Better health.
Within reach.
Every day.
©
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© Hikma Pharmaceuticals PLC
Annual Report 2017
Who we are
Hikma puts better health within reach, every day. We create high-quality
medicines and make them accessible to people who need them. Global experts
with a local presence, we think creatively and act practically, transforming
cutting-edge science into innovative solutions that transform people’s lives,
for a healthier world wherever we are.
How we have performed
Revenue
($m)
$1,936m
Core1 operating profit
($m)
$386m
Reported operating profit/(loss)
($m)
Reported EBITDA2
($m)
$(747)m
$488m
1,950
1,936
413
427
409
419
386
352
402
381
474
454
473
488
427
1,365
1,489
1,440
302
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
1. Core results are presented to show the underlying performance of the Group, excluding the
exceptional items and other adjustments set out in Note 5 in the Notes to the Financial Statements.
2. Earnings before interest, tax, depreciation, amortisation and impairment charges.
3. Core basic earnings per share is reconciled to basic earnings per share in Note 13 in the
Notes to the Financial Statements.
(747)
What’s inside
Strategic report
Corporate governance
Financial statements
IFC Who we are
2 What we do
4 Chairman and Chief Executive’s
statement
Investment case
6
8 Our brand
10 Our brand story
18 Our strategic approach
20 Our markets
22 Our business model
24 Our strategy
26 Our key performance indicators
Business and financial review
Injectables
28
32 Generics
36 Branded
40 Group performance
Sustainability
44 Sustainability and our
company promise
46 Quality
Accessibility
48
50
Innovation
52 Commitment
Risk management
58 Risk management
66 Message from our Chairman
68 Corporate governance
at a glance
70 Board of Directors
72 Executive Committee
74 Governance report
78 Committee reports
86 Remuneration report
109 Directors’ report
113
Independent auditor’s report
122 Consolidated financial statements
127
Notes to the consolidated
financial statements
172 Company financial statements
174 Notes to the Company financial
statements
Strategic report | Who we are
Profit/(loss) to Shareholders
($m)
Basic earnings/(loss) per share
(cents)
Core basic earnings per share3
(cents)
Dividend per share
(cents)
$(843)m
(351.3)c
278
252
140.4
126.6
212
107.6
155
66.5
105.0c
151.0
147.3
139.1
34c
32
32
33
34
118.5
105.0
27
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
(843)
(351.3)
See the Group performance
on page 40
Shareholder information
180 Shareholder information
181
Principal Group Companies
– Advisers
Read more content online
www.hikma.com
What we do
We develop, manufacture and market a broad range of branded
and non-branded generic pharmaceutical products across the US,
the Middle East and North Africa (MENA) and Europe. We are also
a leading licensing partner in MENA.
Our markets
Group Revenue
$1,936m (2016: $1,950m)
29 manufacturing plants in 11 countries
7 R&D centres
>50 markets where our products
are sold
Our operations
2
Manufacturing plants
R&D centres
Injectables
Our Injectables business manufactures, markets
and sells generic injectable products globally, with
state-of-the-art manufacturing facilities in the US
and Europe.
Key highlights
— Third largest manufacturer of injectable generics in the US market
by volume
— A range of manufacturing capabilities, including sterile liquid,
powder, lyophilised and cytotoxic products, in a broad range
of forms, including vials, ampules, bags and prefilled syringes
— Broad product portfolio including controlled substances,
anti-infective, cardiovascular and oncology products
Segmental revenue
$776m (2016: $781m)
For more information see page 29
Strategic report | What we do
United States
Our large manufacturing facilities – one for
sterile injectables and two for non-injectables
– supply products across a broad range of
therapeutic areas, including respiratory,
oncology and pain management. We also
have two dedicated R&D facilities to support
sustained growth.
MENA
We sell branded generics and in-licensed
products across the region. We have local
manufacturing facilities in seven markets,
including FDA-approved facilities in Jordan
and Saudi Arabia. More than 2,000
representatives market our brands to
doctors and pharmacists across 17 markets.
Europe and the rest of the world
We have injectable manufacturing facilities in
Germany, Italy and Portugal, with dedicated
oncology and cephalosporin facilities. These
facilities supply injectable products to the US
and MENA and a growing number of markets
in Europe.
62%
of Group revenue
(2016: 62%)
2,133
employees
33%
of Group revenue
(2016: 33%)
5,547
employees
5%
of Group revenue
(2016: 5%)
784
employees
Generics
Our Generics business develops and sells oral
and other non-injectable generic products
across the United States.
Key highlights
— Twelfth largest non-injectable generic manufacturer in the
US market by volume
— State-of-the-art facilities with a broad range of capabilities,
including oral solid dosage technologies, as well as dedicated
respiratory, nasal spray, suspension, liquid solution and
high-containment areas
— Lower-cost US FDA-approved facilities in Jordan and
Saudi Arabia supplying the US market
Branded
Our Branded business develops and sells
generics, branded generics and in-licensed
patented products across the MENA region
and other emerging markets.
Key highlights
— Leading pharmaceutical manufacturer in the MENA
with operations in 17 markets
— Partnership agreements with leading multinational
pharmaceutical companies
— Strong anti-infective franchise and growing market
presence in chronic therapeutic areas
Segmental revenue
Segmental revenue
$615m (2016: $604m)
$536m (2016: $556m)
For more information see page 33
For more information see page 37
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Hikma Pharmaceuticals PLC
Chairman and Chief Executive’s statement
‘ Whilst 2017 was a challenging year for the Group as we faced significant
headwinds in our US Generics business, we delivered a solid performance
in our Branded and Injectable businesses and our balance sheet remains
strong. I am confident in the prospects for the Group both in the short
term and the long term.’
40 years of better health
2018 marks our 40th anniversary and gives us
an important opportunity to reflect not only on
our past successes and the millions of lives
upon which we’ve had a positive impact, but
also to ready ourselves for the future. We need
to remain competitive in today’s fast-changing
environment, and the next four decades will
no doubt require different things of us and our
business – new ways of working, of innovating
and of enabling more and more people to live
healthy, productive lives. In this letter, I outline
some of our recent challenges, but also our
progress and some of the steps we are taking
to achieve our ambitious goals.
A challenging year
2017 was a challenging year. With more than
62% of our revenues now generated in the US,
we are increasingly impacted by the changing
dynamics of the US market. The consolidation
of our customers and the increase in the pace
of ANDA approvals by the FDA have led to
more significant price erosion and more
intense competition than the industry has
seen in recent years and than we anticipated.
This had a material impact on our results in
2017 and, in particular, on our West-Ward
Columbus business, which was further
impacted by the delay in approval of our
ANDA for our generic version of Advair Diskus®.
As a result of these many headwinds, we
have had to re-evaluate the potential of the
West-Ward Columbus product portfolio and
R&D pipeline, which we now believe will deliver
less than we anticipated at the time of the
acquisition in February 2016. As a result,
we are taking an impairment charge of
$1,084 million to reflect our updated view
of the fair value of this business.
Across our other businesses, we delivered a
solid performance. Our Injectables business
was resilient, maintaining exceptionally strong
margins despite new competitors for our top
products and benefiting from our strong market
position in the US hospital segment. Revenue
and profitability in our Branded business
remained stable and we reinforced our
position as the partner of choice in the MENA
region, signing new licensing agreements.
Overall, the Group delivered revenue of
$1.9 billion and core operating profit of
$386 million, down from $419 million last year.
We generated record cash flow from operations
of $443 million, lowering our net debt and
strengthening our balance sheet, which
remains one of the strongest in the industry.
Transforming our business
To ensure we can continue to overcome
obstacles and deliver growth, we are making
some transformational changes across our
organisation. We have strengthened our
leadership team in the US, bringing in new
heads of research and development, sales
and marketing, business development and
a new plant manager. We have a newly-
appointed Chief Scientific Officer and we
have started the rollout of our new brand.
As part of this transformation, we recently
announced the appointment of Siggi Olafsson
as Chief Executive Officer. Siggi is an
exceptional leader with extensive experience
in the industry. He is the right person to take
the business to the next level.
Progress and recognition
Despite the challenges we faced in 2017, it was
also a year of progress and recognition. In the
MENA region, we continue to be the partner of
choice for leading biotech and pharmaceutical
companies looking to expand into the region.
In 2017, we expanded our long-standing
relationship with Takeda, and likewise
broadened our partnership with Celltrion,
the Korean biopharmaceutical company,
to distribute select products in the region.
Our venture capital arm, Hikma Ventures,
took us into exciting new businesses in the
areas of artificial intelligence, biosensor
technology and online healthcare.
The Institute of Directors in London ranked
Hikma first among the FTSE100 pharmaceutical
companies for corporate governance (17th
overall in the FTSE100). We were also awarded
‘Company of the Year’ by the trade publication
Generics Bulletin, and are proud to remain
a constituent of the FTSE4Good. Investing
in our communities and improving access
to medicine has been a long-established
principle of this company since its founding
day, and we continue to support the many
communities in which we live and work with
donations, fundraising and volunteering.
Enabling collaboration
People have always been at the heart of our
business – the people we employ and the
people whose lives we improve through the
medicines we make. In addition to bolstering
our leadership, we put in place a new human
capital management system and new global
intranet to help colleagues work faster, more
collaboratively and have access to better
information. Our successful pilot of the Hikma
Young Professionals programme in Jordan,
a two-year rotational programme developed
for high-potential and high-performing recent
graduates, was expanded across our global
network. It aims to attract talented individuals
and instill in them Hikma leadership values
through a series of rotations in finance,
operations and commercial roles.
4
Bringing together all we’ve learned in the past 40 years, and with
our new talent, technologies and expertise, we will continue to
deliver on our purpose of providing quality affordable medicines
to people who need them.”
drive efficiencies and improving engagement
with customers and employees. You can read
more about our new brand in this report and
on our website, hikma.com.
I will end where I started, which is to emphasise
my optimism and confidence of the future of
this business, particularly with the introduction
of our new CEO, Siggi Olafsson, earlier this year.
Thank you to my colleagues across the Hikma
family for your hard work, loyalty and integrity.
Said Darwazah
Chairman
Last year, we said goodbye to Mike Raya who
led and grew our US business for more than
20 years. In his career at Hikma, Mike showed
great leadership and commitment in the
many different roles he held, across operations,
quality and ultimately as CEO of the US
business. While Mike will be missed, he leaves
a strong team behind in the US, bolstered by
several new leaders who I know will help carry
on Mike’s legacy.
Value for shareholders
We have a strong track record of delivering
value for shareholders. Since Hikma listed
on the London Stock Exchange in 2005, we
have delivered a total shareholder return of
361%. This exceeds the FTSE250 and FTSE
Pharmaceuticals indices. In 2017, however,
the challenges we faced in the US had a
material impact on our share price, which
closed the year at 1,134p, down from 1,893p
on 31 December 2016. I am confident that
the transformational changes we are
making across the Group will enable us
to deliver positive returns to shareholders
in the near term.
Looking ahead
As we look ahead to 2018, I expect we will
continue to be impacted by the challenges
facing our industry. I am confident that our
new leadership and our strategy built on five
growth pillars will enable us to meet these
challenges head on. In 2018, we are also
implementing a single enterprise brand
strategy that will bring the entire family of
Hikma companies under a revitalised and
more relevant Hikma brand. We expect this
investment in a new brand to be a catalyst for
change within our organisation, helping to
Strategic report | Chairman and Chief Executive’s statement
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A strong investment case
Our broad product portfolio, extensive manufacturing capabilities
and clear strategy for growth offer a strong investment case.
Creating long-term sustainable value
Broad global portfolio
across diverse markets
High-quality and efficient
global manufacturing
operations
Established commercial
capabilities
Our portfolio of more than 650 compounds,
available in thousands of strengths and dosage
forms, makes us a leader in key markets.
We operate a network of high-quality and
efficient manufacturing facilities, the majority
of which are EU or FDA-approved. As a result of
our continued investment in our manufacturing
network, we have the capability and capacity
to capture new market opportunities.
At Hikma, quality defines everything we do
and we ensure it is consistently delivered in all
the communities we serve. Our excellent track
record of regulatory compliance has made us a
trusted partner to our customers and patients.
Our experienced teams in the US, the MENA
region and Europe mean we can confidently
navigate local challenges and capitalise on
opportunities.
In the US, customer consolidation and
increased competition has made it more
important than ever to maintain strong
customer relationships. We have strengthened
our Generic and Injectable commercial teams
to ensure that our business is able to respond
to these challenges.
In the MENA region, we have a sales and
marketing team of more than 2,000 people
that support our position as the fifth largest
pharmaceutical manufacturer. As a local
player, we have extensive networks on the
ground that enable us to perform well, even
in times of political or economic instability.
Compounds on the market
Manufacturing employees
Sales and marketing employees
658
6371
658
588
4,911
4,904
4,911
3,896
2,123
2,164
2,147
2,123
1. In 2016, we overstated the
total number of marketed
compounds by 70. The
correct number was 637.
6
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2016
2017
2015
2016
2017
2015
2016
2017
Strategic report | Investment case
Specialised R&D teams
and a large, differentiated
pipeline
Experienced leadership
and a strong financial
position
Our diversified
business model
Through investment and strategic
acquisitions, we have developed and
strengthened our R&D capabilities to support
sustainable long-term growth. We have
dedicated and experienced R&D teams,
with the ability to execute and replenish
our large and growing product pipeline.
We have 224 compounds pending approval
from global regulatory authorities and
147 compounds under active development.
We have the expertise and resources to focus
on more complex and differentiated products
across a range of therapeutic categories,
dosage forms and delivery systems.
Our experienced management teams have
a history of growing the business. They have
delivered this growth over time whilst ensuring,
through a balance of organic growth and
acquisitions, that we maintain a strong
balance sheet. In an increasingly challenging
environment, this has provided our business
with stability and financial flexibility.
We continue to set ourselves ambitious targets
for future growth, which will continue to be
delivered through organic growth and further
strategic acquisitions.
We have a business model that is diversified
across business segments, regions and
products. This provides both opportunities
and resilience during challenging times.
For a full explanation of our business model,
see page 22.
R&D and product-related investment
Revenue
$121m
139
121
$1,936m
1,950
1,936
1,440
71
2015
2016
2017
2015
2016
2017
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Our promise
Better health.
Within reach.
Every day.
Market across geo g r a p h i e s
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Hikma Pharmaceuticals PLC
Better health.
Within reach.
Every day.
For our 40th anniversary, we are introducing
a new brand built on the promise of putting
better health within reach every day.
By creating high-quality products, and making
them accessible to those who need them,
we are helping to shape a healthier world
that enhances all of our communities.
Our vision and values
Our vision is of a healthier world that enriches
all of our communities. For the past 40 years,
we’ve been guided by the simple belief that
when world-class medicine is put within
people’s reach, it has the ability to transform
their lives and their communities.
Today, we now have the reach, insight
and expertise to transform so many more
people’s lives.
And in a fast-changing world, our commitment
to our vision is as important as ever, not only
for Hikma but also the millions of people
we serve around the world.
8
Strategic report | Our brand
We’re building a world-class
brand at Hikma. One with an
inspiring promise, bold vision,
distinctive personality, and
a recognisable identity.”
Quality without boundaries
Global expertise, local solutions
For more information see page 46
For more information see page 48
Practical creativity
Committed to people
For more information see page 50
For more information see page 52
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For us, quality
knows no
boundaries
We’ve built our global reputation on bringing
high-quality medicines to customers.
When we talk about quality, we’re not simply
talking about our products. We’re talking about
our people, our relationships, and our thinking.
Hikma in action
As well as adhering to the highest standards
in everything we do, our customers and
partners know they can rely on us to deliver
it consistently, in all our markets.
By working with strategic partners around
the world, we not only strengthen our product
portfolio, but also reinforce our commitment
to providing access to important medicines
for those who need them. Building on our
long-standing partnership with Takeda, in 2017
we forged an agreement that gives us the right
to register, manufacture, market, distribute
and sell four of their leading primary care
products in 17 markets in the MENA region.
Our experienced sales and marketing teams,
and expertise in promoting cardiovascular
and diabetes treatments, make us perfectly
positioned to help ensure that the right
medicines are reaching the right people,
in the right places.
For more information see page 46
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Strategic report | Our brand story
Wherever you are in the world,
and whatever your contact
with Hikma, you can rely
on us at every step.”
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Where worldwide
expertise meets
local solutions
We use our global expertise to develop solutions
for the specific challenges of our markets to ensure
reliable access to our medicines.
Hikma in action
Whatever the market needs, we apply our
expertise to put better health within reach
every day.
We believe that people everywhere should
have access to the latest medicines. From our
world-class manufacturing facility in Germany,
we are exporting oncology products to more
than a dozen countries in MENA, where they
meet a significant patient need.
From our FDA-approved facilities in Jordan and
Saudi Arabia, we are exporting products to the
US. Across all our facilities, our colleagues are
sharing knowledge and training, enabling us
to achieve the same high-quality operations
around the world.
From global expertise, to local solutions.
For more information see page 48
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Strategic report | Our brand story
In our connected world,
we believe everyone should
be able to benefit from
breakthrough advances
in medicine.”
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We think creatively
and act practically
Our dedication to practicality, creativity and
innovation comes through in the way we think
and the way we work. We are always questioning
and improving, because as the world changes
and develops, there’s always a better and
more efficient way to make better health
more accessible and affordable.
By thinking creatively and exploring new
technology, they demonstrated the capabilities
of customisation and on-demand production,
and substantially reduced the costs of the
spare parts and machine down-time.
Hikma in action
From developing new dosing solutions to
devising delivery mechanisms that simply
work better, we use practical creativity to
solve the many and varied challenges
facing us and our customers and patients.
When our facility in Amman needed
replacement parts for one of the blistering
machines, a group of young Hikma employees
used their initiative. Rather than ordering
them from Italy, they decided to manufacture
the parts using 3D printing technology.
For more information see page 50
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Strategic report | Our brand story
For us, innovation is a way
of thinking and working,
looking at new solutions
to old problems.”
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A genuine
commitment
to people
Since its inception, our company has been
dedicated to transforming people’s lives by
providing the medicine and support they need
every day.
We feel a real duty of care towards everyone with
whom we come into contact – the people who
use our medicines, our customers, suppliers,
employees and the wider community.
Hikma in action
We are working to improve medical awareness,
health standards and access to medical care,
everywhere we operate around the world.
Our customers and suppliers know this and
collaborate with us to put better health within
everyone’s reach.
Our commitment to people was recently
recognised by the US FDA, who awarded us
with a Drug Shortage Assistance Award for
our role in alleviating shortages of Thiotepa
for Injection and Phentolamine Mesylate
for Injection. In 2014, when we acquired
these products, they were in short supply.
We transferred them to our FDA-compliant
manufacturing facilities and expedited the
submission of post-approval supplements
to the FDA, before re-launching the products
in 2015. And while we were pleased to be
honoured with the award, we’re even more
delighted to know that these critical care
products were able to reach the patients
who needed them.
For more information see page 52
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Strategic report | Our brand story
We’re here to serve people
– from those who use our
medicines, to our customers,
suppliers, employees and the
wider community.”
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Our strategic approach
Our diversified business model enables us to compete successfully across
our markets. Through our strategy for growth and focus on five strategic pillars,
we are striving to deliver value to our shareholders whilst managing the risks
inherent in our business.
Our markets
Our diversified business model
Demand for pharmaceuticals continues to grow across
the markets in which we operate, while at the same time
governments are working to make healthcare more
accessible and more affordable.
We have a business model that is diversified across
business segments, regions and products. This provides
both opportunities and resilience during challenging times.
Increased life expectancy
Better access to healthcare
Rise in chronic diseases
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Our promise
Better health.
Within reach.
Every day.
Competitive market dynamics
Market across geo g r a p h i e s
Constrained healthcare budgets
For a full explanation of our markets,
see page 20.
For a full explanation of our business model,
see page 22.
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Strategic report | Our strategic approach
Our growth strategy
Measuring our progress Managing risks
Commercial excellence
Maximise the potential of our existing
portfolio our across our markets
Group revenue
$1,936m
— Industry earnings
— Product quality
Productivity
Optimise operations and drive efficiencies
Core operating profit
$386m
— Industry earnings
— Product quality
— Supply chain and API sourcing
Research and innovation
Develop more complex and differentiated
products and use innovative technologies to
address doctor/patient needs
Product
approvals
297
Product
submissions
226
— Product pipeline
— Supply chain and API sourcing
— Industry earnings
People
Ensure effective organisation, leadership,
talent management and recruitment
Business development
Expand into new geographies; acquire new
products, capabilities and technologies
Products refer to dosage forms and strengths,
across all markets.
Number of employees with length
of service of more than five years
— Organisational growth
— Reputation
4,616
Return on invested capital
— Inorganic growth
15.1%
Return on invested capital (ROIC) has increased
due to the revaluation of the West-Ward Columbus
business. Using the 2016 asset valuation, ROIC is 9.9%.
For a full explanation of our strategy,
see page 24.
For a full explanation of our KPIs,
For a full explanation of our risks,
see page 26.
see page 58.
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Hikma Pharmaceuticals PLC
Our markets
Strong demand for high-quality, affordable generics is expected
to increase as governments look for cost effective ways to manage
their healthcare budgets.
Global generics market
The global generic prescription market is
expected to reach $112 billion by 2022.1
The global pharmaceutical market has been impacted by key trends
in recent years, including buying consolidation, macroeconomic
instability in key markets and reduced government healthcare budgets.
These changing dynamics are creating opportunities for generic
pharmaceutical companies, as the need for more affordable healthcare
solutions is driving an increase in generic penetration.
Key drivers
— Scientific advances and improved access to healthcare are
contributing to a rise in life expectancy and an expanding older
population. According to United Nations’ projections, the world’s
population is expected to grow by more than two billion people in
the next 30 years, with the number of individuals aged 60 and above
expected to double to more than two billion people.2
— Changes in lifestyle are contributing to a rise in chronic diseases,
particularly cancer, respiratory and cardiovascular diseases. By 2020,
it is expected that 50% of global healthcare expenditure will be
directed at these therapeutic areas.3
— Most governments are now focused on tightly managing their
healthcare budgets. As a result, generic market share continues to
grow as generic substitution is increasingly encouraged. This trend is
expected to continue. By 2022, generic prescription drug sales are
expected to reach $112 billion.4
Worldwide generic prescription drug sales (2017–2022)
6.5% CAGR 2017–2022
84
90
95
101
106
112
2017
2018
2019
2020
2021
2022
EvaluatePharma (June 2017)
$112 billion
by 2022
expected size of the global
generic prescription market
6.5%5
CAGR
expected market growth
(2017-2022)
20
Our markets
US
62%
of Group revenue (2016: 62%)
MENA
33%
of Group revenue (2016: 33%)
Europe and ROW
5%
of Group revenue (2016: 5%)
1. EvaluatePharma (June 2017)
2. United Nations (June 2017)
3. Deloitte (October 2016)
4. EvaluatePharma (June 2017)
5. EvaluatePharma (June 2017)
Key trends shaping our markets
Our response
Despite recent pricing pressures, the US generics market remains the largest
— In this challenging environment, we are focused on
in the world
— The US generics market is the largest in the world. Eighty-nine per cent of
prescription medicines dispensed in the US are generic, accounting for
26 per cent of total drug costs.6
— The pricing environment for generics in the US has become increasingly
challenging with double-digit price erosion across the oral generics market
in 2017 due to both cyclical and structural changes.
— A higher rate of ANDA approvals for generic products is leading to increased
competition. In 2017, 767 ANDAs were approved, 18% more than in 2016.7
— At the same time, increased customer consolidation across the industry is
putting pressure on manufacturers. In 2017, the three largest purchasing groups
represent 90% of all generic purchases in the US.8
optimising the potential of our product portfolio and
driving cost savings across our US business. In 2017,
we put in place a new management team to support
these efforts.
— To offset price erosion on our base portfolio, it is
critical that we have a steady stream of new launches.
In 2017, we undertook a detailed review of the pipeline
to ensure we are focusing on products with the
highest opportunity, whilst balancing the risk profile
of the pipeline.
Economic uncertainty has impacted growth in MENA markets but the
— Thanks to our experienced local management,
fundamental growth drivers remain intact
operating teams and sales and marketing teams,
— In recent years, many markets in the MENA region have been impacted by
we are successfully navigating the challenging
economic and political instability.
— Despite these challenges, the long-term growth outlook remains positive
and there are signs of improvement. Currency fluctuations in our key markets,
such as Egypt, are beginning to stabilise and oil prices are recovering.
— In line with global trends, the ageing population in MENA is growing and lifestyles
are changing. Diabetes is expected to be the fastest growing disease in the
region, with cancer and cardiovascular diseases also forecast to grow rapidly.9
— Governments are committed to improving access to healthcare. In our largest
MENA market, the GCC, pharmaceutical expenditure is forecast to grow by
around 66% between 2016 and 2021.10
market conditions in the MENA region.
— In response to our patients’ changing needs,
we have developed a portfolio of products in
chronic therapeutic categories.
Demand for generics in European markets continues to grow steadily
— In recent years, increased healthcare demand, driven primarily by new
— We are well positioned to capture growth
opportunities in Europe, with injectable
innovative drug launches, an ageing population and an increase in chronic
manufacturing facilities located in Germany,
illnesses, coupled with relatively weak economic growth, led to increased
Italy and Portugal.
pressures on European healthcare budgets.11
— Governments have adopted austerity measures and put in place cost
containment policies to maintain sustainable healthcare budgets. These
policies have impacted the generics industry by driving down prices.
— At the same time, governments are encouraging an uptake of generic products,
driving volumes higher. Generic products now make-up around 56% of
dispensed medicines in the region. This is expected to grow to 70–80%
— To strengthen our position as a pan-European player,
we are increasing our product portfolio, focusing
on the EU5 markets (Germany, France, Italy, Spain
and the UK).
by 2020.12
6. Association for Accessible Medicines (2017)
7.
IQVIA (February 2018)
8. IQVIA (February 2018)
9. PwC (2013)
10. BMI Research (July 2017)
11. Quintiles IMS (December 2016)
12. Medicines for Europe (2017)
Strategic report | Our markets
Our markets
US
62%
of Group revenue (2016: 62%)
MENA
33%
of Group revenue (2016: 33%)
Europe and ROW
5%
of Group revenue (2016: 5%)
1. EvaluatePharma (June 2017)
2. United Nations (June 2017)
3. Deloitte (October 2016)
4. EvaluatePharma (June 2017)
5. EvaluatePharma (June 2017)
Key trends shaping our markets
Our response
Despite recent pricing pressures, the US generics market remains the largest
in the world
— The US generics market is the largest in the world. Eighty-nine per cent of
prescription medicines dispensed in the US are generic, accounting for
26 per cent of total drug costs.6
— The pricing environment for generics in the US has become increasingly
challenging with double-digit price erosion across the oral generics market
in 2017 due to both cyclical and structural changes.
— A higher rate of ANDA approvals for generic products is leading to increased
competition. In 2017, 767 ANDAs were approved, 18% more than in 2016.7
— At the same time, increased customer consolidation across the industry is
putting pressure on manufacturers. In 2017, the three largest purchasing groups
represent 90% of all generic purchases in the US.8
— In this challenging environment, we are focused on
optimising the potential of our product portfolio and
driving cost savings across our US business. In 2017,
we put in place a new management team to support
these efforts.
— To offset price erosion on our base portfolio, it is
critical that we have a steady stream of new launches.
In 2017, we undertook a detailed review of the pipeline
to ensure we are focusing on products with the
highest opportunity, whilst balancing the risk profile
of the pipeline.
Economic uncertainty has impacted growth in MENA markets but the
fundamental growth drivers remain intact
— In recent years, many markets in the MENA region have been impacted by
economic and political instability.
— Despite these challenges, the long-term growth outlook remains positive
and there are signs of improvement. Currency fluctuations in our key markets,
such as Egypt, are beginning to stabilise and oil prices are recovering.
— In line with global trends, the ageing population in MENA is growing and lifestyles
are changing. Diabetes is expected to be the fastest growing disease in the
region, with cancer and cardiovascular diseases also forecast to grow rapidly.9
— Governments are committed to improving access to healthcare. In our largest
MENA market, the GCC, pharmaceutical expenditure is forecast to grow by
around 66% between 2016 and 2021.10
Demand for generics in European markets continues to grow steadily
— In recent years, increased healthcare demand, driven primarily by new
innovative drug launches, an ageing population and an increase in chronic
illnesses, coupled with relatively weak economic growth, led to increased
pressures on European healthcare budgets.11
— Governments have adopted austerity measures and put in place cost
containment policies to maintain sustainable healthcare budgets. These
policies have impacted the generics industry by driving down prices.
— At the same time, governments are encouraging an uptake of generic products,
driving volumes higher. Generic products now make-up around 56% of
dispensed medicines in the region. This is expected to grow to 70–80%
by 2020.12
— Thanks to our experienced local management,
operating teams and sales and marketing teams,
we are successfully navigating the challenging
market conditions in the MENA region.
— In response to our patients’ changing needs,
we have developed a portfolio of products in
chronic therapeutic categories.
— We are well positioned to capture growth
opportunities in Europe, with injectable
manufacturing facilities located in Germany,
Italy and Portugal.
— To strengthen our position as a pan-European player,
we are increasing our product portfolio, focusing
on the EU5 markets (Germany, France, Italy, Spain
and the UK).
6. Association for Accessible Medicines (2017)
7.
IQVIA (February 2018)
8. IQVIA (February 2018)
9. PwC (2013)
10. BMI Research (July 2017)
11. Quintiles IMS (December 2016)
12. Medicines for Europe (2017)
21
Hikma Pharmaceuticals PLC
Our business model
We operate in a competitive, highly regulated industry, across many markets.
Our diversified business model enables us to respond to the many opportunities
and challenges we face, whilst delivering value for our customers, patients,
employees, shareholders and our wider communities.
Our inputs
Our activities
Financial
Investment in R&D, manufacturing facilities and M&A
enables us to expand our product portfolio, technical
capabilities, geographic reach and manufacturing capacity.
While our activities are diversified across our business
segments and our markets, they are aligned with our
purpose – to make quality medicines accessible to
the people who need them.
People
We have a highly skilled, diverse and effective workforce.
Through continuous training of our people and by hiring
new talent, we secure our future development.
Values
We are committed to conducting business ethically
and strive to achieve the highest quality standards.
This approach helps ensure our business is sustainable.
Relationships
Strong relationships with regulators and health authorities
across all our markets, and successful collaborations
with industry partners, enable us to achieve our growth
objectives.
Capabilities
We have extensive manufacturing capabilities across
our global markets focused on operational excellence
and efficiency.
22
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Our promise
Better health.
Within reach.
Every day.
Market across geo g r a p h i e s
Our business segments:
Injectables
Generics
Branded
Strategic report | Our business model
Find out more about our strategy
and key performance indicators
Strategy
KPIs
page 24
page 26
Find out more about how we
are managing risk
Risk
page 58
The value we create
Patient benefits
We provide our patients with
access to our high-quality,
affordable medicines.
658
Number of
compounds
Employee benefits
By focusing on the empowerment
and development of our people,
we provide long and rewarding
careers for our talented and
diverse workforce.
>$1m
Investment in
employees’
education
since 2010
Develop and innovate
We are developing broad and differentiated portfolios of
generic, branded generic and in-licensed products through
internal R&D, co-development partnerships, licensing
agreements and acquisitions.
6%
Revenue invested in R&D (2016: 7%)
Manufacture and maintain quality
We are committed to maintaining the highest quality
standards in all of our manufacturing facilities. We have
29 plants across the Group that supply our global markets
with a broad range of injectable and non-injectable
products, including 12 US FDA-approved facilities
and nine EU-approved facilities.
29
manufacturing plants
12
US FDA-
approved facilities
9
EU-approved
facilities
Shareholder returns
Economic and financial returns
are reinvested for future growth.
361%
Total shareholder
return since
IPO listing
Market across geographies
We actively promote, sell and distribute our products in our
markets through experienced sales and marketing teams.
In the MENA region, nearly 2,000 representatives market
our brands to doctors and pharmacists, while our sales
teams in the US and Europe are selling to a broad range
of customers including the leading wholesalers, pharmacy
chains, governments and hospital purchasing organisations.
2,000+
sales professionals market our products across our markets
Sustainable business
By conducting our business well
and acting responsibly, we are
benefiting the communities in
which we operate.
340,000
Units of medicine
donated in 2017
23
Hikma Pharmaceuticals PLC
Delivering our strategy
Our 5-year strategy is to establish Hikma as a leader across
our markets by providing best value to customers.
Strategic priorities
2017 highlights
2017 challenges
Outlook for 2018
1 Commercial excellence
Maximise the potential of our existing portfolio across our markets
2 Productivity
Optimise operations and drive efficiencies
3 Research and innovation
Develop more complex and differentiated products and use
innovative technologies to address doctor/patient needs
4 People
Ensure effective organisation, leadership, talent management
and recruitment
— Group revenue of $1,936 million
— Leveraged broad Injectables portfolio and remained resilient
in the face of new competition
— Focused on building customer relationships and improving
service levels in our Generics business
— Launched eight new products in Saudi Arabia, including six
first generics
— Drove strong demand for higher value products in Egypt,
delivering more than 20% revenue growth in local currency
— Maintained Injectables operating margin above 40%, despite
increased competition on key products
— Initiated cost cutting programme and identified opportunities
for further cost savings in our Generics business
— Leveraged our manufacturing facilities in Sudan to meet increased
demand for our marketed portfolio
— Invested $121 million, or 6% of revenue, in R&D and product-related
— Product launch delays impacted our ability to offset
— Appointed Group Chief Scientific Officer and Global Head of R&D
investments
— 17 injectable compounds in 23 dosage forms and strength approved
in the US, and eight new compound submissions in 11 dosage forms
and strengths
— 53 branded compounds in 126 dosage forms and strengths
approved, and 42 new compound submissions in 127 dosage forms
and strengths
— Restructured Generics R&D team and implemented new product
selection review and management process
— Strengthened management team across the Group through
external recruitment and internal promotion
— Undertook first global Employee Effectiveness Survey
— Continued to develop leadership training and succession
planning programmes
— Initiated programmes to promote diversity across the Group
— Continued price erosion in the US generics market
— Challenging market conditions in the US expected to continue
— Customer consolidation into larger buying groups
— Enhanced customer focus leading to market share gains
— New launches across all our markets to help offset price and volume erosion
— Accelerated FDA approval of ANDAs
— Volatility in emerging market economies
— Increased demand for controlled drugs in the US led
— Ongoing implementation of cost control programmes across the Group
— Increased costs related to the development of generic
— Consolidation of Generics manufacturing and distribution facilities in the US
— Increased utilisation of lower-cost Injectables manufacturing facility in Portugal
to supply pressures
Advair Diskus®
— Development of new global systems and standardised processes
price erosion
— Continued focus on development of more differentiated products
— Received a CRL from the FDA for our generic version of
across our markets
Advair Diskus®, delaying potential approval and launch
— Increasingly competitive dynamics in the US negatively
impacted the potential of our Generics pipeline
— Alignment of Group values and work practices across
— Appointed Siggi Olafsson as Chief Executive Officer
global organisation, following integration of West-Ward
— Continue roll-out of new Human Capital Management system
Columbus
— Address opportunities identified through Employee Effectiveness Survey
5 Business development
Expand into new geographies, acquire new products, capabilities
and technologies
— Invested in our manufacturing capacity and capabilities for
our Injectable and Generics businesses
— Expanded our partnership agreements with key partners, Celltrion
and Takeda, reinforcing our position as partner of choice in MENA
— Focused capital investment on essential projects to
— Continue to evaluate investment opportunities in new and existing markets
maintain balance sheet strength
— Complete construction of dedicated oncology manufacturing facility
— Limited opportunity for product acquisitions, reflecting
in Portugal
increasingly competitive market dynamics
— Pursue acquisitions of new products and technologies to support
strategic objectives
24
Strategic report | Our strategy
Strategic priorities
2017 highlights
2017 challenges
Outlook for 2018
1 Commercial excellence
Maximise the potential of our existing portfolio across our markets
— Continued price erosion in the US generics market
— Customer consolidation into larger buying groups
— Accelerated FDA approval of ANDAs
— Volatility in emerging market economies
— Challenging market conditions in the US expected to continue
— Enhanced customer focus leading to market share gains
— New launches across all our markets to help offset price and volume erosion
2 Productivity
Optimise operations and drive efficiencies
3 Research and innovation
Develop more complex and differentiated products and use
innovative technologies to address doctor/patient needs
— Increased demand for controlled drugs in the US led
to supply pressures
— Increased costs related to the development of generic
Advair Diskus®
— Ongoing implementation of cost control programmes across the Group
— Increased utilisation of lower-cost Injectables manufacturing facility in Portugal
— Consolidation of Generics manufacturing and distribution facilities in the US
— Development of new global systems and standardised processes
— Invested $121 million, or 6% of revenue, in R&D and product-related
— Product launch delays impacted our ability to offset
price erosion
— Received a CRL from the FDA for our generic version of
Advair Diskus®, delaying potential approval and launch
— Increasingly competitive dynamics in the US negatively
impacted the potential of our Generics pipeline
— Appointed Group Chief Scientific Officer and Global Head of R&D
— Continued focus on development of more differentiated products
across our markets
4 People
and recruitment
Ensure effective organisation, leadership, talent management
— Alignment of Group values and work practices across
global organisation, following integration of West-Ward
Columbus
— Appointed Siggi Olafsson as Chief Executive Officer
— Continue roll-out of new Human Capital Management system
— Address opportunities identified through Employee Effectiveness Survey
5 Business development
Expand into new geographies, acquire new products, capabilities
and technologies
— Invested in our manufacturing capacity and capabilities for
our Injectable and Generics businesses
— Expanded our partnership agreements with key partners, Celltrion
and Takeda, reinforcing our position as partner of choice in MENA
— Focused capital investment on essential projects to
maintain balance sheet strength
— Continue to evaluate investment opportunities in new and existing markets
— Complete construction of dedicated oncology manufacturing facility
— Limited opportunity for product acquisitions, reflecting
in Portugal
increasingly competitive market dynamics
— Pursue acquisitions of new products and technologies to support
strategic objectives
— Group revenue of $1,936 million
— Leveraged broad Injectables portfolio and remained resilient
in the face of new competition
— Focused on building customer relationships and improving
service levels in our Generics business
— Launched eight new products in Saudi Arabia, including six
first generics
— Drove strong demand for higher value products in Egypt,
delivering more than 20% revenue growth in local currency
— Maintained Injectables operating margin above 40%, despite
increased competition on key products
— Initiated cost cutting programme and identified opportunities
for further cost savings in our Generics business
— Leveraged our manufacturing facilities in Sudan to meet increased
demand for our marketed portfolio
investments
and strengths
and strengths
— 17 injectable compounds in 23 dosage forms and strength approved
in the US, and eight new compound submissions in 11 dosage forms
— 53 branded compounds in 126 dosage forms and strengths
approved, and 42 new compound submissions in 127 dosage forms
— Restructured Generics R&D team and implemented new product
selection review and management process
— Strengthened management team across the Group through
external recruitment and internal promotion
— Undertook first global Employee Effectiveness Survey
— Continued to develop leadership training and succession
planning programmes
— Initiated programmes to promote diversity across the Group
25
Hikma Pharmaceuticals PLC
Measuring our progress
We are delivering our strategy through our five strategic priorities and measuring
our performance with relevant key performance indicators (KPIs).
Group revenue
($m)
$1,936m
Core operating profit
($m)
$386m
Product approvals
Product submissions
Return on invested capital
297
226
Employees with more
than five years’ service
4,616
(%)
15.1%
1,950
1,936
413
427
409
419
386
362
343
298
297
1,365
1,489
1,440
132
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
Description
Description
Description
Description
Description
Description
Total annual revenue generated across
all businesses within the Group
Core operating profit generated by the Group
The total number of products across the Group
approved by regulatory authorities
The number of products submitted to
The number of employees who have
Operating profit after interest and tax
regulatory authorities for approval across
been employed by the Group for more
divided by invested capital (calculated as
the Group
than five years
total equity plus total debt and obligations
under finance leases)
Why is it a KPI?
Why is it a KPI?
Why is it a KPI?
Why is it a KPI?
Why is it a KPI?
Why is it a KPI?
This measures our ability to extract value
from our product portfolio across our
global markets
This measures our ability to grow revenue,
deliver efficiencies and ensure cost control,
while maintaining high-quality manufacturing
facilities
This measures our ability to successfully
execute our product pipeline across the Group
This measures our R&D capabilities in new
This measures our ability to retain a talented
This measures our efficiency in allocating
product development across the Group
workforce across the Group
capital to profitable investments
2017 performance
2017 performance
2017 performance
2017 performance
2017 performance
2017 performance
Group revenue decrease of 1% primarily
due to price erosion in US generics industry
and continued impact of currency
headwinds in MENA
The decrease in core operating profit
reflects challenging conditions in the US
generics market and increased competition
on certain injectable products
We maintained a steady pace of product
approvals in our Injectables and Branded
businesses, but Generic approvals were
below target
Increased submissions across our MENA
Slight improvement in number of
The significant increase in ROIC reflects
markets more than offset lower submissions
employees with a length of service above
the reduction in our asset value as a result
in our Generics business
five years, reflecting our continued focus
of the revaluation of the West-Ward Columbus
on initiatives to retain talented employees
business. Using the 2016 asset valuation,
1 R
2 R
3
3
4 R
ROIC is 9.9%
5 R
26
Strategic report | Our key performance indicators
Key to strategic priorities
1 Maximise the potential of our existing portfolio across our markets
2 Optimise operations and drive efficiencies
3 Develop more complex and differentiated products and use innovative technologies
to address doctor/patient needs
4 Ensure effective organisation, leadership, talent management and recruitment
5 Expand into new geographies, acquire new products, capabilities and technologies
R Linked to Remuneration see page 86
Find out more about our strategy
and key performance indicators
Strategy
page 24
Find out more about how we
are managing risk
Risk
page 58
Group revenue
($m)
$1,936m
($m)
$386m
297
Core operating profit
Product approvals
Product submissions
Employees with more
than five years’ service
Return on invested capital
(%)
4,616
15.1%
226
505
389
417
3,674
3,736
2,899
226
188
15.1
10.6
4,598
4,616
24.0
23.0
23.4
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
Description
Description
Description
Description
Description
Description
Total annual revenue generated across
Core operating profit generated by the Group
The total number of products across the Group
all businesses within the Group
approved by regulatory authorities
The number of products submitted to
regulatory authorities for approval across
the Group
The number of employees who have
been employed by the Group for more
than five years
Operating profit after interest and tax
divided by invested capital (calculated as
total equity plus total debt and obligations
under finance leases)
Why is it a KPI?
Why is it a KPI?
Why is it a KPI?
Why is it a KPI?
Why is it a KPI?
Why is it a KPI?
This measures our ability to extract value
This measures our ability to grow revenue,
This measures our ability to successfully
from our product portfolio across our
deliver efficiencies and ensure cost control,
execute our product pipeline across the Group
global markets
while maintaining high-quality manufacturing
facilities
This measures our R&D capabilities in new
product development across the Group
This measures our ability to retain a talented
workforce across the Group
This measures our efficiency in allocating
capital to profitable investments
2017 performance
2017 performance
2017 performance
2017 performance
2017 performance
2017 performance
Group revenue decrease of 1% primarily
The decrease in core operating profit
We maintained a steady pace of product
due to price erosion in US generics industry
reflects challenging conditions in the US
approvals in our Injectables and Branded
and continued impact of currency
generics market and increased competition
businesses, but Generic approvals were
headwinds in MENA
on certain injectable products
below target
Increased submissions across our MENA
markets more than offset lower submissions
in our Generics business
Slight improvement in number of
employees with a length of service above
five years, reflecting our continued focus
on initiatives to retain talented employees
The significant increase in ROIC reflects
the reduction in our asset value as a result
of the revaluation of the West-Ward Columbus
business. Using the 2016 asset valuation,
ROIC is 9.9%
1 R
2 R
3
3
4 R
5 R
27
Hikma Pharmaceuticals PLC
Injectables
Our Injectables business
manufactures, markets and sells
generic injectable products in
the US, the MENA region and
Europe. In the US, we are the
third largest manufacturer of
injectables by volume.
28
Strategic report | Business review | Injectables
We manufacture, market and sell generic
injectable products in the US, the MENA
region and Europe. Our portfolio covers
a diverse range of therapeutic categories,
including anti-infectives, anaesthetic, CNS,
oncology and pain management.
Overview
Highlights
We have injectables manufacturing facilities
in the US, Portugal, Germany and Italy, with
a broad range of capabilities, including sterile
liquid, powder, lyophilised and cytotoxic
products. In recent years, we have added
significant capacity and developed new
capabilities to respond to health care
providers and patients’ needs. We are further
expanding our Portugal campus and expect to
open a dedicated, state-of-the-art oncology
facility in 2019.
We have been building our R&D capabilities in
recent years. We have a dedicated R&D facility
and an experienced scientific team in Bedford,
Ohio, where we are developing global files to
efficiently access all our markets. We
supplement our internal R&D with external
partnerships, product file acquisitions and M&A.
— Global Injectables revenue of $776 million, down 1%
— Strong core operating margin of 40.6 %, reflecting a resilient product mix
Financial highlights
$ million
Revenue
Gross profit
Gross margin
Core operating profit
Core operating margin
Injectables revenue by region
$ million
US
MENA
Europe and ROW
Total
2017
776
480
61.9%
315
40.6%
586
103
87
776
2016
781
505
64.7%
340
43.5%
2017
76%
13%
11%
Change
-1%
-5%
-2.8pp
-7%
-2.9pp
607
91
83
781
Revenue ($m)
Core operating margin (%)
2016
2017
781
776
2016
2017
Constant
currency change
0%
-4%
-3.0pp
-7%
-3.0pp
2016
78%
12%
10%
43.5
40.6
29
Hikma Pharmaceuticals PLC
Injectables continued
In 2017, we reached a licensing agreement with
South Korea-based Celltrion, Inc. and Celltrion
Healthcare, Inc (Celltrion) for Truxima™
(rituximab), the first biosimilar monoclonal
Antibody (mAb) in oncology to be granted
European marketing authorisation. We now
have exclusive agreements with Celltrion
for three biosimilar products – Truxima™
(rituximab), Remsima® (infliximab)
and Herzuma® (trastuzumab).
Looking forward, we expect Injectables revenue
of between $750 million to $800 million in 2018
and core operating margin to return to more
normalised levels in the low to mid 30s.
In 2017, global Injectables revenue declined by
1% to $776 million. In constant currency, global
Injectables revenue was in line with 2016.
Of this total, US Injectables revenue was
$586 million, down 3% from $607 million in
2016, due to increased competition on certain
products with new market entrants and a
reduction in contract manufacturing, partially
offset by recent product launches and
volume gains.
During 2017, MENA Injectables revenue was
$103 million, up 13% from $91 million in 2016.
In constant currency, MENA Injectables
revenue increased by 23%. As expected, sales
accelerated in the second half of the year
across our markets. In addition, we achieved
a strong performance in Sudan and benefited
from the launch of our biosimilar product,
Remsima®, in new markets.
European Injectables revenue was $87 million
in 2017, up 5%, reflecting a good performance
in Italy and Portugal, partially offset by lower
sales in Germany due to expected changes in
government regulations, restricting direct sales.
Injectables gross profit declined to $480
million in 2017, compared with $505 million
in 2016. Gross margin decreased to 61.9%,
compared with 64.7% in 2016, reflecting
increased competition on some of our higher
margin products in the US and a slight
increase in overheads due to the expansion
of our manufacturing facility in Portugal.
Core operating profit, which excludes the
amortisation of intangible assets other
than software and exceptional items of
$22 million, was $315 million in 2017, down
from $340 million in 2016. Core operating
margin was 40.6%, compared with 43.5% in
2016. This reflects a change in product mix
and a slight increase in operating costs.
During 2017, the Injectables business launched
34 compounds in 88 different dosage forms
and strengths across all markets. The
Injectables business also received a total
of 149 regulatory approvals for products in
different dosage forms and strengths across
all markets – 61 in the MENA, 65 in Europe
and 23 in the US.
30
Strategic report | Business review | Injectables
While competition is increasing
on certain products in the
US, we are seeing a good
contribution from recently
launched new products
and strong growth in Europe
and the MENA region.”
Case study: Tailoring our products to meet patients’ needs
We are focused on providing patients with the products that they need. For our Injectable
portfolio, hospital clinicians determine what and how medicines are administered to patients
within the clinical setting.
In 2017, we held focus groups with hospital pharmacists to increase our understanding of how
clinicians currently administer injectable products and to identify their unmet needs. This
increased understanding will enable us to develop products that improve workflow efficiencies
and ultimately support hospitals in their quest to provide better and safer patient care.
31
Hikma Pharmaceuticals PLC
Generics
Our Generics business manufactures
and markets oral and non-injectable
generic products for sale in the United
States. We have two manufacturing
facilities in the US and US FDA-
approved facilities in Jordan and
Saudi Arabia. We are the twelfth
largest manufacturer of oral
generics by volume in the US.
32
Strategic report | Business review | Generics
We have a diversified portfolio of more than
100 products in specialised market segments,
such as oncology and pain management.
We have a broad range of manufacturing
technologies and capabilities, including the
ability to manufacture solids, liquids, nasal
sprays and dry powder inhalers.
We are focused on growing our product
portfolio in niche market segments with
high-entry barriers through investment in
R&D, focused business development and
selective acquisitions.
Overview
Highlights
— Generics revenue of $615 million, up 2% from $604 million
— Core operating profit of $22 million, compared with $35 million
Financial highlights
$ million
Revenue
Gross profit
Gross margin
Core operating profit
Core operating margin
2017
615
219
35.6
22
3.6%
2016
604
196
32.4%
35
5.8%
Change
2%
12%
-3.2pp
-37%
-2.2pp
Revenue ($m)
Core operating margin (%)
2016
2017
604
615
2016
2017
5.8
3.6
33
Hikma Pharmaceuticals PLC
Generics continued
Generics revenue was $615 million in 2017,
up from $604 million in 2016. In 2017, Generics
revenue included twelve months from
West-Ward Columbus, compared with ten
months in 2016. We faced significant industry
headwinds during the year, primarily due
to customer consolidation and greater
competition following an increase in generic
drug approvals by the US FDA. This resulted
in greater than expected price and volume
erosion. As expected, revenue growth was
also limited by a reduction in contract
manufacturing from Boehringer Ingelheim.
Generics gross profit was $219 million in 2017,
compared with $196 million in 2016. Excluding
the impact of exceptional items, core gross
profit was $225 million, in line with 2016. This
reflects an increase in costs associated with
the development of our generic version of
Advair Diskus®, partially offset by a reduction
in raw material and overhead costs. Gross
margin was 35.6%, and core gross margin
was 36.6%, compared with 37.7% in 2016.
Core Generics operating profit was $22 million
in 2017, compared with $35 million in 2016,
primarily reflecting an increase in general and
administrative costs related to strengthening
our human resources, finance and technology
capabilities, which were only partially offset
by lower than expected investment in R&D.
Core operating margin was 3.6%, compared
with 5.8% in 2016.
The Generics business reported an operating
loss of $1,082 million in 2017, largely due to
the impairment of the West-Ward Columbus
business. An initial impairment of product-
related investments of $35 million was taken
in the first half of 2017, primarily related to the
West-Ward Columbus pipeline and a change
in the expected market opportunity of
certain products.
In the second half of the year, as pricing
pressure increased due to customer
consolidation and the pace of FDA approvals
accelerated, we further reduced our
expectations for the West-Ward Columbus
marketed portfolio and pipeline. This has
resulted in an additional impairment,
primarily related to West-Ward Columbus of
$1,070 million.1 The impairment was slightly
offset by a contingent consideration gain of
$29 million related to a refund of the West-
Ward Columbus acquisition purchase price,
given certain regulatory conditions did not
occur as expected by 24 December 2017,
and which will be used for any future
related expenses.
In 2017, we strengthened our Generics
management team, recruiting experienced
generic pharmaceutical leaders to manage
research and development, sales and
marketing, business development and the
West-Ward Columbus facility. We are
confident that going forward the enhanced
management team can deliver the changes
necessary to improve customer relationships
and drive stronger profitability.
During 2017, the Generics business launched
four compounds in nine different dosage
forms and strengths and received 22 product
approvals in different dosage forms and
strengths. The Generics business also signed
licensing agreements for two new products.
Since receiving a complete response letter
(CRL) from the FDA on 11 May 2017 with
respect to our ANDA submission for generic
Advair Diskus®, we have worked collaboratively
with the FDA to address the majority of
questions raised. Concurrently, we also
entered into a dispute resolution process
with the FDA with respect of questions raised
regarding our clinical endpoint study. The
FDA has subsequently concluded this dispute
process, upholding their original determination
and requiring the completion of a new clinical
endpoint study. We have finalised the planning
of the new clinical study and expect to start
patient enrolment in the coming weeks. We
anticipate being able to submit a response
to the FDA with new clinical data as early
as possible in 2019 and remain committed
to bringing this important product to the
US market.
We expect Generics revenue to be between
$550 million to $600 million in 2018 and core
operating margin in the low single digits before
adjusting for lower depreciation related to the
impairment taken in 2017.
1.
See Notes 14 and 15 of the consolidated financial
statements for more details.
34
Strategic report | Business review | Generics
We have put in place a new
management team to improve our
operations, customer relationships
and R&D programme.”
Case study: Investing in complex products
Our experienced Generics R&D team is developing a pipeline of products to drive long-term growth in
the US market to provide broader choice to customers and patients. Our team of more than 100 scientists
is focusing on technically complex products that other manufacturers find difficult to execute.
We have significantly invested in our respiratory capability, building a dedicated manufacturing area for
respiratory products. Due to the significant investment required, very few generic manufacturers have
this capability.
In particular, we are focused on developing dry powder inhalers (DPI). Despite the fact that many patents
on Branded dry powder inhalers have expired, there are no generic DPIs on the market. We have three DPIs
in our pipeline, including generic Advair®, Flovent®, and Serevent Diskus®. Developing these products
supports our vision of bringing more affordable generic pharmaceuticals to the market.
35
Hikma Pharmaceuticals PLC
Branded
Our Branded business develops,
manufactures and markets branded
generics and in-licensed products across
17 MENA markets. We are the fifth largest
generic pharmaceutical company in the
MENA region and the largest regional player.
Our largest markets are Saudi Arabia,
Algeria, Egypt, Morocco and Jordan.
36
Strategic report | Business review | Branded
Our Branded business develops, manufactures
and markets branded generics and in-licensed
products across 17 MENA markets. Historically,
we focused on anti-infective products. In
recent years, in response to changing patients’
demands, we have developed a portfolio of
products in chronic therapeutic categories,
such as cardiovascular, diabetes, central
nervous system and oncology products.
We are proud to be a local player. We employ
experienced local management, operating
teams and sales and marketing teams who
have a deep understanding of their respective
markets. We have invested in manufacturing
facilities in Algeria, Egypt, Jordan, Morocco,
Saudi Arabia, Sudan and Tunisia. Our local
expertise and established position allows us
to capture attractive growth opportunities in
these markets and navigate more challenging
conditions if they arise.
We are committed to bringing new medicines
to the MENA region. To do this, we are investing
in R&D, strengthening our local R&D centres
and establishing new licensing partnerships
for innovative, patented products.
Overview
Highlights
— Branded revenue of $536 million, down 4% and up 2% in constant currency
— Core operating profit of $114 million, slightly ahead of 2016
— Core operating margin of 21.3% and 21.8% in constant currency, up 170 basis points
Financial highlights
$ million
Revenue
Gross profit
Gross margin
Core operating profit
Core operating margin
2017
536
265
49.4%
114
21.3%
2016
556
282
50.7%
112
20.1%
Change
-4%
-6%
-1.3pp
2%
1.2pp
Revenue ($m)
Core operating margin (%)
2016
2017
556
2016
536
2017
Constant
currency change
2%
1%
-0.4pp
10%
1.7pp
20.1
21.3
37
Hikma Pharmaceuticals PLC
Branded continued
In 2018, we expect Branded revenue growth
in constant currency in the mid-single digits.
As in 2017, we expect a stronger second half,
reflecting the usual seasonality of this business.
Other businesses
Other businesses, which primarily comprise
Arab Medical Containers, a manufacturer of
plastic specialised medicinal sterile containers,
International Pharmaceuticals Research Centre,
which conducts bio-equivalency studies,
and the API manufacturing division of Hikma
Pharmaceuticals Limited Jordan, contributed
revenue of $9 million in 2017, in line with 2016.
These other businesses made an operating loss
of $4 million, compared with an operating loss
of $2 million in 2016. This was due to the
establishment of a regional hub in Dubai to
support our expansion into emerging markets.
On a reported basis, Branded revenue was
$536 million, down 4% compared with $556
million in 2016. On a constant currency basis,
before the impact of adverse movements
in the Egyptian pound and Sudanese pound
against the US dollar, Branded revenue
increased by 2% to $565 million. The growth
on a constant currency basis reflects a strong
acceleration in sales in the second half of the
year as well as particularly good growth in
Egypt, the GCC and Sudan, partially offset
by more challenging operating conditions
in other markets.
In Egypt, revenue grew by 18% in constant
currency due to strong underlying market
growth and an improvement in our portfolio
mix. In the GCC, which includes Saudi Arabia
and the UAE, our businesses delivered a
strong performance, with revenue up 5%.
In Algeria, our second largest market, revenue
was in line with 2016 in constant currency,
despite increased import restrictions.
During 2017, the Branded business launched
six new compounds in 113 different dosage
forms and strengths across all markets. The
Branded business also received 126 regulatory
approvals across the region for products in
different dosage forms and strengths.
Revenue from in-licensed products
represented 37% of Branded revenue,
compared with 39% in 2016. We launched
three new in-licensed compounds during 2017,
including Actosmet®, Duetact® and Tamsin®.
In 2017, we expanded our licensing and
distribution agreement with Takeda to add
attractive branded products to our MENA
portfolio. The agreement builds on our
long-standing partnership and enables us
to expand our portfolio in key therapeutic
areas, including cardiovascular, diabetes
and gastroenterology.
On a reported basis, Branded gross profit
was $265 million, down 6% from $282 million
and gross margin was 49.4%, compared with
50.7% in 2016. In constant currency, gross
profit increased by 1% compared with 2016,
and gross margin was 50.3%.
Core operating profit, which excludes the
amortisation of intangibles of $7 million, was
$114 million, slightly ahead of 2016, and core
operating margin was 21.3%, up from 20.1%.
In constant currency, core operating profit grew
by 9.8% and core operating margin increased
to 21.8%, up 170 basis points. This improvement
in profitability reflects the benefit of more
stable exchange rates in 2017 compared to
2016, when we incurred a loss of $17 million
as a result of the devaluation of the Egyptian
pound against the US dollar.
1.
In November 2016, the Egyptian pound had devalued
against the US dollar from its peg of 8.8 EGP:USD to
18.2 EGP:USD as of 31 December 2016.
38
Strategic report | Business review | Branded
We saw a strong acceleration in
sales during the second half, and
a strong performance in Egypt,
the GCC and Sudan leading to
growth in constant currency.”
Case study: Providing patients with access to high-quality affordable medicines
Around 40 per cent of the products we sell in the MENA region are innovative products that we in-license
from global partners. These products enhance our portfolio in key therapeutic areas and increase patients’
access to high-quality, affordable medicines.
Celltrion is one of our long-standing partners in MENA and in 2017, we signed a licensing agreement for the
first biosimilar monoclonal Antibody (mAb) in oncology to be granted European marketing authorisation,
Truxima™ (rituximab). We now have exclusive agreements with Celltrion for three biosimilar products –
Truxima™ (rituximab), Remsima® (infliximab) and Herzuma® (trastuzumab) – in all our MENA markets.
This strengthens our product portfolio in the strategic therapeutic areas of oncology, autoimmune diseases,
rheumatology and dermatology and reinforces our position as a partner of choice in the MENA region.
It also means we are meeting important patient needs.
39
Hikma Pharmaceuticals PLC
Group performance
2017 highlights – core
2017 highlights – reported
— Core Group revenue of $1,936 million, down 1% and in constant
currency up 1%1, despite challenging market conditions in the US
— Core2 operating profit of $386 million, down 8% and down 4%
in constant currency
— Reported Group operating loss of $747 million, down from income
of $302 million, primarily due to the impairment of West-Ward
Columbus’ intangible assets of $920 million and property plant
and equipment of $164 million3
— Basic loss per share of 351.3 cents, compared to basic earnings
— Core basic earnings per share of 105.0 cents, down 11% and down
per share of 66.5 cents in 2016
8% in constant currency
— Proposed full year dividend of 34 cents per share, up from 33 cents
— Record cash flow from operations, up 51% to $443 million, from
per share
$293 million
— Net debt reduced to $546 million from $697 million and healthy
leverage ratios maintained
Summary financial results
Core results
Core revenue
Core operating profit
Core EBITDA3
Core profit attributable to shareholders
Core basic earnings per share (cents)
Reported results
Revenue
Operating profit
EBITDA
Profit/loss attributable to shareholders
Basic earnings per share (cents)
2017
$ million
1,936
386
468
252
105.0
2017
$ million
1,936
-747
488
-843
-351.3
Growth
Constant
currency
1%
-4%
-1%
-5%
-8%
Growth
Constant
currency
1%
-342%
7%
-636%
-620%
$
-1%
-8%
-5%
-9%
-11%
$
-1%
-347%
3%
-644%
-628%
2016
$ million
1,950
419
493
276
118.5
2016
$ million
1,950
302
473
155
66.5
1. Constant currency numbers in 2017 represent reported 2017 numbers re-stated using average exchange rates in 2016, excluding price increases in the Branded business which resulted from
the devaluation of currencies.
2. Core results are presented to show the underlying performance of the Group, excluding the exceptional items and other adjustments set out in Note 5 in the Notes to the Financial Statements.
3. See Notes 14 and 15 of the consolidated financial statements for more details.
40
Strategic report | Business review | Group performance
To ensure the continuous
development of our product
pipeline, we submitted 226
regulatory filings in 2017 across
all regions and markets.”
Research and development (R&D) expenses were $121 million, down
from $150 million in 2016. Excluding exceptional items, core R&D
expense was $115 million, down from $126 million. This primarily reflects
a reduction in R&D expenditure in our Generics business following
a detailed review of our R&D pipeline, which reprioritised high-value
products and identified opportunities for cost savings and efficiencies.
An additional $7 million of product-related investment was capitalised
on the balance sheet in 2017. This related to product development
investments with third party partners in the US to support growth
of our Generics and Injectables businesses. The combined core R&D
expense and product-related investment for the Group was $121 million
(6% of Group revenue), compared with $139 million (7% of Group
revenue) in 2016.
Other net operating expenses were $1,118 million in 2017, compared
with $69 million in 2016. Excluding exceptional items of $1,072 million,
primarily related to the impairment of West-Ward Columbus, other net
operating expenses were $46 million, down from $81 million in 2016.
The Group reported an operating loss of $747 million in 2017, compared
to a reported operating profit of $302 million in 2016. Excluding the
impact of amortisation and exceptional items, core Group operating
profit decreased by 8% to $386 million and core operating margin
was 19.9%, compared with 21.5% in 2016, reflecting lower profitability
in our Generics and Injectables businesses.
Research & Development
The Group’s product portfolio continues to grow as a result of our
product development efforts. During 2017, we launched 44 new
compounds.2 The Group’s portfolio now stands at 658 compounds.
Across all businesses and markets, a total of 214 products3
were launched during 2017. In addition, the Group received 297
product approvals.
To ensure the continuous development of our product pipeline,
we submitted 226 regulatory filings in 2017 across all regions and
markets. As of 31 December 2017, we had a total of 846 products
pending approval across all regions and markets. At 31 December 2017,
we had a total of 147 new compounds under development.
Group
Group revenue was $1,936 million in 2017, down from $1,950 million
in 2016. Group gross profit was $967 million and core gross profit was
$973 million, down from $1,018 million. Group gross margin was 49.9%
and core gross margin was 50.3%, compared with 52.2% in 2016.
Group operating expenses increased by 151% to $1,714 million.
Excluding the amortisation of intangible assets other than software
and exceptional items, core Group operating expenses were $587 million,
compared with $599 million in 2016. In 2017, amortisation of intangible
assets other than software increased to $48 million, compared with
$37 million in 2016, due to a significant upgrade of technology systems
and the consolidation of an additional two months of West-Ward
Columbus. Exceptional items included within operating expenses were
$1,127 million, compared with $85 million in 2016. Exceptional items
comprised an impairment charge to West-Ward Columbus’ intangible
assets of $920 million and property plant and equipment of
$164 million.1 The paragraphs below address the Group’s main
operating expenses in turn.
Sales and marketing (S&M) expenses were $236 million, compared with
$221 million in 2016. Excluding the amortisation of intangible assets
other than software, S&M expenses were $188 million, up 2% compared
to 2016, due to the consolidation of an additional two months of
West-Ward Columbus, partially offset by good control of expenses
across the Group.
General and administrative (G&A) expenses decreased by $5 million
to $239 million in 2017. Excluding exceptional items, G&A expenses
increased by $30 million due in part to an increase in G&A costs in the
Generics business related to the strengthening of human resources,
finance and technology capabilities and the consolidation of an
additional two months of West-Ward Columbus.
1. See Notes 14 and 15 of the consolidated financial statements for more details.
2.
3. Products refer to dosage forms and strengths, across all markets.
Compounds are defined as pharmaceutical compounds in the Group’s portfolio and pipeline.
41
Hikma Pharmaceuticals PLC
Group performance continued
Hikma product pipeline
Products launched in 2017
Products approved in 2017
Products pending approval
as at 31 December 2017
New
compounds1
New dosage
forms and
strengths
Total launches,
across
all countries2
Compounds
Total
approvals,
across all
countries3
Total pending
approvals,
across all
countries3
Compounds
34
4
6
44
36
9
13
58
88
13
113
214
61
9
53
123
149
22
126
297
138
20
66
224
506
39
301
846
Injectables
Generics
Branded
Group
1. New compounds are defined as pharmaceutical compounds being introduced for the first time during the period.
2. Total launches include all dosage forms and strengths that are new product launches, new geographic launches, as well as relaunches.
3. Totals include all dosage forms and strengths that are either approved or pending approval across all markets.
Net cash flow, working capital and net debt
The Group generated operating cash flow of $443 million in 2017,
compared with $293 million in 2016. In 2016, Group operating cash flow
was negatively impacted by the investment in working capital required
to support West-Ward Columbus following the acquisition in February
2016. Group working capital days were 225 days at December 2017,
down from 240 days at December 2016, primarily driven by an
improvement in receivables in the US, following the integration
of West-Ward Columbus.4
Capital expenditure was $107 million, compared with $122 million
in 2016. Of this, around $67 million was spent in the US to expand
the manufacturing capacity and capabilities of our Injectables and
Generics businesses. In the MENA region, around $25 million was spent
to maintain and upgrade our equipment and facilities across a number
of markets. Approximately $15 million was spent in Europe, building
our dedicated oncology facility in Portugal. We expect Group capital
expenditure in the range of $120 million to $140 million in 2018.
The Group’s net debt (excluding co-development agreements and
contingent liabilities) stood at $546 million at the end of December
2017, compared with $697 million at the end of December 2016.
The reduction reflects the increase in cash flow from operations.5
Balance sheet
Net assets at 31 December 2017 were $1,528 million, compared to
$2,411 million at 31 December 2016. The decrease in net assets reflects
the impairment of the West-Ward Columbus business.6 Net current
assets were $777 million, compared to $530 million at 31 December 2016.
Definitions
We use a number of non-IFRS measures to report and monitor the
performance of our business. Management uses these adjusted
numbers internally to measure our progress and for setting
performance targets. We also present these numbers, alongside our
reported results, to external audiences to help them understand the
underlying performance of our business. Our adjusted numbers may
be calculated differently to other companies.
Adjusted measures are not substitutable for IFRS numbers and should
not be considered superior to results presented in accordance with IFRS.
Net finance expense
In 2017, net finance income was $9 million. Excluding non-cash income
of $67 million resulting from the remeasurement of contingent liabilities,
the Group incurred a net finance expense of $58 million, down from
$60 million in 2016. This reduction primarily reflects a decrease in bank
charges and lower debt. In 2018, we expect Group net finance expense
to be around $55 million.
Profit/(loss) before tax
The Group reported a loss before tax of $738 million in 2017, down
451% due to the impairment of the West-Ward Columbus business.
Core profit before tax was $328 million, down 9% compared to 2016.
Tax
The Group incurred a tax expense of $101 million, up from $52 million
in 2016 primarily due to a $49 million write-down to our US deferred tax
asset due to new tax regulations in the US described below. Excluding
the tax impact of exceptional items, core Group tax expense was
$72 million in 2017, down from $80 million in 2016. The core effective
tax rate was 22.0%, compared with 22.3% in 2016.
On 22 December 2017, the Cuts and Jobs Act was enacted in the US,
reducing the statutory rate of US federal corporate income tax to 21%.
As a result, Hikma’s measurement of its US deferred tax assets has
reduced by $49 million. Going forward, we expect the reduction in
the statutory US federal rate to reduce Hikma’s effective tax rate,
which we now expect will be in the range of 21% to 22% in 2018.
Profit/(loss) attributable to shareholders
Loss attributable to shareholders was $843 million, compared with
profit of $155 million in 2016. Core profit attributable to shareholders
decreased by 9% to $252 million, compared with $276 million in 2016.
Earnings per share
Basic loss per share was 351.3 cents in 2017, compared to basic
earnings per share of 66.5 cents in 2016. Core basic earnings per share
decreased by 11% to 105.0 cents, compared with 118.5 cents in 2016.
Core diluted earnings per share decreased by 11% to 104.6 cents,
compared with 117.9 cents in 2016.
Dividend
The Board is recommending a final dividend of 23 cents per share
(approximately 16 pence per share) bringing the total dividend for the
full year to 34 cents per share (approximately 24 pence), up from 33
cents per share in 2016. The proposed dividend will be paid on 24 May
2018 to shareholders on the register on 6 April 2018, subject to approval
at the Annual General Meeting on 18 May 2018.
42
Strategic report | Business review | Group performance
Core results
Reported results represent the Group’s overall performance. However,
these results can include one-off or non-cash items that mask the
underlying performance of the Group. To provide a more complete
picture of the Group’s performance to external audiences, we provide,
alongside our reported results, core results, which are a non-IFRS
measure. Reconciliation between core and adjusted results are
provided in our Financial Statements.
Our core results exclude the exceptional items and other adjustments
set out in Note 5 in the Notes to the financial Statements.
Constant currency
As the majority of our business is conducted in the US, we present our
results in US dollars. For both our Branded and Injectable businesses,
a proportion of their sales are denominated in a currency other than the
US dollar. In order to illustrate the underlying performance of these
businesses, we include information on our results in constant currency.
Constant currency numbers in 2017 represent reported 2017 numbers
re-stated using average exchange rates in 2016, excluding price
increased in the Branded business which resulted from the devaluation
of currencies.
Working capital days
We believe Group working capital days provides a useful measure
of the Group’s working capital management and liquidity. Group
working capital days are calculated as Group receivable days plus
Group inventory days, less Group payable days. Group receivable days
are calculated as Group trade receivables x 365, divided by trailing
12 months Group revenue.
Group net debt
We believe Group net debt is a useful measure of the strength of the
Group’s financing position. Group net debt is calculated as Group total
debt less Group total cash. Group total debt excludes co-development
agreements and contingent liabilities.
Outlook
Injectables
We expect Injectables revenue in 2018 will be in the range of
$750 million to $800 million, as increased competition in the US
is offset by new launches and continued growth in the MENA and
Europe. We expect core Injectables operating margin to return
to more normalised levels in the low to mid 30’s in 2018, reflecting
the expected change in product mix.
Generics
In our Generics business, we are actively pursuing new commercial
opportunities and focusing on the execution of our pipeline to help
offset continuing price erosion. We are also identifying further cost
savings for this business, which will include the consolidation of our
non-injectables manufacturing operations and distribution centres
in the US. We expect Generics revenues in 2018 will be in the range
of $550 million to $600 million and core Generics operating margin
in the low single digits before adjusting for lower depreciation related
to the impairment taken in 2017.
Branded
We expect Branded revenue growth in constant currency in the
mid-single digits as we benefit from new launches of our branded
generics and in-licensed products across our key markets. As in
2017, we expect a stronger second half, reflecting the usual
seasonality of this business.
Group
Across the Group, we are focused on delivering value from our
marketed products, investing in our pipeline and enhancing
the efficiency of our operations to ensure we are well positioned
for future growth.
4. Group working capital days are calculated as Group receivable days plus Group inventory
days, less Group payable days.
5. Group net debt is calculated as Group total debt less Group total cash.
6. See Notes 14 and 15 of the consolidated financial statements for more details.
43
Hikma Pharmaceuticals PLC
Sustainability
Our brand promise, to put better health within reach every day,
is embedded within our sustainability strategy.
Our essentials
What this means for our approach to sustainability
Some notable achievements
Quality without boundaries
Our organisation is dedicated to achieving best practices across our operations. This is
a standard which we extend to our supply chain. We work alongside our industry partners
to uphold ethical labour practices and safeguard human rights.
— Maintained our position in the FTSE4Good sustainability index
— Strengthened our commitment to safeguarding ethical business practices
across our supply chain by incorporating modern slavery clauses into our
Supplier Audit Questionnaires
— Worked alongside leading educational institutions to improve the quality
of information available to doctors in the MENA region
Highlights
3
FTSE4Good
ESG Score
More information
See page 46
Global expertise, local
solutions
Ensuring that our products are available and accessible to those that need them is the
essence of our brand promise. Across our operations, we remain dedicated to affordability
and inclusivity so that the people in need in our communities can benefit from high-quality
healthcare products and information.
— Established a specialised oncology unit in Egypt, increasing the availability
of affordable oncology products in the country and across the MENA region
— Donated in-kind medicine to those in need in Jordan, Libya, Sudan, Gaza
+340k
units of medicine donated
across five countries
and the US
See page 48
— Provided access to information about the growing challenge of Anti-Microbial
Resistance (AMR) through multiple awareness campaigns targeting HCPs,
policymakers and the general public
Practical creativity
We are continuously exploring new and creative ways to serve our communities. From the
introduction of novel products to the support for new research, we consider ingenuity to
be embedded within our organisation. Key to this is the empowerment of our employees,
who we provide with platforms and channels to express and develop their ideas.
— Distributed more than 500,000 ‘smart syringes’ across Jordan and trained
doctors and nurses to combat syringe reuse and prevent needle-stick injuries
400
See page 50
— Introduced the Hikma Innovation Competition, which provided employees
with an opportunity to share innovative ideas and solutions with
executive management
doctors and nurses in Jordan
trained to effectively use ‘smart
syringes’ and improve patient safety
Committed to people
Our employees: Our employees are central to our success. We take measures to engage
and empower them and ensure their safety.
Our communities: We are committed to serving our communities. In all of our markets,
we engage with those around us, helping to improve lives and address social needs.
The environment: We take measures to minimise our environmental impacts and enhance
environmental compliance and regulations.
— Undertook our first global employee survey to enable all employees to
express their views
— Undertook several drug disposal programmes to remove and dispose
of unwanted or expired medications
— Completed our wastewater treatment facility in Egypt, our contribution
to address the country’s shortage of clean water
See page 52
6.4m
unwanted or expired tablets
disposed of in Columbus
200m3
of water treated per day
in Egypt through our wastewater
treatment facility
44
Strategic report | Sustainability
Our essentials
What this means for our approach to sustainability
Some notable achievements
Quality without boundaries
Our organisation is dedicated to achieving best practices across our operations. This is
a standard which we extend to our supply chain. We work alongside our industry partners
to uphold ethical labour practices and safeguard human rights.
— Maintained our position in the FTSE4Good sustainability index
— Strengthened our commitment to safeguarding ethical business practices
across our supply chain by incorporating modern slavery clauses into our
Supplier Audit Questionnaires
— Worked alongside leading educational institutions to improve the quality
of information available to doctors in the MENA region
Highlights
3
FTSE4Good
ESG Score
More information
See page 46
Global expertise, local
solutions
Ensuring that our products are available and accessible to those that need them is the
essence of our brand promise. Across our operations, we remain dedicated to affordability
and inclusivity so that the people in need in our communities can benefit from high-quality
healthcare products and information.
— Established a specialised oncology unit in Egypt, increasing the availability
of affordable oncology products in the country and across the MENA region
— Donated in-kind medicine to those in need in Jordan, Libya, Sudan, Gaza
and the US
+340k
units of medicine donated
across five countries
See page 48
— Provided access to information about the growing challenge of Anti-Microbial
Resistance (AMR) through multiple awareness campaigns targeting HCPs,
policymakers and the general public
Practical creativity
We are continuously exploring new and creative ways to serve our communities. From the
introduction of novel products to the support for new research, we consider ingenuity to
be embedded within our organisation. Key to this is the empowerment of our employees,
who we provide with platforms and channels to express and develop their ideas.
— Distributed more than 500,000 ‘smart syringes’ across Jordan and trained
doctors and nurses to combat syringe reuse and prevent needle-stick injuries
— Introduced the Hikma Innovation Competition, which provided employees
with an opportunity to share innovative ideas and solutions with
executive management
400
doctors and nurses in Jordan
trained to effectively use ‘smart
syringes’ and improve patient safety
See page 50
Committed to people
Our employees: Our employees are central to our success. We take measures to engage
— Undertook our first global employee survey to enable all employees to
and empower them and ensure their safety.
express their views
Our communities: We are committed to serving our communities. In all of our markets,
we engage with those around us, helping to improve lives and address social needs.
— Undertook several drug disposal programmes to remove and dispose
of unwanted or expired medications
— Completed our wastewater treatment facility in Egypt, our contribution
The environment: We take measures to minimise our environmental impacts and enhance
to address the country’s shortage of clean water
environmental compliance and regulations.
See page 52
6.4m
unwanted or expired tablets
disposed of in Columbus
200m3
of water treated per day
in Egypt through our wastewater
treatment facility
C
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45 H
Sustainability continued
Delivering quality in everything we do
At Hikma, we are committed to providing
quality in everything we do. We believe that
building trustworthy, transparent relationships
are key to sustainable long-term partnerships.
In 2017 we took steps to build on our governance
frameworks and broadened the scope of our
partnerships with major suppliers to uphold
the ethical foundations of our organisation.
Maintained inclusion in the
FTSE4Good
As recognition of our quality standards in our
sustainability practices, we are pleased to have
maintained our inclusion in the FTSE4Good
sustainability index in 2017. The FTSE4Good
recognises companies listed on the London
Stock Exchange that demonstrate strong
Environmental, Social and Governance (ESG)
practices as measured against internationally
recognised best practices. The focus areas
include: anti-corruption, climate change,
health and safety, and customer responsibility.
46
Maintained ethical standards and
minimised the risk of corruption
We are committed to upholding ethical
standards, including honesty, integrity and
transparency. As a publicly-listed company
on the London Stock Exchange, we abide by
the UK Anti-Bribery Act 2010 and the Share
Dealing Code and Disclosure Policies. We are
also a founding member of the Partnering
Against Corruption Initiative (PACI), an
offshoot of the World Economic Forum (WEF),
and a leading voice on promoting anti-
corruption and transparency across different
industries. In 2015 we joined the Business 20
(B20) Anti-Corruption Working Group (ACWG),
which operates under the umbrella of the G20
international forum and is tasked with helping
companies improve their ethical conduct.
Our culture at Hikma is one of transparency
and respect, which we support through
our ‘open-door’ policy and ‘Speak Up’
whistleblowing platform. ‘Speak Up’ is an
independent service that enables
stakeholders inside or outside the company
to anonymously raise concerns about
incidents that do not align with our values
such as corruption or discrimination.
Various risks arise for companies that do not
develop effective anti-bribery and corruption
(ABC) policies. These can include reputational,
financial, licensing or regulatory implications,
as well as difficulty receiving financing,
attracting and keeping talent or developing
business partnerships. As such, we continue
to take measures to strengthen our
Case study: A firm stance against modern slavery
We are wholly committed to defending the universal principles of human rights and ensuring
that modern slavery in the form of forced or compulsory labour and human trafficking does not
take place in any of our businesses or supply chains around the world. We have taken measures
to guard against all forms of modern slavery within our sphere of influence. These include:
— training our people on local and universal labour standards, as well as how to recognise and
respond to incidences of modern slavery;
— undertaking periodic evaluations to identify and address modern slavery risks in our
businesses or supply chains; and
— carrying out appropriate due diligence when engaging new supply chain partners.
Strategic report | Sustainability | Quality
Extended our commitment to
ethics across our supply chain
In order to ensure our suppliers and partners
uphold our standards, our supply chain
management team conducts regular audits
that assess compliance in areas including
business ethics, labour standards and
environmental protection. We have ensured
that all of our suppliers follow Good
Manufacturing Practices (GMP) and that our
major suppliers are ISO 14001 and OHSAS
18001 certified or equivalent.
In 2016, we introduced staff training measures
and the development of specific standard
operating procedures (SOPs) to ensure that
we, and our partners, are not involved in forced
or compulsory labour or human trafficking. In
2017, we strengthened our ability to address
this issue, incorporating modern slavery
clauses into our Code of Conduct and Supplier
Audit Questionnaires – the latter being
mandatory for all of our new and major-spend
suppliers. Currently, we do not screen all
suppliers. We are working to increase the
number of those that we engage through
our questionnaires.
Supported continued education
of doctors and pharmacists
We provide education to doctors and
pharmacists to improve the delivery of
healthcare to patients. In 2017, we collaborated
with the Department of Leukemia at the
University of Texas MD Anderson Cancer
Center to host our first annual ‘Hikma Cancer
Network – Middle East Forum of Hematologic
Malignancies.’ Through the forum we
succeeded in attracting more than 100 blood
cancer specialists from around the MENA
region. We provided information on new
technologies and treatments.
In Tunisia, we launched a series of training
programmes for pharmacists and their
support staff. Our training programmes
addressed issues such as improved stock
management, finance and accounting basics,
human resource management, as well as
the soft skills necessary to improve the overall
patient experience.
47
Case study: Our commitment to education
Speaking at our first ‘Hikma Cancer Network
– Middle East Forum of Hematologic
Malignancies,’ our Vice Chairman and CEO
of MENA and Emerging Markets, Mazen
Darwazah explained, ‘This collaboration
reinforces our commitment to continuous
medical education, and enables us to
fulfil our obligation to the communities in
which we operate by allowing us to meet
the needs of our patients and help create
sustainable healthcare.’
100
Cancer specialists participated in our first
annual ‘Hikma Cancer Network’ forum
governance and manage risks by reinforcing
our ABC protocols. Our Compliance,
Responsibility and Ethics Committee (CREC)
– a Board Committee which is chaired by an
independent, non-executive director – has
formalised, developed and implemented an
ABC business integrity programme based on
thorough risk assessment and understanding
of our business. In addition, our Code of
Conduct provides all employees with a clear
understanding of the principles of business
conduct, standards, and ethical behaviours.
We implement frequent ABC programmes
which are monitored through internal
compliance assessments, and carry out
third-party due diligence and oversight
when necessary.
This year, we introduced an e-learning training
module to more effectively train our
employees on how to identify and act on
instances of bribery and corruption. The
module was rolled out globally and will be
updated on an annual basis.
Hikma Pharmaceuticals PLC
Sustainability continued
Meeting patient needs through
accessibility and affordability
We were founded on the principles of access
and affordability nearly 40 years ago, and
these principles are still central to our approach
today. We are committed to meeting the
healthcare needs of patients, doctors and
customers, and work hard to ensure continued
access to quality, safe and reliable medicines.
Improved patient access to oncology
products
Cancer is a prevalent disease in the MENA
region and is growing. In Egypt, one of our
largest markets, it is expected that the
prevalence of cancer will increase three-fold
between 2013 and 2050.
In 2016, we launched Hikma Specialized
and became the only local manufacturer of
oncology products in Egypt. Hikma Specialized
addresses major local and regional cancer
needs. The facility’s comprehensive portfolio
includes products to treat a wide variety of
cancer types including breast, colorectal, lung,
leukemia, multiple myeloma and thalassemia.
Strategic partnerships
The expansion of our partnerships with
Celltrion and Takeda has increased access
for patients across MENA to high-quality,
affordable medicines in key therapeutic areas,
such as cancer, cardiovascular and diabetes.
Developing a global donations policy
It is important to us to support the communities
in which we operate. Every year, we donate
medical supplies to institutions and agencies
that are responding to natural disasters or
addressing other difficulties. This year, we
developed a donations policy through which
we streamline the medicine donation process
across our sites. In 2017, our donations
exceeded 340,000 units – valued at more
than $2.5 million – which were distributed to
people in need across Jordan, Libya, Sudan,
Gaza and the US. We are working to expand
our donations to assist more people across
more of our markets.
In 2017, we expanded several strategic
partnerships that will increase patient access
to vital products in the MENA region. In
addition, we expanded our manufacturing
capability in the MENA to ensure the reliability
and stability of supply for essential products.
This year, we developed a comprehensive
global in-kind donations policy through which
we delivered more than 340,000 units of
medications to those in need around the world.
In the US, generics make
up 89% of prescriptions
dispensed but only 26% of
total medicine spending.”
The Association for Accessible Medicines (2017)
48
340,000
Units of medicine donated to
people in Jordan, Libya, Sudan,
Gaza and the US
$2.5m
Value of medicine donated to people in Jordan,
Libya, Sudan, Gaza and the US
Improved access to information
We consider it our responsibility to provide
access to information about the risks and
dangers related to major medical issues
and diseases.
As the second largest manufacturer of
anti-infective medications in the MENA region,
we believe that we have a responsibility to raise
awareness of the risks and dangers of the rising
threat of AMR.
Over the course of the year, we sought to
address this challenge by organising several
activities targeting multiple stakeholders:
— We believe that the correct usage of
antibiotics by patients is critical to
controlling AMR. We have developed simple
instructions, which we include inside our
packaging, to ensure patients understand
how to use our products.
— In November, we participated in the World
Health Organisation’s (WHO) ‘World
Antibiotic Awareness Week’ by promoting
their campaign on our social media channels
and distributing awareness posters.
— We held numerous events for healthcare
professionals, where we invited experts
to present on AMR and related issues.
— We are the Jordanian Association of
Pharmaceutical Manufacturers (JAPM)
representative in a committee responsible
for developing a local action plan to manage
AMR in Jordan.
Partnering for good: Direct Relief
Strategic report | Sustainability | Accessibility
Our contribution
Where we are helping
US
Supporting Direct
Relief’s community
pharmacies with
volunteers and
medicine
MENA
Working with refugees
across the region,
with a particular focus
on refugee camps
in Jordan
In 2017, we agreed a global partnership
with Direct Relief – one that is based on our
shared values and purpose of delivering
quality medicines to those around the
world who need them. Direct Relief is a
global NGO dedicated to providing tailored
medical solutions for vulnerable and at-risk
populations by improving maternal and
child health, preventing and treating
diseases and assisting emergency
preparedness and response.
Our collaboration begins in 2018 and will
address unmet healthcare needs of people
in the Middle East and the US. In Jordan, we
will work with refugees across the region to
improve their access to medicines. In the
US, we will support Direct Relief’s
community pharmacies, set up to aid those
without adequate medical insurance.
Our partnership with Direct Relief
emphasises the importance of creating
tangible health benefits on the ground,
which we will do by providing our employees
with volunteering opportunities as well as
leveraging our logistics expertise to deliver
regular and timely in-kind donations to
those that need it most.
How we are helping
Volunteers assisting
on the ground
In future years, we will look to expand the
scope of our collaboration beyond Jordan
and the US.
Donation of
medicine
Financial contributions
49
Hikma Pharmaceuticals PLC
Sustainability continued
Innovation as part of our
sustainability strategy
Innovation is integrated into both our
employee and community outreach agendas.
By empowering and enabling the creative
potential of our employees, we are able to
develop tailored solutions that address
company challenges, while encouraging
employees to think creatively and develop new
skills. We also incorporate innovation in our
community engagement by supporting young
people within the community to develop their
creative skills. We believe that this can
contribute to socio-economic development.
Encouraged innovation
We recognise the importance of expanding
communication channels and platforms for
our employees to share and develop their
ideas. Our Innovation and Leadership Advisory
Board (ILAB) was established in 2014 with the
purpose of empowering young employees
and tapping into their creative potential.
Since its inception, ILAB has achieved success,
developing and nurturing ideas. One notable
achievement of ILAB was the introduction
of the Hikma Innovation Competition (HIC),
a company-wide competition that included
contestants from all our markets designed
to find innovative ideas on how to improve
businesses processes.
The competition committee prioritised
proposals that presented innovative yet
practical and feasible solutions to company
challenges. The winning proposal for
‘Real-time Statistical in-Process Control
on Tablet Compression’ is expected to result
in $7.5 million in savings from an investment
of around $70,000. The project will leverage
statistical in-process control during
manufacturing and warn operators of
impending in-process product rejects in
real-time. The warning will enable operators
to make immediate adjustments to reduce
the number of rejected products.
Contestants in our newly-established Hikma
Innovation Competition (HIC) stand alongside
our Executive Chairman, Said Darwazah,
during the competition awards ceremony.
HIC provides a platform through which our
people can share their ideas with executive
management in a competition format, with
the winning team given the opportunity to
implement their idea.
50
Strategic report | Sustainability | Innovation
Encouraged the use of innovative
‘smart syringes’
Needle reuse is often responsible for the
spread of blood-borne diseases such as
hepatitis B, hepatitis C and HIV. In order to
address this challenge in Jordan, we undertook
a multi-faceted campaign of awareness and
distribution of ‘smart syringes’ around the
country in collaboration with the Ministry
of Health. The innovative design of ‘smart
syringes’ includes a retractable safety feature
that makes it impossible for healthcare
professionals to inadvertently use the same
syringe more than once, protecting patients
from needle-stick injuries, possible infections
and the spread of blood-borne diseases.
To promote greater use of ‘smart syringes,’
we distributed 500,000 of them to public
and private hospitals around the country, and
trained 400 doctors and nurses on their use.
We hope that by encouraging the use of ‘smart
syringes’ we can more effectively protect the
health and safety of patients in our markets.
500,000
Smart syringes distributed to public and
private hospitals in Jordan
400
Doctors and nurses trained on their use
51
We trained 400 doctors and nurses on the use of ‘smart syringes’ as part of our campaign
to address syringe reuse and reduce the spread of blood-borne diseases.
Our collaboration with the
Injaz Innovation Camp
As part of our commitment to drive socio-
economic growth in our communities, our
employees in Algeria participated in the Injaz
Innovation Camp – an initiative aimed at
challenging university students to develop
innovative business solutions through
leadership, critical thinking and teamwork.
Our employees volunteered to mentor
and work with more than 50 students from
universities across the country. We hope
that by participating in activities such as this,
we can encourage greater entrepreneurship
and socio-economic development in our
communities.
Hikma Pharmaceuticals PLC
Sustainability continued
Committed to people, community
and the environment
We remain committed to meeting the needs
of our people, our communities and our
environment. We consider the prosperity of
our surroundings, human and environmental,
to be linked to our organisational growth.
We have therefore directed substantial
resources towards addressing social
challenges in our communities and take
active measures to reduce emissions
and minimise the environmental impacts
of our operations.
People
The health and safety as well as engagement
of our people is a key focus of our
sustainability strategy.
Prioritised occupational health
and safety
Protecting the health, safety and welfare
of our people is paramount, and as a result,
we have a focus on Occupational Health,
Safety, Environmental and Energy (OHSEE)
management. We provide information, training
and support to all our employees to increase
their level of awareness of the hazards and
risks that are associated with our operations.
Our OHSEE group-wide corporate policy is
endorsed by the Vice President of Corporate
Communication and communicated to all
our employees.
We monitor targets for health and safety
to review our performance and identify
areas where we can improve our approach.
Our OHSEE policy dictates that all our units
comply with stringent industry standards of
OHSEE management to ensure the well-being
of our employees and business partners
and to minimise environmental impacts of
our operations.
We are continuously refining our production
processes, equipment and training to minimise
potentially harmful situations and to prevent
and manage environmental accidents and
emergencies. This is reflected in the overall
reduction in Lost Time Injury Rates (LTIR)
across our US locations (see chart below).
Going forward, we will expand monitoring
and reporting of LTIRs to include our facilities
in MENA and Europe.
Lost Time Injury Rate – US Facilities
3
2
1
0
Case study: Bringing our people together through the ‘You are Hikma’ campaign
The ‘You are Hikma’ campaign is held every year across all our locations, bringing employees
together to promote health and safety both internally and across our wider communities.
This year, more than 80 employees in our Jordan locations and 250 employees from across
our US locations volunteered and took part in the campaign’s activities which included
awareness lectures on waste recycling and occupational health and safety. The event also
included a blood drive, firefighting training and medical testing.
2012
2013
2014
2015
2016
2017
All US Facilities
— LTIR defined as injuries resulting in one or more days away
from work per 100 employees
— Data for Bedford and Columbus collected as of 2015
— Data for Creekside collected as of 2016
— In 2017, we sustained no LTIRs in Bedford, Creekside,
Eatontown or Memphis
52
Strategic report | Sustainability | Commitment
250
‘You are Hikma’ volunteers from across our
US locations
Our first global employee survey
In 2017, we undertook our first global Employee
Effectiveness Survey (EES) to measure and
address employee engagement and better
understand their positions on a range of issues.
Our intention is to conduct this survey on
a regular basis. This will help us to gauge
our performance internally and benchmark
ourselves against industry best practices.
This year, we achieved a response rate of 70%,
and we will aim to improve this in future years.
Encouraged inclusivity and diversity
We believe in equality for all employees, and
pride ourselves on being an equal opportunity
employer and do not discriminate on the basis
of race, age, religion, sexual orientation or any
other characteristic. We consider the diversity
of our people to be a source of strength that
contributes to our creativity and effectiveness
as an organisation.
Ethnic and gender diversity
Our merit-based and inclusive corporate
culture helps foster a diverse workplace.
Whilst we do not set quotas, we actively
monitor ethnic diversity at all our US locations.
Approximately 33 per cent of our global
workforce is female.
Ethnicity breakdown – our US locations
Asian
Black or
African American
Hispanic or Latino
Two or more races
White
15%
15%
6%
1%
63%
Monthly lectures organised through our ‘Dare to Dream Big’ programme promote capacity-
building and leadership skills for our female employees in the MENA region.
Women’s empowerment
We have developed various programmes and
policies to encourage gender diversity and
women’s empowerment. Through our ‘Dare
to Dream Big Programme’, we hold monthly
lectures that promote capacity-building
and leadership development for our female
employees in the MENA region. We also
established a formal committee tasked with
addressing women-specific issues within the
Company. The Women’s Committee comprises
females from across the organisation, offering
an inclusive platform where issues can
be addressed openly. The Committee
contributed to the development of several
important company policies such as the
provision of a nursery allowance for parents
and an extended maternity leave option
for mothers in Jordan.
In Saudi Arabia, our efforts to reduce gender
disparity, while at the same time accommodate
cultural sensitivities, enabled us to increase
the number of women in the Company from
two in 2012 to 54 in 2017. This was achieved
by establishing ‘women-only’ packaging and
packing lines and including more women
in our training and development agenda.
Gender diversity remains a challenge in certain
locations, and to address this we will continue
to introduce programmes that enable women
to attain leadership roles, and address barriers
to achieving a more inclusive workforce.
33%
Percentage of female employees at Hikma
53
Hikma Pharmaceuticals PLC
Sustainability continued
Employee development: Our
continuing education programme
We offer employees multiple ways to develop
their skills and capabilities, and we believe that
supporting employees’ training enables us to
develop future leaders internally. This was the
rationale behind the establishment of our
Continuing Education programme in 2010.
Every year, we accept up to eight employees
into the Programme, which provides financial
scholarships for education. More than 50
employees have received full scholarships
since the programme’s establishment.
Communities
Across our communities we support
programmes focused on social challenges
and health and wellbeing.
Drug disposal campaigns
This year, we undertook several drug disposal
initiatives to address the challenge of
prescription drug abuse. In Columbus, our
employee volunteers worked alongside local
grocery store and pharmacy chain, Kroger,
to collect and remove unwanted and expired
medications from customers and dispose of
them safely. Over the course of the campaign,
we successfully disposed of more than 4,300
pounds (1,950kg) of medications, equating
to more than 6.4 million tablets.
In Saudi Arabia, volunteers participated in
the ‘Dawaona Amanah’ (Our Medicine, Our
Responsibility) Campaign, which aims to
spread awareness about the importance
of proper drug disposal. The campaign took
place across several locations, including
hospitals, universities, malls and stadiums.
6.4m
Safely disposed of more than 4,300 pounds
(1,950kg) of unwanted or expired medications,
equating to more than 6.4 million tablets
Case study: Ibrahim Shihadeh
Ibrahim Shihadeh began his career with us
in 1978 as a maintenance engineer after
completing a two-year Diploma in mechanical
engineering. After ten years of employment, our
founder, Dr Samih Darwazah, proposed that
the Company sponsor Ibrahim’s continued
education and his pursuit of a bachelor’s
degree. In what became a precursor to our
Continuing Education Programme, Ibrahim
was able to further his education, enabling
him to assume the role of Production Manager
and eventually Head of Engineering. Ibrahim
continued to progress within the organisation,
earning the position of General Manager
of Algeria and Senior Director of Special
Projects. Ibrahim worked at Hikma until his
retirement in July 2017. Ibrahim’s journey
within Hikma embodies our spirit of employee
development and his success was the driving
force behind the establishment of our
Continuing Education Programme.
54
Volunteers in Columbus came together to dispose of unwanted or expired medications.
Strategic report | Sustainability | Commitment
In Jordan, we continued our support for the
Charity Clothes Bank, which developed a
charity distribution centre in the Al Karak
Governorate. Through our contributions,
which totalled more than 93,000 items, we
were able to help more than 26,000 people.
We conducted several activities to help
improve education infrastructure. In Sudan,
volunteers from our Savannah facility
participated in a comprehensive effort to
refurbish the Al-Mahlaj Higher Secondary
School in Khartoum, helping repair critical
infrastructure and complete maintenance work
to improve the learning setting for students.
The school was subsequently renamed the
Pharmaland Higher Secondary School.
In Columbus, we donated a van to assist the
mobile outreach programme of the Mount
Carmel Foundation. The Foundation is a
non-profit organisation dedicated to funding
health and education programmes in Ohio.
It provides extensive healthcare and resources
to those that are not supported by other
healthcare providers.
Assisted those affected by natural
disasters
After the devastating hurricanes Harvey,
Irma and Maria, employees from across five
US facilities came together to donate supplies
and assist in relief efforts. Through these
donations, more than 500 people that were
affected by the hurricanes were provided
with access to essential items.
55
Our employees are keen to take advantage of opportunities to volunteer and give back to their
communities. Every year, we organise several campaigns that bring people together to assist
those in need and improve our communities.
Volunteers in Cherry Hill participated in the
‘Give Back’ campaign, where they collected
and helped to distribute food and beverages
to those in need.
Helped those in need across
our communities
Across our locations, our employees organised
multiple campaigns to assist people in need.
Some of the many activities undertaken during
the year included collecting and distributing
food and supplies and helping to improve
infrastructure for several schools.
We organised multiple food drives across the
US, bringing volunteers together to collect
and distribute food to those in need. In both
Memphis and Cherry Hill, our teams collected
food for their local food banks, helping
thousands gain access to basic supplies.
During the month of Ramadan, our employees
in Egypt carried out a healthy meal distribution
campaign, delivering food to more than
100 people in the village of Khair Allah. In
collaboration with the Kheir W Baraka
Institution, our volunteers were able to visit
the village and offer hands-on assistance
to those in need.
Hikma Pharmaceuticals PLC
Sustainability continued
Measuring our emissions
The table below shows our emissions performance for the last three years.
105,533
79,061
103,191
76,456
26,472
26,735
92,421
36,839
129,260
Data notes:
— Emissions from the consumption of electricity
are reported in tCO2 rather than tCO2e since the
International Energy Agency emission factors for
electricity currently account for carbon dioxide
emissions only.
— Emissions are calculated in alignment with the
WRI’s Greenhouse Gas (GHG) Protocol Corporate
Accounting and Reporting Standard.
— Emissions are reported from sites which represent
92% of total employees.
Scope
1
Scope
2
Total
Scope
1
Scope
2
Total
Scope
1
Scope
2
Total
2015
2016
2017
Scope 1: Combustion of fuel and operation of facilities (tCO2e)
Scope 2: Electricity (tCO2)
Performance
Our reported greenhouse gas emissions increased by 25% in 2017,
compared with 2016. The increase was primarily due to the inclusion
of West-Ward Columbus, our largest manufacturing facility, in our
analysis for the first time. It accounts for 23% of total emissions
in 2017. Excluding West-Ward Columbus from our US results, our
greenhouse gas emissions decreased by 5% in 2017.
There was a slight increase in Europe due to the expansion of our
Portugal manufacturing facility. In the MENA region, our emissions
decreased by 8% due to investments made in energy efficiency.
Year-on-year change by fuel type
Europe
2016
2017
MENA
2016
2017
USA
2016
2017
Our emissions per full-time equivalent (FTE) employee increased
by 3.6%. This was primarily driven by increased manufacturing in
Portugal and Germany. For example, a production increase of 40% in
Germany led to a 16% increase in emissions from electricity at the site.
We are focused on reducing our emissions and have implemented
several initiatives this year, which are discussed in more detail
throughout the section.
Emissions/FTE employee from
reported sites (tCO2e)
17.12
16.30
16.88
0K
5K
10K
15K
20K
25K
30K
35K
Emissions
40K
45K
50K
55K
60K
65K
2015
2016
2017
Electricity
Natural gas
Diesel/Gasoil
Owned Vehicles
F-Gas
Petrol/Gasoline
Other fuels
56
Strategic report | Sustainability | Commitment
Developed wastewater treatment
in Egypt
As part of our efforts to improve environmental
stewardship, we completed construction of
a wastewater treatment unit in Egypt that will
enable the manufacturing facility to reduce
wastewater effluents by up to 90%. The
wastewater treatment unit, operating at a
maximum capacity of 200m3 of treated water
per day, uses the treated water for irrigation
purposes, reducing use of domestic water
consumption by 15%. We are seen as a leader
in environmental compliance in Egypt.
Upgraded sewage treatment
infrastructure
At our facility in Tunisia, we successfully
upgraded and renovated our sewage
infrastructure to reduce water consumption
and mitigate the environmental impact of
our operations. The treatment unit will isolate
industrial water from rainwater and sanitary
water, enabling us to recover industrial
wastewater for treatment and reuse. Our
sewage treatment project will improve the
environmental footprint of our facility and
reduce operating costs.
90%
Potential reduction of wastewater effluents in
our Egypt facility through wastewater treatment
Upgraded lighting fixtures
This year, our Columbus facility undertook
multiple projects to improve energy efficiency
and lower carbon emissions. The most notable
was the installation of LED lighting fixtures.
By investing in the replacement of 32W
fluorescent tubes with more efficient
substitutes, we have halved the energy
consumed in lighting the facility.
The installation of 1,625 fixtures (6,500 tubes)
will result in energy savings of 789,690 kWh
per year, equating to annual savings of around
360 tCO2e.1
Our goals
going forward
— Continue engaging our communities
with activities that address health-
related needs and promote accessibility,
awareness and education
— Refine data collection for employee
training and development and injury rates
— Expand our in-kind medicine donations
to assist more people
— Continue to explore new channels of
employee engagement that encourage
innovation
— Ensure our supply chain is aligned
with the principles of the Modern
Slavery Act by expanding the scope
of our supplier audits
— Continue to seek opportunities to
promote energy efficiency and the use
of renewable energy technology
Environment
We are committed to doing our part to ensure
that our environment is protected for future
generations. Every year we take steps to
improve our energy efficiency and minimise
adverse impacts.
Achieved cleaner manufacturing
In 2017, we finalised agreements that will enable
our Jordan-based facilities as well as our
manufacturing facility in Tunisia to convert
from using diesel fuel to liquefied petroleum
gas (LPG). This will result in significant
improvements to our environmental
performance by reducing the carbon emissions
of our production processes. The switch will
also reduce overhead costs since, unlike diesel
fuel, natural gas boilers have a longer service
life and require less maintenance.
Through the agreement with the energy
company Central Gas, our Jordanian facilities
will be provided with a capacity of up to
30,000 litres of LPG per year, an amount
that will reduce production costs by 7–15%
based on estimated gas prices. In addition
to reducing our carbon emissions, using
natural gas will improve safety.
In Tunisia, our substitution to natural gas use
was the pretext for the Tunisian government
to develop underground gas pipelines for the
entire village of Sidi Thabet. This investment
will enable other businesses and households
to access natural gas, substantially extending
the environmental return of our investment.
The pursuit of cleaner energy in our
production and manufacturing is part of our
wider effort to consider the environmental
impacts of our business, reduce our carbon
footprint in cost-effective ways and to
maximise the efficiency of our production.
1. Based on IEA 2015 US electricity grid emission factor
of 0.4556 tCO2e/ kWh.
57
Hikma Pharmaceuticals PLC
Risk management
Managing the uncertainties
In 2016, we introduced an Enterprise
Risk Management framework. This year,
we have focused on embedding it using
new technologies.
59 Risk management framework
60 Risk management activities
61 Principal risks and uncertainties
65 Longer-term viability
65 Going concern
58
Risk management framework
Risk context
We develop, manufacture and market a broad range of branded and
non-branded generic pharmaceutical products across the US, the
Middle East and North Africa (MENA) and Europe. We are also a leading
licensing partner in MENA.
Risks are inherent for our business. They may be associated with
meeting the expectations of our stakeholders, establishing and
achieving our strategic objectives, the efficient execution of our
core processes, or through key relationships and dependencies.
See the Our markets section on page 20 and the Our business model
section on page 22 for more detail on the external and internal context
for risk management.
Risk strategy
We recognise that effective management of risk is fundamental to
delivering long-term success for the Group. We are embedding an
enterprise risk management approach to ensure that we fulfil our
obligations, have assurance that our activities are appropriately
controlled, consider risk in our decisions, and establish effective and
efficient strategic, tactical, operational and compliance processes.
Risk appetite
The Board determines the nature and extent of the principal risks it is
willing to take and communicates this through the Group risk appetite.
The risk appetite outlines expected management approaches and
details limits and tolerances on risk exposure for each of the principal
risks. The risk appetite is monitored on an ongoing basis, and reviewed
and updated annually. The risk appetite forms the foundation of the
enterprise risk management framework, and guides management
decision making across the Group.
Risk governance
The Board has ultimate responsibility for the Group’s overall approach
to risk management and internal control.
C
o
m
m
u
n
c
a
t
i
o
n
i
On behalf of the Board, the Audit Committee oversees risk
management for the Group in the context of its responsibilities for
internal control. The Audit Committee reviews the material risks facing
the Group taking into account different sources of assurance including
executive risk management, internal audit and external audit.
Internal audit provides independent assurance of the Group’s risk
management and internal control systems. For more details on our
internal audit approach see page 80.
The enterprise risk management office facilitates and monitors
the implementation of effective risk management practices by
management and assists global risk owners in reporting their risks.
We recognise that effective
management of risk is
fundamental to delivering long-
term success for the Group.”
Compliance and control functions are in place across the organisation
that have specialist expertise in managing risk in particular areas.
The CEO and Executive Committee have direct ownership of risk
management for the Group and risk considerations are incorporated
into their management responsibilities and decision making.
As part of the risk governance framework, senior executives are
assigned global risk owner responsibility for each of the principal risks.
Global risk owners coordinate risk management activities across the
organisation to ensure risk exposure is managed to the risk appetite.
Risk governance
Board of
Directors
— Define the Group’s risk appetite
— Determine principal risks and uncertainties
— Responsible for effectiveness of the risk
management framework
— Review risk management key outcomes
Audit
Committee
— Oversee design and implementation of risk
management framework and report to the Board
— Review risk and assurance reports from
management, internal audit and external audit
— Consider risks highlighted by Compliance,
Responsibility and Ethics Committee
— Review external communications and disclosures
Executive
Committee
— Review regular risk and assurance reports to
ensure Group operates within risk appetite
— Take portfolio view of exposure for the organisation
and consider interrelation of risks and significant
emerging risks
— Make decisions on prioritisation for risk response
Internal audit
— Provide independent assurance of the
effectiveness of the Group’s risk management
and internal control systems
Enterprise risk
management
office
— Facilitate and monitor the implementation
of effective risk management practices by
management and assist global risk owners in
reporting their risks
Compliance
and control
functions
Global risk
owners
Divisional risk
owners and
management
teams
— Support management policies, defining roles
and responsibilities, and setting goals for
implementation
— Implement the risk management process and
identify, assess and manage risks within the
business on a daily basis
— Coordinate risk management activities across
the organisation
— Report on risk management status
— Own and manage risks
— Implement group wide policies and procedures
— Implement and monitor internal controls
g
n
i
t
r
o
p
e
R
59
Hikma Pharmaceuticals PLCStrategic report | Risk management
Risk management continued
Risk management activities
Risk management activities occur at all levels of the organisation on an ongoing basis. The risk governance framework provides structure for these
activities to ensure consistency of approach, alignment to the risk appetite and monitoring of risk management performance. In addition to the core
reporting and communication processes described through the risk governance framework, key risk management activities during the year included:
Key risk management activities
Investment in technology solutions
to enable integration of different
lines of assurance and control
Group risk assessments conducted covering
risks such as the threat of anti-microbial
resistance, Brexit, currency devaluations,
VAT implementation in GCC, changes in
tax environment
Risk scenarios developed of interrelated
principal risks and significant risk events
(see the longer-term viability section on
page 65 for more details)
The risk management framework
was reviewed and updated
Broadened scope of API sourcing
risk to include other aspects of
supply chain
Adjusted scope of MENA and
emerging markets risk to focus
on crisis response and continuity
management across the whole group
Brexit
Priorities for 2018
Our risk assessment for the UK withdrawal from the European
Union considers different Brexit scenarios and the wide range of
implications that may impact our business. Our current view is
that the exposure for Hikma is low and manageable. We have a
small footprint in the UK, and as a result limited dependence on
movement of people, goods, services and capital between the
UK and Europe. We continue to monitor the situation as it develops
and assess implications for our business.
In addition to our core risk management activities, in 2018 we will
strengthen our global risk management process, further deploy
our risk management technology, develop our risk culture, and
strengthen partnerships between compliance and control functions
to enhance our risk management capability and bring greater
assurance for the Group.
60
Principal risks and uncertainties
The Group faces risks and uncertainties that could have a material impact on its earnings and ability to trade in the future. These are determined
via robust assessment considering our risk context by the Board of Directors with input from executive management. These risks and uncertainties
are set out below. The contents of this table should not be considered as an exhaustive list of all the risks and uncertainties the Group faces.
The Board is satisfied that these risks are being managed appropriately and consistently with the target risk appetite.
Industry earnings
Description
Mitigating actions
The commercial viability of the industry and business model we operate may
change significantly as a result of political action, economic factors, societal
pressures, regulatory interventions or changes to participants in the value
chain of the industry.
— Securing of key talent to manage complex commercial environment
and develop business
— Growth and expansion in new markets, with new products and in new
therapeutic areas
Product pipeline
Description
Identifying, developing and registering supply of new products from the pipeline
that meet market needs to provide continuous source of future growth.
Organisational development
Description
Developing, maintaining and adapting organisational structures, management
processes and controls, and talent pipeline to enable effective delivery by
the business in the face of rapid and constant internal and external change.
— Portfolio management programme to focus on strategic products that support
revenue, profit and margin targets
— Development of capacity, diversification of capability through differentiated
technology, and investment in local markets
— Active product life cycle and pricing management across all regions
— Continuous alignment of commercial and R&D organisations to identify
market opportunities and meet demand through internal portfolio
— Collaboration with external partners for development and in-licensing
partnerships
Mitigating actions
— Partner marketing and business development departments to monitor
and assess the market for arising opportunities
— Expansive global product portfolio with increased focus on high value
and differentiated products
— Experienced internal R&D teams developing products and overseeing
joint venture activities
— Product related acquisitions bolster pipeline
— Third party pharmaceutical product specialists brought in to assist in the
development of manufacturing processes for new generic products
Mitigating actions
— Strengthening executive experience with key talent appointed to fill strategic
global positions, including appointment of new CEO
— Investment in Group-wide human capital management system
— Developing global HR programmes that attract, manage and develop talent
within the organisation
— Review of organisation design, structures and accountabilities to maintain
empowerment in decision making and bring appropriate level of governance
61
Hikma Pharmaceuticals PLCStrategic report | Risk management
Risk management continued
Principal risks and uncertainties continued
Reputation
Description
Mitigating actions
Building and maintaining trusting and successful partnerships with our many
stakeholders relies on developing and sustaining our reputation as one of our
most valuable assets.
— Launch of new corporate brand to better communicate our values, purpose
and strategy (see page 8 for more details)
— Internal and external monitoring for early detection and monitoring of issues
Ethics and compliance
Description
Maintaining a culture underpinned by ethical decision making, with
appropriate internal controls to ensure staff and third parties comply with
our Code of Conduct, associated principles and standards, as well as all
applicable legislation.
that may impact reputation
— Investment and group alignment of corporate responsibility and ethics
through transparent reporting and compliance with global best practices
and strategic industry and community partnerships
— Communication and engagement programmes on appropriate use of products
— Globalising communication and corporate affairs capabilities
Mitigating actions
— Board level oversight from the Compliance, Responsibility and Ethics
Committee (see page 84 for details)
— Code of Conduct approved by the Board, translated into seven languages
and rolled out to all employees
— Active participation in international anti-corruption initiatives
— Anti-bribery and corruption, sales and marketing, and other compliance
programmes implemented and monitored through internal compliance
assessments
— Development of third party due diligence and oversight programme
Information, technology and infrastructure
Description
Mitigating actions
Ensuring integrity, confidentiality and resilience of data, securing information
stored and/or processed internally or externally, maintaining and developing
technology systems that enable business processes, and in ensuring
infrastructure supports the organisation effectively.
— IT organisational structure designed to enable coordinated, consistent
and comprehensive enterprise approach
— Industry-standard information security solutions and best practice
processes adopted and adapted for local and Group requirements
— Cyber-risk activity monitored and changes implemented as necessary
to combat evolving threats
— Partnership established with strategic third parties to implement and
maintain a robust Group-wide information security framework
— Investment in enterprise-wide standardisation initiative incorporating
data management, access and process control and risk management
62
Legal, regulatory and intellectual property
Description
Mitigating actions
Adapting to changes in laws, regulations and their application, managing
litigation, governmental investigations, sanctions, contractual terms and
conditions and potential business disruptions.
— Internal expertise drives awareness and understanding through policies,
processes, and compliance culture
— Staff trained and contractual terms established to mitigate or lower risks
Inorganic growth
Description
Identifying, accurately pricing and/or realising expected benefits from
acquisitions or divestments, licensing, or other business development activities.
where possible
— Expert external advice procured to provide independent services and
ensure highest standards
— Board of Directors and executive management provide leadership
and take action
Mitigating actions
— The mergers and acquisitions team undertake extensive due diligence of
each acquisition in partnership with external advisers including financial
and legal advisers, investment banks, and industry specialists in order to
strategically identify, value, and execute transactions
— Executive Committee reviews major acquisitions before they are considered
by the Board
— The Board is willing and has demonstrated its ability to refuse acquisitions
where it considers the price or risk is too high
— Dedicated integration project teams are assigned for the acquisition, which
are led by the business head responsible for proposing the opportunity.
Following the acquisition of a target, the finance team, the management
team and the Audit Committee closely monitor its financial and non-financial
performance
— Post transaction reviews highlight opportunities to improve effectiveness
of processes
Supply chain and API sourcing
Description
Mitigating actions
Maintaining continuity of supply of finished product and managing cost, quality
and appropriate oversight of third parties in our supply chain.
API and raw materials represent one of the Group’s largest cost components.
As is typical in the pharmaceuticals industry, a significant proportion of the
Group’s API requirements is provided by a small number of API suppliers.
— Implementing comprehensive Group-wide third party management solution
for suppliers
— Maintaining alternative API suppliers for the Group’s top strategic products,
where possible
— Rigorous selection process for API suppliers and focus on building long-term
supply contracts
— The Group has a dedicated plant in Jordan that can synthesise strategic
injectable APIs where appropriate
— Utilising supply chain models to maintain adequate API levels
— Strengthening trade compliance capability to ensure compliance and
drive efficiency
— Serialisation programme ensuring roll out across the Group
63
Hikma Pharmaceuticals PLCStrategic report | Risk management
Risk management continued
Principal risks and uncertainties continued
Crisis response and continuity management
Description
Mitigating actions
Preparedness, response, continuity and recovery from crisis events such as
natural catastrophe, economic turmoil, operational issues, political crisis,
regulatory intervention.
Product quality
Description
Maintaining compliance with current Good Practices for Manufacturing (cGMP),
Laboratory (cGLP), Distribution (cGDP) and Pharmacovigilance (cGVP) by staff,
and ensuring compliance is maintained by all relevant third parties involved in
these processes.
— Central oversight being established of systems, processes, and capabilities
to enhance our Group-wide resilience and preparedness
— Programme being rolled out to enhance our ability to respond effectively
to crises, and to expedite the restoration of critical processes after disruption
— Engagement with key third parties involved in preparedness, response
and recovery
— Corporate insurance programme reviewed and updated to ensure appropriate
coverage of high impact low likelihood events
Mitigating actions
— Quality culture driven throughout the organisation by global Quality office
initiatives, and regularly reinforced by communication from senior executives
— Global implementation of quality systems that guarantee valid consistent
manufacturing processes leading to the production of quality products
— Facilities are maintained as inspection ready for assessment by relevant
regulators
— Documented procedures are continuously improved and staff receive
training on those procedures on a regular basis
— Continued environment and health certifications
— Global pharmacovigilance programme in place and being enhanced
Financial control and reporting
Description
Mitigating actions
Effectively managing treasury activities, tax position, income, expenditure,
assets and liabilities, and debtors, and reporting accurately and in a timely
manner in compliance with statutory requirements and accounting standards.
— Extensive financial control procedures implemented and assessed annually
as part of the internal audit programme
— A network of banking partners maintained for lending and deposits
— Management monitors debtor payments and takes precautionary measures
and action where necessary
— Where it is economic and possible to do so, the Group hedges its exchange
rate and interest rate exposure
— Management obtains external advice to help manage tax exposures
and has upgraded internal tax control systems
— Introduction of new automated financial consolidation module
64
Longer-term viability
In accordance with the UK Corporate Governance Code, the longer-
term viability of the Group is assessed for a period longer than the
12 months required by the going concern statement. This assessment
takes into account our current position and prospects, our principal
risks and uncertainties, and the assumptions that are part of our
financial modelling.
Viability period
The assessment of the viability of the Group is over a period of three
years. This is the timeframe for acquisitions and business opportunities
to mature and to become integrated businesses, and for pipeline
products that have been transferred or developed to contribute as
marketed products. As such, three years is considered to be the most
appropriate period. We recognise that the accuracy is greater in the
nearer term than it is towards the end of the viability period.
Assessment of position and prospects
Hikma operates in the relatively defensive generic pharmaceuticals
industry which we expect to be less affected by economic downturns
compared to other industries. There are a range of specific risks to the
industry and the business which are set out on pages 61 to 64. We are
well diversified due to our geographic spread, product diversity and large
customer and supplier base – see the Our market section on page 20 and
the Our business model section on page 22 for further details.
The position and prospects of the Group are assessed at each
Executive Committee meeting and at the end of the financial year
considering strategic and operational updates from each member of
the executive team, financial reporting and forecasting from the Chief
Financial Officer, and through the development of a business plan that
takes into account our current position, an assessment of uncertainty
facing the business, and known changes to our organisation and
business model.
These assessments are presented to the Audit Committee and Board
of Directors. The Directors also receive regular updates on operational,
strategic and financial matters from executives.
Assumptions
The financial modelling over the viability period is subject to a number
of assumptions related to:
— Introduction and commercialisation of new products
— Market share and product demand rates
— Foreign exchange rates
— Continuation of elevation of certain product prices
— Political and social stability in the markets
— Ability to re-finance existing debt on similar terms
— Cash flow generation from newly acquired businesses
— Ability to increase operational efficiency and reduce central costs
— The effective tax rate being within the current guidance range
Assessment of viability, stress testing and
sensitivity analysis
Management defined several realistic risk scenarios that could impact
the business adversely and modelled the potential financial impact
of these over the forecast period. The risk scenarios were chosen
considering the Group’s strategic objectives, the principal risks and
uncertainties (see pages 61 to 64), and the financial modelling
assumptions listed above. Realistic but extremely severe adjustments
were applied to the financial models for the viability assessment, and
for stress testing and sensitivity analysis:
— Scenario 1: Industry earnings: significant adverse changes to the
pricing environment in the US
— Scenario 2: Product pipeline: failure of pipeline to deliver strategic
new products
— Scenario 3: Product quality: prolonged closure of one of our major
US-FDA approved facilities
— Scenario 4: Crisis response and continuity management: escalation
of political or social instability in one of our major MENA markets
— Scenario 5: Industry earnings: devaluation of key currencies
— Scenario 6: Supply chain and API: long-term shortage of API
for strategic product from supplier
The assessment and analysis considered the availability and likely
effectiveness of mitigating actions that could be taken in the
circumstances to manage the impact of the risks.
Ongoing implementation of enterprise risk management and
investment in infrastructure and change programmes are not included
in the modelling, but are anticipated to enhance organisational
resilience and support longer-term viability.
Board of Directors’ viability statement
The Directors, having considered the above matters, confirm that
they have a reasonable expectation that the company will be able
to continue in operation and meet its liabilities as they fall due over
the viability period.
Going concern
The Directors considered the going concern position of the Group
during the year and at the financial year-end. The Directors believe that
the Group is adequately placed to manage its business and financing
risks successfully despite current uncertainties. The Directors have
a reasonable expectation that the Group has adequate resources to
continue in operational existence, therefore the Directors continue
to adopt the going concern basis in preparing the financial statements.
In confirming the going concern position, the Directors took into
account a full assessment of the Group’s position, including the
following matters:
— Cash flow: Net cash flow from operating activities in 2017 was
$443 million (2016: $293 million).
— Net debt: The Group’s overall net debt position was $546 million
at 31 December 2017 (2016: $698 million) and is circa 1.2 times
EBITDA (2016: 1.4 times).
— Borrowing capacity: The Group has $1,063 million (2016:
$1,109 million) of undrawn short-term and long-term banking
facilities, in addition
to $238 million (2016: $180 million) of unutilised import and export
financing limits. These facilities are well diversified across the
subsidiaries of the Group and are with a number of financial institutions.
— Forecasting: 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.
65
Hikma Pharmaceuticals PLCStrategic report | Risk management
Corporate
governance
During the year, we continued to uphold
our Hikma values, which are transparency,
respect, trust and quality.
67 Message from our Chair
68 Corporate Governance at a glance
70 Board of Directors
72 Executive Committee
74 Governance report
78 Committee reports
86 Remuneration report
109 Directors’ report
66
Message from our Chair
Evolving governance
Corporate governance
Dear Shareholders
During 2017 and in the early months of 2018,
your Board has initiated a series of important
governance developments for the Group,
which are outlined below.
Executive Chairman
As I mentioned in the beginning of the report,
I have stepped down from my combined role
as Chairman and Chief Executive Officer, to
become the Executive Chairman. My primary
responsibilities as Chief Executive Officer have
been handed over to Siggi Olafsson, who is
dedicated to leading the Group and the
executive leadership team. I am continuing
in an executive capacity to assist strategic
thinking, to develop our entrepreneurial
advantages and to guide Siggi in his role as
the first non-family Chief Executive Officer
in the Group’s history.
Executive leadership
The appointment of Siggi as our new Chief
Executive Officer builds on our desire to obtain
the maximum value from our combined Group
by focusing our strategy on key medium-term
deliverables. Siggi’s appointment is part of
a broader effort to expand our leadership
capabilities, which includes appointments to
our Executive Committee. Siggi and I will work
together over the next few years to further
develop our strategy and maximise the
competitive advantage from our team.
I would like to take a moment to note the
retirement of Mike Raya, our long serving and
highly successful US Chief Executive. Whilst
I would have been delighted had Mike chosen
to continue with Hikma, as a friend I wish him
a happy and fulfilling retirement.
Board composition
This year we will be saying farewell to Ron
Goode, who is retiring at the AGM. Ron’s
retirement brings to a close the era of the
independent directors who joined early in the
Company’s listed life and were instrumental
in developing our group capabilities and
leadership. Under Ron’s guidance, the
CREC and our business integrity programme
were created. We owe him a great deal and
I would like to thank him personally for all
that he has done.
As we move forward, our succession priorities
are to ensure that the independent directors
continue to represent a majority of the Board
members and to gain further advantage from
increasing boardroom diversity, as we did over
the past few years with the appointments
of Dr Pamela Kirby and Nina Henderson.
Effectiveness
During 2017 we undertook our first interview-
based board evaluation. It was a very
rewarding and valuable experience, which
helped to contribute towards some of the
governance changes that I have outlined today
and it will contribute to our plans to further
develop our Board and Group structure.
If there are any matters that you wish to
discuss, please do not hesitate to contact me.
Said Darwazah
Executive Chairman
My primary responsibilities
as Chief Executive Officer
have been handed over
to Siggi Olafsson, who
is dedicated to leading
the Group and executive
leadership team.”
67
Hikma Pharmaceuticals PLC
Corporate governance
at a glance
Highlights 2017
Priorities 2018
— Undertook an executive search process that led to the
— Increase the level of independent representation on the Board
appointment of our first external Chief Executive Officer in
February 2018
— Closely aligned remuneration outcomes with performance
— Seek to enhance diversity at the Board and Executive
Committee level
— Enhance oversight of employee working conditions and improving
— Developed new objectives for the executive directors, focusing
employee engagement
on the delivery of strategic and operational priorities
— Implement recommendations arising from the externally
— Developed a new executive succession plan
facilitated board evaluation
— Undertook our first interview-based board evaluation
— Completed the succession plan for Independent Directors
and Committee Chairs
— Integrated US compliance into the global programme
— Embedded and enhanced the Enterprise Risk Management
programme
Board experience
Geographical experience
Business ethics and integrity
Listed environment
Manufacturing
Sales
Finance
Governance
Commercial
Pharmaceutical
Human resources
Regulatory and political
Strategy and risk
68
50%
70%
80%
90%
100%
80%
MENA
80%
UK
80%
Europe
80%
US
90%
Global
90%
100%
Country of origin
100%
100%
USA
Iceland
UK
Ireland
Germany
Jordan
100%
100%
Corporate governance | At a glance
2017 Board attendance
The Board’s time
Corporate governance
Financial
Operational developments
Risk
Strategy and acquisitions
2016
22%
24%
7%
6%
41%
2017
24%
33%
23%
2%
18%
2016
2017
Directors during 2017
Said Darwazah
Mazen Darwazah
Ali Al-Husry
Dr Jochen Gann1
Robert Pickering
Dr Pamela Kirby2
Dr Ronald Goode
Pat Butler
John Castellani
Nina Henderson
Michael Ashton3
Meetings attended
(7 scheduled and
1 unscheduled)
8/8
8/8
8/8
6/8
8/8
7/8
8/8
8/8
8/8
8/8
3/3
%
100%
100%
100%
75%
100%
88%
100%
100%
100%
100%
100%
1. Dr Jochen Gann was unable to attend two board meetings, one due to a time conflict with
obligations to his primary employer and one called at short notice.
2. Dr Pamela Kirby was unable to attend one board meeting due to changes to the meeting
timing which caused a conflict with another meeting.
3. Michael Ashton retired following the May 2017 AGM.
March 2017/March 2018 Board composition
Tenure range (as at 13 March 2018)
Chairman and Chief Executive Officer
Executive Directors
Non-Independent NED
Independent NED
2017
9%
9%
18%
64%
2018
18%
9%
18%
55%
0 – 3 years
4 – 6 years
7 – 9 years
9+ years
Independent NED
%
No
4
1
0
1
66%
17%
0%
17%
2017
11
2018
11
6
Gender diversity (as at 13 March 2018)
Board
Exco
Group
Women
Men
18%
82%
Non-white 27%
73%
White
Women
Men
18%
82%
Non-white 64%
36%
White
Women
Men
33%
67%
Non-white 65%*
35%*
White
*Estimated
69
Hikma Pharmaceuticals PLC
Board of Directors
Said Darwazah, 60
Executive Chairman
Appointed: 1 July 2007 | Joined Hikma: 1981
Nationality: Jordanian
Board experience:
Sigurdur ‘Siggi’ Olafsson, 49
Chief Executive Officer
Appointed: 20 February 2018 | Joined Hikma: 2018
Nationality: Icelandic
Board experience:
Committee membership: None
Experience: Said has served as Chief Executive
since July 2007 and Chairman since May 2014.
Said has over 36 years of experience in numerous
leadership roles at Hikma. Under Said’s leadership,
Hikma has expanded into the US and become
a leading player in injectables and the MENA region.
Qualifications: Industrial Engineering degree from
Purdue University, MBA from INSEAD.
Other appointments: Unchanged since prior year.
Includes Chairman of the Queen Rania Foundation
and Royal Jordanian Airlines. Director of the Central
Bank of Jordan and Dash Ventures Limited.
Committee membership: None
Experience: Siggi has a wealth of international
experience in the pharmaceutical industry, having
held senior roles with Actavis Pharma Inc., Pfizer Inc.
and Omega Farma. Siggi served as President and
CEO of Global Generic Medicines at Teva
Pharmaceuticals.
Qualifications: M.S. in Pharmacy (Cand Pharm)
from the University of Iceland, Reykjavik.
Other appointments: Independent Director
of Pfenex Inc., a biologics company listed on
the New York Stock Exchange and a Director
at Elucida Oncology.
Mazen Darwazah, 59
Executive Vice Chairman, Chief Executive of MENA
and Emerging Markets
Appointed: 8 September 2005 | Joined Hikma: 1985
Nationality: Jordanian
Board experience:
Committee membership:
Experience: Mazen has led and expanded the MENA
region at Hikma. Since listing, he has Group level
responsibility in his role as Executive Vice Chairman.
Since 2014, he became responsible for the Group’s
expansion into emerging markets.
Qualifications: BA in Business Administration from
the Lebanese American University, AMP from INSEAD.
Other appointments: Vice Chairman of the Capital
Bank of Jordan. Trustee of the St. Louis College of
Pharmacy, Birzeit University and King’s Academy.
Member of the King Abdullah Policy Board.
Dr Pamela Kirby, 64
Independent Non-Executive Director
Appointed: 1 December 2014 | Joined Hikma: 2014
Nationality: British
Board experience:
Dr Ronald Goode, 74
Independent Non-Executive Director
Appointed: 12 December 2006 | Joined Hikma: 2006
Nationality: American
Board experience:
Patrick Butler, 57
Independent Non-Executive Director
Appointed: 1 April 2014 | Joined Hikma: 2014
Nationality: Irish
Board experience:
Committee membership:
C
Experience: Dr Kirby was Chief Executive of Quintiles
Transnational Corp and held senior executive
positions at F Hoffmann-La Roche and AstraZeneca.
Previously, Dr Kirby chaired Scynexis, was Senior
Independent Director of Informa and held non-
executive positions with Smith & Nephew, Novo
Nordisk, Curalogic, and Oscient Pharmaceuticals Corp.
Qualifications: First-class BSc degree in
Pharmacology, Clinical Pharmacology PhD from
the University of London.
Other appointments: Director of DCC PLC, Reckitt
Benckiser Group PLC and Victrex PLC. Supervisory
Board Member of Akzo Nobel NV.
Committee membership:
Experience: Ron’s executive career focused on the
international pharmaceutical industry, including
roles as Chief Executive, President of International
Operations at Searle, Vice President of Clinical and
Scientific Affairs at Pfizer, and adviser to companies
in the pharmaceutical industry.
Qualifications: PhD from the University of Georgia,
MS and BS from the University of Memphis.
Other appointments: President of The Goode
Group. Director of Mercy Ships International. Senior
Business Advisor to The Kinsella Group. Advisory
Board Member of Private Access, Inc.
Committee membership:
C
Experience: Pat was Senior Director at McKinsey
& Co. During 25 years at McKinsey, he focused on
strategic, financial and structuring advice to large
corporations. Pat qualified in the audit and tax
practice of Arthur Andersen.
Qualifications: Chartered accountant. First-class
honours degree in Commerce, postgraduate diploma
in Accounting and Corporate Finance from
University College Dublin.
Other appointments: Director of Aldermore PLC,
The Ardonagh Group and Res Media Limited.
Governor of the British Film Institute. Trustee
of the Resolution Foundation.
70
Corporate governance | Board of Directors
Ali Al-Husry, 60
Non-Executive Director
Appointed: 14 October 2005 | Joined Hikma: 1981
Nationality: Jordanian
Board experience:
Dr Jochen Gann, 53
Non-Executive Director
Appointed: 29 February 2016 | Joined Hikma: 2016
Nationality: German
Board experience:
Robert Pickering, 58
Senior Independent Director
Appointed: 1 September 2011 | Joined Hikma: 2011
Nationality: British
Board experience:
Committee membership: None
Experience: Ali held various management and
leadership roles within Hikma before stepping into an
advisory role in 1995, when he founded Capital Bank
of Jordan, focusing on commercial and investment
banking. Ali served as Chief Executive of the Bank
until 2007.
Qualifications: Mechanical Engineering degree from
the University of Southern California, MBA from
INSEAD.
Other appointments: Director of Endeavour Jordan,
Microfund for Women, Capital Bank of Jordan, and
DASH Ventures Limited. Chairman of Alcazar Energy.
Committee membership: None
Experience: Jochen is Global Head of Corporate
Finance/M&A and Corporate Vice President at
Boehringer Ingelheim GmbH. In his M&A role he
leads Boehringer Ingelheim’s mergers and
acquisitions activities across all businesses.
Qualifications: Doctorate Degree in International
Finance from the University of Hoheinheim. Master’s
Degree in Business Administration and Science from
University of Karsruhe.
Other appointments: Chairman of the Finance
Committee at Verband Der Chemischen Industrie e.V.,
Germany. Advisory Board Member at KfW IPEX-Bank
GmbH, Germany.
Committee membership:
C
Experience: Robert became Senior Independent
Director in May 2014. Robert was Chief Executive of
Cazenove Group PLC and subsequently JP Morgan
Cazenove until 2008. During 23 years at Cazenove
and Co. he acquired extensive experience of the
corporate and investment environment.
Qualifications: Qualified solicitor with a law degree
from Lincoln College, Oxford.
Other appointments: Chairman of the Trustees at
Lincoln College Oxford 2027 Trust. Director at Itau
BBA International PLC, the investment bank of
the Itaú Unibanco group.
John Castellani, 67
Independent Non-Executive Director
Appointed: 1 March 2016 | Joined Hikma: 2016
Nationality: American
Board experience:
Nina Henderson, 67
Independent Non-Executive Director
Appointed: 1 October 2016 | Joined Hikma: 2016
Nationality: American
Board experience:
Committee membership:
C
Experience: John was President and Chief Executive
Officer of Pharmaceutical Research and
Manufacturers of America (PhRMA) and Business
Roundtable. During his career John has also held
senior positions with Burson-Marsteller, Tenneco,
and General Electric.
Qualifications: BSc in Biology from Union College
Schenectady, New York.
Other appointments: Director of 5th Port. Trustee of
The John Hopkins Medical System Sibley Memorial
Hospital, Washington, DC.
Committee membership:
Experience: Nina was Corporate VP of Bestfoods
and President of Bestfoods Grocery prior to its
acquisition by Unilever. During a 30-year career
with Bestfoods, and its predecessor company CPC
International, she held a wide variety of Global and
North American executive general management and
marketing positions. Nina has served as a director
of Royal Dutch Shell, AXA Financial, The Equitable
Companies, DelMonte, Pactiv and Walter Energy.
Qualifications: Honours graduate and BSc from
Drexel University.
Other appointments: Non-Executive Director
of CNO Financial Group Inc and IWG PLC,
Trustee of Drexel University, Director of the
Foreign Policy Association and Visiting Nurse
Service of New York, Inc.
Peter Speirs
Company Secretary
Appointed: 2 April 2012 | Joined Hikma: 2010
Nationality: British
Role: Peter is responsible for advising on governance,
executive remuneration, and listing related matters.
Peter joined Hikma as Deputy Secretary and
previously held roles with Barclays and Pool Re.
Qualifications: Fellow of the Institute of Chartered
Secretaries and Administrators. Law degree from
the University of East Anglia.
Governance
Commercial
Human resources
Regulatory
and political
Strategy and risk
Board experience:
Pharmaceutical
Business ethics
and integrity
Listed environment
Manufacturing
Sales
Finance
Committees:
Audit Committee
Nomination and Governance Committee
Compliance, Responsibility and Ethics Committee
Remuneration Committee
C Chair
For detailed Directors’ biographies go online:
www.hikma.com/about/leadership/
71
Hikma Pharmaceuticals PLC
Executive Committee
Said Darwazah
Executive Chairman
Appointed: 1 July 2007 | Joined Hikma: 1981
Nationality: Jordanian
Sigurdur ‘Siggi’ Olafsson
Chief Executive Officer
Appointed: 20 February 2018 | Joined Hikma: 2018
Nationality: Icelandic
For further biographical details please see page 70.
For further biographical details please see page 70.
Mazen Darwazah
Executive Vice Chairman, Chief Executive of MENA
and Emerging Markets
Appointed: 8 September 2005 | Joined Hikma: 1985
Nationality: Jordanian
For further biographical details please see page 70.
Bassam Kanaan
Chief Strategy and Corporate Development Officer
Appointed: 2014 | Joined Hikma: 2001
Nationality: Jordanian
Role: Bassam has Group level responsibility for
strategic development, acquisitions, alliances,
product development, and risk. Bassam has held
several executive positions during 17 years with
Hikma, including Chief Financial Officer.
Qualifications: US Certified Public Accountant
and Chartered Financial Analyst. BA from Claremont
McKenna. International Executive MBA from Kellogg/
Recanati Schools of Management.
Majda Labadi
Chief Human Capital Officer
Appointed: 2009 | Joined Hikma: 1985
Nationality: Jordanian
Role: Majda has Group level responsibility for
human resources, including people development
and structuring. Majda has held several executive
positions during 32 years with Hikma, including
VP Injectables and VP MENA Operations.
Qualifications: BA from the American University
of Beirut. Master’s degree from Hochschule Fur
Okonomie, Germany. Advanced Management
Program at INSEAD.
Khalid Nabilsi
Chief Financial Officer
Appointed: 2011 | Joined Hikma: 2001
Nationality: Jordanian
Role: Khalid is responsible for Group finance,
including reporting and capital management,
and information technology. Khalid has held several
financial positions during 17 years with Hikma,
including VP Finance.
Qualifications: US Certified Public Accountant.
MBA from the University of Hull.
72
Corporate governance | Executive Committee
Susan Ringdal
Vice President, Corporate Strategy and Investor
Relations
Appointed: 2012 | Joined Hikma: 2005
Nationality: American
Role: Susan is responsible for investor relations,
corporate affairs, the executive committee and
corporate strategy. Prior to joining Hikma, Susan
worked for Alliance Unichem and Morgan Stanley.
Qualifications: BA in History from Cornell University.
MBA from London Business School.
Riad Mishlawi
CEO, Injectables Division
Appointed: 2011 | Joined Hikma: 1990
Nationality: Lebanese
Role: Riad is responsible for all aspects of the
Injectables division globally. Riad has significant
pharmaceutical and operational experience from
leadership roles at Hikma and Watson
Pharmaceuticals.
Qualifications: BSc in Engineering and a Master’s
in Engineering and Management from George
Washington University.
Brian Hoffmann
President, US Generics Division
Appointed: 2015 | Joined Hikma: 2009
Nationality: American
Role: Brian is responsible for all aspects of the
Generics division in the US. Brian has significant
strategic and operational experience from leadership
roles at Hikma and prior consulting roles.
Qualifications: BA in Business Administration
from Boston University. MBA from the University
of Chicago.
Hussein Arkhagha
General Counsel
Appointed: 2013 | Joined Hikma: 2001
Nationality: Jordanian
Role: Hussein has Group level responsibility for legal,
regulatory and taxation related matters. During
17 years at Hikma, Hussein has held several legal
leadership roles, including heading legal in MENA,
the shareholders’ department and tax.
Qualifications: Qualified lawyer in Jordan. Master’s
degree in International Business Law from the
University of Manchester, under a UK Chevening
Scholarship.
Bryan Hotston
Chief Information Officer
Appointed: 2015 | Joined Hikma: 2014
Nationality: British
Role: Bryan has Group wide responsibility for
information technology and systems enhancement.
Prior to joining Hikma, Bryan held IT leadership
positions with Barclays Capital and JP Morgan
Cazenove, where he was a member of the Executive
and Risk committees.
The full biographies of Hikma’s Executive Committee
can be found on the Hikma website:
www.hikma.com/about/leadership/
73
Hikma Pharmaceuticals PLC
Governance report
Explanations under the UK Corporate
Governance Code
Governance principles
The Board is committed to the standards of corporate governance set
out in the UK Corporate Governance Code (the ‘UK Code’) adopted
in April 2016 and the Markets Law of the Dubai Financial Services
Authority. The report on pages 66 to 111 describes how the Board
has applied the Main Principles of the UK Code and Markets Law
throughout the year ended 31 December 2017. The UK Code is available
at www.frc.org.uk
The Board considers that this Annual Report provides the information
shareholders need to evaluate how we have complied with our current
obligations under the UK Code and Markets Law.
The Board acknowledges that Said Darwazah holding the position
of Chairman and Chief Executive during 2017 and from February 2018
Executive Chairman, and the continuation of Independent Non-
Executive Directors who have served more than nine years require
explanation under the UK Code. Hikma is committed to an open
dialogue regarding these matters. Questions may be directed to, and
further information may be requested from the Company Secretary.
Otherwise, throughout the year and up until the date of this report,
Hikma was in full compliance with the UK Code.
Executive Chairman position
The Board acknowledges that Said Darwazah’s position as Executive
Chairman is a departure from the UK Code. The role was created in
February 2018, following the appointment of Siggi Olafsson as Chief
Executive Officer. Previously, Said Darwazah was the Chairman and
Chief Executive Officer.
The change of roles and appointment of a Chief Executive Officer
has caused a significant reduction in Said Darwazah’s executive
responsibilities. However the Board considers that, as the Company
moves into a new era, it is essential to retain Said Darwazah’s services in
an executive capacity for a time period sufficient to ensure a controlled
and orderly transfer of responsibilities.
The Board consulted shareholders prior to his appointment in May 2014
and following the change of role in February 2018. The Independent
Non-Executive Directors met twice during the year to review the Board
structure including consideration of whether the combined role should
continue. As a result of these meetings and discussions with the
Chairman and Chief Executive, a new CEO was appointed and the role
of Executive Chairman was created.
The Board is focused on the commercial success of Hikma and believes
that continuing the position of Executive Chairman for a period of time
is the best way to achieve success for Hikma because:
— Chairman’s role: The Chairman position is highly visible inside
and outside Hikma, acting as an ambassador with business partners
and adviser to the divisions. It is essential the Chairman intimately
understands MENA culture and has strong relationships in the region,
can speak Arabic and has extensive pharmaceutical knowledge.
— Business partners: A significant number of the Company’s key
political and commercial relationships across the MENA region
are built on the long-term trust and respect for the Darwazah family
where the role of the Chairman remains key.
74
— Continuity of success: Said Darwazah has been a driving force
behind the operational success of the business since 2007 and
the Board believes that it is important to the continued success
of the Group that he remains in the lead executive role.
Control enhancements
The Board continues to operate the following enhanced controls:
— Governance structure review: The Independent Directors meet
at least bi-annually in a private session chaired by the Senior
Independent Director. This meeting includes consideration of
the appropriateness of the governance structure and safeguards
for shareholders.
— Committee Chair roles: The Chairs of the Board Committees,
all of whom are Independent Non-Executive Directors, undertake
a significant amount of work in the oversight of the functions that
report to their Committees and have in-depth relationships with
the relevant executives.
— Transparency and engagement: Hikma has always had the highest
regard for external shareholders. Many of the original investors from
before listing still invest and support Hikma today. Over 13 years
since flotation the Company has maintained the highest standards
of shareholder engagement, which is reflective of the importance
placed in maintaining strong investor relations and governance.
Hikma has won and been shortlisted for several transparency and
governance awards.
— Senior Independent role: The Senior Independent Director has joint
responsibility, with the Executive Chairman, for setting the Board
agenda, agreeing action points and the minutes of the meetings.
Independence
The Board considers Robert Pickering, Dr Ronald Goode, Pat Butler,
Dr Pamela Kirby, John Castellani and Nina Henderson 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 its
listing 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. It recognises that Dr Ronald Goode has served in
excess of nine years and therefore this constitutes a departure from the
UK Code. However, in accordance with the previously communicated
succession plan, Dr Ronald Goode will retire from the Board in May
2018. A full explanation describing the reasons for retaining his services
and how the Board considers him to be independent are available on
the Hikma website at www.hikma.com/investors/corporate-
governance/explanations-under-the-uk-corporate-governance-code/
and on page 77 of the 2016 Annual Report.
The Board does not view Ali Al-Husry as an Independent Director due
to the length of his association with the Company, because he was an
executive with Hikma prior to listing and because of his involvement
with Darhold Limited, Hikma’s largest shareholder. However, he
continues to bring to the Board broad corporate financial experience
and a detailed knowledge of the MENA region, which is an important
and specialist part of the Group’s business.
The Board does not view Jochen Gann as an Independent Director
as his appointment was part of the shareholder agreement with
Boehringer Ingelheim, a major shareholder and his primary employer.
However, Jochen brings significant M&A and corporate finance
experience with a particular focus on the pharmaceutical sector.
Corporate governance | Governance report
Evaluation and performance
The Board re-assessed its approach to its external evaluation during
the first quarter of the year. The conclusion from this exercise was
that a full, externally moderated, interview-based evaluation should
be conducted every three years. The first such evaluation took place
during the second and third quarter of 2017.
Progress on prior year
Observations
Action taken
Strategic oversight A dedicated annual strategy session was once
again held providing an opportunity for the
Board to discuss important strategic issues
with management.
Process
The process was co-ordinated by the Senior Independent Director
at the request of the Chairman. Lintstock, an external moderator which
has no other connection with the Company, led the process with a
thematic questionnaire and interview process. Lintstock reported
independently to the Chairman and the Senior Independent Director.
The results were discussed at the Board and action points agreed.
Review of past
decisions
Further time was dedicated to reviewing past
decisions after meetings giving greater insight
into areas for improvement.
Length of reports
and presentations
Board materials were refined to further
enhance the quality of discussion, use of time,
and ability for Directors to focus on key issues.
Risk management
Processes supporting the risk management
framework were enhanced. A new risk director
was appointed to ensure a greater focus on risk
identification and mitigation.
Executive and
management
succession
A series of new internal and external
assessments and training programmes were
put in place across the Group to develop
executive and management capability.
Chairman’s appraisal
The Independent Non-Executive Directors regularly met in private
during the course of the year. The performance of the Chairman and
the Board was discussed during these meetings. Additionally, the
Senior Independent Director met with the Independent Non-Executive
Directors to undertake a formal appraisal of the performance of the
Chairman and subsequently fed back comments to him. The conclusion
of this process was that the Chairman gave clear leadership and
direction to the Board, and that the Board is run in an appropriate
and effective manner.
Director appraisal
The Chairman reviewed the performance of each of the Directors
during the year and concluded that each Director contributes
effectively to the Board and devotes sufficient time to their role.
The Nomination and Governance Committee considered the evaluation
and concluded that each Director, with the exception of Dr Ronald
Goode who is due to retire, be recommended to shareholders for
re-election at the 2018 AGM.
The results of the evaluation process formed part of the Chairman’s
appraisal of the overall effectiveness of the Board and its members.
The Directors suggest and promote improvements that they consider
should be progressed outside the evaluation timetable.
Conclusions and action
The Board considered that it continued to operate effectively with
particular strengths in the following areas:
— Board composition
— Understanding of the key markets in North America and the
MENA region
— Interaction and atmosphere providing for good, healthy discussions
and challenges
— Non-Executive Directors provide support and constructive challenge
to management
— Oversight of risk management
New action points
Observations
Action being undertaken
Operational focus
Stretched
management
Communication
lines
In order to enhance the executives’ focus on
operations, the Board separated the combined
role of Chairman and Chief Executive Officer.
The Executive Chairman role enables the
entrepreneurial talents of the Chairman to
be retained.
The executive team has been enhanced by the
appointment of dedicated personnel in the
scientific and information areas. The new Chief
Executive Officer will be reviewing and further
enhancing the team over the medium-term.
To enhance the communication of and
discussion around more challenging
matters, the Board has allocated more time
for meetings without executives present.
The Board is considering specific meetings
between the Chairman and the Independent
Directors.
West-Ward
Columbus
integration
The Board has requested that management
undertake a review of the status of the WWC
integration and the successes and challenges
of the acquisition project.
75
Hikma Pharmaceuticals PLC
Governance report continued
Board and Committees
Board
For additional information
on the Board:
Board responsibility
www.hikma.com/investors/
corporate-governance/board-
roles-and-responsibilities/
Board regular items and
responsibilities
www.hikma.com/investors/
corporate-governance/board-
roles-and-responsibilities/
Full schedule of matters reserved
www.hikma.com/investors/
corporate-governance/board-
roles-and-responsibilities/
Internal and external advisers
www.hikma.com/investors/
corporate-governance/board-
roles-and-responsibilities/
Board Committees
The Board has an extensive
workload and, therefore, has
delegated the detailed oversight
of certain items to four Board
Committees: Audit; Nomination
and Governance; Compliance,
Responsibility and Ethics Committee
(‘CREC’); and Remuneration. Each
Committee has terms of reference
which were reviewed during the
year. Copies are published on the
Hikma website at www.hikma.com/
investors/corporate-governance/
key-committees/ and are available
for inspection at the registered office
at 1 New Burlington Place, London,
W1S 2HR or by contacting
cosec@hikma.uk.com.
Board Roles
Executive Chairman and Chief Executive Officer (‘CEO’)
As part of the succession process, the Board created new role profiles for the positions of Executive Chairman
and CEO. The Group’s executives report to the CEO, who reports to the Executive Chairman. The role profiles
are reviewed annually and detailed on the Hikma website at www.hikma.com/investors/corporate-governance/
board-roles-and-responsibilities/:
Senior Independent Director
The Senior Independent Director responsibilities include:
— Involvement in setting the Board agenda, actions points and the minutes
— Leading the Board in matters of board composition, effectiveness and evaluation, particularly in relation
to the performance of the Chairman
— Providing a communication channel between the Executive Chairman and the Non-Executive Directors
— Leading the NEDs on their assessment of the appropriateness of the governance structure and safeguards
for shareholders
— Acting as an alternate point of contact for shareholders and maintaining contact with principal investors
and representative bodies
Executive Vice Chairman
When required, the Executive Vice Chairman acts as alternate to the Executive Chairman and is another point
of contact and sounding board for management and Directors.
Company Secretary
The Company Secretary reports to the Chairman and supports him and the Senior Independent Director in
the delivery of their roles, particularly in relation to information flow and setting the Board agenda.
Audit:
— Financial reporting
and performance
— Internal controls
— Risk management
— Internal audit
— External audit
Nomination and
Governance:
— Appointments
— Training and induction
— Board composition
— Succession planning
— Board evaluation
— Corporate governance
CREC
— Anti-money
laundering, bribery
and corruption
— Compliance
— Speak-Up
— Code of Conduct
Remuneration:
— Remuneration policy
— Executive
remuneration
— Performance plans
— Management
incentivisation
See page 78
See page 82
See page 84
See page 86
Executive Committee
The CEO chairs the Group Executive Committee, which develops strategic proposals to the Board, makes operational
decisions and oversees risk control.
76
Governance
2017 key events
Shareholder engagement
Further to the announced appointment of a Chief Executive Officer
and changes to the Chairman’s role, the Board undertook a series of
meetings with major investors and relevant bodies in order to discuss
the governance and remuneration aspects of the change. The Board
is taking these comments into consideration in its plans for further
development over the course of 2018 and beyond.
Hikma is committed to clear and open communication with
shareholders and stakeholders. If there are matters on which
additional explanation is required, Hikma is always happy to discuss
them. Please contact the Company Secretary in the first instance by
writing to cosec@hikma.uk.com.
The Board maintains regular dialogue with shareholders through its
investor relations programme, directed towards ensuring a mutual
understanding of objectives. The principal ongoing communications
with shareholders are through the publication of Hikma’s Annual
Report and Accounts, interim results and trading statements.
The Chairman meets major shareholders periodically to discuss
governance and strategy issues in order to understand their views
on the Company and to ensure their views are communicated to the
Board as a whole. Shareholders are encouraged to attend the Annual
General Meeting (‘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.
All Directors are expected to attend the AGM and full attendance has
been achieved other than when exceptional personal circumstances
have intervened.
Electronic communications
Hikma recently wrote to shareholders to provide them with an
opportunity to confirm how they wish to receive communications
from the Company to help reduce its environmental impact. Hikma’s
preference is to use the Company website for communications,
rather than in paper form. Shareholders are encouraged to visit the
website to access the Company’s Annual Reports and half-year and
final results presentations.
For and on behalf of the Board of Directors of Hikma
Pharmaceuticals PLC
Peter Speirs
Company Secretary
13 March 2018
March
— Roadshows in London,
Paris and Frankfurt.
May
— Annual General Meeting.
August
— Trading update.
— Roadshow in London.
November
— Trading update. Investor
conference in London.
— Healthcare conference
in London.
Corporate governance | Governance report
January
— Healthcare
conference in
San Francisco.
April
— 2016 Annual report
published.
— Roadshow in New York
and Boston.
June
— Healthcare conference
in California and
New York.
— Two healthcare
conferences in London.
September
— Roadshow in New York
and Boston.
— Healthcare conferences
in New York and
London.
77
Hikma Pharmaceuticals PLC
Audit Committee
Letter from the Chair
Assessing and
quantifying
2017 Highlights
Dear Shareholders
— Re-assessed our medium-term projections, longer-term prospects
and adjusted asset valuations accordingly
— Supported management’s assessment and enhancement proposal
for information system and operational processes
— Reviewed the effectiveness of the Enterprise Risk Management and
developed an enhancement programme
— Deepened the relationship with both the internal and external auditors
— Focused management on delivering the process enhancements
from the internal audit programme
2018 Priorities
— Continuing to develop the risk controls and reporting capabilities
— Optimising the financial reporting, processing and forecasting capabilities
Allocation of time
Risk
Internal audit
Financial statements
Forecasts
Financial performance
Acquisitions
16%
5%
23%
7%
30%
19%
Members and attendance
Member
Pat Butler (Chair)
Dr Ronald Goode
Robert Pickering
Dr Pamela Kirby1
John Castellani
Nina Henderson2
Michael Ashton3
Meetings
Attendance
6/6
6/6
6/6
5/6
6/6
5/6
3/3
100%
100%
100%
83%
100%
83%
100%
1. Dr Pamela Kirby was unable to attend one meeting due to changes to the meeting timing
which caused a conflict with another commitment.
2. Nina Henderson was unable to attend one meeting due to a commitment that had been
scheduled prior to joining the Board.
3. Michael Ashton retired following the 2017 May AGM.
Pat Butler, the Independent Chair has extensive experience of financing, accounting,
risk and internal control matters and is therefore considered to have recent and relevant
financial experience. All members are independent and when considered as a whole, have
competence relevant to the sector in which the Company is operating. Dr Ronald Goode,
Dr Pamela Kirby and John Castellani all have extensive pharmaceutical experience.
78
This report, summarises the work of the Committee over the last year,
including the matters that we have found challenging, where careful
judgement has been required.
Impairment
The most significant financial issue that the Committee considered
during the year and up to the date of this report was the impairment
of the West-Ward Columbus (‘WWC’) assets, which amounted to
$1,084bn. The Group and divisional management undertook an
extensive impairment review in advance of the final results for the
year ended 31 December 2017.
The Committee focused on scrutinising the business and financial
projections that underpin the assessment of the asset’s value. The
key judgemental areas for the Committee were the timing of launch for
products in development and the projections of revenue and margins
associated with those products. The Committee also considered the
longer-term prospects for the business in light of changing industry
and market environment in US generics. Management’s expectations
from the WWC existing products and pipeline worsened during the year
chiefly as a result of feedback from regulatory authorities relating to
key products in development, the changing pricing environment in
the US market, and the relative positions of generic competitors.
As part of the exercise, the Committee requested that management
consider particular worst-case scenarios, and extend sensitivity on
revenue and margin assumptions. It also challenged the probability
assumptions of other scenarios in order to ensure appropriate stress-
testing of the key assumptions. As a result of the exercise, the Committee
determined that the impairment value was appropriate.
Significant judgements
The Audit Committee considered and discussed the following
important financial matters:
— Impairment and fair value: Further details are provided above.
The Committee reviewed and challenged the estimate of the fair
value of assets and liabilities. Changes to management’s medium-
term expectations for the Group primarily relating to WWC, including
sales, products under development, co-development agreements
and contract manufacturing agreements, led to an impairment
of $1,105bn.
— Revenue recognition: The Committee reviewed policies for revenue
recognition and the application by management of the policies in
relation to significant products where the potential for returns and
rebates was high. The Committee was satisfied that the review by
management validated the approach to revenue recognition and
took account of changes in the environment for those products
during the year.
Corporate Governance | Committees | Audit
— Taxation: The Group’s worldwide operations are highly integrated
and involve a number of cross-border supply chains. There is
complexity and judgement in estimating the potential tax liabilities
in various jurisdictions. The Committee reviewed the appropriateness
of the disclosures in the Annual Report and considered the advice
from professional services firms and management in this regard.
— Accounts receivable and inventory: The Committee reviewed
the reports on major receivables and inventory provisions. The
Committee considered management’s valuation of inventory, plans
to ensure payment and relevant provisions.
— Rebates and chargebacks: The Committee assessed the reports on
the processing of chargebacks and rebates in the US. This is a highly
judgemental area and applies to a significant proportion of Group
revenue. The Committee considered the control and modelling
environment and the appropriateness of associated provisions.
— Going concern: The Committee assessed the going concern position
when preparing the annual and half-yearly financial statements.
The Committee took into account Hikma’s forecasts and budget,
borrowing facilities, contingent liabilities, medium and long-term
plans, and financial and operational risk management.
— Viability: The Committee received the medium-term business
projections and considered the scenarios that could impact those
projects and the ability of the Company to remain viable.
Fair, balanced and understandable
Hikma is committed to clear and transparent disclosure and seeks to
continuously improve the clarity of its reporting. At the request of the
Board, the Audit Committee considers whether Hikma’s Annual Report
is fair, balanced and understandable and that the narrative section of
the report is consistent with the financial information. The Committee’s
assessment is underpinned by a comprehensive review conducted
by the Reporting Committee, which consists of the leads for finance,
investor relations, and governance and is supported by divisional
and functional heads, as required. The Reporting Committee’s
activities include:
— Initiating the first review of the Annual Report in October, considering
external developments, issuing guidance to contributors and
identifying areas for improvement
— Obtaining input from external advisers, including the auditors,
brokers and public relations advisers
— Reviewing the disclosures as a whole
— Overseeing a verification process to ensure the accuracy
of disclosures
Each member of the Audit Committee and the Reporting Committee
was satisfied that the 2017 Annual Report is fair, balanced and
understandable and recommended the adoption of the report
and accounts to the Board.
The most significant financial issue that the
Committee considered was the impairment
of the WWC assets.”
External audit
The external audit was undertaken by PricewaterhouseCoopers LLP
(‘PwC’) as it has been since their appointment in May 2016, following a
competitive tender process. Following a review of the effectiveness and
the efficiency of the 2016 year-end process, Mr Mark Gill was appointed
as the senior statutory auditor in May 2017. As in previous years, the
Committee maintained regular contact with the auditors throughout
the year. The Committee regularly reviews the work of the external
auditors and undertook an assessment of the auditors’ performance
and independence and in doing so examined the following issues
during the year:
— Audit quality and technical capabilities: The Committee evaluation
and review of the 2016 year-end includes an assessment of the
work of the auditors. The Committee considered that the auditors
undertook a highly effective and in-depth assessment and
verification exercise and that the level of expertise was very high.
The Committee considered that improvements could be made in
communication channels and process timing. The Committee feeds
back its comments on the auditors’ performance as part of the
regular meetings it has with them without management present,
and believes that there is a strong, appropriate and open relationship
between the audit team leadership, the Audit Committee and
management.
— Independence: The Committee regularly reviews the independence
safeguards of the auditors and remains satisfied that auditor
independence has not been compromised.
— Non-audit fees: The Committee’s policy is that the external auditors
should not undertake any work outside the scope of their annual
audit. The Committee has discretion to grant exceptions to this
policy where it considers that exceptional circumstances exist and
that independence can be maintained. PwC provided training on
IFRS 15, 9 and 16 and services related to the reduction in the capital
of an Irish subsidiary that must be provided by the auditor for a cost
of $33,000.
Statutory audit services are conducted in compliance with the
Competition and Markets Authority Order, and a competitive audit
tender process was undertaken in 2015.
Auditors’ fee ($m)
$2.4m
PwC
1 Jan –
31 Dec 2017
1 Jan –
31 Dec 2016
100%
$2.4m
100%
$0.0m
100%
$2.8m
100%
$0.6m
Audit related fees
Tax services
Other non-audit services
Non-audit related fees
79
Hikma Pharmaceuticals PLC
Audit Committee continued
Internal control
The Board confirms that it is ultimately responsible for the effectiveness
of the Group’s systems of internal controls and risk management and
that those systems remain effective. The Board is satisfied that the
Group’s systems for internal control have been in place throughout the
year under review and up to the date of approval of the Annual Report
and Accounts. In making this assessment, the Board takes into account:
— Risk: The principal risks and uncertainties and risk management
report, detailed on pages 58 to 65 form a fundamental part of the
Company’s approach to designing and implementing new and
enhancements to existing controls.
— Internal audit: The Committee receives regular reports from the
The key elements of our internal control framework are as follows:
— A documented and disseminated reporting structure with clear
policies, procedures, authorisation limits, segregation of duties
and delegated authorities
— Written policies and procedures for material functional areas with
specific responsibility allocated to individual managers
— A comprehensive system of internal financial reporting that includes
regular comparison of results against budget and forecast and
a review of KPIs, each informed by management commentary
— An established process for reviewing the financial performance
and providing support to our joint ventures and associates together
with direct support from the Hikma finance function
internal auditors who assess the Company’s process, identify areas
for improvement, monitor progress, and undertake their own risk
assessment.
— Annual budgets, updated forecasts and long-term business plans for
the Group that identify risks and opportunities and that are reviewed
and approved by the Board
— Financial performance: The Group reporting and forecasting reports
reviewed by the Board highlight deviations from expectations and
management’s operational commentary.
— Ethics: The business integrity and ethics procedures and controls
that are led by the Compliance, Responsibility and Ethics Committee.
— Governance: The Board and Group-level controls and processes that
make up our approach to governance that is led by the Nomination
and Governance Committee and includes all appropriate financial
controls and matters reserved.
— External auditors: The Committee and Chair have a regular
and confidential dialogue with the external auditors.
The Board monitors the ongoing effectiveness of the system and
encourages continuous improvement. In the previous report, the
Committee identified two areas for improvement. The first, related
to ABC activities in the US, has been completed. The second, related
to enhancing the Company’s approach to information technology
and associated standardising and streamlining processes is a
significant project. During the year, the Board reviewed and approved
management’s plans for making these enhancements which will take
place during 2018 and 2019.
The Committee received regular reports from the Company’s internal
auditors, EY, regarding their assessment of the Company’s internal
control environment and has identified the following key areas for
management to advance:
— Improving the processes and data that support the automated
financial accounting platform
— Developing the business partner capabilities of the finance function
— Processing of returns and rebates in a more timely manner
— Ensuring that payroll responsibilities are segregated in all sites,
including those with low numbers of staff
— Assigning research and development costs on a product specific basis
— A defined process for controlling capital expenditure which is
detailed in the governance framework
Internal audit
EY has continued to perform the Group’s global internal audit function
and feedback into the enhancement to Group internal controls, as
detailed above. EY assess all group facilities and all relevant processes
over a three year period. For major sites, assessments are more
frequent. Management is required to respond to findings within a short
period and, where necessary, complete all process improvements
within two years, with 80% of high risk items being completed within
one year. There is a regular programme of interaction between EY
and the Committee:
Key internal audit events
May
August
The Committee Chair meets EY at
the Hikma head office in order to
undertake a thorough review of the
internal audit findings to date and
the management responses.
EY report their initial findings to
the full Committee. The Committee
meets with EY without
management present.
November
December
The Committee Chair has a further
meeting with EY to undertake an
in-depth review of the full year
audit findings, review the results of
the risk assessment that is
undertaken in conjunction with
management and consider the
plan for the following year.
EY report their full year findings,
risk assessment and plan for the
following year to the Committee.
The Committee meets with EY
without management present.
80
Corporate Governance | Committees | Audit
Additional information
Copies on the work and policies of the Committee are available at the
Company’s registered office, 1 New Burlington Place, London W1S 2HR
or by contacting cosec@hikma.uk.com.
Alternatively please visit our website for more information of the below.
— Calendar of events
— Internal and external advisers
— Responsibilities and terms of reference
www.hikma.com/investors/corporate-governance/key-committees/
audit-committee/
Going concern and viability
The Committee oversees the Group’s going concern and viability
position, which is reported on page 65.
Taxation
The Committee received reports from the Head of Tax regarding the
tax implications of changes in the structure of the business. These
structural changes were in response to the Board’s desire to ensure
close operational oversight of certain facilities by the divisional
leadership and to move responsibility for core operational functions
to a global level. The Committee considered the resulting impact on
the effective tax rate and the deferred tax assets in key markets. The
Committee reviewed management’s proposals to deliver sufficient
financial resources for certain subsidiaries. In accordance with the
governance principles for the Group, compliance related taxation
matters are considered by the CREC.
Financing
The Committee received and considered reports from management
regarding the financial assets and liabilities of the Group. The Group
has reduced its overall debt using free cash flow, whilst ensuring that
sufficient facilities are available to fund future capital projects.
IT capability
The Committee received reports from the Chief Information Officer
regarding the current status of the Group’s information infrastructure and
the medium-term plan to enhance the operational processes to enable
the Group to maximise the value from the platforms. The Committee
supported efforts to centralise group processes and encouraged the
appointment of new personnel for newly centralised functions.
Risk
The Committee oversees the work of the Group’s risk function, which
is reported on pages 58 to 65. The Committee has ensured that the
Board has been fully involved in the annual review of the principal risks
and uncertainties on pages 61 to 64 and the Group’s risk appetite on
page 59.
As ever, if you have any questions, please do not hesitate to contact me.
Pat Butler
Chair of the Audit Committee
13 March 2018
81
Hikma Pharmaceuticals PLC
Nomination and Governance Committee
Letter from the Chair
Enhancing leadership
2017 Highlights
Dear Shareholders
— Undertook an extensive search process resulting in the appointment
of a new Chief Executive Officer in February 2018
— Completed the implementation of the succession plan for Independent
Directors and Committee Chairs
— Undertook an assessment of the Company and executive management
in order to further develop succession planning
— Enhanced the controls related to the delegation of authority and reporting
to the Board
2018 Priorities
— Developing a new plan for independent succession
— Considering additional board experience requirements
— Renewing the executive succession plan
Allocation of time
Skills and experience
Independence
Diversity
Succession
Corporate governance
12%
12%
16%
30%
30%
Members and attendance
Member
Meetings
Attendance
Robert Pickering (Chair)
Mazen Darwazah
Pat Butler1
Nina Henderson
Michael Ashton2
4/4
4/4
3/4
4/4
2/2
100%
100%
75%
100%
100%
1. Pat Butler was unable to attend one meeting due to a prior commitment with another
organisation.
2. Michael Ashton retired following the 2017 May AGM.
As in previous years, the Nomination and Governance Committee has
considered succession planning for Independent Directors and executive
management, governance, board structure and board effectiveness.
Executive succession
During 2016, the Committee considered potential internal candidates
for the position of Chief Executive Officer (‘CEO’). Following discussions
with the Chairman and CEO regarding his desire to reduce his executive
involvement, the Committee concluded that the Group should
undertake an external search process in 2017. The Committee focused
the search on candidates with the necessary depth of pharmaceutical
experience, vision of where to lead the Company and ability to further
develop the executive team.
The Committee spent a significant amount of time developing and
implementing its plan to find a new CEO. The Committee oversaw
the executive search process that was undertaken by Spencer Stuart
and ensured that the Board and executive team had a thorough
understanding of how the final candidate would fit into the organisation.
Role profiles for the CEO and Executive Chairman were carefully
developed. The profiles allow an appropriate sharing of responsibilities
whilst ensuring that the CEO is responsible for delivering the
Group’s strategy.
Independent succession
With the retirement of Dr Ronald Goode in May 2018, the Company will
have completed the 2014 succession plan for the orderly replacement
of longer-serving independent directors who joined when the Company
listed. The Committee is cognisant that, following the appointment
of an additional executive director and Dr Ronald Goode’s retirement,
there will be an equal balance of independent and non-independent
directors. During 2018, the Committee will develop arrangements for
further succession of independent directors and will consider
additional appointments in order to ensure an independent majority
and the right mix of skills and experience.
Independent Non-Executive Directors are normally expected to serve for
up to nine years. They may be invited to serve for longer, but additional
service beyond nine years is subject to particularly rigorous review.
Experience and training
The Committee continues to believe that a longer induction period
is desirable for new independent directors to allow for building
understanding of the business and the transfer of knowledge and
relationships associated with chairing committees. The Committee
believes it is important for all directors to have significant international
experience at an executive level, a challenging yet consensual style,
and the highest level of integrity. The Committee regularly considers
82
Corporate Governance | Committees | Nomination and Governance
whether there may be gaps in fulfilling the specific and in-depth
experiences that the Board requires as a whole, which focuses
on the following areas:
— Business environment in both the US and the MENA
— Pharmaceutical manufacturing and distribution
— Development of new generic pharmaceutical capabilities
— Listing regulation and governance
The Company supports Directors in their continued development.
As the Directors are highly experienced, their training needs tend to
be either ensuring awareness of changes in the business, political
and regulatory environment, or bespoke training and mentoring on
a particular area for development. Therefore, the Company financially
supports specific training requests and ensures that Directors are
briefed by internal and external advisers on a regular basis.
Commitment and interests
The Committee considers the commitment of all Directors both in terms
of dedication to the role and their time availability. In order to ensure
an appropriate balance of skills and diversity across the boardroom,
the Committee has made accommodations to the board calendar
to maximise availability and has acknowledged that there are times
when this may mean that full attendance may not be achieved. The
Committee has concluded that all Directors are fully dedicated, commit
an appropriate amount of time to their roles, and are readily available at
short notice. When seeking new directors with the experience required,
there are occasions when limited compromises on availability are
required in order to strengthen the Board. The Committee monitors the
external appointments of directors from both an availability and conflict
of interest perspective, whilst noting that experiences with other
organisations can enhance a Director’s ability to perform the role.
Governance
As part of the Committee’s responsibilities, it regularly reviews the
internal governance and control processes and keeps abreast of
external governance developments. This year, the Committee focused
on enhancing the matters reserved to the Board in terms of the
coverage of activities, clarity of the powers delegated, and management
focus on reporting and situations requiring referral. Additionally, the
Committee reviewed and enhanced the Group’s defence arrangements.
Re-election
Each member of the Board will stand for election or re-election at the
2018 AGM, with the exception of Dr Ronald Goode who will step down
at the close of the meeting. The position of each Board member was
closely reviewed during the year as part of the consideration of
succession arrangements, consideration of independence issues, the
Board and Committee evaluation processes and the ongoing dialogue
between the Executive Chairman and the Senior Independent Director.
Diversity
Hikma’s inclusive workplace welcomes different cultures, perspectives,
and experiences from across the globe. Hikma welcomes variety and
treats all employees equally regardless of any actual or perceived
characteristic. Hikma is committed to employing and engaging talented
people, irrespective of their race, colour, religious creed, age, sex,
marital status, national origin, present or past history of mental or
physical disability and any other factors not related to a person’s ability
to perform a role. Since its founding, Hikma has actively promoted
gender diversity across its operations and continues to have excellent
diversity in terms of culture, age, background, skills and experience.
Hikma has successful empowerment and talent development
programmes to help all employees make the most of their potential.
The Committee focused on depth of
pharmaceutical experience, a vision of
where to lead the Company and the ability
to further develop the executive team.”
The Board has not set specific, measurable diversity objectives
because it needs flexibility to recruit the right candidates. The Board
considers that it has always demonstrated strong ethnic diversity.
The Committee was pleased to be able to improve gender diversity
over the past few years but recognises that the current level of female
representation is not sufficient for a leading international organisation.
As the Committee considers appointing an additional independent
director over the course of 2018, it will seek to identify candidates
who bring the right skills and experience, as well as the potential to
improve the gender balance. The Committee continues to require
the external search consultants to actively seek female candidates
and to ensure that a significant proportion of long and shortlisted
candidates are female.
As Senior Independent Director, I am available at any time to discuss
with shareholders any matter of concern.
For and on behalf of the Nomination and Governance Committee
Robert Pickering
Chair of the Nomination and Governance Committee
13 March 2018
Additional information
Copies on the work and policies of the Committee are available at the
Company’s registered office, 1 New Burlington Place, London W1S 2HR
or by contacting cosec@hikma.uk.com.
Alternatively please visit our website for more information of the below.
— Director recruitment process
— Calendar of events
— Internal and external advisers
— Responsibilities and terms of reference
www.hikma.com/investors/corporate-governance/key-committees/
nomination-and-governance-committee/
83
Hikma Pharmaceuticals PLC
Compliance, Responsibility and Ethics Committee
Letter from the Chair
Strengthening integrity
and human dignity
Dear Shareholders
This is my first letter to you as Chair of the Compliance, Responsibility
and Ethics Committee. My first task is to thank Dr Ronald Goode, both
for establishing this Committee and our Anti-bribery and Compliance
(‘ABC’) programme, as well as providing excellent support and advice
during the transition of the CREC Chair.
This year we have focused the report on the matters that occurred
during the year. Further detail on the structure of our ABC compliance
and integrity programme is available on our website.
Commitment to integrity
The Committee is very proud of Hikma’s commitment to the highest
standards of business integrity, including the zero tolerance of bribery
and corruption and being a founding member of the World Economic
Forum’s Partnering Against Corruption Initiative. Whilst the Company
operates in some markets that are considered high risk, it has been
pleasing to note that Hikma’s performance and leadership on business
integrity is admired amongst our regulators, customers and suppliers.
ABC programme
Due to the ‘top-down’ commitment of our senior management and the
effectiveness of our compliance team, our ABC programme is now well
embedded into the organisation. The Committee receives regular
reports on issues arising and oversees the continued improvement of
the programme. Further to the report last year, the team has addressed
the issues identified in our most recent risk assessment by enhancing
the relevant processes in our US businesses. I am pleased to report that
our US ABC efforts are now fully integrated into our global programme.
5/5
5/5
5/5
5/5
5/5
100%
100%
100%
100%
100%
Under the guidance of the General Counsel, we have brought the ABC
activities into the internal audit programme. The ongoing monitoring
and review by the internal auditors ensures that the ABC programme
continuously improves. In the view of the Committee, the implementation
of internal audit practices demonstrates that we have successfully
taken our ABC programme from initiation to the current fully
operational phase.
During the year, the Compliance department developed and tested a
new process and platform for dealing with the complicated challenges
associated with third-party risks. The system will be implemented
during 2018.
2017 Highlights
— Successful transition of Committee Chair
— Integrated US compliance into the global programme
— Implemented ABC enhancements from a recent risk assessment
— Promoted and further developed online training tools for all employees
— Advanced the anti-trust, anti-money laundering and trade sanctions
programme
2018 Priorities
— Promote continued ABC and CR activities across the Group
— Further develop our human dignity programme
— Test and improve the systems that we have implemented
Allocation of time
Anti-trust, AML and anti-trade
sanctions
Corporate governance
Risk assessment
CR (including human dignity)
ABC operations
13%
18%
7%
18%
44%
Meetings
Attendance
Members and attendance
Member
John Castellani (Chair)
Mazen Darwazah
Pat Butler
Dr Ronald Goode
Dr Pamela Kirby
84
Corporate Governance | Committees | Compliance, Responsibility and Ethics
We have successfully taken our ABC
programme from initiation to the current
fully operational phase.”
Ethical issues
The Committee oversaw the Company’s response to ethical issues
arising during the year, including the potential misuse of products
by Departments of Corrections in the US.
I am available at any time to discuss with shareholders any matter
of concern.
For and on behalf of the Compliance, Responsibility and Ethics
Committee
John Castellani
Chair of the Compliance, Responsibility and Ethics Committee
13 March 2018
Additional information
Copies on the work and policies of the Committee are available at the
Company’s registered office, 1 New Burlington Place, London W1S 2HR
or by contacting cosec@hikma.uk.com.
Alternatively please visit our website for more information of the below.
— Calendar of events
— Internal and external advisers
— Responsibilities and terms of reference
www.hikma.com/investors/corporate-governance/key-committees/
cre-committee/
— Commitment to integrity
www.hikma.com/sustainability/global-frameworks/
— Code of Conduct
www.hikma.com/about/ethics-and-compliance/code-of-conduct/
85
Training
Following the development of an online ABC training module last year,
the Compliance department have rolled out the application to all Group
sites and integrated it with our HR on-boarding activities. Additionally,
the application has been further enhanced with the addition of new
modules which enhance understanding of our commitment to integrity.
The Board has fully supported the training programme, which all
directors, officers and senior executives have completed.
Code of Conduct
The Committee continues to oversee the development and promotion
of the Group’s Code of Conduct, which embodies the important moral
and ethical values that the Company seeks to promote. The Code
guides all the Committee’s activities and is the key reference point
for all our employees.
Speak-up
The Committee continued to receive regular reports on issues
identified through the Group’s well-established speak-up
arrangements, which include anonymous reporting lines that report
directly to the Compliance department and Chair of the CREC. The
Committee remains satisfied that the procedures, which include a
committee of senior Group employees that undertake proportionate
investigations and implements corrective action, are appropriate
and effective. The Committee is pleased to report that the regional
speak-up facilities were consolidated into one group-wide application
during the year.
Anti-trust, anti-money laundering and trade sanctions
The General Counsel oversees the Group’s compliance within the
anti-trust, anti-money laundering (‘AML’) and trade sanctions legislation
and reports to the Committee in this regard. The Group has established
extensive policies and procedures to ensure compliance, which have
been reviewed by the Committee during the year. Over the course of
the year, the General Counsel provided advice to the Committee on
the changing sanctions landscape and how this affects the Company’s
operations and strategy.
Compliance with Criminal Finances Act
During the year, the Committee undertook a risk assessment exercise
in response to recently introduced tax evasion legislation from the UK
government. The Group has started implementing processes and
procedures that are proportionate to its risk of failure to prevent the
facilitation of tax evasion. The Group is steadfast in applying the
principles of the UK tax evasion legislation across all its businesses
within the Group and will continue to oversee matters of compliance.
Modern slavery
Hikma is committed to ensuring that modern slavery in the form of
forced or compulsory labour and human trafficking does not take place
in any of its businesses or supply chains across the globe. Key measures
in support of this goal include training Hikma staff on labour standards
and how to recognise and respond to any incidences of modern slavery,
undertaking periodic analysis and management of any modern slavery
risk in Hikma’s businesses or supply chains, carrying out appropriate
due diligence and engaging on the issue with supply chain partners.
Corporate responsibility
The Committee has overseen, encouraged and supported the
Corporate Responsibility programme which is so clearly linked to our
founder’s desire to improve lives, particularly through educational and
development opportunities for the least privileged. Our Corporate
Responsibility report is contained on pages 44 to 57.
Hikma Pharmaceuticals PLC
Remuneration Committee
Letter from the Chair
Aligning achievement
and performance
with pay
2017 Highlights
Dear Shareholders
— Fine tuned the performance metrics and their alignment with strategy
— Extended the 5 year holding period to 100% of shares vesting
— Restrained executive salary increases
— Reviewed management incentivisation leading to the recommendation
to renew the MIP
— Continued to embed the talent management programme
— Considered and responded to issues raised by shareholders
2018 Priorities
— Enhancing oversight of employee conditions and employee engagement
Allocation of time
Conditions in the Group
Developing practices
Corporate governance
Setting executive remuneration
Remuneration policy
18%
11%
16%
43%
12%
Members and attendance
Member
Meetings
Attendance
Dr Pamela Kirby (Chair)
Pat Butler1
John Castellani
Dr Ronald Goode
Nina Henderson2
Robert Pickering
Michael Ashton3
6/6
5/6
6/6
6/6
5/6
6/6
3/3
100%
83%
100%
100%
83%
100%
100%
1. Pat Butler was unable to attend one meeting due to a prior commitment with another
organisation.
2. Nina Henderson was unable to attend one meeting due to a commitment that had been
scheduled prior to joining the Board.
3. Michael Ashton retired following the 2017 May AGM.
As outlined in the Chairman’s statement, 2017 was a challenging year
for the business and our shareholders. The pay and incentive outcomes
for 2017 reflect this, reinforcing the Committee’s pay for performance
policy. We do, however, enter 2018 with optimism following the
appointment of Siggi Olafsson as Chief Executive Officer (CEO) and with
Said transitioning to Executive Chairman. In appointing a candidate of
Siggi’s calibre, the Committee sought to balance the need to secure his
appointment without paying more than is necessary and, importantly,
on terms allowed by our policy as it was approved by shareholders at the
2017 AGM. I provide further detail on the remuneration arrangements for
the executive directors along with other pay related matters below.
Chief Executive compensation
The Committee expended a significant effort developing a package
that was designed to attract and motivate a new CEO, whilst taking
into account the UK governance and remuneration environment.
Siggi Olafsson brings extensive experience and leadership skills that
are essential to Hikma’s future success. For an executive of his calibre,
the Committee had to take account of comparable packages in the
US based pharmaceutical companies. The Committee also determined
that the position of US CEO should not be retained following the
incumbent’s retirement in December 2017, thereby reducing the total
compensation paid to all executives. Whilst the potential performance
remuneration in the first year is within approved policy, the Committee
considered it necessary to provide the CEO with an enhanced award for
2018 only, that is limited to the lesser of 150% of base salary or 72,000
shares. Attaching to this award are stretching and specific targets that
the Board has identified as critical to our ongoing success. A sale
restriction will apply such that the full value of the shares subject to
the enhanced award will not be realisable for five years.
Performance remuneration
Following approval of policy at the 2017 AGM, the Committee has
continued to monitor and refine the performance criteria attaching
to performance remuneration in order to provide the optimum
balance between short-term financial objectives and longer-term
strategic imperatives.
In order to generate adequate returns for shareholders, the strategy
of generic pharmaceutical companies relies on a relatively small
proportion of their product portfolio. This niche portion is dominated
by products that have high barriers to entry, recently ceased to be
patent protected, or where there is a shortage in supply. Therefore,
developing these new product capabilities is critical to the Group’s
success. The financial performance targets are set at a level that
requires the delivery of new product capabilities and certain strategic
targets require the delivery of specific new product capabilities.
86
Corporate Governance | Committees | Remuneration
The year under review has been challenging for the Group and has
resulted in a significant reduction in shareholder value. Whilst the
generics environment has been challenging for us and our competitors,
management has experienced some difficulties in delivering new
product capabilities that were considered strategically critical. In light
of the Group’s performance, Said Darwazah has elected not to receive
any performance remuneration for the year ended 31 December 2017.
The MENA business has been one of the strongest-performing parts
of the Group, which has led to greater performance remuneration for
Mazen Darwazah. However, in light of the above mentioned challenges
for the Group as a whole, remuneration related to Group performance
has also been waived by the Executive Vice Chairman.
Salaries
There will be no annual base salary increases for executive directors
for 2018. Following the appointment of the CEO, and the change in
Said Darwazah’s role to Executive Chairman, the salary of the Executive
Chairman has been reduced by 20%, commensurate with the change
in his responsibilities. The Committee supported management’s
decision to apply only selective salary increases and bonus payments
to employees below the executive level to retain talent and the delivery
of strategy.
Holding periods
In response to the changing governance environment and by way of
demonstrating the Committee and management’s positive long-term
view, we have decided to extend the five year holding period for
Executive Directors and members of the Executive Committee from
50% of shares vesting to 100% of shares vesting. This change will affect
grants under the Executive Incentive Plan (‘EIP’) from 2019, therefore
applying to performance periods from the beginning of 2018.
Management incentivisation
During the year, the Committee reviewed the incentivisation
arrangements for management below the executive level. The existing
Management Incentive Plan (‘MIP’) is very well understood throughout
the organisation, strongly aligns individual and group performance
with the compensation outcome, and was the foundation for the
development of the executive performance remuneration arrangements.
Therefore, the Committee recommends to shareholders the renewal
of the MIP and asks for their support at the AGM. A summary of the
key terms of this plan is included in the AGM circular.
External views
When considering setting remuneration and determining policy,
the Committee carefully considers how its actions may be perceived
by shareholders, the business community, and the wider public. The
Committee remains abreast of remuneration commentary, reviews
feedback from shareholders, and takes into consideration the latest
views of investor bodies and their representatives. The Committee
is committed to consulting on its ideas, having undertaken four
shareholder consultations over seven years.
In light of the Group’s performance, Said
Darwazah has elected not to receive any
performance remuneration for the year
ended 31 December 2017.”
In April 2018, members of the Board will be consulting shareholders
in order to receive views and guidance on the governance and
remuneration changes that were necessary to accommodate
the appointment of the CEO and the role change for the
Executive Chairman.
Internal views
The Committee does not directly consult employees on the Policy
contained in this Report, but receives regular updates on employee
feedback through the Group HR department and the employee
engagement survey, which is conducted by an external organisation
and includes views on remuneration. The Committee considers
it is very important to ensure alignment between the compensation
for Executive Directors and all employees.
Advice and support
The Committee seeks the assistance of senior management on matters
relating to policy, performance and remuneration, but ensures that
no director or employee takes part in discussions relating to their
own remuneration or benefits.
Following a competitive tender process in 2016, Willis Towers Watson
(‘WTW’) were appointed by the Committee. WTW continued to provide
independent advice to the Committee in relation to market practice,
UK corporate governance best practice, incentive plan review and
target setting and support to our HR department. A policy fee structure
is in place for the provision of advice and is used to determine a quote
for each project before it is undertaken. The total fees for advice to
the Committee during the year were $74k (2016: $178k, as part of the
remuneration policy review). The Committee reviewed the performance
of WTW during the year and fees received, concluding that WTW
remained independent and continued to provide high-quality service
to the Committee. WTW adheres to the Remuneration Consultants
Group Code of Conduct.
As an organisation, Hikma is committed to clear and open
communication. I remain open to discussion with shareholders should
there be any matters that they wish to raise directly.
Dr Pamela Kirby
Chair of the Remuneration Committee
Additional information
Copies on the work and policies of the Committee are available at the
Company’s registered office, 1 New Burlington Place, London W1S 2HR
or by contacting cosec@hikma.uk.com.
Alternatively please visit our website for more information of the below.
— Remuneration Policy: on pages 109 to 118 of the Annual Report 2016
— Calendar of events
— Internal and external advisers
— Responsibilities and terms of reference
www.hikma.com/investors/corporate-governance/key-committees/
remuneration-committee/
87
Hikma Pharmaceuticals PLC
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
Remuneration Committee continued
Remuneration dashboard
TSR and total executive pay ($m)
The Committee seeks to ensure that executive pay
reflects the shareholder experience, including the
experience compared to the Company’s index (FTSE 250)
and sector (FTSE 350 pharmaceuticals) which influence
remuneration decisions. The graph below shows the growth
in value of £100 invested in Hikma ordinary shares against
its comparators.
Total pay to
Executive Directors ($m)
TSR
(£)
500
400
300
6.3
200
11.8
9.7
8.6
6.6
3.3
2.7
3.3
2.0
2009 2010 2011 2012 2013 2014 2015 2016 2017
Executive Director pay
Hikma Pharmaceuticals PLC TSR
FTSE 250 TSR
FTSE 350 Pharmaceuticals & Biotechnology TSR
100
0
Shareholder approval
Annual Report on Remuneration (19 May 2017 AGM)
Votes available
Votes cast
For
Against
Withheld*
240,380,475
197,743,353
97.9%
2.1%
0%
Remuneration Policy (19 May 2017 AGM)
Votes available
Votes cast
For
Against
Withheld*
240,380,475
195,676,113
85.5%
13.5%
1.0%
*
Under the Companies Act 2006 votes ‘Withheld’ are not a valid vote and, therefore,
are discounted when considering approval at a general meeting.
88
Value of executive holdings ($m)
Hikma’s executive directors and have substantial equity
interests, which strongly aligns their long-term interests
with shareholders.
Executive Director
shareholding value ($m)
Share price
($)
600
500
400
19.81
33.37
561
30.74
470
523
23.29
331
345
15.30
300
200
100
0
35
28
21
14
7
0
2013
2014
2015
2016
2017
Executive Director Shareholding
Share price
Executive equity
Executive directors are required to build and maintain a
minimum shareholding equal to at least three times base
salary.
Said Darwazah
300%
Mazen Darwazah
300%
17,458%
17,343%
Actual shareholding % of salary
Required shareholding % of salary
Share-based pay
Remuneration is weighted towards equity to further align
management and shareholders.
44%
56%
0%
20%
40%
60%
80%
100%
Cash
Cash
Shares
Shares
Corporate Governance | Committees | Remuneration
Employees
CEO and average employee change
The table below shows how the percentage change in the Chief Executive Officer’s (CEO) salary, benefits and bonus between 2016 and 2017
compared with the percentage change in the average of each of those components of pay for employees (excluding the Executive Directors).
The CEO data reflects the position of Said Darwazah as Chairman and CEO.
Salary
Benefits
Bonus
2017
2016
Percentage
change
2017
2016
Percentage
change
2017
2016
Percentage
change
CEO
$1,273,080 $1,236,000
3.0%
$101,295
$85,000
Employees ($m)
Number of employees
284
8,521
278
8,339
Average per employee
$33,329
$33,337
2.2%
2.2%
0.0%
112
8,521
94
8,339
$13,144
$11,272
19.2%
19.1%
2.2%
16.6%
$0 $2,116,299
-100.0%
37
42
8,521
8,339
-11.9%
2.2%
$4,342
$5,037
-13.8%
The Group’s pay review which took effect from 1 January 2018 awarded average percentage increases in wages and salaries of 2.0 to 3.0% for
existing employees (with certain exceptions for jurisdictions experiencing very high inflation). The nature and level of benefits to employees in the
year ended 31 December 2017 were broadly similar to those in the previous year. The increased level of benefits for the Chairman and CEO relates
to a re-assessment of medical benefits received. The total amount of bonuses paid to employees (excluding the Executive Directors) in respect
of the year ended 31 December 2017 was 11.9% lower than in 2016.
Relative importance of spend on pay
The following table sets out the total amount spent in 2017 and 2016
on remuneration of the Group’s employees and major distributions
to shareholders.
Employee cost and total executive pay ($m)
Executive Director pay
($m)
Average employee cost
($)
Distribution expense
Employee remuneration
Distributions to shareholders
2017
$485
$79m
2016
$465m
$79m
% change
from 2016
to 2017
4.3%
0.0%
Employment conditions
All employees receive a salary, pension and medical insurance
on a similar basis to Executive Directors. Additionally, all employees
participate in a cash bonus scheme, which is similar to Element A
of the EIP. The Committee reviews detailed internal and summary
benchmarking data, and is satisfied that the level of remuneration
is proportionate across the HR grades.
14
12
10
8
6
4
2
0
55,762
55,862
11.8
50,355
48,186
9.7
45,139
8.6
6.6
6.3
2013
2014
2015
2016
2017
Executive Director pay
Average employee cost
60,000
55,000
50,000
45,000
40,000
35,000
30,000
89
Hikma Pharmaceuticals PLC
Remuneration Committee continued
Remuneration and performance summary
References in this document to the ‘Regulations’ refer to The Large and Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013, with which this report complies.
Performance components
Sales
Core Profit
Share price
Dividend
Employee compensation
Shareholder implementation approval
Shareholder policy approval
Total remuneration
Executive Director
Said Darwazah
Siggi Olafsson
Mazen Darwazah
Components
Salary1
Said Darwazah
Siggi Olafsson
Mazen Darwazah
Bonus2
Said Darwazah
Siggi Olafsson
Mazen Darwazah
Share awards3
Said Darwazah
Siggi Olafsson
Mazen Darwazah
Pensions4
Said Darwazah
Siggi Olafsson
Mazen Darwazah
Other benefits5
Said Darwazah
Siggi Olafsson
Mazen Darwazah
90
2016
$1,950m
$359m
1,893p
33 cents
$465m
88.97%
N/A
-1%
-9%
-40%
3%
4%
2017
$1,936m
$328m
1,134p
34 cents
$485m
97.93%
85.49%
2016 ($000)
2017 ($000)
6,308
N/A
3,419
-44%
N/A
-18%
3,522
N/A
2,796
19%
N/A
3%
2016 ($000)
2017 ($000)
1,236
N/A
696
2,116
N/A
1,137
2,871
N/A
1,492
0
N/A
0
85
N/A
94
3%
N/A
3%
-100%
N/A
-65%
-29%
N/A
0%
N/A
N/A
N/A
-19%
N/A
31%
1,273
N/A
717
0
N/A
402
2,050
N/A
1,498
98
N/A
56
101
N/A
123
-20%
N/A
0%
N/A
N/A
168%
-29%
N/A
-40%
-19%
N/A
0%
0%
N/A
0%
2018 ($000)
(estimate)
4,185
3,840
2,867
2018 ($000)
(estimate)
1,018
1,100
717
1,528
2,475
1,076
1,459
0
895
79
165
56
101
100
123
Corporate Governance | Committees | Remuneration
Non-Executive Directors’ fees
Non-Executives
2016 (£000)
2017 (£000)
Non-Executive Directors’ average total fee5
96.2
-12%
84.6
-3.2%
2018 (£000)
(estimate)
81.9
1. Salary: The average rise for salaries across the Group in 2017 was 2-3%. Said Darwazah’s salary has been reduced in line with his change of responsibilities on becoming Executive Chairman in
February 2018.
2. Bonus: The bonus figure comprises Elements A and C of the EIP. See page 92 for further explanation. The 2018 estimate is based on target performance.
3. Share awards: 2016 figures represent 2013 LTIPs exercised during the year. 2017 figures represent 2014 LTIP and Element B of the 2015 EIP exercised during the year. 2018 is an estimation
of the value of Element B of the 2016 EIP and Element C of the 2015 EIP that are to vest in that year, using 31 December 2017 vesting percentages, share prices and exchange rates.
4. Pension: The Company did not contribute to the Executive Directors’ pensions during 2016, but has contributed in all other years. Said Darwazah and Mazen Darwazah participate in the same
pension plan as Jordanian employees, their country of employment.
5. NED fees: The average Non-Executive Director’s fee includes basic fee and Committee membership and Chair fees. Full breakdown of fees on page 107.
91
Hikma Pharmaceuticals PLC
Remuneration Committee continued
Remuneration Policy Summary
The Directors’ Remuneration Policy (the ‘Policy’) is summarised below and is detailed in full on pages 109 to 118 of the 2016 Annual Report and
can also be found on the website at: www.hikma.com/investors/corporate-governance/key-committees/remuneration-committee/. The Policy
in full was approved at the AGM held on the 19 May 2017. The Policy took effect from this date and may operate for up to three years.
Fixed elements
Base salary
Benefits
Pension
Variable elements – Executive Incentive
Plan (EIP)
Element A – cash bonus
Element B – deferred shares
Element C – restricted shares
Total remuneration
Fixed elements: operational overview
Purpose and link to strategy
Operation
Base salary
Provides a base level of
remuneration to support
recruitment and retention of
Directors with the necessary
experience and expertise to deliver
the Group’s strategy.
Base salaries for individual Executive Directors are reviewed annually by the Committee, but not
necessarily increased. Any changes normally take effect from 1 January. Salaries are set with
reference to:
— Pay increases for the general workforce; individual performance, experience and contribution;
market pay in UK listed companies of a similar size, and relevant peer companies from the
pharmaceutical sector; Company performance; and affordability.
s
t
n
e
m
e
e
d
e
x
i
F
l
Benefits
Provides competitive benefits in the
market to enable the recruitment
and retention of directors.
Pension
Provides a minimum level of pension
contribution to support a low fixed
cost and highly entrepreneurial
remuneration policy.
Salaries for individuals who are recruited or promoted to the Board may be set below market levels
at the time of appointment, with the intention of bringing the base salary levels in line with the
market as the individual becomes established in their role.
Benefits may include, but are not limited to: healthcare, school fees, company cars, and life insurance.
A defined contribution scheme and/or cash supplement in lieu of pension may be provided.
Executives currently participate on the same basis as employees in the Hikma Pharmaceuticals
Defined Contribution Retirement Benefit Plan (the ‘Benefit Plan’), which operates in accordance
with the rules relevant to employees in Jordan. 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.
Should a new executive be appointed to the Board, they would normally participate in the Benefit
Plan, according to the rules relevant to employees in the appropriate jurisdiction.
Variable elements: operational overview (EIP)
Element
Maximum award
% of salary
Payout
mechanism
Vesting period
Risks after award
Additional requirements
A
B
C
150%
Cash bonus
Immediate
— Clawback
None
150%
100%
Deferred
Shares
2 years
Restricted
Shares
3 years
— Forfeiture
— Clawback
— Share price
— Employed
— Clawback
— Share price
— Employed
50% of the total Share Award
is subject to a holding period
after vesting. These shares
may not be sold until 5 years
after grant.
Treatment under the
remuneration regulations
Cash bonus
Share award
Bonus* deferred
in shares
* The Regulations require Element C to be included in the ’Bonus’ component for reporting purposes, although it is an award of shares that will vest three years after grant.
The Company discloses the nature and weighting of the 2018 performance targets in the Policy Implementation report on pages 93 to 97. Details
of the 2017 performance targets, their level of satisfaction and the resulting performance remuneration are disclosed on pages 100 to 103.
92
Corporate Governance | Committees | Remuneration
Policy implementation 2018
Salaries, benefits and pension
The Committee considered that there should be no increases to salary in 2018. The application of benefits and pension is unchanged.
Said Darwazah’s salary has been reduced in line with his change of responsibilities on becoming Executive Chairman in February 2018.
Executive Director
Executive Chairman
Chief Executive Officer
Executive Vice Chairman
CEO additional remuneration
Salary
2018
2017
$1,018,464
$1,273,080
$1,100,000
N/A
$717,155
$717,155
Change
%
-20%
N/A
0%
In respect of Siggi Olafsson’s first year of appointment only, he is eligible for an additional potential performance related award of up to 150%
of salary or 72,000 shares (whichever is the lesser) under a bespoke deferred bonus arrangement in accordance with the policy for recruitment
(see page 114 of the 2016 reports and accounts).
Rationale
The Committee had a challenging task balancing competing factors when considering the potential additional award:
a.
The Board believes that it was essential to gain the experience and leadership skills of the CEO, particularly in ensuring that the Group’s
operations globally aligned and maximise the US business, which represents a substantial proportion of revenue;
b. There was unanimous agreement that Siggi Olafsson was the ideal candidate;
c. UK governance and remuneration practice has a strong bearing on the Committee’s position; and
d. Other global generics companies, particularly those with significant US operations, have recently awarded highly competitive up-front
packages to Chief Executives who are in a comparable position.
Operation
The award will operate on a similar basis to Element C of the EIP. The key features are:
— The award is subject to stretching performance criteria that require the CEO to achieve priorities that have been identified by the Board
as strategically and operationally critical;
— The performance criteria are measured over the year to 31 December 2018;
— The potential award would be a deferred bonus by way of an award of shares that would vest three years from the date of grant;
— The price used to determine the number of shares uses the same mechanism as the EIP;
— The award is subject to Malus and Clawback provisions in accordance with the Company’s policy; and
— The entire potential award is subject to a holding period of five years from the date of grant.
Performance targets
Due to the commercial sensitivity of the targets, a summary of the performance criteria for the potential award are detailed below. Full details
will be provided following assessment of performance:
Section
Description
Measurement
Performance Condition
Financial
Generics EBIT
Target EBIT before R&D costs for the Generics
division compared to the outcome for the year
ending 31 December 2018
Weight
35%
Generics Revenue
Target Revenue for the Generics division compared
to the outcome for year ending 31 December 2018
35%
Performance Condition
Threshold
Target
Max
Target
–10%
Target
–10%
Target
Target +10%
Target
Target +10%
Strategic
R&D
Restructuring the Company’s approach to R&D
and ensuring that new products are delivered
30%
Disclosed on measurement
Executive Incentive Plan (EIP)
The 2018 performance conditions and their weighting are set out on the following three pages.
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Hikma Pharmaceuticals PLC
Remuneration Committee continued
2018 Performance criteria: Executive Chairman
Financial
Strategic
Group EBIT
Target Group Core EBIT before R&D costs
compared to actual audited Group Core
EBIT before R&D costs for the year ended
31 December 2018
Group revenue
Target Group Revenue compared to actual
audited Group Revenue for the year ended
31 December 2018
30%
40%
30%
Alignment
Realigning the Group’s strategy, operations
and cost-base
Performance level
Performance level
Detailed targets
Disclosed on measurement
The Remuneration Committee is of the opinion that the
disclosure of high-level forward-looking targets provides
shareholders with an awareness of direction and outcomes but,
given the commercial sensitivity arising in relation to the detailed
financial and strategic targets used for the EIP, disclosing precise
targets for the EIP in advance would not be in shareholders’
interests. This avoids the risk of the Company inadvertently
providing a profit forecast or giving our international competitors
access to sensitive information or an unfair advantage. Actual
targets, performance achieved and awards made are published
at the end of the performance period so shareholders can fully
assess the basis for any pay-outs under the EIP.
Elements
A
Cash bonus
B
Deferred shares
C
Restricted shares
0%
25%
100%
150%
0%
25%
100%
150%
0%
50%
50%
100%
Total
0% award + lose 50% outstanding
Element B
100% award
250% award
400% award
Forfeiture
Budget -30%
Threshold
Budget -10%
Target
Budget
Max
Budget +10%
Outcome
Forfeiture
Threshold
Target
Max
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Corporate Governance | Committees | Remuneration
2018 Performance criteria: Chief Executive Officer
Financial
Strategic
Group EBIT
Target Group Core EBIT before R&D costs
compared to actual audited Group Core
EBIT before R&D costs for the year ended
31 December 2018
Group revenue
Target Group Revenue compared to actual
audited Group Revenue for the year ended
31 December 2018
30%
40%
30%
Alignment
Realigning the Group’s strategy, operations
and cost-base
Performance level
Performance level
Detailed targets
Disclosed on measurement
Forfeiture
Budget -30%
Threshold
Budget -10%
Target
Budget
Max
Budget +10%
Outcome
Forfeiture
Threshold
Target
Max
The Remuneration Committee is of the opinion that the
disclosure of high-level forward-looking targets provides
shareholders with an awareness of direction and outcomes but,
given the commercial sensitivity arising in relation to the detailed
financial and strategic targets used for the EIP, disclosing precise
targets for the EIP in advance would not be in shareholders’
interests. This avoids the risk of the Company inadvertently
providing a profit forecast or giving our international competitors
access to sensitive information or an unfair advantage. Actual
targets, performance achieved and awards made are published
at the end of the performance period so shareholders can fully
assess the basis for any pay-outs under the EIP.
Elements
A
Cash bonus
B
Deferred shares
C
Restricted shares
0%
25%
100%
150%
0%
25%
100%
150%
0%
50%
50%
100%
Total
0% award + lose 50% outstanding
Element B
100% award
250% award
400% award
95
Hikma Pharmaceuticals PLC
Remuneration Committee continued
2018 Performance criteria: Executive Vice Chairman
Financial
Strategic
Group EBIT
Target Group Core EBIT before R&D costs
compared to actual audited Group Core
EBIT before R&D costs for the year ended
31 December 2018
Group Revenue
Target Group Revenue compared to actual
audited Group Revenue for the year ended
31 December 2018
Branded EBITDA
Target Branded EBITDA compared to audited
EBITDA for the year ended 31 December 2018
Branded Revenue
Target Branded Revenue for the year ended
31 December 2018
20%
20%
20%
20%
10%
10%
Branded EBIT
Targeted Branded division EBIT before
R&D costs compared to the outcome for
the year ended 31 December 2018
Branded Revenue
Targeted Branded division Revenue
compared to the outcome for the year
ended 31 December 2018
Performance level
Performance level
Detailed targets
Disclosed on measurement
The Remuneration Committee is of the opinion that the
disclosure of high-level forward-looking targets provides
shareholders with an awareness of direction and outcomes but,
given the commercial sensitivity arising in relation to the detailed
financial and strategic targets used for the EIP, disclosing precise
targets for the EIP in advance would not be in shareholders’
interests. This avoids the risk of the Company inadvertently
providing a profit forecast or giving our international competitors
access to sensitive information or an unfair advantage. Actual
targets, performance achieved and awards made are published
at the end of the performance period so shareholders can fully
assess the basis for any pay-outs under the EIP.
Elements
A
Cash bonus
B
Deferred shares
C
Restricted shares
0%
25%
100%
150%
0%
25%
100%
150%
0%
50%
50%
100%
Total
0% award + lose 50% outstanding
Element B
100% award
250% award
400% award
Forfeiture
Budget -30%
Threshold
Budget -10%
Target
Budget
Max
Budget +10%
Outcome
Forfeiture
Threshold
Target
Max
96
Corporate Governance | Committees | Remuneration
Illustration of policy
The following charts show the value of each of the main elements of the compensation package provided to the Executive Directors during 2017
and the potential available for 2018 (dependent upon performance).
Said Darwazah
2018
Threshold
Target
Maximum
2017
Actual
Siggi Olafsson
2018
Threshold
Target
Maximum
1,215
52%
1,124
32%
1,124
23%
1,489
100%
1,365
41%
1,365
28%
1,365
18%
2017
Actual
N/A
Fixed
Elements A & C
Element B
255
11%
2,233
1,018
27%
764
34%
1,528
41%
2,546
48%
3,389
3,761
1,528
29%
5,289
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Total remuneration $000
Fixed
Elements A & C
Element B
1,650
50%
2,475
50%
4,400
59%
275
8%
3,290
1,100
22%
4,490
1,650
22%
7,415
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Total remuneration $000
Mazen Darwazah
Fixed
Elements A & C
Element B
2018
Threshold
Target
Maximum
2017
Actual
924
56%
825
34%
825
24%
924
59%
538
33%
179
11%
1,641
1,076
40%
1,793
47%
717
26%
2,717
1,076
28%
1402
46%
235
15%
1,562
3,793
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Total remuneration $000
The following notes are applicable to the above calculations:
— Salary, benefits and pension comprise ‘Fixed’ remuneration.
— Elements A and C of the EIP comprise the Bonus and Element B comprises the share award. Elements A, B and C of the EIP are made in the
year after the performance is achieved (e.g. for the 2018 illustration, the bonus would be paid and the share awards be made in 2019. The share
awards would vest two to three years later). Please note that the Remuneration and performance summary on page 90 uses share awards
vesting (i.e. actual shares received, not those granted) during the period in order to make clear the difference between potential remuneration
and what the executive receives in practice.
97
Hikma Pharmaceuticals PLC
Remuneration Committee continued
Annual report on remuneration
All of the information presented on the following two pages have been audited by PwC. For the year ended 31 December 2017, the Group’s policy
on remuneration was implemented as set out below.
Single total figure
The following table shows a single total figure of remuneration in respect of qualifying services for the 2017 financial year for each Executive
Director, together with comparative figures for 2016.
Director
Said Darwazah
Mazen Darwazah
Salary $
Benefits $
Bonus
(EIP Elements
A & C) $
Shares
(LTIP and EIP
Element B) $
Pension $
Total $
1,273,080
101,295
0
2,049,637
98,330
3,522,346
Year
2017
2016
1,236,000
85,000
2,116,299
2,870,939
Nil
6,308,238
2017
2016
717,155
122,500
402,324
1,497,983
55,871
2,795,833
696,267
94,000
1,136,753
1,491,746
Nil
3,418,766
The EIP performance criteria for 2017 are detailed on pages 100 to 103 and criteria for the LTIP that vested on 29 May 2017 are on page 99.
Benefits
Said Darwazah received transportation benefits of $85,000 (2016: $85,000) and medical benefits of $16,295 (2016: $nil). Mazen Darwazah
received transportation benefits of $94,000 (2016: $94,000) and medical benefits of $22,500 (2016: $nil). Social security payments made in
Jordan, that are required to be paid by Jordanian law, are not considered to be a benefit.
Pension
The Company did not contribute to the Executive Directors’ pension during 2016, but resumed contributions in 2017 on the same basis as previous
years. Said Darwazah and Mazen Darwazah participate in the Hikma Pharmaceutical Defined Contribution Retirement Benefit Plan (the ‘Benefit
Plan’) on the same basis as other employees located in Jordan. The Executive Directors do not receive personal pension contributions from the
Group. Under the Benefit Plan the Group matches employee contributions made, which are fixed at a maximum of 10% of applicable salary.
Participants become entitled to all of the Group’s contributions once they have been employed for 10 years. Before that point, there is a staggered
scale which starts at three years of employment. The Executive Directors have served for in excess of ten years and will receive their benefits under
the Benefit Plan when they reach their 60th birthday. The Company does not and has not operated a defined benefit scheme.
Vested share awards
During 2017, the following share awards vested for the Executive Directors. The total shares vested in 2017 are summarised in the following two tables.
Executive Chairman
Scheme
LTIP 2014
EIP Element B 2015
Total
* Share price on LTIP vesting was £16.88 and there were $1.28393 to £1. **Share price on EIP vesting was £17.38 and there were $1.28806 to £1.
Executive Vice Chairman
Scheme
LTIP 2014
EIP Element B 2015
Total
Shares
52,164
Value
$1,130,724*
41,000
$918,913**
93,164
$2,049,637
Shares
Value
38,088
$825,608*
30,000
$672,375**
68,088
$1,497,983
* Share price on LTIP vesting was £16.88 and there were $1.28393 to £1. **Share price on EIP vesting was £17.38 and there were $1.28806 to £1.
EIP
During 2017, the first grant vested under the EIP, Element B from the award in 2015. The first Element C award and the 2016 Element B award will
vest in 2018. Under the EIP, performance criteria must be met before grant and the full award vests, providing there have been no forfeiture events.
Executive Chairman – EIP
Maximum number of shares capable of vesting
Forfeiture
Number of vested shares
Total value of vested shares*
* Share price on vesting was £17.38 and there were $1.28806 to £1.
98
41,000
Nil
41,000
£712,580
($918,913)
Corporate Governance | Committees | Remuneration
30,000
Nil
30,000
£521,400
($672,375)
Executive Vice Chairman – EIP
Maximum number of shares capable of vesting
Forfeiture
Number of vested shares
Total value of vested shares*
* Share price on vesting was £17.38 and there were $1.28806 to £1.
LTIP
During 2017, the final award vested under the Long Term Incentive Plan (‘LTIP’). Further details regarding the operation of the LTIP can be found in
the 2012 report and accounts on pages 97 to 99 or on request from cosec@hikma.uk.com. The LTIP amount included in the 2017 single total figure
of remuneration is the conditional share award granted in 2014. The performance achieved against the performance targets is shown below.
Condition
Requirements
Description
Weighting
Threshold
Maximum
TSR*
Sales growth
EPS growth
Return on invested capital
50%
17%
17%
17%
50th percentile
20% of award element
75th percentile
100% of award element
9%
20% of award element
13%
100% of award element
15%
20% of award element
20%
100% of award element
10%
20% of award element
12%
100% of award element
* TSR is total shareholder return comparative performance against the Company’s Comparator Group.
Practice
Actual
performance
94th
percentile
13%
-5%
17%
Executive Chairman– LTIP
Performance condition
Maximum number of shares capable of vesting
Percentage of maximum vesting
Number of vested shares
Value of vested shares*
Total value
* Share price on LTIP vesting was £16.88 and there were $1.28393 to £1.
Executive Vice Chairman – LTIP
Performance condition
Maximum number of shares capable of vesting
Percentage of maximum vesting
Number of vested shares
Value of vested shares*
Total value
* Share price on LTIP vesting was £16.88 and there were $1.28393 to £1.
Financial performance
TSR
Sales growth
EPS growth
31,500
100%
31,500
10,500
97%
10,164
£531,720
£171,567
10,500
0%
0
£0
£880,527
($1,130,724)
Financial performance
TSR
Sales growth
EPS growth
23,000
100%
23,000
7,667
97%
7,421
£388,240
£125,268
7,667
0%
0
£0
£642,927
($825,608)
Award vested
% of maximum
100%
97%
0%
100%
Return on
invested capital
10,500
100%
10,500
£177,240
Return on
invested capital
7,667
100%
7,667
£129,419
99
Hikma Pharmaceuticals PLC
Remuneration Committee continued
2017 Performance outcome: Executive Chairman (role of Chairman and Chief Executive during 2017)
The following table sets out the performance conditions and targets for 2017 and their level of satisfaction:
Section
Financial
Description
Measurement
Performance Condition
Weighting
Forfeiture
Threshold
Max
Results
Achievement
Said % of salary
Performance Level
Achievement
Application
Profit Before Tax
Target Core Profit Before Tax compared to audited Core Profit Before Tax for the year ended
31 December 2017.
30%
Target -30%
Target -10%
Target +10%
Core PBT of $328m
Threshold
35.0% of salary
$252m
$324m
$396m
to Target
Group Revenue
Target Group Revenue compared to audited Core Group Revenue for the year ended
31 December 2017.
Strategic
Return on Investment
Enhance profitability by delivering on the opportunities from the capital investment
in the product pipelines and manufacturing facilities. Measured by Return on Invested Capital.
20%
Target -50%
Target -20%
Target +20%
ROIC of 9.89%
Below Threshold 0.0% of salary
6%
10%
14%
Product Capability
Delivering the capability to manufacture or distribute identified additional products through
targeted research and development activities and the acquisition of product files and licences.
Group Structure
Optimisation
Reorganise the group to ensure that it is best placed to deliver the board-approved, medium-term
strategic objectives and business plan.
10%
Non-aligned
Partially aligned
Aligned structure
Optimised
Changes to structure
— Below
0.0% of salary
structure and
structure and
and strategy
structure and
during the year were
Threshold
strategy
strategy
strategy
Total
Unacceptable
Acceptable
Good
Excellent
76.8%
Target
Target
$360m
Target
$2,090m
without GxA
or $2,205m
with GxA
Target
12%
30%
Target -30%
Target -10%
$1,463m
without GxA
or $1,544m
with GxA
$1,881m
without GxA
or $1,985m
with GxA
Target +10%
Group Revenue
$2,299m without
of $1,936m
Threshold
to Target
41.8% of salary
GxA or $2,426m
with GxA
10%
Zero increase
Injectables:
Injectables:
Injectables:
Key product not
— Below
0.0% of salary
in product
capability
— 8 product
— 12 product
— 15 product
delivered. However:
Threshold
tech transfer
tech transfer
tech transfer
— 17 Injectables
— 5 submissions
— 6 submissions
— 7 submissions
transfers
determined by
the Committee
of new
molecules
of new
molecules
of new
molecules
Orals:
4 new
Orals:
5 new
Orals:
6 new
submissions
submissions
submissions
— 7 Injectables
submissions
— 1 Generics
submissions
determined by
the Committee
deemed insufficient
— Global roles for
supply chain and
R&D
— Clarified divisional
structure in US
100
2017 Performance outcome: Executive Chairman (role of Chairman and Chief Executive during 2017)
The following table sets out the performance conditions and targets for 2017 and their level of satisfaction:
Section
Financial
Description
Measurement
Performance Condition
Profit Before Tax
Target Core Profit Before Tax compared to audited Core Profit Before Tax for the year ended
Group Revenue
Target Group Revenue compared to audited Core Group Revenue for the year ended
31 December 2017.
31 December 2017.
Strategic
Return on Investment
Enhance profitability by delivering on the opportunities from the capital investment
in the product pipelines and manufacturing facilities. Measured by Return on Invested Capital.
Product Capability
Delivering the capability to manufacture or distribute identified additional products through
targeted research and development activities and the acquisition of product files and licences.
Corporate Governance | Committees | Remuneration
Performance Level
Achievement
Application
Group Structure
Reorganise the group to ensure that it is best placed to deliver the board-approved, medium-term
10%
Optimisation
strategic objectives and business plan.
of new
molecules
Orals:
4 new
submissions
of new
molecules
Orals:
5 new
submissions
Non-aligned
structure and
strategy
Partially aligned
structure and
strategy
Aligned structure
and strategy
of new
molecules
Orals:
6 new
submissions
Optimised
structure and
strategy
Weighting
Forfeiture
Threshold
Target -30%
$252m
Target -10%
$324m
Max
Results
Achievement
Said % of salary
Target +10%
$396m
Core PBT of $328m
Threshold
to Target
35.0% of salary
30%
30%
20%
10%
Target -10%
$1,881m
without GxA
or $1,985m
with GxA
Target -20%
10%
Target -30%
$1,463m
without GxA
or $1,544m
with GxA
Target -50%
6%
Zero increase
in product
capability
Target
Target
$360m
Target
$2,090m
without GxA
or $2,205m
with GxA
Target
12%
Target +10%
$2,299m without
GxA or $2,426m
with GxA
Target +20%
14%
Injectables:
— 8 product
Injectables:
— 12 product
Injectables:
— 15 product
tech transfer
— 5 submissions
tech transfer
— 6 submissions
tech transfer
— 7 submissions
Group Revenue
of $1,936m
Threshold
to Target
41.8% of salary
ROIC of 9.89%
Below Threshold 0.0% of salary
— Below
0.0% of salary
Threshold
determined by
the Committee
— Below
0.0% of salary
Threshold
determined by
the Committee
Key product not
delivered. However:
— 17 Injectables
transfers
— 7 Injectables
submissions
— 1 Generics
submissions
Changes to structure
during the year were
deemed insufficient
— Global roles for
supply chain and
R&D
— Clarified divisional
structure in US
Total
Unacceptable
Acceptable
Good
Excellent
76.8%
The Chairman has waived his right
to performance remuneration in respect
of the year ended 31 December 2017:
Participant
Executive
EIP Element
Salary
Calculation
Maximum
potential
(% of salary)
Receive
Achievement
Value of bonus/shares
Receive
Notes
Chairman
and Chief
Executive
A
B
C
150%
25.9%
$0
$1,273,080
150%
25.9%
$0
100%
30.0%
$0
The information in the table above has been audited by PwC.
Cash now
(March 2018)
Shares in
2 years from
March 2018
Shares in
3 years from
March 2018
Performance
remuneration waived
101
Hikma Pharmaceuticals PLC
Remuneration Committee continued
2017 Performance outcome: Executive Vice Chairman
Section
Financial
Description
Measurement
Performance Condition
Weighting
Forfeiture
Threshold
Max
Results
Achievement
Mazen % of salary
Performance Level
Achievement
Application
Profit Before Tax
Target Core Profit Before Tax compared to audited Core Profit Before Tax for the year ended
31 December 2017.
20%
Target -30%
Target -10%
Target +10%
Core PBT of $328m
Threshold to
23.2% of salary
$252m
$324m
$396m
Target
Group Revenue
Target Group Revenue compared to audited Core Group Revenue for the year ended
31 December 2017.
20%
Target -30%
Target -10%
Target
Group Revenue
Threshold to
27.9% of salary
$1,463m
$1,881m
$2,090m
of $1,936m
Target
Target +10%
$2,299m
MENA Profit Before Tax Target MENA Profit Before Tax compared to audited MENA Core Profit Before Tax for the year
10%
Target -30%
Target -10%
Target +10%
MENA Profit Before
Threshold to
34.9% of salary
ended 31 December 2017.
$84m
$108m
$132m
Tax of $128m
Target
MENA Revenue
Target MENA Revenue compared to audited MENA revenue for the year ended 31 December 2017.
10%
Target -30%
Target -10%
Target +10%
MENA Revenue
Threshold to
19.0% of salary
$466m
$599m
$732m
of $639m
Target
Strategic
Emerging Markets
Initiate revenue generation in Emerging Markets before year ended 31 December 2017.
10%
Target revenue
Target revenue
Target
Target revenue
Threshold Revenue
Threshold
10.0% of salary
Target
Target
$360m
Target
$120m
Target
$665m
revenue
achieved
MENA Structure
Optimisation
Reorganise the structure of the MENA division to ensure it is best positioned for growth and margin
improvements. Ensure internal development for the MENA management team by end of 2017.
Strategic Partnerships/
Product Capability
Expand product capability through the execution of strategic partnerships and licensing
agreements.
less 40%
less 20%
exceeded +20%
determined by
the Committee
20%
Nil structural
Some structural
Structural and
Structural and
Structural and
Below Threshold
0.0% of salary
and
and
development
development
development changes
determined by
development
development
changes are fully
changes lead to
deemed insufficient
the Committee
changes
changes
implemented
superior MENA
performance
10%
Zero
One
Two partnerships
Three
Five partnerships
Target
25.0% of salary
partnerships
partnership
or licences are
partnerships
deemed strategically
determined by
or licences are
or licence is
finalised by end
or licences were
important
the Committee.
finalised by
end of 2017
finalised by
end of 2017
of 2017
finalised by
end of 2017
Total
Unacceptable
Acceptable
Good
Excellent
140.0%
102
2017 Performance outcome: Executive Vice Chairman
Section
Financial
Description
Measurement
Performance Condition
Profit Before Tax
Target Core Profit Before Tax compared to audited Core Profit Before Tax for the year ended
Group Revenue
Target Group Revenue compared to audited Core Group Revenue for the year ended
MENA Profit Before Tax Target MENA Profit Before Tax compared to audited MENA Core Profit Before Tax for the year
31 December 2017.
31 December 2017.
ended 31 December 2017.
MENA Revenue
Target MENA Revenue compared to audited MENA revenue for the year ended 31 December 2017.
Strategic
Emerging Markets
Initiate revenue generation in Emerging Markets before year ended 31 December 2017.
MENA Structure
Optimisation
Reorganise the structure of the MENA division to ensure it is best positioned for growth and margin
improvements. Ensure internal development for the MENA management team by end of 2017.
Strategic Partnerships/
Expand product capability through the execution of strategic partnerships and licensing
Product Capability
agreements.
Corporate Governance | Committees | Remuneration
Performance Level
Achievement
Application
20%
20%
10%
10%
10%
20%
10%
Weighting
Forfeiture
Threshold
Target -30%
$252m
Target -10%
$324m
Target
Target
$360m
Max
Results
Achievement
Mazen % of salary
Target +10%
$396m
Core PBT of $328m
Threshold to
Target
23.2% of salary
Target -30%
$1,463m
Target -10%
$1,881m
Target
$2,090m
Target +10%
$2,299m
Group Revenue
of $1,936m
Threshold to
Target
27.9% of salary
Target -30%
$84m
Target -10%
$108m
Target
$120m
Target +10%
$132m
MENA Profit Before
Tax of $128m
Threshold to
Target
34.9% of salary
Target -30%
$466m
Target -10%
$599m
Target
$665m
Target +10%
$732m
MENA Revenue
of $639m
Threshold to
Target
19.0% of salary
Target revenue
less 40%
Target revenue
less 20%
Target
revenue
achieved
Target revenue
exceeded +20%
Threshold Revenue
Threshold
determined by
the Committee
10.0% of salary
Nil structural
and
development
changes
Some structural
and
development
changes
Structural and
development
changes are fully
implemented
Zero
partnerships
or licences are
finalised by
end of 2017
One
partnership
or licence is
finalised by
end of 2017
Two partnerships
or licences are
finalised by end
of 2017
Structural and
development
changes lead to
superior MENA
performance
Three
partnerships
or licences were
finalised by
end of 2017
Structural and
development changes
deemed insufficient
Below Threshold
determined by
the Committee
0.0% of salary
Five partnerships
deemed strategically
important
Target
determined by
the Committee.
25.0% of salary
Total
Unacceptable
Acceptable
Good
Excellent
140.0%
The Vice Chairman waived his right to potential performance
remuneration from the Group Profit Before Tax and Group
Revenue elements. Accordingly, the following awards
will be made in respect of the 2017 performance year:
Participant
Calculation
Receive
Executive
EIP Element
Salary
Executive Vice
Chairman
A
B
C
$717,155
The information in the table above has been audited by PwC.
Maximum
potential
(% of salary)
150%
150%
100%
Achievement
Value of bonus/shares
Receive
Notes
48.4%
32.8%
48.4%
32.8%
43.3%
23.3%
$235,227
$235,227
$167,097
Cash now
(March 2018)
Shares in
2 years from
March 2018
Shares in
3 years from
March 2018
50% of total shares
unsaleable until five
years after grant
103
Hikma Pharmaceuticals PLC
Remuneration Committee continued
The Company continued to operate the EIP in 2017. The outstanding share awards under the EIP in respect of each of the Executive Directors are:
Participant
Director
Scheme description1
Type of interest
Date
of award
Date of vesting
Basis of award
Shares (max)
Face value2
Share scheme
Quantum
EIP Element C
EIP Element B
EIP Element C
EIP Element B
EIP Element C
EIP Element C
EIP Element B
EIP Element C
EIP Element B
EIP Element C
Conditional
award
Conditional
award
Conditional
award
Conditional
award
Conditional
award
Conditional
award
Conditional
award
Conditional
award
Conditional
award
Conditional
award
15-May-15
15-May-18
100% salary
27,000
$413,154
17-Mar-16
17-Mar-18
147% salary
68,346
$1,045,830
17-Mar-16
17-Mar-19
97% salary
45,100
$690,120
13-Apr-17
13-Apr-19
107% of salary
60,973
$933,008
13-Apr-17
13-Apr-20
64% of salary
36,438
$557,574
237,857
(2016: 244,446)
$3,639,686
(2016: $2,807,165)
15-May-15
15-May-18
100% salary
20,000
$306,040
17-Mar-16
17-Mar-18
147% salary
38,501
$589,142
17-Mar-16
17-Mar-19
97% salary
25,406
$388,762
13-Apr-17
13-Apr-19
103% of salary
33,005
$505,042
13-Apr-17
13-Apr-20
60% of salary
19,318
$295,604
136,230
(2016: 159,907)
$2,084,590
(2016: 2,057,810)
Said Darwazah
Total
Mazen Darwazah
Total
1. The performance criteria for Elements B and C of the EIP are assessed before a grant is considered. Additionally, Element B is subject to forfeiture criteria for the first two years after grant,
which are detailed each year as part of the next year’s EIP performance criteria on pages 100 to 103.
2. The face value is calculated using the vesting percentages described earlier in this section and the closing share price of £11.34p and foreign exchange rates of $1.34912 to £1 on 31 December
2017. The actual value received by Executive Directors under the share incentive arrangements is dependent upon the share price of Hikma at the time of exercise, the satisfaction of
performance criteria and the non-occurrence of forfeiture events (EIP Element B).
The information in the table above has been audited by PwC.
The applicable share prices for Hikma during the period under review were:
Market price
(Closing price)
1,893p
1,134p
2,300p to 950p
872p
Date
1 January 2017
31 December 2017
2017 Range (low to high)
13 March 2018
104
Corporate Governance | Committees | Remuneration
Dilution
In accordance with the guidelines set out by the Investment Association, 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 50% of this (representing 5% of issued share capital) for discretionary
share plans. The following table summarises the current level of dilution resulting from Company share plans since 2006:
Type of plan
Discretionary Share Plans (5% Limit)
Granted in a
rolling ten-year
period
Granted during
the year
4.39%
0.37%
Director share interests
Said Darwazah, Mazen Darwazah and Ali Al-Husry are Directors and shareholders of Darhold Limited. Darhold holds 60,000,000 ordinary shares
in Hikma. The table below breaks down their shareholdings in Hikma by shares effectively owned through Darhold and shares held personally,
by HMS Holdings SAL or by connected people. The cancellation and issuance of shares in Darhold and Hikma, as well as changes in the number
of Hikma shares held by Darhold can lead to a degree of variation in the ‘Effective Hikma shares’.
Director
Said Darwazah
Mazen Darwazah*
Ali Al-Husry**
* Mazen Darwazah holds his shares in Darhold Limited through a family trust.
** Ali Al-Husry holds his shares in Hikma and Darhold Limited through a family trust.
The information in the table above has been audited by PwC.
Darhold
Interest in
Darhold
21.76%
10.96%
8.05%
Effective
Hikma shares
13,054,419
6,577,199
4,827,553
Personal
Shares
(incl. connected
people)
Total
shareholding
1,232,207
14,286,626
1,414,713
1,162,811
7,991,912
5,990,364
The following table sets out details of the Directors’ shareholdings and, where there are shareholding requirements, whether these have been met:
Director
Said Darwazah
Mazen Darwazah1
Ali Al-Husry2
Robert Pickering
Dr Ronald Goode
Pat Butler
Dr Pamela Kirby
Dr Jochen Gann3
John Castellani
Nina Henderson
Ownership requirements
Percentage
of salary
Number
of shares
Requirement
fulfilled?
Total
Shares
owned
EIP subject to
performance
(Element B)
EIP subject to
service
(Element C)
Total
Share
interests
300%
300%
249,591
140,600
Yes
Yes
14,286,626
7,991,912
5,990,364
10,000
12,000
3,875
3,317
0
2,500
3,500
129,319
71,506
108,538
14,524,483
64,724
8,128,142
5,990,364
10,000
12,000
3,875
3,317
0
2,500
3,500
1. Mazen Darwazah holds his shares in Darhold Limited through a family trust.
2. Ali Al-Husry holds his shares in Hikma and Darhold Limited through a family trust.
3. Dr Jochen Gann is senior executive in Boehringer Ingelheim who hold 40m (16.6%) shares in Hikma.
There have been no changes in the interests of the Directors in the shares of the Company between 31 December 2017 and the date of this report. The share price used to calculate whether
the shareholding requirements have been met is the price on 31 December 2017 of £11.34p and foreign exchange rates of $1.34912 to £1 on the same date.
The information in the table above has been audited by PwC.
105
Hikma Pharmaceuticals PLC
Remuneration Committee continued
The following table sets out the changes in interests of Directors during the year under review and up to the date of this report. Directors not listed
in the table did not change their share interests during the period.
Director
Nina Henderson
Said Darwazah
Mazen Darwazah
Said Darwazah
Mazen Darwazah
Date
Event
24 April 2017
Purchase of shares.
15 May 2017
Exercise of 2015 EIP Element B. Retained all shares.
15 May 2017
Exercise of 2015 EIP Element B. Retained all shares.
30 May 2017
Exercise of 2014 LTIP. Retained all shares.
30 May 2017
Exercise of 2014 LTIP. Retained all shares.
The information in the table above has been audited by PwC.
No. Shares
3,500
41,000
30,000
52,164
38,088
Scheme interests
The following table sets out details of the ‘scheme interests’ of the Directors. The LTIP and Element B of the EIP have been included because
they have performance periods of three years and one year plus a two-year forfeiture condition, respectively:
Director
Said Darwazah
Mazen Darwazah
All other directors
Type of interest
Performance measures
Shares
Share options
237,857
136,230
–
–
–
–
Yes
129,319
71,506
–
No
108,538
64,724
–
Vested but
unexercised
–
–
–
Remuneration table
The following table sets out the total remuneration, including amounts vesting under short-term and long-term incentive plans, for each financial
period in respect of the Directors holding the positions of Chief Executive and Executive Vice Chairman.
Year
2017
2016
2015
2014
2013
2012
2011
2010
2009
Said Darwazah – Executive Chairman (Chairman & Chief
Executive during 2017)
Mazen Darwazah – Executive Vice Chairman
Total
$3,538,646
$6,308,238
$7,316,042
$5,056,255
$3,956,836
$3,296,000
$2,629,000
$1,965,000
$1,183,000
Bonus as
% max
Share awards as
% max
0%
71%
98%
100%
100%
80%
80%
100%
37%
0%
68%
98%
70%
62%
50%
67%
49%
67%
Total
$2,795,833
$3,418,766
$4,465,386
$3,572,764
$2,646,280
$2,114,000
$1,748,000
$1,296,000
$797,000
Bonus as
% max
Share awards as
% max
22%
69%
98%
100%
100%
80%
80%
100%
37%
22%
65%
98%
70%
47%
50%
67%
49%
67%
Important note: The total figures for the financial years 2017 and 2016 are higher than would otherwise be the case due to a change of incentive
plan. In accordance with the Regulations, the 2016 and 2017 totals include LTIPs vesting during the relevant period (which were granted three years
before) and Element C of the EIP which was granted in respect of the relevant period. The Regulations require Element C to be treated in a similar
way to the annual bonus, although it is an award of shares that will vest three years after grant. The final LTIP awards vested in 2017, after which
point the totals in the above table will include Element C only.
Additional information: The ‘Bonus as % max’ column comprises cash under Element A of the EIP paid immediately. The ‘Share awards as % max’
column includes Element B of the EIP, shares that vest in two years from the date of grant and shares under Element C of the EIP, shares that vest
in three years from the date of the grant.
106
Corporate Governance | Committees | Remuneration
Non-Executive Directors
The table below details the fees paid to Non-Executive Directors during the year under review and the prior year. Several Directors (marked *)
joined, retired or changed roles during the periods and their fees have been pro-rated for time served in the relevant position:
Name
Board position
Robert Pickering
Senior Independent
Director
Pat Butler
Audit Committee Chair
Michael Ashton
Independent Director
Dr Ronald Goode2
Independent Director
Dr Pamela Kirby
Remuneration
Committee Chair
Breffni Byrne*
Independent Director
Ali Al-Husry
Non-Executive Director
Dr Jochen Gann*
Non-Executive Director
John Castellani*
CRE Committee Chair
Nina Henderson*2
Independent Director
Fee (all
elements)
£,000
2017
Taxable
benefits1
£,000
101.0
109.0
43.5
98.7
101.0
–
85.0
85.0
96.8
116.3
–
–
–
8.4
–
–
1.3
–
1.3
–
Fee (all
elements)
£,000
2016
Taxable
benefits
£,000
101.0
109.0
96.7
101.0
97.3
34.9
85.0
70.8
77.5
–
–
–
11.5
10.7
–
–
–
–
0.9
–
Total
£,000
101.0
109.0
43.5
107.1
101.0
–
86.3
85.0
98.1
116.3
Total
£,000
101.0
109.0
108.2
111.7
97.3
34.9
85.0
70.8
78.4
–
1. ‘Taxable benefits’ includes certain accommodation expenses for Non-Executive Directors that are wholly related to their attendance at Board meetings and are in accordance with normal
Hikma expense policy. These expenses may be treated as taxable benefits by the UK authorities and, where appropriate, the above figure includes the corresponding tax contribution.
2. Nina Henderson was due to receive fees of £23,300 for services during 2016. These fees were paid in 2017 and, in accordance with regulations, have been included in the 2017 table.
The information in the table above has been audited by PwC.
Payments to past Directors
There were no payments to past directors during the financial year. The information in this paragraph has been audited by PwC.
Payments for loss of office
There were no payments for loss of office during the financial year. The information in this paragraph has been audited by PwC.
Terms of appointment and service
Service contracts
The 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 and are available for inspection at the Company’s registered office at 1 New Burlington Place, London W1S 2HR, were:
Executive Director
Said Darwazah
Siggi Olafsson
Mazen Darwazah
Company
notice period
12 months
12 months
12 months
Contract date
1 July 2007
Unexpired
term of contract
Potential termination payment
Rolling contract
12 months’ salary and benefits
20 February 2018
Rolling contract
12 months’ salary and benefits
25 May 2006
Rolling contract
12 months’ salary and benefits
The Company complies with the UK Corporate Governance Code that all directors of FTSE 350 companies be subject to annual election
by shareholders.
107
Hikma Pharmaceuticals PLC
Remuneration Committee continued
Letters of appointment
The Non-Executive Directors have letters of appointment with Hikma, not service contracts and which are available for inspection at the
Company’s registered office at 1 New Burlington Place, London W1S 2HR. Appointments are made for a period of 36 months and then reviewed.
Non-Executive Director
Robert Pickering
Ali Al-Husry
Dr Ronald Goode
Pat Butler
Dr Pamela Kirby
Dr Jochen Gann
John Castellani
Nina Henderson
Date of appointment
1 September 2011
14 October 2005
12 December 2006
1 April 2014
1 December 2014
29 February 2016
1 March 2016
1 October 2016
Notice payment
1 month
1 month
1 month
1 month
1 month
1 month
1 month
1 month
The Company requires all Directors be subject to annual election by shareholders.
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, network and knowledge of the Director, from which Hikma can benefit. Executive
Directors may accept external appointments as long as they do not lead to a conflict of interest and are allowed to retain any fees. During the year
under review, Said Darwazah and Mazen Darwazah received fees of $4,100 (2016: $28,000) and $32,000 (2016: $10,000) respectively relating to
external appointments which are detailed in their Director profiles on page 70. The process for controlling these appointments is described in the
governance statement on page 83.
Closing statement
We have continued to develop our approach to remuneration reporting this year and the Committee hopes that this has aided your understanding
of our Remuneration Policy and practices. Please do not hesitate to contact me if you have any questions or observations.
For and on behalf of the Remuneration Committee
Dr Pamela Kirby
Chair of the Remuneration Committee
13 March 2018
108
Directors’ report
Corporate Governance | Directors’ report
Report of the Directors to shareholders
and stakeholders
The Directors submit their report together with the audited financial
statements for the year ended 31 December 2017. This report forms
the management report for the purposes of the Disclosure and
Transparency Rules. Readers are asked to cross refer to the other
sections of the Annual Report to the extent necessary to meet Hikma’s
reporting obligations as follows (statements that are not applicable
have been excluded):
— Likely future developments of the Group: Strategic report, pages
2 to 58
Donations
During the year the Group made charitable donations of approximately
$3.2 million (2016: $2.3 million):
Type of donation
Local charities serving communities in
which the Group operates
Medical (donations in kind)
Political donations and expenditure
Amount
donated in
2016 ($)
1,611,657
665,851
Nil
Amount
donated in
2017 ($)
1,441,861
1,780,625
Nil
— Long-term incentive schemes: Directors’ remuneration report,
Total
2,277,508
3,222,486
pages 98 to 104
— Related party transactions: Note 40 of the financial statements,
page 167
— Going concern statement: Risk Management Report, page 65
— Names and biographical details of the Directors: corporate
governance report, pages 70 and 71
— Independence of Non-Executive Directors: corporate governance
report, page 74
— Directors’ share interests: Directors’ remuneration report, pages
105 and 106
— Greenhouse gas emissions: Sustainability report, page 56
— Financial instruments and risk: Notes 30 and 31 of the financial
statements, pages 160 and 161
Principal activity
The principal activities of the Group are the development, manufacture
and marketing of a broad range of generic, branded 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, Injectables and Generics.
The majority of the Group’s operations are in the MENA region, the US
and Europe. The Company does not have overseas branches within the
meaning of the Companies Act 2006 (the ‘Act’).
The Group’s net sales, gross profit and operating profit are shown by
business segment in Note 4 to the consolidated financial statements
on pages 137 and 138.
Results
The Group’s reported loss for the year in 2017 was $(839) million
(2016: Profit of $158 million).
Group policy prohibits the payment of political donations and
expenditure within the meaning of the Act.
Research and development
The Group’s investment in research and development (R&D) during
2017 represented 6.3% of Group revenue (2016: 7.7%). Further details
on the Group’s R&D activities can be found on page 41.
Interest
The interest capitalised during the year under review was $0.3m
(2016: $0.3m). The tax impact related to the capitalised interest
was $Nil (2016: $0.1m).
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, other than as
follows. The Company had an agreement with one senior executive,
below Board level, which allows for compensation for loss of office
with an estimated value of $10.3m, based on share and foreign
exchange values on 31 December 2017. During early 2018, this
agreement became obsolete.
There are no persons, with whom Hikma has contractual or other
arrangements, who are deemed to be essential to the business of Hikma.
Dividend
The Board is recommending a final dividend of 23 cents per share
(approximately 16 pence) (2016: 22 cents). The proposed dividend will
be paid on 24 May 2018 to shareholders on the register on 6 April 2018,
subject to approval at the Annual General Meeting (‘AGM’) on 18 May
2018. An interim dividend of 11 cents per share was paid on 22 September
2017 (2016: 11 cents). The total dividend for the year 2017 is 34.0 cents
per share (2016: 33.0 cents).
Directors
It is the Board’s policy that all Directors should retire and, should
the Director wish to continue in office seek election or re-election
on an annual basis. Accordingly, Said Darwazah, Siggi Olafsson, Mazen
Darwazah, Robert Pickering, Ali Al-Husry, Patrick Butler, Dr Pamela
Kirby, Dr Jochen Gann, John Castellani and Nina Henderson will seek
election or re-election as appropriate at the AGM. Dr Ronald Goode
will retire from the Board at the close of the AGM.
Creditor payment policy
Hikma’s policy, which is also applied by the Group and will continue in
respect of the 2018 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 2017 were equivalent to 82
days’ purchases (2016: 65 days), based on the average daily amount
invoiced by suppliers during the year.
109
Hikma Pharmaceuticals PLC
Directors’ report continued
Indemnities and insurance
Hikma maintains an appropriate level of Directors’ and Officers’
insurance. The Directors benefit from qualifying third-party indemnities
made by Hikma that 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.
Auditors
Each person who was a Director of Hikma at the date when this report
was approved confirms that:
— so far as the Director is aware, there is no relevant audit information
of which Hikma’s auditors are unaware
— the Director has taken all the steps that he or she ought to have taken
as a Director to make himself or herself 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.
Employment
During this year, the Company continued to operate its existing
employee engagement mechanisms which include intra-group
communications, social networking, an open door policy for
legitimate union representatives and the operation of share incentive
arrangements. The Company does not discriminate against a
potential employee on grounds of disability and will make reasonable
adjustments to employ and develop such persons.
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 33 to
the financial statements. Hikma has one class of ordinary shares of
10 pence each (‘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 2017:
Type
Ordinary
Nominal value
In issue
Issued during
the year
10 pence
240,678,894
724,362
During 2017, Hikma issued ordinary shares solely pursuant to the
exercise of options under the 2005 Long Term Incentive Plan, 2009
Management Incentive Plan and 2014 Executive 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.
Other than the shareholder agreement between Boehringer Ingelheim
(‘BI’) and Hikma (the ‘Agreement’), 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. The
Agreement restricts BI’s voting rights to 28,500,000 Shares as long as
it holds shares in excess of this level and the onward transfer of Shares,
as disclosed in the combined Prospectus and Circular posted to
shareholders on 21 January 2016. 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.
110
Share buy-back
At the Annual General Meeting (‘AGM’) on 18 May 2017, 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 2018 or the 2018 AGM,
which is scheduled for 18 May 2018. The Directors have not used this
authority during the year, but are proposing to renew this authority at
the 2018 AGM. Additionally, at the Extraordinary General Meeting held
on 19 February 2016, shareholders gave the Directors authority to
re-purchase Shares from BI that were issued in respect of the West-
Ward Columbus acquisition. This authority expires on 22 January 2021.
Share issuance
At the AGM on 19 May 2017, the Directors were authorised to issue
relevant securities up to an aggregate nominal amount of £7,999,293
and to be empowered to allot equity securities for cash on a non
pre-emptive basis up to an aggregate nominal amount of £1,199,894 at
any time up to the earlier of the date of the 2018 AGM or 30 June 2018.
The Directors propose to renew these authorities at the 2018 AGM 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 additional share capital of Hikma.
Details of the employee share schemes are set out in Note 38
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 AGM of Hikma will be held at Sofitel St James, 6 Waterloo Place,
London SW1Y 4AN on Friday, 18 May 2018, starting at 10.00 a.m.
The Notice convening the meeting is given in a separate document
accompanying this document, and includes a commentary on the
business of the AGM, and notes to help shareholders exercise their
rights at the meeting.
The Company provides for the vote on each resolution to be by poll
rather than by show of hands. This provides for greater transparency
and allows the votes of all shareholders to be counted, including
those cast by proxy. The level of proxies lodged for each resolution
is projected onto a screen as each resolution is put to the meeting.
A ‘vote withheld’ explanation is included on the proxy cards.
The powers of the Directors are determined by the Articles, the UK
Code and other relevant UK legislation. The Articles give the Directors
the power to appoint and remove Directors. The power to issue and
allot Shares contained in the Articles is subject to shareholder approval
at each AGM. The Articles, which are available on the website, may only
be amended by special resolution of the shareholders.
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
Darhold Limited1
Boehringer Ingelheim GmbH2
Capital Group International
Fidelity International
Vanguard Healthcare Fund
Number of shares
Percentage held
60,000,000
40,000,000
25,950,451
9,791,950
7,284,981
24.9%
16.6%
10.8%
4.1%
3.0%
1. Said Darwazah, Mazen Darwazah and Ali Al-Husry, each being a Director and shareholder
of Hikma, are shareholders and non-executive directors of Darhold Limited. See page 105
for details of their holdings in Darhold Limited.
2. Dr Jochen Gann is a Director of Hikma and a senior executive of Boehringer Ingelheim
GmbH.
There have been no changes in substantial shareholdings since the
year-end.
Pre-emptive issue of shares
During the year under review, and in the period since the date of
Hikma’s Initial Public Offering on 1 November 2005, Hikma did not issue
any ordinary shares pursuant to an authority given by shareholders at
an AGM to issue ordinary shares for cash on a non pre-emptive basis,
other than in respect of the placing undertaken on 17 January 2008.
Post balance sheet events
There have been no significant post balance sheet events.
Directors’ responsibility statement
Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable laws and
regulations. Company law requires the Directors to prepare financial
statements for each financial year.
Under that law the Directors are required to prepare the Group financial
statements in accordance with International Financial Reporting
Standards (IFRSs) as adopted by the European Union and Article 4
of the IAS Regulation and have also chosen to prepare the Parent
Company financial statements under FRS 101 ‘Reduced Disclosure
Framework’ and applicable law. Under company law the Directors must
not approve the accounts unless they are satisfied that they give a
true and fair view of the state of affairs of the Company and of the profit
or loss of the Company for that period. In preparing these financial
statements, International Accounting Standard 1 requires that Directors:
— Properly select and apply accounting policies
— Present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information
— Provide additional disclosures when compliance with the specific
requirements in IFRSs are insufficient to enable users to understand
the impact of particular transactions, other events and conditions
on the entity’s financial position and financial performance
— Make an assessment of the Company’s ability to continue as
a going concern
Corporate Governance | Directors’ report
The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Company’s transactions and
disclose with reasonable accuracy at any time the financial position of
the Company and enable them to ensure that the financial statements
comply with the Companies Act 2006. They are also responsible for
protecting shareholder investments and safeguarding the assets of
the Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of
the corporate and financial information included on the Company’s
website. Legislation in the United Kingdom governing the preparation
and dissemination of financial statements may differ from legislation
in other jurisdictions.
We confirm to the best of our knowledge:
— The financial statements, prepared in accordance with International
Financial Reporting Standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company and
the undertakings included in the consolidation taken as a whole
— The Strategic report includes a fair review of the development and
performance of the business and the position of the Company
and the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties
that they face
— The Annual Report and financial statements, taken as a whole, are
fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company’s performance,
business model and strategy
On behalf of the Board
Said Darwazah
Executive Chairman
13 March 2018
Mazen Darwazah
Executive Vice Chairman
13 March 2018
111
Hikma Pharmaceuticals PLC
Financial
statements
We continue to deliver accurate,
high-quality and timely information
to all stakeholders with the utmost
integrity and efficiency.
113 Independent auditors’ report
122 Consolidated financial statements
172 Company financial statements
174 Notes to the Company financial statements
112
Independent auditors’ report to the members
of Hikma Pharmaceuticals plc
Report on the audit of the financial statements
Our opinion
In our opinion:
— Hikma Pharmaceuticals plc’s Group financial statements and
Company financial statements (the ‘financial statements’) give a true
and fair view of the state of the Group’s and of the Company’s affairs
as at 31 December 2017 and of the Group’s loss and cash flows for the
year then ended;
— the Group financial statements have been properly prepared
in accordance with International Financial Reporting Standards
(‘IFRSs’) as adopted by the European Union;
— the Company financial statements have been properly prepared in
accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising FRS 101
‘Reduced Disclosure Framework’, and applicable law); and
— the financial statements have been prepared in accordance with the
requirements of the Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements, included within the Annual
Report, which comprise: the consolidated and parent Company
balance sheets as at 31 December 2017; the consolidated income
statement and statement of comprehensive income, the consolidated
cash flow statement, and the consolidated and parent Company
statements of changes in equity for the year then ended; and the
notes to the financial statements, which include a description of the
significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Separate opinion in relation to IFRSs as issued
by the IASB
As explained in Note 2 to the financial statements, the Group, in
addition to applying 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 have been properly
prepared in accordance with IFRSs as issued by the IASB.
Basis for opinion
We conducted our audit in accordance with International Standards
on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our responsibilities
under ISAs (UK) are further described in the ‘Auditors’ responsibilities
for the audit of the financial statements’ section of our report. We
believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Independence
We remained independent of the Group in accordance with the ethical
requirements that are relevant to our audit of the financial statements
in the UK, which includes the FRC’s Ethical Standard, as applicable to
listed public interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit
services prohibited by the FRC’s Ethical Standard were not provided
to the Group or the Company.
Other than those disclosed in Note 6 to the financial statements,
we have provided no non-audit services to the Group or the Company
in the period from 1 January 2017 to 31 December 2017.
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Hikma Pharmaceuticals PLCFinancial statements
Independent auditors’ report to the members
of Hikma Pharmaceuticals PLC continued
Our audit approach
Overview
— Overall Group materiality: $14,000,000 (2016: $13,275,000), based on 5% of profit before tax after adding
back certain non-recurring items such as impairment charges, indemnity income relating to the Group’s
2016 acquisition activity, severance and other expenses resulting from the planned restructuring of
the Eatontown, New Jersey manufacturing facility and the impact of US tax reform. Overall Company
materiality: capped at $10,000,000 (2016: $13,275,000), but calculated based on 1% of total assets. For
the purposes of the Group audit, we applied a lower materiality to Company balances and transactions,
other than those which were eliminated on consolidation in the Group financial statements.
— Our audit included full scope audits of seven components, procedures on specific financial statement
line items of one component and procedures performed centrally over specific material balances at
other locations around the world. Taken together these account for 83% of consolidated revenue,
73% of consolidated profit before tax and 88% of consolidated total assets.
Materiality
Audit Scope
Areas of
Focus
— Impairment of goodwill and intangible assets;
— Revenue recognition – chargebacks, returns and other revenue deductions;
— Taxation;
— Carrying value of investments in subsidiaries (Company only).
The scope of our audit
As part of designing our audit, we determined materiality and
assessed the risks of material misstatement in the financial statements.
In particular, we looked at where the directors made subjective
judgements, for example in respect of significant accounting estimates
that involved making assumptions and considering future events that
are inherently uncertain.
We gained an understanding of the legal and regulatory framework
applicable to the Group and Company and the industry in which they
operate, and considered the risk of acts by the Group and Company
which were contrary to applicable laws and regulations, including fraud.
We designed audit procedures at Group and significant component
level to respond to the risk, recognising that the risk of not detecting
a material misstatement due to fraud is higher than the risk of not
detecting one resulting from error, as fraud may involve deliberate
concealment by, for example, forgery or intentional misrepresentations,
or through collusion. We designed audit procedures that focused on
laws and regulations that could give rise to a material misstatement in
the event of non-compliance particularly relating to, but not limited to,
regulations set out by the United States Food and Drug Administration
(the ‘FDA’) and other industry regulators, defence of products, pricing
and practices legislation, taxation and anti-bribery and corruption
legislation. Our tests included, but were not limited to, enquiries of
management, review of related work performed by component audit
teams, review of relevant Internal Audit reports and discussions with
in-house legal counsel supplemented by review of external legal
counsel correspondence. There are inherent limitations in the audit
procedures described above as the further removed non-compliance
with laws and regulations is from the events and transactions reflected
in the financial statements, the less likely we would become aware of it.
As in all of our audits, we also addressed the risk of management
override of internal controls, including evaluating whether there was
evidence of bias by the directors that represented a risk of material
misstatement due to fraud, and the risk of fraud in revenue recognition.
Procedures designed and executed to address these risks included
use of data enabled auditing techniques to test journal entries and
post-close adjustments, testing and evaluating management’s key
accounting estimates for reasonableness and consistency, undertaking
cut-off procedures to verify proper cut-off of revenue and expenses
and testing the existence and accuracy of revenue transactions. In
addition, we incorporate an element of unpredictability into our audit
work each year
Key audit matters
Key audit matters are those matters that, in the auditors’ professional
judgement, were of most significance in the audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to fraud)
identified by the auditors, including those which had the greatest effect
on: the overall audit strategy; the allocation of resources in the audit;
and directing the efforts of the engagement team. These matters, and
any comments we make on the results of our procedures thereon, were
addressed in the context of our audit of the financial statements as a
whole, and in forming our opinion thereon, and we do not provide a
separate opinion on these matters. This is not a complete list of all risks
identified by our audit.
114
Impairment of goodwill and intangible assets
Key audit matter
How our audit addressed the key audit matter
The Group has goodwill of $282 million and intangible assets of $503 million
(31 December 2016: $682 million and $1,037 million, respectively) comprising
customer relationships, product related intangible assets, software and other
identified intangible assets. This is contained within three cash generating
units (‘CGUs’).
With support from our valuations specialists, we obtained the Group’s impairment
analyses and tested the integrity of the calculations, reasonableness of key
assumptions, including product profit and cash flow growth or decline, terminal
values and discount rates. We challenged management to substantiate its
assumptions, including comparing relevant assumptions to industry forecasts.
All CGUs containing goodwill and indefinite –lived intangible assets must be
tested for impairment annually.
The determination of carrying values, requires judgement on the part of
management in identifying and then estimating the higher of the value in use
and a fair value less cost to dispose for the relevant CGUs. These amounts
are based on management’s view of future cash flow forecasts and external
market conditions such as future pricing probability of technical and regulatory
success and the most appropriate discount rate.
For the year ended 31 December 2017, the Group has recorded $1,105 million
as an exceptional impairment charge, principally in relation to a number
of events that occurred in the second half of 2017 including the continued
delay in approval of its application for its generic version of Advair Diskus®
and sustained pricing pressures and erosion in the US generics market. This
impairment charge was recorded in respect of goodwill, marketed products
and products under development in the Group’s US segment, as well as fixed
assets underpinning the manufacturing process in this segment.
As the carrying values of goodwill and intangible assets are contingent on
future cash flows, there is a risk that the assets will be further impaired if these
cash flows do not meet the Group’s expectations. The impairment reviews
performed by the Group contained a number of significant judgements and
estimates including revenue growth, the success of new product launches,
profit margins, cash conversion, terminal values and discount rate. In particular
the assumptions made in respect of its version of generic Advair Diskus® are
particularly sensitive. Changes in these assumptions could lead to further
impairment to the carrying value of intangible assets and goodwill.
We focused on intangible assets in the Westward Columbus Cash Generating
Unit which were largely acquired from Boehringer Ingelheim in February 2016
given the events detailed above.
Refer to Notes 3 and 14 in the Group financial statements and the audit
committee review of areas of significant judgement pages 78 and 79.
We assessed the determination of the CGUs identified for the impairment calculation
by considering the CGU’s previously used as well as from our understanding of the
business and how it is monitored.
In particular, given the key sensitivity around future cash flows we performed the
following procedures, with significant involvement from senior engagement team
members:
— corroborated the information to board approved budgets and forecasts;
— understood management’s process for forecasting cash flows, which is
underpinned by a model that encompasses a product by product analysis,
and we challenged management’s market and pricing assumptions by
comparing them to historical and third party market data. We also utilised our
valuations specialists to identify any anomalies or trends that warranted further
investigation and corroboration;
— in respect of costs and resulting profit margins in management’s model, we
challenged management on forecasted trends and assumed cost savings in the
context of the Group’s plans for ongoing product development, maintenance of its
manufacturing facilities via capital expenditure and other investment and plans for
organic growth;
— undertook look back testing to understand how accurate management had
been in its previous forecasting;
— took into account that historically the Group has faced challenges in respect
of reliably forecasting cash flows and challenged the rate used to discount the
cash flows to appropriately assess the supportability of the forecast, as well as
management’s process for building up a forecast through detailed testing of
revenue, cost, margin and other inputs, including performing sensitivity analyses on
these assumptions to understand the resulting impact on the impairment charge;
— in respect of generic Advair Diskus®, we obtained and reviewed
correspondence from the FDA, engaged in discussions with management
to understand how its key assumptions around expected launch date and
anticipated market share impacted forecast cash flows and examined external
data to corroborate management’s views;
— for impairment charged against the Group’s In Process Research &
Development (‘IPRD’) in 2017 we corroborated products included in the
valuation model to minutes from the Product Review Committee meetings,
where decisions on pipeline and IPRD opportunities are made;
— considered analysts’ reports and other market information over expected future
market shares and pricing; and
— recalculated the weighted average cost of capital and considered if the amount
was within a reasonable range.
We also obtained management’s sensitivity analyses which showed the impact
of reasonably possible changes to key assumptions. We considered whether these
were the key sensitivities and compared the output to a reasonable range based
on the evidence available.
We validated the appropriateness of the related disclosures in Note 14 of the
financial statements. We considered the presentation of the impairment charge
as an exceptional charge in 2017 in the context of the nature and magnitude of the
charge itself, giving consideration to the Group’s policy for exceptional items. We
reviewed the Annual Report to form a view on whether the disclosures contained
therein are fair, balanced and understandable.
Based on our procedures we consider management’s key assumptions to be within
a reasonable range and the overall impairment charge, whilst judgemental, to
also lie within an acceptable range. For those intangible assets including goodwill
where management determined that no impairment was required, we found that
these judgements were supported by reasonable assumptions.
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Hikma Pharmaceuticals PLCFinancial statements
Independent auditors’ report to the members
of Hikma Pharmaceuticals PLC continued
Revenue recognition
Key audit matter
Management is required to make certain judgements in respect of revenue
recognition and the level of chargebacks, returns and other revenue deductions
that will be realised against the Group’s revenue. These estimates are material to
the financial statements and involve judgement, hence the reason for inclusion
as an area of focus.
The largest of these judgements relates to revenue recognition, chargebacks,
rebates and returns in the US for which the Group recorded revenue deductions
for the year ended 31 December 2017 of $1,933 million (2016: $1,822 million).
We focused on this area as rebates, discounts, allowances and returns
arrangements and the deductions from gross revenue are complex and because
establishing an appropriate accrual requires significant estimation by the
directors. This judgement is complex in a US healthcare environment in which
competitive pricing pressure and product discounting are trends. The directors
have determined an accrual of $388 million to be necessary at 31 December
2017 (2016: $397 million).
Refer to the audit committee review of areas of significant judgement
pages 78 and 79, significant accounting policies Note 2, trade and other
receivables Note 20 and other current liabilities Note 27.
How our audit addressed the key audit matter
We considered the Group’s processes for making judgements in this area and
performed the following procedures:
— We assessed applicable controls in place around this process, tested the
nature of the pricing arrangements and the accuracy of calculations and
agreed the rates in customer agreements with those used in management’s
calculations of the required reserves and deductions.
— We obtained management’s calculations for accruals under applicable
schemes and validated the assumptions used by reference to the Group’s
stated commercial policies, the terms of the applicable contracts and
historical levels of product returns.
— We compared the assumptions to contracted prices, historical rebates,
discounts, allowances and returns levels (where relevant) and to current
payment trends. We also considered the historical accuracy of the Group’s
estimates in previous years and the impact of competitive pricing pressures
and greater discounting in the US market more generally. We formed an
independent expectation of the largest elements of the reserve at 31
December 2017 using third party data and compared this expectation to the
actual accrual recognised by the Group.
Based on the procedures performed, we did not identify any material
differences between our independent expectations and the accrual recorded.
Taxation
Key audit matter
The Group operates across a large number of jurisdictions due to its geographic
spread, resulting in complex cross-border tax arrangements. As a result, it
is subject to periodic challenges by local tax authorities on a range of tax
matters during the normal course of business including transaction related
tax matters and transfer pricing arrangements. In addition and following the
Group’s acquisition of West-Ward Columbus in 2016, the Group undertook legal
entity rationalisation and restructuring in 2017 in support of maintaining the
operational structure which had several complex tax consequences.
Judgement is required in assessing the level of provisions required in respect of
uncertain tax positions. At 31 December 2017, the Group has recorded provisions
of $63 million in respect of uncertain tax positions (2016: $64 million).
There have also been a number of changes in tax law in the US and elsewhere
that have resulted in a material impact on the Group’s current and deferred
tax balances at 31 December 2017. The most significant of these has been as a
result of the Tax Cuts and Jobs Act being substantively enacted before year-end.
In aggregate, the total adjusting item to account for the impact amounts to
$49 million in the tax line. The changes include a reduction in the corporate tax
rate that should be applied to deferred taxation balances and changes to the
foreign taxation credits regime. Some of these changes are complex and there
are a number of areas of uncertainty relating both to the manner in which the law
will apply and how to account for these matters. Therefore we have focused on
this area in our 2017 audit.
Refer to Notes 11 and 17 in the Group financial statements.
How our audit addressed the key audit matter
In conjunction with our UK, US, international tax and transfer pricing specialists,
we evaluated and challenged management’s judgements in respect of the
ongoing taxation impacts of the 2016 West-Ward Columbus acquisition,
estimates of tax exposures and contingencies in order to assess the adequacy
of the Group’s tax provisions, estimates involved in the measurement of
uncertain tax provisions and judgements taken in the measurement of deferred
tax assets.
We assessed the application of International Accounting Standard 12 – Income
Taxes in determining the tax base of the deferred tax assets, and assessed
recoverability of assets against forecast taxable income. Where this has
involved judgements, we challenged the judgements made by management and
evaluated these in the context of the evidence available including examining
correspondence with tax authorities.
In understanding and evaluating management’s judgement relating to the
level of provisioning for uncertain tax positions, we considered the status of
ongoing tax authority audits, the outcome of previous tax authority audits,
and developments in the tax environment. We considered management’s
disclosures in this regard and we agreed with management’s view that a material
change to the Group’s estimates of tax exposures is not expected within the
next 12 months.
For the tax effects as a result of the US tax reform we have discussed the key
judgements made in assessing these implications with management and
we agree that these are appropriate. We have also verified the mathematical
accuracy of the current and deferred tax calculated on the revised basis. Based
on this we believe that management’s position is appropriate. However, as
there remains significant complexity in the new law and a number of areas of
uncertainty relating both to the manner in which the law will apply and to the
accounting in certain areas, we expect that there will be true-ups and updates
to the estimates as further guidance is issued.
We consider that the level of uncertain tax provisioning and disclosure is
acceptable in the context of the Group’s financial statements.
116
Carrying value of investments in subsidiaries (Company only)
Key audit matter
How our audit addressed the key audit matter
The Company holds investments in subsidiaries of $3,323 million at 31 December
2017 (2016: $3,179 million).
Investments in subsidiaries are accounted for at cost less impairment in the
Company balance sheet at 31 December 2017. Investments are assessed for
impairment annually or earlier if impairment indicators exist. If such indicators
exist, the recoverable amounts of the investments in subsidiaries are estimated
in order to determine the extent of the impairment loss, if any. Any such
impairment loss is recognised in the income statement.
We evaluated management’s assumption whether any indicators of impairment
existed by comparing the net assets of the subsidiaries at 31 December 2017
with the Company’s investment carrying values.
For those investments where the subsidiaries’ net assets were lower than the
carrying values, we considered their recoverable value by reference to the
Group’s market capitalisation at 31 December 2017 and the valuations implied
by other models and for goodwill impairment review purposes, all of which were
subject to audit procedures as part of our Group audit.
Management judgement is required in the area of impairment testing,
particularly in determining whether any impairment triggers have arisen that
necessitate carrying out an impairment review to assess whether the carrying
value of an asset can be supported by the recoverable amount which is
determined by reference to the Group’s market capitalisation and in the context
of the net assets underpinning the Company’s investment in subsidiaries.
Within the Company accounts we have performed procedures to ensure the
cost of investment balance of $3,323 million is supported. These procedures
have included auditing the assets and considering actual and expected
performance of the businesses underpinning each of the investments.
As a result of our work, we agreed with management that the carrying values
of the investments held by the Company are supportable.
Refer to Note 47 in the parent company financial statements.
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Hikma Pharmaceuticals PLCFinancial statements
Independent auditors’ report to the members
of Hikma Pharmaceuticals PLC continued
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough
work to be able to give an opinion on the financial statements as a
whole, taking into account the structure of the Group and the Company,
the accounting processes and controls, and the industry in which
they operate.
Procedures were performed prior to year-end to evaluate component
procedures and controls, and visits were undertaken by senior team
members to component locations, to refine the audit approach and
ensure sufficient oversight of component auditors.
As at 31 December 2017, Hikma Pharmaceuticals plc had in total
66 entities (subsidiaries and associates) as part of the Group. These
entities may operate solely in one segment but more commonly
operate across two. Each territory (‘component’) submits a Group
reporting package to Hikma’s central accounting team including its
income and financial position prepared under Group accounting
policies which are in compliance with IFRSs. We requested component
teams in the US (West-Ward Pharmaceuticals and West-Ward
Columbus), Jordan (Hikma Pharmaceuticals), Saudi Arabia (Hikma Al
Jazeera Pharmaceuticals Industries), Algeria (Hikma Pharma Algeria)
and Portugal (Hikma Farmaceutica) to audit reporting packages of
certain entities in these territories and report the results of their full
scope audit work to us. This work was supplemented by procedures
over specific balances performed on West-Ward Pharmaceuticals
International Limited (WWPIL) and procedures performed centrally
including the consolidation, taxation and certain component balances
not covered by local component teams.
The involvement of the Group audit team in the work of the component
auditors included conference calls, meetings with local management,
review of working papers, attendance at audit clearance meetings, and
other forms of communication as considered necessary depending on
the significance of the component and the extent of accounting and
audit issues arising. Senior members of the Group audit team also
visited the US, Algeria and Jordan.
Taken together our audit work accounted for 83% of consolidated
revenue, 86% of the adjusted profit measure we use as a basis for
determining materiality and 73% of consolidated profit before tax.
Materiality
The scope of our audit was influenced by our application of materiality.
We set certain quantitative thresholds for materiality. These, together
with qualitative considerations, helped us to determine the scope of our
audit and the nature, timing and extent of our audit procedures on the
individual financial statement line items and disclosures and in evaluating
the effect of misstatements, both individually and in aggregate on the
financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Overall materiality
$14,000,000 (2016: $13,275,000)
$10,000,000 (2016: $13,275,000)
Group financial statements
Company financial statements
How we determined it
5% of profit before tax after adding back certain
non-recurring items such as impairment charges,
indemnity income relating to the Group’s 2016
acquisition activity, severance and other expenses
resulting from the planned restructuring of the
Eatontown, New Jersey manufacturing facility and
the impact of US tax reform.
1% of total assets. This was capped at $10,000,000
(2016: $13,275,000), but calculated based on 1% of
total assets. For the purposes of the Group audit, we
applied a lower materiality to Company balances and
transactions, other than those which were eliminated
on consolidation in the Group financial statements.
Rationale for benchmark applied The Group’s principal measure of earnings is core
profit. Management believes that it reflects the
underlying performance of the Group and is a more
meaningful measure of the Group’s performance.
We took this measure into account in determining
our materiality but did not add back certain non-core
items unless we deemed them to be non-recurring
in nature. Our materiality would have been higher if
we had adjusted for all non-core items.
There is no income statement presented for the parent
Company, as the entity takes the Companies Act 2006
s408 exemption, and therefore users of the financial
statements are not relying on this figure to make
economic decisions.
The Company holds the Group’s investments and
performs treasury functions on behalf of the Group.
Therefore, the entity is not in itself profit-oriented.
The strength of the balance sheet is the key measure
of financial health that is important to shareholders
since the primary concern for the parent Company
is the payment of dividends and servicing of debt.
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of
materiality allocated across components was between $1 million and $10 million.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above $500,000 (Group and
Company audits) (2016: $500,000) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
118
Strategic Report and Directors’ Report
In our opinion, based on the work undertaken in the course of the audit,
the information given in the Strategic Report and Directors’ Report
for the year ended 31 December 2017 is consistent with the financial
statements and has been prepared in accordance with applicable
legal requirements. (CA06)
In light of the knowledge and understanding of the Group and
Company and their environment obtained in the course of the audit,
we did not identify any material misstatements in the Strategic Report
and Directors’ Report. (CA06)
Corporate Governance Statement
In our opinion, based on the work undertaken in the course of the
audit, the information given in the Corporate Governance Statement
(on page 74) about internal controls and risk management systems
in relation to financial reporting processes and about share capital
structures in compliance with rules 7.2.5 and 7.2.6 of the Disclosure
Guidance and Transparency Rules sourcebook of the FCA (‘DTR’)
is consistent with the financial statements and has been prepared
in accordance with applicable legal requirements.
In light of the knowledge and understanding of the Group and Company
and their environment obtained in the course of the audit, we did not
identify any material misstatements in this information.
In our opinion, based on the work undertaken in the course of the
audit, the information given in the Corporate Governance Statement
(on page 74) with respect to the Company’s corporate governance
code and practices and about its administrative, management and
supervisory bodies and their committees complies with rules 7.2.2,
7.2.3 and 7.2.7 of the DTR.
We have nothing to report arising from our responsibility to report
if a corporate governance statement has not been prepared by
the Company.
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We have nothing material to add
or to draw attention to. However,
because not all future events or
conditions can be predicted, this
statement is not a guarantee as to
the Group’s and Company’s ability
to continue as a going concern.
We have nothing to report.
We are required to report if we
have anything material to add or
draw attention to in respect of the
directors’ statement in the
financial statements about
whether the directors considered
it appropriate to adopt the going
concern basis of accounting in
preparing the financial statements
and the directors’ identification of
any material uncertainties to the
Group’s and the Company’s ability
to continue as a going concern
over a period of at least twelve
months from the date of approval
of the financial statements.
We are required to report if the
directors’ statement relating to
going concern in accordance with
Listing Rule 9.8.6R(3) is materially
inconsistent with our knowledge
obtained in the audit.
Reporting on other information
The other information comprises all of the information in the Annual
Report other than the financial statements and our auditors’ report
thereon. The directors are responsible for the other information.
Our opinion on the financial statements does not cover the other
information and, accordingly, we do not express an audit opinion
or, except to the extent otherwise explicitly stated in this report,
any form of assurance thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the audit,
or otherwise appears to be materially misstated. If we identify an
apparent material inconsistency or material misstatement, we are
required to perform procedures to conclude whether there is a material
misstatement of the financial statements or a material misstatement
of the other information. If, based on the work we have performed, we
conclude that there is a material misstatement of this other information,
we are required to report that fact. We have nothing to report based
on these responsibilities.
With respect to the Strategic Report, Directors’ Report and Corporate
Governance Statement, we also considered whether the disclosures
required by the UK Companies Act 2006 have been included.
Based on the responsibilities described above and our work
undertaken in the course of the audit, the Companies Act 2006,
(CA06), ISAs (UK) and the Listing Rules of the Financial Conduct
Authority (FCA) require us also to report certain opinions and matters
as described below (required by ISAs (UK) unless otherwise stated).
119
Hikma Pharmaceuticals PLCFinancial statements
Independent auditors’ report to the members
of Hikma Pharmaceuticals PLC continued
Responsibilities for the financial statements
and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Directors’ Responsibility Statement
set out on page 111, the directors are responsible for the preparation of
the financial statements in accordance with the applicable framework
and for being satisfied that they give a true and fair view. The directors
are also responsible for such internal control as they determine is
necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for
assessing the Group’s and the Company’s ability to continue as a going
concern, disclosing as applicable, matters related to going concern and
using the going concern basis of accounting unless the directors either
intend to liquidate the Group or the Company or to cease operations,
or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditors’ report that
includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with
ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material
if, individually or in the aggregate, they could reasonably be expected
to influence the economic decisions of users taken on the basis of
these financial statements.
A further description of our responsibilities for the audit of the
financial statements is located on the FRC’s website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our
auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and only for
the Company’s members as a body in accordance with Chapter 3 of
Part 16 of the Companies Act 2006 and for no other purpose. We do
not, in giving these opinions, accept or assume responsibility for any
other purpose or to any other person to whom this report is shown
or into whose hands it may come save where expressly agreed by
our prior consent in writing.
The directors’ assessment of the prospects of the Group and
of the principal risks that would threaten the solvency or liquidity
of the Group
We have nothing material to add or draw attention to regarding:
— The directors’ confirmation on page 61 of the Annual Report that they
have carried out a robust assessment of the principal risks facing the
Group, including those that would threaten its business model, future
performance, solvency or liquidity.
— The disclosures in the Annual Report that describe those risks and
explain how they are being managed or mitigated.
— The directors’ explanation on page 65 of the Annual Report as
to how they have assessed the prospects of the Group, over what
period they have done so and why they consider that period to
be appropriate, and their statement as to whether they have a
reasonable expectation that the Group will be able to continue in
operation and meet its liabilities as they fall due over the period of
their assessment, including any related disclosures drawing attention
to any necessary qualifications or assumptions.
We have nothing to report having performed a review of the directors’
statement that they have carried out a robust assessment of the
principal risks facing the Group and statement in relation to the
longer-term viability of the Group. Our review was substantially less
in scope than an audit and only consisted of making inquiries and
considering the directors’ process supporting their statements;
checking that the statements are in alignment with the relevant
provisions of the UK Corporate Governance Code (the ‘Code’); and
considering whether the statements are consistent with the knowledge
and understanding of the Group and Company and their environment
obtained in the course of the audit. (Listing Rules)
Other Code Provisions
We have nothing to report in respect of our responsibility to
report when:
— The statement given by the directors, on page 111, that they
consider the Annual Report taken as a whole to be fair, balanced
and understandable, and provides the information necessary for
the members to assess the Group’s and Company’s position and
performance, business model and strategy is materially inconsistent
with our knowledge of the Group and Company obtained in the
course of performing our audit.
— The section of the Annual Report on pages 78 to 81 describing the
work of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
— The directors’ statement relating to the Company’s compliance
with the Code does not properly disclose a departure from a relevant
provision of the Code specified, under the Listing Rules, for review
by the auditors.
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to be
audited has been properly prepared in accordance with the Companies
Act 2006. (CA06)
120
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if,
in our opinion:
— we have not received all the information and explanations we require
for our audit; or
— adequate accounting records have not been kept by the Company,
or returns adequate for our audit have not been received from
branches not visited by us; or
— certain disclosures of directors’ remuneration specified by law are
not made; or
— the Company financial statements and the part of the Directors’
Remuneration Report to be audited are not in agreement with the
accounting records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit Committee, we were
appointed by the directors on 11 May 2016 to audit the financial
statements for the year ended 31 December 2016 and subsequent
financial periods. The period of total uninterrupted engagement
is 2 years, covering the years ended 31 December 2016 to
31 December 2017.
Mark Gill
Senior Statutory Auditor
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
13 March 2018
121
Hikma Pharmaceuticals PLCFinancial statements
Consolidated income statement
For the year ended 31 December 2017
Revenue
Cost of sales
Gross profit
Sales and marketing expenses
General and administrative expenses
Research and development expenses
Other operating expenses (net)
Total operating expenses
Operating profit/(loss)
Finance income
Finance expense
Profit/(loss) before tax
Tax
Profit/(loss) for the year
Attributable to:
Non-controlling interests
Equity holders of the parent
Earnings/(loss) per share (cents)
Basic
Diluted
Note
4
4
4
8
4
9
10
11
6
34
13
13
2017
Exceptional items
and other
adjustments
(Note 5)
$m
–
2017
Core
results
$m
1,936
(6)
(6)
(48)
(1)
(6)
(1,072)
(1,127)
(1,133)
93
(26)
(1,066)
(29)
(1,095)
–
(1,095)
(1,095)
(963)
973
(188)
(238)
(115)
(46)
(587)
386
2
(60)
328
(72)
256
4
252
256
105.0
104.6
2017
Reported
results
$m
1,936
(969)
967
(236)
(239)
(121)
(1,118)
(1,714)
(747)
95
(86)
(738)
(101)
(839)
4
(843)
(839)
(351.3)
(349.8)
2016
Exceptional items
and other
adjustments
(Note 5)
$m
–
2016
Reported
results
$m
1,950
(32)
(32)
(37)
(36)
(24)
12
(85)
(117)
9
(41)
(149)
28
(121)
–
(121)
(121)
(964)
986
(221)
(244)
(150)
(69)
(684)
302
12
(104)
210
(52)
158
3
155
158
66.5
66.2
2016
Core
results
$m
1,950
(932)
1,018
(184)
(208)
(126)
(81)
(599)
419
3
(63)
359
(80)
279
3
276
279
118.5
117.9
122
122
Consolidated statement of comprehensive income
For the year ended 31 December 2017
Profit/(loss) for the year
Other Comprehensive Income/(loss)
Items that may be reclassified
subsequently to the income
statement, net of tax:
Effect of change in investment
designated at fair value
Exchange difference on translation
of foreign operations
Total comprehensive income/(loss)
for the year
Attributable to:
Non-controlling interests
Equity holders of the parent
Note
23
34
2017
Exceptional Items
and other
adjustments
(Note 5)
$m
(1,095)
2017
Core
Results
$m
256
2017
Reported
results
$m
(839)
2016
Exceptional Items
and other
adjustments
(Note 5)
$m
(121)
2016
Core
results
$m
279
2016
Reported
results
$m
158
2
20
–
–
2
20
278
(1,095)
(817)
3
275
278
–
(1,095)
(1,095)
3
(820)
(817)
1
(90)
190
–
190
190
–
–
(121)
–
(121)
(121)
1
(90)
69
–
69
69
123
123
Financial statementsHikma Pharmaceuticals PLC
Consolidated balance sheet
At 31 December 2017
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Investment in associates and joint ventures
Deferred tax assets
Financial and other non-current assets
Current assets
Inventories
Income tax receivable
Trade and other receivables
Collateralised and restricted cash
Cash and cash equivalents
Other current assets
Total assets
Current liabilities
Bank overdrafts and loans
Trade and other payables
Income tax provision
Other provisions
Other current liabilities
Net current assets
Non-current liabilities
Long-term financial debts
Obligations under finance leases
Deferred tax liabilities
Other non-current liabilities
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
14
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
17
32
33
35
34
2017
$m
282
503
828
6
135
60
1,814
488
53
707
4
227
95
1,574
3,388
86
365
82
26
238
797
777
670
20
49
324
1,063
1,860
1,528
40
282
(1)
1,193
1,514
14
1,528
2016
$m
682
1,037
969
7
172
48
2,915
459
2
759
7
155
66
1,448
4,363
117
343
112
27
319
918
530
721
21
15
277
1,034
1,952
2,411
40
282
(1)
2,075
2,396
15
2,411
The financial statements of Hikma Pharmaceuticals PLC, registered number 5557934, on pages 122 to 171 were approved by the Board of Directors on
13 March 2018 and signed on its behalf by:
Said Darwazah
Director
13 March 2018
Mazen Darwazah
Director
124
124
Consolidated statement of changes in equity
For the year ended 31 December 2017
Translation
reserves
$m
(161)
Retained
earnings
$m
1,144
Total
reserves
$m
1,021
Share
capital
$m
35
Share
premium
$m
282
Own
shares
$m
(1)
Balance at 1 January 2016
Profit for the year
Effect of change in investment
designated at fair value (Note 23)
Currency translation loss
Total comprehensive
income/(loss) for the year
Total transactions with owners,
recognised directly in equity
Issue of equity shares for
acquisition of a subsidiary
Cost of equity-settled employee
share scheme (Note 38)
Deferred tax arising on
share-based payments
Dividends on ordinary shares
(Note 12)
Acquisition of subsidiaries
Balance at 31 December 2016
and 1 January 2017
Loss for the year**
Effect of change in investment
designated at fair value (Note 23)
Currency translation gain/(loss)
Total comprehensive
(loss)/income for the year
Total transactions with owners,
recognised directly in equity
Cost of equity-settled employee
share scheme (Note 38)
Dividends on ordinary shares
(Note 12)
Adjustment arising from change
in non-controlling interests*
Balance at 31 December 2017
Merger and
Revaluation
reserves
$m
38
–
–
–
–
155
155
–
(87)
1
–
1
(87)
–
(87)
156
69
1,039
–
–
–
–
–
–
–
–
–
–
1,039
22
22
1
1
(77)
–
(77)
–
1,077
(1,039)
(248)
–
1,246
196
2,075
(843)
–
–
(1,039)
–
–
–
38
–
21
21
–
–
–
1
–
1
21
197
(821)
22
22
(79)
(79)
(4)
(4)
(227)
1,382
1,193
Equity
attributable
to equity
shareholders
of the parent
$m
1,337
Non-
controlling
interests
$m
15
155
1
(87)
69
3
–
(3)
–
Total
equity
$m
1,352
158
1
(90)
69
1,044
–
1,044
22
1
(77)
–
2,396
(843)
1
21
–
–
(1)
1
15
4
–
(1)
22
1
(78)
1
2,411
(839)
1
20
(821)
3
(818)
22
(79)
(4)
1,514
–
(2)
(2)
14
22
(81)
(6)
1,528
–
–
–
–
5
–
–
–
–
40
–
–
–
–
–
–
–
40
–
–
–
–
–
–
–
–
–
282
–
–
–
–
–
–
–
282
–
–
–
–
–
–
–
–
–
(1)
–
–
–
–
–
–
–
(1)
* During the year the Group acquired the remaining stake in Ibn Al Baytar bringing the total ownership to 100%. This was completed in April 2017.
** A loss of $1,039 million has been allocated from retained earnings to the merger and revaluation reserves in relation to West-Ward Columbus impairment (Notes 5, 14 and 15).
125
125
Financial statementsHikma Pharmaceuticals PLC
Consolidated cash flow statement
For the year ended 31 December 2017
Cash generated from operating activities
Income tax paid
Net cash generated 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
Cash received from investment in joint ventures
Investment in financial and other non-current assets
Investment in available for sale investments
Acquisition of business undertakings net of cash acquired*
Finance income
Net cash used in investing activities
Financing activities
Increase/(decrease) in collateralised and restricted cash
Proceeds from issue of long-term financial debts
Repayment of long-term financial debts
Proceeds from short-term borrowings
Repayment of short-term borrowings
Dividends paid
Dividends paid to non-controlling shareholders of subsidiaries
Interest paid
Purchase of non-controlling interest in subsidiary
(Payment)/proceeds from co-development and earnout payment agreement, net
Net cash (used in)/generated by financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Foreign exchange translation movements
Cash and cash equivalents at end of year
Note
36
2017
$m
546
(103)
443
(107)
4
(44)
–
2
(2)
(8)
3
1
(151)
3
349
(401)
323
(349)
(79)
(2)
(57)
(6)
(1)
(220)
72
155
–
227
2016
$m
369
(76)
293
(122)
1
(68)
24
–
(11)
(6)
(515)
2
(695)
(4)
471
(326)
345
(337)
(77)
(1)
(54)
–
2
19
(383)
553
(15)
155
* During the year, the Group received a $3 million payment from Boehringer Ingelheim in respect of the price adjustment receivable to the West-Ward Columbus acquisition.
126
126
Notes to the consolidated financial statements
1. Adoption of new and revised 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 may
impact the accounting for future transactions and arrangements.
IAS 7 (Amendments)
Statement of cash flows on disclosure
initiative
The following Standards and Interpretations have not been applied in
these financial statements because while in issue, are not yet effective
(and in some cases have not yet been adopted by the EU):
IFRS 9
Financial instruments
IAS 12 (Amendments)
Income taxes on Recognition of deferred tax
assets for unrealised losses
IFRS 15
Revenue from contracts with customers
IFRS 15 (Amendments)
Revenue from contracts with customers
IFRS 40 (Amendments)
Investment property
IFRS 4 (Amendments)
Insurance contracts
IFRS 16
Leases
IFRS 2 (Amendments)
Share based payment
Foreign currency transactions and advance
considerations
Uncertainty over income tax treatments
Insurance contracts
IFRIC 22
IFRIC 23
IFRS 17
Annual improvements
2014-2016
Annual improvements
2015-2017
IFRS 9 Financial instruments
In July 2014, the IASB issued the final version of IFRS 9 Financial
Instruments that replaces IAS 39 Financial Instruments: Recognition
and Measurement and all previous versions of IFRS 9. IFRS 9 brings
together all three aspects of the accounting for financial instruments
project: classification and measurement, impairment and hedge
accounting. The new version of IFRS 9 is effective for annual periods
beginning on or after 1 January 2018, with early application permitted.
Except for hedge accounting, retrospective application is required;
but providing comparative information is not mandatory. For hedge
accounting, the requirements are generally applied prospectively,
with some limited exceptions.
The Group plans to adopt the new standard on the effective date and
will not restate comparative information.
(a) Classification and measurement
The Group does not expect a significant impact on its balance sheet or
equity upon applying the classification and measurement requirements
of IFRS 9.
Loans as well as trade receivables are generally held to collect contractual
cash flows and are expected to give rise to cash flows solely representing
payments of principal and interest. The Group believes that the contractual
cash flow characteristics of those instruments meet the criteria for
amortised cost measurement under IFRS 9 and any reclassification
of these instruments is estimated to be minimal.
(b) Impairment
IFRS 9 requires the Group to record expected credit losses on all of its
debt securities, loans and trade receivables, either on a 12-month or
lifetime basis. The Group will apply the simplified approach and record
lifetime expected losses on all trade receivables and will not restate
comparative information. During 2017, the Group has performed an
impact assessment of IFRS 9 to estimate the additional provision to be
recorded resulting from the expected credit loss from its trade receivables
and anticipated no significant change in level of impairment recognised
compared to that based on current procedures.
IFRS 15 Revenue from contracts with customers
The IASB issued IFRS 15 Revenue from contracts with customers
(‘IFRS 15’) in May 2014. Subsequent amendments, ‘Clarifications
to IFRS 15,’ were issued in April 2016. Both of these have now
been endorsed by the EU. The new amended standard replaces
IAS 18 Revenue, IAS 11 Construction Contracts and other existing
revenue interpretations.
IFRS 15 sets out new requirements for recognising revenue and costs
from contracts with customers. In particular, it outlines new principles
for an entity to follow in determining the measurement and recognition
of revenue using a five-step model. This model requires revenue to be
recognised when or as goods or services are transferred to customers
based on the consideration to which the entity expects to be entitled.
The new standard is required to be applied by the Group from 1 January
2018 and hence IFRS 15 will be adopted in the financial statements for
the year ending 31 December 2018.
While our assessment remains ongoing, from work performed to date,
which has included a detailed review of some of our largest customer
contracts:
– as the majority of the Group’s revenues are derived from the supply
of goods, (i.e. a single performance obligation), the transition to
IFRS 15 is not anticipated to have a significant impact on the Group’s
revenue recognition (including the approach applied under IAS 18 for
estimating chargebacks, returns, rebates and price adjustments) and
– it is currently anticipated that the standard will be adopted on a
modified retrospective basis
It is, though, noted that the Group’s current accounting policy to defer
revenue recognition in isolated circumstances where dynamic market
circumstances mean that the ultimate net selling price cannot be reliably
measured (as currently applied under IAS 18), will need to be revised. IFRS
15 requires variable consideration to be included in the transaction price
(albeit only to the extent that it is highly probable that a significant reversal
in the amount of cumulative revenue recognised will not occur). As the
Group has rarely deferred revenue under IAS 18 on the basis of being
unable to reliably measure the ultimate net selling price, this change
in the Group’s stated accounting policy is not anticipated to give rise
to a significant difference.
127
127
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
2. Significant accounting policies
General Information
Hikma Pharmaceuticals PLC is a public limited liability company
incorporated in England and Wales under the Companies Act 2006.
The address of the registered office is given on page 181.
Basis of preparation
Hikma Pharmaceuticals PLC’s consolidated financial statements are
prepared in accordance with:
(i) EU endorsed International Financial Reporting Standards (‘IFRS’)
and interpretations of the International Financial Reporting Standards
Interpretations Committee and those parts of the Companies
Act 2006 as applicable to companies using IFRS.
(ii) International Financial Reporting Standards as issued by the
International Accounting Standards Board (‘IASB’).
The financial statements have been prepared under the historical cost
convention, except for the revaluation to fair value of certain financial
assets and liabilities.
The accounting policies included in this note have been applied
consistently other than where new policies have been adopted.
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 and therefore considered
the going concern basis as appropriate. Therefore, they continue to adopt
the going concern basis of accounting in preparing the financial
statements (see page 65).
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’).
The consolidated financial statements include:
– the assets and liabilities, results and cash flows of the Company
and its subsidiaries, (entities that are controlled by the Group, through
the power of governing the financial and operating policies to obtain
benefits from its activities)
– the Group’s share of the results and net assets of associates and
joint ventures
The financial statements of entities consolidated are made up to
31 December each year.
Interests acquired in entities are consolidated from the date the Group
acquires control and interests sold are de-consolidated from the date
control ceases.
Goodwill is capitalised as a separate item in the case of subsidiaries and as
part of the cost of investment in the case of joint ventures and associates.
Transactions and balances between subsidiaries are eliminated and no
profit before tax is taken on sales between subsidiaries until the products
are sold to customers outside the Group.
Transactions with non-controlling interests are recorded directly in equity.
Deferred tax relief on unrealised intra-Group profit is accounted for only
to the extent that it is considered recoverable.
Business combinations
The acquisition of subsidiaries is accounted for using the acquisition
method. All identifiable assets, liabilities and contingent liabilities acquired
are measured at fair value on the acquisition date. All acquisition related
costs are recognised in the consolidated income statement as incurred.
The consideration is measured at the aggregate fair values of assets
given, liabilities incurred or assumed, and equity instruments issued by
the Group in exchange for control of the acquiree, at the acquisition date.
Where applicable, this consideration may include the fair value of assets
or liabilities resulting from a contingent consideration arrangement.
Subsequent changes to 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.
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).
The resulting gain or loss, if any, is recognised in the consolidated
income statement.
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.
128
128
2. Significant accounting policies continued
Investment in associates and joint ventures
An associate is an entity which the Group has significant influence over,
where the Group has the power to participate in the financial and operating
policy decisions of the investee revenue.
Joint Ventures are entities that the Group has the ability to exercise joint
control over their economic activities and net assets.
The results and assets and liabilities of associates and joint ventures are
incorporated in these financial statements using the equity method of
accounting, where the investments 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 impairment charges are 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.
Foreign currencies
Foreign currency transactions, being transactions denominated in a
currency other than an individual Group entity’s functional currency,
are translated into the relevant functional currencies of individual Group
entities at average rates for the relevant monthly accounting periods, which
approximate to actual rates. Monetary assets and liabilities arising from
foreign currency transactions are retranslated at exchange rates prevailing
at the reporting date. Exchange gains and losses on loans and on short-
term foreign currency borrowings and deposits are included within finance
income and expense. Exchange differences on all other foreign currency
transactions are recognised in operating profit in the individual Group
entity’s accounting records. Non-monetary items arising from foreign
currency transactions are not retranslated in the individual Group entity’s
accounting records. In the Consolidated Financial Statements, income
and expense items for Group entities with a functional currency other than
US dollars are translated into US dollars at average exchange rates, which
approximate to actual rates, for the relevant accounting periods. Assets
and liabilities are translated at the US dollar exchange rates prevailing
at the reporting date. Exchange differences arising on consolidation are
recognised in the consolidated statement of other comprehensive income.
Hyperinflationary economies
In hyperinflationary economies, when translating the results of operations
into US dollars, assets, liabilities, income statement and equity accounts
are translated at the rates prevailing on the balance sheet date. Sudan
was considered as a hyperinflationary economy in the year ended
31 December 2016. As of 31 December 2017, Sudan is no longer considered
as a hyperinflationary economy and had no material impact in 2017,
however, it will be kept under review in 2018 for hyperinflation. The effect
of inflation accounting in Sudan for the year ended 31 December 2016
was not material.
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 risk of loss and rewards 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.
Dynamic market changes can generate uncertainty as to the ultimate
net selling price of a pharmaceutical product and therefore revenue cannot
always be measured reliably at the point when the product is supplied
or made available to external customers.
If the ultimate net selling price cannot be reliably measured, revenue
recognition is deferred until a reliable measurement can be made. Deferred
revenue is included in other current liabilities in the consolidated balance
sheet, if any.
Chargebacks
The provision for chargebacks is the most significant and complex
estimate used in the recognition of revenue. In the US, 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
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 as a reduction of revenue in the
period in which the underlying sales are recognised.
The Group estimates its provision for returns based on historical experience,
representing management’s best estimate. While such experience has
enabled 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.
129
129
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
2. Significant accounting policies continued
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 enabled 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 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.
Free goods
Free goods are issued to customers as sale incentives, reimbursement of
agreed upon expenses incurred by the customer or as compensation for
expired or returned goods. Free goods are recognised at cost at the date
at which one of the above conditions is met. The costs associated with
free goods are classified as cost of sales.
Share-based payments
At the Company’s discretion and subject to the achievement of group and
personal performance criteria, employees (including executive directors)
of the Group receive performance remuneration in the form of share-based
payments, whereby employees render their services in exchange for shares
or rights over shares (‘equity-settled transactions’) under either the 2014
Executive Incentive Plan (‘EIP’) or the 2009 Management Incentive Plan
(‘MIP’) and the 2007 Long-Term Incentive Plan (‘LTIP’) noting that the last
grant was issued in 2014.
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 EIP and MIP are
determined based on the share price as at the date of grant discounted
by dividend yield.
The expected life used in the models applied to fair value the EIPs and
MIPs have 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 38). 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 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
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.
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.
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.
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.
Leasing
Leases are classified as finance leases whenever the terms of the lease
substantially transfer 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.
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2. Significant accounting policies continued
A new standard for leasing, IFRS 16, will come into effect on 1 January 2019.
We will adopt this new standard from that date. Our assessment of the
impact this will have on our business is ongoing and we will provide further
updates in future reporting periods.
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.
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 current tax in the current period
and deferred tax.
The current tax incurred in the period is based on taxable profit for the
year and prior year movement accounted for in the current 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 tax incurred 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 reverse. To the extent 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, no deferred tax is provided.
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.
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.
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 booked on unrealised inter-company profits on inventory
sales, to the extent they are expected to unwind, at the rate applicable to
the distribution company. Where there is a significant difference between
the tax rates of the relevant companies, this creates deferred tax that can
materially impact the Group’s effective tax rate. In 2017, this had a 0.9%
unfavourable impact on the effective tax rate (2016: 6.7% favourable).
Exceptional items and other adjustments
We use a number of non-IFRS measures to report and monitor the
performance of our business. Management uses these adjusted numbers
internally to measure our progress and for setting performance targets.
We also present these numbers, alongside our reported results, to external
audiences to help them understand the underlying performance of
our business. Our adjusted numbers may be calculated differently
to other companies.
Adjusted measures are not substitutable for IFRS numbers and should
not be considered superior to results presented in accordance with IFRS.
Core results
Reported results represent the Group’s overall performance. However,
these results can include one-off or non-cash items that mask the
underlying performance of the Group. To provide a more complete
picture of the Group’s performance to external audiences, we provide,
alongside our reported results, core results, which are a non-IFRS
measure. Reconciliation between core and reported results are
provided in our Financial Statements.
Our core results exclude the exceptional items and other adjustments
set out in Note 5 in the notes to the financial statements.
Exceptional items
Exceptional items represent adjustments for costs and profits which
management believes to be exceptional in nature by virtue of their size or
incidence, or have a distortive effect on current year earnings. Such items
include costs associated with business combinations, one-off gains and
losses on disposal of business assets, reorganisation costs, write-down and
impairment charges on assets and impairment of goodwill, net of any tax
impact.
Other adjustments
These include amortisation of intangibles excluding software and finance
cost resulted from remeasurement of contingent consideration, financial
liability and asset, net of any tax impact.
Both exceptional items and other adjustments are excluded from
core results to improve comparability and consistency of our financial
statements which is consistent with our fellow companies. We represent
and discuss our Group and segmental financials reconciled between
reported and core results. This presentation allows for full visibility and
transparency of our financials so that shareholders are able to clearly
assess the performance factors of the Group.
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Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
2. Significant accounting policies continued
The basis of determining exceptional items did not change from prior year.
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.
Judgment 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 internally generated intangible asset is met, which
is usually when approval from the relevant regulatory authority is
considered probable.
Also, the Group engages with third party research and development
companies to develop products on its behalf. Substantial payments
made to such third parties to fund research and development efforts are
recognised as intangible assets if the capitalisation criteria for recognising
an intangible asset is met, which typically is when licence fees and
milestone payments are made, all other payments are charged to
the consolidated income statement.
Principal intangible assets are:
(a) Goodwill: arising in a business combination and 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.
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.
On disposal of a subsidiary, the attributable amount of goodwill is
included in the determination of the consolidated income statement
on disposal.
(b) 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.
(c) Product related intangibles:
(i) Product files and under-licensed products recognised through
acquisitions, and from development activities are amortised over
their useful economic lives once the asset is ready for use.
(ii) In process product files recognised on acquisition are amortised
over the useful economic life once the asset is ready for use.
(d) Trade names: are amortised over their useful lives from the date
of acquisition.
(e) Marketing rights: are amortised over their useful lives commencing
in the year in which the rights first generate sales.
(f) Purchased software: is amortised over the useful economic life when
the asset is ready for use.
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
Machinery and equipment
2% to 4%
5% to 33%
Vehicles, fixtures and equipment
6% to 33%
A units of production method of depreciation is applied to operations in
their start-up phase, 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 or their useful life.
Whenever the recoverable amount of an asset is impaired, the carrying
value is reduced to the recoverable amount and the impairment loss is
taken to the 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.
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2. Significant accounting policies continued
Impairment of property, plant and equipment and
intangible assets
At the same time each year the Group carries out an impairment review
for goodwill and intangible assets that are not yet ready for use. At the
year end, the Group reviews the carrying amounts of its property, plant
and equipment and intangible assets that are subject for depreciation
and amortisation 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). In consideration of the impairment review, the
Group compares the carrying value of the asset to its recoverable amount.
The 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.
When an impairment loss for the asset, other than goodwill, subsequently
reverses, the carrying amount of the asset (or cash-generating unit) is
increased to the revised estimate of its recoverable amount. However, the
increased carrying amount should not exceed the carrying amount that
would have been determined had there been no impairment (or cash-
generating unit) in prior years. A reversal of an impairment loss is
recognised immediately in the consolidated income statement.
The Group’s Goodwill and intangible assets are tested as follows;
(a) Goodwill is allocated to each of the Group’s cash-generating units.
These cash-generating units 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.
The assumptions used in the impairment tests are set out in Note 14.
(b) Intangible assets that are not yet ready for use are not subject to
amortisation, and are tested annually for impairment or more frequently
if events or changes in circumstances indicate that they might be
impaired. Other intangible assets are tested for impairment whenever
events or changes in circumstances indicate that the carrying amount
may not be recoverable.
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 costs of own-manufactured products comprise of 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. Inventory related provisions are made for net realisable value lower
than cost, slow moving and short dated inventory.
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.
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
The current accounting policy falls under IAS 39, while starting 1 January
2018, IFRS 9 will be implemented, replacing the current standard.
Financial Assets within the Group are:
(i) Available for sale (‘AFS’) financial assets
Listed shares 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 the 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. When the investment is disposed of or is determined
to be impaired, the cumulative gain or loss previously recognised in the
investment’s 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. If there is
objective evidence that an impairment loss has been incurred on unlisted
shares that is stated at cost, the amount of impairment is measured as
the difference between the carrying amount of the financial asset and the
present value of estimated future cash flows discounted at the current
market rate of return for a similar financial asset, which is taken to the
consolidated income statement.
(ii) 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’. These receivables include the
reimbursements of certain contingent payments in respect to milestones
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.
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.
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Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
2. Significant accounting policies continued
Note 31 sets out details of the fair values of the derivative instruments
used for hedging purposes.
Income is recognised on an effective interest basis for debt instruments
other than those financial assets classified as ‘at FVTPL’.
Financial liabilities
Financial liabilities are classified in two categories: financial liabilities
‘at FVTPL’ or ‘other financial liabilities’. The classification depends on the
nature and purpose of the financial liabilities and is determined at the
time of initial recognition.
(i) Financial liabilities ‘at FVTPL’
The Group currently has two financial liabilities at FVTPL as below:
– co-development and earn out payment agreements with third parties
where the Group earns milestone payments reflecting the achievement
of R&D and commercialisation milestones. Those payments are
recognised as financial liabilities once received
– contingent consideration arising from West-Ward Columbus acquisition
represent contractual liabilities to make payments to third parties in the
form of milestone payments that are dependent on the achievement
of certain US FDA approval milestones; and royalty payments based on
future sales of certain products that are currently under development
Cash flow hedge
The effective portion of changes in the fair value of a derivative that
is designated and qualifies as a cash flow hedge 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.
Financial liabilities are revalued at the end of each reporting period to
represent the value of expected future cash outflows and the difference
is presented as finance cost/income. These financial liabilities are currently
booked under other non-current liabilities and other current liabilities
in the consolidated balance sheet.
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.
(ii) Other financial liabilities
Other financial liabilities, including borrowings, are initially measured
at fair value, net of transaction costs.
Equity instruments
Equity instruments issued by the Group are recorded at the proceeds
received, net of direct issue costs.
Other financial liabilities are subsequently measured at amortised cost
using the effective interest method, with interest expense recognised on
an effective interest method.
3. Critical accounting judgements and
key sources of estimation uncertainty
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.
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.
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 tests whether the hedging instrument is
highly effective in offsetting changes in fair values or cash flows of the
hedged item.
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 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 (Note 2)
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 (Note 2) which vary by
product arrangements and buying groups. If the ultimate net selling price
cannot be reliably measured, revenue recognition is deferred until a reliable
measurement can be made. The deferred revenue in respect of this is
included in other current liabilities in the consolidated balance sheet.
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3. Critical accounting judgements and
key sources of estimation uncertainty continued
Accounts receivable and bad debts (Note 20)
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 of credit and insurance.
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 (Note 14)
The critical areas of judgement in relation to the valuation of goodwill
and intangible assets involve:
Testing for impairment of goodwill and other assets included within
a CGU to establish the appropriate valuation of the CGU. The valuation
is used for comparison to the carrying value of the net assets of the
CGU and requires the following key judgements:
– establishing a five-year business plan for purposes of forecasting
free cash flows which involves forecasting appropriate sales and
operating expenses taking into considerations both internal and
external information. This involves judgements in evaluating current
and future market conditions, market size, estimated market share,
and competition
– determining future capital expenditures and working capital
requirements over the five-year period
– determining a discount rate that appropriately reflects the Group’s
weighted average cost of capital as adjusted for specific risk premiums
reflecting risks inherent in achieving the projected future cash flows
– determining appropriate terminal growth rate beyond the forecast period
– establishing a normalised terminal year to determine the terminal
year value, including normalised gross margins
Valuing intangible assets upon initial recognition as at the acquisition
date and testing for impairment
– establishing revenue forecasts (including market size, estimated
expected market share, number of competitors and net selling prices)
– establishing the expected economic useful lives of the product-related
intangibles
– determining the sales and the allocation of marketing, R&D and
other operating costs to the individual product-related intangibles
– calculating a contributory asset charge (on working capital, fixed
assets and workforce)
– determining a discount rate and specific risk premiums
– for pipeline products, establishing the launch date and probability
of a successful product approval are also critical judgements
– taking into consideration potential scenarios when determining
forecast revenues
– determining whether a ‘triggering event’ has occurred for intangible
assets with finite lives. In such case we first assess the qualitative factors
to determine whether it is more likely than not that the fair value of a finite
asset is less than its carrying amount as a basis for determining whether
it is necessary to perform a quantitative goodwill impairment test
Contingent liabilities related to acquisitions (Notes 27, 32)
The Group entered contractual liabilities in the form of milestone and
royalty payments, where the critical areas of judgement to those liabilities
are the probability assigned to reaching the success-based milestones
and the management’s estimate of future sales.
If the future sales were 5% higher or lower, the fair value of the financial
liability at profit or loss will increase/decrease by $6 million.
If the probability assigned to reaching the success-based milestones
were 5% higher or lower, the fair value of the financial liability at profit
or loss will increase/decrease by $5 million.
Co-development and earnout payment
agreement (Notes 27, 32)
In connection with a co-development arrangement for certain products,
the Group has a liability for future earnout payments where the critical
area of judgment is management’s estimate of future sales.
If the above critical areas of judgement were 10% higher or lower, the
fair value of the financial liability at profit or loss will increase/decrease
by $1 million.
Taxation (Notes 11, 17)
Critical judgements in applying the Group’s accounting policies
The following are the critical tax related judgements, apart from those
involving estimations (which are dealt with separately below), that
management have made in the process of applying the Group’s
accounting policies and that have the most significant effect on the
amounts recognised in the financial statements:
Recognition of deferred tax assets
The recognition of deferred tax assets is based on the current forecast
of taxable profits arising in the jurisdiction in which the deferred tax asset
arises. A deferred tax asset is recognised to the extent that there are
forecast taxable profits within a reasonable period. The Group has a
potential deferred tax asset of $278 million (2016: $361 million), of which
$135 million (2016: $172 million) has been recognised. This exercise is
reviewed each year and, to the extent forecasts change, an adjustment
to the recognised deferred tax asset may be made.
Recognition of deferred tax assets is driven by the Group’s ability to utilise
the deferred tax asset which is reliant on forecast taxable profits arising
in the jurisdiction in which losses are incurred.
Key sources of estimation uncertainty
The Group has the following key assumptions concerning the future, or
other key sources of estimation uncertainty in the reporting period that
may have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year.
135
135
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
3. Critical accounting judgements and key
sources of estimation uncertainty continued
Tax audit risk
In common with most international organisations, the Group may
be subject to audit from revenue authorities from time to time. Where
an outflow of funds is believed to be probable and a reliable estimate
of the outcome of the dispute can be made, management provides
for its best estimate of the liability. These estimates take into account
the specific circumstances of each dispute and relevant external advice,
are inherently judgemental and could change substantially over time
as new facts emerge and each dispute progresses. Hikma continues to
invest in its financial systems to ensure the quality of the Group’s financial
data which reduces the risk of an adverse revenue authority audit.
Furthermore, Hikma continues to believe that it has made adequate
provision for the liabilities likely to arise from open assessments and audits.
Where open issues exist, the ultimate liability for such matters may vary
from the amounts provided and is dependent upon the outcome of
negotiations with the relevant tax authorities or, if necessary, litigation
proceedings.
Other Risks
In addition to tax audits, the Group faces other potential tax risks that
could affect the sustainability of the Group’s effective tax rate. The main
risks are noted below. Hikma regularly takes professional advice to ensure
the risks mentioned below are appropriately analysed and managed with
any ultimate potential liability being adequately provided.
Transfer Pricing Risk
The transfer pricing risk can arise from a difference in view over the pricing
of cross-border, inter-company product sales and services and of sales of
assets. The standard by which most authorities, and the Group, assess the
transfer price is whether it is set at arm’s length. An upward adjustment by
the tax authority of one territory will not necessarily result in the downward
adjustment by the other territory, potentially leading to an increased
estimated tax cost through a mismatch of tax deductions and taxable
income, as well as a potential increase arising out of a rate arbitrage. The
Group has considered the risk in detail and has provided for potential tax
adjustments so does not believe that any adjustment will materially impact
the rate going forward.
Export Exemption Withdrawal Risk
The Group benefits from a tax exemption in Jordan arising partly from the
WTO approved Export Exemption that will be in force up until 31 December
2018. Hikma does not believe that the impact of the future withdrawal of
this exemption will materially impact the Group’s tax rate in light of the
alternative options available under Jordan’s existing domestic rules.
Legislative Change Risks
The Group makes substantial sales in the US market of products owned
by a UK Group company which also arranges for the product development
and manufacture, both in the US and in other territories in which the Group
operates. Whilst a reduction in the US federal tax rate beneficially impacts
the Group’s effective tax rate, other aspects of the recently enacted US tax
reforms, such as base erosion and anti-avoidance tax and a restriction on
interest deductions, could have a negative impact on the Group’s effective
tax rate. Continuing with the impact of changes in tax rules in the territories
in which we operate, we are experiencing an upward pressure on the
Group’s effective tax rate as a result of the Base Erosion and Profit Shifting
(‘BEPS’) initiative of the OECD. The Group continues to monitor the
impact of such changes as they become clear and is taking any action
necessary to help mitigate any adverse consequences to the extent
reasonably possible.
Valuation Risk
As part of a reorganisation following the West-Ward Columbus acquisition
in the prior year, certain assets and liabilities were transferred intra-group
with external valuations obtained. If these valuations are successfully
challenged by relevant tax authorities, it could adversely impact the tax
recorded on the reorganisation.
Sensitivity
As at the balance sheet date, the Group held an aggregate provision in
the sum of $63 million in respect of liabilities likely to arise from the above
estimation uncertainties. Hikma released $17 million in 2017 due to the
statute of limitations but this was offset by new provisions of $24 million
booked in 2017. In 2018, up to $20 million could be released on the same
grounds. If all areas of uncertainty were audited and all areas resulted
with an adverse outcome, management does not believe any material
additional tax would be payable beyond what is provided.
Contingent liabilities
The promotion, marketing and sale of pharmaceutical products
and medical devices is highly regulated and the operations of market
participants, such as Hikma, are closely supervised by regulatory
authorities and law enforcement agencies, including the FDA and
the US Department of Justice. As a result, the Group is subject to certain
investigations by governmental agencies, as well as other various legal
proceedings considered typical to its business relating to employment,
product liability and commercial disputes.
136
136
4. Business and geographical segments
For management reporting purposes, the Group is organised into three principal operating divisions – Injectables, Generics and Branded. These divisions
are the basis on which the Group reports its segmental information.
Operating profit, defined as segment result, is the principal 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:
Injectables
Year ended 31 December 2017
Revenue
Cost of sales
Gross profit
Total operating expenses
Segment result
Generics
Year ended 31 December 2017
Revenue
Cost of sales
Gross profit
Total operating expenses
Segment result
2017
Exceptional items
and other
adjustments
(Note 5)
$m
–
–
–
(22)
(22)
2017
Exceptional items
and other
adjustments
(Note 5)
$m
–
(6)
(6)
(1,098)
(1,104)
2017
Core
Results
$m
776
(296)
480
(165)
315
2017
Core
Results
$m
615
(390)
225
(203)
22
The Generics segment includes the results of the West-Ward Columbus business.
Branded
Year ended 31 December 2017
Revenue
Cost of sales
Gross profit
Total operating expenses
Segment result
Others
Year ended 31 December 2017
Revenue
Cost of sales
Gross profit
Total operating expenses
Segment result
2017
Exceptional items
and other
adjustments
(Note 5)
$m
–
–
–
(7)
(7)
2017
Core
Results
$m
536
(271)
265
(151)
114
2017
Exceptional items
and other
adjustments
(Note 5)
$m
–
2017
Core
results
$m
9
(6)
3
(7)
(4)
–
–
–
–
2017
Reported
results
$m
776
(296)
480
(187)
293
2017
Reported
results
$m
615
(396)
219
(1,301)
(1,082)
2017
Reported
results
$m
536
(271)
265
(158)
107
2017
Reported
results
$m
9
(6)
3
(7)
(4)
2016
Exceptional items
and other
adjustments
(Note 5)
$m
–
–
–
(28)
(28)
2016
Exceptional items
and other
adjustments
(Note 5)
$m
–
(32)
(32)
(17)
(49)
2016
Exceptional items
and other
adjustments
(Note 5)
$m
–
–
–
(8)
(8)
2016
Exceptional items
and other
adjustments
(Note 5)
$m
–
–
–
–
–
2016
Core
results
$m
781
(276)
505
(165)
340
2016
Core
results
$m
604
(376)
228
(193)
35
2016
Core
Results
$m
556
(274)
282
(170)
112
2016
Core
Results
$m
9
(6)
3
(5)
(2)
2016
Reported
results
$m
781
(276)
505
(193)
312
2016
Reported
results
$m
604
(408)
196
(210)
(14)
2016
Reported
results
$m
556
(274)
282
(178)
104
2016
Reported
results
$m
9
(6)
3
(5)
(2)
‘Others’ mainly comprises of Arab Medical Containers LLC, International Pharmaceutical Research Center LLC, Hikma Emerging Markets and Asia Pacific
FZ LLC, and the chemicals division of Hikma Pharmaceuticals LLC (Jordan).
137
137
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
4. Business and geographical segments continued
Group
Year ended 31 December 2017
Revenue
Cost of sales
Gross profit
Total operating expense
Segment result
Unallocated expenses
Operating profit/(loss)
Finance income
Finance expense
Profit/(loss) before tax
Tax
Profit/(loss) for the year
Attributable to:
Non-controlling interests
Equity holders of the parent
2017
Exceptional
items and other
adjustments
(Note 5)
$m
–
(6)
(6)
(1,127)
(1,133)
–
(1,133)
93
(26)
(1,066)
(29)
(1,095)
–
(1,095)
(1,095)
2017
Core
Results
$m
1,936
(963)
973
(526)
447
(61)
386
2
(60)
328
(72)
256
4
252
256
2017
Reported
results
$m
1,936
(969)
967
(1,653)
(686)
(61)
(747)
95
(86)
(738)
(101)
(839)
4
(843)
(839)
2016
Exceptional
items and other
adjustments
(Note 5)
$m
–
(32)
(32)
(53)
(85)
(32)
(117)
9
(41)
(149)
28
(121)
–
(121)
(121)
2016
Core
results
$m
1,950
(932)
1,018
(533)
485
(66)
419
3
(63)
359
(80)
279
3
276
279
2016
Reported
results
$m
1,950
(964)
986
(586)
400
(98)
302
12
(104)
210
(52)
158
3
155
158
Unallocated corporate expenses mainly comprise of employee costs, third party professional fees, travel expenses, rent expenses and donations
(2016 comprise of employee costs, third party professional fees, travel expenses, donations and acquisition-related expenses).
The following table provides an analysis of the Group’s sales by geographical market, irrespective of the origin of the goods/services:
United States
Middle East and North Africa
Europe and Rest of the World
United Kingdom
The top selling markets were as below:
United States
Saudi Arabia
Algeria
2017
$m
1,201
630
103
2
1,936
2017
$m
1,201
157
106
1,464
2016
$m
1,211
641
95
3
1,950
2016
$m
1,211
143
115
1,469
Included in revenues arising from the Generics and Injectables segments are revenues of approximately $301 million (2016: $253 million) which arose
from the Group’s largest customer which is located in the United States.
138
138
5. Exceptional items and other adjustments
Exceptional items and other adjustments are disclosed separately in the consolidated income statement to assist in the understanding of the Group’s
core performance.
Exceptional items
Impairment of West-Ward Columbus goodwill
Impairment of product related intangible assets, software, property, plant and equipment and others
Impairment of property, plant and equipment
Contingent consideration gain
Acquisition, integration and other costs
Gain from sale of assets, net
Inventory related adjustments
Release of contingent liability
Write-down of products related intangible assets
Exceptional items included in operating profit/(loss)
US tax reform bill
Exceptional items included in profit/(loss)
Other adjustments
Intangible amortisation other than software
Remeasurement of contingent consideration, financial liability and asset, (net)
Exceptional items and other adjustments
Tax effect
Impact on profit/(loss) for the year
2017
$m
(407)
(681)
(17)
29
(9)
–
–
–
–
(1,085)
(49)
(1,134)
(48)
67
(1,115)
20
(1,095)
2016
$m
–
(6)
(10)
–
(41)
18
(27)
4
(18)
(80)
–
(80)
(37)
(32)
(149)
28
(121)
In reference to the exceptional items and other adjustments policy in Note 2, the details are presented below:
Exceptional items:
– Impairment of West-Ward Columbus goodwill relates to the unfavourable industry developments in the US Generics industry in the second half
of 2017 and is included in other operating expenses (Note 14)
– Impairment of product related intangible assets, property, plant and equipment and others, relates to the impairment of West-Ward Columbus other
assets, including product rights, in process R&D, software and property, plant and equipment, and is included in other operating expenses (Notes 14, 15).
In addition, impairment of other product related intangible assets of $4 million which is included in research and development expenses (Note 14)
– Impairment of property, plant and equipment mainly relates to the planned disposal of the Eatontown, NJ manufacturing facility which is included
in other operating expenses (Notes 8, 15)
– Contingent consideration gain represents an adjustment to a refund of the West-Ward Columbus purchase price, given certain regulatory conditions
did not occur as expected by 24 December 2017 and is included in the other operating expenses (Notes 8, 23)
– Acquisition, integration and other costs were incurred in relation to the acquisition of West-Ward Columbus and Eatontown planned disposal
and are included in the overhead, general and administrative, sales and marketing, and research and development expenses
– US tax reform bill represents the estimated impact on the US deferred tax asset of lowering the US federal tax rate which was signed in December 2017,
and is effective from 1 January 2018 (Note 11)
The details of impairment losses are presented below:
West-Ward Columbus goodwill
West-Ward Columbus product related intangible assets
West-Ward Columbus software
West-Ward Columbus intangible assets
West-Ward Columbus property, plant and equipment
Total West-Ward Columbus impairment
Other property, plant and equipment
Other product related intangible assets (Research and development)
Total impairment
Total impairment of intangibles
Total impairment of property, plant and equipment
Total impairment
2017
$m
407
501
12
920
164
1,084
17
4
1,105
924
181
1,105
139
139
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
5. Exceptional items and other adjustments continued
In previous periods, exceptional items and other adjustments were related to the following:
– Impairment of product-related intangible assets was included within research and development expenses
– Acquisition, integration and other related costs were incurred in relation to the acquisition of West-Ward Columbus, which was completed on
29 February 2016. Acquisition related expenses were included within the unallocated corporate expenses, while integration and other expenses
were included within general and administrative expense and cost of sales respectively. Acquisition related expenses mainly comprise of third
party consulting services, legal and professional fees; and other costs represent severance and retention payments paid
– Impairment of property, plant and equipment related to the write-off of machinery and equipment as a result of previous acquisition, and was
included within other operating expenses
– Gain from sale of assets related to the divestiture of certain products, and was included within other operating income
– Inventory-related adjustments reflected the amortisation of the fair value uplift of the inventory acquired as part of the West-Ward Columbus
acquisition, and were included within cost of sales
– Release of contingent liability was due to not achieving certain performance-related milestones in respect of a previous acquisition, and was
included within other operating income
– Write-down of product-related intangible assets related to the write-down of certain R&D elements associated with the co-development
agreements entered into with third parties since 2011 and was included within research and development expenses
Other adjustments:
Remeasurement of contingent consideration, financial liability and asset represents the net difference resulting from the valuation of the liabilities
and assets associated with the future contingent payments receivable in respect of the West-Ward Columbus acquisition and the financial liability
in relation to the co-development earnout payment agreement (Notes 18, 23, 27, 32). The remeasurement is included in finance expense/income.
6. Profit/(loss) for the year
Profit/(loss) for the year has been arrived at after charging/crediting:
Net foreign exchange (gains)/losses
Depreciation and impairment
Amortisation and impairment (including software)
Research and development (other than staff costs)
Inventories:
Cost of inventories recognised as an expense
Write-down of inventories
Staff costs (Note 7)
2017
Exceptional
items and other
adjustments
(Note 5)
$m
–
181
972
–
–
–
8
2017
Core
results
$m
(3)
77
11
81
548
58
477
2017
Reported
results
$m
(3)
258
983
81
548
58
485
2016
Core
results
$m
21
68
7
91
548
68
461
The Group 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
Assurance services*
Total audit and assurance fees
– Tax advisory services
Total non-audit fees
Total fees
2016
Exceptional
items and other
adjustments
(Note 5)
$m
–
10
43
18
27
–
4
2017
$m
0.6
1.6
2.2
0.2
2.4
–
–
2.4
2016
Reported
results
$m
21
78
50
109
575
68
465
2016
$m
0.9
1.7
2.6
0.2
2.8
0.6
0.6
3.4
* Assurance services relate to review procedures in respect to the interim financial information.
A description of the work of the Audit Committee is set out in the Audit Committee report on pages 78 to 81 and includes an explanation of how auditor
objectivity and independence is safeguarded when non-audit services are provided by the auditor.
140
140
7. Staff costs
The average monthly number of employees (including Executive Directors) was:
Production
Sales and marketing
General and administrative
Research and development
Their aggregate remuneration comprised:
Wages, salaries and bonuses
Social security costs
Post-employment benefits
End of service indemnity
Share-based payments (Note 38)
Car and housing allowances
Health insurance
Other costs and employee benefits
8. Other operating expense/income
Other operating expense
Inventory related provisions
Impairment loss
Loss from disposal of property, plant and equipment
Loss from disposal of intangible assets
Forex losses (net)
Others
Other operating income
Gain from disposal of property, plant and equipment
Gain from disposal of intangible assets
Forex gain (net)
Others*
2017
Number
5,017
2,123
1,047
334
8,521
2017
$m
321
30
16
10
22
19
39
28
485
2017
Exceptional
items and other
adjustments
(Note 5)
$m
–
1,101
–
–
–
–
2017
Reported
results
$m
58
1,101
3
–
–
–
1,101
1,162
2017
Core
Results
$m
58
–
3
–
–
–
61
2017
Exceptional items
and other
adjustments
(Note 5)
$m
–
2017
Core
results
$m
1
–
4
10
15
–
–
29
29
2017
Reported
results
$m
1
–
4
39
44
2016
Exceptional
items and other
adjustments
(Note 5)
$m
–
10
–
–
–
–
10
2016
Exceptional items
and other
adjustments
(Note 5)
$m
–
18
–
4
22
2016
Core
Results
$m
68
–
–
1
19
4
92
2016
Core
results
$m
–
1
–
10
11
* Others: mainly includes contingent consideration gain (Note 5) in addition to proceeds from legal claims.
2016
Number
4,904
2,147
992
296
8,339
2016
$m
320
29
16
6
22
17
32
23
465
2016
Reported
results
$m
68
10
–
1
19
4
102
2016
Reported
results
$m
–
19
–
14
33
141
141
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
9. Finance income
Interest income
Remeasurement of contingent consideration,
financial liability and asset, net
Other financial income
10. Finance expense
Interest on bank overdrafts and loans
Interest on Eurobond
Remeasurement of contingent consideration,
financial liability and asset, net
Other bank charges
Net foreign exchange loss
11. Tax
Current tax:
Foreign tax
Adjustment to prior year
Deferred tax (Note 17)
Current year
Adjustment to prior year
2017
Exceptional
items and other
adjustments
(Note 5)
$m
–
2017
Core
Results
$m
2
–
–
2
93
–
93
2017
Exceptional
items and other
adjustments
(Note 5)
$m
2017
Core
Results
$m
29
22
–
8
1
60
–
–
26
–
–
26
2017
Exceptional items
and other
adjustments
(Note 5)
$m
2017
Core
Results
$m
50
–
22
–
72
(20)
–
49
–
29
2017
Reported
results
$m
2
93
–
95
2017
Reported
results
$m
29
22
26
8
1
86
2017
Reported
Results
$m
30
–
71
–
101
2016
Exceptional
items and other
adjustments
(Note 5)
$m
–
9
–
9
2016
Core
Results
$m
2
–
1
3
2016
Exceptional
items and other
adjustments
(Note 5)
$m
2016
Core
Results
$m
26
22
–
13
2
63
–
–
41
–
–
41
2016
Exceptional items
and other
adjustments
(Note 5)
$m
2016
Core
Results
$m
143
2
(57)
(8)
80
(28)
–
–
–
(28)
2016
Reported
results
$m
2
9
1
12
2016
Reported
results
$m
26
22
41
13
2
104
2016
Reported
Results
$m
115
2
(57)
(8)
52
UK corporation tax is calculated at 19.25% (2016: 20.0%) of the estimated assessable profit made in the UK for the year.
The Group incurred a tax expense of $101 million (2016: $52 million). The effective tax (credit)/charge rate is (13.7%), (2016: 24.8%). The reduction in the
effective tax rate largely reflects the impairment booked during the year.
Taxation for all jurisdictions is calculated at the rates prevailing in the respective jurisdiction.
142
142
11. Tax continued
The charge for the year can be reconciled to loss before tax per the consolidated income statement as follows:
Profit/(loss) before tax
Tax at the UK corporation tax rate of 19.25% (2016: 20.0%)
Profits taxed at different rates
Permanent differences
– non-taxable income
– non-deductible expenditures
– adjustment on intercompany inventory
– Other
– Impairment of goodwill
State and local taxes
Temporary differences
– Tax losses and other deductible temporary differences for which no benefit is recognised
– Tax rate changes (US tax reform)
– Other
Change in provision for uncertain tax positions
Unremitted earnings
Prior year adjustments
Tax expense for the year
2017
$m
(738)
(142)
13
(13)
6
(7)
(7)
78
(4)
119
49
–
7
2
–
101
2016
$m
210
42
13
(17)
13
(14)
(1)
–
2
11
–
2
5
2
(6)
52
Profits taxed at different tax rates relates to profits arising in overseas jurisdictions where the tax rate differs from the UK statutory rate.
Permanent differences relate to items which are non-taxable or no tax relief is ever likely to be due. The major items are differences in GAAP between
IFRS and local territory GAAP, expenses and income disallowed where they are covered by statutory exemptions, foreign exchange differences in some
territories and statutory reliefs such as R&D and manufacturing tax credits.
Temporary differences for which no benefit is recognised includes items on which it is not possible to book deferred tax and comprise mainly
unrecognised tax losses. The tax losses have mainly arisen from the impairment of the West-Ward Columbus. Management has not recognised a benefit
for the losses on the basis that there are insufficient forecasted taxable profits in the foreseeable future.
The change in provision for uncertain tax positions relates to the provisions the Group holds in the event of a revenue authority successfully taking an
adverse view of the positions adopted by the Group in 2017 and primarily relates to a transfer pricing adjustment.
Prior year adjustments include differences between the tax liability recorded in the tax returns submitted for previous years and estimated tax provision
reported in a prior period’s financial statements. This category also includes adjustments (favourable or adverse) in respect of uncertain tax positions
following agreement of the tax returns with the relevant tax authorities.
US tax reform
The impact of the US Tax Cuts and Jobs Act of 2017 has been restricted to the reduction of the US deferred tax asset, as a result of the fall in the federal
corporate income tax rate from 35% to 21%, by $49 million.
State Aid
The Group is monitoring developments in relation to the EU’s State Aid investigations, in particular, the EU Commission’s announcement in October 2017
that it will be opening a State Aid investigation into the Group Financing Exemption of the UK’s Controlled Foreign Company (‘CFC’) legislation. This
exemption was introduced by the UK Government in 2013. In common with other UK based international companies that have arrangements in line with
the UK’s current CFC legislation, Hikma is potentially affected by the outcome of this investigation. The Group does not currently consider any provision
is required in relation to EU State Aid. As with all uncertain tax positions, the assessment of risk is subjective and involves significant management
judgement. The judgement is based on management’s understanding of legislation, experience and professional advice taken on the matters.
Publication of tax strategy
The new UK requirement for large UK businesses to publish their tax strategy came into effect in 2017. Hikma’s tax strategy has been made available
on the Group’s website.
143
143
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
12. Dividends
Amounts recognised as distributions to equity holders in the year:
Final dividend for the year ended 31 December 2016 of 22.0 cents (2015: 21.0 cents) per share
Interim dividend for the year ended 31 December 2017 of 11.0 cents (2016: 11.0 cents) per share
2017
$m
53
26
79
2016
$m
51
26
77
The proposed final dividend for the year ended 31 December 2017 is 23.0 cents (2016: 22.0 cents).
The proposed final dividend is subject to approval by shareholders at the Annual General Meeting on 19 May 2018 and has not been included as a liability
in these financial statements. Based on the number of shares in issue at 31 December 2017 (240,678,894), the unrecognised liability is $55 million.
13. Earnings/(loss) per share
Earnings/(loss) 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. Core basic earnings per share and Core
diluted earnings per share are intended to highlight the Core results of the Group before exceptional items and other adjustments.
Earnings/(loss) for the purposes of basic
and diluted earnings per share being net profit
attributable to equity holders of the parent
2017
Exceptional items
and other
adjustments
(Note 5)
$m
2017
Core
results
$m
2017
Reported
results
$m
2016
Exceptional items
and other
adjustments
(Note 5)
$m
2016
Core
results
$m
2016
Reported
results
$m
252
(1,095)
(843)
276
(121)
155
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
2017
Number
‘m
240
1
241
2016
Number
‘m
233
1
234
2017
Core Earnings
per share
Cents
105.0
2017
Reported Earnings
per share
Cents
(351.3)
2016
Core Earnings
per share
Cents
118.5
2016
Reported Earnings
per share
Cents
66.5
104.6
(349.8)
117.9
66.2
Basic
Diluted
144
144
14. Goodwill and Other intangible assets
The changes in the carrying value of goodwill and other intangible assets for the years ended 31 December 2017 and 31 December 2016 are as follows:
Cost
Balance at 1 January 2016
Additions
Acquisition of subsidiaries*
Write-down (Note 5)
Disposals
Translation adjustments
Balance at 1 January 2017
Additions
Translation adjustments
Balance at 31 December 2017
Amortisation
Balance at 1 January 2016
Charge for the year
Adjustments to beginning balance
Impairment (Note 5)
Translation adjustments
Balance at 1 January 2017
Charge for the year
Impairment (Note 5)
Translation adjustments
Balance at 31 December 2017
Carrying amount
At 31 December 2017
At 31 December 2016
Goodwill
$m
Product-related
intangibles
$m
Software
$m
Other identified
intangibles
$m
293
–
420
–
–
(30)
683
–
7
690
(1)
–
–
–
–
(1)
–
(407)
–
(408)
282
682
287
18
743
(18)
(5)
(19)
1,006
7
2
1,015
(52)
(30)
(2)
(6)
3
(87)
(41)
(505)
–
(633)
382
919
52
35
1
–
–
(1)
87
31
–
118
(22)
(7)
–
–
1
(28)
(11)
(12)
–
(51)
67
59
96
19
–
–
(1)
(8)
106
1
4
111
(46)
(7)
2
–
4
(47)
(7)
–
(3)
(57)
54
59
Total
$m
728
72
1,164
(18)
(6)
(58)
1,882
39
13
1,934
(121)
(44)
–
(6)
8
(163)
(59)
(924)
(3)
(1,149)
785
1,719
* Goodwill recognised as part of the West-Ward Columbus and EUP transactions in 2016.
In 2017, the Group recorded a total intangible impairment charge of $924 million related to goodwill of $407 million, product-related intangibles of
$505 million and software of $12 million. Of this amount $920 million relates to the impairment of the intangible assets related to West-Ward Columbus
(Note 5).
Of the $924 million impairment recorded, $35 million was recorded in the first half and the remaining $889 million was recorded in the second half.
Goodwill
Goodwill acquired in a business combination is allocated at acquisition to the cash generating units (CGUs) that are expected to benefit from that
business combination. The carrying amount of goodwill has been allocated as follows:
Branded
Injectables
West-Ward Columbus
Total
As at 31 December
2016
$m
164
111
407
682
2017
$m
169
113
–
282
145
145
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
14. Goodwill and Other intangible assets continued
In accordance with the Group policy, goodwill is tested annually for impairment during the fourth quarter or more frequently if there are indications that
goodwill may be impaired.
Details related to the discounted cash flow models used in the impairment tests of the CGUs are as follows:
Valuation basis
Key assumptions
Higher of fair value less costs of disposal and value in use
Sales growth rates
Profit margins
Terminal growth rate
Discount rate
Determination of assumptions
Growth rates are internal forecasts based on both internal and external market information
Margins reflect past experience, adjusted for expected changes
Terminal growth rates based on management’s estimate of future long-term average growth rates
Discount rates based on Group WACC, adjusted where appropriate
Period of specific projected cash flows
5 years
Terminal growth rate and discount rate
Branded
Injectables
West-Ward Columbus
Terminal growth
rate (perpetuity)
2%
Pre-tax
discount rate
18%
2%
2%
13%
13%
Considering the unfavourable industry developments impacting the Generics’ business during the second half of 2017, Hikma recorded an impairment
charge of $407 million against the West-Ward Columbus goodwill.
West-Ward Columbus CGU: Over the second half of 2017, Hikma noted ongoing and difficult market conditions in the US generics market, driven
primarily by:
– Pricing challenges due to customer consolidation.
– Increasing generic approvals affecting the value in use of already marketed products and the potential of future launches.
– Delays in generic approvals of more complex products.
As a result of these factors discussed, Hikma adjusted certain assumptions used in its cash flow projections to determine the value in use of the West-
Ward Columbus CGU. More specifically, in comparison with previous periods, Hikma expects lower revenues and profitability from newly launched
products as well as higher price erosion on its currently marketed portfolio. The outlook for West-Ward Columbus revenue and profitability over the
medium term is lower than previously expected.
In performing the impairment test for the West-Ward Columbus CGU, an additional impairment charge of $269 million above the amount of impairment
of the goodwill and stand-alone IPR&D and Product Rights was required. In accordance with IFRS, such excess was allocated pro rata to the remaining
non-current asset of the CGU.
The impairment charge was the result comparing the estimated value in use of the CGU based on its discounted cash flow model to the carrying value
of the CGU. The key sensitivities in determining the value in use and the potential impact on the impairment charge were as follows:
Sensitivity factor
Assumption in model
Sensitivity Variant
Terminal Growth
rate
2% per year into perpetuity
Discount rate
10.5% post tax, 12.9% pre-tax
Sales
According to management projections of volumes
and prices on a product by product basis
1% change
1% change
5% change in price and volumes
5% change in price
5% change in volume
Terminal
year margins
Based on five-year average
5% change
* Represents the low and high end of the range of change in the impairment charge based on the sensitivity variant.
Change in total impairment
Low*
High*
44
83
230
133
103
192
(57)
(106)
(235)
(125)
(97)
(188)
146
146
14. Goodwill and Other intangible assets continued
The discount rate is expected to reduce over time as any risk-premium associated with the acquisition should reduce. Also, any change in expected
product launch dates is likely to result in potential operational changes which could mitigate any potential impairment charges.
Other CGUs: The Group also performed its annual goodwill impairment test on a quantitative basis of the Branded and Injectables CGU’s. The Group
conducted a sensitivity analysis on the impairment of each CGU’s carrying value. Although the Directors have concluded sufficient headroom* exists for
both of these CGU’s, there is a reasonable possibility that changes to the key assumptions could result in impairment. The most uncertain assumptions
are sales growth and the discount rate. We have performed sensitivity analysis on the key assumptions affecting the valuation for both the Branded and
Injectables CGUs and have determined that sufficient headroom exists. Specifically, an evaluation of the valuation of the CGU was made assuming an
increase of 1% in the discount rate, or a 5% decline in the forecasted net sales, or a 5% decline in the gross margins in the terminal year, or a 1% decline
in the terminal growth rate and in all cases sufficient headroom exists.
Whilst there is some uncertainty regarding the short-term impact of the political events in the MENA, the Group does not consider that the likelihood of
impairment losses in the long-term has increased.
* Headroom is defined as the excess of the higher of fair value and the value in use, compared to the carrying value of a CGU.
Other Intangible Assets
Other intangible assets with a net book value of $503 million at 31 December 2017 (2016: $1,037 million) consists of In-Process Research and Development
(IPR&D) of $223 million (2016: $547 million), product rights of $159 million (2016: $375 million) and other intangible assets of $121 million (2016: $115 million).
The majority of the Group’s product related intangible assets are marketed in the US region, whereby the carrying value of individually significant assets
within the product-related intangibles are presented below:
Generic Advair®
As at 31 December
2016
$m
306
2017
$m
138*
* Amount is lower than the stand-alone asset value of $206 million as a result of a $68 million allocation of the excess CGU impairment as discussed above.
IPR&D: During the first half of 2017, certain triggering events occurred and required the Group to perform tests for impairment. Such events included
continued pricing pressure and increased competition on a number of products and delays in product launches, resulting in a reduced forecast of future
net cash inflows compared to previous forecasts. The Group recorded impairment charges of $35 million for other intangible assets using a value-in-use
model in the first half of 2017.
As of 31 December 2017, Hikma performed an analysis and valuation of the Generic Advair® and the related contingent consideration using a discounted cash
flow model based on a probability weighting of a number of different potential scenarios, including the expected launch date and the number of competitors
at the time of launch. As a result, a total impairment charge of $168 million was recorded in the second half of 2017 after considering the pro-rata allocation of
the excess CGU impairment. The key sensitivities in the valuation of this IPR&D asset and the impact on the valuation of the asset are as follows:
Sensitivity factor Assumption in model
Launch date
Sales
Probability weighted average of
different possibilities
According to management projections
of volumes and prices
1Q change
5% change in price and volumes
5% change in price
5% change in volume
Discount rate 12.5% post tax
1% change
Sensitivity Variant
Low end
change
Change in Generic
Advair® base asset value
High End
change
Base asset
value
(31)
(34)
(18)
(17)
(12)
138
138
138
138
138
29
37
19
17
14
As of 31 December 2017, the Group performed its annual review of other IPR&D assets acquired as part of the West-Ward Columbus and Bedford
acquisitions. The result of this testing was a further impairment charge of $177 million for the West-Ward Columbus IPR&D. The impairment charge was
based upon updated forecasts and future development plans, compared with the carrying values. The updated values were determined based upon
detailed valuations employing the value in use approach. The valuations reflect, among other things, the impact of changes to development programs,
the projected development and regulatory time frames and the current competitive environment. Any future change to these assumptions may result
in further reduction to the estimated fair values of these IPR&D assets and could result in additional impairment charges. We performed sensitivity
analysis on the remaining $85 million of indefinite life IPR&D (other than Generic Advair® discussed above) on the key assumptions affecting the
valuation and have determined that sufficient headroom exists. Specifically evaluated an increase of 1% in the discount rate, or a 5% decline is the
forecasted net sales, or a 5% decline in the gross margins in the terminal year, or a 1% decline in the terminal growth rate and in all cases no additional
impairment was necessary.
Based on the new estimates incorporating all of the above factors, an impairment charge of $345 million, including for Generic Advair® above, was
recorded in the second half of 2017 for IPR&D products.
147
147
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
14. Goodwill and Other intangible assets continued
Product Rights: Whenever impairment indicators are identified for definite life intangible assets, Hikma reconsiders the asset’s estimated life, calculates
the undiscounted value of the assets or asset group’s cash flows and compares such value against the asset’s or asset group’s carrying amount. If the
carrying amount is greater, Hikma records an impairment loss for the excess of book value over valuation based on the discounted cash flows by applying
an appropriate discount rate that reflects the risk factors associated with the cash flow streams. The more significant estimates and assumptions inherent
in the estimate of the value in use of identifiable intangible assets include all assumptions associated with forecasting product profitability.
In the second half of 2017, due to the challenges impacted the US generics market, discussed above, an impairment charge of $123 million was recorded
for product rights.
Other Intangible assets:
Software: Software intangibles mainly represent the Enterprise Resource Planning solutions that are being implemented in different operations across
the Group in addition to other software applications. The software has an average estimated useful life that varies from three to ten years. As noted above,
$12 million of the West-Ward Columbus CGU impairment charge was allocated to software intangibles.
Customer relationships: Customer relationships represent the value attributed to existing direct customers that the Group acquired on the acquisition
of subsidiaries. The customer relationships have an average estimated useful life of 15 years (2016: 15 years).
Trade name: Trade names were mainly recognised on the acquisition of Hikma Germany GmbH (Germany) and Promopharm with estimated useful lives
of ten years.
Marketing rights are amortised over their useful lives commencing in the year in which the rights are ready for use with estimated useful lives that varies
from 2 to 10 years.
Other acquisition related: This mainly represents intangible assets recognised on the acquisition of Thymoorgan, which relate to its specialist
manufacturing capabilities. The estimated useful life is 12 years.
Amortisation of all intangible assets with finite useful lives is charged on a straight-line basis.
As at 31 December 2017, the Group had entered into contractual commitments for the acquisition of intangible assets of $5 million (2016: $19 million).
148
148
15. Property, plant and equipment
Cost
Balance at 1 January 2016
Additions
Acquisition of subsidiaries
Adjustments to opening balance
Disposals
Transfers
Translation adjustment
Balance at 1 January 2017
Additions
Adjustments to opening balance
Disposals
Transfers
Translation adjustment
Balance at 31 December 2017
Accumulated depreciation
Balance at 1 January 2016
Charge for the year
Adjustments to opening balance
Disposals
Impairment (Note 5)
Translation adjustment
Balance at 1 January 2017
Charge for the year
Adjustments to opening balance
Disposals
Impairment (Note 5)
Translation adjustment
Balance at 31 December 2017
Carrying amount
At 31 December 2017
At 31 December 2016
Land is not subject to depreciation.
Land and
buildings
$m
298
Machinery and
equipment
$m
360
Vehicles, fixtures
and equipment
$m
84
Projects under
construction
$m
90
8
180
–
–
64
(20)
530
2
2
(1)
52
7
592
(70)
(18)
–
–
–
4
(84)
(21)
(2)
–
(86)
(3)
(196)
396
446
7
144
8
(3)
44
(21)
539
7
1
(4)
64
12
619
(198)
(39)
(7)
2
(10)
10
(242)
(45)
(1)
1
(84)
(8)
(379)
240
297
6
9
–
(1)
9
(9)
98
8
1
(2)
7
2
114
(53)
(11)
–
2
–
5
(57)
(11)
(1)
2
(5)
(1)
(73)
41
41
97
125
2
(1)
(117)
(4)
192
95
–
(2)
(123)
2
164
(4)
–
(3)
–
–
–
(7)
–
–
–
(6)
–
(13)
151
185
Total
$m
832
118
458
10
(5)
–
(54)
1,359
112
4
(9)
–
23
1,489
(325)
(68)
(10)
4
(10)
19
(390)
(77)
(4)
3
(181)
(12)
(661)
828
969
During the year the Group reported an impairment charge of $181 million, of which $164 million related to the West-Ward Columbus CGU impairment,
in addition to $17 million resulted from the decision to consolidate certain manufacturing facilities in the US (Notes 5, 14).
The net book value of the Group’s property, plant and equipment includes an amount of $6 million (2016: $6 million) in respect of assets held under
finance lease.
As at 31 December 2017, the Group had pledged property, plant and equipment having a carrying value of $11 million (2016: $42 million) 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 Germany, Tunisia and Egypt (2016: Portugal, Germany and Tunisia).
As at 31 December 2017, the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to
$12 million (2016: $9 million).
149
149
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
16. Investments in associates and joint ventures
The Group’s share in Hubei Haosun Pharmaceutical Co Ltd (China) is 30.1% at 31 December 2017 (31 December 2016: 30.1%) with an investment balance
of $3 million at 31 December 2017 (31 December 2016: $4 million),
The Group’s share of the results of Hubei Haosun Pharmaceutical Co. Ltd is loss of $1 million (2016: $nil).
Balance at 1 January
Share of loss
Balance at 31 December
For the year ended 31 December 2017
For the year ended 31 December 2016
Joint
ventures
$m
3
–
3
Associates
$m
4
(1)
3
Total
$m
7
(1)
6
Joint
ventures
$m
3
–
3
Associates
$m
4
–
4
Total
$m
7
–
7
During 2017, Hikma and MIDROC have agreed not to proceed with the HikmaCure joint venture and to liquidate it. During the year, the Joint venture
granted two loans of $2.3 million each to the Group and MIDROC.
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 revenue
Net loss
Group’s share of loss of associates
17. Deferred tax
As at
31 December 2017
$m
16
As at
31 December 2016
$m
15
7
9
3
5
10
3
For the year ended
31 December 2017
$m
3
For the year ended
31 December 2016
$m
4
(1)
(1)
–
–
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:
As at 31 December
2016
$m
(15)
172
157
2017
$m
(49)
135
86
Deferred tax liabilities
Deferred tax assets
150
150
17. Deferred tax continued
The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting years.
At 1 January 2016
Credit/(Charge) to income
Acquisition of subsidiary
Exchange differences
At 1 January 2017
Credit/(Charge) to income
At 31 December 2017
Deferred R&D
costs
$m
1
Other short-term
temporary
differences*
$m
74
Tax losses
$m
4
Amortisable assets
$m
(18)
Fixed assets
$m
(13)
Share-based
payments
$m
1
2
–
–
6
(3)
3
–
–
–
1
–
1
70
61
(3)
202
(71)
131
10
(20)
5
(23)
7
(16)
(16)
(2)
2
(29)
(4)
(33)
(1)
–
–
–
–
–
Total
$m
49
65
39
4
157
(71)
86
* The other deferred taxes on short-term temporary differences primarily relate to charge backs and product returns in the US of $76 million (2016: $104 million) and the unrealised intercompany profits of
$17 million (2016: $25 million).
No deferred tax asset has been recognised on temporary differences totalling $770 million (2016: $189 million) due to the unpredictability of the related
future profit streams. $578 million (2016: $167 million) of these temporary differences relate to losses on which no deferred tax is recognised. None of
these losses are expected to expire.
We have recognised a deferred tax liability on temporary differences relating to the unremitted earnings of overseas subsidiaries of $4 million (2016: $2 million).
No deferred tax liability has been recognised on the remaining unremitted earnings of $278 million (2016: $208 million), 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.
18. Financial and other non-current assets
Price adjustment receivable
Available for sale investments
Other non-current asset
As at 31 December
2016
$m
3
7
38
48
2017
$m
4
16
40
60
Price adjustment receivable represents the non-current portion of the contingent receivable in relation to the West-Ward Columbus acquisition
(Note 30), whereby as part of the acquisition, the Group will be reimbursed for certain contingent payments in respect of milestones and other conditions
based on future events, the current portion of the price adjustment receivable is disclosed in Note 23. During the year, the Group received $3 million
reimbursement (2016: $82 million) in cash.
Available for sale investments include investments in five venture capital companies through the Group’s venture capital arms, Hikma International
Ventures and Development LLC and Hikma Ventures Limited.
Other non-current assets represent mainly inventory expected to be sold after one year.
19. Inventories
Finished goods
Work-in-progress
Raw and packing materials
Goods in transit
Spare parts
As at 31 December
2016
$m
120
73
229
18
19
459
2017
$m
135
63
234
33
23
488
151
151
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
19. Inventories continued
Inventories are stated net of provision as follows:
Provisions against inventory
20. Trade and other receivables
Trade receivables
Prepayments
VAT and sales tax recoverable
Employee advances
As at
31 December
2016
$m
65
Additions
$m
56
Utilisation
$m
(40)
Translation
adjustments
$m
–
As at
31 December
2017
$m
81
The fair value of receivables is estimated to be equal to the carrying amount.
Trade receivables are stated net of provisions for chargebacks and doubtful debts as follows:
Chargebacks and other allowances
Doubtful debts
The following table provides a summary of the age of trade receivables:
As at
31 December
2016
$m
261
54
315
Additions
$m
1,711
14
1,725
At 31 December 2017
Total trade receivables as at
31 December 2017
Related allowance for doubtful debts
Chargebacks and other allowances
Net receivables
At 31 December 2016
Total trade receivables as at
31 December 2016
Related allowance for doubtful debts
Chargebacks and other allowances
Net receivables
Not past due on
the reporting
date
$m
Less than
90 days
$m
Between
91 and
180 days
$m
Between
181 and
360 days
$m
750
750
82
82
22
22
22
22
Not past due on
the reporting
date
$m
841
841
Less than
90 days
$m
70
70
Between
91 and
180 days
$m
Between
181 and
360 days
$m
13
13
24
24
As at 31 December
2016
$m
699
2017
$m
650
41
13
3
707
44
14
2
759
Translation
adjustments
$m
–
–
–
As at
31 December
2017
$m
238
67
305
Impaired
$m
67
(67)
–
Impaired
$m
54
(54)
–
Total
$m
955
(67)
888
(238)
650
Total
$m
1,014
(54)
960
(261)
699
Utilisation
$m
(1,734)
(1)
(1,735)
Past due
Over one
year
$m
12
12
Past due
Over one
year
$m
12
12
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 risk are provided in Note 30.
152
152
21. Collateralised and restricted cash
Collateralised and restricted cash amounting to $4 million and mainly represents restricted cash retained against short-term bank transactions granted
to the Group’s Sudanese, Algerian and Egyptian operations (2016: Sudanese, Algerian and US operations of $5 million and a further of $2 million of
restricted cash held in an escrow account related to the acquisition of EIMC United Pharmaceuticals).
22. Cash and cash equivalents
Cash at banks and on hand
Time deposits
Money market deposits
As at 31 December
2016
$m
77
68
10
155
2017
$m
98
80
49
227
Cash and cash equivalents include highly liquid investments with maturities of three months or less which is convertible to known amounts of cash and
are subject to insignificant risk of changes in value.
23. Other current assets
Price adjustment receivable
Investment designated at fair value
Others
As at 31 December
2016
$m
34
20
12
66
2017
$m
61
22
12
95
Price adjustment receivable: In respect to Note 18 this represents the current portion of the contingent receivable in relation to the West-Ward Columbus
acquisition (Note 30). In addition, the Group was entitled to be reimbursed with $30 million from the seller of a previous acquisition if certain regulatory
conditions existed as of 24 December 2017.
Investment designated at fair value: Represents the agreement the Group entered into with an asset management firm in 2015 to manage a $20 million
portfolio of underlying debt instruments. The investment comprises a portfolio of assets that are managed by an asset manager and is measured at fair
value; any changes in fair value go through other comprehensive income. This asset is classified as level 1 as it uses quoted prices in active markets.
24. Bank overdrafts and loans
Bank overdrafts
Import and export financing
Short-term loans
Current portion of long-term loans (Note 28)
The weighted average interest rates paid were as follows:
Bank overdrafts
Bank loans (including the non-current bank loans)
Eurobond
Import and export financing
Import and export financing represents short-term financing for the ordinary trading activities of the Group.
As at 31 December
2016
$m
10
63
–
44
117
2016
%
4.32
3.26
4.25
3.75
2017
$m
10
48
1
27
86
2017
%
4.55
3.65
4.25
4.58
153
153
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
25. Trade and other payables
Trade payables
Accrued expenses
Other payables
As at 31 December
2016
$m
172
157
14
343
2017
$m
218
134
13
365
The fair value of payables are estimated to be equal to the carrying amount.
Other payables mainly comprise of employees’ provident fund liability of $4 million (31 December 2016: $5 million), which mainly represents the
outstanding contributions to the Hikma Pharmaceuticals Ltd (Jordan) retirement benefit plan, on which the fund receives 3.5% interest.
26. Other provisions
Other provisions represent the end of service indemnity provisions for employees 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
At 31 December
27. Other current liabilities
Deferred revenue
Return and free goods provision
Co-development and earnout payment
Supply Manufacturing Agreement
Contingent consideration
Contingent liability
Obligations under finance leases
Indirect rebate and other allowances
Others
2017
$m
27
3
(4)
26
2017
$m
–
127
3
9
–
–
1
67
31
238
2016
$m
28
1
(2)
27
As at 31 December
2016
$m
13
109
4
–
93
30
1
49
20
319
Return and free goods provision: The Group allows customers to return products within a specified period prior to and subsequent to the expiration date.
Free goods are issued to customers as sale incentives, reimbursement of agreed upon expenses incurred by the customer or as compensation for expired
or returned goods.
The movement on return and free goods provision is presented below:
Return and free goods provision
As at
31 December
2016
$m
109
Additions
$m
96
Utilisation
$m
(78)
As at
31 December
2017
$m
127
Co-development and earnout payment agreement: The liability mainly relates to the present value of future payments on a co-development and
earnout agreement. As part of this agreement, milestone payments dependent on successful clinical development of defined products are received by
the Group. In return of receiving such milestone payments, the Group has agreed to pay the contracting party a certain percentage of future sales of
those products. As at 31 December 2017, the liability associated with these earnout payments was adjusted to reflect the present value of the expected
future cash outflows and the difference is presented as a finance expense/income. This balance represents the current portion of the liability and the
non-current portion is disclosed in Note 32.
154
154
27. Other current liabilities continued
Supply Manufacturing Agreement: As part of the acquisition of West-Ward Columbus, the Group entered into supply and manufacturing contracts
with the seller, Boehringer Ingelheim. This balance represents the current portion of the liability and the non-current portion is disclosed in Note 32.
Contingent consideration: This contingent consideration results from the acquisition accounting of West-Ward Columbus and represents future
estimated consideration payable to the seller, which is in the form of milestones that are dependent on the achievement of certain US FDA approval
targets. As of 31 December 2017, the balance was moved to other non-current liabilities (Note 32).
During the year, the Group paid a total of $nil (2016: $20 million).
Contingent liability: This contingent liability results from the acquisition accounting of West-Ward Columbus and represents a contractual obligation
assumed at the time of the acquisition from a third party, which is in the form of royalty payments based on future sales of certain products that are
currently under development. As of 31 December 2017, the balance was moved to other non-current liabilities (Note 32).
During the year, the Group paid a total of $nil (2016: $10 million).
28. Long-term financial debts
Long-term loans
Long-term borrowings (Eurobond)
Less: current portion of long-term loans (Note 24)
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
In the sixth year
Breakdown by currency:
US Dollar
Euro
Algerian Dinar
Saudi Riyal
Egyptian Pound
Tunisian Dinar
As at 31 December
2016
$m
270
495
(44)
721
44
29
171
519
2
–
765
746
1
2
1
13
2
2017
$m
201
496
(27)
670
27
139
520
4
2
5
697
673
12
–
1
9
2
697
765
The loans are held at amortised cost.
Long-term loans amounting to $2 million (31 December 2016: $3 million) are secured on certain property, plant and equipment.
Included in the table above are the following major arrangements entered into by the Group:
(a) A $500 million (carrying value of $496 million, and fair value of $502 million) 4.25% Eurobond due in April 2020 with the rating of (BB+/Ba1).
The proceeds were used to refinance existing debt and to finance part of the cash consideration of the West-Ward Columbus acquisition.
(b) A syndicated revolving credit facility of $1,175 million was entered into on 27 October 2015. The facility has an outstanding balance of $112 million
at 31 December 2017 (with a fair value of $112 million) (2016: $145 million with a fair value of $145 million) and a $1,063 million unused available limit
(2016: $1,030). The facility matures on 24 December 2019 and can be used for general corporate purposes.
(c) A nine-year $110 million loan from the International Finance Corporation was entered into on 19 December 2011. The loan has an outstanding
balance of $54 million at 31 December 2017 with a fair value of $54 million (2016: $74 million with a fair value of $73 million). Quarterly equal
repayments of the term loan commenced on 15 November 2013 and will continue until 15 August 2020. The loan has been used to finance
acquisitions in the MENA region and MENA’s capital expenditure.
(d) A ten-year $150 million loan from the International Finance Corporation was entered into on 21 December 2017. There was no utilisation of the loan
as at 31 December 2017. Quarterly equal repayments of the long-term loan will commence on 15 March 2021. The loan will be used in the MENA region
and in other World Bank countries of operations for its general corporate purposes.
155
155
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
29. Obligations under finance leases
Amounts payable under finance leases:
Within one year*
In the second to fifth years inclusive
Less: Interest lease charges
Present value of minimum lease payments payable
Minimum lease payments
Present value of minimum
lease payments
2017
$m
2
21
23
(2)
21
2016
$m
2
23
25
(3)
22
2017
$m
1
20
21
2016
$m
1
21
22
* The current portion of the obligations under finance leases is included within Other Current Liabilities (Note 27).
It is the Group’s policy to lease certain of its property, plant and equipment under finance leases. The average lease term is 5 years (2016: 5 years). For the
year ended 31 December 2017, the average effective borrowing rate was between 1.87% and 14.00% (2016: between 1.88% and 14.00%).
30. 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, investments 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 2017, the Group’s largest two customers in the MENA region represented 6.2% of Group revenue, 3.9% from one
customer in Saudi Arabia, and 2.3% from a customer in Algeria. At 31 December 2017, the amount of receivables due from all customers based in Saudi
Arabia was $131 million (2016: $113 million), and in Algeria was $67 million (2016: $87 million).
During the year ended 31 December 2017, three key US wholesalers represented 44.3% of Group revenue (2016: 36.1%). The amount of receivables due
from all US customers at 31 December 2017 was $293 million (2016: $369 million).
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 creditworthiness 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 of credit and insurance.
Market risk
The Group is exposed to foreign exchange and interest rate risk. The Group’s objective is to reduce, where it is appropriate to do so, fluctuations in
earnings and cash flow associated with changes in interest rates and foreign currency rates. Management actively monitors these exposures to manage
the volatility relating to these exposures by entering into a variety of derivative financial instruments.
156
156
30. Financial policies for risk management and their objectives continued
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.
The Group defines capital as equity plus net funds, which include bank overdrafts and loans (Note 24), obligations under finance leases (Note 29), long-
term financial debts (Note 28), 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, regional 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.
At 31 December 2017, the Group’s gearing (Total debt/equity) was 51% (2016: 35%). The increase in the Group’s gearing ratio is due to the impact of full
year 2017 losses, which reduces total equity with debt remaining fairly stable.
Cash management
The Group manages the deployment of cash balances to predefined limits approved by the Board of Directors under the cash/risk management policy.
Per the policy, the Group’s excess cash should be held with highly rated global and regional financial institutions. The aim of the policy is to mitigate the
risk of holding cash in certain currencies, countries and financial institutions, through a specific threshold. The Group reviews the policy periodically to
meet Hikma’s risk appetite.
Foreign exchange risk and currency 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, the Sudanese Pound, the Tunisian Dinar, the Moroccan Dirham and the Egyptian Pound
cannot be hedged at reasonable cost. Where possible, the Group uses financing facilities denominated in local currencies to mitigate the risks. The
Jordanian Dinar and the Saudi Riyal had no impact on the consolidated income statement as those currencies are pegged against the US Dollar.
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
2017
0.8319
20.0000
114.9402
3.7495
0.7379
0.7090
17.7936
112.7800
9.3574
2.4839
Period end rates
2016
0.9500
15.9490
110.5274
3.7495
0.8077
0.7090
18.2482
116.8907
10.0699
2.3386
2017
0.8848
16.9779
110.9802
3.7495
0.7755
0.7090
17.8891
112.1826
9.6800
2.4194
Average rates
2016
0.9053
12.0919
109.4432
3.7495
0.7432
0.7090
10.1112
116.8907
9.7920
2.1482
157
157
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
30. Financial policies for risk management and their objectives continued
2017
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.
2016
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
$m
Euro
$m
19
–
(6)
39
(10)
(35)
(2)
(1)
(3)
–
1
28
–
–
(3)
–
(1)
2
(5)
–
–
21
US Dollar
$m
Euro
$m
Net foreign currency financial assets/(liabilities)
Others*
$m
Japanese Yen
$m
Algerian Dinar
$m
(11)
–
–
–
–
–
–
–
–
–
(1)
–
–
(4)
–
–
–
–
–
–
37
–
–
–
–
–
–
–
2
1
(11)
(5)
40
Algerian Dinar
$m
Net foreign currency financial assets/(liabilities)
Others*
$m
Japanese Yen
$m
54
(11)
(66)
38
(13)
(29)
(3)
(2)
(2)
–
(34)
15
–
–
(2)
–
(2)
2
(7)
–
12
18
(19)
–
–
–
–
–
–
–
–
–
(19)
(1)
–
–
(2)
–
(1)
–
–
–
–
(4)
47
–
–
–
–
–
–
–
–
8
55
A sensitivity analysis based on a 10% movement in foreign exchange rates has no material impact on the Group results and Group statement of changes
in equity.
The Group sets certain limits on liquid funds per currency (other than the functional currency of the Group) and per country.
158
158
30. Financial policies for risk management and their objectives continued
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.
As at 31 December 2017 the Group had no outstanding interest rate swap agreements.
Financial liabilities
Interest-bearing loans and borrowings
Financial assets
Cash and cash equivalents
As at 31 December 2017
As at 31 December 2016
Fixed rate
$m
Floating rate
$m
515
–
262
129
Total
$m
777
129
Fixed rate
$m
Floating rate
$m
Total
$m
514
346
860
–
78
78
An interest rate sensitivity analysis assumes an instantaneous 100 basis point change in interest rates in all currencies from their levels at 31 December
2017, with all other variables held constant. Based on the composition of the Group’s debt portfolio as at 31 December 2017, a 1% increase/decrease
in interest rates would result in a $1 million (2016: $3 million) increase/decrease in finance cost being incurred per year and would not be material to
the Group.
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.
The following financial assets/liabilities are presented at their carrying value which approximates to their fair value:
– 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
– Short-term loans and overdrafts – approximates to the carrying amount because of the short maturity of these instruments
– Long-term loans – loans with variable rates are re-priced 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
– Loans with fixed rates relate to the $500 million Eurobond accounted through amortised cost. The fair value is determined with reference to quoted
price in an active market on the balance sheet date (Note 28)
– 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
– Receivables and payables – the fair values of receivables and payables are estimated to be equal to the respective carrying amounts
– Lease obligations – are valued at the present value of the minimum lease payments
– Contingent liability results from the acquisition accounting of the West-Ward Columbus acquisition, which represents a contractual obligation
assumed at the time of the acquisition from a third party, is measured at cost (Note 27)
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
Financial assets and liabilities that fall under Level 1 are:
– Investment designated at fair value amounted to $22 million (Note 23).
Financial assets and liabilities that fall under Level 3 are:
– Co-development and earnout payment agreement (Note 27).
– Contingent consideration receivable resulted from the acquisition accounting of the West-Ward Columbus acquisition (Notes 18, 23, 27 and 32).
159
159
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
30. Financial policies for risk management and their objectives continued
The following table presents the changes in Level 3 items for the period ended 31 December 2017 and the year ended 31 December 2016:
Balance at 1 January 2016
Additions
Release
Received/Settlement
Acquisition of subsidiaries
Remeasurement through income statement (Note 5)
Balance at 31 December 2016
Received/Settlement
Remeasurement through income statement (Note 5)
Additions
Balance at 31 December 2017
Liquidity risk of assets/(liabilities)
Liquidity risk
2017
Cash and cash equivalents
Trade receivables
Interest-bearing loans and borrowings*
Interest-bearing overdrafts*
Interest-bearing Import and Export loans*
Interest bearing finance lease
Trade payables and accruals
2016
Cash and cash equivalents
Trade receivables
Interest-bearing loans and borrowings*
Interest-bearing overdrafts*
Interest-bearing Import and Export loans*
Interest-bearing finance lease
Trade payables and accruals
* As these are interest bearing liabilities, expected interest expense has been included in the balance.
Financial
Assets
$m
–
Financial
Liabilities
$m
25
1
–
(82)
118
2
39
(3)
2
29
67
Less than
one year
$m
227
One to
five years
$m
–
More than
five years
$m
–
650
(52)
(10)
(51)
(2)
(352)
410
–
(700)
–
–
(21)
–
(721)
–
(6)
–
–
–
–
(6)
Less than
one year
$m
155
One to
five years
$m
–
More than
five years
$m
–
699
(73)
(10)
(64)
(2)
(329)
376
–
(787)
–
–
(22)
–
(809)
–
–
–
–
–
–
–
5
(4)
(23)
220
35
258
(3)
(65)
–
190
Total
$m
227
650
(758)
(10)
(51)
(23)
(352)
(317)
Total
$m
155
699
(860)
(10)
(64)
(24)
(329)
(433)
160
160
30. Financial policies for risk management and their objectives continued
The Group regularly monitors all cash, cash equivalents and debt to maintain liquidity needs, this is done by analysing debt headroom and expected
cash flows. The Group seeks to be proactive in its liquidity management to avoid any adverse liquidity effect.
At 31 December 2017, the Group had undrawn facilities of $1,534 million (2016: $1,289 million). Of these facilities, $1,256 million (2016: $1,093 million)
were committed and the remainder were uncommitted.
31. Derivative financial instruments
Foreign exchange forward contracts
The Group utilises currency derivatives to hedge significant future transactions and cash flows. The Group uses foreign currency forward contracts 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 Group was not committed to any forward foreign exchange contracts (2016: $6 million foreign exchange forward contract JPY).
Interest rate swaps
The Group uses interest rate swaps to manage its exposure to interest rate movements on its bank borrowings when necessary. There are no outstanding
interest rate swaps as at 31 December 2017 (2016: $nil).
32. Other non-current liabilities
Contingent consideration (Note 27)
Contingent liability (Note 27)
Supply Manufacturing Agreement (Note 27)
Co-development and earnout payment (Note 27)
Others
33. Share capital
Issued and fully paid – included in shareholders’ equity:
At 1 January
Issued during the year (ordinary shares of 10p each)
At 31 December
As at 31 December
2016
$m
146
2017
$m
178
109
25
8
4
324
Number
239,954,532
724,362
240,678,894
2017
$m
40
–
40
Number
199,385,118
40,569,414
239,954,532
80
33
14
4
277
2016
$m
35
5
40
161
161
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
34. Non-controlling interests
At 1 January
Share of profit
Dividends paid
Currency translation loss
Acquisition of subsidiaries
At 31 December
35. Own shares
2017
$m
15
4
(2)
(1)
(2)
14
The Employee Benefit Trust (‘EBT’) of Hikma holds 40,831 (2016: 40,831) Ordinary Shares in the Company. The trustee of the EBT is Link Market
Services Trustee Limited, an independent trustee. The market value of the Ordinary Shares held in the EBT at 31 December 2017 was $0.6 million
(2016: $1.2 million). The book value of the retained own shares at 31 December 2017 are $0.6 million (2016: $0.6 million). The Ordinary Shares held
in the EBT will be used to satisfy long-term commitments arising from the employee share plans operated by the Company.
36. Net cash generated from operating activities
2017
$m
(738)
258
983
3
–
(1)
22
(95)
86
(4)
–
514
52
(28)
(31)
15
31
(7)
546
(Loss)/profit before tax
Adjustments for:
Depreciation, amortisation, impairment, and write-down of:
Property, plant and equipment
Intangible assets
Loss on disposal of property, plant and equipment
Gain on disposal of intangible assets
Movement on provisions
Cost of equity-settled employee share scheme
Finance income
Interest and bank charges
Foreign exchange (gain)/loss
Release of contingent liability
Cash flow before working capital
Change in trade and other receivables
Change in other current assets
Change in inventories
Change in trade and other payables
Change in other current liabilities
Change in other non-current liabilities
Cash generated by operations
162
162
2016
$m
15
3
(1)
(3)
1
15
2016
$m
210
78
68
–
(18)
(1)
22
(12)
102
19
(4)
464
(128)
1
(32)
46
15
3
369
37. Contingent liabilities
Contingent liability
A contingent liability existed at the balance sheet date in respect of external guarantees and letters of credit totalling $47 million (31 December 2016:
$49 million), arising in the normal course of business. No provision for these liabilities has been made in these financial statements.
In 2017 the Group received two subpoenas from a US state attorney general and the US Department of Justice, each requesting information related to
certain products, pricing and related communications. Management do not believe sufficient evidence exists to make any provision for this currently.
38. Share-based payments
Executive Incentive Plan
The 2014 Executive Incentive Plan (EIP) was approved by shareholders at the 2014 Annual General Meeting. The EIP is a combined cash bonus
(element A), deferred shares (element B) and restricted shares (element C) scheme. Under the EIP, the Company makes grants of conditional awards
and $nil cost options under elements B and C to the executive directors and senior executives of the Group. Awards under all elements are dependent
on the achievement of individual and Group KPIs over one year prior to grant. The shares awarded under element B are not released for a period of two
years during which they are subject to a forfeiture condition. The shares awarded under element C are not released for a period of three years, but are
not subject to a forfeiture condition. Members of the Executive Committee must retain 50% of the shares received from elements B and C for a period
of five years from the date of grant.
Year 2017
Beginning Balance
Granted during the year
Exercised during the year
Expired during the year
Outstanding at 31 December
Exercisable at 31 December
Year 2016
Beginning Balance
Granted during the year
Outstanding at 31 December
2017 grants
13 Apr
Number
–
613,269
–
(4,893)
608,376
–
2016 grants
11 May
Number
165,553
–
(3,578)
(12,396)
149,579
–
2016 grants
11 May
Number
–
165,553
165,553
2016 grants
17 Mar
Number
448,875
–
–
–
2015 grants
15 May
Number
118,000
–
2015 grants
10 Apr
Number
338,808
–
Total
Number
1,071,236
613,269
(71,000)
(224,378)
(298,956)
–
–
(17,289)
448,875
47,000
–
–
114,430
17,386
1,368,260
17,386
2016 grants
17 Mar
Number
–
448,875
448,875
2015 grants
15 May
Number
118,000
–
2015 grants
10 Apr
Number
338,808
–
Total
Number
456,808
614,428
118,000
338,808
1,071,236
The cost of the EIP of $16 million (2016: $13 million) has been recorded in the consolidated income statement as part of general and administrative expenses.
The fair value per share is the face value of shares on the date of grant.
The weighted average share price for 2017 is $20.03 (2016: $27.84).
EIP’s 1
EIP’s 2
EIP’s 3 B
EIP’s 3 C
EIP’s 4
EIP’s 5 B
EIP’s 5 C
The exercise price of the share award is $nil.
Date of
grant
10/04/2015
15/05/2015
17/03/2016
17/03/2016
11/05/2016
13/04/2017
13/04/2017
The estimated fair
value of each share
option granted
$
33.24216
The share price at
grant date
$
33.24216
33.11449
26.97918
26.97918
32.15333
23.97771
23.97771
33.11449
26.97918
26.97918
32.15333
23.97771
23.97771
Number
granted
338,808
118,000
242,608
206,267
165,553
428,528
184,741
163
163
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
38. 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 2017
Outstanding at 1 January
Granted during the year
Exercised during the year
Expired during the year
Outstanding at 31 December
Year 2016
Outstanding at 1 January
Granted during the year
Exercised during the year
Expired during the year
Outstanding at 31 December
2017 grants
19 May
Number
–
273,724
–
(14,625)
259,099
2016 grants
11 May
Number
192,725
–
–
(19,000)
173,725
2016 grants
11 May
Number
–
196,373
–
(3,648)
192,725
2015 grants
14 May
Number
132,442
–
(121,879)
–
10,563
2015 grants
14 May
Number
140,594
–
–
(8,152)
132,442
2014 grants
11 Jun
Number
12,632
–
(4,483)
–
8,149
2014 grants
11 Jun
Number
214,009
–
(190,400)
(10,977)
12,632
2013 grants
17 May
Number
9,973
–
(5,186)
–
4,787
2013 grants
17 May
Number
9,973
–
–
–
9,973
Total
Number
347,772
273,724
(131,548)
(33,625)
456,323
Total
Number
364,576
196,373
(190,400)
(22,777)
347,772
The cost of the MIP of $6 million (2016: $6 million) has been recorded in the consolidated income statement as part of general and administrative expenses.
The fair value per share is the face value of shares on the date of grant less the present value of dividends expected to be paid during this period.
Valuation is based on Black-Scholes methodology for nil-cost options.
The weighted average share price for 2017 is $20.03 (2016: $27.84).
Date of
grant
19/03/2009
28/03/2010
11/05/2011
18/05/2012
17/05/2013
11/06/2014
11/05/2015
11/05/2016
19/05/2017
Number
granted
340,000
147,561
356,894
412,056
252,482
225,904
145,918
196,373
273,724
The estimated fair
value of each
share option
granted
$
4.89
The share price at
grant date
$
5.11
9.15
12.96
9.47
14.61
27.73
32.17
31.73
22.09
9.36
13.23
9.72
14.93
28.33
32.63
32.20
22.54
Expected
dividends
yield
%
1.47
1.15
1.00
1.29
1.10
0.71
7.08
0.73
1.01
MIP’s 1
MIP’s 2
MIP’s 3
MIP’s 4
MIP’s 5
MIP’s 6
MIP’s 7
MIP’s 8
MIP’s 9
The exercise price of the share award is $nil.
164
164
38. Share-based payments continued
Long-Term Incentive Plan
The 2007 Long-Term Incentive Plan (‘LTIP’) was approved by shareholders at the 2007 Annual General Meeting and the last grant was made under
the LTIP during the year ended 31 December 2014. The LTIP is settled by equity instruments, with 15 separate grant dates. Under the LTIP, conditional
awards and $nil cost options were granted which vest after three years subject to total shareholder return (TSR), revenue growth, earnings per share and
return on invested capital performance conditions. The TSR condition measures the Group’s TSR relative to a comparator group of other pharmaceutical
companies. The TSR 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. The threshold and maximum performance requirements
for the revenue growth, earnings per share and return on invested capital performance conditions are detailed in page 99 of the remuneration report
and are measured against the audited financial statements for the closest three-year financial period to the grant and vesting dates.
Details of the grants under the plan are shown below:
Date of grants
3-Dec-2014
11-Jun-2014
29-May-2014
3-Apr-2014
6-Nov-2013
17-May-2013
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
$
23.28
The share price at
grant date
$
31.39
23.47
22.67
23.25
15.18
11.00
8.65
9.00
6.97
3.89
2.94
5.46
4.70
4.47
4.33
28.62
27.63
27.73
19.41
14.92
11.43
11.74
9.00
6.67
5.11
9.22
8.28
7.69
7.46
Number
granted
5,899
151,429
109,000
89,727
20,802
470,683
547,780
646,054
730,253
200,000
920,000
700,000
150,000
466,000
160,000
Expected
volatility
25.40%
25.40%
27.00%
26.00%
26.00%
26.40%
30.31%
37.04%
37.18%
38.98%
38.98%
31.47%
34.64%
34.64%
34.64%
Expected
dividend
yield
0.71%
0.71%
0.73%
0.72%
0.89%
1.10%
1.14%
1.11%
1.20%
1.22%
1.47%
0.08%
0.08%
0.08%
0.08%
Risk-free
interest
rate
1.28%
1.28%
1.15%
1.17%
0.89%
0.45%
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.
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 2011, 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. For further details see the
remuneration committee report.
The exercise price of the share award is $nil.
165
165
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
38. Share-based payments continued
Further details on the number of shares granted are as follows:
Year 2017
Outstanding at 1 January
Exercised during the year
Expired during the year
Outstanding at 31 December
Exercisable at 31 December
Year 2016
Outstanding at 1 January
Exercised during the year
Expired during the year
2014
grants
03 Dec
Number
5,899
2014
grants
14 June
Number
151,429
2014
grants
29 May
Number
109,000
2014
grants
3 Apr
Number
84,954
2013
grants
6 Nov
Number
5,180
2013
grants
17 May
Number
31,986
(4,885)
(104,914)
(90,252)
(70,342)
(4,485)
(4,637)
(1,014)
(21,795)
(18,748)
(14,612)
(695)
(718)
2012
grant
16 March
Number
22,220
–
–
–
–
24,720
24,720
–
–
–
–
–
–
26,630
26,630
22,220
22,220
2007
grants
23 April
Number
13,000
Total
Number
423,668
423,668
(13,000)
(292,515)
–
–
–
(57,582)
73,570
73,570
2014
grants
03 Dec
Number
5,899
–
–
2014
grants
14 June
Number
151,429
2014
grants
29 May
Number
109,000
2014
grants
3 Apr
Number
84,954
2013
grants
6 Nov
Number
20,802
2013
grants
17 May
Number
431,876
2012
grant
16 March
Number
27,820
2007
grants
23 April
Number
13,000
Total
Number
844,780
–
–
–
–
–
–
(13,529)
(346,295)
(5,600)
(2,093)
(53,595)
–
–
–
(365,424)
(55,688)
Outstanding at 31 December
5,899
151,429
109,000
84,954
Exercisable at 31 December
–
–
–
–
5,180
5,180
31,986
31,986
22,220
22,220
13,000
423,668
13,000
72,386
A true up of $1 million has been credited to the consolidated income statement as part of the general and administrative expenses (2016: $3 million
charged to profit and loss).
The weighted average share price for 2017 is $20.03 (2016: $27.84).
39. Operating lease arrangements
Minimum lease payments under operating leases recognised in profit or loss for the year
2017
$m
9
2016
$m
7
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
After five years
2017
$m
9
22
13
44
2016
$m
8
23
18
49
Operating lease payments represent rentals payable by the Group for certain of its office properties. Leases are negotiated for a term of one to eight years.
166
166
40. Related parties
Transactions between Hikma Pharmaceuticals PLC (‘Hikma’) and its subsidiaries (together, the ‘Group’) have been eliminated on consolidation
and are not disclosed in this note. Transactions between the Group and its associates, joint ventures and other related parties are disclosed below.
Trading transactions:
During the year ended 31 December 2017, the Group entered into the following transactions with related parties:
Boehringer Ingelheim GmbH (‘BI’): is a related party of Hikma because BI owns 16.6% (2016: 16.7%) of the share capital of Hikma, controls 11.7%
(2016: 11.7%) of the voting capital of Hikma, has the right to appoint a director of Hikma and a senior executive of BI holds a directorship of Hikma.
During the year, the Group acquired six products from BI which amounted to an aggregate consideration of $3.0 million, the Group total sales to
BI amounted to $79.1 million (2016: $90.1 million) and the Group total purchases from BI amounted to $10.6 million (2016: $10.3 million). As at the
year end, the amount owed from BI to the Group was $43.8 million (2016: $45.2 million). Additionally, balances arising from the acquisition of
West-Ward Columbus from BI relating to contingent consideration are disclosed in Notes 18, 23, 27, 30 and 32.
Capital Bank, Jordan: is a related party of Hikma because one director of Hikma is the founder and former Chief Executive Officer of Capital Bank.
At the year end, total cash balance at Capital Bank was $11.8 million (2016: $11.3 million) and utilisation of facilities granted by Capital Bank to the
Group amounted to $nil (2016: $8.3 million). The interest expense/income is within market rate.
Darhold Limited (‘Darhold’): is a related party of Hikma because three directors of Hikma jointly constitute the majority of directors and shareholders
(with immediate family members) in Darhold and because Darhold owns 24.93% (2016: 25.00%) of the share and voting capital of Hikma. Other than
dividends (as paid to all shareholders), there were no transactions between the Group and Darhold Limited during the year.
HikmaCure Limited (‘HikmaCure’): is a related party of Hikma because HikmaCure is a 50:50 joint venture (JV) with MIDROC Pharmaceuticals Limited
(‘MIDROC’). Hikma and MIDROC have invested in HikmaCure in equal proportions of $2.5 million each in cash (2016: $2.5 million). During 2017 Hikma and MIDROC
have agreed not to proceed with and to liquidate the venture. During the year, HikmaCure granted two loans of $2.3 million each to the Group and MIDROC.
HMS Holdings SAL (‘HMS): is a related party of Hikma because HMS is owned by the family of two directors of Hikma. Other than dividends (as paid to
all shareholders), there were no transactions between the Group and HMS during the year.
Hubei Haosun Pharmaceutical Co. Ltd (‘Haosun’): is a related party of Hikma because the Group holds a non-controlling interest of 30.1% (2016: 30.1%)
in Haosun. During 2017, total purchases from Haosun were $1.4 million (2016: $0.4 million). At 31 December 2017, the amount owed from Hubei Haosun
Pharmaceutical to the Group amounted to $1.6 million (2016: $1.7 million). On 13 February 2018, Hikma acquired an additional stake in Hubei Haosun
Pharmaceutical Co. Ltd bringing the total ownership to 49% (Note 43).
Labatec Pharma (‘Labatec’): is a related party of the Group because Labatec is owned by the family of two directors of Hikma. During 2017, total Group sales
to Labatec amounted to $1.8 million (2016: $1.4 million). As at the year end, the amount owed by Labatec to the Group was $0.3 million (2016: $0.3 million).
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 86 to 108.
Short-term employee benefits
Share-based payments
Post-employment benefits
Other benefits
2017
$m
11.0
10.2
10.3
0.6
32.1
2016
$m
14.2
11.5
–
0.3
26.0
167
167
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
41. Subsidiaries, associate and joint venture
The subsidiaries, associate and joint venture of Hikma Pharmaceuticals PLC are as follows:
Company’s name
Al Jazeera Pharmaceutical Industry S.A.R.L Algeria
Incorporated
in
Address of the registered office
Zone d’Activité, Propriété N° 379 Section
N° 04 Staoueli, Algeria
Ownership %
Ordinary shares
At 31 December
2017
99%
Owned by the Group
Ownership %
Ordinary shares
At 31 December
2016
99%
Owned by PLC ‘the Company’
Ownership %
Ordinary shares
At 31 December
2016
–
Ownership %
Ordinary shares
At 31 December
2017
–
Algeria
Zone d’Activité 16/15 Staoueli, Algeria
Algerie Industrie Mediterraneene Du
Medicament S.A.R.L.
Hikma Pharma Algeria S.A.R.L.
SPA Al Dar Al Arabia pour la Fabrication de
Médicaments
Algeria
Algeria
Hubei Haosun Pharmaceutical Co Ltd
China
Hikma for Importation Co. LLC
Hikma Pharma S.A.E*
Egypt
Egypt
Hikma Pharmaceuticals Industries S.A.E
Egypt
Hikma Specialised Pharmaceuticals (S.A.E) Egypt
HikmaCure Pharmaceuticals Share
Company
Hikma Pharma GmbH
Thymoorgan GmbH*
Ethiopia
Germany
Germany
Thymoorgan Pharmazie GmbH
Germany
Hikma Finance (Ireland) Limited
Ireland
Hikma Italia S.p.A
Hikma Pharma Limited*
Arab Medical Containers LLC*
Italy
Jersey
Jordan
Zone d’Activité 16/15 Staoueli, Algeria
Zone d’Activité El Boustane N° 78, Sidi
Abdellah, Al Rahmania, Algeria
No 20 Juxian Road, Gedian Economic
and Technology Development Area,
Hubei, China
12 El-Esraa Street, El-Mohandeseen,
Lebanon Square, Giza, Egypt
12 El-Esraa Street, El-Mohandeseen,
Lebanon Square, Giza, Egypt
16 Ahmed Hosny Street, First Zone,
Naser City, Cairo, Egypt
10 D, 11 D, Industrial Zone, Badr City,
Cairo, Egypt
Addis Ababa, Bole Sub City, Kebele 16,
Woreda, Ethiopia
Lochhamer Strasse 13, 82152,
Martinsried, Germany
Schiffgraben 23, DE-38690, Goslar, OT
Vienenburg, Deutchland
Schiffgraben 23, DE-38690, Goslar, OT
Vienenburg, Deutchland
2 Grand Canal Square, Grand Canal
Harbour, Dublin 2, Ireland
Viale Certosa 10, 27100, Pavia, Italy
47 Esplanade, St Helier, JE1 0BD, Jersey
P.O. Box 80, Sahab Industrial Estate,
11512, Jordan
Arab Pharmaceutical Manufacturing PSC*
Jordan
Al Buhaira – Salt, P.O. Box 42, Jordan
Future Pharmaceutical Industries LLC
Jordan
Hikma International Pharmaceuticals LLC
(Exempt)
Hikma International Ventures and
Development LLC (Exempt)
Jordan
Jordan
Hikma Investment LLC*
Jordan
Hikma Pharmaceuticals LLC*
Jordan
Hikma United Renewable Energy
Jordan
P.O. Box 80, Sahab Industrial Estate,
11512, Jordan
122 Queen Zain AlSharaf Street, Bayader
Wadi Al-Seer, Amman, Jordan
Bayader Wadi Al-Seer, Industrial Area,
Saleem Bin Al-Hareth Street, Building 21,
P.O. Box 182400, Amman, 11118, Jordan
Bayader Wadi Al-Seer, Industrial Area,
Saleem Bin Al-Hareth Street, Building 21,
P.O. Box 182400, Amman, 11118, Jordan
Bayader Wadi Al-Seer, Industrial Area,
Saleem Bin Al-Hareth Street, Building 21,
P.O. Box 182400, Amman, 11118, Jordan
Bayader Wadi Al-Seer, Industrial Area,
Saleem Bin Al-Hareth Street, Building 21,
P.O. Box 182400, Amman, 11118, Jordan
91%
100%
100%
30%
99%
100%
100%
98%
50%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
91%
100%
100%
30%
99%
100%
100%
98%
50%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
International Pharmaceutical Research
Centre LLC
Jordan
P.O. Box 963166, Amman, 11196, Jordan
51%
51%
168
168
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
100%
100%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
41. Subsidiaries, associate and joint venture continued
Company’s name
Sofia Travel and Tourism
Incorporated
in
Jordan
Specialised for Pharmaceutical Industries
LLC
Jordan
Address of the registered office
Mustafa Semreen Complex Building No.
29, Jamal Qaytoqa Street, Bayader Wadi
Al-Seer, Amman, Jordan
Bayader Wadi Al-Seer, Industrial Area,
Saleem Bin Al-Hareth Street, Building 21,
P.O. Box 182400, Amman, 11118, Jordan
Hikma CIS JSC
Hikma Pharmaceuticals Co. Ltd., Almaty
(Kazakhtan) Representative Office
Kazakhstan Apt. 1, House 7, Building-28, ‘Keremet’
Microdistrict, Bostandykskiy District,
Almaty,A15C8X2, Kazakhstan
Kazakhstan Apt. 1, House 7, Building-28, ‘Keremet’
Microdistrict, Bostandykskiy District,
Almaty,A15C8X2, Kazakhstan
Hikma Liban S.A.R.L.
Lebanon
Saria Building, Ground Floor, Embassies
Street, Bir Hassan, Beirut, Lebanon
Hikma Finance (Luxembourg) SARL
Luxembourg 20 rue des Peupliers, L-2328
Luxembourg
Société de Promotion Pharmaceutique
du Maghreb (Promopharm S.A.)*
Morocco
Zone Industrielle du Sahel, Rue N. 7, Had
Soualem, Province de Settat, Morocco
Hikma International N.V
Netherlands Luna Arena, Herikerberweg 238, 1101 CM,
Amsterdam Zuidoost, Netherlands
Hikma Pharma Benelux B.V
Netherlands Nieuwe Steen 36, 1625 HV, Hoorn,
Eurohealth N.V
Netherlands
Netherlands
Antilles
Pareraweg 45, P.O. Box 4914, Curacao,
(Netherlands Antilles)
Hikma Farmaceutica, (Portugal) S.A
Portugal
Lifotec Farmaceutica S.G.P.S S.A*
Portugal
Estrada Rio Da Mo no.8, 8a, 8B-
Fervenca, 2705-906, Terugem SNT,
Portugal
Estrada Nacional 9, Fervença, São João
das Lampas e Terrugem, Sintra, Portugal
Al Jazeerah Pharmaceutical Industries Ltd* Saudi Arabia Riyadh Gallery, Olaya Street, P.O. Box
Hikma Slovakia s.r.o
Pharma Ixir Co. Ltd
Sudan
Savannah Pharmaceutical Industries Co. Ltd Sudan
106229, Riyadh-11666, Kingdom of Saudi
Arabia
Slovakia
Seberíniho 1, 821 03 Bratislava, Slovakia
Riyad Area, Obied Khatim Street,
P.O. Box 10461, Block No. 21, House
No. 420, Khartoum, Sudan
Riyad Area, Obied Khatim Street,
P.O. Box 10461, Block No. 21, House
No. 420, Khartoum, Sudan
Eurohealth International S.A.R.L.
Switzerland Rue des Battoirs 7, 1205 Genève,
APM Tunisie S.A.R.L.
STE D’Industriee Pharmaceutique Ibn Al
Baytar*
STE Hikma Pharma Tunisie
STE Medicef
Tunisia
Tunisia
Tunisia
Tunisia
Switzerland
Impasse N°4-Energie Solaire, Zone
Industrielle La Charguia 1, Tunis-
Carthage, 2035, Tunisia
11 Rue 8610 Charguia 1-2035 Tunis-
Carthage, Tunisia
Impasse N°4-Energie Solaire, Zone
Industrielle La Charguia 1, Tunis-
Carthage 2035, Tunisia
Avenue Habib Bourguiba, Sidi Thabet,
2020 Ariana, Tunisia
Hikma Emerging Markets and Asia Pacific
FZ-LLC
United Arab
Emirates
Premises 202-204, Floor 2, Building 26,
Dubai, United Arab Emirates
Ownership %
Ordinary shares
At 31 December
2017
100%
Owned by the Group
Ownership %
Ordinary shares
At 31 December
2016
100%
Owned by PLC ‘the Company’
Ownership %
Ordinary shares
At 31 December
2016
–
Ownership %
Ordinary shares
At 31 December
2017
–
100%
100%
100%
100%
100%
100%
67%
100%
94%
100%
100%
100%
100%
100%
100%
100%
51%
67%
100%
94%
100%
100%
100%
100%
100%
100%
100%
51%
100%
100%
100%
99%
100%
100%
100%
100%
100%
99%
66%
100%
100%
100%
–
–
–
–
–
–
–
–
–
–
100%
100%
–
–
–
–
–
–
–
–
52.5%
52.5%
–
–
–
–
–
–
100%
100%
–
–
–
–
–
–
–
–
100%
100%
169
169
Financial statementsHikma Pharmaceuticals PLC
Notes to the consolidated financial statements continued
Ownership%
Ordinary shares
At 31 December
2017
100%
Owned by the Group
Ownership %
Ordinary shares
At 31 December
2016
100%
Owned by PLC ‘the Company’
Ownership %
Ordinary shares
At 31 December
2016
100%
Ownership %
Ordinary shares
At 31 December
2017
100%
100%
100%
100%
100%
41. Subsidiaries, associate and joint venture continued
Company’s name
Hikma International Trading Limited
Hikma MENA Holdings Limited*
Hikma (Maple) Limited
Hikma Acquisitions (UK) Limited*
Hikma Holdings (UK) Limited*
Hikma UK Limited*
Hikma Ventures Limited*
HikmaCure Limited*
West-Ward Holdings Limited*
West-Ward Pharmaceuticals International
Limited*
Incorporated
in
United Arab
Emirates
United Arab
Emirates
Address of the registered office
The Oberoi Centre, Level 15,
Business Bay, P.O. Box 36282, Dubai,
United Arab Emirates
The Oberoi Centre, Level 15, Business
Bay, P.O. Box 36282, Dubai, United Arab
Emirates
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
1 New Burlington Place, London, W1S
2HR, United Kingdom
1 New Burlington Place, London, W1S
2HR, United Kingdom
1 New Burlington Place, London, W1S
2HR, United Kingdom
1 New Burlington Place, London, W1S
2HR, United Kingdom
1 New Burlington Place, London, W1S
2HR, United Kingdom
1 New Burlington Place, London, W1S
2HR, United Kingdom
1 New Burlington Place, London, W1S
2HR, United Kingdom
1 New Burlington Place, London, W1S
2HR, United Kingdom
Bedford Property Holdings, Inc.
United States Corporation Trust Center 1209 Orange
Street, Wilmington, New Castle,
DE 19802, United States
100%
100%
100%
100%
100%
50%
100%
100%
100%
100%
100%
100%
100%
100%
50%
100%
100%
100%
Eurohealth (U.S.A.) Inc*
United States Corporation Trust Center 1209 Orange
100%
100%
Street, Wilmington, New Castle,
DE 19802, United States
Hikma Americas, Inc.
United States C T Corporation System, 800 S Gay
100%
100%
Street, Suite Knoxville TN 2021 37929-
9710, United States
Roxane Laboratories, Inc.
United States Corporation Trust Company of Nevada
100%
100%
701 S Carson Street Suite 200, Carson
City, NV 89701, United States
West-Ward Columbus Inc.
United States Corporation Trust Center 1209 Orange
100%
100%
Street, Wilmington, New Castle DE
19802, United States
West-Ward Injectables, Inc.
United States Corporation Trust Center 1209 Orange
100%
100%
Street, Wilmington, New Castle DE
19802, United States
West-Ward Pharmaceuticals Corp
United States Corporation Trust Center 1209 Orange
100%
100%
Street, Wilmington, New Castle
DE 19802, United States
The investments in subsidiaries are all stated at cost in PLC ‘the Company’, while accounted for using the equity method in the Group.
The investments in associates and joint ventures are accounted for using the equity method in the Group (Note 16).
The Group’s subsidiaries principally operate in trading pharmaceuticals products and associated goods and services. Companies marked (*)
were incorporated as holding companies.
170
170
–
–
100%
100%
–
–
–
–
100%
100%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
42. Defined contribution retirement benefit plan
Hikma Pharmaceuticals PLC has defined contribution retirement plans in five of its subsidiaries: Hikma Pharmaceuticals PLC – United Kingdom, Hikma
Pharmaceuticals LLC (Jordan), Arab Pharmaceutical Manufacturing PSC, West-Ward Pharmaceuticals Corp and West-Ward Columbus Inc. The details of
each contribution plan are as follows:
Hikma Pharmaceuticals PLC – United Kingdom
The Group currently has a defined contribution pension plan available for staff working in the United Kingdom whereby the Group contributes 10% of
basic salary. Employees are immediately entitled to 100% of the Group’s contributions. The Group’s contributions for the year ended 31 December 2017
were $0.2 million (2016: $0.2 million).
Hikma Pharmaceuticals LLC – Jordan
The Group currently has an employee savings plan whereby the Group fully matches employees’ contributions, which are fixed at 10% (up to 2011, the
level was 5%) of basic salary. Employees are entitled to 30% of the Group contributions after three years of employment with the Company and an
additional 10% for each subsequent year. Employees are entitled to 100% of the Company contributions after ten years of employment with the
Company. The Group’s contributions for the year ended 31 December 2017 were $3 million (2016: $2 million).
Arab Pharmaceutical Manufacturing PSC – Jordan
The Group currently has an employee saving plan whereby the employees contribute at 10%, and the company at 15% of basic salary. After three
years of employment with the Company, employees are entitled to 100% of the Company contributions. The Group’s contributions for the year ended
31 December 2017 were $1 million (2016: $1 million).
West-Ward Pharmaceuticals Corp: (401 (k) salary saving plan)
West-Ward Pharmaceutical Corp. has 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 90 days. Employees
can defer up to 95% of their gross salary into the Plan, not to exceed $18,000 (2016: $18,000), not including catch-up contributions available to eligible
employees as outlined by the Internal Revenue Service. The Company matches 40% of the employees’ eligible contribution. Employer contributions vest
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 2017 were $3 million (2016: $3 million).
The assets of both retirement Plans are held separately from those of the Group. The only obligation of the Group with respect to both retirement benefit
Plans is to make specified contributions.
West-Ward Columbus Pharmaceuticals Inc: (401 (k) salary saving plan)
West-Ward Columbus Pharmaceutical Corp has a 401(k)-defined contribution Plan, which allows all eligible employees to defer a portion of their income
through contributions to the Plan. Employees can defer up to 95% of their gross salary into the Plan, not to exceed $18,000 (2016: $18,000), not including
catch-up contributions available to eligible employees as outlined by the Internal Revenue Service. The Company matches 100% on first 5% of the
employees’ eligible contribution. Employer contributions vest after six 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 2017 were $8 million (2016: $8 million). The assets of both retirement Plans are held separately from those of the Group. The only
obligation of the Group with respect to both retirement benefit Plans is to make specified contributions.
43. Subsequent Events
On 13 February 2018, Hikma acquired an additional stake in Hubei Haosun Pharmaceutical Co. Ltd bringing the total ownership to 49%.
171
171
Financial statementsHikma Pharmaceuticals PLC
Company balance sheet
At 31 December 2017
Non-current assets
Property, plant and equipment
Intangible assets
Investments in subsidiaries
Due from subsidiaries
Financial and other non-current assets
Current assets
Other receivables
Due from subsidiaries
Cash and cash equivalents
Other current assets
Total assets
Current liabilities
Other payables
Income tax provision
Due to subsidiaries
Other current liabilities
Net current assets
Non-current liabilities
Long-term financial debts
Due to subsidiaries
Total liabilities
Net assets
Equity
Share capital
Share premium
Own shares
Profit for the year
Other reserves
Equity attributable to equity holders of the parent
Note
46
47
48
48
50
49
51
52
53
52
57
58
59
2017
$m
3
20
3,323
362
5
3,713
3
71
25
86
185
3,898
4
–
39
14
57
128
610
115
725
782
3,116
40
282
(1)
12
2,783
3,116
2016
$m
3
13
3,179
507
6
3,708
2
108
32
59
201
3,909
4
5
32
13
54
147
640
55
695
749
3,160
40
282
(1)
77
2,762
3,160
The financial statements of Hikma Pharmaceuticals PLC, registered number 5557934, on pages 172 to 179 were approved by the Board of Directors on
13 March 2018 and signed on its behalf by:
Said Darwazah
Director
13 March 2018
Mazen Darwazah
Director
172
Company statement of changes in equity
For the year ended 31 December 2017
Balance at 1 January 2016
Profit for the year
Effect of change in investment designated at fair value
Total comprehensive income for the year
Total transactions with owners, recognised directly in equity
Issue of equity shares
Cost of equity settled employee share scheme
Dividends paid
Balance at 31 December 2016 and 1 January 2017
Profit for the year
Effect of change in investment designated at fair value
Total comprehensive income for the year
Total transactions with owners, recognised directly in equity
Cost of equity settled employee share scheme
Dividends paid
Balance at 31 December 2017
Paid up
capital
$m
35
Share
premium
$m
282
Own
shares
$m
(1)
–
–
–
5
–
–
40
–
–
–
–
40
–
–
–
–
–
–
282
–
–
–
–
282
–
–
–
–
–
–
(1)
–
–
–
–
(1)
Merger
reserve
$m
707
–
–
–
1,039
–
–
Retained
earnings
$m
1,070
77
1
78
–
22
(77)
Total
$m
2,093
77
1
78
1,044
22
(77)
1,746
1,093
3,160
–
–
–
–
12
1
13
22
(79)
1,746
1,049
12
1
13
22
(79)
3,116
173
Financial statementsHikma Pharmaceuticals PLC
Notes to the Company financial statements
For the year ended 31 December 2017
44. Adoption of new and revised standards
The impact on the Company of new and revised standards is the same as for the Group. Details are given in Note 1 to the consolidated financial statements.
45. Significant accounting policies
Basis of accounting
For all periods, up to and including the year ended 31 December 2016, the Company prepared its financial statements in accordance with International
Financial Reporting Standards adopted for use in the European Union. These financial statements, for the year ended 31 December 2017, are the first
the Company has prepared in accordance with FRS 101 (Reduced Disclosure Framework). The transition to FRS 101 did not result in any material impact.
As permitted by FRS 101, the Company has taken advantage of the following exemptions from the requirements of IFRS as below:
The following paragraphs of IAS 1, ‘presentation of financial statements’:
– 10(d), statement of cash flows;
– 16 (statement of compliance with all IFRS);
– 38A (requirements for minimal of two primary statements, including cash flow statements);
– 111 (cash flow statement information); and
– IAS 7. ‘Statement of cash flows’.
No individual profit and loss account is prepared as provided by section 408 of the Companies Act 2006.
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 of the consolidated financial statements with the addition of the policies noted below.
Investments in subsidiaries are stated at cost less, where appropriate, provision for impairment.
Equity-settled employee share schemes are accounted for in accordance with IFRS 2 ‘Share based payments’. The current charge expenses relating
to the subsidiaries’ employees are recharged to subsidiary companies.
46. Intangible assets
Cost
Balance at 1 January 2016
Additions/(transfers to) subsidiaries
Transfer to investment in subsidiaries
Disposals
Balance at 1 January 2017
Additions
Balance at 31 December 2017
Amortisation
Balance at 1 January 2016
Charge for the year
Transfers to subsidiaries
Balance at 1 January 2017
Charge for the year
Balance at 31 December 2017
Carrying amount
At 31 December 2017
At 31 December 2016
Details of useful lives and amortisation rates are included in Note 14.
174
Goodwill
$m
Product related
intangibles
$m
Software
$m
43
–
(43)
–
–
–
–
–
–
–
–
–
–
–
–
145
(140)
–
(5)
–
–
–
(1)
(2)
3
–
–
–
–
–
10
3
–
–
13
8
21
–
–
–
–
(1)
(1)
20
13
Total
$m
198
(137)
(43)
(5)
13
8
21
(1)
(2)
3
–
(1)
(1)
20
13
47. Investments in subsidiaries
The details of Investment in subsidiaries are mentioned in Note 41.
The following table provides the movement of the investments in subsidiaries:
Beginning balance
Additions to subsidiaries
Transfer from Goodwill
Reduction in investment*
Reduction in paid up capital**
Ending balance
* This category relates to an intragroup restructuring following the acquisition of West-Ward Columbus Inc.
** In 2016, the capital of Hikma Finance (Luxembourg) SARL was reduced by $10 million.
48. Due from subsidiaries
Non-current assets
West-Ward Pharmaceuticals Corp.
Hikma Italia S. p. A
Hikma MENA Holdings Limited
West-Ward Pharmaceuticals International Limited
Hikma UK Limited
Current assets
Hikma Pharmaceuticals LLC
Hikma UK Limited
Hikma MENA Holdings Limited
West-Ward Pharmaceuticals Corp.
Hikma Pharma SAE
Hikma Farmaceutica, (Portugal) S.A.
Hikma Emerging Markets and Asia Pacific FZ-LLC
2017
$m
3,179
144
–
–
–
3,323
2017
$m
8
4
–
167
183
362
2017
$m
–
55
5
4
3
1
3
71
2016
$m
1,888
1,908
43
(650)
(10)
3,179
2016
$m
8
4
7
488
–
507
2016
$m
3
62
7
33
2
–
1
108
175
175
Financial statementsHikma Pharmaceuticals PLC
Notes to the Company financial statements continued
49. Other current assets
Price adjustment receivable
Investment designated at fair value
Co-development and earnout receivable
Others
2017
$m
61
22
–
3
86
2016
$m
34
20
3
2
59
Price adjustment receivable: in respect to Note 18 this represents the current portion of the contingent receivables in relation to the West-Ward
Columbus acquisition. In addition, the Group was entitled to be reimbursed with $30 million from the seller of a previous acquisition if certain regulatory
conditions existed as of 24 December 2017.
Investment designated at fair value: represents the agreement the Group entered into with an asset management firm in 2015 to manage a $20 million
portfolio of underlying debt instruments. The investment comprises a portfolio of assets that are managed by an asset manager and is measured at fair
value; any changes in fair value go through other comprehensive income. This asset is classified as level 1 as it uses quoted prices in active markets.
50. Cash and cash equivalents
Cash at banks and on hand
Time deposits
As at 31 December
2016
$m
5
2017
$m
5
20
25
27
32
Cash and cash equivalents include highly liquid investments with maturities of three months or less which is convertible to known amounts of cash and
are subject to insignificant risk of changes in value.
51. Other payables
Management consider that the carrying amount of other payables approximates to their fair value.
2017
$m
44
1
10
–
60
115
2016
$m
44
1
–
10
–
55
52. Due to subsidiaries
Non-current liabilities
Hikma (Maple) Limited
Hikma Investment LLC
Hikma Pharmaceuticals LLC
Eurohealth International SARL
Hikma MENA Holdings Limited
176
52. Due to subsidiaries continued
Current liabilities
Hikma Investment LLC
Thymoorgan GmbH
West-Ward Pharmaceuticals International Limited
Hikma Pharma Limited
53. Long-term financial debts
2017
$m
22
–
15
2
39
2016
$m
5
1
24
2
32
The balance comprises mainly of a $500 million (carrying value of $496 million, and fair value of $502 million) 4.25% Eurobond due April 2020
with the rating of (BB+/Ba1) and a withdrawal of $112 million on the syndicated revolving credit facility (Note 28).
54. 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.
A sensitivity analysis based on a 10% 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 30.
Interest rate risk
Financial liabilities
Interest-bearing loans and borrowings
Financial assets
Cash and cash equivalents
Fixed rate
$m
Floating rate
$m
As at
31 December
2017
Total
$m
Fixed rate
$m
Floating rate
$m
496
–
112
20
608
20
495
–
145
27
As at
31 December
2016
Total
$m
640
27
An interest rate sensitivity analysis assumes an instantaneous 100 basis point change in interest rates in all currencies from their levels at 31 December
2017, with all other variables held constant. Based on the composition of the Company debt and cash portfolio as at 31 December 2017, a 1% increase
in interest rates would result in an additional interest expense of $1 million being incurred per year (2016: $1 million of interest income incurred).
177
177
Financial statementsHikma Pharmaceuticals PLC
Notes to the Company financial statements continued
54. Financial policies for risk management and their objectives continued
Liquidity risk
2017
Cash and cash equivalents
Other receivables
Interest bearing loans and borrowings
Other payables
2016
Cash and cash equivalents
Other receivables
Interest bearing loans and borrowings
Other payables
Less than
one year
$m
25
3
(22)
(4)
2
Less than
one year
$m
32
2
(24)
(4)
6
Two to
five years
$m
–
–
(643)
–
(643)
Two to
five years
$m
–
–
(702)
–
(702)
Total
$m
25
3
(665)
(4)
(641)
Total
$m
32
2
(726)
(4)
(696)
The Company believes that, given the Group’s operating cash flow during 2017, it has the ability to satisfy its liability commitments.
55. Staff costs
Hikma Pharmaceuticals PLC currently has an average of 30 employees (2016: 21 employees) (excluding Executive Directors); total compensation paid
to them amounted to $8 million (2016: $6 million) of which salaries and bonuses compromise an amount of $6 million (2016: $5 million) the remaining balance
of $2 million (2016: $1 million) represents national insurance contributions. The cost of share-based payments and other benefits is represented below.
56. Share based payment
Executive incentive plans (‘EIPs’)
The details of the EIP scheme are provided in Note 38. As at 31 December 2017, the total number of awards granted to employees of the Company under
the EIP during the life of the plans was 554,700 shares (2016: 364,274) and the total amount of the compensation expenses charged to profit and loss is
$5.4 million (2016: $3 million).
Management incentive plans (‘MIPs’)
The details of the MIP scheme are provided in Note 38. As at 31 December 2017, the total number of awards granted to employees of the Company
under the MIP during the life of the plans was 31,316 shares (2016: 25,716) and the total amount of the compensation expenses charged to profit and loss
is $0.2 million (2016: $0.2 million).
Long-term incentive plans (‘LTIPs’)
The details of the long-term incentive plan (‘LTIPs’) are provided in Note 38. As at 31 December 2017, the total number of awards granted to employees
of the Company under the LTIPs during the life of the plans was 1,649,615 shares (2016: 1,649,615). A true up of $0.3 million has been credited to profit
and loss (2016: $2 million charged to profit and loss).
178
57. Share capital
Issued and fully paid – included in shareholder’s equity:
At 1 January
Issued during the year (ordinary shares of 10p each)
At 31 December
58. Share premium
Balance at 1 January and 31 December 2017
59. Profit for the year
Number
239,954,532
724,362
240,678,894
2017
$m
40
–
40
Number
199,385,118
40,569,414
239,954,532
2016
$m
35
5
40
Share
premium
$m
282
The net income in the Company for the year is $12 million (2016: $77 million). Included in the net income for the year is an amount of $16 million
(2016: $125 million) representing dividends received, $29 million contingent consideration gain (Note 5) included in the other operating income
(2016: $nil), and $5 million (2016: $5 million) representing the current year charge of share based payments. The remaining $16 million (2016: $17 million)
of the Group’s share based payment charge is recharged to subsidiary companies. The remaining income statement components represent general and
administrative expenses. Audit fees for the Company are borne by the Group (Note 6).
60. Related Parties
Amounts repayable to and from subsidiaries are disclosed in Notes 48 and 52.
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 40. Details of Directors remuneration are disclosed in the Remuneration Committee Report on pages 86 to 108.
More details on the general information of the ultimate parent of the Group are disclosed in Note 2.
61. Contingent liabilities
A contingent liability existed at the balance sheet date in respect to a standby letter of credit totalling $9 million (2016: $9 million) for a potential
stamp duty obligation that may arise for repayment of a loan by intercompany guarantors. It is not probable that the repayment will be made by
the intercompany guarantors, accordingly, no provision for any liability has been made in these financial statements.
179
179
Financial statementsHikma Pharmaceuticals PLC
Shareholder information
Shareholder information
2018 financial calendar
5 April
6 April
18 May
24 May
2017 final dividend ex-dividend date
2017 final dividend record date
Annual General Meeting
2017 final dividend paid to shareholders
15 August*
2017 interim results and interim dividend
announced
23 August*
2018 interim dividend ex-dividend date
24 August*
2018 interim dividend record date
21 September*
2018 interim dividend paid to shareholders
* Provisional dates
Shareholding enquiries
Enquiries or information concerning existing shareholdings should
be directed to the Company’s registrars, Link Registrars either:
— in writing to Shareholder Services, Link Registrars, 34 Beckenham
Road, Beckenham, Kent BR3 4TU
— by telephone from within the UK on 0871 664 0300
— by telephone from outside the UK on +44 371 664 0300 or
— by email – enquiries@linkgroup.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 Dinars. 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 shareholder’s
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.
Share listings
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 Depository. One ADR equates to 2 Hikma Ordinary
Shares. ADRs are traded as a Level 1 (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 Conduct 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 FCA by looking the firm up on
www.fca.org.uk/register;
— Report the matter to the FCA either by calling 0800 111 6768 or visit
www.fca.org.uk/consumers;
— 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 1 New Burlington Place, London W1S 2HR.
Telephone number + 44 207 399 2760.
180
Principal Group Companies
Hikma Pharmaceuticals PLC
Registered in England and Wales number 5557934
Registered office:
1 New Burlington Place
London W1S 2HR
UK
Telephone: +44 (0)20 7399 2760
Facsimile: +44 (0)20 7399 2761
E-mail: investors@hikma.uk.com
West-Ward Pharmaceutical Corp.
401 Industrial Way West
Eatontown
New Jersey 07724
US
Telephone: +1 732 542 1191
Facsimile: +1 732 542 6150
Hikma Pharmaceuticals LLC
P.O. Box 182400
11118 Amman
Jordan
Telephone: +962 6 5802900
Facsimile: +962 6 5827102
Hikma Farmacêutica (Portugal) S.A.
Estrada Rio Da Mo no. 8
8A, 8B – Fervença
2705 – 906 Terrugem SNT
Portugal
Telephone: +351 21 9608410
Facsimile: +351 21 9615102
Advisers
Auditors
PricewaterhouseCoopers LLP
1 Embankment Place
London WC2N 6RH
UK
Brokers
Citigroup Global Markets Limited
Canada Square
London E14 5LB
UK
Bank of America Merrill Lynch
2 King Edward Street
London EC1A 1HQ
UK
Media Relations
FTI Consulting
200 Aldersgate
Aldersgate Street
London EC1A 4HD
UK
Registrars
Link Registrars
34 Beckenham Road
Beckenham
BR34 4TU
Printed in the UK by Pureprint using vegetable inks
and their environmental printing technology.
Pureprint is a CarbonNeutral® company. Both manufacturing
mill and the printer are registered to the Environmental
Management System ISO14001 and are Forest Stewardship
Council® (FSC) chain-of-custody certified.
Designed and produced by
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© Hikma Pharmaceuticals PLC
1 New Burlington Place
London
W1S 2HR
T 020 7399 2760
www.hikma.com
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