assets total property, plant and equipment and intangible assets (net book value) depreciation amortisation (including software) interests in associated companies Balance sheet total assets total liabilities Branded $000 26,071 1,886 503,858 21,120 9,937 – injectables $000 16,916 35,738 281,588 12,944 5,750 – generics $000 5,193 7,056 61,129 6,710 160 – Corporate and others $000 1,661 – 6,417 1,585 185 38,337 group $000 49,841 44,680 852,992 42,359 16,032 38,337 1,050,373 574,526 481,001 252,054 135,214 5,751 63,524 49,931 1,730,112 882,262 The following is an analysis of the group’s revenue and results by reportable segment in 2011: year ended 31 december 2011 revenue Cost of sales gross profit Adjusted segment result exceptional items: – integration related expenses – inventory related adjustments intangible amortisation* segment result Adjusted unallocated corporate expenses exceptional items: – acquisition related expenses Unallocated corporate expenses Adjusted operating profit operating profit results from associated companies finance income finance expense other expense (net) profit before tax tax profit for the year attributable to: non-controlling interest equity holders of the parent Branded $000 441,907 (227,830) 214,077 105,143 (921) – (5,763) 98,459 injectables $000 315,728 (188,151) 127,577 54,938 (4,551) (1,770) (3,186) 45,431 generics $000 154,813 (102,609) 52,204 17,124 – – (39) 17,085 others $000 5,577 (4,086) 1,491 (2,369) – – (10) (2,379) group $000 918,025 (522,676) 395,349 174,836 (5,472) (1,770) (8,998) 158,596 (29,012) (10,896) (39,908) 145,824 118,688 (1,164) 468 (23,368) (732) 93,892 (10,423) 83,469 3,362 80,107 83,469 *Intangible amortisation comprises the amortisation of intangible assets other than software. “Others” mainly comprise Arab Medical Containers Ltd, 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, donations, travel expenses and acquisition related expenses. 129 Hikma PHarmaceuticals Plc / annual rePort 20124. segmentaL r eporting Continued segment assets and liabilities 2011 additions to property, plant and equipment (cost) acquisition of subsidiary’s property, plant and equipment (net book value) additions to intangible assets intangible assets arising on acquisition total property, plant and equipment and intangible assets (net book value) depreciation amortisation (including software) interests in associated companies Balance sheet total assets total liabilities Branded $000 44,869 24,125 5,054 110,900 527,240 18,205 7,064 – injectables $000 11,926 50,071 2,520 40,324 244,725 10,521 3,748 – generics $000 12,925 – 1,106 – 50,759 6,250 307 – Corporate and others $000 975 – 287 – 7,437 684 224 37,445 group $000 70,695 74,196 8,967 151,224 830,161 35,660 11,343 37,445 958,709 490,523 389,819 197,271 168,526 31,514 58,588 57,700 1,575,642 777,008 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 United states europe and rest of the world United Kingdom The top selling markets were as below: United states saudi arabia algeria 2012 $000 619,185 399,877 80,992 8,667 1,108,721 2012 $000 399,877 124,819 120,828 645,524 2011 $000 508,776 317,334 87,622 4,293 918,025 2011 $000 317,334 121,387 102,495 541,216 Included in revenues arising from the Branded and Injectables segments are revenues of approximately $103,971,000 (2011: $101,905,000) which arose from sales to the group’s largest customer, which is located in Saudi Arabia. The following is an analysis of the total non-current assets excluding deferred tax and financial instruments and an analysis of total assets by the geographical area in which the assets are located: total non-current assets excluding deferred tax and financial instruments as at 31 december 2012 $000 563,091 144,586 155,604 345 863,626 2011 $000 567,935 141,481 131,589 800 841,805 total assets as at 31 december 2012 $000 1,157,406 191,302 372,797 8,607 1,730,112 2011 $000 1,019,288 197,128 349,705 9,521 1,575,642 middle east and north africa europe United states United Kingdom 130 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSContinued5. 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. acquisition related expenses integration related expenses severance expenses plant remediation costs inventory related adjustment Exceptional items intangible amortisation* Exceptional items and intangible amortisation tax effect Impact on profit for the year 2012 $000 – (3,131) (3,131) (4,469) (6,787) – (14,387) (12,674) (27,061) 6,852 (20,209) 2011 $000 (10,896) (5,472) (16,368) – – (1,770) (18,138) (8,998) (27,136) 6,374 (20,762) *Intangible amortisation comprises the amortisation of intangible assets other than software. Acquisition and integration related costs During the year, the group incurred $3,131,000 of costs associated with the integration of MSI, Promopharm S.A, and Savanna. In the previous year, acquisition and integration-related expenses were incurred as a result of the acquisition of MSI, Promopharm, and Savanna. Acquisition-related expenses are included in unallocated corporate expenses while integration-related expenses are included in segment results. Acquisition-related expenses mainly comprise third party consulting services, legal and professional fees. Costs of $1,519,000 (2011: $10,147,000) have been classified as investing activities in the cash flow statement relating to the cash outflow in respect of acquisition and integration costs in the period. Other costs Other costs include severance expenses related to the restructuring of management teams across all three operating regions. The generics segment incurred plant remediation costs for compliance work at our Eatontown facility in response to observations made by the US fDA. In the prior year, the inventory-related adjustment reflects the fair value uplift of the inventory acquired as part of the MSI acquisition. 6. profit for the year Profit for the year has been arrived at after charging/(crediting): net foreign exchange losses research and development costs Loss on disposal of property, plant and equipment Loss/(gain) on disposals of intangible assets depreciation of property, plant and equipment amortisation of intangible assets (including software) inventories: Cost of inventories recognised as an expense write-down of inventories staff costs (see note 7) auditor’s remuneration (see below) A more detailed analysis of the group’s auditor’s remuneration is provided on the following page. 2012 $000 2,759 34,019 349 67 42,359 16,032 2011 $000 111 31,218 22 (91) 35,660 11,343 367,711 19,218 294,188 1,941 330,537 12,271 237,839 3,734 131 Hikma PHarmaceuticals Plc / annual rePort 20126. profit for the year Continued The group’s auditor’s remuneration on a worldwide basis was as 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 – other services** Total non-audit fees Total fees 2012 $000 387 815 1,202 128 1,330 91 266 254 611 1,941 2011 $000 324 825 1,149 463 1,612 135 239 1,748 2,122 3,734 * Audit related services relate to review procedures in respect of the interim financial information. The prior year figure includes services for the opening balance sheet work in respect of MSI, Promopharm and the prospectus work relating to the Promopharm acquisition. ** Other services include transaction services related to corporate transactions. The previous year’s figure includes integration planning performed in the US in respect of the MSI acquisition. A description of the work of the Audit Committee is set out in the Audit Committee report on pages 72 to 75 and includes an explanation of how auditor objectivity and independence is safeguarded when non-audit services are provided by the auditor. 7. staff Costs The average monthly number of employees (including Executive Directors) was: production sales and marketing research and development general and administrative Their aggregate remuneration comprised: wages, salaries and bonuses social security costs post-employment benefits end of service indemnity share-based payments Car and housing allowance other costs and employee benefits 132 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 2012 number 3,716 1,986 285 662 6,649 2012 $000 210,195 17,938 5,911 5,585 7,961 14,579 32,019 294,188 2011 number 3,625 1,699 239 602 6,165 2011 $000 175,627 15,051 3,559 2,934 7,507 13,483 19,678 237,839 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSContinued8. other oper ating expenses (net) other operating expense other operating income 2012 $000 (27,864) 4,862 (23,002) 2011 $000 (20,579) 7,971 (12,608) Other operating expenses consist mainly of provisions against slow moving inventory items, abnormal manufacturing spoilage, disposal of intangible and fixed assets, and foreign exchange losses. Other operating income consists mainly of foreign exchange gains, other product related income, and commissions and royalties. 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 11. tax Current tax: foreign tax prior year adjustments deferred tax (note 17) Uk corporation tax is calculated at 24.5% (2011: 26.5%) of the estimated assessable profit made in the Uk for the year. The effective tax rate for the group is 18.8% (2011: 11.10%). 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 consolidated income statement as follows: profit before tax: tax at the UK corporation tax rate of 24.5% (2011: 26.5%) profits taxed at different rates permanent differences temporary differences for which no benefit is recognised prior year adjustments tax expense for the year 2012 $000 1,266 2011 $000 468 2012 $000 20,810 1,161 13,417 329 35,717 2011 $000 12,884 869 9,615 – 23,368 2012 $000 2011 $000 30,535 4,703 (10,412) 24,826 15,541 (1,358) (3,760) 10,423 2012 $000 132,041 32,350 (17,219) 2,891 2,101 4,703 24,826 2011 $000 93,892 24,881 (10,796) (5,158) 2,854 (1,358) 10,423 133 Hikma PHarmaceuticals Plc / annual rePort 2012 12. dividends amounts recognised as distributions to equity holders in the year: final dividend for the year ended 31 december 2011 of 7.5 cents (2010: 7.5 cents) per share interim dividend for the year ended 31 december 2012 of 6.0 cents (2011: 5.5 cents) per share 2012 $000 2011 $000 14,746 11,804 26,550 14,497 10,704 25,201 The proposed final dividend for the year ended 31 December 2012 is 10.0 cents (2011: 7.5 cents) per share, bringing the total dividend for the year to 16.0 cents (2011: 13.0 cents) per share. The proposed final dividend is subject to approval by shareholders at the Annual general Meeting on 16 May 2013 and has not been included as a liability in these financial statements. Based on the number of shares in issue at 31 December 2012 (196,765,000), the unrecognised liability is $19,677,000. 13. earnings per shar e Earnings per share is calculated by dividing the profit attributable to equity holders of the parent by the weighted average number of ordinary shares. The number of ordinary shares used for the basic and diluted calculations is shown in the table below. Adjusted basic earnings per share and adjusted diluted earnings per share are intended to highlight the adjusted results of the group before exceptional items and intangible amortisation (excluding software). A reconciliation of the basic and adjusted earnings used is also set out below: earnings for the purposes of basic and diluted earnings per share being net profit attributable to equity holders of the parent exceptional items (see note 5) intangible amortisation* tax effect of adjustments adjusted earnings for the purposes of adjusted basic and diluted earnings per share being adjusted net profit attributable to equity holders of the parent number of shares weighted average number of ordinary shares for the purposes of basic earnings per share effect of dilutive potential ordinary shares: share-based awards weighted average number of ordinary shares for the purposes of diluted earnings per share Basic diluted adjusted basic adjusted diluted *Intangible amortisation comprises the amortisation of intangible assets other than software. 134 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 2012 $000 100,320 14,387 12,674 (6,852) 2011 $000 80,107 18,138 8,998 (6,374) 120,529 100,869 number ’000 196,348 1,951 198,299 2012 earnings per share Cents 51.1 50.6 61.4 60.8 number ’000 194,135 3,633 197,768 2011 earnings per share Cents 41.3 40.5 52.0 51.0 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSContinued14. intangiBLe assets Cost Balance at 1 January 2011 additions acquisition of subsidiaries disposals translation adjustments Balance at 1 January 2012 additions adjustments* reclassification disposals translation adjustments Balance at 31 December 2012 amortisation Balance at 1 January 2011 Charge for the year translation adjustments Balance at 1 January 2012 Charge for the year reclassification translation adjustments Balance at 31 December 2012 Carrying amoUnt At 31 December 2012 At 31 December 2011 goodwill $000 marketing rights $000 Customer relationships $000 product related intangibles $000 in process r&d $000 trade names $000 other acquisition related intangibles $000 software $000 total $000 177,685 – 99,311 – (6,983) 270,013 – 606 – (31) (2,958) 267,630 (608) – – (608) – – – (608) 8,352 1,155 – – (197) 9,310 1,245 – – – 186 10,741 (3,094) (1,033) 100 (4,027) (884) – (70) (4,981) 62,737 – 17,216 – (1,259) 78,694 – – – – (951) 77,743 (14,079) (4,488) 226 (18,341) (5,195) – 205 (23,331) 25,391 6,831 30,275 (100) (715) 61,682 30,850 – 686 (150) (1,086) 91,982 (5,597) (2,768) 139 (8,226) (5,625) (207) 29 (14,029) 4,318 – – – (51) 4,267 – – (686) – (19) 3,562 (912) (279) 30 (1,161) (241) 207 17 (1,178) 6,949 – 4,286 – (268) 10,967 – – – – (68) 10,899 (127) (228) 12 (343) (530) – 3 (870) 2,982 – 73 – (65) 2,990 230 – – (142) 26 3,104 (919) (202) 29 (1,092) (199) – 37 (1,254) 14,014 981 63 – (179) 14,879 12,355 – – – (62) 27,172 (7,972) (2,345) 117 (10,200) (3,358) – 25 (13,533) 302,428 8,967 151,224 (100) (9,717) 452,802 44,680 606 – (323) (4,932) 492,833 (33,308) (11,343) 653 (43,998) (16,032) – 246 (59,784) 267,022 269,405 5,760 5,283 54,412 60,353 77,953 53,456 2,384 3,106 10,029 10,624 1,850 1,898 13,639 4,679 433,049 408,804 The current year additions include licences, new products under development and software, which mainly relates to the group’s ongoing SAP implementation. * An adjustment of $606,000 was made to the provisional goodwill recognised on the acquisition of MSI as a result of the adjustment to deferred taxes made prior to the end of the measurement period on 2 May 2012 (Note 17). 135 Hikma PHarmaceuticals Plc / annual rePort 201214. 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: Br anded arab pharmaceuticals manufacturing Co. al jazeera pharmaceutical industries Ltd hikma pharma sae (egypt) societe d’industries pharmaceutiques ibn al Baytar s.a. spa societe al dar al arabia société de promotion pharmaceutique du maghreb s.a. (promopharm) savanna pharmaceuticals industries Co. Ltd. injeCtaBLes german operations Baxter healthcare multi-source injectables (msi) hikma italia s.p.a others arab medical Containers iprC Total as at 31 december 2011 $000 2012 $000 74,399 6,752 30,164 10,580 14,108 60,849 1,644 198,496 34,485 32,494 743 67,722 742 62 804 267,022 74,399 6,752 31,745 10,943 14,495 59,934 3,411 201,679 34,273 31,888 728 66,889 742 95 837 269,405 The group tests goodwill annually for impairment or more frequently if there are indications that goodwill may be impaired. The recoverable amounts of the CgUs are determined from value-in-use calculations. The value-in-use calculations are based on cash flows over five years grown at 2% in perpetuity. The key assumptions for the value-in-use calculations are those regarding the discount rates and compound annual cash flow growth rate for the five-year business plan. 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 10.1% and 18.8% based on the markets in which the CgU’s operate. The compound annual cash flow growth rates range from 1% growth to 37% growth. The group has conducted a sensitivity analysis on the impairment test of each CgU’s carrying value. In each case the valuations indicate sufficient headroom such that a reasonably possible change to key assumptions is unlikely to result in an impairment of the related goodwill. whilst there is some uncertainty regarding the short-term impact of the political events in MENA, the group does not consider that the likelihood of impairment losses in the long-term has increased. other intangible assets Amortisation of all intangible 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. The estimated useful life of marketing rights varies from 5 to 10 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 (2011: 15 years). Product related intangibles Product related intangibles include three types: a. Product files and under-licensed products: $5,536,000 (2011: $5,739,000) of the product files and under-license products intangibles are assessed as having indefinite useful lives due to the expected longevity of the products. The movement relates to retranslation at year end rates. These assets are reviewed for impairment at least annually. The product files recognised on the acquisition of MSI have an average estimated useful life of 10 years. The carrying value of these files is $4,646,000 (2011: $5,162,663). b. Under-license agreements: The estimated useful life of under-license agreements varies from 5 to 11 years (2011: 5 to 11 years). 136 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSContinued 14. intangiBLe assets Continued c. Product dossiers: Product dossiers have an average estimated useful life of 15 years (2011: 15 years). In-process R&D: In-process r&D represents mainly the pipeline of products under development that were recognised on the acquisition of Arab Pharmaceutical Manufacturing Company and Hikma Pharma SAE- Egypt. The in-process r&D has an average estimated useful life of 15 years (2011: 15 years). Trade name: Trade names were mainly recognised on the acquisition of Hikma germany gmbH (germany), Arab Pharmaceutical Manufacturing Company, Promopharm, Savanna and Ibn Al Baytar. The trade name recognised on the acquisition of Hikma germany gmbH (germany) is expected to have an indefinite economic useful life due to its expected longevity. The carrying value of Hikma germany gmbH (germany) trade name is $5,536,000 (2011: $5,423,000). The movement has arisen due to retranslation. The trade names recognised on the acquisition of the other subsidiaries have useful lives that vary from 3 to 20 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 life varies from 10 years to an indefinite useful life. The carrying value of assets with indefinite lives is $991,000 (2011: $971,000). The movement relates to retranslation at year end rates. 15. property, pLant and eqUipment Cost Balance at 1 January 2011 additions acquisition of subsidiaries disposals transfers translation adjustment Balance at 1 January 2012 additions disposals transfers translation adjustment Balance at 31 December 2012 aCCUmULated depr eCiation Balance at 1 January 2011 Charge for the year disposals and transfers translation adjustment Balance at 1 January 2012 Charge for the year disposals translation adjustment Balance at 31 December 2012 Carrying amount At 31 December 2012 Carrying amount At 31 December 2011 Land and buildings $000 174,417 7,915 36,447 (35) 1,709 (2,342) 218,111 4,118 (446) 20,037 (4,161) 237,659 (32,229) (6,855) 1 780 (38,303) (8,929) 98 (10) (47,144) vehicles $000 machinery and equipment $000 fixtures and equipment $000 projects under construction $000 13,345 2,039 120 (1,527) 549 (150) 14,376 1,143 (1,183) 130 (471) 13,995 (7,111) (1,949) 1,189 68 (7,803) (2,019) 970 144 (8,708) 215,287 22,290 34,234 (1,221) 7,082 (3,393) 274,279 10,527 (10,277) 14,424 (1,555) 287,398 (108,423) (21,107) 946 1,727 (126,857) (25,554) 9,798 (169) (142,782) 43,344 7,444 3,165 (440) (962) (429) 52,122 1,241 (3,877) 3,243 (663) 52,066 (26,293) (5,749) 420 340 (31,282) (5,857) 3,829 141 (33,169) 45,126 31,007 230 (53) (8,378) (1,218) 66,714 32,812 (248) (37,834) (816) 60,628 – – – – – – – – – total $000 491,519 70,695 74,196 (3,276) – (7,532) 625,602 49,841 (16,031) – (7,666) 651,746 (174,056) (35,660) 2,556 2,915 (204,245) (42,359) 14,695 106 (231,803) 190,515 5,287 144,616 18,897 60,628 419,943 179,808 6,573 147,422 20,840 66,714 421,357 137 Hikma PHarmaceuticals Plc / annual rePort 201215. property, pLant and eqUipment Continued The net book value of the group’s property, plant and equipment includes an amount of $17,151,000 (2011: $18,229,000) in respect of assets held under finance lease. As at 31 December 2012, the group had pledged property, plant and equipment having a carrying value of $135,166,000 (2011: $150,268,000) 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, Egypt, US, germany and Tunisia (2011: Portugal, Egypt, Saudi Arabia, US, and Tunisia). In 2008, the german government provided Thymoorgan Pharmazie gmbH with a grant of Euro 560,000, being a contribution towards the purchase of two freeze dryers and additional equipment. The carrying value of the grant as at 31 December 2012 was $187,000 (2011: $249,000). During the year 2012, the group entered into contractual commitments for the acquisition of property, plant and equipment amounting to $2,800,000 (2011: $166,000). The amount of borrowing costs that have been capitalised in the year, within the projects under construction, is $68,000 (2011: $781,000). The average capitalisation rate used ranges between 2.87%–11.00% (2011: 3.12%–10.50%). 16. interest in assoCiated Companies On 15 April 2011, the group acquired a non-controlling interest of 23.1% in the Indian company Unimark remedies Limited (“Unimark”) through the subscription of new equity for a cash consideration of $33,609,000. Through this strategic partnership, Hikma and Unimark will collaborate on the development of strategic APIs and new product formulations. Unimark’s strong technical and r&D capabilities will complement Hikma’s in-house r&D efforts and are expected to enable Hikma to bring more products in more therapeutic categories to market globally. On 28 june 2011, the group acquired a non-controlling interest of 30.1% in Hubei Haosun Pharmaceutical Co., Ltd (“Haosun”) through the subscription of new equity, for a cash consideration of $5,000,000. Through this partnership Hikma gains access to a high quality, long-term source of API, particularly in the strategically important area of oncology. gains of $892,000, representing the group’s share of the results of associates, are included in the consolidated income statement. Balance at 1 January 2012 additions share of income/loss of associates Balance at 31 December Summarised financial information in respect of the group’s interests in associated companies is set out below: total assets total liabilities net assets Group’s share of net assets of associates total revenues net income/loss Group’s share of income/loss of associates for the year ended 31 december 2012 $000 for the year ended 31 december 2011 $000 37,445 – 892 38,337 – 38,609 (1,164) 37,445 for the year ended 31 december 2012 $000 for the year ended 31 december 2011 $000 227,345 118,640 108,705 25,947 139,596 3,974 892 192,645 93,424 99,221 23,775 89,659 (6,017) (1,164) The information above is adjusted for fair value adjustments arising on acquisition and to comply with the group’s accounting policies. 138 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSContinued17. 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 2011 (Charge)/credit to income Charge to equity acquisition of subsidiaries adjustments exchange differences At 1 January 2012 (Charge)/credit to income Credit to equity adjustments* exchange differences At 31 December 2012 tax losses $000 954 (665) – – – 19 308 (254) – – 1 55 deferred r&d costs $000 1,040 297 – – (571) (45) 721 (317) – – 6 410 other short-term temporary differences $000 16,637 6,963 – 15,989 – (238) 39,351 10,308 – (606) (29) 49,024 amortisable assets $000 fixed assets $000 share-based payments $000 (7,329) (1,411) – (11,918) – 547 (20,111) 1,015 – – (53) (19,149) (7,604) (1,132) – – – 142 (8,594) 137 – – 97 (8,360) 7,186 (292) (5,644) – – – 1,250 (477) 98 – – 871 total $000 10,884 3,760 (5,644) 4,071 (571) 425 12,925 10,412 98 (606) 22 22,851 *An adjustment of $606,000 was made to the deferred tax recognised on acquisition of MSI prior to the end on the measurement period on 2 May 2012. 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 as at 31 december 2011 $000 2012 $000 (22,921) 45,772 22,851 (23,147) 36,072 12,925 No deferred tax asset has been recognised on temporary differences totalling $33,310, 000 (2011: $64,514,000) due to the unpredictability of the related future profit streams. Of these temporary differences, $8,681,000 relate to unrecognised deferred tax on Uk share-based payments. The remaining temporary differences of $24,629,000 relate to losses on which no deferred tax is recognised. Of these losses $1,321,000 relate to losses that have expired by 31 December 2012. No deferred tax liability is recognised on temporary differences of $57,933,000 (2011: $39,201,000) relating to the unremitted earnings of overseas subsidiaries, as the group is able to control the timing of the reversal of these temporary differences and it is probable that they will not reverse in the foreseeable future. 139 Hikma PHarmaceuticals Plc / annual rePort 201218. finanCiaL and other non-CUrrent assets other financial assets available for sale investments other non-current asset Other non-current assets represent advance payments made to acquire products and product related technologies. 19. inventories finished goods work-in-progress raw and packing materials goods in transit as at 31 december 2011 $000 2012 $000 632 412 10,000 11,044 1,644 435 10,000 12,079 as at 31 december 2011 $000 2012 $000 87,663 30,011 135,571 18,986 272,231 77,862 28,039 114,449 18,910 239,260 goods in transit includes inventory held at third parties whilst in transit between group companies. provisions against inventory as at 31 december 2011 $000 24,078 additions $000 22,206 Utilisation $000 (19,195) translation adjustments $000 as at 31 december 2012 $000 (278) 26,811 The total expense in the consolidated income statement for the write-off of inventory, including provisions for such write-offs, was $19,218,000 (2011: $12,271,000). 20. tr ade and other r eCeivaBLes trade receivables prepayments value added tax recoverable interest receivable employee advances Trade receivables are stated net of provisions for chargebacks and doubtful debts as follows: as at 31 december 2011 $000 2012 $000 294,048 22,758 8,439 579 2,323 328,147 292,100 16,015 5,188 490 2,063 315,856 as at 31 december 2011 $000 57,616 18,429 76,045 additions $000 167,146 4,104 171,250 Utilisation $000 (176,266) (324) (176,590) translation adjustments $000 28 (504) (476) as at 31 december 2012 $000 48,524 21,705 70,229 Chargebacks and other allowances doubtful debts 140 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSContinued20. tr ade and other r eCeivaBLes Continued The following table provides a summary of the age of trade receivables: At 31 December 2012 total trade receivables as at 31 december 2012 related allowance for doubtful debts Chargebacks and other allowances net receivables At 31 December 2011 total trade receivables as at 31 december 2011 related allowance for doubtful debts Chargebacks and other allowances net receivables not past due on the reporting date $000 less than 90 days $000 between 91 and 180 days $000 between 181 and 360 days $000 past due over one year $000 250,285 61,128 8,479 14,672 8,008 250,285 61,128 8,479 14,672 8,008 impaired $000 total $000 21,705 (21,705) – 364,277 (21,705) 342,572 (48,524) 294,048 not past due on the reporting date $000 274,862 – 274,862 less than 90 days $000 56,367 – 56,367 between 91 and 180 days $000 between 181 and 360 days $000 past due over one year $000 impaired $000 total $000 9,422 – 9,422 5,479 – 5,479 3,586 – 3,586 18,429 (18,429) – 368,145 (18,429) 349,716 (57,616) 292,100 The group establishes an allowance for impairment that represents its estimate of losses in respect of specific trade and other receivables, where it is deemed that a receivable may not be recoverable. when the receivable is deemed irrecoverable, the allowance account is written-off against the underlying receivable. More details on the group’s policy for credit and concentration of risk management are provided in Note 28. 21. CoLLater aLised and restriCted Cash Collateralised and restricted cash primarily represent an amount retained against short-term bank transactions granted to the group’s Sudanese, Egyptian, jordanian and Algerian operations of $1,756,000. (2011: Sudanese, Egyptian, jordanian and Algerian operations of $2,595,000). 22. 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. as at 31 december 2011 $000 2012 $000 76,023 99,798 689 176,510 64,944 29,623 148 94,715 141 Hikma PHarmaceuticals Plc / annual rePort 201223. BanK overdr afts and Loans Bank overdrafts import and export financing short-term loans deferred consideration Current portion of long-term loans (note 26) The weighted average interest rates paid were as follows: Bank overdrafts Bank loans (including the non-current bank loans) import and export financing as at 31 december 2011 $000 2012 $000 19,591 72,768 12,011 – 88,509 192,879 2012 % 5.24 3.07 3.69 18,286 53,196 4,284 11,785 65,302 152,853 2011 % 4.80 2.94 2.42 Import and export financing represents short-term financing for the ordinary trading activities of the business. The deferred consideration is in relation to the acquisition of MSI and was paid during the year ended 31 December 2012. 24. tr ade 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 2011 $000 2012 $000 110,600 69,734 5,863 560 2,074 1,709 2,862 1,403 194,805 97,756 60,276 4,181 535 2,207 1,107 2,482 668 169,212 * The employees’ provident fund liability mainly represents the outstanding contributions due to the Hikma Pharmaceuticals Ltd (jordan) retirement benefit plan, on which the fund receives 5% interest. **Dividends payable includes $1,889,000 (2011: $2,022,000) due to the previous shareholders of APM. 25. other provisions Other provisions represent the end of service indemnity provisions of certain Hikma group subsidiaries. This provision is calculated based on relevant laws in the countries where each group company operates, in addition to their own policies. Movements on the provision for end of service indemnity: 1 January additions Utilisation translation adjustments 31 December 142 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 2012 $000 9,398 2,069 (767) (36) 10,664 2011 $000 8,641 1,865 (1,069) (39) 9,398 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSContinued26. Long-ter m finanCiaL deBts total loans Less: current portion of loans (note 23) Long-term financial loans Breakdown by maturity: within one year in the second year in the third year in the fourth year in the fifth year Thereafter Breakdown by currency: Us dollar euro jordanian dinar algerian dinar saudi riyal egyptian pound tunisian dinar as at 31 december 2011 $000 2012 $000 460,997 (88,509) 372,488 410,197 (65,302) 344,895 88,509 79,794 79,513 77,923 47,644 87,614 460,997 405,350 13,247 5,642 29,294 – 4,355 3,109 460,997 65,302 84,488 63,732 65,490 58,069 73,116 410,197 346,405 18,394 – 37,400 – 4,343 3,655 410,197 The loans are held at amortised cost. At 31 December 2012, import and export financing, short-term loans and the current and long-term portion of long-term loans totalled $545,777,000 (2011: $467,677,000). Long-term loans amounting to $85,989,000 (2011: $105,338,000) are secured. Included in the table above are the following major arrangements entered into by the group: a) A five year $100,000,000 syndicated term loan and a four year $45,000,000 revolver were entered into on 2 May 2011. The term loan was partially repaid by $25,000,000 on 15 December 2011. Equal quarterly repayments for the term loan commenced on 30 june 2012 and will continue until 2 May 2016. The loan had an outstanding balance of $68,750,000 at the year-end and an unused revolver balance of $40,000,000. The revolver maturity date is 2 May 2015. The term loan was used to fund the acquisition of the MSI business in 2011 and the revolver is used to fund the US business’ working capital needs. b) A seven year syndicated loan of up to $180,000,000 was entered into on 27 September 2011. The syndicate was closed on 1 june 2012 and has an outstanding balance at year end of $180,000,000. quarterly repayments for the term loan should commence 18 months after the date of the agreement, 27 March 2013 and will continue until the 84th month after the date of the agreement, 27 September 2018. Payments will be made with equal instalments representing 3.182% of the loan balance and a bullet payment of 30% at the maturity of the loan. The loan was used to finance the Promopharm acquisition and the group’s general capital expenditure. c) A nine year $110,000,000 loan from the International finance Corporation (“IfC”) was entered into on 19 December 2011. The loan had an outstanding balance of $60,000,000 at year end and a $50,000,000 unused available limit. Equal quarterly repayments for the term loan should commence on 15 November 2013 and will continue until 15 August 2020. The loan has been used to finance acquisitions and capital expenditure in the MENA region, noting that the loan is restricted for use in permitted developing countries. 143 Hikma PHarmaceuticals Plc / annual rePort 201227. 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 2011 $000 2012 $000 present value of minimum lease payments 2011 $000 2012 $000 3,641 16,664 20,305 (934) 19,371 3,490 19,315 22,805 (1,371) 21,434 3,480 15,891 19,371 3,300 18,134 21,434 It is the group’s policy to lease certain of its property, plant and equipment under finance leases. The average lease term is five years (2011: five years). for the year ended 31 December 2012, the average effective borrowing rate was between 1.0% and 8.8% (2011: between 1.7% and 8.8%). 28. 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, without recourse discounts, and other allowances. 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, customers in the MENA region are offered relatively long payment terms compared to customers in Europe and the US. During the year ended 31 December 2012, the group’s largest three customers in the MENA region represented 13.7% of group revenue, 9.4% in Saudi Arabia, 2.3% in Algeria and 2.0% in Tunisia. At 31 December 2012, the amount of receivables due from customers based in Saudi Arabia was $60,271,000 (2011: $53,351,000), in Algeria was $40,911,000 (2011: $31,139,000), and in Tunisia was $5,502,000 (2011: $3,382,000). During the year ended 31 December 2012, three key US wholesalers represented 16.8% of group revenue (2011: 18.8%). The amount of receivables due from US customers at 31 December 2012 was $59,197,000 (2011: $86,476,000). The group manages this risk through the implementation of stringent credit policies, 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 30–90 days, in Europe 30–120 days, and in MENA 180–360 days. where appropriate, the group endeavours to minimise risk by the use of trade finance instruments such as letters in 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. Capital risk management The group manages its capital and monitors its liquidity to have reasonable assurance that the group will be able to continue as a going concern and deliver its growth strategy objectives whilst reducing its cost of capital and maximising the return to shareholders through the optimisation of the debt and equity mix. The group regularly reviews the capital structure by considering the level of available capital and the short to medium- term strategic plans concerning future capital spend, as well as the need to meet dividends, banking covenants and borrowing ratios. 144 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSContinued28. finanCiaL poLiCies for risK management and their oBjeCtives Continued The group defines capital as equity plus net funds, which include bank overdrafts and loans (Note 23), obligations under finance leases (Note 27), long-term financial debts (Note 26), net of cash and cash equivalents (Note 22) and collateralised and restricted cash (Note 21). During the year, the group continued its strategy of obtaining debt financing at both the group level and at the operating entities level. This enables the group to borrow at competitive rates and to build relationships with local and international banks and is therefore deemed to be the most effective means of raising finance, while maintaining the balance between borrowing cost, asset and liability management and balance sheet currency risk management. In order to monitor the available net funds, management reviews financial capital reports on a monthly basis in addition to the continuous review by the group treasury function. gearing (debt/equity) increased from 65% to 69%. Acquisitions, a key element of the group’s business strategy, have been funded by debt financing of $33,528,000 in the year of which $20,000,000 relates to the acquisition of the Egyptian Company for the Pharmaceuticals and Chemicals Industries (“EPCI”) (Note 40). The Directors consider that the group’s current gearing is appropriate in that it enables the group to maintain its existing dividend policy and at the same time to accommodate the group’s investment policy. Foreign exchange risk The group uses the US Dollar as its presentation currency and is therefore exposed to foreign exchange movements primarily in the Euro, Algerian Dinar, Sudanese Pound, japanese yen, Egyptian Pound, Tunisian Dinar and Moroccan Dirham. 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. Due to the lack of open currency markets, the Algerian Dinar and the Sudanese Pound cannot be hedged. where possible, the group uses financing facilities denominated in local currencies to mitigate the risks. The jordanian Dinar and Saudi riyal have no impact on the consolidated income statement as those currencies are pegged against the US Dollar. Interest rate risk The group manages its exposure to interest rate risk by changing the proportion of debt that is floating by entering into interest rate swap agreements. Using these derivative financial instruments has not had a material impact on the group’s financial position as at 31 December 2012 or the group’s results of operations for the year then ended. Financial liabilities interest-bearing loans and borrowings Financial assets Cash and cash equivalents fixed rate $000 as at 31 december 2012 total $000 floating rate $000 fixed rate $000 as at 31 december 2011 total $000 floating rate $000 174,496 410,242 584,738 190,329 328,853 519,182 – 99,798 99,798 – 29,623 29,623 An interest rate sensitivity analysis assumes an instantaneous 100 basis point change in interest rates in all currencies from their levels at 31 December 2012, with all other variables held constant. Based on the composition of the group’s debt portfolio as at 31 December 2012, a 1% increase/decrease in interest rates would result in an additional $3,104,000 (2011: $2,992,000) in interest expense/income being incurred per year. Fair value of financial assets and liabilities The fair value of financial assets and liabilities is 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. Management classifies items that are recognised at fair value based on the level of inputs used in their fair value determination as described below: • Level 1: quoted prices in active markets for identical assets or liabilities • Level 2: Inputs that are observable for the asset or liability • Level 3: Inputs that are not based on observable market data 145 Hikma PHarmaceuticals Plc / annual rePort 201228. finanCiaL poLiCies for risK management and their oBjeCtives Continued The following methods and assumptions were used to estimate the fair value: 3 Cash and cash equivalents – due to the short-term maturities of these financial instruments and given that generally they have negligible credit risk, management considers the carrying amounts to be not significantly different from their fair values; 3 Short-term loans and overdrafts – approximates to the carrying amount because of the short maturity of these instruments; 3 Long-term loans – the majority of the loans are variable rate and re-price in response to any changes in market rates and so management considers the carrying amount to be not significantly different from their fair market value. for fixed-rate loan exposures, fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities of such loans; 3 Over the counter (“OTC”) derivative contracts may include forward, swap, and option contracts relating to interest rates or foreign currencies and are valued based on level 2 market prices and prevailing exchange rates at the balance sheet date; 3 receivables and payables – due to the short-term maturities of these financial instruments, the fair values of receivables and payables are estimated to be equal to the respective carrying amounts; and 3 Lease obligations – are valued at the present value of the minimum lease payments. 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 an 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 Usd/japanese yen Usd/moroccan dirham Usd/tunisian dinar 2012 0.7565 5.9988 78.0915 3.7495 0.6185 0.7090 6.3654 85.9013 8.4838 1.5506 period end rates 2011 0.7722 2.8918 76.0061 3.7495 0.6470 0.7090 6.0481 77.4136 8.6133 1.4993 2012 0.7775 4.3346 77.5551 3.7495 0.6309 0.7090 6.0864 79.8155 8.6458 1.5686 average rates 2011 0.7180 2.9869 72.8147 3.7495 0.6233 0.7090 5.9648 79.7414 8.3682 1.4079 The jordanian Dinar and Saudi riyal have no impact on the consolidated income statement as those currencies are pegged to the US Dollar. Us dollar $000 euro $000 British pound $000 net foreign currency financial assets/(liabilities) others* japanese yen $000 $000 algerian dinar $000 83,304 9,106 (112,399) 18,296 (13,908) (4,781) (5,538) (1,291) (3,552) – (30,763) (4,526) – (1,409) 2,114 7 (1,199) 1,197 (5,080) – 16,885 7,989 (138) – (2) (91) – – (8) – – 989 750 (149,886) – – (35) – – – – – 0 (149,921) (4) – – (2,720) – (30) – – – – (2,754) 14,284 – (25) (72) – (25) (6) (578) (6,072) (80) 7,426 2012 functional currency of entity: – jordanian dinar – euro – algerian dinar – saudi riyal – sudanese pound – egyptian pound – tunisian dinar – moroccan dirham – Lebanese pound – Us dollar *Others include Saudi riyal and jordanian Dinar. 146 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSContinued28. finanCiaL poLiCies for risK management and their oBjeCtives Continued sensitivity analysis: 2012 functional currency of entity: – jordanian dinar – euro – algerian dinar – saudi riyal – sudanese pound – egyptian pound – tunisian dinar – moroccan dirham – Lebanese pound – Us dollar 2011 functional currency of entity: – jordanian dinar – euro – algerian dinar – saudi riyal – sudanese pound – egyptian pound – tunisian dinar – moroccan dirham – Lebanese pound – Us dollar *Others include Saudi riyal and jordanian Dinar. Us dollar $000 833 91 (1,124) 183 (139) (48) (55) (13) (36) – (308) euro $000 (45) – (14) 21 – (12) 12 (51) – 169 80 impact on profit or loss assuming 1% appreciation of foreign currency against functional currency as at year end others $000 algerian dinar $000 japanese yen $000 British pound $000 (1) – – (1) – – – – – 10 8 (1,499) – – – – – – – – – (1,499) – – – (27) – – – – – – (27) 143 – – (1) – – – (6) (61) (1) 74 Us dollar $000 euro $000 British pound $000 net foreign currency financial assets/(liabilities) others* japanese yen $000 $000 algerian dinar $000 55,945 (2,736) (65,510) 14,926 (18,874) (3,981) (4,062) (423) (1,729) – (26,444) 1,070 – (834) 944 405 (485) 790 (5,383) – 1,992 (1,501) (279) – (25) 15 – (3) (228) – – (1,378) (1,898) (99,710) – – (1,798) – – – – – – (101,508) 316 – – (4,318) – (312) – – – – (4,314) 12,095 – (1) (2) – (30) – (501) (8,795) 579 3,345 147 Hikma PHarmaceuticals Plc / annual rePort 201228. finanCiaL poLiCies for risK management and their oBjeCtives Continued Us dollar $000 euro $000 559 (27) (655) 149 (189) (40) (41) (4) (17) – (265) 11 – (8) 9 4 (5) 8 (54) – 20 (15) sensitivity analysis: 2011 functional currency of entity: – jordanian dinar – euro – algerian dinar – saudi riyal – sudanese pound – egyptian pound – tunisian dinar – moroccan dirham – Lebanese pound – Us dollar Liquidity risk of assets/(liabilities) Liquidity risk 2012 Cash and cash equivalents trade receivables interest-bearing loans and borrowings interest-bearing overdrafts interest-bearing finance lease trade payables 2011 Cash and cash equivalents trade receivables interest-bearing loans and borrowings interest-bearing overdrafts interest-bearing finance lease trade payables impact on profit or loss assuming 1% appreciation of foreign currency against functional currency as at year end others japanese yen $000 $000 algerian dinar $000 British pound $000 (3) – – – – – (2) – – (14) (19) Less than one year $000 176,510 294,048 (191,855) (20,301) (3,641) (110,600) 144,161 Less than one year $000 94,715 292,100 (149,240) (18,563) (3,490) (97,756) 117,766 (997) – – (18) – – – – – – (1,015) two to five years $000 – – (314,952) – (16,664) – (331,616) two to five years $000 – – (298,954) – (19,315) – (318,269) 3 – – (43) – (3) – – – – (43) more than five years $000 – – (90,486) – – – (90,486) more than five years $000 – – (74,957) – – – (74,957) 121 – – – – – – (5) (88) 6 34 total $000 176,510 294,048 (597,293) (20,301) (20,305) (110,600) (277,941) total $000 94,715 292,100 (523,151) (18,563) (22,805) (97,756) (275,460) At 31 December 2012 the group had undrawn facilities of $313,021,000 (2011: $396,459,000). Of these facilities, $158,929,000 (2011: $258,615,000) was committed and the remainder was uncommitted. 148 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSContinued29. 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, the total notional amount of outstanding forward foreign exchange contracts that the group was committed to have been translated at 31 December exchange rates as below. foreign exchange forward contracts and options (euro) foreign exchange forward contracts and options (jpy) 2012 $000 – 2,000 2011 $000 4,031 6,000 These arrangements are designed to address significant exchange exposures. At 31 December 2012, the fair value of the group’s currency derivatives, some of which were designated as effective cash flow hedges, was a liability of $7,000 (2011: a liability of $187,000). The movement in fair value in the year resulted in a gain of $180,000 (2011: loss of $270,000); which has been reflected in other comprehensive income. These amounts are based on market values of equivalent instruments at the balance sheet date. The fair value of currency derivatives designated as ineffective cash flow hedges was $Nil (2011: $Nil) held at fair value through profit and loss. The movement in fair value in the year has not resulted in any profit or loss being recognised in the consolidated income statement for the year ended 31 December 2012 (2011: loss of $8,000) in respect of such derivatives. The group believes that the effect on the value of cash flow hedges of currency 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 $157,858,000 (2011: $173,164,000) and have fixed interest payments at rates ranging from 1.41% to 4.34% (2011: 1.41% to 4.34%) for periods up until 2018 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 $4,001,000 (2011: liability of $1,699,000). These amounts are based on fair 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 $2,301,000 (2011: loss of $422,000) has been reflected in other comprehensive income. The remaining outstanding interest rate swaps that the group was committed to at the year end are held at fair value through profit and loss. The movement in fair value in the year resulted in a loss of $1,000, which has been recognised in the consolidated income statement for the year ended 31 December 2012 (2011: gain of $10,000) in respect of such derivatives. 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. 30. share CapitaL Issued and fully paid – included in shareholders’ equity: At 1 January issued during the year At 31 December number ’000 195,851 1,185 197,036 2012 $000 34,904 187 35,091 number ’000 193,517 2,334 195,851 2011 $000 34,525 379 34,904 149 Hikma PHarmaceuticals Plc / annual rePort 2012 31. non-ControLLing inter ests At 1 January share of profit dividends paid issue of equity shares of subsidiaries Currency translation (loss)/gain acquisition of subsidiaries adjustment arising from change in non-controlling interests At 31 December 2012 $000 22,059 6,895 (1,271) – (5,310) – (7,176) 15,197 2011 $000 6,378 3,362 (100) 488 195 26,650 (14,914) 22,059 In 2012, the group acquired an additional 9.8% stake in Promopharm for a cash consideration of $12,009,000, bringing the total ownership to 94.1%. This was completed as part of a mandatory tender offer, which closed on 6 january 2012. The change in non-controlling interest in 2011 was mainly due to the group acquiring an additional stake in Promopharm of 20.4%, for a cash consideration of $29,196,000, through the purchase of additional shares in the market. 32. own shares Own shares represent 270,651 (2011: 571,000) ordinary shares in the Company held by Sanne Trust Company Limited, an independent trustee. During the year, the Company issued 1,005,400 Ordinary Shares to the independent trustee to meet short-term commitments in relation to employee share plans. 1,305,749 shares were utilised during the year. The market value for the own shares at 31 December 2012 was $3,183,000 (2011: $5,472,000). In 2012, no shares were acquired. The book value of the retained own shares at 31 December 2012 is $86,000 (2011: $2,222,000). The trustee holds these shares to meet long-term commitments in relation to employee share plans. 150 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSContinued33. net Cash from oper ating aCtivities Profit before tax adjustments for: depreciation and amortisation of: property, plant and equipment intangible assets Loss on disposal of property, plant and equipment Loss (gain) on disposal of intangible assets movement on provisions movement on deferred income Cost of equity-settled employee share scheme payments of costs directly attributable to acquisitions finance income interest and bank charges results from associates Cash flow before changes in 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 34. Contingent LiaBiLities note 2012 $000 2011 $000 132,041 93,892 5 42,359 16,032 349 67 1,266 (62) 7,961 1,519 (1,266) 35,717 (892) 235,091 (20,759) 2,259 (42,305) 21,914 10,429 206,629 (24,468) 182,161 35,660 11,343 22 (91) 757 (87) 7,507 10,147 (468) 23,368 1,164 183,214 (59,898) (4,570) (8,199) 15,987 1,958 128,492 (2,095) 126,397 A contingent liability existed at the balance sheet date in respect of guarantees and letters of credit totalling $120,554,000 (2011: $82,494,000). The integrated nature of the group’s worldwide operations, involving significant investment in research and strategic manufacturing 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, has the potential to produce conflicting claims from revenue authorities as to the profits to be taxed in individual territories. In common with many other companies in the pharmaceutical industry, the group is involved in various legal proceedings considered typical to its business, including litigation relating to employment, product liability and other commercial disputes. 151 Hikma PHarmaceuticals Plc / annual rePort 201235. share-Based payments equity settled share option scheme During the year ended 31 December 2012, the Company had one stock option compensation scheme settled by equity instruments, with four separate grant dates. The options over these instruments are settled in equity once exercised. Details of the grants under the scheme are shown below: The estimated fair value of each share option granted $ 1.14 2.61 0.74 0.35 number granted 85,000 1,041,500 1,600,000 9,520,000 The share price at grant date $ 5.45 9.19 4.50 0.91 exercise price $ 5.45 9.19 4.50 0.91 expected volatility expected dividend yield expected average contractual life risk-free interest rate 34.90% 31.50% 26.20% 44.80% 1.21% 0.08% 6.67% 3.85% 4.0 years 3.8 years 7.5 years 7.5 years 4.11% 4.54% 4.54% 4.22% date of grants 4-nov-2008 29-apr-2008 13-oct-2005 12-oct-2004 All of the general employees share option plans have a ten-year contractual life and vesting conditions of 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 plans was calculated by applying a binomial option pricing model. It was assumed that each option tranche will be exercised immediately after the vesting date. further details of the general employee share option plan are as follows: outstanding at 1 january exercised during the year expired during the year outstanding at 31 december exercisable at 31 december 2012 weighted average exercise price (in $) 7.24 6.74 9.18 7.33 6.85 number of share options 743,200 (179,800) (23,700) 539,700 378,600 2011 weighted average exercise price (in $) 3.33 1.55 5.45 7.24 6.06 number of share options 2,382,618 (1,634,318) (5,100) 743,200 433,000 The cost of the equity settled share option scheme of $104,000 (2011: $296,000) has been recorded in the consolidated 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 $11.25. The options outstanding at 31 December 2012 had a weighted average remaining contractual life of less than one year. 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 the year ended 31 December 2012, the Company had a long-term incentive plan (“LTIP”) settled by equity instruments, with nine separate grant dates. Under the LTIP, conditional awards and nil cost options are granted 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. for awards made from 2010, the TSr condition applies in respect of 50% of the award and financial metrics apply in respect of the remaining 50%. for further details see the remuneration Committee report. 152 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSContinued35. share-Based payments Continued Details of the grants under the plan are shown below: date of grants 16-mar-2012 18-mar-2011 22-mar-2010 19-may-2009 19-mar-2009 29-apr-2008 10-sep-2007 23-apr-2007 2-apr-2007 The estimated fair value of each share option granted $ 8.65 9.00 6.97 3.89 2.94 5.46 4.70 4.47 4.33 The share price at grant date $ 11.43 11.74 9.00 6.67 5.11 9.22 8.28 7.69 7.46 number granted 547,780 646,054 730,253 200,000 920,000 700,000 150,000 466,000 160,000 expected volatility expected dividend yield risk-free interest rate 30.31% 37.04% 37.18% 38.98% 38.98% 31.47% 34.64% 34.64% 34.64% 1.14% 1.11% 1.20% 1.22% 1.47% 0.08% 0.08% 0.08% 0.08% 0.67% 1.65% 1.88% 1.92% 1.88% 4.50% 5.00% 5.45% 5.40% All long-term incentive plans have ten years contractual life and vest after three years, subject to performance conditions as mentioned above. for further details see the remuneration Committee report. The estimated fair value of each share option granted in the LTIP was calculated by applying the Monte Carlo simulation methodology. for awards made from 2010, 50% of the award is subject to a TSr performance condition which was valued by applying the Monte Carlo simulation methodology, the remaining 50% of the award is subject to financial metrics which are valued by applying the Black-Scholes model. The exercise price of the share award is nil. further details on the number of shares granted are as follows: year 2012 outstanding at 1 january granted during the year exercised during the year expired during the year forfeitures expired during the year performance condition outstanding at 31 december exercisable at 31 december year 2011 outstanding at 1 january granted during the year exercised during the year expired during the year outstanding at 31 december exercisable at 31 december 2009 grants 19 may number 2008 grants 29 april number 19 march number 2 april number 23 april number 2007 grants 10 september number total number 2012 grant 16 march number – 547,780 – 2011 grant 18 march number 646,054 – – 2010 grant 22 march number 693,632 – – 820,000 200,000 – (680,800) (184,000) – 42,000 – – (55,830) (68,230) (84,129) – – – – 491,950 – – 577,824 – – 609,503 – (59,200) (16,000) – 80,000 – 80,000 – 42,000 42,000 – – – – – – – 13,000 – – – 2,414,686 547,780 – (864,800) – – – (208,189) – 13,000 13,000 – – – (75,200) 1,814,277 135,000 2011 grant 18 march number – 646,054 – – 646,054 – 2010 grant 22 march number 730,253 – – (36,621) 693,632 – 2009 grants 19 march number 19 may number 870,000 – – (50,000) 820,000 – 200,000 – – – 200,000 – 2008 grant 29 april number 650,000 – (608,000) – 42,000 42,000 2 april number 25,000 – (25,000) – – – 23 april number 21,000 – (8,000) – 13,000 13,000 2007 grants 10 september number total number 50,000 – (50,000) – – – 2,546,253 646,054 (691,000) (86,621) 2,414,686 55,000 The cost of the long-term incentive plan of $4,471,000 (2011: $4,796,000) has been recorded in the consolidated income statement as part of general and administrative expenses. 153 Hikma PHarmaceuticals Plc / annual rePort 201235. share-Based payments Continued management incentive plan The 2009 Management Incentive Plan (“MIP”) was approved by shareholders at the 2010 Annual general Meeting, whereby shareholders consented to the Company satisfying awards under the MIP from newly issued shares. Under the MIP, the Company makes grants of conditional awards to management across the group below senior management level. Awards are dependent on the achievement of individual and group kPIs over one year and are then subject to a two year holding period. The 2009 MIP awards were made at the start of the kPI performance period, whereas the 2011 awards and future awards will be made at the end of the kPI performance period. Details of the grants under the plan are shown below: year 2012 outstanding at 1 january granted during the year exercised during the year expired during the year outstanding at 31 december year 2011 outstanding at 1 january granted during the year exercised during the year expired during the year outstanding at 31 december 2012 grants 18 may number – 412,056 – (33,786) 378,270 2011 grants 11 may number 339,134 – (5,305) (33,705) 300,124 2011 grants 11 may number – 356,894 – (17,760) 339,134 2009 grants 19 march number 460,809 – (435,644) (25,165) – 2009 grants 19 march number 487,561 – – (26,752) 460,809 total number 799,943 412,056 (440,949) (92,656) 678,394 total number 487,561 356,894 – (44,512) 799,943 The cost of the MIP of $3,386,000 (2011: $2,415,000) has been recorded in the consolidated income statement as part of general and administrative expenses. 36. oper ating Lease arr angements minimum lease payments under operating leases recognised in profit or loss for the year 2012 $000 4,766 2011 $000 4,368 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 two to five years inclusive 2012 $000 3,548 3,123 6,671 2011 $000 2,163 3,345 5,508 Operating lease payments represent rentals payable by the group for certain of its office properties. Leases are negotiated for a term of one to three years. 154 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSContinued37. 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 associates 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 an ownership percentage of 29.0% at the end of 2012 (2011: 29.2%). further details on the relationship between Mr. Samih Darwazah, Mr. Said Darwazah, Mr. Mazen Darwazah and Mr. Ali Al-Husry, and Darhold Limited are given in the Directors’ report. Other than dividends (as paid to all shareholders), there were no transactions between the group and Darhold Limited in the year. 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. Total cash balances at Capital Bank – jordan were $2,977,000 (2011: $610,000). Loans and overdrafts granted by Capital Bank to the group amounted to $Nil (2011: $3,841,000) with interest rates ranging between 8.25% and 3MLIBOr + 1%. Total interest expense incurred against group facilities was $344,000 (2011: $7,000). Total interest income received was $Nil (2011: $Nil) and total commission paid in the year was $91,000 (2011: $8,000). 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 $3,423,000 (2011: $3,035,000). The group’s insurance expense for jordan International Insurance Company contracts in the year 2012 was $2,806,000 (2011: $2,902,000). The amounts due to jordan International Insurance Company at the year-end were $154,000 (2011: Due from $109,000). Mr. Yousef Abd Ali: is a related party of the group because he holds a non-controlling interest in Hikma Lebanon of 33%, the amount owed to Mr. yousef by the group as at 31 December 2012 was $150,000 (2011: $150,000). Labatec Pharma: is a related party of the group because it is owned by Mr. Samih Darwazah. During 2012, the group total sales to Labatec Pharma amounted to $282,000 (2011: $338,000) and the group total purchases from Labatec Pharma amounted to $1,179,000 (2011: $3,805,000). At 31 December 2012, the amount owed from Labatec Pharma to the group was $211,000 (2011: Owed to $753,000). King and Spalding: is a related party of the group because the partner of the firm is a Board member and the company secretary of west-ward. king and Spalding is an outside legal counsel firm that handles general legal matters for west-ward. During 2012 fees of $45,000 (2011: $1,216,000) were paid for legal services provided. Jordan Resources & Investments Company: is a related party of the group because three Board members of the group are shareholders in the firm. During 2012 fees of $151,000 (2011: $Nil) were paid for training services provided. American University of Beirut: is a related party of the group because one Board member of the group is also a trustee of the University. During 2012 fees of $125,000 (2011: $Nil) were paid for training services provided. remuneration of key management personnel The remuneration of the key management personnel (comprising the Executive and Non-Executive Directors and certain 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 remuneration Committee report on pages 82 to 103. short-term employee benefits share-based payments post-employment benefits other benefits 2012 $000 10,460 3,716 211 204 14,591 2011 $000 8,474 3,196 102 428 12,200 155 Hikma PHarmaceuticals Plc / annual rePort 201238. sUBsidiaries The main subsidiaries of Hikma Pharmaceuticals PLC are as follows: Company’s name hikma pharmaceuticals Limited arab pharmaceutical manufacturing Co. hikma pharma algeria sarL hikma farmaceutica s.a. west-ward pharmaceutical Corp. pharma ixir Co. Ltd hikma pharma sae Thymoorgan pharmazie gmbh hikma pharma gmbh hikma italia s. p. a al jazeera pharmaceutical industries Ltd. societe d’industries pharmaceutiques ibn al Baytar s.a. spa societe al dar al arabia societe de promotion pharmaceutique du maghreb s.a. savanna pharmaceuticals industries Co. Ltd. ownership% ordinary shares at 31 december 2012 100 100 100 100 100 51 100 100 100 100 100 66 100 94.1 100 ownership% ordinary shares at 31 december 2011 100 100 100 100 100 51 100 100 100 100 100 66 100 84.3 100 established in jordan jordan algeria portugal U.s.a. sudan egypt germany germany italy K.s.a. tunisia algeria morocco sudan 39. defined ContriBUtion r etirement Benefit pLan Hikma Pharmaceuticals PLC has defined contribution retirement plans in three of its subsidiaries: west-ward Pharmaceuticals Corp, Hikma Pharmaceuticals Limited (jordan) and Arab Pharmaceutical Manufacturing Co. The details of each contribution plan are as follows: hikma pharmaceuticals Limited – jordan: The group currently has an employee savings plan wherein the group fully matches employees’ contributions, which are fixed at 10% (up to 2011 was 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 2012 were $2,163,000 (2011: $885,000). west-ward pharmaceuticals Corp: (401 (k) salary saving plan) Prior to 2001, west-ward Pharmaceutical 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 95% of their gross salary into the plan, not to exceed $17,000 and $16,500 for 2012 and 2011, 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 do not vest for up to two years 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 the 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 2012 were $2,020,000 (2011: $1,357,000). arab pharmaceutical manufacturing Company – jordan: The group currently has an employee saving plan wherein the employees contribute at 10%, and the company at 15% of basic salary. Employees are entitled to 100% of the company contributions after three years of employment with the company. The group’s contributions for the year ended 31 December 2012 were $708,000 (2011: $600,000). 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. 40. sUBseqUent events On 9 january 2013, Hikma announced that is has agreed to acquire the Egyptian Company for Pharmaceuticals & Chemical Industries (“EPCI”); the deal was completed on 22 january 2013. Hikma paid a cash consideration of $18,500,000 and deferred consideration of $2,000,000. The main purpose of the acquisition was to strengthen Hikma’s position in the large and fast growing Egyptian market. Due to the timing of the acquisition, Purchase Price Allocation has not yet been performed. 156 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSContinuedCompany BaLanCe sheet at 31 deCemBer 2012 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 accounts receivable Total assets Current liabilities other payables other current liabilities short-term debt due to subsidiaries Net current assets/(liabilities) Non-current liabilities Long-term financial debts Total liabilities Net assets Equity share capital share premium own shares other reserves Equity attributable to equity holders of the parent Notes 43 44 45 44 46 47 48 54 55 56 2012 $000 2011 $000 1,678,040 70,079 37 309 1,748,465 568 5,803 136,329 83 142,783 1,891,248 340 2,036 30,705 16,217 49,298 93,485 1,664,637 57,324 87 571 1,722,619 589 6,091 111,666 92 118,438 1,841,057 412 2,237 – 592,000 594,649 (476,211) 148,836 198,134 1,693,114 137,410 732,059 1,108,998 35,091 279,116 (86) 1,378,993 1,693,114 34,904 278,094 (2,222) 798,222 1,108,998 The financial statements of Hikma Pharmaceuticals PLC, registered number 5557934, were approved by the Board of Directors and signed on its behalf by: said darwazah Director mazen darwazah Director 12 March 2013 157 Hikma PHarmaceuticals Plc / annual rePort 2012 Company statement of Changes in eqUity for the year ended 31 deCemBer 2012 Balance at 1 January 2011 issue of equity shares purchase of own shares Cost of equity-settled employee share scheme exercise of employees long-term incentive plan net profit for the year dividends paid Balance at 31 December 2011 and 1 January 2012 issue of equity shares purchase of own shares Cost of equity-settled employee share scheme exercise of employees long-term incentive plan net profit for the year dividends paid Balance at 31 December 2012 paid up capital $000 34,525 379 – – – – – 34,904 187 – _ – – – 35,091 share premium $000 own shares $000 merger reserve $000 275,968 2,126 – – – – – 278,094 1,022 – – – – – 279,116 (2,220) – (115) – 113 – – (2,222) – (158) – 2,294 – – (86) 707,369 – – – – – – 707,369 – – – – – – 707,369 retained earnings $000 40,793 – – 7,507 (113) 67,867 (25,201) 90,853 – – 7,961 (2,294) 601,654 (26,550) 671,624 total $000 1,056,435 2,505 (115) 7,507 – 67,867 (25,201) 1,108,998 1,209 (158) 7,961 – 601,654 (26,550) 1,693,114 As permitted by section 408 of the Companies Act 2006, the statement of comprehensive income of the Company is not presented as part of these accounts. 158 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 Company Cash fLow statement for the year ended 31 deCemBer 2012 Profit before tax Cost of equity-settled employee share scheme finance income interest and bank charges Change in other current assets Change in other payables depreciation of property, plant and equipment amortisation of intangible assets Change in accounts receivable Change in amounts due from/to subsidiaries Change in other current liabilities Net cash from operating activities investing aCtivities Change in amounts due from subsidiaries purchase of property, plant and equipment investment in subsidiary interest income Net cash (used in) investing activities finanCing aCtivities proceeds from issue of new shares increase in long-term financial debts increase in short-term debts interest paid dividends paid Net cash generated from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 2012 $000 601,654 1,754 (2,442) 5,183 21 (72) 71 51 9 (594,014) (152) 12,063 (12,755) (35) (13,403) 2,442 (23,751) 1,051 11,426 30,705 (5,232) (26,550) 11,400 (288) 6,091 5,803 2011 $000 67,867 1,818 (2,753) 1,334 (398) 157 60 60 1 (4,648) (1,224) 62,274 (34,529) (489) (141,510) 2,753 (173,775) 2,390 137,410 – (70) (25,201) 114,529 3,028 3,063 6,091 159 Hikma PHarmaceuticals Plc / annual rePort 2012notes to the Company finanCiaL statements 41. adoption of new and r evised 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 consolidated financial statements. 42. signifiCant aCCoUnting poLiCies The separate financial statements of the Company are presented as required by the Companies Act 2006. As permitted by that Act, the separate financial statements have been prepared in accordance with International financial reporting Standards and Uk company law. 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 policies noted below. Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment. Equity-settled employee share schemes are accounted for in accordance with IfrIC 11 ‘group and Treasury Share Transactions’, whereby current charge expenses relating to the subsidiaries’ employees are recharged to subsidiary companies. 43. investments in sUBsidiaries Investments in subsidiaries represent the following: Company’s name hikma Limited hikma pharma Limited hikma holdings (UK) Limited hikma acquisitions (UK) Limited al jazeera pharmaceutical industries Ltd (“jpi”) hikma pharmaceuticals Limited hikma mena holdings amKi mena holdings hikma international n.v. The investments in subsidiaries are all stated at cost. *The remaining shares are held by other group companies. ownership % ordinary shares 2012 ownership % ordinary shares 2011 100 100 – 100 52.5* 22.8* 100 100 100 100 100 100 – 52.5* 22.8* 100 – – established in UK jersey UK UK Ksa jordan Uae Uae netherlands The movement in the carrying value of the investments in the year represents an increase in the investment in Hikma MENA Holdings of $13,400,000 and a new investment in AMkI MENA Holdings of $2,722. The total investment in subsidiaries is $1,678,040,000 (2011: $1,664,637,000). During the year ended 31 December 2012, Hikma undertook an internal reorganisation of the group subsidiary structure. The ultimate interest in all subsidiaries remains unchanged. The changes in ownership immediately below the Company were the addition of Hikma International N.v. and Hikma Acquisitions (Uk) Limited and the removal of Hikma Holdings (Uk) Limited. 44. dUe from sUBsidiaries non-current assets hikma investment Ltd. west-ward pharmaceuticals Corp. hikma italia s.p.a hikma pharma Limited – jersey 2012 $000 8,512 50,628 3,959 6,980 70,079 2011 $000 8,384 37,952 3,782 7,206 57,324 These balances represent loans that carry interest of 1.5% to 4.8% (2011: 1.5% to 4.8%) per annum charged on the outstanding loan balances. 160 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 44. dUe from sUBsidiaries Continued Current assets due from hikma pharma Limited – jersey due from hikma farmaceutica – portugal due from hikma pharma – germany due from hikma UK Limited due from hikma Limited due from hikma mena holdings Limited due from west-ward pharmaceutical Corp. due from hikma pharmaceuticals Limited – jordan others 45. finanCiaL assets 2012 $000 7,491 643 113 90,291 625 14,229 837 20,109 1,991 136,329 2011 $000 7,222 487 78 93,446 580 7,151 1,196 – 1,506 111,666 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. 46. finanCiaL LiaBiLities other payables The Directors consider that the carrying amount of other payables approximates to their fair value. 47. dUe to sUBsidiaries due to hikma holdings due to hikma pharmaceuticals Limited – jordan due to hikma phamia Limited – jersey due to hikma investment Ltd. due to eurohealth – nv 2012 $000 – – 15 728 15,474 16,217 2011 $000 591,800 200 – – – 592,000 These balances mainly represent amounts due to Hikma Holdings (Uk) Ltd which are non-interest-bearing loans repayable on demand. During the year ended 31 December 2012, Hikma undertook an internal reorganisation of the group subsidiary structure. The ultimate interest in all subsidiaries remains unchanged. As a result of this re-organisation, the non-interest bearing loan with Hikma Holdings (Uk) Limited ceased. 48. Long-ter m finanCiaL deBts The Company has a seven-year syndicated term loan of $180,000,000 which was entered into on 27 September 2011. The loan has an outstanding balance at year end of $172,468,000 (with a fair value of $170,541,000) from which $21,705,000 is due in one year and a zero unused available limit. quarterly repayments for the term loan should commence 18 months after the date of the agreement and will continue until the 84th month after the date of the agreement. Payment will be made with equal instalments representing 3.182% of the loan balance and a bullet payment of 30% at the maturity of the loan. The loan was used to finance the Promopharm acquisition and the group’s general capital expenditure. 161 Hikma PHarmaceuticals Plc / annual rePort 2012notes to the Company finanCiaL statements Continued 49. 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 British pound jordanian dinar 2012 $000 – 960 – Liabilities 2011 $000 – 1,537 – 2012 $000 36 975 29 assets 2011 $000 1,992 159 31 A sensitivity analysis based on a 1% movement in foreign exchange rates has no material impact on the Company results and Company statement of changes in equity. further details on how the Company manages the currency risk are given in Note 28. 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 2012, with all other variables held constant. Based on the composition of the Company debt and cash portfolio as at 31 December 2012, a 1% increase/decrease in interest rates would result in an additional interest expense/income of $1,800,000 being incurred per year (2011: $1,400,000). Liquidity risk 2012 Cash and cash equivalents accounts receivables interest-bearing loans and borrowings other payables 2011 Cash and cash equivalents accounts receivables interest-bearing loans and borrowings other payables Less than one year $000 5,803 83 (35,412) (340) (29,866) Less than one year $000 6,091 92 (4,341) (412) 1,430 two to five years $000 _ – (99,193) – (99,193) two to five years $000 _ _ (83,053) – (83,053) more than five years $000 _ – (63,161) – (63,161) more than five years $000 _ _ (70,495) – (70,495) total $000 5,803 83 (197,766) (340) (192,220) total $000 6,091 92 (157,889) (412) (152,118) The Company believes that, given the group’s forecast operating cash flow during 2012, it has the ability to satisfy its liability commitments. 50. staff Costs Hikma Pharmaceuticals PLC currently has ten employees (2011: ten) (excluding Executive Directors); total compensation paid to them amounted to $2,466,000 (2011: $1,890,000) of which salaries and wages compromise an amount of $1,768,000 (2011: $1,291,000) the remaining balance of $698,000 (2011: $599,000) represents national insurance contributions, the cost of share-based payments and other benefits. 51. stoCK options The details of the stock compensation scheme are provided in Note 35. As at 31 December 2012, the total number of options granted to employees of the Company under the stock compensation scheme during the life of the scheme was 2,560,000 (2011: 2,560,000) and the total amount of the compensation expenses charged to profit and loss is $Nil (2011: $Nil). 162 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 52. Long-ter m inCentive pLans (Ltips) The details of the LTIP scheme are provided in Note 35. As at 31 December 2012, the total number of awards granted to employees of the Company under the LTIPs during the life of the plans was 1,331,000 shares (2011: 1,123,000) and the total amount of the compensation expenses charged to profit and loss is $1,744,000 (2011: $1,818,000). 53. management inCentive pLans (mips) The details of the MIPs scheme are provided in Note 35. As at 31 December 2012, the total number of awards granted to employees of the Company under the MIPs during the life of the plans was 4,000 shares (2011: Nil) and the total amount of the compensation expenses charged to profit and loss is $11,000 (2011: $Nil). 54. share CapitaL Issued and fully paid – included in shareholders’ equity: 197,036,507 (2011: 195,851,307) ordinary shares of 10p each Details of the issue of share capital in the year are given in Note 30. 55. share premiUm Balance at 1 January 2012 premium arising on exercise of stock options Balance at 31 December 2012 56. net inCome for the year 2012 $000 2011 $000 35,091 34,904 share premium $000 278,094 1,022 279,116 As permitted by section 408 of the Companies Act 2006, the statement of comprehensive income of the Company is not presented as part of these accounts. The net income in the Company for the year is $601,654,000 (2011: $67,867,000). Included in the net income for the year is an amount of $614,422,000 (2011: $75,557,000) representing dividends received and $1,744,000 (2011: $1,818,000) representing the current year charge of LTIPs and $11,000 (2011: $Nil) representing the current year charge of MIPs expenses relating to the Company’s employees. The remaining $6,206,000 (2011: $5,689,000) of the group’s stock options, LTIPs and MIPs charge is recharged to subsidiary companies. 57. reLated party Darhold Limited: is a related party of the Company because it is considered one of the major shareholders of Hikma Pharmaceuticals PLC with ownership percentage of 29.0% at the end of 2012 (2011: 29.2%). further details on the relationship between Mr. Samih Darwazah, Mr. Said Darwazah, Mr. Mazen Darwazah and Mr. Ali Al-Husry, and Darhold Limited are given in the Directors’ report. Amounts repayable to and from subsidiaries are disclosed in Notes 44 and 47. Other transactions with related parties include management charges for services provided to the subsidiary companies, equity settled employee share scheme costs relating to the subsidiary companies and transactions with key management personnel. Compensation paid to key management personnel is disclosed in Note 37. Details of Directors remuneration are disclosed in the remuneration Committee report on pages 82 to 103. More details on the general information of the ultimate parent of the group are disclosed in Note 2. 163 Hikma PHarmaceuticals Plc / annual rePort 2012sharehoLder information 2013 financial calendar share listings 17 april 19 april 16 may 23 may 21 august* 5 september* 7 september* 10 october* *Provisional dates. 2012 final dividend ex-dividend date 2012 final dividend record date annual general meeting 2012 final dividend paid to shareholders 2013 interim results and interim dividend announced 2013 interim dividend ex-dividend date 2013 interim dividend record date 2013 interim dividend paid to shareholders shareholding enquiries Enquiries or information concerning existing shareholdings should be directed to the Company’s registrars, Capita registrars either: 3 in writing to Shareholder Services, Capita registrars, The registry, 34 Beckenham road, Beckenham, kent Br3 4TU; 3 by telephone from within the Uk on 0870 162 3100; 3 by telephone from outside the Uk on +44 208 639 2157; or 3 through the website www.capitaregistrars.co.uk. dividend payments – Currency The Company declares dividends in US Dollars. Unless you have elected otherwise, you will receive your dividend in US Dollars. Shareholders can opt to receive the dividend in Pounds Sterling or jordanian Dinar. The registrar retains records of the dividend currency for each shareholder and only changes them at the shareholder’s request. If you wish to change the currency in which you receive your dividend please contact the registrars. dividend payments – Bank transfer 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. dividend payments – 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. website Press releases, the share price and other information on the group are available on the Company’s website www.hikma.com. London Stock Exchange The Company’s Ordinary Shares are admitted to the Official List of 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 the Nasdaq Dubai. They are listed under EPIC – HIk and ISIN – US4312882081. further information on the Nasdaq Dubai, its trading systems and current trading in Hikma Pharmaceuticals PLC gDrs can be found on the website www.nasdaqdubai.com. American Depository Receipts (ADRs) Hikma Pharmaceuticals PLC has an ADr programme for which BNy Mellon acts as Depositary. One ADr equates to 2 Hikma Ordinary Shares. ADrs are traded as a Level 1 Over-the-Counter (OTC) programme under the symbol HkMPy. Enquiries should be made to: BNy Mellon Shareowner Services PO Box 358516 Pittsburgh, PA 15252-8516 Tel: +1 201 680 6825 Tel: +1 888 BNy ADrS (toll-free within the US) E-mail: shrrelations@bnymellon.com shareholder fraud 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. The Company’s website is www.hikma.com and the registered office is 13 Hanover Square, London w1S 1Hw. Telephone number + 44 207 399 2760. 164 HIkMA PHArMACEUTICALS PLC / ANNUAL rEPOrT 2012 PriNciPaL GroUP coMPaNieS Hikma PHarmaceuticals Plc west-ward PHarmaceutical corPoration registered in england and wales number 5557934 registered office: 13 Hanover square london w1s 1Hw uk telephone: +44 (0)20 7399 2760 Facsimile: +44 (0)20 7399 2761 e-mail: investors@hikma.uk.com 465 industrial way west eatontown new Jersey 07724 usa telephone: +1 732 542 1191 Facsimile: +1 732 542 6150 Hikma PHarmaceuticals limited Hikma Farmacêutica s.a. P.o. box 182400 11118 amman Jordan telephone: +962 6 5802900 Facsimile: +962 6 5827102 adviSerS auditors deloitte llP 2 new street square london ec4a 3bZ uk estrada rio da mo no. 8 8a, 8b – Fervença 2705 – 906 terrugem snt Portugal telephone: +351 21 9608410 Facsimile: +351 21 9615102 Brokers citigroup global markets limited canada square london e14 5lb uk Legal advisers ashurst broadwalk House 5 appold street london ec2a 2Ha uk Public relations Fti consulting Holborn gate 26 southampton buildings london wc2a 1Pb uk bank of america merrill lynch 2 king edward street london ec1a 1HQ uk Produced and designed by radley yeldar www.ry.com this report is printed on “olin” paper. this paper is made from virgin wood fibre from well-managed forest 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 totally chlorine free (tcF), and some pulp is bleached using an elemental chlorine fee (ecF) process. the inks in printing this report are all vegetable-based. Printed at Pureprint group, iso14001, Fsc certified and carbonneutral® 170 Hikma PHarmaceuticals Plc / annual rePort 2012 H i 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 1 2 Hikma PHarmaceuticals Plc 13 Hanover sQuare, london w1s 1Hw, uk www.hikMa.coM

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